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Instances of civil forfeiture abuse are common. Indictments against law enforcement are not.

However, this week an Oklahoma grand jury returned an indictment against Wagoner County Sheriff Bob Colbert and one of his deputies stemming from a civil asset forfeiture case.  The indictment charges Sheriff Colbert and Deputy Jeffrey Gragg with extortion and bribery, among other things, stemming from the stop, arrest, and subsequent release of Torrell Wallace and a 17-year old passenger.  

According to the indictment, during a traffic stop of Wallace’s car, Deputy Gragg discovered $10,000 in cash.  When asked about the money, Wallace and his passenger both claimed it belonged to them and were subsequently arrested for “possession of drug proceeds.”

At the jail, the indictment alleges that Sheriff Colbert and Deputy Gragg told the men that they’d be allowed to go free if they signed over the $10,000 to the office’s asset forfeiture fund, which they did.

If this fact pattern sounds familiar, it’s because cases like this are not isolated incidents. The case of Javier Gonzalez sounds eerily familiar. In 2013 Sarah Stillman at The New Yorker documented several similar cases of seemingly extortive forfeiture actions.  Our friends at the Institute for Justice have compiled many more

Because the burden of proof for civil forfeitures is so low, even perfectly benign behaviors can result in seizures. These include carrying too much money, carrying money in an envelope or some other “unorthodox” fashion, or even “traveling to or from a known drug source city,” which seems to include virtually every major city in America.  Such a deficient process for government seizures of cash and property makes abuse inevitable, especially when the seizing agency is permitted to keep most or all of the proceeds for itself.

Sheriff Colbert’s lawyer, however, insists that the real culprit here is the push for forfeiture reform, and was quick to condemn the prosecution as politically motivated:

“We note that there is pending legislation in the Senate hoping to drastically change drug interdiction laws. Their accusations remain politically motivated.”

The “pending legislation” can only be a reference to efforts by State Senator Kyle Loveless to reform Oklahoma’s civil asset forfeiture laws.  Oklahoma has become one of the flashpoints in the national debate over civil forfeiture, and I’ve written previously on the hyperbolic rhetoric that Oklahoma law enforcement is using to shut down reform in the state.

As for the political motivations of reformers, it’s worth noting that support for civil asset forfeiture reform comes from all corners of the political spectrum, from the conservative Heritage Foundation, to the liberal ACLU, to libertarian organizations like the Institute for Justice. The bipartisan coalition in favor of reform has grown so massive that it seems the only factions still opposed to reform are the government agencies that directly profit from the seizures.

Sheriff Colbert’s lawyer also argued that the sheriff was simply following routine procedure:

“The underlying accusation involves a routine drug interdiction (lawful cash seizure of drug funds) by the sheriff’s department. The funds are not missing and are accounted for. The Sheriff’s Office timely deposited every cent of this money in the county’s treasurer account as required by state law. This money was earmarked for fighting drug trafficking to help protect the citizens.

“The basis for this interdiction as reported includes the accusation of deleted records. That accusation cannot be supported at trial. We are looking forward to being released from the gag order such that we can release the counter-evidence exonerating Sheriff Colbert.”

The lawyer’s statement makes no mention of the alleged arrangement to let the men go free in exchange for signing over their money, which seems to be the crux of the indictment. Even that tactic, however, has routinely taken place in other jurisdictions.

But to be fair, it’s understandable that law enforcement officers may sometimes struggle to distinguish civil asset forfeiture from extortion and bribery. Many reform advocates suffer from the same problem.

That is precisely why civil asset forfeiture should be abolished.

For more on civil asset forfeiture and the need for reform, check out our explainer on the topic.

Two articles in the same section of the Washington Post remind us of how government actually works. First, on page B1 we learn that it pays to know the mayor:

D.C. Mayor Muriel E. Bowser has pitched her plan to create family homeless shelters in almost every ward of the city as an equitable way for the community to share the burden of caring for the neediest residents.

But records show that most of the private properties proposed as shelter sites are owned or at least partly controlled by major donors to the mayor. And experts have calculated that the city leases­ would increase the assessed value of those properties by as much as 10 times for that small group of landowners and developers.

Then on B5 an obituary for Martin O. Sabo, who was chairman of the House Budget Committee and a high-ranking member of the Appropriations Committee, reminds us of how federal tax dollars get allocated:

Politicians praised Mr. Sabo, a Norwegian Lutheran, for his understated manner and ability to deliver millions of dollars to the Twin Cities for road and housing projects, including the Hiawatha Avenue light-rail line and the Minneapolis Veterans Medical Center.

Gov. Mark Dayton (D) said Minnesota has important infrastructure projects because of Mr. Sabo’s senior position on the House Appropriations Committee.

We all know the civics book story of how laws get made. Congress itself explains the process to young people in slightly less catchy language than Schoolhouse Rock:

Laws begin as ideas. These ideas may come from a Representative—or from a citizen like you. Citizens who have ideas for laws can contact their Representatives to discuss their ideas. If the Representatives agree, they research the ideas and write them into bills….

When the bill reaches committee, the committee members—groups of Representatives who are experts on topics such as agriculture, education, or international relations—review, research, and revise the bill before voting on whether or not to send the bill back to the House floor.

If the committee members would like more information before deciding if the bill should be sent to the House floor, the bill is sent to a subcommittee. While in subcommittee, the bill is closely examined and expert opinions are gathered before it is sent back to the committee for approval.

When the committee has approved a bill, it is sent—or reported—to the House floor. Once reported, a bill is ready to be debated by the U.S. House of Representatives.

Ah yes … an idea, from a citizen, which is then researched, and studied by experts, and debated by representatives, and closely examined and carefully considered. But it does help if you know the mayor, or if your representative has enough clout to slip goodies for his constituents into a bill – often without being researched, and studied by experts, and closely examined, and debated.

I wrote about this in The Libertarian Mind, in a chapter titled “What Big Government Is All About” – not the civics book version, but the way laws actually get made and money actually gets spent. 

The New York Times reports today that five key members of the US women’s national soccer team have filed a complaint with the Equal Employment Opportunity Commission charging U.S. Soccer, the private federation that oversees soccer in the United States, with wage discrimination. It seems that, on average (see the article for details), the federation pays women players considerably less than players on the men’s team, and that may be a problem under current law.

If Thomas Jefferson only knew what would follow from writing “All men are created equal.” What he meant, of course, was only that we all have equal rights to “life, liberty, and the pursuit of happiness,” and we’re free to pursue happiness however we think best. Most of us do that through voluntary association with others, which can result in all kinds of inequalities, yet violate the rights of no one. After all, whose rights are violated if Mia Hamm negotiates a salary with the team that is higher than a lesser player negotiates?

“Equality” hasn’t been pressed that far yet, but its life is still unfolding. In higher education, for example, we have Title IX to the 1964 Civil Rights Act, as amended over the years, which prohibits discrimination on the basis of sex. And that has led in stages to everything from the abolition of countless college men’s athletic programs, due to a paucity of female participants in equivalent programs, and more recently to sexual harassment charges against even female professors who write articles that some students find offensive, to college kangaroo-court trials of students charged with sexual assault, and much more.

Here at issue is the Equal Pay Act of 1963, part of the Fair Labor Standards Act of 1938, as amended and as administered and enforced by the EEOC. As one might imagine, the very idea of enforcing equal pay for “equal” work is fraught with peril, as the reams of exceptions in the Act only hint at. (Don’t take my word for that; read the Act.) Not surprisingly, the Act has become a full employment scheme for lawyers and a hammer for special-interest politicians.

When the EEOC is called on to see that women in the WNBA are paid the same as Lebron James, Kevin Durant, and other NBA stars, maybe we’ll see this “fairness” fiasco seriously called into question. But don’t bet on it.

The federal government spends about $30 billion a year on the war on drugs. Much of the spending is wasteful and counterproductive. This week, for example, an auditor’s report revealed how the drug bureaucracy flushed $86 million down the drain on an anti-drug aircraft that was never used.

