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Brett Kavanaugh is a strong pick for the Supreme Court.

In his 12 years on the D.C. Circuit, Judge Kavanaugh has demonstrated a devotion to legal text and constitutional principle. I admire his dedication to the Constitution’s structural protections for liberty, his steadfast defense of the rights of speech and religious conscience, and most notably his willingness to question the excesses of the regulatory state. He has repeatedly affirmed that judges serve not as the champions of faction, but as the readers of laws and adjudicators of disputes.

While there will no doubt be cases where the future Justice Kavanaugh and Cato do not see eye-to-eye, I hope that he will not flinch in those super-hard cases where Chief Justice Roberts may be inclined to bend over backwards to uphold a law or split the baby by rewriting it. I wish him a speedy confirmation; there is literally nothing in his record that justifies the smears and demagoguery he’s about to face.

Private services account for 69% of GDP, and 128.2 million jobs in June. In the Bureau of Economic Analysis industry accounts, private service industries “consist of utilities; wholesale trade; retail trade; transportation and warehousing; information; finance, insurance, real estate, rental, and leasing; professional and business services; educational services, health care, and social assistance; arts, entertainment, recreational, accommodation, and food services; and other services (except public administration).”

Goods-producing industries, by contrast, “consist of agriculture, forestry, fishing, and hunting; mining; construction; and manufacturing.” All of these goods-producing industries combined accounted for only 20.7 million jobs this June. That was fewer goods-producing jobs than in July 2000 (24.7 million) or August 1979 (25 million) or even May 1969 (22.9 million).  In other words, all long-term U.S. job growth has been in service occupations, not in manufacturing, mining, construction, and agriculture.

The United States is predominantly a service economy.  Many world-famous U.S. enterprises provide services all over the world – including entertainment, transportation, legal services, chain restaurants, advertising, accounting, medical tourism and college degrees.  In fact, rising U.S. service exports accounted for a third of total exports from January through May, and the U.S. surplus in services shrunk the total deficit by 31%.

Yet when President Trump and his trade war generals talk excitedly about bilateral trade deficits, they invariably talk only about goods - never services.  Commerce Secretary Wilbur Ross, for example, published “Free Trade Is a Two-Way Street” in The Wall Street Journal, writing only about “trade in goods” – as though a third of U.S. exports, most U.S. jobs and 69% of U.S. GDP is not worth mentioning.

A reporter for TheBalance.com (a financial website) inadvertently provided an excuse for widespread journalistic neglect of U.S. service exports by writing, “Please note that the Census provides trade data by country for goods only, not services.” That might have been a helpful warning if it was true. But Census does provide trade data for goods and services for most important countries, and for groups of countries such as the EU and OPEC.

Country trade data for goods and services are so commonly neglected, that I am going to post the data in several posts about various regions of the world, starting with Asia.

“Last year, we lost $500 billion on trade with China,” Trump said at a March 23 news conference. That was fake news. The correct number was $335.7 billion once we count the $40.2 billion U.S. surplus in services. And there’s no excuse for not counting services. But everyone also forgets that Hong Kong is part of China and has no tariffs against the rest of China or the U.S. or anyone else (neither does Singapore). It’s like a Chinese Free Trade Zone. Since Hong Kong ran a $35 billion trade deficit with the U.S. in 2017, that leaves the combined China/Hong Kong net trade deficit with the U.S. at $300.6 billion – $200 billion less than the President claimed.

President Trump might nonetheless claim “we lost” $300 billion in trade with China last year, except getting $300 billion in desirable industrial and consumer goods from China was a U.S. gain, not a loss. Why else would we have bought the goods?

The benefit from trade comes from imports. Exports are the cost.

Foreigners don’t sell us goods because they’re collecting dollars as a hobby. U.S. dollars can ultimately be spent only on U.S. goods, services and assets, and they are frequently used to buy U.S. services and assets rather than goods.

If people in counties like Japan, India or China find better and safer investment opportunities in U.S. tech stocks and small caps than in their own local markets, then they have an incentive to sell us something to get the dollars to invest here. I long ago dubbed that “The Investment Opportunity Theory of Trade.” Foreigners bidding-up the value of U.S. equity or property is not American “borrowing.” And contrary to Mr. Trump it’s a win-win deal – not a loss.

This news report from the Washington Post is a striking example of the absurd costs of complex tariff systems:

Brand-new Ford Transit Connect vans, made in Spain, are dropped off at U.S. ports several times a month. First, they pass through customs — and then workers hired by the automaker start to rip the vehicles apart. The rear seats are plucked out. The seat belts in back go, too. Sometimes, the rear side windows are covered with painted plates. Any holes left in the floor are patched over. 

Why? Because there’s a 25 percent tariff on imported pickup trucks and work vans, but only a 2.5 percent tariff on passenger vans. So even with all the extra effort of building a passenger-quality van, and then dismantling it, it’s still cheaper to do that than to pay a substantial tax on the import. 

The story is also a reminder of how bad policies can linger for decades. In the early 1960s Europeans increased their purchases of American chicken. European governments responded by imposing tariffs on chicken imported from the United States. In retaliation, President Lyndon B. Johnson imposed a 25 percent tariff – known as the “chicken tax” – on potato starch, dextrin, brandy, and light trucks. Tariffs on the other products were eventually lifted, but the high tax on light trucks remains. Thus the counterproductive construction and destruction. And by the way, this is no secret; the Wall Street Journal wrote about Ford’s practice in 2009.

The Post goes on to report:

Tariff engineering has a long history. 

In the 1880s, the Supreme Court ruled it was acceptable for a sugar importer to intentionally darken refined sugar with molasses to lower the grade and secure a lower duty. Three decades later, the court took up the case of a company accused of trying to evade a 60 percent duty on strung pearls by instead shipping loose pearls with holes pre-drilled for stringing. Those faced only a 10 percent duty….

For example, some athletic shoes, such as Converse All-Stars, come with just enough fuzzy cloth on the rubber soles to qualify them as lower-duty slippers. In the early 1980s, the United States imposed a tariff on motorcycles with engines larger than 700 cubic centimeters in a bid to protect U.S.-based Harley-Davidson, so Japanese companies turned to making 699-cubic-centimeter motorcycles instead. 

[See https://www.cato.org/publications/policy-analysis/taking-america-ride-po…

Sugar import quotas also create opportunities for gaming the system, which the government tries to block. In 1985, the Wall Street Journal and then the New York Times reported that the Reagan administration had slapped emergency quotas on “edible preparations” such as jams, candies, and glazes—and even imported frozen pizzas from Israel—lest American companies import such products for the purpose of extracting the sugar from them. Apparently it might have been cheaper to import pizzas, squeeze the tiny amount of sugar out of them, and throw away the rest of the pizza than to buy sugar at U.S. producers’ protected prices.

A U.S. tariff is a tax on the American people. That’s easy to see. American consumers and businesses are forced to pay higher prices for the goods they want to buy. What is not so obvious is all the deadweight loss such obstacles to trade create. Businesses and consumers may have to shift their purchases to a less-preferred domestic alternative. And as the reports above indicate, companies sometimes go to great lengths to get around the obstacles created by tariffs, quotas, and other barriers to trade. Just think of all that wasted labor and material involved in getting a Ford passenger van from a Spanish factor to an eager American consumer. This is pure waste, waste that literally makes America poorer. In the case of the chicken tax, the waste is related to a 1963 executive order that’s never been rescinded. The sugar quotas benefit a highly concentrated, politically effective industry and impose costs on far more businesses.

Tariffs impose costs on Americans. We should be reducing and eliminating them, not expanding them.

On Tuesday, Donald Trump took to Twitter to draw attention to an important story about a large scale National Security Agency surveillance program—though largely for the wrong reasons.  

Wow! The NSA has deleted 685 million phone calls and text messages. Privacy violations? They blame technical irregularities. Such a disgrace. The Witch Hunt continues!

— Donald J. Trump (@realDonaldTrump) July 3, 2018

There are two significant errors here and one important truth.  The first error is that NSA is in the process of deleting “Call Detail Records”—or metadataabout phone calls and text messages, not the calls and messages themselves.  The second error is that the records being purged were acquired pursuant to a counterterrorism authority: They have nothing to do with Special Counsel Robert Mueller’s investigation into Russian interference in the 2016 presidential election (or “The Witch Hunt,” as Trump is fond of characterizing it). The important truth is that the dramatic purge of hundreds of millions of records is indeed an attempt to remedy “technical irregularities” that led to privacy violations: the acquisition by NSA of large numbers of private telecommunications records it was not legally entitled to receive.  The New York Times reported on this in late June, and David Kris, former head of the Justice Department’s National Security Division, wrote a helpful explanatory post for Lawfare.

