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The federal government owns 28 percent of the land in the United States, including about half of the land in the 11 westernmost states. Federal agencies are poor land managers in many ways, and the government’s top-down regulations on land use are frustrating to many Westerners, as I discuss in studies here and here.

Much federal land would generate more value if it were owned by the states or the private sector. Economic and environmental needs would be better balanced by local policymakers than by the unaccountable bureaucracies in faraway Washington. Increased federal control over lands does not automatically benefit the environment, as liberals seem to think. Instead, it usually creates disincentives for sound environmental management.

The good news is that the House took a step toward devolving federal lands yesterday, as reported by the Washington Post:

House Republicans on Tuesday changed the way Congress calculates the cost of transferring federal lands to the states and other entities, a move that will make it easier for members of the new Congress to cede federal control of public lands.

Many Republicans, including House Natural Resources Committee Chairman Rob Bishop (R-Utah), have been pushing to hand over large areas of federal land to state and local authorities, on the grounds that they will be more responsive to the concerns of local residents.

But…

Rep. Raul Grijalva (Ariz.), the top Democrat on the Natural Resources Committee, sent a letter Tuesday to fellow Democrats urging them to oppose the rules package on the basis of that proposal.

“The House Republican plan to give away America’s public lands for free is outrageous and absurd,” Grijalva said in a statement. “This proposed rule change would make it easier to implement this plan by allowing the Congress to give away every single piece of property we own, for free, and pretend we have lost nothing of any value.”

Rep. Grijalva gets it backwards. Devolving ownership would increase the value of federal lands to Americans, not reduce it. And far from being “outrageous and absurd,” devolution was the general policy of the government for much of the nations’ history. The federal government privatized 792 million acres of land between 1781 and 1940, and it transferred 470 million acres of land to the states.

President-elect Donald Trump and his nominee to head the Department of the Interior apparently lean against devolving federal lands. But I hope they reconsider, as there are 640 million acres of diverse lands we are talking about here. I am not saying that we should privatize Yellowstone. But what about the Bureau of Land Management’s 250 million acres, which is mainly used for cattle grazing?

Today, artificially low federal grazing fees encourage overgrazing. Federal ownership also makes ranchers insecure about their tenures, such that they have an incentive to overstock grazing lands and a disincentive to make long-term investments to improve the lands. Privatizing grazing lands would create more secure property rights, and thus encourage ranchers to improve their stewardship of the lands. That would benefit the economy and the environment.

A good first step for the Trump administration would be to create a detailed inventory of federal land holdings. Then the administration should work with Congress and the states to identify those parcels that might be better managed by state and local governments, nonprofit groups, and businesses.

 

I wrote yesterday to praise the Better Way tax plan put forth by House Republicans, but I added a very important caveat: The “destination-based” nature of the revised corporate income tax could be a poison pill for reform.

I listed five concerns about a so-called destination-based cash flow tax (DBCFT), most notably my concerns that it would undermine tax competition (folks on the left think it creates a “race to the bottom” when governments have to compete with each other) and also that it could (because of international trade treaties) be an inadvertent stepping stone for a government-expanding value-added tax.

Brian Garst of the Center for Freedom and Prosperity has just authored a new study on the DBCFT. Here’s his summary description of the tax.

The DBCFT would be a new type of corporate income tax that disallows any deductions for imports while also exempting export-related revenue from taxation. This mercantilist system is based on the same “destination” principle as European value-added taxes, which means that it is explicitly designed to preclude tax competition.

Since CF&P was created to protect and promote tax competition, you won’t be surprised to learn that the DBCFT’s anti-tax competition structure is a primary objection to this new tax.

First, the DBCFT is likely to grow government in the long-run due to its weakening of international tax competition and the loss of its disciplinary impact on political behavior. … Tax competition works because assets are mobile. This provides pressure on politicians to keep rates from climbing too high. When the tax base shifts heavily toward immobile economic activity, such competition is dramatically weakened. This is cited as a benefit of the tax by those seeking higher and more progressive rates. …Alan Auerbach, touts that the DBCFT “alleviates the pressure to reduce the corporate tax rate,” and that it would “alter fundamentally the terms of international tax competition.” This raises the obvious question—would those businesses and economists that favor the DBCFT at a 20% rate be so supportive at a higher rate?

Brian also shares my concern that the plan may morph into a VAT if the WTO ultimately decides that is violates trade rules.

Second, the DBCFT almost certainly violates World Trade Organization commitments. …Unfortunately, it is quite possible that lawmakers will try to “fix” the tax by making it into an actual value-added tax rather than something that is merely based on the same anti-tax competition principles as European-style VATs. …the close similarity of the VAT and the DBCFT is worrisome… Before VATs were widely adopted, European nations featured similar levels of government spending as the United States… Feeding at least in part off the easy revenue generate by their VATs, European nations grew much more drastically over the last half century than the United States and now feature higher burdens of government spending. The lack of a VAT-like revenue engine in the U.S. constrained efforts to put the United States on a similar trajectory as European nations.

And if you’re wondering why a VAT would be a bad idea, here’s a chart from Brian’s paper showing how the burden of government spending in Europe increased once that tax was imposed.

In the new report, Brian elaborates on the downsides of a VAT.

If the DBCFT turns into a subtraction-method VAT, its costs would be further hidden from taxpayers. Workers would not easily understand that their employers were paying a big VAT withholding tax (in addition to withholding for income tax). This makes it easier for politicians to raise rates in the future. …Keep in mind that European nations have corporate income tax systems in addition to their onerous VAT regimes.

And he points out that those who support the DBCFT for protectionist reasons will be disappointed at the final outcome.

…if other nations were to follow suit and adopt a destination-based system as proponents suggest, it will mean more taxes on U.S. exports. Due to the resulting decline in competitive downward pressure on tax rates, the long-run result would be higher tax burdens across the board and a worse global economic environment.

Brian concludes with some advice for Republicans.

Lawmakers should always consider what is likely to happen once the other side eventually returns to power, especially when they embark upon politically risky endeavors… In this case, left-leaning politicians would see the DBCFT not as something to be undone, but as a jumping off point for new and higher taxes. A highly probable outcome is that the United States’ corporate tax environment becomes more like that of Europe, consisting of both consumption and income taxes. The long-run consequences will thus be the opposite of what today’s lawmakers hope to achieve. Instead of a less destructive tax code, the eventual result could be bigger government, higher taxes, and slower economic growth.

Amen.

My concern with the DBCFT is partly based on theoretical objections, but what really motivates me is that I don’t want to accidentally or inadvertently help statists expand the size and scope of government. And that will happen if we undermine tax competition and/or set in motion events that could lead to a value-added tax.

Let’s close with three hopefully helpful observations.

Helpful Reminder #1: Congressional supporters want a destination-based system as a “pay for” to help finance pro-growth tax reforms, but they should keep in mind that leftists want a destination-based system for bad reasons.

Based on dozens of conversations, I think it’s fair to say that the supporters of the Better Way plan don’t have strong feelings for destination-based taxation as an economic principle. Instead, they simply chose that approach because it is projected to generate $1.2 trillion of revenue and they want to use that money to “pay for” the good tax cuts in the overall plan.

That’s a legitimate choice. But they also should keep in mind why other people prefer that approach. Folks on the left want a destination-based tax system because they don’t like tax competition. They understand that tax competition restrains the ability of governments to over-tax and over-spend. Governments in Europe chose destination-based value-added taxes to prevent consumers from being able to buy goods and services where VAT rates are lower. In other words, to neuter tax competition. Some state governments with high sales taxes in the United States are pushing a destination-based system for sales taxes because they want to hinder consumers from buying goods and services from states with low (or no) sales taxes. Again, their goal is to cripple tax competition.

Something else to keep in mind is that leftist supporters of the DBCFT also presumably see the plan as being a big step toward achieving a value-added tax, which they support as the most effective way of enabling bigger government in the United States.

Helpful Reminder #2: Choosing the right tax base (i.e., taxing income only one time, otherwise known as a consumption-base system) does not require choosing a destination-based approach.

The proponents of the Better Way plan want a “consumption-base” tax. This is a worthy goal. After all, that principle means a system where economic activity is taxed only one time. But that choice is completely independent of the decision whether the tax system should be “origin-based” or “destination-based.”

The gold standard of tax reform has always been the Hall-Rabushka flat tax, which is a consumption-base tax because there is no double taxation of income that is saved and invested. It also is an “origin-based” tax because economic activity is taxed (only one time!) where income is earned rather than where income is consumed.

The bottom line is that you can have the right tax base with either an origin-based system or a destination-based system.

Helpful Reminder #3: The good reforms of the Better Way plan can be achieved without the downside risks of a destination-based tax system.

The Tax Foundation, even in rare instances when I disagree with its conclusions, always does very good work. And they are the go-to place for estimates of how policy changes will affect tax receipts and the economy. Here is a chart with their estimates of the revenue impact of various changes to business taxation in the Better Way plan. As you can see, the switch to a destination-based system (“border adjustment”) pulls in about $1.2 trillion over 10 years. And you can also see all the good reforms (expensing, rate reduction, etc) that are being financed with the various “pay fors” in the plan.

I am constantly asked how the numbers can work if “border adjustment” is removed from the plan. That’s a very fair question.

But there are lots of potential answers, including:

  • Make a virtue out of necessity by reducing government revenue by $1.2 trillion.
  • Reduce the growth of government spending to generate offsetting savings.
  • Find other “pay fors” in the tax code (my first choice would be the healthcare exclusion).
  • Reduce the size of the tax cuts in the Better Way plan by $1.2 trillion.

I’m not pretending that any of these options are politically easy. If they were, the drafters of the Better Way plan probably would have picked them already. But I am suggesting that any of those options would be better than adopting a destination-based system for business taxation.

Ultimately, the debate over the DBCFT is about how different people assess political risks. House Republicans advocating the plan want good things, and they obviously think the downside risks in the future are outweighed by the ability to finance a larger level of good tax reforms today. Skeptics appreciate that those proponents want good policy, but we worry about the long-run consequences of changes that may (especially when the left sooner or late regains control) enable bigger government.

P.S. This is not the first time that advocates of good policy have bickered with each other. During the 2016 nomination battle, Rand Paul and Ted Cruz proposed tax reform plans that fixed many of the bad problems in the tax code. But they financed some of those changes by including value-added taxes in their plans. In the short run, either plan would have been much better than the current system. But I was critical because I worried that the inclusion of VATs would eventually give statists a tool to further increase the burden of government.

“Trump’s pick for SEC chair criticized U.S. anti-bribery enforcement in 2011 as too zealous,” gasps one tweet reacting to President-elect Donald Trump’s selection of Sullivan & Cromwell attorney Jay Clayton to head the Securities and Exchange Commission. In a subhead, the WSJ says Clayton “criticized SEC and [Department of] Justice handling of Foreign Corrupt Practices Act as overly aggressive.”