The Washington Post described this Drug Enforcement Administration (DEA) and Department of Defense (DOD) boondoggle:

The plan was for DOD to modify a DEA plane to be used in counter-narcotics operations in a combat zone. … The Justice Department’s Office of the Inspector General (IG) determined “collectively, the DEA and DOD spent more than $86 million to purchase and modify a DEA aircraft with advanced surveillance equipment to conduct operations in the combat environment of Afghanistan, in what became known as the Global Discovery Program. We found that more than 7 years after the aircraft was purchased for the program, it remains inoperable, resting on jacks in Delaware, and has never flown in Afghanistan.”

The IG found that the “program has cost almost four times its original anticipated amount of $22 million.” Sadly, this sort of failure is par for the course when it comes to federal capital investments.  

Thank goodness for the IGs who uncover such waste, but what will come of these findings? Will anyone be fired? Will policymakers begin to rethink the drug war? Not yet it seems. When the Washington Post asked the DEA and DOD about the report, “the Pentagon did not reply and the DEA response was short boilerplate.”

For more on the government’s drug war, see Jeff Miron’s work here.

Marijuana is now legal under the laws of four states and the District of Columbia, but not under federal law. And this creates huge headaches for marijuana businesses: 

Two years after Colorado fully legalized the sale of marijuana, most banks here still don’t offer services to the businesses involved.

Financial institutions are caught between state law that has legalized marijuana and federal law that bans it. Banks’ federal regulators don’t fully recognize such businesses and impose onerous reporting requirements on banks that deal with them.

Without bank accounts, the state’s burgeoning pot sector—2,500 licensed businesses with revenue of $1 billion a year, paying $130 million in taxes—can’t accept credit or debit cards from customers, Colorado officials say.

Marijuana-related businesses instead use cash to pay their employees, purchase equipment or pay taxes to the state. Reports abound of business owners refurbishing retired armored bank trucks to transport money and hiring heavily armed security guards.

The best solution is repeal of federal prohibition. This is not on the policy table yet, but if more states legalize marijuana in November (at least five states are likely to vote on the issue), the pressure on federal policy might just hit the boiling point.

Plant pathogens have long been a thorn in the side of the agricultural industry, reducing crop production between 10-16 percent annually and costing an estimated $220 billion in economic losses (Chakraborty and Newton, 2011). What is more, there are concerns that such damages may increase in the future if temperatures rise as predicted by global climate models in response to CO2-induced global warming. Noting these concerns, Sabburg et al. (2015) write that “to assess potential disease risks and improve our knowledge of pathogen strengths, flexibility, weakness and vulnerability under climate change, a better understanding of how pathogen fitness will be influenced is paramount.”

In an attempt to obtain that knowledge, the team of four Australian researchers set out to investigate the impact of rising temperatures on Fusarium pseudograminearum, the “predominant pathogen causing crown rot of wheat in Australia” that is responsible for inducing an average of AU$79 million in crop losses each year. More specifically, they examined “whether the pathogenic fitness, defined as a measure of survival and reproductive success of F. pseudograminearum causing crown rot in wheat, is influenced by temperature under experimental conditions.”

The experiment was conducted in controlled-environment glasshouses at the Queensland Crop Development Facility in Queensland, Australia, where eleven lines of wheat were grown under four day/night temperature treatments (15/15°C, 20/15°, 25/15° and 28/15°C for 14-hour days and 10-hour nights). The first three treatments were representative of “the range of average maximum temperatures of the various wheat-growing regions across Australia,” whereas the fourth (28/15°C) treatment was intended to simulate a future warming scenario. The minimum temperatures of all treatments were kept at 15°C because “night-time temperatures over the last 50 years in the large majority of wheat-growing regions across Australia have not shown an increasing temperature trend in all seasons.” With respect to the eleven wheat lines, they were selected based on known susceptibilities and resistances to crown rot. Fourteen days after sowing a portion of each line was infected with F. pseudograminearum and then grown to maturity.

So what did the researchers find?

With respect to disease severity, Sabburg et al. report it was highest under the lowest temperature treatment and declined with increasing temperature (Figure 1a), and this general reduction was noted in all of the eleven wheat lines. Similarly, pathogen biomass was also reduced as treatment temperature increased (Figure 1b). According to the researchers, “on average, warming reduced pathogen biomass in stem base (PB-S) by 52% at either 25/15°C or 28/15°C compared with the biomass at 15/15°C.” And it also decreased the amount of relative pathogen biomass from the stem base to flag leaf node. (The flag leaf is to top leaf on the plant.)

A third fitness measure of F. pseudograminearum – deoxynivalenol (also known as “vomitoxin,” for an obvious reason) content (DON) – was also reduced in the stem base and flag leaf node tissue as temperature treatment increased. And the significance of this finding was noted by the authors as “an encouraging result if we consider temperature rises in the future,” because “DON can make food sources including wheat grains unsafe for human or animal consumption.” That’s putting it mildly!

Figure 1. Effect of temperature on (Panel A) disease severity as expressed by the length of stem base browning (cm) and (Panel B) relative pathogen biomass in stem base (PB-S) and flag leaf node tissue (PB-F) as measured by Fusarium DNA relative to wheat DNA. All measurements in wheat plants were made at maturity following stem base inoculation by Fusarium pseudograminearum. Adapted from Sabburg et al. (2015).

In light of the above results, Sabburg et al. conclude that “this study has clearly established that temperature influences the overall fitness of F. pseudograminearum,” and that “based on our findings, warmer temperatures associated with climate change may reduce overall pathogenic fitness of F. pseudograminearum.” And given the annual production and monetary damages inflicted by this pathogen on wheat, this is news worth both reporting and celebrating!

 

References

Chakraborty, S. and Newton, A.C. 2011. Climate change, plant diseases and food security: an overview. Plant Pathology 60: 2-14.

Sabburg, R., Obanor, F., Aitken, E. and Chakraborty, S. 2015. Changing fitness of a necrotrophic plant pathogen under increasing temperature. Global Change Biology 21: 3126-3137.

 

Many worry about international trade and the increased competition to which it leads, while overlooking trade’s incredible benefits. In a refreshing Wall Street Journal article, the founder and CEO of FedEx, Fred Smith, reflects on how trade and deregulation have improved American living standards over the course of his lifetime. He recalls how many luxuries enjoyed by few during his youth plummeted in price and became accessible to more people than ever before. 

“Foreign travel was exotic, expensive and rare among the population as a whole” during the 1960s, Smith reminds us. Industry deregulation and international Open Skies agreements changed that. “Long-distance telephone calls were expensive, international calls prohibitively so,” and cell phones did not even exist yet. “From furniture to TVs and appliances, and especially automobiles, American brands dominated consumer spending” across the United States, and were often out of reach to the less affluent. Then trade worked its magic: 

[Trade] has rewarded Western consumers with low-cost products that have substantially improved standards of living. [Today] Americans and Europeans don’t need to be affluent to afford cell phones, digital TVs, furniture and appliances.

The moral of Smith’s story is clear: competition, which trade and deregulation facilitate, has an extraordinary tendency to enhance efficiency and bring down prices.

As we have documented, the falling cost of living improves the lives of ordinary people irrespective of how fast incomes rise. The few areas where costs have gone up instead of down—education, housing, and healthcare—have been subject to severe market distortions. Subjecting education, housing, and healthcare to more competition could have salutary results. Falling cosmetic procedure prices, for example, provide insight into how deregulated healthcare might affect healthcare costs. 

Smith’s article also recounts how increased competition has helped to move technology forward. Technology, in turn, has furthered expansion of trade—a virtuous cycle: 

During the 1970s and 1980s, while container ships and planes became increasingly efficient with each successive model, newly developed fiber-optic cables (patented in 1966) began running underseas, connecting the world at the speed of light, lowering voice and data-communication costs by orders of magnitude. Financial markets became globally integrated and transactions multiplied at an astounding rate.

In addition to improving lives in the United States, trade has also helped lift billions of people out of extreme poverty around the world, notably in East Asia

While the vast majority of Americans are made better off by trade, that is of small comfort to those working in industries that are having trouble competing with the rest of the world. Their disappointment contributes to the popularity of anti-trade political figures like Donald Trump and Bernie Sanders. 