I can offer a bit of additional perspective because I participated in a call held by intelligence officials with privacy advocates on Monday, July 2nd to discuss the CDR deletion.  As those officials described it, the issue arose as a result of problems in the systems of the telecommunications providers from whom these records were sought. This introduced errors into some of those records, which were not immediately detected because the problem only manifested itself under specific circumstances—the officials were, understandably, unable to go into any technical detail here.  But when those records were subsequently fed back into the system as part of regular requests for additional records, those initial errors were compounded, leading to NSA obtaining records it was not authorized to receive.  Since the erroneous records are difficult to identify, NSA opted to purge the entire database, though now that the technical issues have been resolved, they will be able to repopulate it by re-requesting records for which there’s still an applicable Foreign Intelligence Surveillance Court order in place.

That’s what we got on the call, but it’s probably necessary to have a bit of background to understand what it really means in practice.  Until 2015, as we learned from disclosures by former NSA contractor Edward Snowden, NSA was collecting nearly all domestic calling records in bulk.  When analysts had a phone number they believed was linked to a foreign terror group, they queried this number against that massive database, pulling up not only the phone numbers in direct contact with that initial number, but the numbers in contact with those numbers, and then the numbers in communication with those second-degree contacts. In short, they built up a kind of social network graph extending out to three degrees of separation, or three “hops”, from an initial suspicious number.  The USA Freedom Act of 2015 put an end to the practice of indiscriminate bulk collection, instead allowing NSA to obtain two “hops” worth of contacts from an initial suspicious number by making requests, approved by the Foreign Intelligence Surveillance Court, directly to telecommunications providers, rather than maintaining an enormous database itself.  

So imagine what happens if (and here I’m necessarily speculating a bit about the nature of the errors) some technical glitch causes records to include wrong numbers—numbers the target of that FISC order wasn’t really in communication with.  At that step, NSA has gotten records it is legally entitled to, though they contain some inaccuracies.  But when those wrong numbers are fed back to the telecoms the NSA ends up improperly receiving the call records of people who were not really in direct contact with the initial target—records NSA lacks legal authority to collect.

The first thing to note about this situation is that it’s still less violative of privacy than the initial NSA bulk program, under which the agency received everyone’s call records. The second is that it’s a good illustration of how small errors can easily be magnified by feedback loops when doing telecommunications analysis, and of how those errors can go undetected for years at a time thanks to the sheer volume of data involved.  Needless to say, had NSA been authorized to seek an additional third “hop,” those additional iterations would have magnified the improper collection by another order of magnitude. The secrecy around the process means that the providers from whom records are sought may have limited ability to detect errors when they occur—but also that they have few real incentives to scrupulously limit production: They face no legal liability for coughing up too much information about their customers. And while these errors may not have anything to do with Donald Trump’s “Witch Hunt,” it seems entirely possible they may have led to innocent people being inappropriately subjected to further scrutiny: Since NSA itself can’t easily identify which records it obtained in error, we will probably never know.

As far as we can tell at present, this was a genuine mistake that NSA has now taken steps to correct.  But the fact that it persisted unnoticed for as long as it did, and the way the iterative nature of the program worked to magnify small initial errors, should make us skeptical of the wisdom of relying on intelligence tools that require this kind of large scale data collection.

One of the benefits of school choice is that it allows students with varying needs and backgrounds to choose which schooling model helps them achieve the best educational outcomes. An extensive literature on charter schools, one of the most visible alternatives to traditional public schools, has found that charters with certain characteristics and policies tend to have positive results. Most of this literature focuses on non-profit schools, but a recent study finds that the advantages of charters extend to for-profit schools. 

In their recent paper, University of Michigan economists Susan Dynarksi, Daniel Hubbard, Brian Jacob, and Silvia Robles estimate the educational impact of one of the largest for-profit charter school networks in the country, National Heritage Academy (NHA), which enrolls over 50,000 students in 9 states. Using randomized lottery admissions at NHA schools in Michigan, they find that attending a NHA charter school for one year is associated with an increase in math achievement and positive—though not statistically significant—impacts on other outcomes.

Also of note, the authors find that non-poor, non-urban students benefited the most from one year at NHA. Most of the prior literature has found the opposite, that low-income, urban students receive a larger share of the benefits.  And similar to results for non-profit charters, the authors find that certain key characteristics—such as a “No excuses” culture, providing extra time for core subjects, and frequent diagnostic assessments—are what seem to drive the positive results.

The study is the first evidence on the impact of for-profit charter schools, and it indicates that for-profits can provide similar advantages as non-profits. As non-profit and for-profit charters expand, these benefits will continue to offer different types of students the best opportunities for academic success.

In 1996 John Perry Barlow penned A Declaration of the Independence of Cyberspace, a radical call for complete online freedom. The document begins with an optimistic word of caution for states the world around; “Governments of the Industrial World, you weary giants of flesh and steel, I come from Cyberspace, the new home of Mind. On behalf of the future, I ask you of the past to leave us alone. You are not welcome among us.”

The internet did not develop as Barlow had hoped, as Jacob Mchangama illustrates in the latest episode of his podcast, Clear and Present Danger: A History of Free Speech. He notes that the “digital promised land turned into a dystopia of surveillance, disinformation, trolling and hate, to which governments responded with increasingly draconian measures.” China has simply banned foreign social media platforms like Facebook and Twitter, while inside the “great firewall,” the government manipulates its population’s infoscape through a combination of flooding popular sites with positive comments and the prohibition of specific characters. Elsewhere, states pressure social media companies to establish sophisticated censorship mechanisms with threats of regulation and liability imposition.

 “The Great Disruption: Part I,” interrogates the claim that the disruptive effects of the internet and social media on the spread of information are historically unprecedented. In some ways, of course, the internet’s effects are unparalleled. But throughout the podcast, Mchangama demonstrates that they are less novel than they might appear. The human rights lawyer turns to the early 16th century and the Great Disruption, a period of social and religious upheaval sparked by the invention of the Gutenberg printing press in 1447.

Like the internet, the impact of the printing press cannot be overstated. The social effects of the printing press are mirrored by the consequences of social media today. The new technology allowed a single document to be cheaply, reliably copied (making it hard for authorities to get rid of material they deemed problematic), allowed authors to effectively write anonymously (allowing them to put pen to page with less fear of consequence), and provided individuals with the ability to bypass traditional authorities and gatekeepers when creating content.

Scholars disagree on why the printing press failed to take hold in the Ottoman empire, but many think religion played a role, as some were fearful the printing press could contribute to the distribution of erroneous copies of the Qur’an. After all, the printing press had fueled religious schism in Europe. Their disruptive potentials aside, both the internet and the printing press have driven tremendous growth and economic development. The Ottomans increasingly lagged behind Western Europe in terms of literacy, science, and the spread of new ideas – “disciplines in which Muslims had previously been civilizational frontrunners.” The cost of being outside the information loop was high then, and is high now, exemplified by the fact that it would be nearly impossible to be successful starting an “offline” business or university. Societies that spurn technological adoption may be more stable in the short run, but they miss out on opportunities for future benefits, productivity, and progress.

Mchangama recounts Martin Luther used the printing press. In October 1517, Luther sent his list of 95 theses to the local printing press, prompting the Reformation that disrupted the religious unity of Europe. Mchangama compares Luther’s work to a twitter post (95 tweets?) as his arguments often were short and simplified so they could be spread widely and easily digested. They found an audience: by 1523, one third of Germany’s book titles came from Luther alone.

The effects of Luther’s work would eventually lead authorities to create and expand an index of prohibited books, and other extreme censorial measures. Luther himself would also try to take up the censor’s tools as well, eventually advocating the death penalty for blasphemy and idolatry. He condemned Michael Servetus, who was burned at the stake atop a pyre of his books. Despite the Calvinists’ best efforts, three copies of Servetus’ book survived, demonstrating the difficulty of controlling the new technology.

The past is never really past and so it is here too. Mchangama observes: “But for all the social and political progress, the explosive effects of new communication technologies has still seen liberal democracies increasingly copy the playbook of those desperate European rulers, whose world was turned upside down by the double whammy of the printing press and the Reformation.”