Good! Clayton is right to voice such criticisms. As I’ve argued in this space, the 1977 FCPA “is a feel-good piece of overcriminalization that oversteps the proper bounds of federal lawmaking in at least four distinct ways, any of which should have prevented its passage”: it is extraterritorialvicariouspunitive, and vague. It is not clear that a more carefully drafted law would have been a good idea; my Cato colleague Jeffrey Miron writes that while curtailing Americans’ involvement in overseas corruption may be a well-intentioned goal, FCPA “discourages U.S. companies from doing business abroad in the first place,” is readily circumvented in many situations, fails to distinguish between the most corrosive forms of bribery and those in which favors to officials are “an attempt to get around laws that make little sense in the first place”—such as restrictions on entering markets—and leaves some countries to welter in poverty if they cannot fix a local culture of baksheesh.

All of this was made worse by the Obama administration’s decision to step up the pace of FCPA prosecution, which ran into a series of rebukes from federal judges throwing out high-profile cases. Allegations of FCPA violations led to a great furor about Wal-Mart’s operations in Mexico that mostly fizzled later, while other prosecutions have been based on purported corruption oddly reminiscent of practices that go on right here in the U.S. without anyone prosecuting, such as Western banks’ alleged practice overseas of hiring young relatives of influential persons, something that has been known to happen in politics and the media here in Washington, D.C.

Don’t back down, Mr. Clayton.

Antonio Buehler was arrested in Austin, Texas, after recording a woman he believed was getting abused by police. The officer even threatened other innocent bystanders with arrest if they didn’t stop paying attention to what was going on. The officer later said that he arrested Buehler for spitting on him, but the video and independent witnesses dispute this and a grand jury refused to indict him for it. The grand jury did, however, indict Buehler for failure to obey the officer in putting his hands behind his back—but even on this charge he was found not guilty.

Now Buehler is trying to sue the police because he believes his arrest, along with two earlier arrests, were in retaliation for his video recording—a First Amendment-protected activity. The Austin Police Department moved for summary judgment on this lawsuit, claiming that the police should not be liable even if Buehler’s account is correct because he was indicted—and that indictment is conclusive evidence of the probable cause justifying his arrest. The federal district court granted this motion, dismissing the case, and the U.S. Court of Appeals for the Fifth Circuit affirmed that result.

Cato, joined by the National Press Photographers Association and five other media organizations, has filed an amicus brief asking the Supreme Court to take this case and give Buehler his chance to prove that the facts underlying the grand jury indictment were false. Instead of taking the grand jury determination as conclusive, the Fifth Circuit should have relied on the Supreme Court’s holding in Hartman v. Moore (2006) that probable cause “is not necessarily dispositive,” and even if it was that the plaintiff need only “plead and prove its absence.” Buehler has pled the absence of probable cause and seeks only to prove it.

Considering the facts that he has pled, where the officer explicitly told him after he was arrested that “it would have been so much easier if you would just pay attention to your own selves,” it’s reasonable for a jury to infer that this was the real reason for the arrest.

Sadly, Buehler’s travails aren’t isolated happenstance. Police around the country have been trying to put the technological genie back in the bottle by harassing those who are just trying to record what the police do. Even credentialed journalists have not been immune and many have been arrested on trumped up charges.

It’s for this reason that it’s critically important that the Court takes this case, not just to secure justice (or even a day in court) for Mr. Buehler, but to help all people like him who are pretextually arrested by police just because they choose to record what these law-enforcement agents do. Everyone deserves the opportunity to prove that the facts underlying one’s arrest aren’t true and to be awarded compensation for the government’s violation of our rights.

The Supreme Court will decide later this winter whether to take Buehler v. Austin Police Department.

Senator Tom Cotton (R-AR) recently penned an op-ed for the New York Times in which he calls for a large reduction in legal immigration, something he believes will raise American wages. It’s nice when immigration restrictionists are honest about their intention to cut legal immigration, but Senator Cotton would be disappointed if his policy ever came to fruition. Senator Cotton does make some cursory arguments for expanding high-skilled immigration—a positive policy—but I will focus here on his argument to restrict it. I will respond to a few of Senator Cotton’s comments below. His will be in block quotes while my responses will follow. 

Higher wages, better benefits and more security for American workers are features, not bugs, of sound immigration reform. For too long, our immigration policy has skewed toward the interests of the wealthy and powerful: Employers get cheaper labor, and professionals get cheaper personal services like housekeeping. We now need an immigration policy that focuses less on the most powerful and more on everyone else.

Senator Cotton argues that skilled native workers are complementary to low-skilled immigrants, meaning that the former’s wages rise rather than fall when more of the latter arrive. This is because low-skilled immigrants and higher skilled workers don’t compete for the same jobs but instead work together, expanding productivity and compensation for both parties. These complementarities do exist, but there is also much evidence that lower-skilled American workers are actually complementary with low-skilled immigrants. Economists Gianmarco Ottaviano and Giovanni Peri found that immigration had a small positive relative effect on the wages of native workers with no high school degree (between +0.6 percent and +1.7 percent) and a small positive effect on average native wages (+0.6%) from 1990 to 2006. Immigrants are complementary to native workers but substitutable for other immigrants who experienced a substantial relative negative effect (−6.7 percent) from immigration. It should not be surprising that new immigrants compete with older immigrants who both share similar skills while native-born American workers benefit overall.

Language differences are a major reason why immigrants and natives with the same skill level are complementary according to economists Peri and Chad Sparber. Low-skilled immigration incentivizes low-skilled natives to specialize in jobs that require communication in English. Meanwhile, immigrants specialize in jobs that are more manual-labor intensive and require less English-language proficiency. Communication jobs are more highly compensated than manual-labor jobs. This complementary task specialization reduces the downward wage pressure because natives react by adapting and specializing in more highly paid occupations, not by dropping out of the job market or accepting lower wages. This effect decreases wage competition between lower-skilled natives and immigrants by around 75 percent. Economist Peter Henry also found that low-skilled immigrants to an area induced natives to improve their school performance so that they wouldn’t have to compete with lower-skilled immigrants. Immigrants tend to push Americans upward rather than downward.

More low-skilled workers incentivize more Americans to enter the labor market. A good example of this is provided by economists Patricia Cortes and Jose Tessada, who found that skilled American women with young children reentered the workforce faster when they lived in cities with many low-skilled immigrants who could work as nannies. In this case, an immigrant with a job increases the number of working skilled American women. 

After all, the law of supply and demand is not magically suspended in the labor market. As immigrant labor has flooded the country, working-class wages have collapsed. Wages for Americans with only high school diplomas have declined by 2 percent since the late 1970s, and for those who didn’t finish high school, they have declined by nearly 20 percent, according to Economic Policy Institute figures.

Senator Cotton rightly tells us to pay attention to the law of supply and demand but then promptly ignores demand. Immigrants boost demand by buying goods and services, which create more jobs than are occupied by the immigrant workers themselves according to research by Gihoon Hong and John McLaren. If immigrants are removed from an area they take their purchasing power, and the jobs that their purchases support, with them. An example will help explain this. Let’s say you own a small local business. One day the government rounds up half of your customers, some of whom are your employees, and deports them. As a business owner, would you be eager to hire more workers at a higher wage to replace those who were deported or would you refrain because your revenues are about to take a substantial hit? The answer is obvious. Now multiply that by 11 million unauthorized immigrant consumers.

Some will claim that money sent abroad by immigrants in the form of remittances, about $135 billion in 2015, does nothing to help the U.S. economy. First off, most of that money wouldn’t have been made had it not been for immigrants earning it—the economy is not a fixed pie. Secondly, that money eventually returns to the United States in the form of exports or foreign investment.

There is not a fixed number of jobs in the economy, so an employed immigrant does not automatically force a native out of the job market. Immigrants “taking” jobs from natives, also known as displacement, is a minor phenomenon when it exists at all. One prominent study found that an increase in the foreigner share of a population by 10 percent reduces native employment by 0.2 to 0.7 percent, a result exacerbated by labor market regulations. Many of those Americans displaced by immigrants tend to get better-paid jobs that exist due to the complementarities described above. David Card and Ethan Lewis found that most of the workers displaced were actually immigrants themselves, although this was confined to just a handful of cities.

The wage decline figures provided by the left-wing Economic Policy Institute have been soundly rebutted when proper deflators are used.  A forthcoming Mercatus Center paper by Scott Winship, a visiting fellow at the Foundation for Research on Equal Opportunity, finds that wages for workers in the 20th percentile who are most likely to be only high school graduates have increased slightly since 1970. Wages for workers with less than a high school degree have likely fallen somewhat since 1970.

However, the U.S. workforce is a lot more educated than it was in 1970. In that year, there were 47.2 million native-born American high school dropouts who were 25 years or older. They comprised 46.4 percent of the native population in that age category. In 2015, there were only 16.8 million native high school dropouts in the same age range and they comprised a mere 9.4 percent of the natives. Both the absolute and percentage of native-born Americans with less than a high school degree has crashed since 1970.

The number of natives who are at least 25 years old with only a high school degree increased from 43.5 million in 1970 to 51.1 million in 2015, but their percentage of the population dropped from 42.8 to 28.6 percent. Native high school dropouts and those with only a high school degree numbered almost 91 million in 1970 and comprised 89 percent of natives who were at least 25 years old. In 2015, they numbered 67.9 million and a mere 38 percent of natives in the same age range. Even if Senator Cotton’s figures were correct (they aren’t) the percentage and number of native-born Americans who suffer is much reduced from 45 years ago.

Interestingly, workers with only a high school degree might be the most complementary to those with less than a high school degree. There is some evidence that Miamians with less than a high school degree suffered wage declines after the Mariel Boaltift dropped about 125,000 mostly low-skilled Cubans in Miami in 1980. However, the wages for native-born Miamians with only a high school degree shot up afterward and likely overwhelmed the wage decline for those with less than a high school degree. If these results are generalizable (a huge if) then halting immigrants with less than a high school degree could stop wage growth for high school graduates. That’s disincentives climbing the skills ladder.

It’s been a quarter-century since Congress substantially reformed the immigration system. In that time, the population of people who are in this country illegally has nearly tripled, to more than 11 million. We’ve also accepted one million legal immigrants annually — and a vast majority are unskilled or low-skilled.

If controlling immigration to the United States was as easy as flipping a policy switch, then there would be no debate over immigration reform. There would be no illegal immigrants and the system would behave as its designers intended. In the real world, people respond to incentives and are not passive objects that just accept government laws. When laws, like our heavily restrictive immigration laws, erect legal barriers to voluntary exchange then the result is a vast black market represented by 11 to 12 million illegal immigrants. More restrictions are unlikely to reduce the size of the black market. Assume, for the sake of argument, that Senator Cotton is correct that wages for Americans with less than a high school degree will rise if millions of illegal immigrants are deported and the future legal flow is halted. Foreigners will then have even more of an incentive to sneak in illegally to work, overstay visas, or find other ways to circumvent American labor market regulations. More comprehensive enforcement will just raise wages, which will attract more illegal immigrants, who will then lower wages again, which in turn will be countered by better enforcement—and so on in a familiar and predictable cycle. All is not hopeless, however: there is a way out.

