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Whatever’s happening with James Comey’s testimony, Donald Trump’s Twitter account, or congressional inaction on Obamacare repeal, tax reform, or much of anything else, from where I stand all that is #fakenews designed to distract your eyes from the prize: we have more judicial nominees! In an echo of how the 21 contenders for the Supreme Court vacancy were announced during the campaign, on top of last month’s stellar list of 10 lower-court nominees come 11 more, including three circuit court judicial candidates: Justice Allison Eid of the Colorado Supreme Court to fill Neil Gorsuch’s vacant Tenth Circuit seat; North Dakota District Judge Ralph Erickson for the Eighth Circuit; and Professor Stephanos Bibas of the University of Pennsylvania Law School for the Third Circuit. 

Of those 11, I know three. Eid, a former clerk for Justice Clarence Thomas, is a thoughtful and intellectual jurist much in the mold of her former boss. Bibas is one of the top criminal-law scholars in the country with whom I’ve worked professionally and had a drink personally; he’ll be outstanding but leaves a gaping hole as faculty adviser for Penn’s Federalist Society chapter. And then there’s Stephen Schwartz, an old friend who was a few years behind me at the University of Chicago Law School and who’s been nominated to the U.S. Court of Federal Claims. He’ll be terrific.

If the other eight are of the same caliber as these three (and the previous 10) – and we have no reason to think otherwise given that the administration’s nominations staff and advisers are the same – then this is the sort of #winning of which I won’t ever tire.

The only curiosity is that again there’s no mention of Justice Don Willett of the Texas Supreme Court – and indeed no nominees to the Fifth Circuit at all. As Hugh Hewitt has pointed out, of the 11 original SCOTUS short-listers, five were state judges. Three of them have now been nominated to the federal appellate courts. The two remaining are Tom Lee of Utah (which has no current vacancies) and Willett (and Texas has two vacancies). Moreover, Willett was apparently one of the five or six finalists for the seat that Gorsuch filled, and is close to Texas Senator Ted Cruz. So you’d think he’d be a shoo-in.

Now, I’ve speculated about the possibility of some grand bargain whereby two other worthies get the Fifth Circuit slots but Willett goes to the high court whenever Justice Anthony Kennedy decides to retire. But that’s pie-in-the-sky because so many other stakeholders are involved at that point. Of course, if this deal – the best deal! – is ratified by the president himself, that would be bigly indeed.

In the meantime, the White House counsel’s office should just keep these black-robe orders coming.

Former U.S. transportation secretary Ray LaHood lobbied for a federal gas tax increase in a Washington Post letter the other day. The letter captures the illogic and misrepresentation that influences the highway funding debate.

Hugh Hewitt was right on target in his May 31 op-ed, “Trump should raise this tax,” about boosting the federal gas tax to address our nation’s crumbling roads and bridges. The federal gas tax of 18.4 cents a gallon has not been increased in 24 years. Imagine living today on the same salary you made in 1993. That’s the dire situation facing our infrastructure: We’re supporting our roads and bridges using outdated budgets that fail to meet the demands of 2017.

On this important issue, Congress must look to the 22 states that have raised their gas taxes since 2013. States leading the way are “red” states such as Wyoming, Georgia and Idaho and “blue” states such as California, Maryland and Vermont. The list also includes New Jersey, with a Republican governor and Democratic-controlled legislature. Infrastructure is a bipartisan issue. It’s time our federal government takes the action for which Republicans and Democrats have been tirelessly advocating.

Over the years, gridlock and finger-pointing have prevented real action on addressing our infrastructure challenges. All the while, traffic congestion has worsened, potholes have multiplied, and our roads and bridges have further deteriorated.

Here are some problems with LaHood’s position:

First Problem. As former transportation chief, LaHood must know that his own department publishes data showing that the condition of the nation’s bridges has steadily improved for two decades, while the condition of highways has been stable in recent years and improved in some cases since the 1990s. (Highway data summarized here and here. Bridge data here). Why does he say “… bridges have further deteriorated” when he surely knows that is not correct?

Second Problem. The 18.4 cent-per-gallon federal gas tax has not been raised since 1993, and its real value has eroded since then. However, the gas tax rate was more than quadrupled between 1983 and 1993 from 4 cents to 18.4 cents. The 1983 rate would be 9.8 cents in today’s dollars, so the real gas tax rate has risen substantially since then. Even if “potholes have multiplied,” the blame would go to the increasing diversion of plentiful gas tax funds to non-highway uses such as urban rail.

Third Problem. The final issue is the internal inconsistency of LaHood’s position. His first paragraph complains that federal gas taxes are not high enough. But his second paragraph says that 22 states have raised their own gas taxes in just the past four years, which logically negates the need for a federal gas tax increase. The states that have the highest demands for new highway funds are apparently already taking action. Great, problem solved.

In my new Cato study on infrastructure, I note that 98 percent of U.S. streets and highways are owned by state and local governments. The states are entirely capable of funding such infrastructure they own without federal aid. States can tax, borrow, collect user charges, and attract private investment to fund their highways, bridges, airports, and seaports.

Are there any advantages to raising federal gas taxes over raising state gas taxes? How is federal funding of state-owned infrastructure superior to state funding? LaHood and other advocates don’t tell us. Instead, they wave their arms, prattle about crumbling roads and multiplying potholes, and always demand more centralized spending and control.