In short, censorship as a response to new communicative technology is not new, and we should be wary of its effects. Returning to a statement made by Mchangama earlier in the podcast, “censorship has now…gone viral,” and “the platforms once hailed as the global infrastructure of freedom and democracy, are now often seen as the enemies of these values.” The internet, much like the printing press, has “the ability to inspire innovations in political philosophy” and should be a place for free expression. Societies can respond to new divisions created by technology with skepticism and increased polarization, but the only lasting balms seem to be greater tolerance and acceptance of human freedom.

The entire series of the Clear and Present Danger podcast merits a listen. Many people discuss legal doctrines and current issues regarding freedom of speech. Mchangama covers both and more while recounting a reliable and informed history of free speech. Free speech has many detractors just now, but Mchangama shows it was ever so. The struggle for free speech should and will continue.

You can see a Cato forum with Jacob Mchangama here.

The minutes of the Federal Reserve’s June FOMC meeting were released yesterday and there were few, if any, surprises. The minutes show a policy discussion hewing close to the Fed’s normalization plan. Members view the current economic expansion as “progressing roughly as anticipated” and see the risks to the economic outlook “as roughly balanced.” Though the Fed continues to undershoot its preferred measure of inflation, the Committee continues to expect 2% inflation “on a sustained basis over the medium term.” 

Two rather new developments received attention at the meeting. The first relates to increasing tensions over trade and tariffs. FOMC members are concerned that global disruptions and trade policies will exert downward pressure on financial markets. Furthermore, several regional Federal Reserve districts report that proposed plans for capital spending across the country have already been reduced, with several contacts within districts expressing concerns over tariff policies.

The second issue is the flattening yield curve that has the potential to invert. Recently the spread between short-term and long-term Treasuries has narrowed. In the past, this compression has presaged a recession. However, the FOMC is currently split as to whether or not the current flattening is similarly a cause for concern; namely, that increasing yields on the front end of the curve are indicative of investor concern about the short-term economic outlook. Due to this split, the Fed seems inclined to take a wait-and-see approach before adjusting the path of monetary policy in response to financial market data.

Lastly, and most concerning, there was precious little revealed about the Fed’s thinking on the operational aspects of monetary policy that remain in uncharted waters.

One decision during the June meeting was to raise the interest rate paid on excess reserves (IOER) less than the top of the Fed’s range for the federal funds rate. IOER is the interest the Fed pays banks on their excess cash on deposit at the Fed. The federal funds rate is the interest rate that banks charge one another for overnight loans. Since the crisis the Fed has adopted a target “range” for the federal funds rate, rather than a single interest rate target as it did before the crisis. Now, in order to influence short-term rates in the economy, including the effective federal funds rate, the Fed adjusts the IOER. Until the recent FOMC meeting the top of this range was the IOER rate. Recently, however, the effective federal funds rate had been approaching the IOER rate, getting too close to the top of the target range for the Fed’s comfort. By raising the IOER rate less than the target range in June, the Fed intended to move the effective federal funds rate towards the middle of their range. 

But that hasn’t happened. While the effective federal funds rate has backed off the top, it remains elevated above the midpoint of the target range, hovering just four basis points below the IOER rate. While this is more of a window dressing problem than a cause for immediate concern, it is an important reminder that the current operating system, a creation of the Fed’s reaction to the financial crisis, is still very much an experiment—one with which the Fed has little experience.

Prominent economists are already considering what will become of the Fed’s new operating system. My colleague George Selgin recently discussed why the Fed’s “leaky floor” system is ultimately responsible for the recent compression between IOER and the effective federal funds rate. And Stephen Williamson, formerly of the St Louis Fed, blogged about why the adverse effects of quantitative easing and ill-targeted regulations are culpable for the trouble the Fed is facing. Unfortunately, the recent FOMC minutes give us no indication that the Fed has been wrestling with these issues in a similar fashion.

Last week, the Senate Appropriations Committee filed a report along with the appropriations bill for the Departments of Labor, Health and Human Services, and Education. The report mostly consists of broad policy recommendations and guidance for how to spend the appropriated money. On page 108 of the 273 page report, however, is a discussion of “barriers to research,” specifically, how the “Committee is concerned that restrictions associated with Schedule 1 of the Controlled Substance Act effectively limit the amount and type of research that can be conducted on certain Schedule 1 drugs, especially marijuana or its component chemicals and certain synthetic drugs.”

While the report is not law, it signals a welcome change in attitude. For decades, marijuana’s Schedule 1 status has made it very difficult for researchers and scientists to investigate the plant’s medicinal and harmful properties. In order to research marijuana legally for clinical purposes, even if you’re in Colorado and could just purchase some, you must first get a license from the DEA, then get approval from the FDA, and finally get access to the one federally authorized marijuana supply, which is grown at the University of Mississippi and run by the National Institute on Drug Abuse (NIDA). On top of that, the federally sourced marijuana is often moldy and of unpredictable quality. And then there’s funding, which has often not been forthcoming to those trying to research the possible beneficial uses of cannabis.

Taken together, all of those steps make researching marijuana more difficult than researching almost any other drug on the planet, including other Schedule 1 substances such as heroin and LSD. As the Appropriations Committee report says, “At a time when we need as much information as possible about these drugs, we should be lowering regulatory and other barriers to conducting this research.” The report thus directs NIDA to “provide a short report on the barriers to research that result from the classification of drugs and compounds as Schedule 1 substances.”

The report comes at a time when Attorney General Jeff Sessions is blocking an Obama administration attempt to make marijuana more easily available to researchers. In August 2016, the DEA began accepting applications to become an authorized marijuana supplier. Twenty-six applications were submitted but, after the administration changed over, Attorney General Sessions stalled the approval process. In response, Senators Orrin Hatch (R-UT) and Kamala Harris (D-CA) sent a letter to Sessions asking him to stop blocking research. Hatch has also introduced the MEDS Act, which is a more permanent legislative fix to the problems around marijuana research.

Federal marijuana prohibition, at least as a Schedule 1 drug, is on its last legs. Nine states and the District of Columbia have legalized recreational cannabis and 30 states have legalized medical marijuana. No one is putting that genie back in the bottle. Federal law is so antiquated, in fact, that it makes no distinction between medical and recreational use. Schedule 1 drugs have no accepted medical uses, and the difficulty of carrying out medical research is one reason marijuana still has that status. The Senate Appropriations report is just another step toward the inevitable revision of federal marijuana laws.

So EPA Administrator Scott Pruitt is gone, the environmentalists’ noirest bete noire since James Watt ran the Interior Department early in the Reagan Administration.  He will be replaced (at least temporarily) by Deputy Administrator Andrew Wheeler, a longtime Washington insider with a keen knowledge of the Agency.  He served as chief of staff for the Senate Environment and Public Works Committee, which oversees all EPA activities, and he also has extensive and diverse experience as a lobbyist.

He’s likely to be lower key than Pruitt, but also very effective, given his thick rolodex.  He’s certain to continue EPA’s efforts to separate its science advisors from its research largess.  He’ll likely continue to prioritize and streamline remediation of the 1000+ “superfund” sites nationwide, a key Pruitt program. And he most assuredly will not bring back anything like the Obama Administration’s clean power plan with its “renewable” solar and wind power mandates.  Instead, the switch from coal to more efficient gas-fired power plants is likely to continue.

The lynchpin of EPA’s regulatory apparatus for global warming is the 2009 “Endangerment Finding” from emissions of carbon dioxide.  According to the 2007 Supreme Court decision in Massachusetts v. EPA, if the Agency finds that resultant global warming endangers health and welfare, it can then regulate those emissions under the Clean Air Act Amendments of 1990.

The Finding is in turn based upon prospective climate change generated by large computer models both for climate and an estimate of its “social cost”. In 2016, Science magazine carried a news story by Paul Voosen noting that all of the climate models used by the United Nations Intergovernmental Panel on Climate Change have been “tuned” to simulate 20th century climate changes.  This includes a substantial warming from 1910 to 1945, despite the fact that there was very little additional carbon dioxide in the atmosphere when it began.

In 2017, France’s Frederic Hourdin and 14 coauthors published a landmark paper called “The Art and Science of Model Tuning” in the Bulletin of the American Meteorological Society.  Among other things, they revealed that there is an “anticipated acceptable range” of output. Who decides that?

It turns out that the forecasts of 21st century climate change are subjectively bounded.  Voosen’s article describes the problems encountered at the Max-Planck Institute when their model produced seven degrees (C) of warming for doubled carbon dioxide.  “They had to get that number down”, Voosen wrote.

