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For months, the United States has contemplated launching a series of naval patrols in the South China Sea.  Pentagon leaders are especially determined to defy China’s position that building “reclaimed” or artificial reefs and islands also creates rights to new territorial waters surrounding those entities.  On October 27, the Navy sent the guided-missile destroyer USS Lassen on a “freedom of navigation” patrol within 12-miles of a man-made island in the Spratly chain.  That action triggered an immediate outburst, with China’s Foreign Ministry admonishing the United States to “immediately correct its mistake and not take any dangerous or provocative acts that threaten China’s sovereignty and security interests.”

Washington’s action is a dangerous escalation of already worrisome tensions in the South China Sea.  It is understandable that, as the world’s leading maritime power, the United States is unwilling to accept Beijing’s extremely broad territorial claims in that body of water.  The full extent of China’s claims would cover nearly 90 percent of the South China Sea.  U.S. officials stress the importance of the sea lanes that pass through the area.  They note that some $5 trillion in oceanic commerce is involved, and that unimpeded navigation is especially crucial to the trade and overall economies of Japan, South Korea, Australia, and other U.S. allies in East Asia.

The importance of continued free navigation in the South China Sea is obvious, but two points are relevant.  First, China has made no credible threat to disrupt the trade routes.  Indeed, given China’s vast stake in international trade, threatening trade flows in any region would be risky to the point of self-destructive folly.  Second, one has to ask why the United States is expected to take the lead in dealing with this issue.  A Reuters article notes that “U.S. allies such as Japan and Australia, are unlikely to follow with their own direct challenges to China, despite their concerns over freedom of navigation along vital trade routes.”

If China truly poses a threat to trade routes that are so essentiall to countries in the immediate neighborhood, why aren’t those countries initiating naval patrols to challenge Beijing’s claims?  Why is the United States, whose homeland lies thousands of miles away, the only challenger?  The answer is that such reticence by the East Asian countries continues a long-standing habit of free riding on U.S. security exertions.  That is never going to change unless and until Washington conveys the message to those countries that the United States is through bearing the expense and incurring the risks of dealing with matters that are (or at least ought to be) far more important to them than to us.

The trajectory of U.S. policy in the South China Sea creates a crisis atmosphere and entails the grave risk of a direct military confrontation with China.  The potential benefits flowing from an aggressive U.S. policy are, at most, quite modest.  China’s East Asian neighbors should not be allowed to stand on the sidelines while Washington does their dirty work for them.

In his Cato Online Forum essay, Georgetown University law professor Joost Pauwelyn deftly rebuts some of the central – but, as you will be convinced, outdated – objections to the Transatlantic Trade and Investment Partnership. Joost’s essay supports two main points:

First, the Transatlantic Trade and Investment Partnership (TTIP) is less of a threat to multilateral trade than were first generation free trade agreements (FTAs), which involved a proliferation of preferential tariff treatment.  And second, unlike these shallow FTAs, deep FTAs – such as TTIP – force us to re-think the operating system of the World Trade Organization (WTO).

Thoughout his presentation, Pauwelyn challenges certain long-held assumptions about the trade-diverting effects of preferential trade agreements, making a compelling case for why TTIP is a different animal.  He also exposes some of the conventional wisdom and calls into question some of the purist gospel about the need for WTO primacy, arguing that its role should be diminished and more focued.

Read Joost’s essay here.

Read the other essays published in conjuction with the Cato TTIP conference here.

Take a look at how markets and technology are taking on some of society’s biggest problems and revolutionizing the way we live. 

Nanotech and clean drinking water 

The World Economic Forum recently reflected on nanotechnology’s potential to improve people’s lives by providing smaller yet more powerful batteries, and by speeding up the purification process for air and water, among other things. Nanotechnology could deliver clean drinking water to millions of people who currently lack it, furthering the current positive trend. Around 10 percent of the global population lacks clean drinking water, down from around 20 percent in 1990.

Telemedicine and elderly care 

Lifespans are rising. As a result, elderly populations in developed countries are growing, and their need for medical care is increasing. Both Politico and the Huffington Post recently commented on how telemedicine may be poised to help make medical care more widely available and cost-efficient for the elderly. Some benefits of a virtual visit to the doctor include allowing aging patients to avoid the strain of a physical trip to the doctor’s office, communicate better with their doctors as they are more relaxed in their home environment, and even remember medical advice more accurately. 

Eye-scanners and money transfers 

The Wall Street Journal reported that eye-scanning ATMs will soon be available. Citigroup will roll out eye-scanning ATMs first, while J.P. Morgan Chase and Bank of America are still in earlier phases of internally testing eye-scanning technology. Credit cards once represented a huge innovation in how people transferred money, but the future may be card-less, with credit card swipes supplanted by quick biometric scans. Eye-scanning technology could simultaneouslyincrease the security and lessen the hassle of monetary transfers. 

Data and precision agriculture 

Robots, smart tractors, sensors and big data hold the potential to increase agricultural profits, while lessening negative environmental impact. Technological innovation is key to increasing yields per unit of land and decreasing emissions and erosion—all areas in which we are already seeing positive trends. Some specific examples of precision agriculture include using sensors to monitor weather and crop moisture levels, as well as to identify crop diseases early on. In the words of advisory member Jesse H. Ausubel, “The environment will be protected, not harmed, technology.”  

Learn more about how human ingenuity is making the world a better place at

In Washington, the word “bipartisan” usually means “watch your wallet.”  If anyone needs any further proof, just look to the bipartisan budget agreement announced yesterday. 

Hailed in the name of “coming together” and “compromise” to “get things done,” the proposed deal is a dog’s breakfast of every bad budgetary idea to land on the table in recent months. 

It’s a deal so bad that even incoming House Speaker Paul Ryan says it “stinks” (although, it appears, he will still be voting for it). Still, current speaker John Boehner, House Minority Leader Nancy Pelosi, Senate Majority Leader Mitch McConnell, and Senate Minority Leader Harry Reid, who hammered out the deal behind closed doors, can probably put together enough votes to push it through, with a united Democratic caucus and just enough pro-defense spending Republicans.  