Tomorrow Congress will vote on resolutions of disapproval in response to Trump’s recent arms deal with Saudi Arabia. If passed, Senate Resolution 42 and House Resolution 102 would effectively block the sale of precision guided munitions kits, which the Saudis want in order to upgrade their “dumb bombs” to “smart bombs.” A similar effort was defeated last year in the Senate. How should we feel about this vote?   Before the ink was dry President Trump was busy bragging about his arms deal with Saudi Arabia, a deal that he claimed would reach $350 billion and would create “hundreds of thousands of jobs.” The sale bore all the hallmarks of Trump’s operating style. It was huge. It was a family deal—brokered by his son-in-law, Jared Kushner. It was signed with pomp and circumstance during the president’s first international trip. But most importantly, as with so many of his deals, the deal was all sizzle and no Trump Steak.™   Trump’s arms deal with the Saudis is in fact a terrible deal for the United States. It might generate or sustain some jobs in the U.S. It will certainly help the bottom line of a handful of defense companies. But from a foreign policy and national security perspective, the case against selling weapons to Saudi Arabia is a powerful one for many reasons.   1. The deal will deepen U.S. complicity in Saudi Arabia’s inhumane war in Yemen.  In an almost three-year long intervention into the Yemeni civil war to defeat the Houthi rebels and to destroy the local Al Qaeda franchise (Al Qaeda in the Arabian Peninsula—AQAP), the Saudis have demolished much of Yemen with little concern about the consequences. NGOs have documented case after case of the Saudis attacking civilian targets—the United Nations estimates over 10,000 civilians have died to date—and millions of Yemenis now suffer at the brink of starvation under increasingly desperate and unhealthy conditions. Tragically, the Saudis now seek American firepower to help them break the stalemate that has emerged on the ground in Yemen.    2. The deal will not help the United States defeat” AQAP.  As the United States should have learned by now, military intervention is a blunt tool ill-suited to counterterrorism. Airstrikes are wonderful for destroying buildings and military equipment, but of much less value for killing terrorists. And they are less than worthless for confronting the political motivations that actually drive groups to conduct terrorism in the first place. America’s track record in the Middle East since 2001 shows that despite having killed thousands of terrorists, U.S. military intervention has actually caused chaos, resentment, and terrorism to spread. Instead of defeating Al Qaeda, sixteen years of constant military pressure has helped spawn dozens of new terrorist groups and tens of thousands of new jihadist fighters. And in Yemen, where AQAP thrives despite years of U.S. drone strikes and special forces missions, there are signs that the Saudis are partnering with AQAP in the fight against the Houthis. In short, American-fueled escalation by the Saudis is only likely to help AQAP further enhance its position, while adding to the anti-U.S. sentiment in Yemen brought about by the devastation U.S. munitions have wrought.   3. The deal pushes the United States down the slippery slope in the Middle East. Picking sides in the broader struggles between Saudi Arabia and Iran, between Sunni and Shia, and among the array of other groups seeking power and dominance in the Middle East can only cause trouble. The idea that through arms sales the United States can “project stability” or dictate geopolitical outcomes in the Middle East is dangerous folly. The more likely outcomes of the Saudi arms deal are increased tensions with Israel and a costly and dangerous arms race with Iran. Even worse, picking sides increases the risk that the U.S. will wind up getting dragged deeper into future conflicts as it seeks to make sure “its side” maintains the advantage. Given that Saudi Arabia lobbied for Western intervention in Libya and Syria, and has intervened itself to varying degrees in Egypt, Tunisia, Syria, Libya, and Bahrain since 2011, this risk is non-trivial.   The reality is that this self-imposed entanglement does nothing to advance American security or other national interests. Neither vague concerns about regional stability nor the modest risk posed by terrorism warrant such large-scale arms deals. Though the Trump administration worries about Iran’s influence, it makes no sense to worry more about Iran—who opposes Al Qaeda and ISIS—than about the other autocratic states in the region. Why, for example, does it make sense for the United States to double down on a partnership with Saudi Arabia, the very country most responsible for the spread of Wahhabism—the hard line version of Islam embraced by Al Qaeda and the Islamic State? Why does it make sense to continue pouring weapons into a region already fragile, already tense, already in conflict? As civil wars across the region should illustrate, external intervention, whether in the form of troops or weapons, simply amplifies existing conflicts.    4. The Saudi arms deal will privilege military solutions at the expense of diplomacy.  When countries believe they have the ability to impose their will by military force, their desire to negotiate dwindles. By selling the Saudis weapons, the United States will embolden Saudi hawks to continue pressing for a military approach, not only in the short run in Yemen, but in other conflict areas as well. Likewise, when Israel or Iran’s national security team meets, the U.S. weapons sale to the Saudis will give those hawks the upper hand in their discussions. This problem will be further multiplied by every other instance where the United States is selling weapons in the Middle East. The dynamic will, in turn, encourage arms racing, inflame tensions, will very likely amplify existing violence, and in short will make it much more difficult for leaders of all nations in the region to work toward diplomatic solutions.    Beyond their impact on the recipients’ interest in diplomacy, U.S. reliance on arms sales also destroys America’s moral authority and reduces its diplomatic flexibility. By arming oppressive governments throughout the Middle East without regard for the consequences, not only does the United States risk the resentment of Arab populations and the wrath of terrorist groups, it also loses the ability to call out autocratic behavior, to inspire political change, and to speak credibly to democratic movements. By using weapons sales to take sides in various sectarian and regional disputes, the United States loses the ability to serve as a convener of stakeholders and a mediator of peace agreements. This, in turn, leaves the United States even more reliant on military tools.   In the end, the most tragic outcome of Trump’s arms deal may be to prolong the period of conflict, terrorism, and war through which the people of the Middle East must suffer before diplomacy is finally able to take root.

In a memo dated June 5, Attorney General Jeff Sessions has ended the practice by which the Department of Justice earmarks legal settlement funds for non-governmental third-party groups that were neither victims nor parties to the lawsuit. This is terrific news and a major step forward in respecting both the constitutional separation of powers and the private rights that litigation is meant to vindicate.

The use of surplus or unclaimed settlement money for causes allegedly similar to those served by the litigation (“cy près,” in the legal jargon) is not itself new. In recent years, however, law enforcers at both state and federal levels have developed it as a way to direct funds to a wide variety of causes, from private charities and advocacy groups to legal aid programs, law schools, and an assortment of other causes that legislatures and their appropriations committees have shown no interest in funding.

Not surprisingly, officials tend to designate as beneficiaries recipients they find ideologically congenial. “With control over big money flows,” as I noted in a piece two years ago, “smart AGs can populate a political landscape with grateful allies.” The Obama administration came under justified criticism for using the mortgage settlement to funnel tens of millions of dollars to “housing counseling” often carried on by left-leaning community-organizing groups.

The problems with this practice begin at the level of constitutional structure. It is the legislative branch, not some combination of executive and judiciary in connivance, that is supposed to wield exclusive power to appropriate public moneys, and moneys extracted by government enforcement and not otherwise owned (as by parties or victims) are a species of public moneys. In the recent D.C. Circuit decision of Keepseagle v. Perdue, arising from the settlement of a lawsuit by Indians shortchanged by agriculture programs, Judge Janice Rogers Brown wrote a slashing and readable separation-of-powers critique of the practice in her dissent (the panel majority dismissed the issue as having been raised too late.)

There are other constitutional issues at stake as well. Cato has argued as amicus, in cases involving settlements by Facebook and Duracell, that the use of cy près endangers the constitutional rights of individual members in class litigation, both as to due process rights protected by the Fifth Amendment and to First Amendment rights of expression (since the practice uses members’ money to advance causes with which they may strongly disagree). Courts including the Eighth Circuit have voiced misgivings as well, and Chief Justice John Roberts has flagged the constitutional status of cy près as an issue that could soon be ripe for Supreme Court consideration. Members of Congress led by Rep. Robert Goodlatte (R-Va.) have proposed the Stop Settlement Slush Funds Act (H.R. 732), and as I note in a chapter of the new Cato Handbook for Policymakers, state lawmakers in places like New Mexico have pursued similar ideas.

A follow-up question is whether the Department of Justice will follow the same logic by moving against the diversion of funds from entered judgments (as distinct from future settlements) to outside groups, as in the Keepseagle case. Logically, there is good reason for it to pursue this further step.

In the mean time, we should applaud Attorney General Jeff Sessions for one of the big wins for constitutional principle so far in the new administration.

Diversity is and has been at the center of many of our debates about higher education and related issues, including freedom of speech. I see two different meanings of diversity, one compatible with free speech and one perhaps incompatible.

The ordinary meaning of diversity can be found in a dictionary, for example the online Oxford Living Dictionaries (is there an Oxford Originalist Dictionary?). There we find that diversity means “the state of being diverse” and diverse in turn means “showing a great deal of variety; very different.” This definition comports with freedom of speech. The First Amendment prevents public officials from imposing a single view on the governed, thereby protecting advocacy of diverse views. Diversity in this sense and free speech go together.

But diversity has another meaning which I think of as “diversity-as-recognition.” Imagine you see  the world divided into two groups: oppressors and the oppressed. The speech of the oppressor dominates the society and the beliefs of its members; speech in this society is both unequal and unitary, not diverse. What should be done? Government officials (or for that matter, university administrators) should seek “true diversity” by promoting recognition of the equality of the oppressed. If this task were accomplished, all groups would speak from an equal place, and diversity of speech would truly exist.

But achieving this change might require censorship. The oppressor tends to utter speech that asserts the inequality of the oppressed. Such speech is incompatible with achieving equality and true diversity. Put otherwise, to just allow “a great deal of variety” in speech is not equal to the task of achieving “diversity-as-recognition.” Public officials or university administrators thus are required to censor extreme speech to achieve diversity-as-recognition. To allow the speech of the oppressor is to endorse oppression. Diversity-as-recognition thus seems to imply the return of “repressive tolerance.”

Some questions follow for me. Should all speech contrary to “diversity-as-recognition” be censored? Or should only extreme and unargued words be suppressed? In other words, should the advocate of diversity-as-recognition seek to suppress both Charles Murray and racial epithets or just the latter? And if the latter only, why?

Contrary to those questions, a second thought. Might diversity-as-recognition be interpreted in a way compatible with freedom of speech?