The only times in American history when our immigration laws were largely obeyed was when the Great Depression turned off the “jobs magnet,” a world war prevented the crossing of borders, and a large-scale guest-worker program funneled would-be illegal immigrants into the legal system (the Bracero program). Since 1964, we have not had a Great Depression (thank God), world war (double-thank God), or a functional guest-worker visa program for lower-skilled workers. As a result, we have a large problem with illegal immigration that enforcement cannot halt except by triggering a world war or economic depression. Foreigners want to sell their labor to Americans and Americans want to buy it. The law does dent that flow but there will always be a large black market so long as the government tries to enforce laws that conflict so much with reality. A functional legal immigration system can prevent or substantially reduce illegal immigration far more cheaply and effectively than expanding an already vast border bureaucracy.

Immigration produces a net-benefit for Americans. Economist David Card called research on the topic “the elusive search for negative wage impacts of immigration.” Although some noted economists like George Borjas at Harvard do find relative wage declines for some groups of American workers, even his work shows that wages for native-born Americans benefit overall, although by a small amount. An honest discussion of immigration policy must consider the known economic benefits of immigration as well as the costs.

Inside U.S. Trade reports that there may be a confirmation hearing for President-elect Trump’s pick for Commerce secretary, Wilbur Ross, “as early as next week.” Here are some questions I would ask him. Some of these are designed to poke him a bit on inconsistent statements he has made, but for others, I’m just curious to see what exactly the Trump adminstration has in mind for its trade policy.

Regional vs. Bilateral Trade Agreements

You have been critical of regional trade agreements, and supportive of bilateral ones, and in this regard you once said, “The problem with regional trade agreements is you get picked apart by the first country. Then you negotiate with the second you get picked apart. And you go with the third one. You get picked apart again.”

But you also praised the CAFTA-DR, a regional agreement, and criticized the bilateral US-Korea trade agreement. Doesn’t your praise for CAFTA-DR and criticism of the US-Korea agreement contradict your view that regional trade agreements are bad deals?

Also related to this point, other countries seem eager to negotiate regional deals. If they can engage in regional trade negotiations without getting picked apart, why can’t the U.S.?

And finally, with regard to your praise for CAFTA-DR and criticism of the US-Korea FTA, these two agreements are based on the same model, and have very similar provisions. In your view, what were the substantive differences between the two agreements that led to different results?

Renegotiating NAFTA

You have talked about a NAFTA renegotiation on Day 1 of a Trump Presidency. Can you tell us some of the specific provisions in NAFTA you don’t like and would want to see changed, and some of those you like and think should be maintained?

The TPP

In May of 2016, you said that you did not agree with Donald Trump on the TPP,  saying that you “like[d] the TPP.” But now you are opposed to it. What changed your mind?

A US-UK Trade Agreement 

There has been a lot of recent talk about a US-UK trade agreement. Do you support such an agreement? If so, would you hope to start these trade negotiations right away, or would they have to wait until after the UK completes its exit from the EU? 

Foreign Investment Treaties

Trade gets most of the attention, but foreign investment is important too. The U.S. and China have been negotiating an investment treaty for many years. Would you continue this effort? If so, what topics would you want to see included? What is your view of the investor-state dispute mechanism that is a key feature of U.S. investment treaties?

The Republicans in the House of Representatives, led by Ways & Means Chairman Kevin Brady and Speaker Paul Ryan, have proposed a “Better Way” tax plan that has many very desirable features.

And there are many other provisions that would reduce penalties on work, saving, investment, and entrepreneurship. No, it’s not quite a flat tax, which is the gold standard of tax reform, but it is a very pro-growth initiative worthy of praise.

That being said, there is a feature of the plan that merits closer inspection. The plan would radically change the structure of business taxation by imposing a 20 percent tax on all imports and providing a special exemption for all export-related income. This approach, known as “border adjustability,” is part of the plan to create a “destination-based cash flow tax” (DBCFT).

When I spoke about the Better Way plan at the Heritage Foundation last month (my portion of the panel starts about 1:11:00 if you want to skip ahead), I highlighted the good features of the plan in the first few minutes of my brief remarks, but raised my concerns about the DBCFT in my final few minutes.

Tax Reform in the Next Congress

Allow me to elaborate on those comments with five specific worries about the proposal.

Concern #1: Is the DBCFT protectionist?

It certainly sounds protectionist. Here’s how the Financial Times described the plan.

The border tax adjustment would work by denying US companies their current ability to deduct import costs from their taxable income, meaning companies selling imported products would effectively be taxed on the full value of the sale rather than just the profit. Export revenues, meanwhile, would be excluded from company tax bases, giving net exporters the equivalent of a subsidy that would make them big beneficiaries of the change.

Charles Lane of the Washington Post explains how it works.

…the DBCFT would impose a flat 20 percent tax only on earnings from sales of output consumed within the United States… It gets complicated, but the upshot is that the cost of imported supplies would no longer be deductible from taxable income, while all revenue from exports would be. This would be a huge incentive to import less and export more, significant change indeed for an economy deeply dependent on global supply chains.

That certainly sounds protectionist as well. A tax on imports and a special exemption for exports.

But proponents say there’s no protectionism because the tax is neutral if the benchmark is where products are consumed rather than where income is earned. Moreover, they claim exchange rates will adjust to offset the impact of the tax changes. Here’s how Lane explains the issue.

…the greenback would have to rise 25 percent to offset what would be a new 20 percent tax on imported inputs — propelling the U.S. currency to its highest level on record. The international consequences of that are unforeseeable, but unlikely to be totally benign for everyone. Bear in mind that many other countries — China comes to mind — can and will manipulate exchange rates to protect their own short-term interests.

For what it’s worth, I accept the argument that the dollar will rise in value, thus blunting the protectionist impact of border adjustability. It would remain to be seen, though, how quickly or how completely the value of the dollar would change.

Concern #2: Is the DBCFT compliant with WTO obligations?

The United States is part of the World Trade Organization (WTO) and we have ratified various agreements designed to liberalize world trade. This is great for the global economy, but it might not be good news for the Better Way plan because WTO rules only allow border adjustability for indirect taxes like a credit-invoice value-added tax. The DBCFT, by contrast, is a version of a corporate income tax, which is a direct tax.

The column by Charles Lane explains one of the specific problems.

Trading partners could also challenge the GOP plan as a discriminatory subsidy at the World Trade Organization. That’s because it includes a deduction for wages paid by U.S.-located firms, importers and exporters alike — a break that would obviously not be available to competitors abroad.

Advocates argue that the DBCFT is a consumption-base tax, like a VAT. And since credit-invoice VATs are border adjustable, they assert their plan also should get the same treatment. But the WTO rules say that only “indirect” taxes are eligible for border adjustability. The New York Times reports that the WTO therefore would almost surely reject the plan.

Michael Graetz, a tax expert at the Columbia Law School, said he doubted that argument would prevail in Geneva. “W.T.O. lawyers do not take the view that things that look the same economically are acceptable,” Mr. Graetz said.

A story in the Wall Street Journal considers the potential for an adverse ruling from the World Trade Organization.

Even though it’s economically similar to, and probably better than, the value-added taxes (VATs) many other countries use, it may be illegal under World Trade Organization rules. An international clash over taxes is something the world can ill afford when protectionist sentiment is already running high. …The controversy is over whether border adjustability discriminates against trade partners. …the WTO operates not according to economics but trade treaties, which generally treat tax exemptions on exports as illegal unless they are consumption taxes, such as the VAT. …the U.S. has lost similar disputes before. In 1971 it introduced a tax break for exporters that, despite several revamps, the WTO ruled illegal in 2002.

And a Washington Post editorial is similarly concerned.

Republicans are going to have to figure out how to make such a huge de facto shift in the U.S. tax treatment of imports compliant with international trade law. In its current iteration, the proposal would allow corporations to deduct the costs of wages paid within this country — a nice reward for hiring Americans and paying them well, which for complex reasons could be construed as a discriminatory subsidy under existing World Trade Organization doctrine.

Concern #3: Is the DBCFT a stepping stone to a VAT?

If the plan is adopted, it will be challenged. And if it is challenged, it presumably will be rejected by the WTO. At that point, we would be in uncharted territory.

Would that force the folks in Washington to entirely rewrite the tax system? Would they be more surgical and just repeal border adjustability? Would they ignore the WTO, which would give other nations the right to impose tariffs on American exports?

One worrisome option is that they might simply turn the DBCFT into a subtraction-method value-added tax (VAT) by tweaking the law so that employers no longer could deduct  expenses for labor compensation. This change would be seen as more likely to get approval from the WTO since credit-invoice VATs are border adjustable.

This possibility is already being discussed. The Wall Street Journal story about the WTO issue points out that there is a relatively simple way of making the DBCFT fit within America’s trade obligations, and that’s to turn it into a value-added tax.

One way to avoid such a confrontation would be to revise the cash flow tax to make it a de facto VAT.

The Economist shares this assessment.

…unless America switches to a full-fledged VAT, border adjustability may also be judged to breach World Trade Organisation rules.

Steve Forbes is blunt about this possibility.

One tax initiative that should be strangled before it sees the light of day is to give a tax rebate to exporters and to impose taxes on imports. …It’s a bad idea. Why do we want to make American consumers pay more for products while subsidizing foreign buyers? It also could put us on the slippery slope to our own VAT.

And that’s not a slope we want to be on. Unless the income tax is fully repealed (sadly not an option), a VAT would be a recipe for turning America into a European-style welfare state.

Concern #4: Does the DBCFT undermine tax competition and give politicians more ability to increase tax burdens?

Alan Auerbach, an academic from California who previously was an adviser for John Kerry and also worked at the Joint Committee on Taxation when Democrats controlled Capitol Hill, is the main advocate of a DBCFT (the New York Times wrote that he is the “principal intellectual champion” of the idea).

He wrote a paper several years ago for the Center for American Progress, a hard-left group closely associated with Hillary Clinton. Auerbach explicitly argued that this new tax scheme is good because politicians no longer would feel any pressure to lower tax rates. The very first subtitle of his paper even refers to “ending the race to the bottom.”

This…alternative treatment of international transactions that would relieve the international pressure to reduce rates while attracting foreign business activity to the United States. It addresses concerns about the effect of rising international competition for multinational business operations on the sustainability of the current corporate tax system. With rising international capital flows, multinational corporations, and cross-border investment, countries’ tax rates and tax structures are of increasing importance. Indeed, part of the explanation for declining corporate tax rates abroad is competition among countries for business activity. …my proposed reforms…builds on the [Obama] Administration’s approach…and alleviates the pressure to reduce the corporate tax rate.

This is very troubling. Tax competition is a very valuable liberalizing force in the world economy. It partially offsets the public choice pressures on politicians to over-tax and over-spend. If governments no longer had to worry that taxable activity could escape across national borders, they would boost tax rates and engage in more class warfare.

Also, it’s worth noting that the so-called Marketplace Fairness Act, which is designed to undermine tax competition and create a sales tax cartel among American states, uses the same “destination-based” model as the DBCFT.