The deal essentially guts the spending limits in place under the 2011 Budget Control Act which brought about sequestration. It would increase spending by at least $80 billion over the next two years above current spending limits, split equally between domestic and defense spending. It would also increase funding for the military’s Overseas Contingency Operation slush fund by $32 billion, meaning the total spending hike would top $112 billion. More domestic spending for Democrats. More defense spending for Republicans.  Everyone wins except the taxpayers. 

But the deal is much worse than just the particular spending increases it contains. Sequestration may have been a blunt instrument but it has been one of the few successful restraints on federal spending in recent years. Without it and the caps in the Budget Control Act, federal spending would have been at least $200 billion higher since 2011.  

This really would mark the second consecutive budget deal in which Congress agreed to ignore the caps. That’s a pretty clear signal that Congress plans to return to its wide open tax and spend past. 

The deal would supposedly offset these increases through a rehashed collection of budget gimmicks such as selling some of the strategic petroleum oil reserves, auctioning telecommunications spectrum (again), and making changes to the crop insurance program.  Been there.  Done that. Still paying for the t-shirt. 

In fact, this deal actually weakens long term entitlement reform.  For example, it cancels coming increases in Medicare Part B premiums for the 30 percent of beneficiaries not already shielded from premium increases by a hold harmless provision.  It would also allow Congress to avoid reforming the Social Security Disability Insurance program by shifting funds to it from Social Security’s retirement program. The move weakens Social Security’s overall financing, but props up the disability program for another six years.   

So we will spend more on domestic discretionary programs, more on defense, and more on entitlements, while papering over the cost.  Happy days all around. 

The deal would also raise the debt ceiling by enough to last through March 2017.  In fact, the deal doesn’t just raise the debt ceiling, it simply does away with it for a year and a half. 

Of course, no one really expected Congress not to raise the debt ceiling eventually. But this deal surrenders even token Republican leverage. 

We’ve been fortunate the last few years.  A combination of renewed economic growth and sequestration-driven spending restraint has reduced our budget deficit to just (just!) $435 billion.  But this is only a temporary respite.  Within just a couple of years, deficits are expected to start growing once more. By 2025 we could again see $1 trillion deficits.  Worse, our $18.2 trillion debt is scheduled to rise to $26.9 trillion over the same period.  And all of this is before the big cost of entitlements really kicks in.  By some measures, our real debt tops $80-90 trillion. 

But at least we’ve found something everyone in Washington can agree on: screwing the taxpayer. 

This morning the latest scores from the 4th and 8th grade National Assessment of Educational Progress – the so-called Nation’s Report Card – came out, and the story isn’t very good, at least upon first examination. Average scores in 4th and 8th grade math, and in 8th grade reading, were down from 2013, and essentially stagnant in 4th grade reading.  

Of course, there is a lot you cannot tell about school systems from looking just at NAEP scores. Numerous variables that affect academic outcomes, ranging from demographic changes to cultural shifts, can have important impacts on scores. But it is sobering to see national test scores stagnate or drop, and at the very least the scores should put a damper on some of the declarations of success we’ve seen in the past from people like U.S. Secretary of Education Arne Duncan, who in 2013 credited state transitions to the Common Core national curriculum standards for upticks that year.

Perhaps a look at Kentucky, which has been held up as a success story for adopting the Core ahead of all other states and seeing increases on its state tests, is telling. Kentucky may well be seeing improvements, but the NAEP exams, for many people, serve as something of an external audit to see if states’ own tests are producing deceptive information. Of course there can be legitimate disagreements about what test is better – and if testing is even a good way to measures success – but many people who support the Core see state tests as dishonest if they differ markedly in their results from NAEP. So NAEP is important to them. Well, now, while seeing rising scores in 4th grade reading, Kentucky has seen falling scores in 8th grade math and reading, and stagnant scores in 4th grade math. Does that mean the Common Core, or anything else they are doing in Kentucky, necessarily doesn’t work? No. But it does furnish evidence that contradicts the simplistic message of, “Look at Kentucky – the Common Core works!”

There is much that NAEP is too limited to tell us definitively, but the same goes for any single measure of education. And we should be concerned whenever we see scores go down.

PORT-AU-PRINCE, HAITI—Haitians voted for a new president this past Sunday. A run-off looms, but whoever wins will face overwhelming challenges. What’s worse, the Dominican Republic, which shares the island of Hispaniola, is threatening to expel hundreds of thousands of ethnic Haitians. They ultimately could spill over America’s borders.

Haiti was liberated in 1804 but never developed into a stable, prosperous democracy. Haiti’s economic problems are severe. The nation’s per capita GDP ran $846 last year, making the former the poorest nation in the region.

Even an honest and competent president will have a difficult time transforming Haiti. According to the Economic Freedom of the World Report, the openness of Haiti’s economy–a key determinant of growth–has remained largely static since 2000.

As I noted on Forbes online: “While Haiti at best ran in place, other countries moved forward. In 2012, Haiti ranked 92 of 152 nations, barely above the bottom third. By punishing entrepreneurship and investment, the government is allowing its people to fall further behind.”

Reforming the economy will be difficult in the best of circumstances. Unfortunately, for the past year, the Dominican Republic has been threatening to expel nearly 300,000 ethnic Haitians who have lived in the DR, many for their entire lives.

Relations between the two countries have been troubled since their beginnings. The 1929 DR constitution, in effect until 2010, granted “birth right” citizenship, meaning anyone born in the DR, other than of a diplomat or someone “in transit,” interpreted as a short-term tourist, was a citizen.

However, the DR then revised its constitution to restrict citizenship to children of “residents.” In 2013, the country’s top court reinterpreted the 1929 constitution, treating undocumented migrants who came for work as being “in transit,” leaving hundreds of thousands of ethnic Haitians stateless.

