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The Cato Institute has long been unique in Washington, D.C.’s foreign policy debate. For years, our scholars have argued that there is essentially no debate over grand strategy here in the nation’s capital. Vigorous political battles about U.S. foreign policy tend to happen only within a very narrow range of opinion, usually centering on tactics rather than competing strategic visions. These surface level disagreements mask a bipartisan consensus in favor of a grand strategy of primacy (alternatively termed “liberal hegemony” or “deep engagement”), which is further buttressed by an extensive network of foreign policy professionals within the national security bureaucracies. The consensus sees the United States as the indispensable nation - the policeman of the world - that must maintain military preponderance and extensive security commitments in Europe, the Middle East, and Asia in the name of upholding the international order.

The election of Donald Trump to the presidency has, in an odd way, created incentives for a debate about grand strategy. The president’s erratic and often contradictory utterances on alliances, free trade, and interventionism - what the Brooking Institution’s Thomas Wright describes as Trump’s Jekyll and Hyde foreign policy -  has occasionally questioned the core foundations of U.S. grand strategy in the post-WWII era. Unfortunately, Trump is just about the worst vessel for ushering in such a debate, for reasons that are too numerous to count but include his economic protectionism, chauvinistic nationalism, habitual threat inflation, and worrying illiberal tendencies. Nevertheless, the shock to the status quo that is Trump’s rise has elicited number of well-publicized defenses of primacy by people in the Washington foreign policy community.

And that’s what makes an upcoming Cato Institute event so timely and important. The debate over grand strategy in academia has always been comparatively robust, and two leading scholars who advocate the continuation of America’s deep engagement, Stephen G. Brooks and William C. Wohlforth, both professors at Dartmouth College, will be here on March 21 to discuss their newest book, America Abroad: The United States’ Global Role in the 21st Century. Our two discussants are at the other end of the spectrum on grand strategy: Cato’s own Benjamin H. Friedman and Eugene Gholz, professor at the University of Texas at Austin and Cato adjunct scholar. 

Please join us for this vital discussion of America’s role in the world. Register to attend the event here

A new Congressional Budget Office report projecting the effects of the House Republican leadership’s American Health Care Act weakens the case for the bill’s ObamaCare-lite approach, and strengthens the case for full repeal. The CBO projects that over the next two years, the AHCA would cause average premiums to rise 15 percent to 20 percent above ObamaCare’s already high premium levels. The report raises the prospect that insurance markets may collapse under the AHCA, just as they are collapsing under ObamaCare. It makes unreasonable assumptions about Medicaid spending; more reasonable assumptions could completely eliminate the bill’s projected deficit reduction. Finally, the CBO projects more people will lose coverage under the AHCA than under full repeal.

ObamaCare-Lite, ObamaCare-Forever

The AHCA purports to repeal and replace ObamaCare. In reality, it would do no such thing.

In a previous post, I wrote:

This bill is a train wreck waiting to happen.

The House leadership bill isn’t even a repeal bill. Not by a long shot. It would repeal far less of ObamaCare than the bill Republicans sent to President Obama one year ago…

[It] merely applies a new coat of paint to a building that Republicans themselves have already condemned…If this is the choice, it would be better if Congress simply did nothing.

The ACHA retains all the powers ObamaCare gives the federal government over private insurance, gives those powers a bipartisan imprimatur, and therefore gives them immortality. Its repeal of ObamaCare’s Medicaid expansion would likely never take effect. It fails to create real block grants in Medicaid, and preserves perverse incentives from both the “old” Medicaid program and the expansion. It would create an ongoing series of crises in the individual market, for which Republicans would take the blame and suffer at the polls, at the same time it would create pressure for more taxes and government spending. It’s hard to imagine what House Republicans were thinking.

Premiums and Market Stability

Full repeal, in particular repeal of ObamaCare’s health-insurance regulations, would cause premiums to fall for the vast majority of consumers in the individual market.

In contrast, the AHCA would increase premiums from their already high ObamaCare levels. “In 2018 and 2019…average premiums for single policyholders in the nongroup market would be 15 percent to 20 percent higher than under current law,” the CBO reported.

Premium increases of that magnitude could further destabilize ObamaCare’s health-insurance Exchanges. Adverse selection has already led to an exodus of insurers from the individual market. ObamaCare has driven every last insurer from the Exchange in 16 counties in Tennessee, leaving 43,000 residents with no health insurance options for 2018. In a thousand other counties around the country, the law has driven all but one insurer from the Exchange. Nearly 3 million people in those counties are just one carrier exit from being in the same position as those 43,000 Tennesseans.

The CBO posits that, nonetheless, “the nongroup market would probably be stable in most areas under either current law or the legislation.”

In most areas. Probably.

Supporters of the legislation note that the CBO projects the average premiums would then begin to fall after 2019. One reason is that the AHCA would end one of ObamaCare’s health-insurance regulations (actuarial-value requirements). Another is that the CBO predicts states would use the AHCA’s new Patient and State Stability Fund to subsidize high-cost enrollees.

There are reasons to doubt this prediction. First, it assumes the Exchanges survive the ensuing adverse selection and make it to 2020. Second, the Patient and State Stability Fund would not reduce premiums. Like ObamaCare’s reinsurance program, it would hide a portion of the full premium by shifting it to taxpayers. So even though the CBO reports that the portion of the premium that consumers see would fall 10 percent by 2026, it is not accurate to say premiums would fall. We don’t know if the full premium would fall or rise after 2019, because the CBO isn’t telling us.