It is important to acknowledge the “destructive” part of “creative destruction”—and trade contributes to creative destruction—but also to put trade in a proper perspective. The positives markedly outweigh the negatives. As Fred Smith concludes: 

More than three billion people are now connected to the Internet. Billions more have aspirations for a better life and are likely to come online as global consumers. The odds are good, therefore, that today’s remarkable transport systems and technologies will continue to improve and facilitate an even larger global economy as individual trade is becoming almost “frictionless.”

History shows that trade made easy, affordable and fast—political obstacles notwithstanding—always begets more trade, more jobs, more prosperity. From clipper ships to the computer age, despite economic cycles, conflict and shifting demographics, humans have demonstrated an innate desire to travel and trade. Given this, the future is unlikely to diverge from the arc of the past.

MetLife notched an important win this week, securing a ruling from a federal court that it is not a systemically important financial institution (SIFI) under Dodd-Frank. Like much of the Dodd-Frank Act, the SIFI designation has been controversial since its introduction in 2010. The designation is intended to help the Financial Stability Oversight Council (FSOC, another Dodd-Frank creation) to monitor companies whose demise could destabilize the country’s financial system. Putting aside the question of whether a group of regulators in Washington could see and stop a crisis more quickly than those in the trenches at the nation’s financial giants, the designation triggers a host of regulatory requirements that many companies would prefer to avoid. 

One of the most controversial aspects of the SIFI designation is its black box nature. There is no publicly available SIFI check-list. The rationale for following a more principles- than rules-based approach may be that the definition needs to remain flexible. Companies may be motivated to avoid the letter of such a rules-based approach without avoiding the spirit, leaving FSOC without the ability to monitor a company that, despite not triggering the SIFI designation, still poses a risk to the financial system. But this has left companies in a bind. The SIFI designation has real and substantial ramifications for any company that triggers it, but companies have been unable both to avoid designation and to challenge designation once applied.  It’s hard to argue that you don’t fit a certain definition if you don’t know what the definition is.

Of course, not all companies want to avoid SIFI status. Although some have argued that FSOC and other aspects of Dodd-Frank will prevent future bailouts, it seems naïve to think that the government could designate a company as a risk to the entire financial system and then sit idly by as it burns.  SIFI designation is a wink and a nod, all but assuring government support if the designated company founders in rocky times.

In its case against the government, MetLife argued that its designation as a SIFI was “arbitrary and capricious.” This is the famously deferential standard by which actions by federal agencies are judged. Rarely will a court overstep an agency’s decision to find that it violated this very low bar. And yet this is exactly what Judge Rosemary Collyer found. Although the government may appeal the decision, it will likely spur other SIFIs to challenge their designation as well.

More importantly, however, Judge Collyer’s decision may provide the check-list that companies have been seeking. Judge Collyer issued her opinion under seal, meaning that its details are not currently public. She has asked the parties to weigh in on whether any portions of it should remain hidden, signaling her interest in making the opinion public in the near future. Once the opinion, and Judge Collyer’s legal analysis, is made known, I foresee many lawyers scrambling to set their clients on MetLife’s path.

My previous post, inquiring as to the actual impact of the Dodd-Frank Act on bank capital, elicited some comments, mainly in the form of tweets, from Dodd-Frank’s defenders.  Here are some of the issues raised, along with my response.

A tweet from former Schumer staffer and current law professor David Min suggests that, while my analysis referred to depositories, the real issue is consolidated bank holding companies.  I don’t think the distinction matters much, because the capital requirements in Section 2(o)(1) of the Bank Holding Company Act, mirror those in Section 38 of the Federal Deposit Insurance Act, which I had discussed.  In any case the fact remains that bank regulators had more than sufficient authority before Dodd-Frank to set almost any capital standards they wanted, whether for bank holding companies or their depository subsidiaries.

That said, the question remains whether  bank holding companies’ capital levels  have in fact gone up since Dodd-Frank.  Let’s see.  In 2010, the year  Dodd-Frank was passed, the largest bank holding companies, on a consolidated basis, had a tier 1 leverage ratio of 9.05%.  By 2015 the ratio had risen to 9.69% — a mere 64 basis points.  Again, color me unimpressed.  Other leverage measures for holding companies show slightly different numbers, but the magnitudes are all similar.

In another tweet, Mike Konczal suggests that the 64 basis-point increase, although slight, is nevertheless the result of Dodd-Frank.  But that conclusion may well be doubted.  As I’ve observed, regulators might have insisted on a similar, if not greater, increase before Dodd-Frank.  In fact, I believe the  increase is most likely do to  the Basel process, rather than to domestic regulatory pressures.

Konzcal, in contrast, suggests that the increase may be due to Dodd-Frank’s capital “surcharge” on very large banks.  Were that the case, one would expect the largest holding companies to have witnessed the greatest increases in capital, with  smaller banks not subject to the surcharge experiencing smaller gains, or none at all.  As mentioned above, the leverage ratio for the largest bank holding companies increased by 64 basis points since Dodd-Frank.  But holding companies just below this in size ($3B – $10B), which are not subject to the Dodd-Frank surcharge, also witnessed an increase of 64 basis points.  If we go further down the list, and look at the community banks between $500MM – $1B, the increase in the capital ratio is actually higher, at 127 basis points.  This runs counter to Konzcal’s suggestion.  Now other things may be going on here, so my evidence doesn’t necessarily amount to a refutation.  But it does at least cast doubt upon the claim that Dodd-Frank capital surcharges were an important cause of the overall (modest) increase in post-2010 bank capital ratios.

Although my post specifically concerned bank capital, both Min and Konzcal also say that the real issue concerns non-banks (a view nicely consistent with candidate Clinton’s position).  They suggest that, even if I’m correct about the impact of Dodd-Frank on bank capital, Dodd-Frank has nonetheless made a big difference by allowing bank regulators to extend both capital and liquidity requirements to designated large non-banks.

So, let’s consider that possibility.  So far, only four non-banks have been designated under Title I of Dodd-Frank.  Three of these non-banks are predominately insurance companies.  That’s important for a number of reasons.  For starters, the Dodd-Frank liquidity requirements explicitly exclude nonbank financial companies that “have substantial insurance activities.”  It follows that three of the four non-banks cannot possibly have had their capital holdings raised as a result of Dodd-Frank’s requirements.  Also, despite what Konzcal’s tweets seems to suggest, insurance companies were not “unregulated” prior to Dodd-Frank.  State insurance regulators monitor insurance companies’ liquidity, impose liquidity requirements, and enforce capital standards, as they’ve being doing to some extent since at least 1837.

In fact it makes little sense to imagine, as Min appears to do, that imposing bank-like regulation on non-banks will raise their capital levels, since non-banks have always been far less leveraged than banks.  Even Goldman already met the standards of Dodd-Frank before that law was passed.  Yes, Title I of Dodd-Frank subjects insurance companies, hedge-funds, and some other non-banks to additional regulatory oversight;  but it doesn’t follow that it will cause them to hold more capital, for they already hold more than that law requires — as should not be surprising given that they also do not enjoy the level of government guarantees enjoyed by the banks.  In fact, the only non-banks that are more leveraged than banks, and notoriously so, are Fannie Mae and Freddie Mac.  Yet neither Dodd-Frank nor any other recent legislation attempts to impose meaningful capital requirements on either.

Two much-balleyhooed arguments for Dodd-Frank are that it has given regulators needed tools they lacked beforehand, and that it has made the financial system safer by subjecting certain non-banks to bank-like regulation.  Both arguments are false, and dangerously so.  If we truly wish to avoid future financial crises, we had better assess Dodd-Frank’s consequences honestly, instead of confusing what many claimed it would accomplish with what it has accomplished in fact.