Then there’s the whole problem of the “social cost of carbon” calculated by the Obama Administration to justify its sweeping “Clean Power Plan”. As shown by Kevin Dayaratna and colleagues at the Heritage Foundation, that cost is extremely sensitive to changes in prospective warming, and conceivably can be negative (i.e. a benefit) for modest warming, because carbon dioxide itself is a boon to plant growth, which includes crops.

Just last month, EPA proposed a revised method to calculate the cost, which cut the previous estimate by around 85%.

The model tuning, and the subjective estimates of both the amount and costs of future warming, indeed may endanger the Endangerment Finding itself.  The new Acting Administrator should revisit that critical 2009 document.

In the 1980s, there was concern regarding the endangered sea otter population in California, so Congress passed a law by which a group of otters would be relocated to an island off the coast where they might flourish. Congress was concerned, however, that the relocated otters might cause problems for the fishermen who made their living in those same waters, and so the legislation mandated that the agency in charge set up a management zone which would prevent the otters from damaging the fisheries. It also gave legal protection to well-meaning fishermen who accidentally caused the death of a sea otter—an accident which would otherwise have grave consequences under the Endangered Species Act.

The otters flourished, the fisheries were protected, and everything worked well enough for the next few decades—until some environmental groups convinced the federal government to remove the fisheries’ protections. Congress had balanced the interests at stake when crafting the legislation, but now the feds considered that balance inconvenient. The agency rescinded the fisheries’ regulation, yet left the otters in their new home. A number of groups that depend on the fisheries were nonplussed by this change, and filed a lawsuit.

Under existing Supreme Court precedent, when agencies interpret the statutes for which they are responsible, courts grant them what is known as Chevron deference. This framework has two steps: first, the court asks whether the language of the statute is ambiguous; if it is, the court then asks whether the agency’s interpretation is anything but “arbitrary and capricious.” In other words, the agency doesn’t have to be right, but it can’t be crazy. But this framework is predicated on a text that the court can examine to judge the clarity or lack thereof. Here the statute says nothing about the circumstances whereby the fisheries protection can be rescinded; it says only that the agency must issue it.

The U.S. Court of Appeals for the Ninth Circuit didn’t care about the legal niceties. It declared that Chevron applies not only to unclear congressional commands, but to congressional silence. If the statute doesn’t say the agency can’t  do something, they court will defer to the agency’ judgement as long as it is a “reasonable policy choice.” The plaintiffs have now filed a petition asking the Supreme Court to take up their case and reject the extension of Chevron from mere ambiguity to silence.

The Cato Institute, joined by the Goldwater Institute and Cause of Action Institute, filed a brief in support of the petition. We argue that Congress alone has authority to authorize federal action. If there is no express grant of authority, then the agency is by definition not empowered to act. Allowing agencies to make up their own rules anytime Congress has neglected to preempt them would run afoul of the principles of “nondelegation,” a constitutional doctrine that holds that it is Congress that legislates, not the executive branch.

We urge the Court to take up California Sea Urchin Commission v. Combs and put a stop to this perfunctory rubber-stamping of the unaccountable administrative state.

A persistent myth surrounding the ongoing Syrian refugee crisis is that the wealthy Gulf States are not sponsoring Syrian refugees.  As I wrote in late 2015, the Gulf States did not host refugees but they were sponsoring almost 1.4 million Syrian emigrants in 2013 – about a million more than they were sponsoring in 2010 before the Syrian civil war began.  The recently released World Bank bilateral migration index for 2017 shows that Gulf Countries are still sponsoring about 1.2 million Syrians, a 12 percent decline relative to 2013 (Table 1).

Table 1: Syrians Living in Gulf States

These Syrians are technically not “refugees” because Saudi Arabia and the other Gulf States are not signatories to the 1951 UNHCR convention that created the modern international refugee system. Statements by government spokesmen in the Gulf States confirm that they have taken in large numbers of “Arab brothers and sisters in distress,” but that they do not abide by international law governing refugees. In many cases, these government extended work and residency permits to Syrians who were already there when the civil war began in 2011, allowed them to bring their families, and then permitted other Syrians to join them.

The total number of Syrians in the Gulf States declined by 12 percent from 2013 to 2017 but their share of all Syrians living outside of their home country more than halved. The number of Syrians living outside of Syria in 2017 increased by 96 percent over 2013, from about 3.9 million to 7.8 million (Table 2). About 82 percent of the global increase in the number of Syrian emigrants from 2013 to 2017 settled in Turkey and Lebanon. A full 88 percent of all Syrians who left Syria from 2010 to 2017 settled in other Middle Eastern countries. Of all Syrian emigrants globally, 85 percent living in the Middle East (Figure 1).

Table 2: Syrians Living in Other Middle Eastern Countries
Copy: Figure 1: Where Syrians Emigrants Are Living

Every additional Syrian emigrant living in the Gulf States is one fewer potential refugee elsewhere. Although the Gulf States have cut the number of Syrians living there since 2013, they are still housing over 1.2 million. The mere fact that the Gulf States have allowed large numbers of Syrians to live in their territory has helped relieve the humanitarian crisis somewhat. As much criticism as we can heap on the Gulf States for other issues, at least they allowed many Syrians to live there during the worst years of the Syrian civil war.

Several media reports citing the U.S. intelligence community and arms control experts indicate that North Korea has upgraded its infrastructure for building nuclear weapons and ballistic missiles in recent months. The revelations counteract Trump’s optimistic tweet that “There is no longer a Nuclear Threat [sic] from North Korea” following his summit with Kim Jong Un last month.

The United States should not be surprised by these developments. The Trump-Kim summit was not the culmination of a long, arduous diplomatic process as most summits are, but a high-profile meeting that had far more symbolic value than nitty-gritty arms control substance. This was the expected outcome given the short period of time to prepare for the summit and the fact that it almost fell apart just a few weeks before it happened. Additionally, Kim made no pledge to halt construction of ballistic missiles, fissile material, or related infrastructure, and it isn’t surprising that he would want to keep expanding these capabilities until it is necessary to give them up.

Concessions made by Washington and Pyongyang have built some trust and momentum for diplomacy, but this is not sufficient to achieve denuclearization. Looking ahead, U.S. negotiators should take these recent revelations seriously and press Pyongyang to reveal more information about its nuclear and missile infrastructure. The United States should also demand that North Korea allow inspectors to keep tabs on nuclear and missile facilities and verify North Korean compliance with promises to dismantle facilities as negotiations progress. Creating a robust inspection and verification regime is a necessary step to ensure that North Korea is living up to its rhetoric and taking steps toward denuclearization.

The recent revelations should also be a sobering reminder for the Trump administration that it has a long road ahead. Denuclearization is possible, but getting there will require years of careful diplomacy that fundamentally transforms the nature of U.S.-North Korea relations. The administration should disabuse itself of the notion that denuclearization will be achieved quickly and easily. The history of U.S.-North Korea relations is replete with diplomatic initiatives that failed and dashed the optimism that accompanied their announcements. Trump and his senior officials should not get ahead of themselves in declaring victory when so much work needs to be done.

While the recent revelations should curb the Trump administration’s enthusiasm, it would be unwise to conclude that diplomatic engagement with North Korea is doomed to fail. There is still value to talking with the North even if they are hiding nuclear enrichment activities and building ballistic missiles. The United States should keep up its nuclear intelligence efforts as it negotiates with Pyongyang to put together a complete picture of the North’s nuclear enterprise and verify if the North is complying with the agreements it makes. Good intelligence is an essential part of effective diplomacy and should be conducted in concert with negotiations.

The Trump administration should take Pyongyang’s efforts to conceal nuclear activity and expand its missile production capacity seriously. The Singapore summit was the start of a long process and problems like this are to be expected, especially in the early stages of talks. The Trump administration needs to set realistic goals and expectations, maintain a watchful eye over Kim’s nuclear facilities, and push for a rigorous inspection regime at the negotiating table. The photo ops are over. Time for the real work to begin.

If government is going to establish public schools, which must be secular, the U.S. Constitution requires that it also provide school choice for religious Americans. So argued Corey DeAngelis and I last week in a Detroit News op-ed, and it’s something you might mull over this 4th of July as you watch over your grilling burgers or, hopefully, even more satisfying smoked brisket or bacon-wrapped hot dogs. (It’s always a good time to raise your outdoor cooking game!) Government must not inculcate religious beliefs, but it also must not elevate non-belief over religion, hence the need for choice.