Spending

On paper the AHCA cuts taxes and government spending. But it also sets forces in motion that could undo those gains.

The CBO projects the AHCA would reduce federal spending by $1.2 trillion over ten years and reduce tax revenues by $883 billion, for a total reduction in the deficit of $337 billion. That certainly makes the bill appear attractive. Until you look at the details.

Take the bill’s Medicaid provisions. The CBO projects the bill would reduce Medicaid spending by $880 billion. The reduction would come both from phasing out ObamaCare’s Medicaid expansion, and from changing how the federal government pays for each state’s Medicaid program.

I doubt these savings will materialize. In my previous post, I wrote:

When eventually we see a Congressional Budget Office score of the bill (House leadership has numbers, but they’re not sharing them), it may show a reduction in federal spending on the Medicaid expansion after 2020. I would not bet on that happening.

True enough, the CBO bases those projected spending reductions on assumptions I do not find reasonable.

For instance, the CBO assumes that under current law, some number of the 19 states that have refused to implement ObamaCare’s Medicaid expansion would do so. The AHCA reduces the cost to states of implementing the expansion. But rather than assume even more states would implement the expansion under the AHCA, however, the CBO assumes no states would. That makes no sense.

The AHCA would reduce the risks to states of implementing the expansion. Prior to or absent the AHCA, states face the risk that Congress might reduce the enhanced federal funding ObamaCare provides states for Medicaid-expansion enrollees. Such a change would mean states would go from paying 10 percent of the cost of the expansion to paying 50 percent of the cost. A five-fold increase. The AHCA eliminates that risk by holding expansion states completely harmless with respect to Medicaid-expansion enrollees who enroll prior to 2020. It would guarantee states would continue to pay only 10 percent of the cost for every Medicaid expansion enrollee, even after the bill would “repeal” the expansion by barring new enrollments starting in 2020.

The cost of expanding Medicaid would go down, yet fewer states would do it. And here I thought demand curves slope downward.

If I’m correct that more states would expand Medicaid and go on an enrollment binge prior to 2020— and especially if those decisions pressured Congress to scrap “repeal” of the expansion—the CBO’s projected savings from the AHCA would prove too optimistic. If just half of the projected Medicaid savings fail to materialize, that would wipe out all of the AHCA’s presumed budget savings.

If states game the new per-enrollee matching grant system of federal Medicaid funding, even more of those presumed spending reductions would evaporate.

Likewise, if the AHCA were to create even more instability in the individual market, it would create even more pressure for additional taxes and government spending to stabilize the market. Even more of the AHCA’s projected savings would disappear.

Coverage Levels

In January, the CBO projected that completely repealing ObamaCare, without a replacement, would increase the uninsured by 23 million people by 2026. The agency projects the AHCA’s non-repeal approach would increase the uninsured by even more—24 million people. As my colleague Josh Blackman notes, there is ample reason to believe the CBO models overstate the coverage gains achieved by ObamaCare’s individual mandate, and the coverage losses the agency projects would follow its repeal.

Even so, the CBO score confirms the folly of the House Republicans’ approach, and that there is no reason not to repeal ObamaCare in full. Like it or not, the CBO’s estimates of coverage impacts are the ones ObamaCare’s defenders and the media will cite. If Republicans are going to take the same amount of heat either way, they might as well do the right thing and do a full repeal.

Republicans could then repurpose the $361 billion they planned to spend on tax credits on expanding tax-free health savings accounts—a reform that would drive down health care prices for the poor, that Congress can enact via reconciliation, and that does not divide ObamaCare opponents like tax credits do, not least because HSAs do not subsidize abortion like tax credits do. They could convert Medicaid into an actual system of block grants, giving states the flexibility to target Medicaid funds to those who still could not afford the care they need. 

Four decades ago, the United States began a dramatic change in domestic policy, repealing swaths of economic regulation and abolishing whole agencies charged with managing sectors of the U.S. economy.

If you mention this “deregulation” today, most people think it refers to wild Reagan administration efforts to undo environmental, health, and safety protections. In fact, the deregulation movement predated Ronald Reagan’s presidency, had broad bipartisan support, and had little to do with health, safety, or environmental policy. Rather, deregulation targeted regulations that directed business operations in different sectors of the American economy: which airlines could service which routes, what railroads could charge what amounts for their services, how telephone service would be billed and what technologies would be used, how the power industry was organized, and much more.

For decades, policy researchers had compiled evidence that those regulations harmed consumers and stunted economic growth by suppressing competition and innovation. With America mired in the stagflation of the 1970s, policymakers decided to stop sheltering (some) U.S. businesses from the demands of consumers and the competition of upstart and foreign rivals.

That policy change now seems obviously virtuous, but at the time some commentators predicted it would unleash mayhem and disaster: a crippled economy, spiraling prices, “ruinous” competition, frightened consumers, plane crashes, hobbled communications, and other horribles. Fortunately, those frightful predictions did not obstruct reform. Today, the 1970s–1990s deregulations are broadly recognized as having yielded great benefits to consumers and contributed to the two decades of American prosperity that ended the 20th century. (For more on deregulation, see the soon-to-be-released spring issue of Regulation, celebrating the magazine’s 40th anniversary. Links forthcoming.)

Which brings us to current criticisms of Trump administration efforts to launch a new wave of deregulation. Like yesteryear, the critics are predicting mayhem and disaster. But their arguments aren’t convincing.