Concern #5: Does the DBCFT create needless conflict and division among supporters of tax reform?

As I pointed out in my remarks at the Heritage Foundation, there’s normally near-unanimous support from the business community for pro-growth tax reforms.

That’s not the case with the DBCFT.

The Washington Examiner reports on the divisions in the business community.

Major retailers are skeptical of the House Republican plan to revamp the tax code, fearing that the GOP call to border-adjust corporate taxes could harm them even if they win a significant cut to their tax rate. As a result, retailers, oil refiners and other industries that import goods to sell in the U.S. could provide a major obstacle to the Republican effort to reform taxes. …The effect of the border adjustment, retailers fear, would be that the goods they import to sell to consumers would face a 20 percent mark-up, one that would force retailers like Walmart, the Home Depot and Sears…to raise prices and lose customers.

A story from CNBC highlights why retailers are so concerned.

…retailers are nervous. Very nervous. …About 95 percent of clothing and shoes sold in the U.S. are manufactured overseas, which means imports make up a vast majority of many U.S. retailers’ merchandise. …If the GOP plan were adopted as it’s currently laid out, Gap pays 20 percent corporate tax on the $5 profit from the sweater, or $1. Plus, 20 percent tax on the $80 cost it paid for that sweater from the overseas supplier, or $16. That means the tax goes from $1.75 to $17 for that sweater, more than three times the profit on that sweater. Talk about a hit to margins. …Retailers certainly aren’t taking a lot of comfort in the economic theory of dollar appreciation. …the tax reform plan will dilute specialty retailers’ earnings by an average of 132 percent. …Athletic manufacturers could take a 40 percent earnings hit… Gap, Carter’s , Urban Outfitters , Fossil and Under Armour are most at risk under the plan.

And here’s another article from the Washington Examiner that explains why folks in the energy industry are concerned.

…the border adjustment would raise costs for refiners that import oil. In turn, that could raise prices for consumers. The border adjustment would amount to a $10-a-barrel tax on imported crude oil, raising costs for drivers buying gasoline by up to 25 cents a gallon, the energy analyst group PIRA Energy Group warned this week. The report warned of a “potential huge impact across the petroleum industry,” even while noting that the tax reform plan faces many obstacles to passage.

Concern #6: What happens when other nations adopt their versions of a DBCFT?

Advocates of the DBCFT plausibly argue that if the WTO somehow approves their plan, then other nations will almost certainly copy the new American system.

That will be a significant blow to tax competition, which would be very bad news for the global economy.

But is also has negative implications for the fight to protect America from a VAT. The main selling point for advocates of the DBCFT is that we need a border-adjustable tax to offset the supposed advantage that other nations have because of border-adjustable VATs (both Paul Krugman and I agree that this is nonsense, but it still manages to be persuasive for some people).

So what happens when other nations turn their corporate income taxes into DBCFTs, which presumably will happen? We’re than back where we started and misguided people will say we need our own VAT to balance out the VATs in other nations.

The bottom line is that a DBCFT is not the answer to America’s wretched business tax system. There are simply too many risks associated with this proposal. I’ll elaborate tomorrow in Part II and also explain some good ways of pursuing tax reform without a DBCFT.

Former Reagan administration deputy U.S. trade representative and longtime trade-remedies attorney, Robert Lighthizer, is President-elect Trump’s choice for United States Trade Representative. Considered in conjunction with the appointments of Peter Navarro to head the newly-created National Trade Council at the White House (my take) and Wilbur Ross at the Commerce Department (my take), Lighthizer’s selection seems to confirm fears that U.S. trade policy is descending into darkness.  At the very least, it is reasonable to assume that for the foreseeable future trade policy will be overwhelmingly enforcement-oriented, while trade agreements and other forms of liberalization will be relegated to the doghouse.

For many years, Lighthizer has represented U.S. steel companies, America’s most trade-litigious industry, filing dozens of antidumping and countervailing duty petitions to keep foreign steel out of the United States. Some of the cases in which he was involved were brought before WTO dispute settlement, where the panels and Appellate Body ruled that the United States was administering its antidumping law in ways that violated U.S. commitments under the WTO Antidumping Agreement.

Perhaps, as a result of those experiences, Lighthizer has been a strident critic of the WTO’s dispute settlement body, which he accuses of overreach and usurpation of U.S. sovereignty. (Here is a debate from 10 years ago between Lighthizer and me on the merits of the WTO.) The fact is that there may be somewhat of a pro-complainant “bias” at the WTO because governments don’t bring cases to dispute settlement unless they are reasonably certain of victory.  There is a selection bias.  When the United States is the complainant, it wins most of the issues in most of the cases.  When the United States is the defendant, it loses most of the issues in most of the cases. It just so happens that the United States has had to defend its indefensible antidumping regime many times at the WTO, and in most cases it has lost.  Antidumping litigation is Lighthizer’s bread and butter.

Lighthizer has advocated for the formal establishment of a committee composed of retired federal judges to review WTO dispute panel and Appellate Body findings that are adverse to the U.S. government’s position. While that is not, in and of itself, necessarily provocative, the ultimate purpose of such a committee would be to collect evidence that the WTO has an anti-American bias, which might be used to advocate WTO withdrawal. The Uruguay Round Agreements Act, which was passed by the U.S. Congress in 1994, contains a provision that effectively requires Congress to vote every five years on whether the United States should remain a member of the WTO.

From Lighthizer’s view, this process would send a signal to the WTO and its members that if the United States doesn’t get its way, it might bolt the system.  And that would give the United States some extra leverage, which might deter the filing of formal complaints and add a corrupting political dimension to dispute settlement determinations. Or, perhaps worse, Lighthizer could use his perch at USTR to lobby Congress to vote for WTO withdrawal.

Lighthizer fancies himself a conservative, although he is more aptly characterized as an economic nationalist with deep disdain for free trade.  He has argued that true conservatives throughout American history have been suspicious of free trade and favored protectionism.  He proudly notes that Ronald Reagan – often pegged as a free trader – imposed all sorts of protectionist measures against imported cars, motorcycles, steel, textiles, and sugar.  And all of these measures were “successful,” he claims.

Despite conclusions reached after the appointments of Ross and Navarro, USTR’s role in formulating trade policy won’t be diminished, but dramatically altered. Enforcement will be the mantra and, I suspect, much of the enforcement effort will be directed at China, Mexico, and developing countries alleged to be the destinations for massive amounts of U.S. outsourcing.  But the targets may change when the Trump administration comes to realize that most U.S. outward investment goes, not to China or Mexico, but to Europe. Actually, the EU is likely to come under greater scrutiny because Trump and the GOP Congress want to overhaul the tax code, and some of the changes being considered may run afoul of U.S. WTO obligations, possibly prompting complaints from Brussels. Having added leverage to suppress formal EU complaints about border tax adjustments seems like it would dovetail neatly with Trump’s approach.

Whether and how long the imbalance between enforcement and liberalization persists will be determined, in part, by how provocative and unilateral U.S. enforcement efforts become. Raising import barriers will have an immediate and deleterious impact on the U.S. economy, especially on manufacturers who rely heavily on imported intermediate goods and capital equipment. Raising those barriers unilaterally – or in circumvention of WTO rules – would likely spark retaliation, which would reduce export revenues and exacerbate the economic damage. 

My best guess remains that Trump doesn’t want to kill the economy, will eventually recognize the folly of this approach, and will reverse course before too long.  But, buckle up.  It’s going to be a bumpy ride.

Harvard economist George Borjas recently published an important paper on how the unexpected surge of 125,000 Cubans (henceforth Marielitos) to Miami in 1980 lowered the wages of native-born male Miamians with less than a high-school degree. Because at least 60 percent of the Marielitos were high school dropouts, Borjas found that the negative wage effects were concentrated on Miamians with the same level of education.  

There are excellent criticisms of Borjas’ paper that show his results hinge on the control cities he chose, his exclusion of women, the age group of the workers, whether Hispanics are included, whether high-school-or-less or no-high-school-at-all are included, and whether datasets with the larger samples are used. For the sake of argument, supposing that Borjas made the correct methodological choices on every single point above, the Mariel Boatlift still raised the wages for low-skilled U.S. workers collectively due to wage complementarities. That’s because native-born Miamians with only a high school degree (no associate degree, no education after high school) experienced significant wage increases immediately after Mariel relative to workers with the same levels of education in the control groups, or placebos, of other cities. Borjas’ supporters ignore this finding but he does not. 

In his Mariel paper, Borjas reports the wage of high school dropouts relative to high school graduates in Figure 3(C) and the wage of Miami high school graduates across an all cities permutation in Figure 4(B), but he doesn’t have a dramatic graph like this that shows what happened to the relative wages of high school graduates after Mariel. 

Another working paper by Borjas and Monras on the wage effects of refugees also found that “the rate of wage growth for high school graduates, a group whose size was only increased modestly by the Marielitos, is noticeably higher in Miami than outside Miami.”  They go on to write that, “the predominantly low-skill Marielitos … raised the wage of workers with a high school education, and this effect is both numerically and statistically significant. The cross-wage elasticity is about +0.7 [compared to -0.9 for high school dropouts].”  They do not find any employment effects for high school dropouts but they did uncover positive and statistically significant employment gains for those with a high school degree. Furthermore, Figure 7.5 on page 148 of Borjas’ new book We Wanted Workers hints at a wage increase for high school graduates immediately after Mariel.              

My intern Cole Blondin and I followed Borjas’ methods to create graphs for the wages of high school graduates before and after the Boatlift. We used the March Current Population survey (March CPS) and combined the May Current Population Survey and the May Outgoing Rotation Group (May CPS-ORG) datasets. The only differences are that we present the figures in dollars rather than logs, we did not use three-year averages to smooth the data, and we did not recreate the synthetic control. One final note, the wage effect of the Marielitos must be compared to placebos because there was only one Miami in 1980 and we can’t actually observe what would have happened to that city had the Marielitos not arrived. We used the same sets of placebo cities as Borjas.

Even under Borjas’ assumptions, native-born male Miamians with a high school degree or less saw a ­net-wage increase after the Mariel Boatlift.    

March CPS 

Just as Borjas reported, there is a significant drop in the wages for male native-born Miamians with less than a high school degree who were 25 to 59 years old after 1980 relative to workers with the same characteristics in the placebos (Figure 1).  By contrast, the wages for Miamians with only a high school degree also increased after the Mariel Boatlift (Figure 2). The wage changes in both figures are statistically significant relative to the placebos. Miamians with just a high school degree are complementary to high school dropouts. Figure 3 shows the wages for high school dropouts and high school graduates in Miami.       

Figure 1

High School Dropouts, March CPS

 

Figure 2

High School Only Graduates, March CPS

 

Figure 3

High School Dropout and High School Only Graduate Wages 1977-2002, March CPS

 

Relative wages for high school dropouts reached their nadir in 1985 and 1986 while the wages for workers with only a high school degree reached their peak in 1984. A mere 19 percent of Miami workers in the March CPS sample had less than a high school degree but 36 percent had only a high school degree which means that more low-skilled American workers experienced a wage gain than a wage decline after Mariel.  