[Cross-posted from Alt-M.org]

William Galston’s Wall Street Journal column, “Why Trade Critics Are Getting Traction,” asks why U.S. employment in manufacturing fell from 17.2 million in December 2000 to 12.3 million last year.    He suggests that “import penetration from China [not Mexico] has been responsible for up to 20% of U.S. job losses.” But “up to” 20% explains very little, and that figure is at the high end of a range of estimates about 1999-2011 from a working paper by David Autor, David Dorn and Gordon Hanson. They speculate that “had import competition not grown after 1999” then there would have been 10% more U.S. manufacturing jobs in 2011.  In that hypothetical sense, “direct import competition [would] amount to 10 percent of the realized job loss” from 1999 to 2011.  Since 2007, however, the study’s authors find “a marked slowdown in import expansion following the onset of the global financial crisis, which halted trade growth worldwide.”

Deep recession and weak recovery is what slashed manufacturing jobs since 2007, not imports. In reality, imports always fall in recessions.  Although Autor, Dorn and Hanson emphasize imports of consumer goods (clothing and furniture), nearly half of U.S. goods imports (47.7% last year) are industrial supplies and capital goods which are essential inputs into expanding U.S. production.  That is a big reason why imports rise when U.S. industry expands and fall in slumps.

Even if “up to” 20% of manufacturing jobs lost since 2007 could be blamed on imports from China, as Galston claims, that need not mean the overall numbers of U.S. jobs were reduced.  “There is no evidence,” writes Galston, “that increased competition from China has produced offsetting employment increases in other industries whose products are traded internationally [emphasis added].”  Confining overall employment effects to “traded goods,” as Autor, Dorn and Hanson do, arbitrarily excludes services – such as financial and legal services, accounting, advertising, travel, telecom and insurance.   Services account for 32% of U.S. exports, and the U.S. runs a large and growing trade surplus with China ($28 billion in 2014) and with the world ($233 billion). Dollars foreign firms earn by exporting goods to the U.S. are commonly used to import services from the U.S. or to invest in U.S. real and financial assets; both those activities create U.S. jobs. Hollywood, Madison Avenue and Wall Street are big, high-wage U.S. exporters.

Confining the job impact to traded goods also excludes U.S. jobs in transporting, wholesaling and retailing Chinese goods (Walmart, Amazon…), as well as shipping U.S. exports to China and Hong Kong.  Incidentally, the U.S. ran a $30.5 billion trade surplus with Hong Kong last year, which isn’t counted trade with China though it really is.

Galston acknowledges that “rising productivity” [output per worker] is “part of the story” about manufacturing jobs.  In fact, it is essentially the whole story from 1987 to 2007, when U.S. manufacturing output nearly doubled.  The deep recession and slow recovery explain what happened to manufacturing jobs over the past ten years, not foreign trade.  

This morning, I attended an interesting speech by Jack Lew, Secretary of the Treasury, on the future of economic sanctions. The speech was notable in that Lew made not only a defense of the effectiveness of sanctions, but also highlighted their potential costs, a variable that is too often missing from debates over sanctions policy.

Some of the points Lew made – like the argument that multilateral sanctions are better than unilateral ones – were hardly novel. Yet others were more interesting, including the argument that sanctions implementation should be based on cost/benefit analysis and an assessment of whether they are likely to be successful. Though such an approach sounds like common sense, it has not always been the rule.

He also focused on the importance of lifting sanctions once they’ve achieved their ends. This is a rebuke to some, particularly in congress, who have argued for reintroducing the sanctions on Iran lifted by the nuclear deal through some other mechanism. As he pointed out, refusing to lift these sanctions now means that they will be less effective in the future: if states know sanctions will remain in place regardless of their behavior, what incentive do they have to change it?

Perhaps most interestingly, Lew argued for the ‘strategic and judicious’ use of sanctions and against their overuse. This is an interesting argument from an administration for whom sanctions have often been the ‘tool of first resort.’ In doing so, he referenced both growing concerns about the costs of sanctions from the business community, and the broader strategic concern that overuse of sanctions could weaken the U.S. financial system or dollar in the long-run.

I still disagree with the Secretary on several points. While he is correct that nuclear sanctions on Iran have broadly been a success, he dramatically overstates the effectiveness of sanctions in the more recent Russian case. Much of the economic damage in that case was the result of falling oil prices, and sanctions have produced little in the way of coherent policy change inside Russia.

He also overstates the extent to which today’s targeted sanctions avoid broad suffering among the population. In fact, evidence suggests that modern sanctions still suffer some of the same flaws as traditional comprehensive trade sanctions, allowing the powerful to deflect the impact of sanctions onto the population, and reinforcing, not undermining, authoritarian dictators.

Despite this, it is refreshing to hear concerns about the long-term implications of runaway sanctions policy expressed by policymakers. In alluding to these concerns – many of which have been noted for some time now by researchers – the Treasury Secretary may help to spark a broader policy discussion of the benefits and costs of sanctions. If we wish to retain sanctions as an effective tool of foreign policy moving forward, such discussion is vital.

For more on some of the big issues surrounding sanctions policy, you can read some of Cato’s recent work on sanctions policy here and here, or check out the video from our recent event on the promises and pitfalls of economic sanctions

Californian lawmakers and labor unions have reportedly reached a deal to increase the minimum wage to $15 an hour by 2022, and index it to inflation after that. If this deal becomes a reality, California would be the first statewide experiment with the $15 minimum wage. The ratio of the minimum wage to the median wage in California would be one of the highest in the world among high-income countries. California’s minimum wage deal brings with it unprecedented risks, and any resulting adverse results will be primarily borne by younger workers, people with limited job skills, and people living outside of major cities.

Ratio of Minimum Wage to Median Wage, California (2022) and High-Income Countries (2014)

 

Source: OECD.

Note: European OECD countries, with the addition of Australia, Canada and United States. California projection assumes two percent real wage growth.

Unlike the recent deal in Oregon, which included a tiered minimum wage with lower levels in smaller cities and rural areas, California’s increase would apply uniformly throughout the state. While major cities like San Francisco or San Jose that generally have higher wages might be able to absorb some of the adverse effects of this increase, non-metro areas will be the most impacted by this deal. The New York Times estimates that in 2022 the $15 minimum will be 40 percent of the median wage in San Jose, but 74 percent in Fresno, significantly higher than France and approaching the 77 percent seen in Puerto Rico. Arindrajit Dube, a prominent minimum wage researcher who has found relatively small disemployment effects from past increases, acknowledged that “In rural areas like Fresno, a majority of workers will be affected.” There is also more slack in the labor market in places away from the major urban metros: ten of the thirteen metropolitan statistical areas (MSAs) with the highest unemployment rates in the country are in California, and people in these places will find it even harder to deal with these minimum wage increases.

Another potential pitfall of the new deal is it would effectively lock California into a rigid trajectory for the next six years, which will limit the state economy’s ability to adapt to changing circumstances. With a phase-in stretching to 2022, it’s likely that a recession will hit at some point during this period. This could cause wage growth to stall out, which would push up the ratio of the proposed minimum to median wage ration even higher. Even Governor Brown recognized the implicit trade-offs in minimum wage increases of this magnitude, warning in his most recent budget proposal that in this scenario “such an increase would require deeper cuts to the budget and exacerbate the recession by raising businesses’ costs, resulting in more job loss.” The Sacramento Bee reports that the tentative deal includes a provision giving the governor the ability to temporarily halt future increases during a recession, but given how quickly Governor Brown has reversed course in the face of pressure from unions and activists, it is hard to see how a future governor would halt increases in the future.

The increases do not end in 2022.  After that, the minimum wage would be indexed to inflation. One of the arguments employed for increases now is that the real value minimum wage has eroded over time, because it has not been linked to inflation. This leads to a “sawtooth pattern” in the real value of the minimum wage. Businesses might be less likely to respond to minimum wage increases that they perceive as temporary in nature. Shifting investment and hiring decisions is disruptive and costly for employers, so if the impact of the minimum wage increase will be attenuated by inflation and broader wage growth, the adjustments will be more muted. Responses to a minimum wage increase of this magnitude that will then be indexed to inflation will be significantly larger than most previous cases that have been analyzed.

Sawtooth Pattern: Real Value of Federal Minimum Wage

 

Source: Federal Reserve Bank of St. Louis, Federal Reserve Economic Data.