Consider, for instance, Northwestern University law professor Andrew Koppelman’s warning that “Trump’s ‘Libertarianism’ Endangers the Public.” (Credit Koppelman for using scare quotes to indicate that President Trump isn’t a libertarian.) Specifically, he worries about Trump’s recent order on regulation, which instructs agencies to (temporarily) keep the nation’s aggregate cost of regulatory compliance at its current level and to repeal two regulations for every new one adopted.

Writes Koppelman:

When he was President, [Barack Obama] demanded (following a principle laid down by Ronald Reagan!) that any new regulations survive rigorous cost–benefit analysis. … Trump, on the other hand, has replaced cost–benefit analysis with cost analysis. Benefits are ignored. … Consumer fraud, tainted food, pollution, unsafe airplanes and trains, epidemic disease all have to be put up with, if stopping them would increase the costs of regulation.

Koppelman properly praises cost–benefit analysis, the idea that proposed regulations should be scrutinized to ensure that they do not produce more harm (cost) on net than good (benefit). But even if we assume that all federal regulations were covered by Obama’s order (they weren’t) and all of the cost–benefit analyses were accurate (ditto), there is still a serious problem with Koppelman’s argument.

He assumes that passing a cost–benefit test should be sufficient for a new rule to be implemented. Yet, human resources are limited, and resources devoted to complying with regulations cannot be devoted to producing other benefits. Put another way, all rules—even terrific ones—have opportunity costs, and ignoring those costs is bad public policy. As President Jimmy Carter explained back in 1979:

Our society’s resources are vast, but they are not infinite. Americans are willing to spend a fair share of those resources to achieve social goals through regulation. Their support falls away, however, when they see needless rules, excessive costs, and duplicative paperwork.

(H/T Richard Williams; link forthcoming.)

Federal cost–benefit analysis is supposed to take opportunity costs into account, but that accounting is dicey to say the least. So it’s sensible to place a limit—which in essence is what Trump’s order does—on the United States’ total regulatory compliance cost in order to ensure that plenty of resources can be devoted to other benefits.

Admittedly, the Trump order is a crude way to do this. The limit de facto assumes the current level of U.S. spending on regulatory compliance is the right amount, whereas Koppelman apparently believes there is no limit to what the nation should spend on new rules so long as they pass a cost–benefit test. On the other hand, many Americans say that they are already overburdened with the costs of regulatory compliance.

But crude initiatives can be useful. In theory, capping compliance costs should prompt regulators to prioritize current and prospective rules, embracing those with high net benefits and dispensing with those with low (and even negative) net benefits. It’s outlandish to think that good regulations protecting from “consumer fraud, tainted food, pollution, unsafe airplanes and trains, epidemic disease” should be prioritized over, say, low-value but costly regulations.

Of course, the devil is in the details, and the Trump administration’s performance so far gives little confidence about its ability to manage details. For instance, how reliable will his agencies be at estimating the costs of regulations implemented and repealed? What does it mean to repeal “two” regulations—repeal two small provisions or two whole rules? Doesn’t repeal of a regulation require the writing of a new regulation striking the old one? Will, say, the Occupational Safety and Health Administration give up on a low-value worker safety rule in order for a high-value Environmental Protection Agency to advance?

Still, the cost limit and the one-in, two-out requirement (versions of which have been tried in other countries) could be useful exercises to cull poor federal regulations. Contra Professor Koppelman, they shouldn’t be dismissed out-of-hand.

Even when it comes to protecting children, good intentions are not enough. Backpage.com is

a website that grew rich on classified ads for services like escorts, body rubs and exotic dancers. Far from being a marketplace for consensual exchanges, Backpage, the authorities said, often used teasers like “Amber Alert” and “Lolita” to signal that children were for sale.

In the midst of a Senate investigation, a federal grand jury inquiry in Arizona, two federal lawsuits and criminal charges in California accusing Backpage’s operators of pimping children, the website abruptly bowed to pressure in January and replaced its sex ads with the word “Censored” in red.

And the consequences? 

Tiffany — a street name — did not stop using the site, she said. Instead, her ads moved to Backpage’s dating section. “New in town,” read a recent one, using words that have become code for selling sex. “Looking for someone to hang out with.” Other recent dating ads listed one female as “100% young” and suggested that “oh daddy can i be your candy.”

And,

For Tiffany, 18, the demise of Backpage’s adult listings has made things far more unpredictable — and dangerous, she said. The old ads allowed her to try to vet customers by contacting them before meetings, via phone or text message. With far fewer inquiries from the dating ads, she said, her first encounters with men now take place more often on the street as she gets into cars in red light districts around the Bay Area.

For an earlier Cato discussion of the relevant First Amendment issues, see here.

For months, we’ve been following the saga of a misguided agency regulation that would have deprived some of the most vulnerable Americans of their basic due process rights. In May of last year, the Obama administration proposed a rule designating everyone who uses a “representative payee” (usually a friend or relative) to aid in filing social security disability forms as “mentally defective.” The practical consequence of such a change is that those deemed “mentally defective” (itself a vague and insulting term from a bygone legal era) will automatically fail their federal background check if they attempt to buy a gun. This presumption of unfitness can only be overcome after a lengthy, years-long bureaucratic process to prove one’s own competency. 