HT: Donald Downs for prompting thinking about the compatibility of diversity and free speech. 

Education reporters frequently make the claim that government ought to fund and operate educational institutions because schooling is a public good. However, since schooling fails both conditions required for a public good to exist, schools should not be publicly operated.

Schooling is Not a Public Good

According to the economic definition, a public good is non-rival in consumption and non-excludable. The first condition means that one individual’s consumption of the good does not hinder others’ abilities to use the product. Schooling fails this condition since students take up seats when receiving an education. The second condition means that the producer of the good is unable to exclude non-payers. Schooling fails this part of the definition since school leaders can prevent students from attending their institutions, if necessary.

Since schooling is not a true public good, the basic free-rider problem does not exist. This is important because it means that government does not need to operate schools or force residents to pay for them.

A Merit Good?

When journalists claim that schooling is a public good, I believe they actually mean to say that education is a merit good since it produces positive externalities. When an educational product is purchased, both the consumer and the provider benefit, as in all other voluntary transactions. However, the rest of society may also benefit if schooling actually creates citizens that are more educated. This argument leads many scholars to support government subsidization of schooling.

The Problem

Obviously, schooling is only one channel through which people can achieve an education. Since children can learn in various settings, the current system of schooling may actually harm their overall educational levels. In other words, schooling may impose negative externalities on society through providing a less than optimal level of education to all children.

Similarly, schooling likely creates a more obedient citizenry. This generates positive externalities, through less criminal activity, and negative externalities, through less creativity and technological innovation.

Since there are large positive and negative externalities that result from schooling, in theory, it is impossible to determine the overall sign of the net spillover. Consequently, it is unclear whether we ought to tax or subsidize schooling; and even if we could somehow figure out the overall sign, we would not be able to determine the optimal magnitude of the intervention.

We should recognize the fact that externalities do exist in education. However, as the founder of externalities conceded, we must also realize that attempting to reach the socially optimal level of schooling through government intervention may ironically result in much harm. Instead, we ought to limit this probable detriment by allowing individual families to seek ideal educational experiences for their own children.

Megyn Kelly is probably kicking herself for not delaying her interview of Vladimir Putin. Had she waited just a few days, she could’ve brought a leaked copy of the latest NSA estimate of the timeline, motivations, and targets of alleged Russian hackers during the 2016 election cycle to her chat with Putin and asked a lot of pointed questions about it. Even though that opportunity never materialized, she and other journalists still have the chance to ask some equally important questions of American officials about this rather interesting document and the young woman responsible for sharing it with the world. What follows are some of my suggested lines of inquiry for our friends in the Fourth Estate.

The Leaker: Reality Leigh Winner

As I read The Intercept’s story, I kept asking myself one question, over and over: did this young woman learn nothing from Ed Snowden? 

This extract from the arrest warrant affidavit contains details that, if accurate, speak to a total lack of awareness of or concern for the kind of “insider threat” detection measures that now exist in most, if not all, Intelligence Community components:

Why did Winner not use a truly secure means of contacting The Intercept? Why did she select this particular document? Why did she not contact a whistleblower advocacy organization for legal advice before even contemplating such a rash act?

The Media Outlet: The Intercept

In a statement published a short time ago, The Intercept claimed that

On June 5 The Intercept published a story about a top-secret NSA document that was provided to us completely anonymously. Shortly after the article was posted, the Justice Department announced the arrest of Reality Leigh Winner, a 25-year-old government contractor in Augusta, Georgia, for transmitting defense information under the Espionage Act. Although we have no knowledge of the identity of the person who provided us with the document, the U.S. government has told news organizations that Winner was that individual.

That statement is at odds with the search warrant affidavit quoted above, which claims that Winner was in “email contact” with the “News Outlet” (The Intercept).

Who’s telling the truth here vis a vis Winner’s alleged email contact with The Intercept–the Department of Justice or the paper? Could Winner have emailed the wrong reporter at The Intercept, and the actual story authors were in the dark that she’d contacted the paper? Did Winner’s email bounce? And why did Intercept staff share an exact copy of the purloined document with NSA officials in the first place? Why didn’t they simply read key passages of the document over the phone, or include extracts in an email to NSA officials?

Given the fact that Winner printed the document and thus left investigators a digital trace of her actions, perhaps The Intercept’s decision to share a scanned version of the document wouldn’t have mattered–but maybe it would have, and why endanger a source (annonymous or otherwise) by behaving in such an irresponsible way with the document?

The Document: Some Answers, More Questions

The NSA report that Winner leaked contained a number of new details about the alleged Russian hacking campaign, including a flow chart that lays out in greater detail the precise mechanism used by the attackers in not only the spearphishing campaign but their attempts to actually gain access voter-related data and possibly voting machines themselves. Here’s the key paragraph from the story, which quotes Alex Halderman, director of the University of Michigan Center for Computer Security and Society, at length:

“Usually at the county level there’s going to be some company that does the pre-election programming of the voting machines,” Halderman told The Intercept. “I would worry about whether an attacker who could compromise the poll book vendor might be able to use software updates that the vendor distributes to also infect the election management system that programs the voting machines themselves,” he added. “Once you do that, you can cause the voting machine to create fraudulent counts.”

How long has the Intelligence Community known that Putin ignored Obama’s warnings not to interfere in our election? How much of the vulnerability-related information has been shared with municipalities that employ voting technology susceptible to the kinds of attacks described by NSA? Are states and localities currently assessing whether their electronic voting machine and voter roll infrastructure is vulnerable to these kinds of attacks?

When I worked for then-Rep. Rush Holt (D-NJ), one of his major concerns was the security–or lack thereof–of electronic voting machines and the infrastructure that supports them. It’s been nearly 10 years since Holt had Princeton professor and computer scientist Ed Felton conduct a live hack of a Diebold voting machine for the House Committee on Administration, an event that should have served as a wake-up call about the potential for digital election fraud by one or more hostile actors. The leaked NSA assessment underscores that such cyber vulnerabilities in our election process remain. Whether one accepts or rejects the Intelligence Community assessment that Vladimir Putin ordered his intelligence services to interfere in our election is almost beside the point now. What’s clear is that this digital vulnerability is real and we ignore the implications at our peril.

 

Any serious efforts to improve the tax system inevitably comes up against dubious assertions that such changes won’t improve economic growth or reduce tax avoidance, and will therefore not be “revenue neutral” but will simply increase deficits and debt for no reason.

The easiest way to block growth-oriented tax reforms is to insist that any such changes must be “revenue neutral” even in the short run.  However, that goal typically relies on uncritical acceptance of dubious estimates of (1) how much “baseline” revenue the existing system will bring in over 10-20 years, and (2) how much revenue a better tax system would bring in under the conventional and official assumption that higher or lower marginal tax rates on added income have no significant effect on anything.

As Harvard economist Greg Mankiw importantly notes, “A key question is how revenue neutrality is to be judged.” 

Before Congress could even attempt to be “revenue neutral” they must first have credible estimates of future revenue under the current tax regime.  Unfortunately, the Congressional Budget Office and Joint Committee on Taxation have so far provided only incredible projections.  

Here are links to my critiques of official revenue projections for corporate and individual income taxes. 

For Congress to judge “revenue neutrality” on the basis of these extremely flawed hyper-static CBO/JCT estimates would be economically and fiscally irresponsible.

In the latest issue of Survival, Hal Brands and Peter Feaver address an important debate in American foreign policy circles. Was the rise of ISIS inevitable, or was it the result of misguided U.S. policies? Most agree it is the latter, but the dispute gets fraught on the question of whether it was U.S. military interventionism or inaction that deserves the blame. Some say it was the invasion of Iraq that led to the rise of ISIS. Others insist it was Obama’s decision to withdraw from Iraq in 2011.