Studies focusing on discrete job levels over a short time frame might be failing to accurately measure where these adjustments are taking place.  Jonathan Meer and Jeremy West suggest that the impact of a minimum wage increase is primarily driven by reduced job creation, rather than companies firing people. Over a longer time period, they estimate that a 10 percent increase in the minimum wage leads to a 0.8 percent reduction in total employment, with these effects concentrated among lower-skilled workers. California’s much greater minimum wage increase would lead to slower job growth in the future, which would disproportionately harm people at the lower end of the skills spectrum.

With this deal, California ventures into largely uncharted waters for the United States experience with the minimum wage, and the ratio of minimum wage to median wage would be one of the highest in the world. While other cities have passed a $15 minimum, and Oregon recently enacted a significant increase, California would impose uniform minimum wage hikes throughout the entire state, which could especially harm people outside major cities. After reaching $15, the minimum wage will be indexed to inflation, which could lead to disemployment effects larger than many recent studies have found. Young workers and people with limited job skills will bear the brunt of any negative consequences from California’s minimum wage experiment, while rural areas and smaller towns will see the most disruption. 

I’m still capable of being shocked when other people make outlandish assertions.

Like the policy wonk who claimed that capitalism is actually coercion, even though free markets are based on voluntary exchange. Or the statist columnist who argued people aren’t free unless they’re entitled to other people’s money, even though that turns some people into unfree serfs.

Here’s another example of upside-down thinking. It deals with the “inversion” issue, which involves American-chartered companies choosing to redomicile overseas.

A column in the Huffington Post implies that Pfizer is some sort of economic traitor for making a sensible business decision to protect the interests of workers, consumers, and shareholders.

Pfizer…wants to turn its back on America by claiming to be an Irish company through an offshore merger, giving it access to Ireland’s low tax rates. The change would only be on paper. The company would still be run from the United States, enjoying all the benefits of being based in America—such as our taxpayer-supported roads, public colleges, and patent protections—without paying its part to support them.

There’s a remarkable level of inaccuracy in that short excerpt. Pfizer wouldn’t be claiming to be an Irish company. It would be an Irish company. And it would still pay tax to the IRS on all U.S.-source income. All that changes with an inversion is that the company no longer would have to pay tax to the IRS on non-U.S. income. Which is money the American government shouldn’t be taxing in the first place!

Here’s more from the article.

Pfizer could walk out on its existing U.S. tax bill of up to $35 billion if its Irish tax maneuver goes forward. That’s what it already owes the American people on about $150 billion in profits it has stashed offshore, much of it in tax havens.

Wrong again. The extra layer of tax on foreign-source income only applies if the money comes back to the United States. Pfizer won’t “walk out” on a tax liability. Everything the company is doing is fully compliant with tax laws and IRS rules.

Here’s another excerpt, which I think is wrong, but doesn’t involve misstatements.

When corporations dodge their taxes, the rest of us have to make up for what’s missing. We pay for it in higher taxes, underfunded public services, or more debt.

For what it’s worth, the “rest of us” aren’t losers when there’s an inversion. All the evidence shows that ordinary taxpayers benefit when tax competition puts pressure on governments.

By the way, the author wants Obama to arbitrarily and unilaterally rewrite the rules .

President Obama can stop Pfizer’s biggest cash grab: that estimated $35 billion in unpaid taxes it wants to pocket by changing its mailing address. There are already Treasury Department rules in place to prevent this kind of overseas tax dodge. As now written, however, they wouldn’t apply to Pfizer’s cleverly-crafted deal. The Obama Administration needs to correct those regulations so they cover all American companies trying to exploit the loophole Pfizer is using. It already has the authority to do it.

Needless to say, Pfizer can’t “grab” its own money. The only grabbing in this scenario would be by the IRS. Since I’m not an international tax lawyer, I have no idea if the Obama Administration could get away with an after-the-fact raid on Pfizer, but I will note that the above passage at least acknowledges that Pfizer is obeying the law.

Now let’s look at some analysis from someone who actually understands the issue. Mihir Desai is a Harvard professor and he recently explained the reforms that actually would stop inversions in a column for the Wall Street Journal.

Removing the incentive for American companies to move their headquarters abroad is a widely recognized goal. To do so, the U.S. will need to join the rest of the G-7 countries and tax business income only once, in the country where it was earned. …Currently, the U.S. taxes the world-wide income of its corporations at one of the highest rates in the world, but defers that tax until the profits are repatriated. The result is the worst of all worlds—a high federal statutory rate (35%) that encourages aggressive transfer pricing, a significant restriction on capital allocation that keeps cash offshore, very little revenue for the Treasury, and the loss of U.S. headquarters to countries with territorial tax systems.

In other words, America should join the rest of the world and adopt a territorial tax system. And Prof. Desai is right. If the U.S. government stopped the anti-competitive practice of “worldwide” taxation, inversions would disappear.

That’s a lesson other nations seem to be learning. There’s only a small handful of countries with worldwide tax systems and that group is getting smaller every year.

Japan in 2009 and the United Kingdom in 2010 shifted to a territorial tax regime and lowered their statutory corporate rates. The U.K. did so to stop companies from moving their headquarters abroad; Japan was primarily interested in encouraging its multinationals to reinvest foreign earnings at home.

Professor Desai closes with a broader point about how it’s good for the American economy with multinational firms earn market share abroad.

…it is mistaken to demonize the foreign operations of American multinationals as working contrary to the interests of American workers. Instead the evidence, including research by C. Fritz Foley, James R. Hines and myself, suggests that U.S. companies succeeding globally expand at home—contradicting the zero-sum intuition. Demonizing multinational firms plays to populist impulses today. But ensuring that the U.S. is a great home for global companies and a great place for them to invest is actually the best prescription for rising median wages.

Amen. You don’t get higher wages by seizing ever-larger amounts of money from employers.

This is why we should have a territorial tax system and a much lower corporate tax rate.

Which is what Wayne Winegarden of the Pacific Research Institute argues for in Forbes.

…why would a company consider such a restructuring? The answer: the uncompetitive U.S. corporate income tax code. Attempts to punish companies that are pursuing corporate inversions misdiagnose the problem and, in so doing, make a bad situation worse. The problem that needs to be solved is the uncompetitive and overly burdensome U.S. corporate income tax code. The U.S. corporate income tax code puts U.S. companies at an unsustainable competitive disadvantage compared to their global competitors. The corporate income tax code in the U.S. imposes the highest marginal tax rate among the industrialized countries (a combined federal and average state tax rate of 39.1 percent), is overly-complex, difficult to understand, full of special interest carve-outs, taxes the same income multiple times, and taxes U.S. companies based on their global income.

Mr. Winegarden also makes the key point that a company that inverts still pays tax to the IRS on income earned in America.

…a corporate inversion does not reduce the income taxes paid by U.S. companies on income earned in the U.S. Following a corporate inversion, the income taxes owed by the former U.S. company on its income earned in the U.S. are precisely the same. What is different, however, is that the income that a company earns outside of the U.S. is no longer taxable.

Let’s now return to the specific case of Pfizer.

Veronique de Rugy of the Mercatus Center explains in National Review why the entire inversion issue is a classic case of blame-the-victim by Washington.

Almost 50 companies have chosen to “invert” over the last ten years. More than in the previous 20 years. …there are very good reasons for companies to do this. …for American businesses operating overseas, costs have become increasingly prohibitive. …Europe now sports a corporate-tax rate below 24 percent, while the U.S. remains stubbornly high at 35 percent, or almost 40 percent when factoring in state taxes. …it’s the combination with America’s worldwide taxation system that leaves U.S.-based corporations so severely handicapped. Unlike almost every other nation, the U.S. taxes American companies no matter where their income is earned. …So if a U.S.-based firm does business in Ireland they don’t simply pay the low 12.5 percent rate that everyone else pays, but also the difference between that and the U.S. rate.

Veronique explains why Pfizer made the right choice when it recently merged with an Irish company.

That’s a sensible reason to do what Pfizer has done recently with its attempt to purchase the Irish-based Allergan and relocate its headquarters there. The move would allow them to compete on an even playing field with every other company not based in the U.S. Despite the impression given by critics, they’ll still pay the U.S. rate when doing business here.

And she takes aim at the politicians who refuse to take responsibility for bad policy and instead seek to blame the victims.