We compare the pre- and post-Mariel Miami wages, weighted by the relative size of the native educational cohorts in the March CPS, to produce a rough estimate of Mariel’s net impact on native wages.  For instance, if there are 10 high school dropouts who each lose $1 and 20 high school only graduates who each gained $0.60, then the net wages earned by Americans increased by $2 [(20*$0.60)-(10*$1)]. In such a scenario, total wages rise for Americans who are high school dropouts and high school graduates. 

We compared the post-Mariel period of 1981 to 1986 to the pre-Mariel period of 1976-1979. The total wage gain for high school graduates outweighs the total losses for high school dropouts in the “All Cities” placebo (the placebo that produced Borjas’ stunning graph). The Card and Low-Skill placebos also returned slightly net wage losses while the employment placebo returned a deeply negative result (Table 1).  The average for all the placebos from the March CPS data was -5.85.       

Table 1

Net Wage Effects, March CPS

          March CPS Differences in Differences Changes (1976-1979, 1981-1986)   Card Cities Employment Cities Low-Skill Cities All Cities No HS, Wage Changes Times Pop

-9.7804

-21.2793

-10.0078

-9.41663

HS Only, Wage Changes Times Pop

5.471363

4.892769

6.571003

10.13576

Net effect

-4.30904

-16.3865

-3.4368

0.71913

May CPS-ORG

Professor Borjas also used the May CPS-ORG data to test whether Mariel lowered the wages of similarly-skilled Miamians. The May CPS-ORG dataset returned a much smaller wage decrease for high school dropouts in Borjas’ paper. This is important by itself because the May CPS-ORG dataset is superior for two widely-reported reasons: First, the May CPS-ORG contains fewer errors because it asks respondents about their wages last week rather than last year (which is the case for the March CPS). Second, it has a larger sample size than the CPS in every year from 1979 onward.  

Regardless, we confirmed Professor Borjas’ findings that the wages of male high school dropouts in the relevant age range fell after the Mariel Boatlift, although they fell less than in the March CPS data (Figure 4). We also found that the wages for high school graduates in the May CPS-ORG dataset increased relative to the placebo cities after the Mariel Boatlift (Figure 5).

Figure 4

High School Dropouts, May CPS-ORG

 

Figure 5

High School Only Graduates, May CPS-ORG

 

The wage gains for high school graduates outweigh the losses of male high school dropouts in Miami for each placebo group—using the March CPS weight of the population by education (Table 2). The Card Cities, Low-Skill Cities, and All Cities placebos all returned very positive results.  The Employment Cities placebo was the only one that returned a slightly negative result. The average net gain for high school graduates and dropouts across the placebos is a positive +17.43. 

Table 2

Net Wage Effects, May CPS-ORG

May CPS-ORG Differences in Differences Changes (1976-1979, 1981-1986)   Card Cities Employment Cities Low-Skill Cities All Cities No HS, Wage Changes Times Pop

-2.20452

-8.33419

-1.67613

-1.91032

HS Only, Wage Changes Times Pop

28.30903

7.618387

25.00548

22.89419

Net effect

26.10452

-0.71581

23.32935

20.98387

To further check our results, we also weighted the wage changes by the May CPS-ORG survey’s estimate of Miami’s education level. The May CPS-ORG survey found that the share of Miami’s native population without a high school education is higher and the percentage with only a high school degree is lower than in the March CPS. Using the May CPS-ORG education weights returns a reduced net positive wage impact for the Card, Low-Skill, and All Cities groups while the Employment Cities group is more negative. Using the May CPS-ORG education estimates, the average is still a positive +10.09.    

Evaluating the Complementary Effects from the March CPS and May CPS-ORG

We ran Borjas’ four different sets of placebo cities on two educational groups of male workers in two different datasets—the March CPS and the May CPS-ORG. There were eight final estimates of the net effects, four in the March CPS and four in the May CPS-ORG.  Four of the eight showed a positive net-wage impact – three in the May CPS-ORG and one in the March CPS.  Four of the eight also showed a negative net-wage impact—three in the March CPS and one in the May CPS-ORG. For each placebo, the positive net-wage gains in the May CPS-ORG results were far larger than the estimated loss in either the May CPS-ORG or the March CPS.

Conclusion

The Mariel Boatlift provides a wonderful natural experiment to test how a sudden, exogenous surge of immigrants affects wages. Professor Borjas’ examination of how Marielitos substituted for native-born Miamians with the same level of education is an important component of that story. However, most have ignored the important complementary effects of the Marielitos on the wages of workers with only a high school degree. A full understanding of Professor Borjas’ contributions to this subject requires acknowledging these complementary effects. To borrow the language used by Professor Borjas, the Marielitos’ redistributed wages from dropouts to workers with only a high school degree with a net positive effect on all low-skill workers.  

On Monday, House Republicans will vote on a possible addition to the House Rules proposed by Rep. Kevin Cramer (R-ND) and endorsed by Rep. Pete Sessions (R-TX), Chair of the House Rules Committee. The proposed “Tenth Amendment Rule” could incentivize states to propose useful, limited-government constitutional amendments without any fear of a “runaway convention” (not that such fears are justified, just prevalent and therefore worth a response). It could be the most important House rule change in a generation.

The proposed rule states in its entirety:

It shall not be in order to consider a bill, joint resolution, amendment, or conference report referring to the States for ratification under Article V of the Constitution of the United States any amendment to the Constitution which is proposed by a convention called by Congress pursuant to such Article unless the amendment is within the permitted scope of the convention, as authorized under each of the applications of the States calling for the convention or, if the resolution or other legislation enacted by Congress to call for the convention identified specific resolutions adopted by States to call for the convention, the amendment is within the permitted scope authorized by such resolutions.

In other words, the House cannot refer back to the states for ratification any constitutional amendment that wasn’t duly proposed by the states in the first place. No amendment convention would be able to go beyond its charge; states could limit such a convention to an up-or-down vote on a specific amendment. 

This proposed rule has been named after the Tenth Amendment because that provision reserves most power to the states and to the people – which suggests that the states and the people have the power to limit the scope of any Article V convention. James Madison indicated that states had that power when he wrote in Federalist 43: “It [the Constitution] equally enables the general and the State governments to originate the amendment of errors, as they may be pointed out by the experience on one side, or on the other.”

Since 1994, when the American people supposedly triggered a tectonic shift by ending 60 years of Democratic control of the House, efforts to restore the federal government to its limited, constitutional roots have either failed to win 60 votes in the Senate, been countermanded by the big-government aspects of the Bush administration, or been eviscerated by subsequent Democratic majorities. But in 2017, proponents of limited government have a new advantage: the legislatures of 33 states have Republican majorities looking to push back on Washington.

A coalition of congressional and state leaders could potentially persuade Congress to propose permanent constitutional limits on federal power and debt. There has never been a constitutional amendment enacted after a proposal by the states and then an Article V convention – because Congress has seen the writing on the wall and jumped ahead of any such actions by proposing its own amendment. Similarly now, if states, emboldened by the new House rule, start making calls for amendment conventions, Congress would almost certainly propose the very amendments the states want – and, again, refer only them for ratification.

What sorts of amendments are worthy of consideration? I wrote about one idea at the start of the new Congress four years ago, and no constitutional reform has become more evidently necessary than the rebalancing of federal power by requiring that Congress approve major new federal regulations. The House has already twice voted to do just that in the form of the REINS (Regulations from the Executive in Need of Scrutiny) Act. But a statute like the REINS Act could be challenged in court or repealed by a future Congress. A constitutional amendment would be permanent.

More than 900 state legislators, 6 governors (including Vice President-elect Mike Pence), a unanimous Republican National Committee, and resolutions passed by 19 state legislative chambers have already urged Congress to propose such an amendment – called the Regulation Freedom Amendment – and polls show 2-1 voter support for it.

Empowered by the 10th Amendment Rule, House Republicans could mobilize state allies to persuade Congress to move this sort of thing along, among other opportunities for lasting reform. It will be interesting to see how House Republicans react to this opportunity.

The legal minimum wage will increase in 20 states today. The Wall Street Journal news story on that fact starts out accurately enough:

Minimum wages will increase in 20 states at the start of the year, a shift that will lift pay for millions of individuals and shed light on a long-running debate about whether mandated pay increases at the bottom do more harm or good for workers.

But it quickly segues into the same error that afflicts most such stories:

In California, the minimum goes up 50 cents, to $10.50 an hour, boosting pay for 1.7 million individuals.

Wages are also going up in many Republican-led states, where politicians have traditionally been skeptical of the benefits of minimum-wage increases.

In Arizona, one out of every nine workers is slated to receive a wage increase….So will tens of thousands of workers in Arkansas, Michigan and Ohio….

In all, about 4.4 million low-wage workers across the country are slated to receive a raise because they earn less than the new minimum in their respective states.

Every one of those sentences assumes facts not in evidence. What these new laws do is ensure that no worker can be paid less than a statutory minimum. They cannot ensure that every worker with a minimum-wage job will still have one if his employer required to pay more. They won’t prevent employers from replacing labor with technology, such as these McDonald’s order-taking kiosks. 

The Journal isn’t alone, of course. Here’s the Associated Press lead:

It will be a happy New Year indeed for millions of the lowest-paid U.S. workers. 

And CBS:

Millions will ring in the new year – with a raise. The minimum wage is going up in 20 states and Washington, D.C. as well.

And a Washington Post headline:

There’s some really good news for low-wage workers this weekend

What all these chipper stories fail to take into account is the possibility that some low-wage workers will lose their jobs because their work just isn’t worth the new minimum wage or the employer can’t be profitable with higher costs. There’s abundant evidence that higher minimum wage laws reduce employment, especially among young and minority workers. If only Journal reporter Eric Morath had read this op-ed headline in the Journal a year ago:

The Evidence Is Piling Up That Higher Minimum Wages Kill Jobs

Economist David Neumark, perhaps the leading student of the effects of minimum wage laws, wrote:

Economists have written scores of papers on the topic dating back 100 years, and the vast majority of these studies point to job losses for the least-skilled. They are based on fundamental economic reasoning—that when you raise the price of something, in this case labor, less of it will be demanded, or in this case hired. 

Among the many studies supporting this conclusion is one completed earlier this year by Texas A&M’s Jonathan Meer and MIT’s Jeremy West, which reaffirmed that “the minimum wage reduces job growth over a period of several years” and that “industries that tend to have a higher concentration of low-wage jobs show more deleterious effects on job growth from higher minimum wages.”

The broader research confirms this. An extensive survey of decades of minimum-wage research, published by William Wascher of the Federal Reserve Board and me in a 2008 book titled “Minimum Wages,” generally found a 1% or 2% reduction for teenage or very low-skill employment for each 10% minimum-wage increase.

I hope these stories will prove accurate, that millions of low-wage workers will get higher wages and that the new minimum wage rates will not reduce the growth in jobs that Americans need. But I’d have to shut my eyes to economic theory and empirical evidence to believe that. In fact, you’d pretty much have to be an economics denier to believe that a mandated increase in the supply of labor won’t reduce the demand for labor.