The government responded by pushing what became the Naturalization Law, to allow those affected to legalize their residency or citizenship. However, warned Human Rights Watch: “the law has been riddled with design and implementation flaws that have thwarted the re-nationalization process.”

In practice, noted the Open Society’s Justice Initiative, “the new law’s recognition of citizenship is based not on the fact of birth itself on Dominican territory, but rather on whether a birth was officially registered at the time.” Many were not, which results in an enormous problem in documentation.

Moreover, HRW reported: “military and immigration authorities have harassed, detained, and expelled individuals seeking to enter the civil registries through the registration process as well.” Police have engaged in indiscriminate round-ups of ethnic Haitians, even those born in the DR.

Thousands of ethnic Haitians have left or been forced to leave the DR. Hundreds of thousands more could be forced into Haiti, where most have never lived.

There is little that Haiti can do. The government could better assist ethnic Haitians seeking documentary support to regularize their status in DR. Haiti is preparing to ban select DR imports, but that will hurt its own citizens.

The Haitian government cannot afford to support tens or hundreds of thousands of new entrants in an economy which doesn’t work and offers few opportunities.

Haitians are appealing for assistance from their neighbors, the Organization of American States, and particularly the United States. 

The number of Haitian boat people seeking refuge in the United States surged in the late 1970s under the “Baby Doc” Duvalier dictatorship, and continued through the Cuban Mariel boatlift into the following decade. The number rose again in the early 1990s. However, few were granted asylum; tens of thousands were repatriated to Haiti.

Washington surely wants to avoid a repeat performance. But given nationalistic sensitivities, sustained and quiet diplomacy might be more effective than public pressure in persuading the DR to adopt an approach which meets humanitarian necessities.

Haiti is one of the Caribbean’s most sustained tragedies. The Haitian people need better political leadership, to be sure. Equally important, Haiti and the Dominican Republic must cooperate for the benefit of all.

After nearly three months of debate, Congress has agreed to extend federal highway and transit spending for three weeks. Authority to spend federal dollars (mostly from gas taxes) on highways and transit was set to expire tomorrow. The three-week extension means that authority will expire on November 20.

Many members in Congress hope that the three-week delay will allow them to reconcile the House and Senate versions of a six-year bill. Among other things, the Senate version spends about $16.5 billion more than the House bill, $12.0 billion on highways and $4.5 billion on transit. The two bills also use different sources of revenue to cover the difference between gas tax revenues and the amounts many members of Congress want to spend.

To cover this difference, the Senate bill, known as the “Developing a Reliable and Innovative Vision for the Economy Act” or DRIVE Act, provides three years of funding by supplementing gas taxes with new customs, air travel, and mortgage-backed securities guarantee fees. The House bill, called the Surface Transportation Reauthorization and Reform Act, doesn’t offer any source of funds; instead, House Transportation & Infrastructure Committee Chair Bill Shuster merely expressed hope that the House Ways & Means Committee would find a source of funds.

Despite the use of the word “reform,” the House bill doesn’t reform much other than to streamline environmental review, thus making it easier for cities and states to waste money faster. However, the bill does create new competitive grant programs, including a $4.5 billion program for “freight and highway projects” and a return to using competitive grants for buses and bus facilities. The Senate bill, meanwhile, creates a new “competitive grant” program aimed at “funding major projects.”

Competitive grant programs invariably turn into pork barrel programs, with either the most powerful members of Congress or the president designating where the money will be spent, usually to the benefit of the party in power. As revealed by a Cato paper, for example, spending under the New Starts program has strongly favored the districts of Democrats who were on the House Transportation & Infrastructure Committee, while a Reason Foundation paper reached similar conclusions regarding the TIGER grant program.

The 2012 reauthorization bill, MAP-21, converted most competitive grant programs, including the bus & bus facility program, to formula funds so neither Congress nor the president could tinker with how the money was spent to favor their friends. This left many members of Congress frankly disappointed that they could no longer “take credit” for bringing home the bacon. Both the House and Senate bills would remedy this by sliding backwards into pork.

Given the $16.5 billion difference in spending and the lack of funding beyond the first three years, it seems unlikely that the two houses could reach agreement by November 20. However, the November deadline will keep the issue at the forefront of Congressional minds, so even if they have to extend it another four weeks, it is possible that they could reach agreement before the end of the year. Staffers say that, unless they pass a six-year bill this year, the Senate at least won’t want to pass a bill next year because it is an election year.

Until a few years ago, Congress had a pay-as-you-go policy in which highway and transit spending was no more than actual highway revenues. But then Congress decided to increase spending every year whether or not revenues covered those expenses, and since gas tax revenues leveled off in 2007, deficits have averaged about $10 billion a year. Unfortunately, few in Congress are willing to either cut spending or raise gas taxes to make up the difference. Without the discipline that comes from staying within a budget, transportation spending has become a free-for-all.

In a nutshell, the House bill is marginally better than the Senate bill, but both are worse than the current federal law regarding highway and transit spending. Members of Congress should avoid being stampeded into passing a big-spending bill based on false claims of an infrastructure crisis or a supposed economic boost created by such a bill. Instead, they should curb transportation spending to be no more than actual transportation revenues and eliminate, rather than create, pork-barrel programs.

In researching an upcoming study on privatization, I came across an interesting illustration of the advantages of private science over government science. Private science focuses on efficiency and results, but government science maybe not so much.

The study by Jonathan Karpoff in the Journal of Political Economy found:

From 1818 to 1909, 35 government and 57 privately-funded expeditions sought to locate and navigate a Northwest Passage, discover the North Pole, and make other significant discoveries in arctic regions. Most major arctic discoveries were made by private expeditions. Most tragedies were publicly funded. By other measures as well, publicly-funded expeditions performed poorly. … Although public expeditions made some significant discoveries, they did so at substantially higher cost (as measured by crew size or vessel tonnage) than private discoveries.