We’ve written extensively on why this rule is prejudicial and unfair. During the rule’s “notice and comment” period, Cato’s Center for Constitutional Studies submitted its first-ever public regulatory comment, objecting to the rule on 10 different grounds. We pointed out that the rule is vastly overbroad, since those filers who use a “representative payee” include anyone the Social Security Agency believes “would be served thereby … regardless of the legal competency or incompetency of the individual.” Moreover, the rule is counterproductive even when applied to those who do suffer from a psychiatric disability, because those people are more likely to be the victims of violent crimes rather than the perpetrators. Finally, we explained that the rule violates constitutional due process; the burden of proof must fall on the government before it can deprive an individual of a constitutional right.

But despite these efforts, the Obama administration forged ahead, finalizing the rule two days before President Trump took office. This seemed to be the final chapter of the story. Now, however, we can report a much happier ending, thanks to a vital law called the Congressional Review Act (CRA).

The CRA was enacted in 1996 to preserve the legislature’s role in American policy-making when agencies try to unilaterally create sweeping national rules. The Act requires that agencies must submit every newly promulgated rule to Congress for review. Once a new rule has both been submitted to Congress and published in the Federal Register, Congress has a period of 60 legislative days—about six months of real time in practice—in which both houses can pass a disapproval resolution by simple majority vote (no Senate filibusters or parliamentary stall tactics are allowed). If such a resolution is passed by both houses and signed by the president, the rule in question is abolished, and no similar rule can be enacted in the future except by statute.

Soon after the “representative payee” rule was finalized, a movement began urging Congress to implement the CRA in overturning it. The arguments were bipartisan; one of us (Blackman) joined with authors from the Autistic Self Advocacy Network and the National Disability Rights Network to explain why the rule was terrible for both gun rights and disability rights. Whatever one’s views are on the gun debate in America, both sides could agree that “individuals with a disability should not be scapegoated to advance gun control.”

This campaign caught on. Many of the arguments that we and others had made to agency regulators—to no avail at the time—were echoed by the people’s elected representatives. House Majority Leader Kevin McCarthy, for example, wrote that the rule “would elevate the Social Security Administration to the position of an illegitimate arbiter of the Second Amendment.”

The disapproval resolution passed both houses and has now been signed by the president, putting an end to the rule once and for all.

Elections have consequences. In this instance, it’s satisfying that one such consequence has been the end of a stigmatizing rule that never should have been proposed in the first place. As this case has demonstrated, the CRA has the potential to be an enormously important tool in the fight against misconceived regulations. The “mentally defective” rule is one of three regulations that have already been revoked using the CRA during the Trump Administration, and 11 more could be on the chopping block soon, with disapproval resolutions having passed in at least one house of Congress.

Even if common-sense arguments for the protection of individual rights fall on deaf ears in the federal bureaucracy, the people’s representatives still retain the ultimate power to create federal policy and vindicate those rights. That is the system the Framers designed, and that is the system the CRA helps preserve. For more on the ambitious project to use the CRA to reverse harmful regulations, see Pacific Legal Foundation’s RedTapeRollback.com.

We thank Cato legal associate Tommy Berry for his help with this blog post.

While the newest federal agency, the Consumer Financial Protection Bureau (CFPB), has been controversial for many reasons, its most troubling feature may simply be its unconstitutional structure.  Its sole director reports to no one but himself, and, under the terms of Dodd-Frank, can be removed by the President only for cause.  And it receives its funding not through Congress, but through the Federal Reserve.  Not even the Fed has the authority to challenge its spending, however.  Instead, the law says the Fed “shall” give the CFPB the funds it requests, up to 12 percent of the Fed’s total operating expenses.  As of 2015, that meant the CFPB could demand up to $443 million in one year.

Last year, a federal appeals court, ruling against the agency, issued a stinging indictment of this structure in PHH v. CFPB.  The CFPB, however, sought a rehearing en banc.  In a typical federal appeals case, a three-judge panel will hear and rule on the matter.  The losing party can request that the entire court – in this case, the 11 active judges of the D.C. Circuit Court of Appeals – to hear and rule on the case again.  The courts rarely grant such requests, except when the matter is one of particular importance.  In this case, the request was granted and the court will hear argument again on May 24, 2017.

Cato has filed an amicus brief in support of PHH.  In it, Cato argues that the CFPB’s unconstitutional structure poses a threat to liberty in two ways.  First, by violating core principles of separation of powers.  Although this principle is often invoked to preserve the powers of the various governmental branches, in fact its purpose is to safeguard individual rights, not any “right” of the government.  Second, by existing unfettered by any accountability to the people, either through direct election or through control by an elected office.  Although any independent agency is constitutionally suspect, most other independent agencies have certain structural protections to ensure some checks on their power.  For example, the Securities and Exchange Commission is headed by a five-member panel.  This panel must include no more than three members from any one political party, and the chair serves in that capacity at the pleasure of the President.  Even though the individual members are removable only for cause, these safeguards assure some restraint. 

The constitutional problems would be reason enough to fear the CFPB, but these problems are not merely academic.  The way Director Cordray has wielded his considerable authority demonstrates just how important these checks are.  In the case of PHH, not only did the company suffer from prosecution by an unconstitutionally structured agency, it suffered clear violations of due process.  After PHH appealed a ruling by one of the CFPB’s in-house judges (for further discussion of the problems with such in-house judges, see our filing in Lucia v. SEC), Director Cordray not only applied a brand-new interpretation of a relevant regulation without first providing notice of the new interpretation, he applied that new understanding retroactively to earlier conduct, and based on this retroactive application, increased 18-fold (yes, eighteen-fold) the penalty already assessed by the in-house judge, resulting in a penalty of $109 million.