 

Once again, the editors at the New York Times have allowed their bias against school choice to get in the way of reporting facts.

On Friday, the NYT ran a blog by Professor Susan Dynarski with the incredibly misleading headline (which, in fairness, she likely didn’t write): “Free Market for Education? Economists Generally Don’t Buy It.

Based on that description, you might think that a survey of economists found that most economists think a market in education wouldn’t work, or at least that there were more economists who thought it wouldn’t work than thought it would. Well, not quite. Dynarski writes:

But economists are far less optimistic about what an unfettered market can achieve in education. Only a third of economists on the Chicago panel agreed that students would be better off if they all had access to vouchers to use at any private (or public) school of their choice.

Follow the link to the 2011 IGM survey and you’ll find that 36% of surveyed economists agreed that school choice programs would be beneficial–but only 19% disagreed and 37% expressed uncertainty.

Scott Alexander of the Slate Star Codex blog writes:

A more accurate way to summarize this graph is “About twice as many economists believe a voucher system would improve education as believe that it wouldn’t.”

By leaving it at “only a third of economists support vouchers”, the article implies that there is an economic consensus against the policy. Heck, it more than implies it – its title is “Free Market For Education: Economists Generally Don’t Buy It”. But its own source suggests that, of economists who have an opinion, a large majority are pro-voucher. […]

I think this is really poor journalistic practice and implies the opinion of the nation’s economists to be the opposite of what it really is. I hope the Times prints a correction.

Actually, it’s even worse than that. Oddly, Dynarski did not include the results from the more recent 2012 IGM survey, in which the level of support for school choice was higher (44%) and opposition was lower (5%), a nearly 9:1 ratio of support to opposition. When weighted for confidence, 54% thought school choice was beneficial only 6% disagreed.

We should give Professor Dynarski the benefit of the doubt and assume that she didn’t know about the more recent results (though they pop right up on Google and the IGM search feature), but the NYT deserves no such benefit for its continuing pattern of misleading readers about the evidence for school choice.

Former colleague and flourishing restaurateur Justin Logan and I have an essay in the current edition of Strategic Studies Quarterly: Why Washington Doesn’t Debate Grand Strategy. For now, you can read it for free.

Our argument is that defense policy analysis here is mostly in the grips of what we call an operational mindset, which accepts the existing policy goals and evaluates the means of achieving them—building a better mousetrap rather than asking whether a mousetrap is worth building. In the essay, we describe both the demand for and supply of analysis about grand strategy, which means a theory about how states create security for themselves.

We argue that there’s little demand for such analysis in Washington because of a near consensus in the foreign policy establishment in favor of the grand strategy of primacy, which is sometimes called “liberal hegemony” or even “deep engagement.” We discuss the limits and cause of that consensus. It comes, we argue, mostly from the historical growth of U.S. wealth and military power. We reject two alternatives sources, democratic preferences and inherent intellectual superiority, by noting that neither the public nor academics are nearly as fond of primacy as foreign policy thinkers in Washington.

Turning to supply, we explain why defense analysts, including those think tanks, respond to that demand, or really its absence, by focusing on operational questions, in contrast to academics, who devote more scrutiny to strategic questions. We describe the various incentives that encourage analysts to serve power. But unlike some who see the problem similarly, we deny that the solution lies in protecting defense analysis from political interests:

A standard reaction to this notion that politics often wants science to serve rather than guide it is to propose emancipation, schemes to liberate analysis from political influence. That means keeping campuses and think tanks free of political ambition and government funds or somehow protecting “the policy process” from “self-interested individuals and groups.” But it is neither possible nor desirable to purge policy debates of self-interest. Washington’s marketplace of policy ideas is flawed—but democratic. Were it possible to purge it of self-interest, the market would be barren and silent but for the few failing merchants proudly disdainful of customers that never arrive. Think tanks totally divorced from political interests would wither or die, leaving their job to entities that respond to political demand. The solution to bad policy is better politics, meaning more productive conflict that demands new ideas, not quixotic attempts to empower Platonic guardians by quieting interested parties.

But what about Trump, you might be asking? Doesn’t he defy the foreign policy establishment in his disdain for allies, musings about nuclear proliferation, and affection or Russia, and thus generate demand for the debate we say is lacking? I plan to thoroughly answer that question in a coming essay. For now, I have two brief responses.

First, as I discussed recently in War on the Rocks, Trump will likely deviate less from establishment thinking than many expect. In fact, his appointments suggest he’ll govern like a hawkish Republican, with some tics. Time will tell, of course.

Second, the essay considers the possibility of a president that bucks the primacy consensus, though not as much as it should have, in retrospect. That’s one function of the wimpy modifiers throughout that dilute the strength of its claims. I even wanted to drop a “really” or “much” in front of “debate” in the title, as I’ve done here, but got overruled. More importantly, we note there that public opinion allows for the election of leaders that buck the consensus, and we observe its strength in the bipartisan attacks on Trump for his foreign policy heresies during the campaign. The incoming administration offers a strong test of the operational mindset, at least.

The incoming Trump administration and the Congressional majority plan a push to repeal federal spending caps in order to boost military spending. A key talking point for this push claims that the Obama administration’s anemic military spending has caused a “readiness crisis,” where the U.S. military lacks the men, weapons, and funds to do its job. On the campaign trail, or Hannity, the claim became that the Obama is “gutting the military.” The president-elect typically went further, calling the U.S. military a “disaster” and in “shambles.”

In a recent presentation, embedded below, I raised three problems with these claims. One is that military spending remains high. The recent drawdown cut military spending by more twenty percent in real terms, but it came after buildup of nearly fifty percent. It’s now around Cold War peaks, in real terms.

Second, the military is shrinking partly because of its heightened quality. Rising personnel costs reflect the heightened professionalization of American troops. Similarly, U.S. weapons systems have grown deadlier, more complex, and costlier to maintain. The net result is forces are fewer but substantially more capable than previously possible.

Here I’ll focus on the third problem with claims of a readiness crisis: the debate uses readiness only as an impetus to tout other issues. Overall, U.S. military readiness is alright, better when it comes to fighting current wars. Complaints about readiness mostly accompany requests for higher military spending. What readiness shortfalls exist could be solved without increasing the existing Pentagon budget. Those that complain the loudest about readiness, like the majority of the House Armed Services Committee, could improve it through reallocation, but they prefer to hype the crisis as a way to push for a higher total budget and stave off sacrifices

In the U.S. military, readiness generally refers to “the ability of forces to perform the missions and tasks assigned to them,” as Todd Harrison puts it. That metric depends on variables like whether units are adequately manned, the quality of training, equipment condition, and overall morale. The Pentagon tracks readiness through two internal tracking systems and classified reports to Congress.

Military leaders sometimes cite those scorecards, but they do little to support claims of a readiness crisis. Pentagon insiders and outside analysts largely agree that official readiness ratings are a poor guide for actual performance of military missions, especially in combat. Various unmeasured factors, like enemy capabilities, impact how those missions go. Questions of the military balance thus invade real readiness discussions. The vagueness and variability of readiness means that, as Brad Carson and Morgan Plummer note, debates occur without a shared definition, and the sides talk past each other.

For example, last summer, in two articles, David Petraeus and the Michael O’Hanlon attacked the idea of a readiness crisis by arguing that U.S. military forces remain well-trained and equipped for the fights they face. They note that readiness is far from perfect, especially in areas like Marine Corps aviation, but that ships and planes are mostly well-operated, and in good shape, especially compared to possible enemies. The torrent of responses chose to focus on other things: complaining that spending should be higher, worrying that preparation for future wars should be better, in some instances even acknowledging the absence of a readiness crisis before discussing various shortfalls.

Likewise, the service chiefs, whose cries about the dangers of sequestration (by which they mean budgets restrained by spending caps that Congress has annually increased and augmented with alleged war funds) inflame the “gutting the military” crowd, avoid the word “crisis” when pressed. They highlight areas of future risk or capabilities they would like, note problem areas, request more money, and mostly reject politicians’ contentions that U.S. forces are broken and weak.

To the extent that there is a readiness problem, it is partly the fault of those that most lament it: the Armed Services Committees, especially in the House, which has held numerous hearings on the topic. Its chairman, Rep. Mac Thornberry of Texas, recently blamed the Obama administration for a helicopter crash in Hawaii that killed twelve Marines. He argued that because the administration was “playing political games” and limiting operational funds needed for flight training, it bore responsibility for the crash.

It’s true that investigators believe that low readiness in terms of training and morale helped cause the crash. But Thornberry is himself guilty of using readiness as a political game. Though his committee has less say than appropriators, it could push to shift funds into the operations and maintenance accounts that fund readiness at the expense of some acquisition spending. However, acquisition is generally of greater interest to Congressmen because the money goes to their local production facilities and creates jobs in their districts. Thornberry prefers to keep the readiness issue as a lever to push for higher military spending rather than reallocate funds that help him keep his seat. Meanwhile, the administration he vilified has tended to push for operations and maintenance funding and sacrificed acquisition to get it.

A review of the debate about the readiness crisis reveals not only that there’s no real crisis, but also that’s there’s no real debate about it. The debate is actually a vehicle for other issues, like how much we ought to spend and what we ought to do to meet threats. Readiness has become a kind of synonym for a strong defense—a concept so capacious and positive that everyone uses it to mean what they want. It’s best to discard the term and recognize that military spending choices are largely about what you want to be ready for, not how ready you are for everything.

You Ought to Have a Look is a regular feature from the Center for the Study of Science. While this section will feature all of the areas of interest that we are emphasizing, the prominence of the climate issue is driving a tremendous amount of web traffic. Here we post a few of the best in recent days, along with our color commentary.

As the time towards Trump’s inauguration closes, panic mounts in the climate change-agenda community as evinced by their hyperventilation about what a Trump Administration might unleash on President Obama’s Climate Action Plan. This includes ventilation about blocking access to climate data, data manipulation, investigating climate scientists, squashing dissent, selective science, end runs around Congressional intent, etc…sort of like a catalog of what they have been doing since climate change went prime time in 1988.

Many of these bloviations are completely unfounded—for example, a particular favorite of the press during recent weeks has been that “Scientists [are] Rac[ing] To Preserve Climate Change Data Before Trump Takes Office.” This is nonsense—despite the hand-wringing and (faux) concern raised by some folks. And while we, like everyone else should be, are opposed to deleting government datasets (paid for with our tax dollars), there is simply no evidence that such an action is in the works or even being contemplated.

Many of the other fears are overblown as well, but there are, in fact, some things that should bother climate campaigners (and no one else). These include efforts to retract the Clean Power Plan, to eliminate the use of the social cost of carbon as currently constituted in federal cost/benefit analyses, and acknowledgement the current generation of climate models has no utility with regard to policy.

Together these actions would go a long way to dismantling much of the overreaction inherent in Obama’s Climate Action Plan and also form a strong case for reversing the EPA’s “endangerment finding” for carbon dioxide. Should any/all of this come to pass, the climate campaigners will go bonkers, while the rest of us will be freed from burdensome regulations and have greater economic ability to address/adapt to what climate changes may come our way.