Historical accounts indicate that, compared to private expeditions, public expeditions: (1) employed leaders that were relatively unmotivated and unprepared for arctic exploration; (2) separated the initiation and implementation functions of executive leadership; and (3) adapted slowly to new information about clothing, diet, shelter, modes of arctic travel, organizational structure, and optimal party size. These shortcomings resulted from, and contributed to, poorly aligned incentives among key contributors.

My upcoming study will look at the advantages of privatizing federal activities such postal services, air traffic control, and passenger rail. But policymakers should also explore the advantages of privatizing federal science activities.

Cato adjunct Terence Kealey has written about the advantages of private over government science, and he will discuss that topic at an upcoming Chicago seminar.

Meanwhile, if you plan to explore the Arctic, it would be best to go on a private rather than government ship. There would be less chance of getting scurvy–at least that’s the way it used to be, according to Karpoff.

On this blog, Chris Edwards shared some hopeful thoughts on the fate of postal privatization - which people of a sound mind should certainly cherish. Mr. Edwards built on the news of the impending sale of a 40 percent stake in Italy’s mail delivery incumbent, Poste Italiane. If even Italians are privatizing, why are the US keeping loyal to the ideal of a government-owned post office? We certainly share Edward’s attitude towards privatization. But we are afraid that this time Italy (which indeed privatized much in the 90s, from the national telecom company to the highways) isn’t an example to imitate.

There was, indeed, a series of successful postal privatizations: Germany, the Netherlands, and the UK have shown the way. But we are afraid Prime Minister Matteo Renzi hasn’t followed their lead.

Poste Italiane is a strange animal. As with all national post services, for years now its traditional core business has been eaten up by the development of the e-mail. And yet the company ostensibly failed to adapt, for example by seizing the opportunities created by e-commerce. In seven years, revenues from mail and parcel delivery declined from 33% of total revenues to a mere 14%. Conversely, Poste Italiane diversified heavily: insurance and banking now rake in the bulk of its yearly income. This is an unhealthy paradox: the Italian government privatized its insurance company, INA, in 1994. The government-owned banks were likewise privatized in the early 90s. Now, with Poste Italiane, the government is back into the insurance business and owns the first Italian insurance companies by premiums collected.

At the same time, Poste Italiane started looking at new ventures, like mobile telecoms and retail, eventually turning its post offices into small convenience stores.

If we look at the bottom line, such a strategy payed out: the company’s financials are now in much better shape, as more profitable businesses began making up for the losses of its postal unit. But if we look at the government involvement in those industries in which Poste Italiane plays a role, the picture gets murkier. Not only the government got back into banking and insurance. It did so in a rather untransparent way, shielded under the brand of his postal company.

Diversification loosened the public oversight over the company’s mission and allowed for cross subsidies and other distortions, which in turn enabled the company to leverage its postal monopoly in multiple markets.

For instance, Poste Italiane’s bank unit benefits from a huge network of 14,000 offices. There should be a post office even in the smallest of the Italian towns in the Appenini, as the public postal service shouldn’t leave anybody behind. But certainly no private-sector banking competitor could ever match such an extensive web of branches.

At the same time, even though the market for mail services in the European Union was fully liberalized in 2011, Poste Italiane’s mail unit still enjoys a monopoly right over the serving of judicial documents and it has been exclusively entrusted with the provision of the so-called universal service, a task which the government generously subsidize.

None of these concerns was addressed before the IPO. In fact, what happened was exactly the opposite. Universal service obligations were eased, the monopoly right over judicial notifications (due to expire shortly) was prolonged; the sale of single units (as opposed to shares of the group as a whole) was ruled out. In short, the appetite of investors was stimulated by reinforcing a legal monopoly.

It ain’t necessarily so. In Germany, Deutsche Post, Deutsche Postbank and Deutsche Telekom were unmerged and ultimately went their separate ways. If the same method was applied in Italy, it might well be that the IPO of the insurance or the bank branch of Poste Italiane may have been even more successful: they are indeed thriving businesses.

Not only does the privatization fail to sort out any of the remaining competitive issues, but it will hardly curb government interventions in the market. With a 60 percent stake left and no plans for further divesture, the Italian government will still be in charge of the company’s strategy. Just a couple weeks ago, the UK government sold its entire remaining stake in Royal Mail, two years after the original flotation. When is the same thing to happen with Poste Italiane? The Italian government has said nothing that may allow us to speculate that that days is going to come any soon.

It might well be that the privatization of Poste Italiane will produce some benefits. Partial privatization of companies like Eni (the Italian oil and gas giant) and Enel (the electricity utility) helped in modernizing their governance: investors disciplined the management to some extent and the government’s influence somehow weakened. And yet, the government still controls some 30% of both.

Indeed, the government is the only party which unequivocally stands to benefit from the privatization of Poste Italiane: it gets to pocket € 3,4 billion, but won’t have to relinquish control over the company.

Enav (which provides air traffic services and other air navigation services in Italy) and Ferrovie dello Stato (the railways company) are bound to the same fate. The government set to retain a majority stake in both entities, using the capital markets as supplier of much needed oxygen for public finances, but keeping a tight rein on the companies. Plus ça change, plus c’est la même chose.

Massimiliano Trovato is  a Research Fellow with Istituto Bruno Leoni, Italy’s free market think tank ( Alberto Mingardi is Director General of Istituto Bruno Leoni and an Adjunct Scholar at the Cato Institute.

During the 1980 presidential campaign, Ronald Reagan famously said “there you go again” when responding to one of Jimmy Carter’s attacks.

Well, the Gipper’s ghost is probably looking down from Heaven at the new budget deal between congressional leaders and the Obama Administration and saying “there they go again.”

That’s because we basically have a repeat of the distasteful 2013 budget deal.

The new agreement, like the 2013 deal, busts the budget caps. In this case, the politicians in DC have approved $50 billion of additional spending for the 2016 fiscal year (which started on October 1) and $30 billion of additional spending in the 2017 fiscal year (starting October 1, 2016).