…politicians and their ideological sycophants in the media wish to cast the issue as a moral failure on the part of businesses instead of as the predictable response to a poorly constructed corporate-tax code. …Clinton wants to stop the companies from moving with an “exit tax.” Clinton isn’t the first to propose such a silly plan. Lawmakers and Treasury officials have made numerous attempts to stop businesses from leaving for greener pastures and each time they have failed. Instead, they should reform the tax code so that businesses don’t want to leave.

Let’s close with an observation about the Pfizer controversy.

Perhaps the company did make a “mistake” by failing to adequately grease the palms of politicians.

Consider the case of Johnson Controls, for instance, which is another company that also is in the process of redomiciling in a country with better tax law.

Brent Scher of the Washington Free Beacon reports that the company has been a big donor to the Clinton Foundation, which presumably means it won’t be targeted if she makes it to the White House.

Hillary Clinton has spent the past few months going after Johnson Controls for moving its headquarters overseas, but during a campaign event on Monday, her husband Bill Clinton said that it is one of his “favorite companies.” …He described Johnson Controls as “one of my favorite companies” and praised the work it had done in the clean energy sector during an event in North Carolina on Monday. …Johnson Controls has contributed more than $100,000 to the Clinton Foundation and also partnered with it on numerous projects over the past eight years and as recently as 2015. Some of the Clinton Foundation projects included multi-million commitments from Johnson Controls. Bill Clinton pointed out in his speech that his foundation has done business with Johnson Controls—something that Hillary Clinton is yet to mention.

Given the sordid way Washington works, the folks at Johnson Controls may have made a wise “investment” by funneling money into the Clinton machine, but they shouldn’t delude themselves into thinking that this necessarily protects them. If Hillary Clinton ever decides that it is in her interest to throw the company to the wolves, I strongly suspect she won’t hesitate.

Though it’s worth pointing out that Burger King didn’t get attacked very much by the White House when it inverted to Canada, perhaps because Warren Buffett, a major Obama ally, was involved with the deal.

But wouldn’t it be nice if we had a reasonable tax code so that companies didn’t have to worry about currying favor with the political class?

Well, it was fun while it lasted.

Last December, civil liberties advocates cheered the Department of Justice’s announcement that it was indefinitely suspending its equitable sharing asset forfeiture program due to fiscal constraints.  This week, unfortunately, the Department of Justice lifted the suspension and resumed payments to local police departments.

Civil asset forfeiture allows the government to seize property and cash from Americans, without charge or trial, on the mere suspicion of wrongdoing. In most jurisdictions, the seizing agency gets to keep some or even all of the proceeds, creating a clear profit motive for the agencies to seize property.  

Equitable sharing is a federal program which allows state and local law enforcement to seize property under federal, rather than state, forfeiture law. Law enforcement agencies in states with more restrictive forfeiture laws are thus able to get around those state restrictions by participating in the federal program.

The equitable sharing program also provides an 80% kickback to the seizing local agency, which is a larger share of the proceeds than many states allow. As one might expect, the more a state restricts the use and abuse of civil asset forfeiture, the more state and local police tend to rely on the federal program instead.

In short, equitable sharing creates a federal incentive for law enforcement to sidestep state law and chase profits under federal law instead.

While then-Attorney General Eric Holder imposed some small rerforms on the equitable sharing program on his way out of office, the program still rakes in hundreds of millions of dollars a year.  Given this week’s announcement, the chances that the Obama Administration will take further steps to rein in forfeiture abuse in its final year seem slim.  

Nothing, however, prevents state governments from asserting their sovereignty by restricting their law enforcement agencies from participating in the federal program.

This morning I discussed the resumption of equitable sharing with Darpana Sheth of the Institute for Justice:

 

For more on civil asset forfeiture, check out the Institute for Justice’s exhaustive survey of forfeiture laws and abuses, Policing for Profit.

Also check out Cato’s explainer on civil asset forfeiture.

This morning, the Supreme Court disappointingly, but expectedly, split 4-4 in Friedrichs v. California Teachers Association. With Justice Antonin Scalia’s untimely death, one of the likely blockbusters of the term turned into a terse, one-sentence opinion: “The judgment is affirmed by an equally divided Court.”

“The judgment” was the Ninth Circuit’s decision, which sided with the unions on the question of whether forced union dues for public-sector workers violate the First Amendment. At stake in Friedrichs was whether public-sector unions would continue to be permitted, under a 1977 case called Abood v. Detroit Board of Education, to take forced dues from non-members in order to fund the day-to-day activities of the union. In an alternate universe, one in which Scalia is still alive and sitting on the Court, Friedrichs would have almost assuredly overruled or severely limited Abood, essentially converting public-sector unions into “right to work” unions.  

The lack of a blockbuster decision in Friedrichs is one of the most significant immediate consequences of Scalia’s death. Few issues split the Court more starkly than unions, and there were clearly irreconcilable differences among the justices. Friedrichs was only argued on January 11, so the justices didn’t take too long to conclude that there was no way to decide the case with five justices in the majority, thus the thoroughly unsatisfying opinion today.

Prior to Friedrichs, two 5-4 decisions had limited the power and scope of public-sector unions. Friedrichs was the culmination of those two cases, Knox v. SEIU and Harris v. Quinn. Now the future of forced dues for public-sector workers is uncertain, but they are certainly safe for now. And, unless a Republican wins the presidency in November, the Republicans in the Senate continue to block the nomination of Merrick Garland through the election, and the new president makes a good nomination to the Court, then it will be hard to bring a successful challenge again. Unfortunately, given the polls and the craziness of this election year, it’s likely the opportunity won’t come up again any time soon.

Going forward, lawyers for Friedrichs have announced that they will seek rehearing. It is unclear whether such an action will be successful (it takes five votes to get a rehearing) and, furthermore, if the justices are still irreconcilably split, then this issue cannot be resolved by this eight person court. That question, like so many others, rests on this election.

Today, an evenly divided Supreme Court affirmed a lower court’s decision in Friedrichs v. California Teachers Association to permit unions to continue charging nonmembers “agency fees” to cover collective-bargaining activities that the union supposedly engages in on their behalf. About half the states require agency fees from public-sector workers who choose not to join a union.

Not only do agency fees violate the First Amendment rights of workers by forcing them to financially support inherently political activities with which they may disagree (as my colleague Ilya Shapiro and Jayme Weber explained), but the unions often negotiate contracts that work against the best interests of the workers whose money they’re taking. For example, union-supported “last-in, first-out” rules and seniority pay (as opposed to merit pay) work against talented, young teachers. Moreover, a teacher might prefer higher pay to tenure protections, or greater flexibility over rigid scheduling rules meant to “protect” them from supposedly capricious principals.

Even worse, collective bargaining can come at the expense of students, as Ilya Shapiro and I recently explained:

When schools lack high-quality math teachers because the union contract requires they be paid the same amount as gym teachers, kids lose out. And when that contract has “last in, first out” (LIFO) rules that force a district to lay off a talented young teacher before a low-performing teacher with seniority, students suffer.

Last year, a judge in California struck down such tenure and LIFO rules after finding “compelling” evidence that making it hard to fire low-performing teachers had a negative impact on students, especially low-income and minority students. The judge pointed to research by Harvard professor Thomas Kane showing that Los Angeles Unified School District students who were taught by an English teacher in the bottom 5 percent of competence lose the equivalent of 9.5 months of learning in a single year relative to students with average teachers.

“Indeed,” the judge concluded, “it shocks the conscience.”

Sadly, the deleterious effects of collectively bargained tenure rules can be serious and long-lasting. In a 2012 study of more than 2.5 million students, Harvard professors Raj Chetty and John Friedman and Columbia professor Jonah Rockoff found that students who had just a single year in a classroom with a teacher in the bottom 5 percent of effectiveness lose approximately $50,000 in potential lifetime earnings relative to students assigned to average teachers.

And in a just released study, professor Michael F. Lovenheim and doctoral student Alexander Willén of Cornell found that laws forcing school districts to negotiate with unions had a modest but statistically significant negative impact on students’ future employment and earnings. Adults who had been subject to duty-to-bargain laws while attending grade school worked a half-hour less per week and earned $795 less per year. The aggregate national effect is an annual loss of about $196 billion.