If you want to seriously grapple with this and have a fair amount time tomorrow between firing up some savory dishes and sparking some dazzling fireworks, read this 2013 Florida Law Review article by Northwestern University law professor Steven Calabresi and attorney Abe Salander. It lays out in great legal detail how equal protection under the law demands equal access to education consistent with one’s values, religious and non-religious alike.

Write Calabresi and Salander, “states discriminate on the basis of religion when they administer secular private schools that are unpalatable to religious individuals and that are funded with taxpayer dollars….religious students are effectively excluded by the character of the public schools, and general atmosphere of public schools.”

If you don’t want to tax yourself—it will be the 4th of July, after all—with too much heavy legal reading, maybe this grilling-relevant analogy will kindle some thoughts. Suppose you love hamburgers (or brisket!) and the government promised neutrality regarding what meat people eat. Then suppose legislators passed a law spending tax dollars to feed everyone, but only on vegetables so as not to favor a meat. What kind of neutrality would that be? The kind that elevates vegetarians over all meat eaters, de facto rendering the latter second-class citizens. Secular public schooling absent school choice does the same, only unlike food, education deals with nothing less than the development of human minds!

None of this, of course, is to say that veggies should have no place on your grill tomorrow. They can be delicious. But favoring them to the exclusion of burgers, brisket, and dogs would be, well, un-American.

As The Wall Street Journal, The New York Times, and several other news outlets reported recently, although it has managed to avoid setting off another taper tantrum like that of 2013, the Fed is having a bad case of unwind jitters, thanks to unanticipated tightening in the market for fed funds.

That tightening has manifested itself in a considerable narrowing, since the Fed began unwinding in late October 2017, of the gap between the Fed’s IOER rate and the “effective federal funds” (EFF) rate — meaning the actual rate banks have had to pay other banks, or GSEs with Fed accounts, for unsecured, overnight funds.

In effect the narrowing IOER-EFF gap means that the Fed’s recent IOER rate hikes have ended up being more potent than was expected. As a step toward addressing the problem, the FOMC at its last meeting decided to redefine its funds rate target range upper limit. Now, instead of being equal to the going IOER rate, the upper limit is defined as the IOER rate plus 5 basis points. By itself the new definition is the sheerest of window dressings. But because the Fed, which had been contemplating raising its IOER rate to 200 basis points, could now raise it to just 195 basis points, whilst still sticking to its original rate move, as defined by the upper and lower bounds of its rate target range, the change marked a slight retreat from the Fed’s original tightening plans.

That the Fed risked over-tightening if it adhered to its original normalization plans is something Heritage’s Norbert Michel and I warned about, in an American Banker op-ed, a little over a year ago. “If the Fed keeps paying banks not to lend at the same time it starts slimming its balance sheet,” we said, “we could be in for very tight money.” That’s because the Fed’s plans called for it to  shrink its balance sheet at a predetermined rate, while also adhering to a schedule of rate hikes aimed at re-establishing a supposedly “normal” effective funds rate sometime in 2019. Last May the Fed anticipated getting the funds rate back to 3 percent; since then it has lowered that goal to 2.8 percent.

That raising the IOER rate tightens money is obvious enough. But why, in a system in which banks hold trillions of dollars in excess reserves, should shrinking the Fed’s balance sheet itself lead to further tightening? The short answer is that, instead of being spread evenly throughout the banking system, excess reserves have mostly piled-up in a small number of very large banks, and especially in a handful of foreign banks with U.S. branches. For various reasons these banks find the return on reserve balances especially attractive compared to what they might earn by parting with those reserves. When the Fed was gobbling-up assets, these banks were gobbling-up reserves, thereby keeping them from contributing to any general increase in lending.

Now that the Fed has begun selling assets in order to buy-back reserves, the same IOER payments that encouraged certain banks to hoard reserves in the first place are discouraging them from parting with them. Instead, banks that held relatively small reserve cushions are choosing to swap reserves for other assets, and to rely more on federal funds to stay liquid. That means competing harder for a relatively small pool of fed funds, now supplied exclusively by GSEs, and driving the fed funds rate up closer to the IOER rate. (That the EFF rate never goes noticeably above the IOER rate is easily explained by the fact that the supply of fed funds becomes highly elastic at rates at or above the IOER rate, for such rates will convince even the most aggressive reserve hoarders to disgorge reserves.)

The question remains whether, and how, the new circumstances will alter the Fed’s future plans. Should money market conditions continue to tighten, Fed officials will face two options. One is to reduce their planned IOER rate increases, either by reducing their announced target range increases or by further increasing the difference between the IOER rate and the range’s upper limit. The other is to renege on their promised balance sheet unwind.

Not surprisingly, Fed officials appear increasingly inclined to take the latter course, and to thereby abandon a large chunk of their long-promised normalization plan. As the NYT reported,

That narrowing gap between the federal funds rate and the interest on excess reserves, or IOER, has stoked a debate over whether the Fed’s reduction of its massive bond holdings, which started in October 2017, has made it more expensive for banks to borrow excess reserves to meet regulatory requirements or fund their daily needs, analysts said.

This outcome was also one I predicted a while ago. In a March working paper version of Floored!, my forthcoming book-length critique of the Fed’s post-crisis operating system, I wrote that

the Fed’s determination to raise its policy rate (or rates) to a preconceived “normal” level, and to do so within a relatively rapid span of time, seems imprudent, and may, if pursued obstinately, ultimately cause it to further delay its planned balance sheet reduction, or even to abandon it altogether.

Of course, the Fed could easily stick to, or even hasten, its balance-sheet unwind, while still providing for a plentiful supply of federal funds, by lowering its IOER rate enough, relative to other market rates, to encourage the handful of banks now holding 90 percent of all excess reserves to part with them. But that would mean abandoning the Fed’s “floor” operating system, and establishing a “corridor” system in its place. Alas, whether its because they subscribe to some dubious Fed economics or for other reasons, most Fed officials seem unwilling to entertain such a switch — despite having once planned on it, and despite the well-established advantages of corridor systems, and their corresponding worldwide popularity.

It may yet be possible to change those officials’ minds. Let’s hope so. For if not, as I warned in a previous post, the day may not be far off when Mr. Powell finds himself transformed into the world’s first Six Trillion Dollar central banker. That is perhaps a burden he’s willing to bear. But it shouldn’t be one we’re willing to assign, to him or to any other mortal.

[Cross-posted from Alt-M.org]

Is an “excessive” fine constitutional if it’s levied against someone other than a human being? According to the Colorado Department of Labor and Employment, yes it is.

Mrs. Soon Pak manages Dami Hospitality, LLC, a company that runs hotels and motels in Colorado. Pak is a Korean immigrant with minimal proficiency in English. She relies on third-party professionals to assist her in maintaining compliance with the myriad of regulations that even native English speakers struggle to understand. Between 2006 and 2014, Dami’s insurance agent failed to renew the company’s worker’s compensation insurance, despite assuring Pak that Dami maintained full coverage.

In 2014, the Labor Department gave notice that Dami’s policy had lapsed, and Pak immediately secured coverage. A few weeks later, the Department imposed a fine of $841,200, including daily penalties the Department had allowed to accumulate for a full eight years before finally giving notice to the company. Put simply, the Department assessed nearly a million-dollar fine against a small corporation—which grosses less than a quarter of the total fine—for a violation that was solved immediately after notice was received, with no actual harm done to anyone. This fine is clearly excessive compared to Dami’s violation. To frame it in the worker’s comp context, if an employee is killed on a job, his dependent receives $250,000. That means the Department considers the results of Dami’s lazy insurance agent to be worse than three workplace fatalities.

We disagree. Unwilling to acquiesce to an attempt to justify excessive fines, Cato and the Independence Institute filed an amicus brief in support of Dami before the Colorado Supreme Court, to which the state had taken the case after the Colorado Court of Appeals set aside the fine as unconstitutionally excessive under the Eighth Amendment.

The Department argues that corporations have no Eighth Amendment protection, but this provision an absolute limit on what the government can do. There is no loophole that empowers a government bureau to impose excessive fines on selected defendants due to their organizational structure.

Regardless of who it is assessed against, no government has the lawful power to impose an excessive fine. By arguing that the Excessive Fines Clause can never apply to corporations, the Department is literally claiming the power to fine corporations excessively. The result would be contrary to our constitutional heritage, which comes from historical experience that governments with the power to impose excessive fines harm both people and the rule of law. Imposing an admittedly excessive fine would be a danger to the rule of law, ratifying the state’s ability to ruin persons who do not deserve to be ruined, by definition. The danger of such excessive power does not vanish because their targets have chosen to associate in a corporation. Any fine that is “excessive” necessarily exceeds the powers the people granted to a government bound by the law.