This has to stop.  The CFPB has an unconstitutional structure, vests enormous power in one individual, and includes no real checks on this power.  We hope that the D.C. Circuit will uphold the earlier finding that the CFPB exists in clear violation of the constitution and that the people have a right to be free of such tyranny.  

Eleven House Republicans are pushing new legislation to provide a pathway to legal status for young immigrants who entered the United States as children—commonly known as “Dreamers.”* Congressman Carlos Curbelo (R-FL) and ten other Republican members introduced Recognizing America’s Children (RAC) Act today (PDF). The bill will benefit the United States economy and provide certainty for a group of young people who are deserving of a humane approach.

The bill would grant conditional legal permanent status to immigrants who have arrived before the age of 16, have been in the United States since January 1, 2012, have graduated high school, and have either been accepted into college or vocational school, applies to enlist in the military, or works with an existing valid work authorization. The conditional status will be cancelled if they become dependent on government, are dishonorably discharged from the military, or are unemployed for more than a year. The conditional status woudl become permanent after 5 years if they graduate from college or vocational school, are honorably discharged from the military or has served for 3 years, or have been employed for at least 48 months.

As my colleague Ike Brannon has noted, the economic benefits of the Dreamers are enormous. His research for Cato about the DACA program that has allowed many Dreamers to live and work legally in the United States concluded that:

the fiscal cost of immediately deporting the approximately 750,000 people currently in the DACA program would be over $60 billion to the federal government along with a $280 billion reduction in economic growth over the next decade.

I have also written about how the claim that the DACA program for Dreamers attracted children to the border causing the unaccompanied child migrant crisis is inaccurate. The numbers show that the crisis began before DACA was ever announced, and that DACA did not change the upward trend in children coming to the border. DACA, nor this bill, will lead to a more insecure border.

President Trump has repeatedly claimed that he wants to treat the Dreamers humanely, calling them as recently as last month “these incredible kids” and saying he would treat them with “great heart.” So far, he’s kept his word not to end the DACA program, but because he promised to end it, it makes sense for him to seize this opportunity and defend this bill that would provide certainty for these immigrants while keeping his promise to end DACA.

*Post originally said eight House Republicans. Three more have signed onto the legislation. 

The system of checks and balances that the Constitution established is an essential safeguard against government overreach. Yet, the ever growing administrative state often undermines fundamental checks and balances. “Fourth branch” agencies frequently take on legislative, executive, and judicial roles simultaneously. And to make matters worse, administrative officials are much less accountable to the people than their counterparts in the traditional three branches.

One especially alarming example of the breakdown of essential separation of powers within the administrative state is the Securities and Exchange Commission’s use of administrative law judges (ALJs). ALJs adjudicate most of the SEC’s enforcement actions. They have the authority to impose significant civil penalties and can bar respondents from working in the securities industry.

The SEC’s use of ALJs to decide important cases violates the Constitutional principle of an independent judiciary. ALJs are housed within the same agency that initiates the proceedings they adjudicate. While notionally independent, the lack of distance between ALJs and the SEC’s enforcement counsel may serve as a source of bias and conflict of interest. The SEC selects the ALJs that hear cases, even though the Supreme Court has deemed it problematic when “a man chooses the judge in his own cause.”

There is also the risk that ALJs may feel pressure, whether explicit or implicit, to support their employer agency.  The SEC’s win rate is better in cases heard by ALJs than cases brought to federal court.  While there may be some selection bias at play, the optics are not good and, in matters of justice, the appearance of injustice can be harmful in itself.

In addition to these separation of powers and due process issues, ALJs are insulated from public accountability, meaning there is very little any elected official can do to check instances of bias or overreach. Cato recently filed an amicus brief in Lucia v. SEC, a case regarding ALJs’ lack of accountability to the public.

The SEC classifies its ALJs as employees rather than officers. Under the Constitution’s appointments clause, federal government officials are divided into two primary categories, officers and employees. All officers in the executive branch are subject to presidential removal power. The president’s power to remove officers that fail to preform their duties is essential for his ability to faithfully execute the law. Presidential removal power is also necessary in order for officers to be held accountable to the public.

Position holders that exercise significant power and discretion therefore must be labeled officers so that the president can carry out the laws and that officials can be held publically accountable. It is for that reason that jurists going back to the Founding understood that the definition of an officer includes any public official who exercises coercive authority over others. It is also why the Supreme Court defined an officer as an official that “excecis[es] significant authority” in Buckley v. Valeo while describing employees as subordinate “lesser functionaries.”

Given that SEC ALJs issue decisions in high impact cases involving significant dollar sums it is hard to argue that they are “lesser functionaries.” Indeed, the Supreme Court has ruled that the holders of similar positions like tax court special trial judges are officers, not employees. But the SEC insists its ALJs are mere employees. It argues that ALJs are not officers because the SEC Commission can review their decisions. However, this claim ignores the role of ALJs in influencing respondents to settle cases before appeal.

The SEC wants to have its cake and eat it too by trying enforcement cases before judges that are not independent yet still insulated from the public. Defendants should have the right to have their cases heard by federal judges, with all the due process protections that implies. But subjecting ALJs to presidential removal power is an important first step towards restoring accountability.    