Brands and Feaver use counterfactual analysis to assess whether different U.S. policy decisions at four “inflection points” could have nipped the rise of ISIS in the bud. The first of these points was the Bush administration’s decision to invade Iraq in 2003. The other three occurred during the Obama administration and include the decision not to press Iraq to allow the United States to leave behind a significant number of U.S. troops, the decision not to intervene aggressively early on in the Syrian civil war, and the decision not to intervene more forcefully to help the government of Iraq defeat ISIS before it took the city of Mosul.

The authors take a middle road, arguing that, “the rise of ISIS was indeed an avertable tragedy,” but that both restraint and activism share the blame. Had U.S. policymakers not invaded Iraq in 2003, or been more aggressive in Iraq and Syria from 2011-2014, they argue, “ISIS might not have emerged at all.”

With suitable analytic humility, however, the authors warn against overconfidence that any of the alternatives would have made a decisive difference to the eventual outcome:

We find, for instance, that limited intervention in Syria in 2011-13 might have had benefits, but it probably would not have shifted the course of the conflict so fundamentally as to head of ISIS’s rise. Likewise, not invading Iraq in 2003 would have left the United States saddled with the costs of continuing to contain that country, whereas striking ISIS militarily in late 2013 or early 2014 might have weakened that organization militarily while exacerbating the political conditions that were fueling its rise. Intervening more heavily in Iraqi politics in 2010 in order to bring about a less sectarian government than that which ultimately emerged, and leaving a stay-behind force in Iraq after 2011, represent a fairly compelling counterfactual in the sense that such policies could have had numerous constructive effects. But even here, choosing a different path from the one actually taken would have meant courting non-trivial costs, liabilities, uncertainties and limitations (p. 10).

We applaud Brands and Feaver, who served in the Obama and George W. Bush administrations, respectively, for their attempt to “move away from polemical and polarized assessments focused on assigning blame, and toward more granular, balanced analysis based on a fairer-minded view of what went wrong (p. 10).” At the same time, there is plenty of room for disagreement over their interpretation of the “what ifs” of such a complex historical question.

The most problematic issue is their treatment of the invasion of Iraq. By bundling the invasion of Iraq with the other three inflection points, the authors introduce a false sense of equality among them, making it seem as if they were all the same sort of decision, and of equal magnitude. In so doing, they obscure the most critical lesson from not only the invasion of Iraq but from the entire war on terror: the fact that American military intervention creates more problems than it solves, leading to destabilization and the amplification of civil conflicts.

To their credit, Brands and Feaver do acknowledge, in the conclusion, that “the most fateful choice was also the oldest one: the decision to invade Iraq in 2003, followed by mismanagement of the occupation” (p. 41) but they then temper that note by arguing that “it is not correct to claim that the invasion of Iraq set in motion forces that led ineluctably to the problems that the United States has faced since mid-2014.”

In a strict sense, of course, this is true. Other things could, in theory, have happened to blunt the rise of ISIS. But only a decision not to invade Iraq in 2003 would clearly and unequivocally have averted the rise of ISIS. The reason is simple: the single clearest cause of the rise of ISIS was the invasion of Iraq. As President Obama explained in 2015, “ISIL is a direct outgrowth of Al-Qaeda in Iraq, that came out of our invasion, which is an example of unintended consequences, which is why we should generally aim before we shoot.” David Kilcullen, who worked on counterterrorism at the State Department in 2005-06 and was senior adviser to General David Petraeus at the height of the Iraq surge in 2007-08, put it even more bluntly: “There would be no ISIS if we had not invaded Iraq.”

It is also true that mismanagement during the Iraq war made things worse. Most notably, the decision to dismantle the Iraqi army and “de-Ba’athify” the post-Saddam government made enemies out of former Ba’athists, many of whom would later join the insurgency. But the invasion and occupation itself was the main ingredient that made Iraq a magnet for Muslim militants from throughout the Middle East and a hotbed of insurgency and terrorism. By 2006, the U.S. National Intelligence Estimate on Trends in Global Terrorism found that the Iraq war was “shaping a new generation of terrorist leaders and operatives.” The war had “become the ‘cause celebre’ for jihadists, breeding a deep resentment of U.S. involvement in the Muslim world and cultivating supporters for the global jihadist movement.”

By contrast, though Obama could have made greater efforts in 2010 to arrange a leave behind force, there was no way in 2010 that the administration could have predicted that their failure to do so would lead to the emergence of an ISIS. Moreover, even had 20,000 American troops remained in Iraq, blocking some of the immediate avenues for ISIS to emerge, their presence would have done nothing to alleviate the motivations behind its rise. In fact, as Brands and Feaver acknowledge, the continued high-visibility presence of U.S. troops would potentially have exacerbated many of the grievances that gave the group its energy and raison d’etre. As the endurance of the Taliban in Afghanistan has shown, the United States might have stayed in Iraq indefinitely without “defeating terrorism” and thus without resolving the problem of how to leave without risk.

Given the fact that it was in the interest of the United States to leave Iraq at some point, 2010 looked about as good as one can imagine for doing so. As Brands and Feaver point out, Al Qaeda in Iraq – the predecessor to ISIS – had been seriously degraded over the previous three years. Certainly the administration must have expected some level of increased instability after the withdrawal, but no one was arguing that a withdrawal would result in the stunning rise of ISIS. On the other hand, many people – including experts in the Bush State Department, predicted much chaos, violence, and civil conflict resulting from toppling Saddam Hussein.

The bottom line is that all three Obama-era counterfactuals that Brands and Feaver explore involve battling ISIS (in either its current or previous iterations) more forcefully and earlier in risky military interventions that themselves would undoubtedly have wrought future negative unintended consequences and blowback. The lesson to draw about how to avoid future monsters like ISIS is not that sometimes America should be more eager to use force, but that military action, especially in the Middle East, inevitably delivers negative unintended consequences, and so should remain an absolute last resort.

If libertarians were in charge of legalizing marijuana, their first instinct would be to reach for an eraser.

That is, libertarians would simply eliminate existing laws that outlaw marijuana, rather than “design” the marijuana market by establishing a licensing board, capping the number of legal marijuana retailers, and the like.

Actual state marijuana legalizations, however, have generally capped the number of retail establishments and put a government board in charge of doling out the lucrative licenses to run them.

Predictably, this means that well-connected, white entrepreneurs benefit at the expense of African-Americans: 

Darryl Hill, hailed for integrating college football in his youth half a century ago, was a successful entrepreneur with no criminal record and plenty of capital when he applied for a license to grow marijuana in Maryland — a perfect candidate, or so he thought, to enter a wide-open industry that was supposed to take racial diversity into account.

To his dismay, Hill was shut out on his first attempt. So were at least a dozen other African American applicants for Maryland licenses. They were not told why.

The good news is that, in this instance, Hill seems to have circumvented the apparent bias:

… the 73-year-old great-grandfather who was the first black football player at the University of Maryland sought an ally in his quest to help other minorities — and himself — break into the closed ranks of cannabis cultivation and sales.

Hill’s new business partner, Rhett Jordan, happens to be a groundbreaker in his own right. The 33-year-old Colorado industry pioneer, who is white, founded one of the largest legal marijuana operations in the nation.

But Hill’s success should not obscure licensing’s harm: restricted supply, higher prices, and crony capitalism.

This week, the Supreme Court issued a unanimous opinion finding what should have been obvious from the start.  That when a government agency requires someone to turn over money to the U.S. Treasury as a result of the person being found guilty of wrongdoing, that constitutes a penalty. 

In Kokesh v. SEC, the Securities and Exchange Commission argued that disgorgement is not a penalty or forfeiture and therefore, due to a particular law’s limitations, the SEC is entitled to bring cases that are even decades old.  Disgorgement is a remedy that requires the defendant to pay back something that was obtained through unlawful means.  Under 28 U.S.C. § 2462, the federal government has five years in which to bring any “action, suit, or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise.” The SEC has held that disgorgement falls into none of these categories and therefore there is no limit on how long the agency has to bring a case in which it is seeking disgorgement.