Which means that the President gets to further undo his biggest fiscal defeat.

And what do Republicans get in exchange?

Many of them want higher defense spending, of course, and some of them doubtlessly are happy to have more domestic spending as well. Those politicians are presumably happy, at least behind closed doors.

So let’s rephrase the question: What do advocates of fiscal restraint get in exchange?

Well, if you peruse the agreement, it’s apparent they don’t get anything. Sure, there are some promises of future restraint. But if the 2013 deal and the current agreement are any indication, those promises don’t mean much.

The deal has a handful of back-door revenue increases, including an assumption that the IRS will be more aggressive in squeezing money out of taxpayers. And there are some budget gimmicks, along with some tinkering with entitlement programs, especially the fraud-riddled disability program, that ostensibly will lead to some modest savings.

The net result is that we have a pact that leads to guaranteed spending increases over the nest few years, combined with some nickel-and-dime proposals that will probably offset each other in the future.

So the bad news - assuming the goal is enforceable spending restraint - is that policy has moved in the wrong direction.

In other words, I was right to worry that Republicans would fumble away a guaranteed victory.

And this deal probably sets the stage for another bad deal two years in the future since more spending in 2016 and 2017 will make it harder to meet the spending caps for 2018 and beyond.

Now for the good news…

Ooops, there isn’t any good news.

About the only positive thing to say is that this new agreement is not a huge defeat. There will still be budget caps, which is better than no spending caps.

And the new spending, while wasteful and counterproductive, is relatively small in the context of an $18 trillion economy.

Moreover, the deal only partially unwinds the fiscal discipline that already has been achieved thanks to the spending caps.

Last but not least, nothing in this deal precludes a better and more comprehensive spending cap, perhaps modeled after Switzerland’s very successful debt brake, once Obama is out of the White House.

P.S. This new deal also increases the debt limit. Some view this as a defeat, but it more properly should be viewed as a missed opportunity to get some much-needed reforms.

That being said, I can’t resist commenting on the deliberately dishonest scare tactics from our statist friends. They routinely claim that the United States government would have to default on its debt and cause a global crisis unless there is approval for more borrowing.

For instance, exuding an air of faux hysteria, one writer for the Washington Post asserted that, “Failure to raise the debt ceiling would unleash hell on the U.S. economy.” Another Washington Post columnist fanned the flames of fake despair, writing, “The chaos…is about to have some very serious effects on the entire country.” And a third Washington Post reporter falsely fretted that not raising the debt limit by November 3rd, “could plunge the United States into default, an outcome that…could lead to economic catastrophe.”

Oh, please, we’ve heard this song and dance before. But it’s utter nonsense.

Here’s some of what I said as part of my testimony to the Joint Economic Committee in 2013.

…there is zero chance of default. Why? Because…annual interest payments are about $230 billion and annual tax collections are approaching $3 trillion. …there’s no risk of default – unless the Obama Administration deliberately wants that to happen. But that’s simply not a realistic possibility.

But some folks may wonder whether my analysis is accurate. After all, maybe I’m some sort of nihilistic libertarian who fantasizes about laying waste to Washington.

And other than the nihilistic part, that’s actually a good description of my long-run goals.

But that doesn’t mean I’m wrong. So for backup, let’s look at some identical analysis from an ultra-establishment source, as reported in The Hill.

Moody’s Investors Service announced Monday that, despite dire warnings from the Treasury Department, the government would find a way to pay money owed on its debt, regardless of whether lawmakers agree to raise the $18.1 trillion borrowing cap. …”Even if the debt limit is not raised, …the government will order its payment priorities to allow the Treasury to continue servicing its debt obligations,” says Moody’s Senior Vice President Steven Hess.

Gee, maybe all the partisans at the Washington Post are the ones who are wrong. Along with the partisan and status-quo voices from the political establishment.

Don Boudreaux recently despaired that only 26 percent of economists surveyed agreed that

If the federal minimum wage is raised gradually to $15-per-hour by 2020, the employment rate for low-wage US workers will be substantially lower than it would be under the status quo.

In the University of Chicago Booth School of Business’s regular survey of distinguished policy economists chosen for ideological diversity, 24 percent disagreed with the statement, and 38 percent said they were uncertain.

Some said that employment effects were likely, but they might not be “substantial.” That’s an empirical question, of course, and knowing the direction of a change doesn’t necessarily tell us its magnitude. In addition, each person’s definition of “substantial” might be different. Boudreaux doesn’t think there should be much uncertainty:

Would 74 percent of my fellow economists either disagree that, be “uncertain” that, or have no opinion on the question of whether a forced 107 percent increase in the price of the likes of 737, 777, and 787 jetliners would cause airlines to cut back substantially on the number of new jetliners they buy from Boeing?  Or what if the question were about the prices of fast-food?  Would 74 percent of these economists either disagree that, be “uncertain” that, or have no opinion on the question of whether a forced 107 percent increase in the prices of the likes of Big Macs, Baconators, and buckets of KFC fried chicken would cause consumers to cut back substantially on the amount of food they purchase at fast-food restaurants?

But who am I to jump into this battle of economists? Just a lowly newspaper reader, that’s all. And as it happens, Boudreaux posted his critique on Sunday, and on Monday I read an interview in the Wall Street Journal with Sally Smith, CEO of Buffalo Wild Wings. She runs a chain of more than 1,000 sports bars, and she’s trying to expand. Here’s part of her interview:

WSJ: How are minimum-wage increases affecting the way you make business decisions?

MS. SMITH: You look at where you can afford to open restaurants. We have one restaurant in Seattle, and we probably won’t be expanding there. That’s true of San Francisco and Los Angeles, too. One of the unintended consequences of rising minimum wages is youth unemployment. Almost 40% of our team members are under age 21. When you start paying $15 an hour, are you going to take a chance on a 17-year-old who’s never had a job before when you can find someone with more experience?

WSJ: Are you turning to automation to reduce labor costs?