In his call to repeal the Affordable Care Act, also known as Obamacare, House Speaker Paul Ryan contended “there are two ways of fixing healthcare…have the government run it, ration it, and put price controls…[or] have a vibrant free market where people…go out in a free market place and buy the health care of their choosing.”

A new survey from the Cato Institute finds that 55% of Americans believe “more free market competition among insurance companies, doctors, and hospitals” offers the “better way” to provide affordable high-quality health insurance to people. In contrast, 39% say that “more government management of insurance companies, doctors, and hospitals,” would better achieve this goal.

Respondents sort themselves along partisan lines. A majority (62%) of Democrats including leaners think that more government management of insurance companies, hospitals, and doctors is the better approach to health care reform. In contrast, majorities of non-partisan independents (57%) and Republicans including leaners (84%) think free market competition offers a better alternative.

The divide between Republicans and Democrats widens as they attain higher levels of education. Fifty percent (50%) of Democrats with high school degrees believe that free market competition would better provide high-quality affordable health care. However, this share drops to 17% among Democrats with college degrees—a 33-point swing. The share of Republicans who believe free markets better deliver high-quality affordable coverage increases from 81% among those with high school degrees to 94% among college graduates. Non-partisan independents’ attitudes don't change much with education.

These results are consistent with the theory that partisans become more likely to learn about and accept partisan cues on health care policy as they gain more political information. Independents, on the other hand, feel less inclined to accept partisan cues regardless of their political knowledge.

This is not the only survey which finds Americans prefer a free market approach to reducing costs in health care.  A Kaiser Family Foundation survey found that 51% of Americans thought free market competition would better reduce prescription drug prices than government regulation (40%).

For decades Americans have debated how to best provide access to high-quality affordable health care. Some argue that health care markets operate differently and thus require more government management to ensure people get the care they need. Others contend that, just like in other sectors, injecting free market forces into health care would incentivize lower costs, increase quality, and expand access.

These results indicate public appetite for taking a new approach to health care reform: injecting free market forces into the system in order to provide access to affordable high-quality health insurance.

Women certainly should be celebrated for their many contributions, and “Day Without a Woman” did a little of that and a lot of advocacy for labor policies yesterday. According to the organizer’s website, the strike was intended to “call out decision-makers” on topics like the minimum wage, the gender pay gap, women’s healthcare, vacation time, and child care.

An impartial observer would likely believe that women’s prospects must be quite depressing, given the missed work, public school closures, and street protests that occurred in some U.S. cities. Luckily, American women’s social welfare and economic prospects are better than many strikers realize.

Take female leadership, for example: it would probably surprise Day Without a Woman strikers that 42% of legislators, senior officials, and managers in America are female. This figure is higher than comparable places like Canada, Western Europe, and Eastern Europe. According to World Bank data, the U.S. is at the top of the pack and has been for at least the last decade.

 

Of course, comparisons to less-developed geographies, like Asia, Africa, and the Middle East are substantially more stark. For example, American women outperform Indian women by around 30 percentage points on this female leadership indicator, despite India taking aggressive actions – like reserving one-third of Village Council head positions for women – since the mid-1990’s. 

It may also surprise strikers that American women are successful on various labor market economic indicators. For example, U.S. women participate in the labor force at levels close to or surpassing other developed countries. The percentage of women in the labor force in the U.S. is about tied with Western Europe, a little over 1 percentage point under that of Eastern Europe, and six percentage points higher than the world average. 

When it comes to personal freedom, American women do especially well. Ian Vasquez and Tanja Porcnik’s 2016 Freedom Index uses OECD information on missing women, equal inheritance regulation, parental-rights, freedom of movement, and female genital mutilation to rank countries across three metrics. On each metric, American women score a 10 of 10, and the report ranks overall welfare of North American women close to the highest in the world. 

Finally, take the so-called gender pay gap: though strikers have been led to believe that women make 78-82% of what men make doing the same work, this simply isn’t true. When researchers compare men and women with the same levels of education, years of experience, job title, age, and geography, the pay gap all but disappears.

So, although men and women in the United States are dealing with different social and cultural pressures, and certainly face unique challenges as a result, the average American working woman should be optimistic. In any event, genuine progress on any issue is only possible when we review all of the available facts. When that happens, the picture that emerges empowers females to do more of the bold things that strikers advocate, not less.

One of Donald Trump’s first actions as president was to sign a presidential memorandum freezing federal government employment. But the order specifically exempts certain federal agencies, including all military personnel and all law enforcement. At the same time that he signed this supposed hiring freeze, he also signed an executive order requiring that the hiring of 5,000 new agents for Customs and Border Protection. This increase would ramp up Border Patrol spending to its highest levels ever and do it at a time when the agency is doing less than it has in decades.

First of all, this increase in agents is being proposed a time when the number of border crossers is at record lows. Since 2010, each border agent apprehended fewer than 2 crossers per month, as the figure below shows. This is less than 1 every other week. This figure includes a large number of “apprehensions” of asylum seekers and unaccompanied children who simply turn themselves over to border agents and who made up 1 in 3 apprehensions last year. Thus, the actual number of border crossers that Border Patrol agents needed to race down was just 14 per agent for the entire year. That means that each agent caught on average someone sneaking into the United States once every 26 days in 2016.