Any day now, the Trump administration will release a final rule allowing greater consumer protections in so-called “short-term, limited duration insurance,” a category of health insurance Congress exempts from federal health insurance regulations, including ObamaCare regulations. In 2016, the Obama administration arbitrarily prohibited certain consumer protections in these plans. It shortened the maximum duration from 12 months to 3 months; state insurance regulators complained this exposes sick consumers to underwriting and loss of coverage. It likewise prohibited “renewal guarantees” that could protect consumers who develp expensive illnesses from ever facing underwriting or losing their coverage. Last year, President Trump urged the Department of Health and Human Services to allow short-term plans to last 12 months and to allow consumers to bridge together consecutive short-term plans with “renewal guarantees” that protect them from being re-underwritten after they get sick. 

In comments I filed on the proposed version of the Trump administration’s rule and an accompanying Wall Street Journal oped, I explained some of the benefits of allowing these consumer protections. As ObamaCare premiums have been soaring and the consulting firm Avalere finds “substantial increases” in ObamaCare premiums for 2019, I wrote that these consumer protections would mean “consumers could purchase health-insurance protection for 90% less than the cost of the average ObamaCare plan.“ Renewal guarantees could also keep people with expensive conditions out of ObamaCare plans, thereby improving ObamaCare’s pools and reducing the cost of the law. Along the way, it would “increas[e] transparency in government and provid[e] voters and policymakers with better information about the cost of the ACA.” Thirty-five senators sent a letter to the Trump administration citing my regulatory comments and urging the administration to implement both changes.

My comments did not cover all the benefits of these consumer protections, however. What follows is updated and new infomation about the benefits of those changes.

Critics Agree: Expanding Short-Term Plans Would Cover More Americans

The American Action Forum has a roundup of economic projections of the impact of the proposed changes. Every organization that has modeled these changes, including those that oppose these changes, has found they would increase the number of Americans with health insurance.

These projections indicate expanding short-term plans would produce significant social-welfare gains. The Urban Institute, for example, projects 2.2 million consumers would leave ObamaCare plans for short-term plans because they would “prefer STLD to ACA-compliant plans,” which suggests a large increase in consumer welfare. Similar welfare gains would result from as many as 1.7 million previously uninsured Americans enrolling in short-term plans with the proposed consumer protections.

Protecting Conscience Rights

An often-overlooked benefit of allowing these consumer protections in short-term plans is they would free more consumers to avoid coverage they do not want, including coverage that may violate their religious convictions.

As Susan Marquis and colleagues note, “Purchasers derive value from having the range of choices that the individual market offers.” The range of health insurance choices will expand, and consumer welfare will increase, if the Trump administration allows short-term plans to last 12 months and offer renewal guarantees.

The fact that short-term plan premiums are lower than ObamaCare premiums for the vast majority of consumers because they often exclude such coverage captures much of this benefit. But there are additional welfare gains that premium levels do not capture, including those that come from freeing consumers to purchase coverage consistent with their views on contraception.

ObamaCare requires all health insurance plans to cover all FDA-approved forms of birth control. This requirement forces devout Catholics and others to choose between going without health insurance or paying to support a practice they believe is an offense against God. The Trump administration has taken steps that allow protect conscience rights for some employers. But these changes do not protect all employers, much less all consumers.

Short-term plans, however, are exempt from ObamaCare’s contraceptives mandate. Allowing short-term plans to offer 12-month terms and renewal guarantees would give Catholics and others full freedom to purchase secure health insurance without violating their their religious beliefs. A world of wanted coverage would make a world of difference.

Improving ObamaCare’s Risk Pools

Finally, renewal guarantees would improve ObamaCare’s risk pools by keeping potentially millions of patients who develop expensive conditions out of those risk pools.

There is a sizeable if underappreciated literature showing that renewal guarantees provide secure coverage to patients even after they develop expensive medical conditions. In “Guaranteed Renewability in Insurance” (Journal of Risk and Uncertainty, 1995), Mark Pauly, Howard Kunreuther, and Richard Hirth explain how renewal guarantees can provide patients secure insurance protection even after they get sick: 

Insurances of many types typically cover some risk for a limited time period. For instance, health insurance contracts conventionally provide coverage against loss for a year, although longer and shorter terms are possible. Over that time period, the premium is known with certainty. At the beginning of the next period, however, the factors which determine the level of the premium that an insurance purchaser is charged may change…

In the case of individual health insurance, for example, the discovery of an indicator of chronic disease can cause a person’s insurance premiums to jump substantially…

Effectively, [with a renewal guarantee,] the consumers initially prepay enough premiums to cover the excess losses of everyone who becomes a high risk.

In “Incentive-Compatible Guaranteed Renewable Health Insurance Premiums” (Journal of Health Economics, 2006), Bradley Herring and Mark Pauly explain: 

A person initially in good health who develops a chronic illness may expect to have above-average expenses in subsequent years. If the annual insurance premium is set proportional to expected expense in each year, someone who contracts a multi-year condition would face a substantial and unexpected jump in premiums—something public policy finds undesirable and something which a risk-averse person would prefer to avoid. A potential solution to this problem is for the insurance policy purchased when the individual is still in good health to contain a guaranteed renewability (GR) provision which stipulates that no insured’s future premium for the given policy will increase more than any other insured’s premium increases. Thus, people who unexpectedly become high-risk will pay the same premium as those who remain low-risk.

See also John Cochrane, “Time-Consistent Health Insurance” (Journal of Political Economy, 1995).

Researchers have found considerable evidence that, prior to ObamaCare, widespread renewal guarantees in the individual market did indeed provide secure, long-term insurance for those who develop expensive illnesses. In “Pooling Health Insurance Risks” (American Enterprise Institute, 1999), Pauly and Herring found that renewal guarantees make premiums affordable for high-cost patients: 

The overarching message from these data is that nongroup premiums do vary with risk, but not nearly as strongly as would be consistent with vigorous risk rating. Perhaps more important, they do not vary at all with risk as measured by chronic conditions…This is not to deny that some people pay very high premiums for their coverage, and that some of the people who do so are high risks. Apparently, however, many high risks do not pay higher-than-average nongroup premiums.

In “Individual Versus Job-Based Health Insurance: Weighing The Pros And Cons” (Health Affairs, 1999), Mark Pauly, Allison Percy, and Bradley Herring write:

In other words, there was substantial cross-subsidization of high-risk by low-risk persons in the individual insurance market in a period in which there was only minimalstate regulation. Premiums do rise with risk, but the increase in premiums is only about 15 percent of the increase in risk. Premiums for individual insurance vary widely, but that variation is not very strongly related to the level of risk.

From an economic viewpoint, the main problem with risk rating is…that the occurrence of an extended illness may subject buyers to the risk that their premium may jump, potentially by several multiples. While a thousand-dollar jump in one’s annual premium may seem trivial compared with the high medical bills the insurance will cover, risk-averse persons would prefer to avoid it. There is a simple way to do so: Buy insurance when healthy but pay extra for guaranteed renewability or protection from cancellation.

The evidence indicates that even before the Health Insurance Portability and Accountability Act (HIPAA) became effective in 1997, the majority of individual policies contained this feature. The intent of guaranteed renewability can be circumvented (for example, by canceling all policies in a class), but it usually is not, for the obvious reason that sale of this feature requires that it be effective most of the time…In recent years some states have required guaranteed renewability, but it is apparent that this was a common feature of individual (not small-group) policies even before it was required. The presence of guaranteed renewability may account in part for the moderate increase in paid premiums with risk, noted earlier.

In “How Private Health Insurance Pools Risk” (NBER Reporter, 2005), Pauly writes:

Although there have been some anecdotes about insurers slipping out of their policy provision to renew coverage at group average premiums for high risks by canceling the coverage entirely, we conclude that on average guaranteed renewability works in practice as it should in theory and provides a substantial amount of protection against high premiums to those high risk individuals who bought insurance before their risk levels changed. The implication is that, although there are some anecdotes about individual insurers trying to avoid covering people who become high risk (for example, by canceling coverage for a whole class of purchasers), the data on actual premium-risk relationships strongly suggest that such attempts to limit risk pooling are the exception rather than the rule.