MS. SMITH: We are testing server hand-held devices for order-taking in 30 restaurants now, and we’ll roll them out to another 30 in the next month and another 30 by the end of the year. Servers like it because they can take on more tables and earn more tips. Eventually we’ll have tablets where guests can place their own order from the table and pay for it.

Ms. Smith is no economist. (She has a BSBA in accounting and finance, and served as CFO of Buffalo Wild Wings and other companies for about 10 years before becoming CEO in 1996.) She’s just a CEO trying to make revenues come out ahead of costs. And when she thinks about a substantial increase in the minimum wage, her thoughts turn to not expanding, hiring more experienced workers, and using technology so fewer servers can serve more customers.

She doesn’t seem as uncertain about the effects on employment as the academic economists do.  

It has been just over a decade since the Supreme Court decided in Kelo v. New London that local governments can take private property by eminent domain under a very broad reading of “public use”.  Cato held an event earlier this year to examine the legal impact of Kelo, featuring remarks from George Mason Law Professor Ilya Somin based upon his recent book, The Grasping Hand.  Not only has Kelo spawned widespread public backlash, but its also given birth to renewed interest by legal scholars.  As an economist, I am a little more interested in the direct impact on families.

Unfortunately, I have had no luck finding a database of all U.S. takings.  The American Housing Survey (AHS), conducted by the Census Bureau every two years, does, however, offer some estimates.  For survey respondents who moved within the previous year, the AHS asks respondents the “main reason” for leaving their previous unit.  One option offered is “government displacement”. For the survey years since Kelo, the average has been 109,000 households who state that government action displaced them from their previous home.  If that average holds for non-survey years, then a good estimate is that just over a million households have been displaced by government action since Kelo

The AHS also confirms some suspicions as to who the victims of eminent domain are.  Since Kelo, about 29% of households displaced by government action have been African-American, about twice that of the general population.  As concerning is that about 32% are households in poverty, again about twice the rate of the overall population.  If you’re poor or African-American, you are twice as likely as households overall to be displaced by government action.  Also concerning is that the annual average for families displaced by government action in the decade prior to Kelo is about half that witnessed after Kelo.  So despite the public backlash, takings are up not down.

It should be emphasized that the AHS is a sample, not a census.  The 90% confidence interval for my million estimate is +/- 107,000.  Also keep in mind that government could displace a families by means other than eminent domain.  The AHS is also a survey of housing units, so any homeless families would not be included.  Lastly responses are based upon household questionnaires and not verified.  All that said, a million homes taken since Kelo is likely a good approximation and still troubling.

Wage appreciation, or lack thereof, does not tell us everything we need to know about our standard of living. Wages often fail to capture changes that come from competition and technological breakthroughs. 

One—much underutilized—way in which we can get a sense of the improvements in our standard of living is to look at the number of hours an average employee needs to work in order to buy commonly used items. When cost is measured in terms of hours worked, almost everything in 2015 is “on sale” when compared to the same product in 1979. 

Consider two common kitchen appliances: the microwave and the refrigerator.

Those are some impressive discounts! Look at the data for yourself and you will find that the trend of falling prices, when measured in hours of labor, is widespread. The main exceptions when it comes to the cost of living are the highly distorted healthcare, education and housing markets. In contrast, when market competition thrives, it tends to bring down prices and raise living standards for all of us. 

The Wall Street Journal has an editorial today on the prosecutorial abuses surrounding “John Doe” investigations.  By way of background, so-called “John Doe” laws allow prosecutors to bypass the regular search warrant application process and use special subpoenas to demand all sorts of information from various institutions, such as internet service providers.  If the prosecutor demands your email records, you may never know it has even happened.

Excerpt from the editorial:

New evidence shows that John Doe investigators were trawling the files they collected via subpoenas and search warrants for information on national conservatives.

The documents are under seal in a state court case, Eric O’Keefe and Wisconsin Club for Growth v. Wisconsin Government Accountability Board (GAB), but two sources have read them to us. The lawsuit is a complaint against the GAB, the state agency that worked with Milwaukee prosecutors on the John Doe that used campaign-finance laws to trample the First Amendment.

We’ve tried to expose this illegal harassment since the autumn of 2013, when early morning home raids and subpoenas hit conservative groups across the state. From that investigation and a previous John Doe whose documents were transferred into the new investigation, prosecutors and the GAB collected millions of documents, including personal files, emails and bank statements.

Eric O’Keefe recently shared his chilling experiences in Wisconsin in a Cato Daily Podcast.

There is no place for “John Doe” investigations in America.  Period.  “Reforming” John Doe falls short.

Trade economist Hanna C. Norberg writes:

When it comes to the value of real estate, the three most important factors are said to be location, location and location. With regards to the Transatlantic Trade and Investment Partnership, it’s regulation, regulation and regulation. 

In her Cato Online Forum essay, which was published in conjunction with this month’s Cato TTIP conference, Dr. Norberg explains how firms, workers, and consumers in the United States, in the European Union, and crucially (for those concerned about trade diversion and other adverse externalities), in third countries, can share in the benefits of reduced regulatory compliance costs.  Achieving greater economies of scale, reducing the costs of under- or over-estimating market-specific demand, reducing barriers to entry for smaller firms, and creating efficiencies in portions of global value chains that will have ripple effects on other portions are all channels through which TTIP can drive global growth.

The associated cost savings from these efficiences, Norberg argues, “get passed on in the form of lower-prices, higher wages, more research and development, new and better quality products, and more investment.”

Read Hanna’s essay here.

Find the other essays here

Last week, our friends at the Competitive Enterprise Institute won a small but important victory in the effort to bring the Transportation Security Administration under law. It began when the Electronic Privacy Information Center (EPIC) challenged the TSA’s policy of using strip-search machines at airports for primary screening. EPIC’s Fourth Amendment attack failed, but the D.C. Circuit Court of Appeals found that the TSA hadn’t used required administrative procedures to establish the policy, and it ordered the agency to promulgate a rule after taking comments from the public.