At the same time, Congress continues to throw enormous sums at this agency. Border Patrol has spent an average of $172,000 per agent from 2000 to 2016. This amount has fluctuated between a high of $205,000 in 2006 to a low of $146,000 in 2009. The median has been $176,000, and last year’s total was $183,000. Thus, this hiring surge will likely cost almost $1 billion per year. A leaked Border Patrol memo concludes that the costs of “recruiting, hiring, supporting, and training” the new agents will be $328 million in fiscal year 2017 (which ends in October) and $1.884 billion in fiscal year 2018, meaning that the price tag could be even greater than my projection. The GOP Congress has increased the Border Patrol budget in real terms by only $223 million since 2011.

Figure: Apprehensions Per Border Patrol Agent and Border Patrol Budgets (2016$)                                          

 

Sources: CBP(agents), CBP (apprehensions), CBP (Budgets, PCE-adjusted figures)

Any increase of this magnitude will require special appropriations from Congress, meaning that at most the president’s executive order could speed up the hiring of agents provided by Congress. But even still, Border Patrol has struggled to meet its hiring mandate of 21,380 agents as it is. Since 2012, so many agents are leaving the force that the agency has struggled to keep up. “We are not able to hire as fast as attrition,” CBP Commissioner Gil Kerlikowske told Congress last year. He asked Congress to reduce the mandate by 300.

The Inspector General’s office found last year that Border Patrol and CBP “do not have the staff or comprehensive automated systems needed to hire personnel as efficiently as possible,” finding “significant delays in hiring.” Only 1 in 52 applicants make it through the application process, which makes it difficult to speed up hiring. Last time that Congress pressured the agency to rapidly expand, corners were cut on background checks, and internal corruption reviews were cast aside. About 30 applicants admitted that they were sent by drug cartels.

Border Patrol was still trying in 2015 to cut back on the interview process, and the leaked Border Patrol memo from this month shows the agency is still trying to make it easier to hire people with fewer checks. This is despite the fact that an independent advisory council found just last year that Border Patrol was still “vulnerable to a corruption scandal that could potentially threaten the security of our nation.”

Border security has certainly improved, but when Border Patrol agents are doing as little as they are, Congress should be asking itself whether this agency should receive the funds it is currently getting, not whether it should receive even more. It especially should not consider cutting corners to make hires that the agency cannot guarantee are qualified.

During his campaign President Trump made it clear that his administration would strictly enforce immigration law while also seeking to limit immigration. Trump’s executive orders so far are consistent with his campaign rhetoric, including a revitalization of the controversial 287(g) program, threats to withdraw grants from so-called “Sanctuary Cities,” the construction of a wall on the southern border, a temporary ban on immigration from six Muslim-majority countries, and the hiring of 10,000 more Immigration and Customs Enforcement (ICE) agents. Recent reporting reveals that these agents, tasked with implementing significant parts of Trump’s immigration policy agenda, will have access to an intelligence system that should concern all Americans who value civil liberties.

Earlier this month The Intercept reported on Investigative Case Management (ICM), designed by Palantir Technologies. ICE awarded Palantir a $41 million contract in 2014 to build ICM. ICM is scheduled to be fully operational by September of this year.

Here is The Intercept’s breakdown of how ICM works:

ICM funding documents analyzed by The Intercept make clear that the system is far from a passive administrator of ICE’s case flow. ICM allows ICE agents to access a vast “ecosystem” of data to facilitate immigration officials in both discovering targets and then creating and administering cases against them. The system provides its users access to intelligence platforms maintained by the Drug Enforcement Administration, the Bureau of Alcohol, Tobacco, Firearms and Explosives, the Federal Bureau of Investigation, and an array of other federal and private law enforcement entities. It can provide ICE agents access to information on a subject’s schooling, family relationships, employment information, phone records, immigration history, foreign exchange program status, personal connections, biometric traits, criminal records, and home and work addresses.

In addition to access to federal law enforcement databases, ICM at full implementation will, according to 2014 documents, allow users to have access to a wide range of intelligence systems (see Appendix B). These systems include but are not limited to:

  • Falcon - An ICE analytical system designed by Palantir, which allows ICE’s Homeland Security Investigations (HSI) agents “to track immigrants and crunch data on forms of cross-border criminal activity.”

  • Seized Asset and Case Tracking System (SEACATS) - A Customs and Border Protection (CBP) system that tracks arrests, seizures, and property.

  • Student and Exchange Visitor Information System (SEVIS) -  According to the ICE website, SEVIS “is a web-based system for maintaining information on international nonimmigrant students and exchange visitors in the United States.”

  • The Alien Criminal Response Information Management System (ACRIMe) - “an information system used by U.S. Immigration and Customs Enforcement (ICE) to receive and respond to immigration status inquiries made by other agencies about individuals arrested, subject to background checks, or otherwise encountered by those agencies.”

  • Analytic Framework for Intelligence (AFI) - Palantir played a role in developing this system, which, according to one civil liberty expert, can provide the profiling algorithms necessary for the Trump administration to carry out “extreme vetting.”

The picture below from this document will give you some idea of the data available to ICM users.

Although it’s clear the ICM is used as part of immigration enforcement that doesn’t mean that it can’t affect American citizens. As the screenshot from an ICE funding page below shows, American citizens are part of ICM (the highlighting is mine).

You only need to take a fleeting glance at the history of American domestic surveillance to see how law enforcement priorities change. My colleague Patrick Eddington has put together an excellent timeline of surveillance, covering the last one hundred years or so. At the moment, Islamic terrorism and undocumented immigrants are at the forefront of the Trump administration’s law enforcement priorities. But Patrick’s timeline shows that in the last century socialists, pacifists, labor organizers, anarchists, civil rights leaders, Quakers, the ACLU, Japanese-Americans, folk singers, and others have all been the target of government surveillance.