Indeed, Pauly concludes, guaranteed renewability does such a good job at protecting the sick from higher premiums, regulations that prohibit charging higher premiums to the sick (i.e., community rating) doesn’t change much:

We find that regulation modestly tempers the (already-small) relationship of premium to risk, and leads to a slight increase in the relative probability that high-risk people will obtain individual coverage. However, we also find that the increase in overall premiums from community rating slightly reduces the total number of people buying insurance. All of the effects of regulation are quite small, though. We conjecture that the reason for the minimal impact is that guaranteed renewability already accomplishes a large part of effective risk averaging (without the regulatory burden), so additional regulation has little left to change.

In “Consumer Decision Making in the Individual Health Insurance Market” (Health Affairs, 2006), Susan Marquis et al. find renewal guarantees made the individual market “a source of long-term coverage for a large share of subscribers.” This occurs because enrollees who purchase coverage and then later become sick “are not placed in a new underwriting class.” The authors attribute this to renewal guarantees: “We also find that there is substantial pooling in the individual market and that it increases over time because people who become sick can continue coverage without new underwriting.” The authors also found that, despite underwriting, “a large number of people with health problems d[id] obtain coverage” in the individual market pre-ObamaCare. The authors conclude:

Our analysis confirms earlier studies’ findings that there is considerable risk pooling in the individual market and that high risks are not charged premiums that fully reflect their higher risk. Moreover, guaranteed renewal and underwriting only at initial enrollment appear to help promote pooling to some extent, and they protect subscribers from financial consequences associated with changes in their health status.

In “Risk Pooling and Regulation: Policy And Reality in Today’s Individual Health Insurance Market” (Health Affairs, 2007), Pauly and Herring found that as a result of renewal guarantees:

Analysis of new data on the relationship between and premiums and coverage in the individual insurance market and health risk shows that actual premiums paid for individual insurance are much less than proportional to risk, and risk levels have a small effect on obtaining coverage. States limiting risk rating in individual insurance display lower premiums for high risks than other states, but such rate regulation leads to an increase in the total number of uninsured people. The effect on risk pooling is small because of the large amount of risk pooling in unregulated [i.e., guaranteed-renewable] individual insurance…

As the MEPS data show, the predicted high risks (above the median) had both high expected expenses (before the fact) and high actual expenses (after the fact); they were roughly four times higher compared with the bottom half. But the premiums that higher-risk people actually paid were only, on average, about 1.6 times those of lower-risk people…At least half of their higher expected expense appears to be pooled, even in the individual market…

Premiums were definitely far from proportional to risk, so there was a substantial amount of risk pooling present…Although in these data people of a given age and sex with chronic health conditions paid higher premiums than people without such conditions, individual insurance, through guaranteed renewability or some other device, pooled 84.5–88.5 percent of the risk…

Yet again in “Incentive-Compatible Guaranteed Renewable Health Insurance Premiums” (Journal of Health Economics, 2006), Herring and Pauly find “evidence that guaranteed renewability provisions appear to be effective in providing protection against reclassification risks in individual health insurance markets.”

Perhaps the strongest evidence that renewal guarantees will keep high-cost patients out of ObamaCare’s risk pools comes from “How Risky Is Individual Health Insurance?” (Health Affairs, 2008), in which Mark Pauly and Robert Lieberthal find that guaranteed-renewable, individual-market insurance often does a better job than employer-sponsored insurance of providing secure coverage to patients with high-cost illnesses. As the below graph shows, high-cost patients with guaranteed-renewable coverage are roughly half as likely to end up uninsured as high-cost patients with small-group coverage.

The more high-cost patients that renewal guarantees can keep from becoming losing their non-ObamaCare plans–including, as I discuss in my regulatory comments and Wall Street Journal oped, those enrolled in employer plans–the more stable and less costly ObamaCare will be.

Conclusion 

Giving consumers the choice of purchasing renewal guarantees, either in conjunction with a short-term plan or as a standalone product protecting enrollees from underwriting in that market, would produce significant benefits well in excess of any costs. It would increase the number of Americans with health insurance, allow Americans to purchase insurance that respects their religious beliefs, and improve ObamaCare’s risk pools.

A fair reading of Food and Drug Administration Commissioner Scott Gottlieb’s “Sunday Tweetorial” on the opioid overdose crisis leaves one simultaneously encouraged and frustrated. 

First the encouraging news. The Commissioner admits that the so-called epidemic of opioid overdoses has “evolved” from one “mostly involving [diverted] prescription drugs to one that’s increasingly fueled by illicit substances being purchased online or off the street.” Most encouraging was this passage:  

Even as lawful prescribing of opioids is declining, we’re seeing large increases in deaths from accidental drug overdoses as people turn to dangerous street drugs like heroin and synthetic opioids like fentanyl. Illegal online pharmacies, drug dealers and other bad actors are increasingly using the Internet to further their illicit distribution of opioids, where their risk of detection and the likelihood of repercussions are seen by criminals as significantly reduced.

As I have written here and here, the overdose crisis has always been primarily caused by non-medical users accessing drugs in a dangerous black market fueled by drug prohibition. As government interventions have made it more expensive and difficult to obtain diverted prescription opioids for non-medical use, the black market responds efficiently by filling the void with heroin, illicit fentanyl (there is a difference) and fentanyl analogs. So policies aimed at curtailing doctors’ prescriptions of opioids to patients only serve to drive up deaths from these more dangerous substitutes, while causing patients to suffer needlessly, sometimes desperately, in pain. Gottlieb validates my argument in his “tweetorial,” providing data from the Centers for Disease Control and Prevention and the Drug Enforcement Administration. 

Now for the frustrating news. Gottlieb next reminds us, “No controlled substances, including opioids, can be lawfully sold or offered to be sold online. There is no gray area here.” He provides evidence of rampant illegal internet marketing of prescription opioids, with 95 percent of internet pharmacy websites selling opioids without a prescription, often conducting transactions with cryptocurrencies, and shipping these orders “virtually anywhere in the US.” This is also the way illicit fentanyl is flooding the market. 

Gottlieb states, 

Senate investigators found hundreds of transactions in more than 40 states, adding up to more than $750 million worth of fentanyl by its street value, from just six online sellers, resulting in several deaths. People are increasingly going online to illegally buy drugs like Vicodin or Percocet, but we believe they are often unknowingly getting pressed fentanyl – sometimes at lethal doses – given the lower cost and greater profitability of fentanyl for drug trafficking organizations 

So, Gottlieb provides more evidence that fighting the war on drugs is worse than a costly exercise in futility—it is the major cause of opioid overdose deaths in the US.  But does he suggest a reassessment of America’s longest war? Does he cite the success Portugal has had in saving lives while reducing substance abuse since it decriminalized all drugs in 2001? Does he propose redirecting opioid policies away from the number of pills doctors prescribe and toward an emphasis on harm reduction

No. Instead the Commissioner announces that the FDA is “increasing enforcement activities to crack down on the illegal sale of opioids, particularly drugs sold online and typically shipped through the mail.”  This week the FDA is convening “internet stakeholders” to help find new ways to crack down on illegally operated internet sites. In other words, more of the same.

Therein lies the frustration. It seems as if Dr. Gottlieb understands what is really behind the overdose crisis and that the present approach is misguided and is exacerbating matters. But he has yet to muster the will to challenge the prevailing narrative reverberating around policymakers. Hopefully, he will take that next step sometime soon. Until he does, don’t expect the death rate to slow.

In a page-one piece in yesterday’s New York Times, Supreme Court reporter Adam Liptak offered up a generally even-handed account, misleadingly headlined “How Conservatives Weaponized the First Amendment,” about how liberals and the left have increasingly abandoned the First Amendment’s protection of free speech. No less than Justice Elena Kagan invoked the weaponizing charge on the Court’s last day last week when she dissented vigorously from the Court’s decision that Illinois could no longer compel a public-sector non-union member to support union activity he opposed. “There is no sugarcoating today’s opinion,” she wrote.

[I]t prevents the American people, acting through their state and local officials, from making important choices about workplace governance. And it does so by weaponizing the First Amendment, in a way that unleashes judges, now and in the future, to intervene in economic and regulatory policy.

Only the day before, Justice Kagan objected similarly to the Court’s rejection of a California law that required religiously oriented “crisis pregnancy centers” to provide information to women about abortion options.

Like conservatives of old—Robert Bork argued that “constitutional protection should be accorded only to speech that is explicitly political”—many on the left today would allow a wide birth to legislatures to restrict speech, especially where they see it as harmful to interests they support—unions, as here, women (pornography), democracy (corporate campaign contributions), minorities (white supremacist marches), and, more broadly, consumers (commercial speech).