But for Justice Scalia’s untimely death, the Friedrichs plaintiffs would have won. Instead, half the states are stuck with a system that violates the rights of workers and reduces the quality of children’s education, at least for the foreseeable future.

After years of controversy and equivocation, a new federal catfish inspection program has finally come into force.  The program—supported by the U.S. catfish industry—ranks among the crony-est of crony boondoggles.  It’s also a blatant example of thinly-disguised regulatory protectionism and a violation of U.S. trade obligations.

Catfish inspections were originally conducted by the Food and Drug Administration, but under a provision of the 2008 Farm Bill, that responsibility has now been assumed by the U.S. Department of Agriculture.  The excuse for the switch is that the USDA’s more rigorous inspection regime will help protect consumers. 

But it won’t.  The USDA itself has said that the program will not reduce risks associated with catfish consumption, which is a very low risk food.  The Government Accountability Office has flatly told Congress the program is wasteful and should be repealed.  Despite bringing no measurable benefits to consumers, the USDA program will cost an estimated $14 million more per year than the original FDA inspection regime.

This damning analysis hasn’t kept the program from being implemented, of course, because it’s true purpose is to protect the politically powerful U.S. catfish industry from foreign competition.  Here’s what I wrote a couple of years ago when there was still a chance that Congress might repeal the program:

The main impact of the new inspection regime—and its actual purpose—is that foreign catfish producers will be banned from the U.S. market until they can show equivalence to U.S. production standards.  Regardless of how they produce the catfish, showing equivalence will take years.  In the meantime, U.S. consumers will be left with nothing but domestic catfish at hugely inflated prices.

By far the most common source country for catfish in the U.S. market is Vietnam.  There was a small hope that the some deal could be reached to reform the catfish program as part of the Trans-Pacific Partnership negotiations.  Ultimately, the Obama administration agreed to an 18-month transition period before applying the new inspection standards to imports.  

The transition period will help alleviate much of the program’s harm to consumers and downstream businesses by giving producers time to demonstrate equivalence without shutting down export operations.  However, catfish prices have already been reported to be on the rise in anticipation of the new regulatory environment.

Now that the inspection regime is officially in place, Vietnam has begun to make its case that the regulations violate the rules of the World Trade Organization.  The WTO Agreement on Sanitary and Phytosanitary Measures prevents WTO members from abusing food safety rationales to impose protectionist import barriers.  Specifically, food safety regulations must not be more trade-restrictive than necessary to meet the goals of the regulation and must be based on scientific evidence.

These rules—long championed by the United States as a way to prevent unjustified foreign trade barriers—are designed to prevent exactly the sort of protectionist shenanigans at play in the catfish inspection regulation.  Moving catfish inspection to the USDA imposes a disproportionate burden on imports without being justified by any rigorous analysis or legitimate scientific research.

Vietnam has now formally raised the issue at the WTO but has not yet initiated dispute settlement procedures.  If they do, Vietnam could eventually be authorized to retaliate by imposing tariffs on various products from the United States.

A recent Wall Street Journal piece explored the economic impact of Arizona’s immigration laws based on a Moody’s Analytics report that hasn’t been published yet. The following is an update on some of my earlier work on the economics of Arizona’s two immigration enforcement laws.  The Legal Arizona Workers Act (LAWA) became law in mid-2007 and focused on workplace enforcement by mandating E-Verify for all new hires and the “business death penalty” for habitual violators. Arizona followed up in mid-2010 with SB 1070 which gave the police more power to expand the scope of immigration enforcement. The Supreme Court struck down much of SB 1070 while leaving LAWA intact.    

The goal of these laws was to force unlawful immigrants out the state so that natives could get their jobs. LAWA was poorly enforced while the Supreme Court mostly struck down SB 1070. However, the fear and uncertainty caused by these laws did damage Arizona’s economy compared to its neighbors.

Arizona’s decline in construction employment was steeper and didn’t recover nearly as well as in neighboring states. From July 2007 through December 2014, Arizona employment in construction declined by 45.6 percent compared to 29.5 percent in the neighboring states of New Mexico, Nevada, and California.  Nevada is a special case due to its gambling-induced boom and bust cycle.  Construction employment in Arizona December 2014 was 49.8 percent below the peak in June 2006, while it was 29.8 percent below the peak in California, and 28.4 percent below in New Mexico. Arizona’s immigration laws aren’t the only factors affecting construction employment, both on the supply and demand sides, but they certainly didn’t improve the situation.  

Chart 1

Construction Employment Indexed to 2001

Source: Bureau of Labor Statistics, Quarterly Census of Employment and Wages.

Wages for construction workers in Arizona kept pace with wages in surrounding states. They were a little higher in the run up to the housing crisis but quickly fell in 2008 after LAWA became law and only recovered by about 2012 – tracking closely with California which has a much more lenient immigration enforcement policy than Arizona (Chart 2). Neither LAWA nor SB 1070 appear to have improved Arizona wages relative to other states.

Chart 2

Construction Wages Indexed to 2001

Source: Bureau of Labor Statistics, Quarterly Census of Employment and Wages.

Building construction employment shows a steeper decline in Arizona and a bottoming out worse than in neighboring states (Chart 3).

Chart 3

Building Construction Employment Indexed to 2001

Source: Bureau of Labor Statistics, Quarterly Census of Employment and Wages.

Arizona wages for building construction workers also don’t deviate much from California but New Mexico’s fluctuate wildly (Chart 4). 

Chart 4

Building Construction Wages Indexed to 2001

Source: Bureau of Labor Statistics, Quarterly Census of Employment and Wages.

The Arizona’s immigration laws impact on the construction industry is difficult to tease out of the data because their passage coincided with the housing crisis and the Great Recession. Agriculture, on the other hand, would not be much affected by a housing shock but would be greatly disturbed by an immigration enforcement law – which is what the Chart 5 shows. A small note before proceeding, agriculture is seasonal and 2015 data is available only for the first three quarters so the following charts only go up through the end of 2014. Agricultural employment crashed in Arizona around the time LAWA was passed but actually increased in Nevada and California. New Mexico shows a similar decline.    

Chart 5

All Agriculture Employment

Source: Bureau of Labor Statistics, Quarterly Census of Employment and Wages.

Wages for all agricultural workers grew steadily throughout the whole period but more rapidly before LAWA and SB 1070 became law (Chart 6). 

Chart 6

All Agriculture Wages

Source: Bureau of Labor Statistics, Quarterly Census of Employment and Wages.

The crop production employment figures through 2014 show a substantial difference between Arizona and its neighbors (Chart 7). Native Americans did not fill the gaps left by unauthorized immigrants who fled Arizona – they just took their jobs with them. I had to chop off the first three months of 2015 because crop production is seasonal. This sector was already suffering before LAWA and SB 1070.

Around half of hired workers in crop agriculture are unauthorized immigrants because the H-2A visa is too costly for most farmers. Labor is a particular important factor input for fruits, vegetables, and nursey plants which is where unauthorized immigrants are concentrated. Dairy farms and slaughterhouses also rely heavily on them because there are no visa categories for workers in year-round food production but those aren’t big industries in the Southwest.

Chart 7

Crop Production Employment

Source: Bureau of Labor Statistics, Quarterly Census of Employment and Wages.

Wages in crop production are pretty closely correlated with the other states (Chart 8). 

 

Source: Bureau of Labor Statistics, Quarterly Census of Employment and Wages.

In conclusion, supporters of the Arizona immigration laws should admit that they did not contribute to job growth for natives. On the other hand, opponents of the laws (myself included) overstated the potential economic harm from them. I expected Arizona’s immigration laws to be far better enforced than they were and to withstand constitutional scrutiny – neither of which happened. None of this is meant to diminish the harms from violated civil liberties or other problems that have arisen in Arizona.