As we argued in our amicus brief filed on behalf of Charles Kokesh, it is a well-established principle in law that cases must be timely to be just.  When actions are fresh, access to evidence will likely be robust.  Witnesses’ memories are more likely to be clear.  Both sides will likely have the relevant documents at hand.  The court will have the best chance of getting to the truth.  But when a case is stale, memories will have faded, documents will have been lost or innocently destroyed, and it will be uncertain whether the existing evidence will present the most accurate picture of what really happened.

In ruling in favor of Mr. Kokesh a unanimous court found that disgorgement is indeed a penalty.  In writing for the Court, Justice Sotomayor announced two factors that determine whether a payment is a penalty.  First, it must be determined whether the payment has been imposed to redress a wrong to the public, or a wrong to an individual.  A penalty is imposed to redress the former, not the latter.  “This is because penal laws, strictly and properly, are those imposing punishment for an offense committed against the State.”  (internal quotations omitted.)  The second question is whether the payment was imposed to deter future wrongdoing.

What is remarkable about disgorgement in SEC cases is the fact that often the defendant is required to pay back more than was even received as a result of wrongdoing.  In the case of insider trading, for example, an insider can be liable for the full amount of profit made by others who traded on the inside information.  This is money that the insider never actually saw.  This means disgorgement does not simply undo the effects of the wrongdoing, making the insider pay back money illicitly earned, it puts the insider in a materially worse position.

Disgorgement in SEC cases, the Court noted, “bears all the hallmarks of a penalty: It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate.”  Because of this, it falls within the confines of 28 U.S.C. § 2462 and therefore the SEC may not bring an action seeking disgorgement more than five years after the events have occurred.  This is the right result, and it is gratifying that the full Court recognized the fact that a penalty by any other name still involves the government punishing a lawbreaker.  Calling it a new name does not change its essential nature.  

Donald Trump fired off several tweets this morning about his executive order barring for at least 90 days all immigration or travel to the United States for six Middle Eastern and African nationalities, stating that he thinks it should actually be much broader. I have previously explained why President Trump’s national security justification for the order is completely devoid of evidence. But another fact that we highlighted in our amicus brief deserves attention here: that the order’s supposed “security” purpose is based on an entirely false legal premise.

The executive order claims that it is suspending entries to give the Secretary of Homeland Security time to study “whether, and if so what, additional information will be needed from each foreign country to adjudicate an application by a national of that country for a visa, admission, or other benefit under the INA (adjudications) in order to determine that the individual is not a security or public-safety threat.” It justified the specific countries by stating that their governments have shown less “willingness or ability to share or validate important information about individuals seeking to travel to the United States.”

Even if his claim about all six countries were true, this justification is entirely without merit because the applicant, not the government, has the burden to prove their eligibility under the law. In other words, the government has no obligation whatsoever to identify or gather information on the behalf of the applicant simply to “adjudicate” an application. 8 U.S.C. 1361 could not be clearer on this point:

Whenever any person makes application for a visa or any other document required for entry, or makes application for admission, or otherwise attempts to enter the United States, the burden of proof shall be upon such person to establish that he is eligible to receive such visa or such document, or is not inadmissible under any provision of this chapter, and, if an alien, that he is entitled to the nonimmigrant, immigrant, special immigrant, immediate relative, or refugee status claimed, as the case may be. If such person fails to establish to the satisfaction of the consular officer that he is eligible to receive a visa or other document required for entry, no visa or other document required for entry shall be issued to such person, nor shall such person be admitted to the United States unless he establishes to the satisfaction of the Attorney General that he is not inadmissible under any provision of this chapter.

Thus, if someone fails to obtain identity documents or criminal history certified by the relevant foreign authorities—as the law requires—then the consular officer can still adjudicate the application by issuing a denial. The U.S. government need not affirmatively determine anything about the applicant. Indeed, even if officers conclude that they know nothing about the applicants, this lack of knowledge still wouldn’t prevent them from denying the visa. Applicants must gather the relevant proof to establish their identity and eligibility on their own. If their foreign governments are uncooperative or unreliable, that redounds to the detriment of the visa applicant, not the U.S. government. It would certainly not prevent an individualized adjudication of their application.

But if a foreign government won’t cooperate, doesn’t that by definition mean that their nationals can’t ever meet their burden of proof? Not at all. A person may be a national of a certain country, yet have lived for many years apart from it. Indeed, in the case of Syria and Iran, a national may have literally never lived in their country at all yet possess such “nationality” as a legal matter. According to the United Nations, 11.2 million nationals of the six banned countries lived outside their country of origin in 2015. (Literally no applicant can actually travel directly from five of these countries because the U.S. has closed its embassies and consulates.)

Many of these people could easily fulfill their burden of proof through the country of residence. Other individuals could meet their burden because they had previously obtained evidence from their home governments before the outbreak of civil war or because the U.S. government knows their identities for other reasons, such as scientific achievements, past U.S. travel, or cooperation with counterterrorism efforts.

Nor is there any evidence for the view that consular officers have failed to enforce the burden of proof or that they are not reacting to changes in the availability of evidence. As the table below shows, the visa refusal rate for the most common visa class is much higher in each of the nationalities impacted by the ban (plus Iraqis who the first order barred). This shows that officers have taken into account these nationals’ unique circumstances. Moreover, the visa refusal rates increased, as you would predict based on the law, after the outbreak of civil wars in Libya, Syria, and Iraq when many documents would have become lost and reliable government records more difficult to obtain.

Table: B-1 Visa Refusal Rate (% of Applicants) by Nationality

Country

2010

2011

2012

2013

2014

2015

2016

Somalia

70

67

62

66

52

65

64

Syria

28

33

42

46

60

63

60

Iraq

42

27

33

39

41

53

52

Yemen

54

48

48

44

44

54

49

Iran

39

31

38

48

42

39

45

Libya

14

31

39

34

34

43

41

Sudan

33

41

45

48

42

40

37

Average

40

40

44

46

45

51

50

All other countries

26

25

24

24

23

24

25

Source: Department of State, Adjusted Visa Refusal Rate

In sum, as courts decide whether the executive order was completely forthcoming about its purpose, they should consider the fact that its purported premise is, in fact, false. The government does not need to gather information to adjudicate visas because it has no legal obligation to gather anything since applicants bear the burden of proof. Neither can it claim that no national of these countries could ever meet its burden nor that consular officers are not enforcing this burden. Thus, despite his tweets to the contrary, the president is left without a true justification for this order.

The Trump administration will highlight its infrastructure agenda this week. As outlined in its recent budget, the administration plans to reduce regulations on construction projects and attract private investment to traditionally government activities, such as air traffic control (ATC).

Trump will “deliver remarks in the White House Rose Garden about his vision for separating air traffic control from the federal government,” and Transportation Secretary Elaine Chao will testify to Congress on the issue. The administration has just released principles for ATC reform.

The Hill says that ATC reform has run into a “buzz saw of opposition on Capitol Hill,” but that is not a fair characterization. There is always opposition to any legislation that reduces the government’s role in anything. That’s Washington. But ATC reform has momentum, and a bill has been passed out of the House transportation committee to move ATC operations from the bureaucratic Federal Aviation Administration (FAA) to a private, nonprofit corporation.

The airlines are for it, the key labor union is for it, aviation experts are for it, and the second-largest nation on earth did it. Canada privatized its system in 1996, and today the nonprofit Nav Canada is on the leading edge of ATC efficiency and innovation. The image below shows Iridium satellites that will form the basis of an advanced navigation system for aircraft called Aireon. Nav Canada leads the revolutionary project in an international partnership—a partnership that does not include the FAA. The system will generate “more efficient use of airspace, substantial fuel savings, fewer delays and significantly enhance safety over large parts of the world.”