Here’s what’s afoot. First is well-designed dismantling of Obama’s Clean Power Plan, described in a letter sent to Mike Pence, Paul Ryan, and Mitch McConnell (and copied to Myron Ebell, head of Trump’s EPA transition team), by a coalition of 24 state Attorneys General. It builds upon their belief that the Clean Power Plan goes far beyond what is allowed under the Clean Air Act and that it unlawfully commands states to “fundamentally alter electricity generation in their States by shifting from existing fossil-fueled power plants to other methods of generation preferred by EPA.”

Basically, the plan that they’d like to see President Trump put into motion starts with an immediate executive order making it clear that “it is the Administration’s view that the Rule is unlawful and that EPA lacks authority to enforce it.” From there, they’d like the Trump Administration to work closely with the States on ways to withdraw the rule and with Congress to make sure that no such rule gets promulgated in the future, i.e., that any “legislation should recognize the rights of States to develop their own energy strategies, so that energy can be generated in a cost effective and environmentally responsible manner.”

This course of action sounds a lot like the strategy that David Rivkin Jr. and Cato Adjunct Scholar Andrew Grossman laid out in an op-ed published in the Wall Street Journal two weeks after Trump was elected. It will be good to see their sound advice taken to heart and put into action.

Next up are signs that federal government’s love affair with the social cost of carbon is going to come to an abrupt and welcome end. The social cost of carbon, or SCC, is the Obama Administration’s determination of the monetary cost (tallied as the modelled damages resulting from climate changes that occurs between now and the year 2300) from every new ton of carbon dioxide that is emitted by human activities. Yes, not only does this sound ludicrous, but you can come up with nearly any number you want (including negative values—which indicate a net benefit from carbon dioxide emissions) based on how you treat certain parameters—like the future discount rate, the climate sensitivity, global vs. domestic impacts, the damage functions, adaptations, etc. Currently, in 2015 dollars, the Obama Administration’s SCC is about $40/ton. Alternative calculations produce numbers that range from near zero to several hundreds of dollars—basically, anybody’s guess.

But, while you may think that this huge uncertainty would pretty much render reliance on the SCC in federal rulemaking moot—you’d be wrong. In fact, just the opposite is the case—the Obama Administration requires the inclusion of its determination of the SCC in all cost/benefits analyses for federal decision-making that may result carbon dioxide emissions (which is nearly everything).

We have been strongly pushing back against this practice for several years now through all avenues available to us, and it now seems that the Trump Administration will take much of what we have written into consideration.

A recent article in Bloomberg explores many of the problems with the SCC and the avenues that the new Administration would have to defang the SCC. You ought to have a look.

And to this, we add an avenue that was not explored in the Bloomberg article, but which was discussed in a recent Vox article about the White House Office of Information and Regulatory Affairs (OIRA). According to Jody Freeman, a former climate advisor to President Obama:

OIRA is the location in the White House where they oversee agency rulemaking. This office oversees the methodology that agencies use to count up costs and benefits for new rules. That can be changed with the stroke of a pen. And it sounds weedy, but it’s the kind of thing that can make it harder to issue new regulations.

So for instance, right now the Obama administration currently uses a “global social cost of carbon” for its climate rules — that means if you have any rule that reduces greenhouse gases, the benefits counted for that rule include the [climate] benefits globally. You could imagine a Trump OIRA saying, “We don’t want to do that anymore. We’re not going to count the social cost of carbon as a benefit.” That changes the calculus for which rules are cost-beneficial.

This seems intriguing—we really ought to have more of a look!

And finally, the grand prize of all would be overturning the EPA’s finding that greenhouse gases “endanger both the public health and the public welfare of current and future generations.” From this “endangerment finding” stems the EPA’s imperative to regulate carbon dioxide emissions and unleashes all manner of regulations large and small. 

There are many approaches that a Trump Administration can take. They could convince Congress to act by explicitly stating that regulating carbon dioxide is not within the purview of the Clean Air Act. Alternatively, the EPA could overturn its own endangerment finding, which, according to the Supreme Court, compels the agency to regulate carbon dioxide.

The EPA has just been handed a loaded gun to accomplish just that.

It is all laid out in a forthcoming paper in the Bulletin of the American Meteorological Society that was released online in August. The paper “The art and science of climate model tuning” is written by Frederic Hourdin and 15 co-authors. It details the phenomenal amount of adjustment that has been applied to the GCMs in order to get them to simulate the 20th Century or just the present climate. 

Recently, it was summarized by Paul Voosen in Science, who said the modelers have heretofore have clammed up about all of this, fearing when it became public, “skeptics” would have a field day. Specifically, he wrote this doozey:

For years, climate scientists had been mum in public about their “secret sauce”: What happened in the models stayed in the models. The taboo reflected fears that climate contrarians would use the practice of tuning to seed doubt about models—and, by extension, the reality of human driven warming.

Yes, in fact, we will. And we should, with the caveat that carbon dioxide does cause some warming, but far, far less than what is in these models.

What comes out of the paper is that each fiddling of the models—which includes adjusting everything from the earth’s reflectivity to the mixing of heat in the ocean—gives a different answer for how much the earth will warm for doubling atmospheric carbon dioxide. 

This figure, known as the “equilibrium climate sensitivity” (ECS) is the bottom line when it comes to climate change. If it can be moved to any value depending upon the “tuning” of the model, then it is the modeler and not the physics that decides this critical number. Hourdin et al. put it rather artfully when they said, that it’s important when fiddling with the models to keep the ECS within an “anticipated acceptable range.”

What’s “acceptable” is therefore entirely subjective and, outside of ridiculous values that don’t comport with reality (such as one that would imply a greenhouse runaway), we are now regulating carbon dioxide by arbitrary caprice. That knowledge dooms EPA’s Endangerment Finding.

The Endangerment Finding is itself based upon a massive compendium, EPA’s “Technical Support Document,” which is a literature review of the causes and effects of global warming based, of course, on the GCMs. There is nothing to keep the EPA from modifying that document with this new (and universal) finding, and concluding that the technical support for an Endangerment Finding no longer exists.

Our greener friends will take that to court, to absolutely no avail. Courts do not intervene over the scientific determinations of agencies, a doctrine called “Chevron Deference” to their technical expertise. This was originally decided in the 1984 Supreme Court case Chevron, Inc. v. Natural Resources Defense Council

Georgia Tech atmospheric scientist Judy Curry wrote this about the Hourdin paper:

“If ever in your life you are to read one paper on climate modeling, this is the paper that you should read. Besides being a very important paper, it is very well written and readable by a non-specialist audience.”

We agree completely.

The Washington Post’s Jennifer Rubin has a solution for the fake news epidemic: better collaboration among think tanks. “In an era of ‘fake news,’ with a president-elect who regularly lies and partisan hacks who dispute that there are such things as ‘facts,’ think tanks seem more important than ever,” Rubin wrote.

Among her specific recommendations for improving the quality and salience of think tanks’s ouput, Rubin would like to see more efforts to dispel false rumors, and confirm the accurate ones. For example, “a joint project confirming Russian attempts to interfere with our and our allies’ elections.” 

She also suggests that “reducing think tank partisanship and involving those outside the Beltway might go a long way toward finding legislative consensus and stimulating civil debate.”

But one of her other suggestions particularly caught my eye: Civil debate and respectful disagreement.

Think tanks like to put on programs featuring a parade of essentially like-minded experts. There is much more to be gained by, say, the Cato Institute inviting professional colleagues from, say, the Council on Foreign Relations to discuss American support for democratic values in the world. If nothing else, inculcating an atmosphere of convivial debate may spread to pundits, lawmakers, activists and voters themselves. 

As it happens, Cato did host a colleague from the Council on Foreign Relations just a few weeks ago, to discuss a recent paper on North Korea. And I think that we generally do a pretty good job of assembling panels of speakers who are not all singing from the same playbook, but who instead disagree with one another, from time to time, and usually in a civil and respectful way. In short, we already collaborate quite a bit.

But I decided to test my assumptions. With the help of my able assistant James Knupp, I compiled a list of the 16 public events hosted and organized by the defense and foreign policy department in 2016. All but one included participants from institutions other than Cato, a total of 42 speakers. Of these, nearly 60 percent (25) are not primarily affiliated with a think tank, but rather work as full-time professors at a major research university. This is consistent with Rubin’s suggestion that DC think tanks reach beyond the Beltway, and it reflects Cato’s ongoing commitment to expand outreach between academia and the policy community. This effort includes our visiting fellows program, and the publication of papers by non-Cato scholars in the academy (e.g. here and here). 

Of the 17 speakers from think tanks, many major institutions were represented, including Brookings (3 times); and CNAS, CSIS, and New America (2 times, each); as well as the Atlantic Council, the German Marshall Fund, Hoover, RAND, and USIP.

And, as it happens, we’re continuing this tradition into the new year. Our first foreign policy event of 2017, on January 17th, features, among others, Kathleen Hicks from the Center for Strategic and International Studies, and will be moderated by the Post’s own Karen DeYoung. I will be thrilled if Rubin attends. If she does, she will see that we value a frank discussion of ideas, ones that do not fit within neatly partisan labels.

The open question arising from Rubin’s suggestion for greater collaboration among think tanks is whether that will actually cause people to change their minds, especially about facts that challenge preconceived notions, or that are uncomfortable. But, despite what I’ve read about cognitive shortcuts (e.g. confirmation bias), and of experts’ collective inability to influence major events (the 2016 presidential election being merely the latest case in point), I’m willing to give it a try. So I look forward to speaking at many think tanks around town in 2017, just as I’m sure we’ll continue to welcome their experts here.

By the end of the year, 2016 had accrued a list of international crises, celebrity deaths and electoral shenanigans so long that a spate of articles appeared questioning whether it was the worst year ever, while social media appeared to be primarily filled with people asking “Is 2016 over yet?” But at least in the realm of foreign policy, there’s little hope that 2017 will bring much respite.  

It would, of course, take an extraordinarily narrow view of history to argue that 2016 was really the worst year on record. That would require one to overlook 1942-3, the height of Second World War barbarity, or 1914, the year when the “war to end all wars” began. 1968 wasn’t that great, either, bringing us the assassination of Martin Luther King Jr, the crushing of the Prague Spring, Vietnam War massacres, and a plane accident involving four nuclear bombs.  Or if you want to go back further in history, it’s pretty hard to ignore 1347, the year the Black Death reached Europe.

But 2016 did present an impressive series of foreign policy and political disasters, ranging from a coup in Turkey to Russian meddling in the U.S. electoral process to terror attacks in France, Belgium, and Germany. In the ongoing Syrian civil war, Russian and Syrian government troops finally succeeded in crushing opposition in Aleppo at massive humanitarian cost. And crises that in any other year would have been front page news – like North Korean missile tests or worsening relations between Iran and Saudi Arabia – were sidelined in favor of more urgent crises.