That was more than four years ago. The agency has been dragging its feet. And last week the court gave TSA thirty days to submit a schedule for “the expeditious issuance of a final rule within a reasonable time.”

Once the TSA has finalized its rule, it will be subject to challenge under the “arbitrary and capricious” standard in federal administrative law. John Mueller, Mark Stewart, and I filed comments during the rulemaking that will help show that the TSA’s policy is incoherent when it’s before the court.

Yes, it’s taking a long time. Courts often defer to agencies as experts in the fields they regulate, though they’re really expert at gaming the regulatory system and the courts. With persistence, though, the effort to bring the TSA under law and reverse its needlessly invasive and expensive programs will bear fruit.

Or responsibility for air security will be restored to airlines and airports.

Prior restraints—legal prohibitions on disseminating information before publication—are an odious burden on the freedom of expression and come with a “heavy presumption” against their constitutionality. Indeed, they are so disfavored in the law as to be virtually impossible to obtain outside of wartime.

Informal prior restraints—government pressure without formal sanction—are even more unconstitutional than formal ones, as the Supreme Court noted in Bantam Books v. Sullivan (1963). In that case, the Court forbade the Rhode Island Commission to Encourage Morality in Youth from sending threatening letters to book distributors in an attempt to nudge the distributors into not carrying “obscene” material.

But that strong precedent didn’t stop Cook County (Chicago) Sheriff Thomas Dart and his crusade against, an online commerce site similar to Craigslist. Rather than trying to get a formal prior restraint from a court, Dart used his office, letterhead, and title to send letters threatening investigation to Visa and MasterCard (Backpage’s primary financial transaction processors) to pressure them into dropping Backpage as a customer. Dart justifies his actions by asserting that there have been “years of growth in the online sex trade,” “driving demand even higher and increasing the enslavement of prostituted individuals, including children” due to commercial sites like hosting “adult services” classified ads.

It worked: when Backpage sued to stop Sheriff Dart, the district court denied a preliminary injunction, accepting Dart’s claims and ruling that the public interest weighed against the website. appealed to the U.S. Court of Appeals for the Seventh Circuit.

As Cato, Reason Foundation, and DKT Liberty Project point out in our amicus brief before that court, Dart’s claimed “epidemic” of sex trafficking has evaded any sort of empirical verification for over two decades. Indeed, State Department data indicate that the opposite may be true. Nevertheless, Sheriff Dart, along with a new-age Baptist-and-bootleggers coalition matching the religious right and radical feminists, have raised the human-trafficking bugaboo to rally against prostitution—mimicking the drug war and all of its worst legal mechanisms.

Never mind that only about 11% of ads are in the “adult” section and that many ads there, whatever one may think of dominatrix services, are perfectly legal and entitled to First Amendment protection. Never mind that Backpage has fully cooperated in investigations of actual child exploitation and other noxious activity and one of the foremost experts in trafficking posits that “[s]hutting down Backpage would mean that approximately 400 persons per month would not be identified as suspicious and would thus fall off the radar screen” (because their credit-card tracking information would be lost).

Courts have a responsibility to ensure that government officials, particularly law enforcement, follow constitutional constraints, and this is especially true when the results of extra-constitutional crusades can actually drive illicit behavior underground. Not unlike the recent Operation Choke Point scandal, the use of government power to pressure politically disfavored (yet legal) businesses out of the marketplace is simply un-American.

To paraphrase Lord Coke’s maxim from centuries ago, the government shouldn’t be able to achieve indirectly what it’s not allowed to do directly.

The Seventh Circuit will hear v. Dart the second week of November.

In a private response to my post earlier this afternoon, Ed Whelan has brought to my attention two errors in this paragraph:

The addition of the Bill of Rights, in short, did not reduce the number of rights we enjoy, limiting them to those fairly clearly “in” that document. It simply enumerated some of the rights in that vast sea of previously unenumerated rights—all of which, enumerated and unenumerated alike, were later incorporated against the states through the Fourteenth Amendment, properly read.

He alerts me that in his post last Thursday, to which I responded on Friday, he had written:

These proponents of originalism and judicial restraint aim, in other words, to have judges enforce the rights, and limits on power, that the Constitution, fairly construed, sets forth, and to prevent judges from inventing rights and powers that are not in the Constitution. (emphasis added)

Fair enough. By placing the emphasis on judges limiting power (which they rarely do since the New Deal constitutional revolution), Ed doesn’t have to worry about whether the Constitution “sets forth” unenumerated rights pursuant to the Ninth Amendment, and so I stand corrected—at least in the case of challenges to federal power.

But of course most unenumerated rights questions arise in challenges to state power, which brings me to a misstatement in that passage of mine above. I wrote that all of our rights, “enumerated and unenumerated alike, were later incorporated against the states through the Fourteenth Amendment, properly read,” and that of course is not correct. For just as we give up some of our rights when we constitute ourselves nationally, so too we give up others when we constitute ourselves at the state level. The usual state cases, however, (Griswold, Troxel, etc.) involve rights that we do not give up—all of which, to fully explain, requires a more detailed theory of both state police power and the rights retained pursuant to the Ninth Amendment. I thank Ed for bringing that to my attention.

While I’ve got your attention, however, I might as well take this opportunity to call into question a contention that many conservatives, including Ed, are fond of making, namely, that the Ninth Amendment should be read as a rule of construction. As he writes in this morning’s post, “defenders of the original Constitution argued against a bill of rights on the ground that such a listing might imply that the national government’s powers were far greater than they were.” True, that is one reason they opposed a bill of rights. But he continues:

When the Bill of Rights was added, the Ninth Amendment was crafted to guard against this implication. The text of the Ninth Amendment (“The enumeration in the Constitution of certain rights shall not be construed to deny or disparage others retained by the people”), which sets forth a mere rule of construction (“shall not be construed”), comports perfectly with this purpose.