What is the opposition The Hill refers to? The corporate jet lobby—the National Business Aviation Association (NBAA)—is against reform, and it raises the spectre of higher fees under a privatized system. But aircraft charges under the privatized Canadian system have fallen, not risen. The latest data show that “Nav Canada has seen its inflation-adjusted user fees fall 45 percent lower than the aviation taxes they replaced,” notes Marc Scribner of CEI.

The opposition of NBAA’s leadership to reform is short-sighted. Over the long term, NBAA members will be best served by an advanced and dynamic private ATC system, not one mired in bureaucracy and unstable government funding. NBAA members should research the successful Canadian reforms themselves because the record is clear.

Kudos to President Trump and Secretary Chao for rebuffing the special interests on this issue, and pursuing reforms to the overall benefit of the aviation industry and flying public.

For an overview of ATC reform, see here. For Reason’s resources on the issue, see here.

I recently questioned two connected remarks by Wall Street Journal reporter Richard Rubin that (1) “Each percentage-point reduction in the 35% corporate tax rate cuts federal revenue by about $100 billion over a decade” and that (2) “independent analyses show economic growth can’t cover all the costs of rate cuts.”

That first remark–about each percentage-point reduction in the rate losing $100 billion over a decade–is an interpretation of pages 178-79 from a Congressional Budget Office (CBO) report on “Options for Reducing the Deficit.”

But the CBO was just talking about raising the corporate rate by one point, not cutting it 10-20 points. That can’t be converted into a rule of thumb because each percentage point reduction in the top corporate tax rate can’t lose the exact same amount of dollars. A percentage point reduction in a 35% rate loses more static revenue than a percentage point reduction in a 30% rate, which loses more than a percentage point reduction in a 25% rate, and so on. 

Yet even for a single percentage point, I called the $100 billion 10-year projection a “bad estimate” because it assumes zero change in the economy and zero change in tax avoidance (“elasticity”).

The Table compares the CBO/JCT static estimates of what might happen with a percentage-point increase in the corporate tax rate to their baseline “projections” of what corporate revenues might look like under current tax law, assuming 1.9% GDP growth. The line below the baseline adds static estimates (“from the staff of the Joint Committee on Taxation” or JCT) of the revenue gain from raising four graduated corporate tax rates from 15-35% to 16-36%. 

The average tax rate is below the top marginal rate because of reduced 15-25% rates on small profits, credits for foreign taxes, deferral of taxes on unrepatriated foreign profits, and deductions for interest and business expenses. Goldman Sachs estimates the average tax as 28% under current law and 24% (not 20%) under the Ryan-Brady tax.

If the average tax is 28% then a 1 percentage point increase in all four marginal rates might be expected to raise static revenue by about 2.8%. Sure enough, JCT claims a 1 percentage point increase in corporate rates would eventually raise revenues by roughly 2.8%, suggesting those estimates entirely staticThat is, they assume zero impact on GDP and zero elasticity of taxable income.

Despite publishing these static revenue estimates, the CBO analysis does a good job of explaining why they are seriously flawed. Bad bookkeeping is no substitute for good economics.

What follows is the CBO analysis of the economics of a higher corporate tax rate, with emphasis added in bold:

Increasing corporate income tax rates would make it even more advantageous for firms to organize in a manner that allows them to be treated as an S corporation or partnership…. Raising corporate tax rates would also encourage companies to increase their reliance on debt financing because interest payments… can be deducted…. Moreover, the option [of raising the tax rate] would discourage businesses from investing, hindering the growth of the economy.

Higher rates in the United States influence businesses’ choices about how and where to invest; to the extent that firms respond by shifting investment to countries with low taxes as a way to reduce their tax liability at home, economic efficiency declines…. The current U.S. system also creates incentives to shift reported income to low-tax countries without changing actual investment decisions. Such profit shifting erodes the corporate tax base and requires tax planning that wastes resources. Increasing the top corporate rate to 36 percent (40 percent when combined with state and local corporate taxes) would further accentuate those incentives to shift investment and reported income abroad.

How could all of those changes possibly fail to affect the amount of revenue collected?

Hindering growth of the economy by discouraging business investment reduces revenue. Shifting reported income into other countries and into pass-through entities erodes the tax base and reduces revenue. Increasing debt and other deductible expenses (fancier offices and lunches) reduces revenue. Yet the static revenue estimates in the Table obviously take none of this into account–ignoring both macroeconomic effects of higher tax rates on investment and GDP growth and microeconomic “elasticity” effects on tax avoidance.

Since the CBO explains how and why a higher corporate tax rate has numerous adverse effects on revenues, it follows that a lower corporate tax rate has numerous beneficial effects on revenues. In fact, the CBO analysis explains quite well why CBO/JCT estimates of the effects of a lower corporate tax rate on revenues are worthless.

Richard Rubin wrote that “independent analyses show economic growth can’t cover all the costs of rate cuts.” But the estimates in the Table, which he cites, pretend economic growth can’t cover a single dollar of those badly estimated costs. Besides, as the CBO explains, the effect of tax rates on revenues involves much more than just economic growth.

Tax Foundation economist Alan Sloan figures that “for a corporate income tax cut to 15 percent to be self-financing [over 10 years], it would have to raise the level of growth to 2.8 percent on average,” or 0.9% faster than the 1.9% the CBO projects. A 2.8% growth rate doesn’t seem ambitious compared to the 1947-2006 average of 3.6%. Yet the Tax Foundation “model predicts something more like 0.4 percent over the budget window: a sustained period of 2.3 percent growth instead of 1.9 percent growth.”

This is an example of what Mr. Rubin meant by independent analysts predicting that “economic growth can’t cover all the costs.” Yet faster economic growth would cover nearly half the cost, in Sloan’s estimation. CBO/JCT static revenue estimates, by contrast, always assume no effect at all. Whether tax rates are doubled or cut in half, JCT revenue estimates will pretend GDP growth remains unchanged.

Tax Foundation estimates of the revenue feedback from faster GDP growth are a huge improvement over static JCT estimates, yet they too remain incomplete. They do not account for microeconomic “elasticity of taxable income” of the sort the CBO wrote about–such as shifting income and/or investment abroad, setting up pass-through entities, and maximizing deductions for interest and office expenses. 

My previous blog noted that Treasury Department economists find the elasticity of corporate taxable income is 0.5 for smaller corporations, so when the tax rate goes down reported taxable income goes up. A paper for the Center for European Economic Research finds a higher 0.8 elasticity for multinationals: “Hence, reported profits decrease by about 0.8% if the international tax differential [e.g., between U.S. and foreign rates] increases by 1 percentage point.”

Lowering the super-high U.S. corporate tax rate will not reduce revenues from corporate and other taxes by nearly as much as crude rules of thumb may suggest, if revenues decline at all. And the reason is not entirely the result of greater investment, entrepreneurship, and economic growth, but also a reduction in myriad wasteful ways of avoiding this country’s uniquely dispiriting business tax.

Whether people in a society think that most others can be trusted seems to predict many positive social and economic outcomes. A common criticism of liberalized immigration is that the newcomers come from societies with low trust, so they might bring their low-trust attitudes with them, pass them on to their descendants, and leave our society with less trust, potentially reducing future economic growth.

Economist Bryan Caplan ran a recent exercise showing that immigrants and their descendants make substantial gains in trust, virtually assimilating by the second generation. In a similar vein, my research shows that trust levels among the second-generation are basically the same as Americans whose ancestors have been here for at least four generations according to survey responses on three related questions. 

Caplan’s post provides a possible answer to the oddest question raised in my post: Why do third-generation Americans have the highest trust scores? Based on cliometric research, Caplan argues that the descendants of slaves in the United States have far lower levels of trust, similar to how African societies that were most afflicted by the slave trade have enduringly low trust rates today. All of the descendants of slaves in the United States have ancestors who arrived on our shores more that four generations ago, as legal slave importation ended in 1808. 