2016 also saw a global surge in populism, with the election of bluntly anti-establishment politicians like Donald Trump and Rodrigo Duterte, and the surprising victory of pro-Brexit campaigners in the United Kingdom’s referendum on the European Union.  Indeed, one of the few positive foreign policy events of the year – Colombia’s peace deal with the FARC, ending a 50-year conflict – was almost derailed when voters rejected the deal at the ballot box.

Unfortunately, it’s not clear that 2017 will substantially improve matters. Many of this year’s crises will in fact carry over into next year: the war in Syria continues apace, Brexit negotiations are ongoing, and North Korea is likely to continue its saber rattling. Worse, some of this year’s less visible crises have the potential to deteriorate further, like the war in Yemen or Venezuela’s economic and social collapse.

More broadly, the overarching trends that defined much of the foreign policy landscape in 2016 look set to continue for the foreseeable future. Populism is likely to impact next year’s key European elections. In France, Marine Le Pen’s National Front looks likely to do well, as does Germany’s Alternative for Deutschland. In the Netherlands, anti-EU sentiment has some speculating that March’s election could precipitate a ‘Nexit’ from the EU.    

The complexity of this year’s crises – and the broader shift towards a more multipolar international system – also looks set to continue. This will create challenges for U.S. policymakers, who may have to seek cooperation with states like Russia or China on key issues at the same time as opposing them on others. And authoritarian backsliding by countries within U.S. alliances, most notably Turkey, raises key questions about what U.S. security guarantees in some areas actually achieve.

Still, as one cliché points out: “Prediction is hard, especially the future.” This pessimistic view of foreign policy in 2017 may well turn out be inaccurate. It simply seems unlikely given the growing global trends which precipitated many of this year’s big foreign policy surprises. Pretty soon, we may be asking if 2017 is over yet. 

The Washington Post has published another report on the Glenn Defense Navy scandal. For more than a decade, the head of Glenn Defense, Leonard Glenn Francis, cozied up to Navy leaders in the Pacific to win lucrative contracts for resupplying ships. He cashed in on overpriced contracts and fraudulent invoices, and he had numerous moles inside the Navy to ensure his continued enrichment.

Francis wined and dined Navy officers, providing them with gifts, prostitutes, and other favors to get their help and protection. The episode is appalling in so many ways, and it has disturbing implications: If Navy officers were so easily seduced by this Singapore con artist, are leaders in other military and intelligence services just as vulnerable to old-fashioned, low-tech bribes?

Here are some highlights from the Post:

The Navy allowed the worst corruption scandal in its history to fester for several years by dismissing a flood of evidence that the rotund Asian defense contractor was cheating the service out of millions of dollars and bribing officers with booze, sex and lavish dinners, newly released ­documents show.

The Singapore-based contractor, Leonard Glenn Francis, found it especially easy to outwit the Naval Criminal Investigative Service (NCIS), the renowned law enforcement agency that has inspired one of the longest-running cop shows on television.

Starting in 2006, in response to a multitude of fraud complaints, NCIS opened 27 separate investigations into Francis’s company, Glenn Defense Marine Asia. In each of those instances, however, NCIS closed the case after failing to dig up sufficient evidence to take action against the firm, according to hundreds of pages of law enforcement records ­obtained by The Washington Post under the Freedom of Information Act.

Known as Fat Leonard for his 350-pound physique, Francis held lucrative contracts to resupply U.S. warships and submarines in ports throughout Asia. He was also legendary within the Navy for throwing hedonistic parties, often with prostitutes, to entertain sailors.

Other Navy documents obtained by The Post show that staffers at U.S. Pacific Fleet headquarters were so worried about the potential for trouble that they drafted a new ethics policy to discourage Navy personnel from accepting favors from Francis. But their effort was blocked for more than two years by admirals who were friendly with the contractor, according to officials familiar with the matter.

Despite rising signs of widespread fraud, the Navy kept awarding business to Francis’s company. In 2011, Glenn Defense won deals valued at $200 million to service U.S. vessels at ports stretching from the Russian Far East to Australia.

Besides Francis, 12 people — including an admiral and nine other Navy personnel — have pleaded guilty to federal crimes. Five other defendants still face charges.

Justice Department officials say there is no end in sight to the investigation and that 200 people have fallen under scrutiny. Among them are about 30 current or retired admirals, according to Navy ­officials.

… In exchange for paid sex with prostitutes, cash and luxury vacations, Francis’s informants fed him a near-daily diet of classified material and inside information that enabled him to keep gouging the Navy and outfox his pursuers for years, according to court records.

A prior Washington Post story on the scandal is here.

A study examining federal bureaucratic failure is here.

Since the launch of the Sovrin Foundation, Phil Windley has been blogging a lot (no, reallya lot and more, more, more, more, and more) about how self-sovereign identity works and can be used. His most interesting and accessible post for a liberty-minded identity-layperson might be “On Sovereignty,” in which he briefly lays out what it means to have a “self-sovereign” identity.

Sovereignty over your identity doesn’t mean having complete control over information about yourself, but it puts you in a peer relationship with others, including the larger organizations we deal with, such as governments. “The beauty of sovereignty,” Phil emphasizes, is the “balance of power that leads to negotiations about the nature of the relationships between various entities in the system.” I want to expand on this notion that there are power arrangements in identity systems.

In a centralized identity system, the identity provider (such as your Department of Motor Vehicles) determines whether you can assert information and what you can assert. Centralized systems also often share information about you, or facilitate such sharing, whether you want them to or not. Implementation of the REAL ID Act would essentially move these powers from state governments to the U.S. Department of Homeland Security.

A self-sovereign identity system, on the other hand, gives you power to assert information about yourself, which others may accept or reject. It also better positions you to decline to share information about yourself. Those powers are important.

“Power” is an elusive concept. We’re more familiar with talking about power in terms of political and legal arrangements, such as how the Constitution gives certain powers to the U.S. federal government or denies all U.S. governments other powers. But absent these rules, “pre-political” power is simply the ability to do something or act in a particular way, or the capacity to direct or influence the behavior of others or the course of events. Power comes down to what resources you can bring to bear in going after what you want.

To illustrate pre-political power arrangements, look at physical power in the “state of nature.” If a tall, muscular man meets a short, skinny man on a trail in a desolate forest, the arrangement of power between the two is pretty clear: the bigger man has more ability to use force, so he can take things from the smaller man, do him in, or whatever he pleases. Give the skinny man a gun, though, and the power allocation reverses. The gun’s capacity to defeat human musculature gives the small man more power to defend himself, to take from the larger man, or to do the larger man in. Physics and technology allocate power before legal rules come into play.

Pre-political power arrangements seem to strongly influence what political and legal rules can achieve. It’s taken hundreds of years to bring the power of physical force possessed by feudal lords and governments relatively under control. This is probably because it’s pretty great to have power, and pretty awful to lose it.

It follows from all this that liberty can be advanced not just by fettering governments’ powers, but by allocating power more evenly in the first place. There aren’t going to be “do-overs” about how physical arrangements allocate power, but the ways that information arrangements allocate power have yet to gel. Balanced power in identity and information systems are important to pursue now.

Instead of the large man and the small man, imagine two scenarios where a government agent meets a local resident on that same trail. It’s a post-political world, so the government agent has to live within decent rules, but there can be very different allocations of power based on information arrangements.

In the first scenario, the government agent knows nothing more than what he sees: an ordinary resident making her way up the path. Without information to justify anything else, he bids the resident good day and they pass one another.

In the second scenario, the government agent can identify the resident and pull up records about her. Instead of sharing brief courtesies, the government agent notes debts owed on some parking tickets and a tax bill in arrears. With information about where the resident and her friends live, and data about them, the agent might infer that the resident is on her way to visit people with criminal histories. Financial details in hand, the government agent finds that the quality of clothing and jewelry she wears suggests untaxed or illicit profits on her person. In these ways or countless others, identity and biography empowers the government agent to interfere with the life of the hapless local resident by questioning, detaining, or arresting her.

Think also of the power imbalance when the government can decide when to allow someone to identify him- or herself and when to deny it. In the not-too-distant future, identity systems will all be digital and electronic. This means your centralized identity provider, the DMV, will be able to shut off recognition of identities that have unpaid parking tickets, tax liabilities, or other defects in the eyes of official policy.

Many people like this power when used to deny licenses to illegal immigrants today, but the use of the power is likely to broaden. Linking the vote to a national ID, as the Carter-Baker Commission proposed some years ago, could be one direction. Conditioning access to health care, financial services, housing, and more on the showing of government-issued ID have all been raised seriously in recent years. The power held by identity providers—now mostly governments—are only going to grow.

The solution is to disperse that power—not through rules but through technical infrastructure design. Let people assert their own identities without requiring it to be done through intermediaries, governmental or otherwise. There is plenty of capacity in a distributed identity system to prove the facts that make identities reliable, even while they minimize the data that needs to be shared in doing so.

The Sovrin Foundation has a good library of documents describing how they would do this, using a public, permissioned blockchain. And for those who are just learning the importance of identity—say, through this blog post—one entry-point to the basic concepts might be my book, Identity Crisis: How Identification is Overused and Misunderstood.

Lester Packingham beat a parking ticket and celebrated on his Facebook page by proclaiming, “God is good! … Praise be to GOD, WOW! Thanks JESUS!” For this post, he was sentenced to prison—because he was a registered sex offender and a North Carolina statute bans such people from accessing a wide variety of websites. (Packingham took “indecent liberties with a minor” when he was 21, receiving a suspended sentence and probation, which he had completed.)

The law is meant to prevent communications between sex offenders and minors, but it sweeps so broadly that it conflicts with basic First Amendment principles. It doesn’t even require the state to prove that the accused had contact with (or gathered information about) a minor, or intended to do so, or accessed a website for any other illicit purpose.

After the state court of appeals overturned Packingham’s conviction—finding the criminal “access” provision unconstitutional—the North Carolina Supreme Court, over vigorous dissent, reversed and reinstated the conviction and sentence. The U.S. Supreme Court took the case and now Cato, joined by the ACLU, has filed an amicus brief supporting Packingham’s position.

The North Carolina law bans access not just to what people consider to be social-media sites, but also any sites that enable some form of connection between visitors, which would include YouTube, Wikipedia, and even the New York Times. The statute is also vague, in that it covers websites that “permit” minor children to create profiles or pages—and you can’t even find out what a website “permits” without first looking at its terms of service—itself a violation of the statute. Even if the site purports to stop minors from accessing its content, it’s impossible for someone to know whether and how that contractual provision is enforced in practice. Someone subject to this law literally can’t know what he can’t do or say; the police themselves aren’t sure!

The statute also fails constitutional scrutiny because it criminalizes speech based on the identity of the speaker. It’s well established that a state may not burden “a narrow class of disfavored speaker,” but that’s exactly what happens here. The very purpose of the First Amendment is to protect the speech of disfavored minorities—which sex offenders certainly are. Signaling out this speech for prosecution—without any allegation that it relates to conduct or motive—should earn the Tar Heel State a big “dislike” from the Supreme Court.

The Court hears argument in Packingham v. North Carolina on February 27.

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