True again, the Ninth Amendment does guard against that implication. But that does not mean that the amendment “sets forth a mere rule of construction.” For the object of “construed” is “to deny or disparage other[] [rights] retained by the people.” And that brings us to a different rule of construction: expressio unius est exclusio alterius. An additional fear opponents of a bill of rights had was that the enumeration of some rights in such a bill would be construed as excluding other, unenumerated rights from protection, and that too is why, if a bill of rights were to be added, the Ninth Amendment would be needed to ensure that both enumerated and unenumerated rights were protected. True, the question comes up most often in challenges to state laws, but with the demise of the doctrine of enumerated powers it comes up in federal cases as well.

George Will’s latest column draws attention to Judge Alex Kozinski’s critique of the American criminal justice system.  Here is an excerpt:

The Republican Party, like Sisyphus, is again putting its shoulder to a boulder, hoping to make modest but significant changes in the Electoral College arithmetic by winning perhaps 12 percent of the African American vote. To this end, Republicans need to hone a rhetoric of skepticism about, and an agenda for reform of, the criminal justice system. They can draw on the thinking of a federal appellate judge nominated by Ronald Reagan.

In an article that has stirred considerable discussion since it appeared this past summer in the Georgetown Law Journal, Alex Kozinski of the U.S. Court of Appeals for the 9th Circuit provides facts and judgments that should disturb everyone, but especially African Americans, whose encounters with the criminal justice system are dismayingly frequent and frequently dismaying….

Prosecutions are preceded by police investigations. Police, says Kozinski, have “vast discretion” about, among many other things, which leads to pursue and witnesses to interview. They also have opportunities “to manufacture or destroy evidence, influence witnesses, extract confessions” and otherwise “stack the deck against people they think should be convicted.” A woman spent 23 years on death row because of an oral confession she supposedly made during a 20-minute interrogation by a detective who Kozinski says was later shown “to be a serial liar.” The conviction of a man who spent 39 years in prison was based “entirely” on the eyewitness testimony of a 12-year-old who saw the crime from a distance, failed to identify the man in a lineup and was fed information by the police.

Read the whole thing.

Cato will be hosting a debate between Judge Kozinski and Judge J. Harvey Wilkinson next month.  Related post here.

Rising home prices and apartment rents have been in the news lately, but almost no one is looking at the real causes behind these problems. Instead, they are proposing band-aid solutions that will do little to help most people afford housing but will greatly benefit special interest groups.

According to the news, BostonLos AngelesMiamiNew YorkPortlandSan Francisco-Oakland, San JoseSeattle, and Washington, DC, among other major urban areas, are all suffering from housing crises. Economists who have studied these regions know why their housing is becoming less affordable.

First, urban-growth boundaries and other land-use regulations in most of these regions have limited the amount of land available for new housing. Urban planners say these regulations are needed to control the externalities caused by urban sprawl. However, as New Zealand’s Deputy Prime Minister recently noted in a speech about a similar housing crisis in Auckland, urban planning itself “has become the externality” that is making housing the most expensive.

Second, in many of these regions–specifically, Los Angeles, New York, San Francisco-Oakland, San Jose, and Washington–rent control has only made housing less affordable for everyone not lucky enough to live in a rent-controlled apartment. Even though some of these cities exempt new developments from rent-control rules, developers know that such exemptions could be eliminated at any time and are wary of investing in new housing. Many of these and other cities have also passed “inclusionary zoning ordinances” that force developers to sell or rent 10 to 20 percent of the new housing units they build at below-market rates, which both discourages new development and increases the cost of the market-rate units that are built.

Although these problems are obvious to anyone who understands the rudiments of supply and demand, they are almost completely ignored by politicians, housing officials, and low-income housing advocates. Instead, the almost exclusive focus is on building government-subsidized (or, in the case of inclusionary zoning, developer-subsidized) housing. Yet this does nothing to solve the problem for the vast majority of homebuyers and renters.

California has the nation’s second-least affordable housing (after Hawaii), and probably has some of the most aggressive subsidized housing programs. Yet a recent report from the state legislative analyst’s office found that these programs have produced only about 7,000 subsidized housing units per year, or about 5 percent of new housing. In a state that has nearly 14 million homes and apartments, adding 7,000 subsidized units per year will have no measurable influence on overall prices, especially in the face of growth boundaries and other factors that make housing expensive.

So why is so much emphasis placed on a policy that won’t work while a policy of deregulating land markets is ignored? The answer is that long-standing federal subsidies to housing have created an affordable-housing-industrial complex that thrives on subsidies in unaffordable housing markets and whose reason for existence would be severely diminished if those markets were deregulated.

Take, for example, Enterprise Community Partners (ECP), whose mission (as described on its 2013 IRS Form 990) is “to create opportunities for low and moderate-income people through affordable housing.” ECP is heavily funded by your tax dollars to promote affordable housing, getting much of its tax support through Section 4 of the HUD Demonstration Act of 1993, which specifically designates ECP as a grant recipient.

Enterprise Community Partners has certainly found the business of promoting a few units of affordable housing, as opposed to making all housing more affordable, to be quite lucrative, at least for many of its staff. According to its tax form, only a quarter of the organization’s $58 million annual expenses went to grants aimed at making more affordable housing, while 62 percent went for salaries, benefits, and professional service contracts. (The rest went for things like conferences, travel, rent, and office expenses.)

More than two dozen of its staff members earned more than $200,000 in salaries and benefits in 2013. The United States of America gets along with just one vice president; ECP has sixteen of them, half of whom make more than the $230,700 per year taxpayers pay to Joe Biden.

The organization’s tax form also admits that it spent nearly $600,000 on lobbying in 2013. Thus, groups like Enterprise Community Partners that focus on creating a few units of affordable housing while they ignore the real problem become self-perpetuating. They use taxpayer dollars lobby to continue their tinkering at the edges of affordability while they and the people who listen to them do nothing about the overall affordability problem in regions with strict land-use regulation and rent control.