LAWA’s E-Verify mandate has not been enforced.  Only about 57 percent of new hires in 2014 were run through E-Verify despite the law’s universal mandate. The business death penalty has only been enforced three times.  Most of SB 1070 was struck down. The reputational harm to Arizona’s business climate was real but that was minor compared to damage that would have occurred by fully enforcing LAWA and SB 1070. If the Arizona state government is unwilling or unable to enforce immigration enforcement laws there is little hope that the federal government will do so.

 

The False Claims Act (FCA) allows a private individual with knowledge of past or present fraud on the federal government to bring a lawsuit against the defrauder. The statute allows for compensation to private whistleblowers—known as “relators”—when they bring a successful claim against a defendant on the government’s behalf.

If used properly, the FCA can be an important tool for uncovering fraud and abuse against taxpayer-funded programs. If abused, however, the law can destroy businesses and create perverse incentives that harm the market, innovation, and broader public policy.

In United States ex rel. Harman v. Trinity Industries, relator Josh Harman happens to be a competitor of Trinity Industries, which designs guardrails to protect vehicles when they crash on highways. In 2000, Trinity designed a guardrail safety device known as the “ET-Plus,” which was approved by the Federal Highway Administration (FHWA). In 2005, Trinity modified the ET-Plus without fully informing the FHWA of the changes it had made. Harman alleges that by not informing the FHWA of the design change, Trinity defrauded the government and should be held liable for damages under the FCA.

Trinity contends—and the alleged federal-agency victim agrees!—that the re-designed device, which passed all diagnostic tests, met all the safety criteria required by the FHWA, and therefore that the omission of the redesign failed to qualify as the sort of “false statement” required for liability under the FCA. Despite a warning from the U.S. Court of Appeals for the Fifth Circuit regarding the weakness of the FCA claims, a trial court in the eastern district of Texas—known for being a “judicial hellhole”—moved the case forward, to an eventual jury verdict for Harman.

The jury found Trinity liable for more than $680 million in damages, which is the largest damage award in FCA history. Out of the millions in damages and penalties, the court awarded Harman a 30% share of the recovery, plus almost $19 million in attorneys’ fees and expenses.

Trinity has now appealed the case back to the Fifth Circuit, arguing that Harman didn’t meet the FCA-required burden of proof. Even if the appellate court were to somehow find that burden to be met, the damage award was improper.

We agree. Cato has filed a brief arguing that the jury’s finding of liability and damages were unsustainable under the law. If upheld, this erroneous precedent would lead businesses to withhold innovative products from the marketplace, either by not improving existing products or by not entering the market at all. Others may merely increase the price of their products to reflect the additional risk, increasing the amount of federal reimbursement that must be paid.

Although legal liability plays an important role in the functioning of the free market—and a properly structured tort regime is generally better than command-and-control regulation—excessive liability distorts the market and harms the public welfare.  

There is a current running through the ObamaCare debate that goes something like this:

Every other advanced country provides health insurance to all its citizens for a fraction of what Americans spend on health care. ObamaCare emulates what those countries do. Anyone who complains about ObamaCare increasing premiums or imposing other costs is therefore a right-wing nut who doesn’t understand that universal coverage results in lower spending, not higher spending.

This line of reasoning, so to speak, leads supporters to believe ObamaCare is a free lunch. Their ignorance is not accidental. MIT health economist and ObamaCare architect Jonathan Gruber helpfully explained some years ago that he and his co-architects deliberately designed the law to hide its costs and make the benefits seem like a free lunch.

ObamaCare’s “Millennial mandate”—the requirement that employers who offer health coverage for employees’ dependents continue to offer such coverage until the dependents turn 26 years old—is one of those supposed free lunches. This mandate’s benefits unquestionably come at a cost. Expanding health insurance coverage among adults age 19-26 leads them to consume more medical care. When those people file insurance claims, health-insurance premiums rise. Yet ObamaCare does an amazing job of hiding those costs from voters.

Does ObamaCare impose a special tax that the IRS collects to pay for that extra coverage? No. That would be far too transparent. The cost just gets added to your premiums.

Does ObamaCare require employers to include a line-item on your premium payments, to show you how much this additional coverage is costing you? Absolutely not. That, too, would make the costs dangerously noticeable. The additional cost just gets thrown onto the pile, hidden among the costs of all the other mandated coverage you don’t want, and the coverage you actually do want.

Maybe workers see their premiums rising, and are merely ignorant of the fact that the Millennial mandate is part of the reason? Nope. ObamaCare hides the cost further still. Explaining how requires a little bit of labor economics.

Workers pay about one-quarter of their health premiums themselves. Employers pay the rest. But employers get the money to pay that three-quarters share of the premium by taking money out of other types of worker compensation. So when your employer pays $13,000 toward your health premiums, it is you—not your employer—who bears that cost, because you otherwise would have gotten that $13,000 in salary or other benefits. Workers lose control over that money without ever knowing it belongs to them.

Workers, therefore, pay 100 percent of the cost of their health benefits, which means they pay 100 percent of the cost of the Millennial mandate as well. But you don’t realize you bear those costs because you never see your employer taking money away from other forms of compensation. In fact, since your employer is writing the check, you probably think it’s your employer’s money rather than yours. You probably don’t know—because, importantly, you have no way of knowing—that the Millennial mandate is preventing you from getting a raise this year. Or that the Millennial mandate led your employer to jettison other health benefits you value more, like lower deductibles or broader physician and hospital networks. And even if you notice those changes, you are more likely to blame their employer than ObamaCare.

ObamaCare’s Millennial mandate may be the perfect crime. Politicians hand out benefits, but no one can tell who’s paying. Workers don’t see a special tax. They don’t see a special premium surcharge. At best, they see only a fraction of the increase in their premiums. They may not see their premiums rise at all. And if they feel any harm, they are likely to blame someone other than the politicians who enacted ObamaCare.

How can voters possibly weigh whether the Millennial mandate’s benefits justify the costs when ObamaCare so systematically keeps them in the dark? They can’t. And, as Jonathan Gruber let slip, that is by design.

Thank God, as always, for economists. Some of them are actually trying to reveal the costs and benefits of this mandate.

  • Stanford University’s Jay Bhattacharya and his coauthors estimate the mandate has reduced wages for workers in affected firms by $1,200 per year. That’s about $6,000 per affected worker since the mandate took full effect in 2011. Note that all workers subject to the mandate saw this reduction in wages, not just workers with dependents.
  • Asako Moriya of the federal Agency for Health Care Research & Quality and her coauthors find evidence that adults age 19-26 used more inpatient care and mental-health services, and that those who were hospitalized were more likely to be insured.
  • Gregory Colman (Pace University) and Dhaval Dave (Bentley University) find evidence that the mandate: induced adults age 19-26 to reduce their labor supply; resulted in those adults spending less time waiting for care; induced them to spend more time socializing; and improved these Millennials’ subjective well-being.

Thanks to such scholars—and only thanks to them—we can have a reasonably informed debate about whether the benefits of this mandate are worth the costs. When it comes to ObamaCare, having information about costs and benefits is the exception rather than the rule.

Even so, don’t expect that information or that debate to do a whole lot of good. The political system doesn’t much care about weighing benefits against costs. Politicians obey whoever shouts the loudest.

In this case, that would be the small number of employers, insurers, health care providers, and (to a lesser extent) Millennials who get relatively large benefits in the form of a competitive advantage or other indirect subsidies. The political system will obey them rather than the much larger population of workers, employers, and others whom this mandate harms.

Why? Because even though it is larger, that group doesn’t shout as loudly because it is much harder to organize. And one of the reasons they are so hard to organize is, as Jonathan Gruber reminds us, ObamaCare’s authors designed the law to make sure that its victims don’t even realize they are victims. That’s why ObamaCare’s Millennial mandate may survive even if its costs vastly exceed the benefits.

Note: I will be hosting a discussion on ObamaCare’s Millennial mandate featuring Prof. Jay Bhattacharya (Stanford) and Asako Moriya (AHRQ) at the Cato Institute in Washington, D.C., this Wednesday, March 30, from 12-1:30 pm ET. Register to attend the event here. If you can’t make it to the event, you can watch it live online at www.cato.org/liveFollow the discussion and ask questions on Twitter at #MillennialMandate.

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