Excluding black respondents from the General Social Survey (GSS) on the question “Generally speaking, would you say that most people can be trusted or that you can’t be too careful in life?” does improve trust for Americans who can trace their lineage in the United States back at least four generations (all of their grandparents were born in the United States), but the biggest trust improvement is for the immigrants themselves. I limited my sample to the years 2004 to 2014 to focus on more recent immigrants. Figure 1 presents my original findings that include respondents of all races. Figure 2 excludes all black respondents. 

Figure 1

Trust, Respondents of All Races Included, Years 2004-2014

Source: General Social Survey.

Figure 2

Trust, Black Respondents Excluded, Years 2004-2014

 

Source: General Social Survey.

When black respondents are excluded, “can trust” for Americans whose descendants have been here at least four generations goes from 32.7 percent to 37 percent while “cannot trust” drops from 62.7 percent to 58.1 percent. The answer “depends” shrinks the most from 8.5 percent to 1.2 percent. For immigrants, the “can trust” response shoots up from 22.6 percent to 36.1 percent while “cannot trust” drops from 68.9 percent to 62.7 percent. The GSS survey question shows that non-black immigrants have trust scores about the same as Americans whose grandparents were all born in the United States.

As part of its 2018 budget proposal, the Trump administration has introduced a plan to improve the nation’s infrastructure. The administration intends to reduce regulatory barriers on infrastructure projects and encourage greater private investment. It has also proposed increasing federal spending on infrastructure by $200 billion over 10 years.

A new Cato study provides input to the debate by examining infrastructure ownership and funding. Some people assume that the federal government plays the main role in infrastructure, but the states and private sector own 97 percent of U.S. nondefense infrastructure, and they fund 94 percent of it.

However, the federal government is the tail that wags the dog—its regulations, taxes, and subsidies affect the level and efficiency of state, local, and private infrastructure investment. The study argues that reforms to these federal interventions and privatization are the paths to higher-performance infrastructure.

President Trump’s decision to withdraw from the Paris Climate Accord was the latest in a steadily expanding list of actions that highlight his contempt for multilateral diplomacy in U.S. foreign policy. This does not mean that Trump is an isolationist. He clearly favors bilateral engagement with other countries and doesn’t mind using American military power to wage war in the Middle East and apply pressure to North Korea. The question is, what does Trump’s withdrawal from the Paris agreement mean for other areas of multilateral engagement?

A preference for bilateral over multilateral diplomacy may be appropriate in some cases, but the bilateral approach is not ideal for combating, for example, nuclear proliferation. Trump’s disdain for multilateral diplomacy is especially worrisome when combined with the deepening militarization of U.S. foreign policy. These two emerging trends simultaneously endanger the Iran nuclear deal, a major success for multilateral diplomacy and nuclear nonproliferation, while increasing the probability of armed conflict should the deal fail.

The Iran deal is a triumph of multilateral diplomacy, involving the United Nations’ Permanent Five (United States, United Kingdom, France, Russia, and China), Germany, and the European Union. This level of international involvement enhances both the legitimacy and strength of the agreement, which Iran has complied with since implementation began in January 2016. If the Trump administration wants to successfully renegotiate the deal, it would need the buy-in of the partner countries, a condition that becomes harder to achieve as Trump alienates many of our Iran deal partners with actions such as withdrawing from the Paris Climate Accord.

If Trump truly wants to renegotiate the Iran deal (and not just unilaterally withdraw from it), then he will need the support of the very countries that he is repeatedly frustrating with his characteristically undiplomatic actions on the world stage.

The other major nuclear challenge facing the Trump administration is North Korea. So far, the administration has tried to rein in the North’s nuclear weapons and ballistic missile programs through shows of military force and sanctions. Trump also wants China to do more to pressure North Korea. Pyongyang does not seem deterred by this approach. While there has not been a nuclear weapons test since Trump took office, there has been a steady march of successful ballistic missile tests and Kim Jong Un continues to place great value in his nuclear arsenal.

A multilateral diplomatic approach failed to bring North Korea to heel in the 2000s, so it makes sense that Trump would not place much confidence in a similar approach today. The administration has made no serious overt attempt at multilateral diplomacy besides introducing new sanctions via the United Nations. If the current approach of pressure fails to halt North Korea’s progress, the administration could choose to double down on their approach or try a different strategy that makes greater use of multilateral diplomacy. Trump’s aversion to multilateral diplomacy suggests that the administration is primed to keep ratcheting up pressure rather than change course.

While this latest withdrawal from a multilateral initiative is not the end of the world, it arguably has worrisome implications for nuclear nonproliferation. Multilateral cooperation is not necessary to solve every foreign policy problem, but it is incredibly valuable for preventing the spread of nuclear weapons. The sooner Trump and his advisors realize this, the better. 

In response to the U.S. withdrawing from the Paris climate treaty, I’ve issued the following statement:

The Paris climate treaty is climatically insignificant. EPA’s own models show it would only lower global warming by an inconsequential two-tenths of a degree Celsius by 2100. The cost to the U.S. – in the form of required payments of $100 billion per year to the developing world – is too great for the inconsequential results. These very real expenses will consume money that could be used by the private sector to fund innovative new technologies that are economically sound and can power our society with little pollution.

Because of our private investments in technological innovation, America leads the world in reducing carbon dioxide emissions from power plants. We did that without Paris, and we will continue our exemplary leadership without it.

While Paris will be with us for the near future as the process of withdrawing transpires, this is a step in the right direction. If you’d like to read more on the science behind Paris, take a look at this recent piece I wrote for The Hill, called “The Scientific Argument against the Paris Climate Agreement.”

The Supreme Court issued a ruling this week in the case of County of Los Angeles v. Mendez.  The case involved a police shooting and the ruling involves some technical legal analysis regarding the proper application of prior Supreme Court precedents.  In this post I want to take a step back from the technical legal discussion and highlight the facts of the case, which are quite sad.

In October 2010, Angel Mendez and his then pregnant girlfriend, Jennifer Garcia, were dirt poor.  They lived in a one room shack, made of plywood, in the backyard of a home owned by Paula Hughes in Lancaster, California.  On the awful day in question, the couple were not bothering anyone.  They were actually napping in their tiny shack when their world was suddenly shattered.

Without any announcement at all, a police officer entered the shack.  Startled, Angel got up and grabbed a BB gun that he kept in the shack to kill rodents and other pests.  The deputy then yelled “Gun!” to alert his fellow officers of potential danger.  In a moment, several police officers entered and opened fire, discharging a total of 15 rounds.  Both Angel Mendez and Jennifer Garcia were shot “multiple times and suffered severe injuries.”  Mr. Mendez’s right leg had to be amputated below the knee.

Two people minding their own business and in just a few moments, the police are shooting at them.  The police did not accuse them of violating any law. They were totally innocent.

Since Angel and Jennifer Mendez (they were subsequently married) knew they had done nothing wrong, they filed a lawsuit against the police officers and the police department. The government’s response was that it was just a tragic accident and no one was really to blame.  Since the BB gun resembled a real rifle, the deputies acted reasonably under the circumstances.

The Supreme Court, as noted above, addressed certain Fourth Amendment precedents that had been in place in the lower federal court, and remanded the case for further proceedings.  It remains to be seen whether the couple will receive the $4 million in damages that the district judge awarded, or whether that legal win will be reversed.  

It is worth noting here that the case does not have to run its course thru additional legal proceedings.  A just government would never have waited for a lawsuit to be filed.  An apology and a lavish settlement offer would have been quickly forthcoming.  The County of Los Angeles can still do the right thing.  Rein in the county lawyers and agree to the $4 million in money damages that the federal district court previously awarded to Angel and Jennifer.

That would be a decent outcome for the Mendez family, to the extent that money can address such a horrific episode.