In a piece worth reading, Liptak points to areas where conservative judges have protected speech they abhor: violent video games, lies about military awards, and more. And he nicely captures the rationale for the shift on the left with a quote from Georgetown Law’s Michael Seidman:

When I was younger, I had more of the standard liberal view of civil liberties. I’ve gradually changed my mind about it. What I have come to see is that it’s a mistake to think of free speech as an effective means to accomplish a more just society.

Free speech as a means [toward progressive ends], not as an end in itself. Just which side today would weaponize the First Amendment?

Do arms sales cause war? Or do wars cause arms sales? Critics of arms sales often argue that selling weapons abroad fuels conflict. And indeed, one can point to one or more sides using American weapons in many recent conflicts including Syria, Yemen, and Iraq. Skeptics argue, on the other hand, that weapons don’t start the fire and that conflicts would arise whether or arms exporters like the United States sell weapons abroad.

The debate has important implications for foreign policy. If selling or transferring weapons abroad makes conflict more likely, or intensifies conflicts already in process, then the United States should rethink its long-held policy of selling weapons to pretty much any nation that wants them. If, on the other hand, arms sales have no impact on conflict or make conflict less likely, then the Trump administration’s intention of expanding arms sales should be seen as a positive move. 

As it turns out, several academic studies have looked at this question. The primary conclusion of these works is that although arms sales do not create conflicts out of thin air, they do make conflict more likely when the conditions for conflict are already present.

The basic logic behind this conclusion is fairly straightforward and has been noted in the academic literature for some time. In a 1998 article, “Arms Transfer Dependence and Foreign Policy Conflict,” David Kinsella argues that states that enjoy a steady flow of arms – especially from multiple countries – tend to pursue more aggressive foreign policies. The increase in the recipient’s military capability makes victory in a potential conflict more likely, which in turn raises the likelihood that the state will start disputes, demand concessions from its neighbors in those disputes, and to escalate to conflict if negotiations fail to produce the desired outcome. Using case studies from Israel, Egypt, Syria, Iran, Iraq, India, Pakistan, Ethiopia, and Somalia Kinsella finds that, when a country has more than one weapons supplier, arms sales drastically increase the chances of conflict.

In their 2002 article, “The Arms Trade and the Incidence of Political Violence in Sub-Saharan Africa, 1967-97,” Cassady Craft and Joseph Smaldone identify another mechanism by which arms sales can fuel conflict. They find that autocratic governments importing weapons are more likely to use those weapons to oppress/mistreat/kill their own citizens since they now have a greater coercive capability.

But despite the straightforward logic behind the arms sales/conflict connection, most work on the topic to date has relied on case studies, which are wonderful for highlighting potential causal mechanisms but not much use for establishing whether those mechanisms hold across the time and space. Until recently there had not been any work using statistical methods that would allow scholars to state with confidence which direction the causal mechanism actually flows – that is, do arms sales precede conflict or do impending conflicts lead to increased arms sales? Happily, the most recent article on arms sales by Oliver Pamp and his colleagues in the January 2018 issue of the Journal of Peace Research entitled, “The Build-Up of Coercive Capacities: Arms Imports and the Outbreak of Violent Intrastate Conflict,” uses a simultaneous equations model to overcome this problem. Looking at the relationship between arms sales and the outbreak of civil conflicts, the authors confirm the general thrust of previous research, concluding that:

“…while arms imports are not a genuine cause of intrastate conflicts, they significantly increase the probability of an onset in countries where conditions are notoriously conducive to conflict. In such situations, arms are not an effective deterrent but rather spark conflict escalation.”

This new confidence in the arms sales/conflict connection should compel serious revision to American arms sales policies. Since 2002 the United States has sold over $286 billion dollars of weapons to 167 countries. These exports have gone to numerous countries where the conditions were or remain ripe for conflict. U.S. arms transfers to an unstable Iraq preceded the emergence of the Islamic State, but wound up helping amplify the Islamic State’s military capability when it took vast quantities of American weapons from defeated Iraqi army units. U.S. arms sales over the past decade also helped prepare Saudi Arabia to launch its disastrous intervention in Yemen and enabled the Nigerian government to unleash more effective violence on its own citizens, just to list a few examples.

Academic research often gets a bad rap in policy making circles. In the case of arms sales and arms transfers, however, the scholarly literature has correctly pointed out the serious risks involved. If the United States is serious about preventing conflict and managing regional stability in trouble spots around the globe, it would do well to stop pouring gas on the fire.

This blog post was written with help from Jordan Cohen, a Ph.D. student in political science at the Schar School of Policy and Government at George Mason University.

The abolish ICE movement is spreading among mostly left-wing activists and politicians after the revelation of mass family separations along the U.S. border.  Immigration and Customs Enforcement (ICE) is the federal agency charged with enforcing immigration laws in the interior of the United States, not along the border, but public anger is focusing on them regardless.  Senator Elizabeth Warren (D-MA) said, “The president’s deeply immoral actions have made it obvious we need to rebuild our immigration system from top to bottom starting by replacing ICE with something that reflects our morality and that works.”  Senator Kirsten Gillibrand (D-NY) said, “I believe you should get rid of it, start over, reimagine it and build something that actually works.”

Many are attempting to portray the abolish ICE movement as a shadow campaign for open borders but, as those statements above show, it is largely political grandstanding without much substance yet.  Senator Richard Blumenthal (D-CT) is correct that abolishing ICE without changing policies wouldn’t accomplish much.  ICE was established in 2003 under the Department of Homeland Security (DHS) as part of the government’s post-9/11 reorganization.  The government deported illegal immigrants from the interior of the United States prior to 2003.  There is not much point in abolishing ICE if another government agency then gains the same power.  Furthermore, untangling ICE from the rest of DHS can be tricky without wholesale reform.   

If the goal is to limit interior immigration enforcement to serious criminals and remove the constant fear felt by otherwise law-abiding illegal immigrants, their American families, and businesses in the United States then there are two legal reforms that will functionally abolish ICE without disbanding the agency.  The first is to reform immigration law to change all crimes into civil offenses.  The second is to reorganize Homeland Security Investigations (HSI) by giving it some of the responsibility of Enforcement and Removal Operations (ERO) and then abolishing the latter agency.  Both reforms will substantially weaken interior immigration enforcement for non-criminals and abolish the worst part of ICE without removing its ability to deport serious criminals and national security threats. 

Abolish Immigration Crimes

Most violations of immigration law are civil offenses that are “remedied” through deportation.  Criminal offenses are punished with jail time and fines.  However, there are some immigration crimes like illegal entry that are misdemeanors with potential jail time as punishment.  Previous Congresses did not consider these crimes to be serious as they are only misdemeanors but, nonetheless, the people who violate them are criminals.  Transforming all criminal immigration offenses, or at least as many as possible, into civil violations guts much of the political rationale for cracking down on illegal immigration.  If none of them are criminal violators of immigration law then the arguments for sending ICE into their communities to harass them diminishes greatly.  This reform also will not prevent the deportation of illegal immigrants who commit other serious crimes. 

Abolish ERO and Revamp HSI

HSI investigates and enforces the most serious criminal violations committed by illegal immigrants and others in the United States involving national security and transnational crime.  ERO mostly partners with the Border Patrol and local law enforcement agencies to apprehend illegal immigrants who haven’t committed crimes worthy of the name.  Two-thirds of ERO’s arrests are for non-criminal offenses and victimless crimes while only 15.4 percent are for violent or property criminals and another 18.8 percent are for crimes with possible victims. 

ERO’s responsibility for apprehending and removing the one-third of its arrests who have committed crimes (broadest definition) should be transferred to HSI.  Thus, part of the resources allocated to ERO every year should be transferred to HSI.  Congress should then abolish ERO and claim a major victory against arbitrary and capricious enforcement of immigration laws.

This reorganization will focus immigration enforcement on criminals and national security threats.  Even better, it will give its proponents the cover to say that they have abolished ICE without removing its ability to deport serious criminals and to lift the specter of harsh immigration enforcement on otherwise law-abiding communities.  

Conclusion

Members of DHS have proposed spinning off HSI and ERO into different agencies because of their largely different responsibilities.  Those DHS bureaucrats believe that ERO’s bad reputation is hindering the ability of HSI to fulfill its more important mission.  The reform I propose above would accomplish the overall goal of protecting HSI’s important work, a DHS goal, while also offering up a bureaucratic sacrifice in the form of a disbanded ERO.  Combined with replacing all criminal immigration violations with civil infractions, these two reforms would largely accomplish the goals of the abolish ICE movement without the difficulty of abolishing ICE.  

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