In our recent American Banker opinion piece, Heritage’s Norbert Michel and I argue that, if the Fed is really serious about shrinking its balance sheet, it had better quit paying interest on banks’ excess reserves (IOER) as well. How come? Because the current, relatively high IOER rate  is contributing to a strong overall demand for excess reserves, while a shrunken Fed balance sheet will mean a reduced supply of reserves. Reducing the supply of reserves while doing nothing to reduce banks’ demand for them is a recipe for demand-driven deflation, which is a monetary policy no-no.

Predictably (because it has happened every time I write on this topic) our article generated several comments to the effect that we didn’t know what we were talking about, because banks couldn’t possibly prefer the meager 100 basis points they can earn by holding reserves (or something less than that, if they are obliged to pay FDIC premiums) to the far greater amount they can earn by making loans.

The remarkable thing about these criticisms is that they all appear to deny that banks (or some banks, in any event) are in fact sitting on large amounts of excess reserves, and that they are, to that extent, settling for a return on those reserves of 100 basis points or less, instead of swapping reserves for other assets.

“For a bunch of ‘smart guys,” our first commentator writes,

these fellows don’t understand how banking works. 10 times out of 10 a bank would rather make a loan than have the funds parked at the Fed. Of course the loans have to be of the quality that the bank would expect the borrower to be able to repay the loan.

So far as the evidence up to October 2008 is concerned, our commentator is on solid ground, for until then banks did in fact prefer making loans to holding reserves 10 times out of 10. But that has manifestly not been the case since since October 2008, which happens to be when the Fed started paying IOER. Since then, as the figure below, comparing commercial banks’ loans and leases to their total deposits and Fed reserve balances, shows, the odds that a bank would rather make a loan than park funds at the Fed have been closer to 8 to 10:

Although our friend Chris (“r.c.”) Whalen, a highly-regarded bank consultant, is at least aware that reserves now make up a substantial share of commercial banks’ assets, he denies that this has anything to do with the fact that those reserves now yield a positive (if seemingly modest) return.

Whalen’s brief comment consists of two parts. The first, declaring that “The Fed is not paying banks not to lend. It prices the rate for excess reserves and Fed funds at a margin designed to preserve balance,” strikes me as nothing more than an exercise in empty semantics. Whatever “balance” the Fed may be trying to strike, the fact remains that it involves a substantial increase in banks’ overall demand for excess reserves. And if paying 100 basis points instead of zero doesn’t make reserves more desirable, and all the more so when rates are generally low, then it is time for us economists to toss-away everything we thought we knew about the workings of supply and demand.

The rest of Whalen’s comment is more substantial. “Even if you ended paying interest on excess reserves,” he observes, “the totals would not move because they are ultimately tied to a purchase of securities by the FOMC.” More substantial, but still wrong. As I tried to make explain in a previous Alt-M article, although the Fed’s security purchases largely determine the total outstanding quantity of bank reserves (and currency), those purchases  don’t determine banks quantity of excess reserves, which depend on what banks choose to do with reserves that come their way.

The point is perhaps best illustrated by looking at statistics from before 2008. Back then, banks hardly held any excess reserves; yet ongoing Fed security purchases (and sales) caused the total quantity of reserves to vary considerably, at least by pre-2008 standards:

Again, for emphasis: the size of the Fed’s balance sheet determines the quantity of total, but not excess, reserves. If excess reserves increase along with total reserves, as they have tended to do since the fall of 2008, that’s because banks have found it worthwhile to accumulate excess reserves, and not because they could not possibly get rid of them.

The last comment on our piece is by Wayne Abernathy, the ABA’s Executive VP for Financial Institutions Policy and Regulatory Affairs. In full it reads,

A major problem with the authors’ theory is the assumption that banks prefer to place money at the Fed rather than lend it out. In fact, banks would rather receive the 3.19% margin that they get on loans than the net 60 or 70 basis points that they get from the Fed. Loan demand, while growing, is not yet vigorous enough to absorb the flood of deposits that banks are still receiving. The banks’ choice is place the excess deposits with the Fed or tell their depositors “no thank you.”

In referring to “60 or 70” rather than 100 basis points as the net return on reserves, Abernathy evidently has domestic U.S. banks in mind, since U.S. branches and agencies of foreign banks, being exempt from FDIC charges, earn their 100 basis points free and clear. Pointing this out isn’t nit-picking, because  foreign banks have been holding a very large share of all outstanding excess reserves, in part precisely because reserves yield more to them than to their domestic counterparts. But the more important point is that, so far as both these foreign banks and the (mostly very large) U.S. banks holding large amounts of excess reserves are concerned, holding Fed balances is in fact more profitable, at the margin, than lending the funds those balances represent.

Evidently, so far as these banks are concerned, the relevant net margin isn’t 3.19%. So what is it? First of all, margins for the largest U.S. banks and foreign bank branches and agencies, which are the ones holding most of the reserves, are much lower than that for U.S. banks as whole. Although the FRED database doesn’t supply separate net interest margin data for the very biggest U.S. banks (instead it gives the margin for banks of over $15 billion in assets, which is not high enough for the purpose), it does report the margin for New York banks, which is a better though still rough proxy.  Here’s a chart comparing that measure to net interest margins for U.S. banks as a whole, and also to margins for banks in the Euro area, which are available in FRED only until 2014:

Evidently, if you are a New York bank, or a branch of a European bank, your idea of a decent net lending margin is, not 3.19%, as it might be for a “typical” U.S. bank, but something closer to 2% or (for the foreign banks) 1.5%.

In fact, many foreign banks found it profitable to acquire and retain excess dollar reserves for the sake of earning the modest spread between the risk-free IOER rate and lower effective Fed Funds and private repo rates. We know that, because they’ve been arbitraging that difference for some time. Foreign central banks, in the meantime, have been parking money at the Fed through its reverse-repo facility, which allows them to arbitrage the spread between what the facility pays and rates on short-term  T-bills. Before the Fed began paying banks to keep balances with it, these arbitrage opportunities simply didn’t exist.

The 3.19% margin to which Mr. Abernathy refers would, in any event, be irrelevant allowing, as he does, that the demand for loans is  not “vigorous enough” to actually support it! Here it’s worth keeping in mind that, whereas the demand schedule for bank reserves is, in effect, a horizontal line at whatever rate the Fed is paying, the  demand schedule for loans slopes downward. Assuming a state of equilibrium, banks have already expanded their loan portfolios to the point where the net loan margin, whatever its value may be for banks’ entire loan portfolio, is no higher at the margin than the IOER rate. Beyond that, reserves dominate loans. In equilibrium, in other words, parking another dollar at the Fed pays more than lending it does. Were IOER reduced to zero again, on the other hand, banks would once again find lending more profitable than reserve-hoarding, and they would continue to make loans until the net margin on them (the marginal net margin, that is!)  itself approached zero.

In case it helps, here is a picture of what I just said:

In the picture, the blue line is the (downward-sloping) demand schedule for bank loans, while the orange and grey lines are the Net Interest Margin for all bank loans and the IOER rate, respectively. The picture assumes a given level of total bank deposits, here set equal to $10 trillion. The vertical red line shows equilibrium quantity of bank loans with IOER=1, while the vertical green line shows the equilibrium quantity with IOER=0.  The numbers are, of course, only meant to be suggestive.  Since banks can’t dispose of reserves (though they can dispose of excess reserves by creating more deposits), a reduced IOER rate would in practice lead, other things equal, to growth in the level of both loans and deposits.

For those who continue nonetheless to doubt that the IOER rate has much bearing on banks’ demand for excess reserves, I offer, as a final exhibit, and without commentary, one last chart, this time comparing the difference between the IOER rate and the LIBOR rate, which I treat as a measure of the relative yield on reserves, to the overall ratio of reserves to commercial bank deposits:

[Cross-posted from Alt-M.org]

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