No one knows what federal law enforcement priorities will be in the next few decades, but when we consider tools like ICM we should be aware of the fact that it and similar systems can and will be used on the next surveillance targets, whether they’re gun owners, progressives, conservatives, pro-life/choice advocates, marijuana users, or the many, many other groups that could upset a future Oval Office occupant.

Federal courts criticized President Trump for initially failing to demonstrate that his executive order suspending immigration from several majority-Muslim countries was based on a real threat to the country. In his revised order, President Trump was careful to include specific evidence to support the idea that refugees and immigrants from these countries pose a threat to the United States and that banning immigration temporarily to review vetting procedures is therefore justified.

Yet the president’s evidence, laid out in a single paragraph in the order, is so exceptionally weak that it exposes his security defense as little more than a fig-leaf to cover his blanket discrimination.

  • The executive order provides no evidence for singling out certain countries.

The executive order states:

Recent history shows that some of those who have entered the United States through our immigration system have proved to be threats to our national security.

This vague language provides no estimate of the level of the threat. The Cato Institute’s recent paper on immigration and terrorism risk does estimate that level: a U.S. resident had a 1 in 3.61 million chance of being killed by a foreign-born terrorist from 1975 to 2015. For comparison, a person had a 1 in 14 thousand chance of being killed in a regular homicide. There is simply no evidence of intolerable terrorism risk from the immigration system generally or from these countries in particular. No person from the six banned countries has killed any U.S. resident in a terrorist attack during those years.

Moreover, two Department of Homeland Security assessments have also rejected the argument that certain countries pose a unique threat to national security. The first stated that “country of citizenship is unlikely to be a reliable indicator of potential terrorist activity” because, of the 82 foreign-born individuals who died in pursuit of or were convicted of any terrorism-related offense, “more than half were native-born United States citizens. Of the foreign-born individuals, they came from 26 different countries.” The second assessment concluded that “most foreign-born, U.S.-based violent extremists likely radicalized several years after their entry,” meaning increased vetting would have no impact.

  • The executive order cites convictions that were not for terrorism offenses.

The executive order states:

Since 2001, hundreds of persons born abroad have been convicted of terrorism-related crimes in the United States.

“Terrorism-related” includes any crime that begins with a terrorism investigation. As my colleague Alex Nowrasteh has described, less than half of the 488 cases of foreign-born people with “terrorism-related” convictions—in a list published by Attorney General Jeff Sessions—were actually convicted of a terrorism offense. Mr. Sessions even included thieves who stole a couple of trucks of cereal. Moreover, only 8 percent of the foreign-born residents with terrorism-related convictions (40 people total) actually planned a terrorist attack inside the United States.

  • The executive order cites a case where the individuals were not planning a domestic attack.

But surely these 40 individuals were so dangerous that it makes sense to shut down our immigration system from these places for a while. The executive order provides two examples to attempt to highlight the danger:

… in January 2013, two Iraqi nationals admitted to the United States as refugees in 2009 were sentenced to 40 years and to life in prison, respectively, for multiple terrorism-related offenses.

My colleague Alex Nowrasteh reviewed this case yesterday—two Iraqi interpreters who attempted to send weapons to Iraq to aid insurgents there. First, they were not planning an attack here, and second, even if they were, this new order specifically exempts those who worked for the U.S. government, so this order would not apply to them. Third, President Obama instituted new vetting procedures that would have caught them anyway. If the goal was to frighten the public, this is about the worst case to cite.

  • The executive order cites a case of a person who entered as a child to justify more vetting.

The executive order also provides this example:

… in October 2014, a native of Somalia who had been brought to the United States as a child refugee and later became a naturalized United States citizen was sentenced to 30 years in prison for attempting to use a weapon of mass destruction as part of a plot to detonate a bomb at a crowded Christmas-tree-lighting ceremony in Portland, Oregon.

As I wrote yesterday, the use of this case about a child who came to the United States as a two-year-old thoroughly undermines the argument that this ban is about vetting. This was a failure of assimilation, not vetting. No review of screening procedures will prevent a similar situation. In any case, the would-be bomber never actually had any real explosives. The threat was so remote that the FBI agents were laughing when they arrested him as he was trying to detonate their fake bomb. The FBI called him a “confused college kid that talks mildly radical jihad out one ear, and drugs, sex, drinking out the other.”

  • The order cites “investigations” as a reason for the ban, even though very few investigations turn into convictions.

The executive order states:

The Attorney General has reported to me that more than 300 persons who entered the United States as refugees are currently the subjects of counterterrorism investigations by the Federal Bureau of Investigation.

As I explained in a post yesterday, 99.7 percent of all FBI terrorism investigations end without a terrorism conviction, and 99.95 percent of all FBI investigations end without a terrorism conviction of a person who was attempting to carry out terrorism against the United States. These statistics predict that only 1 in 300 of these investigations will turn into a terrorism conviction and that it will not involve a domestic terror plot.

In any case, these 300 represent less than 0.1 percent of all refugees admitted since 1975. As the Cato Institute’s recent report found, only 20 refugees have planned, attempted, or carried out a terrorist attack in the United States from 1975 to 2015. Only three killed anyone, and all were before 1980. During those years, the annual risk of death to a U.S. resident by a refugee terrorist in the country is 1 in 3.64 billion. The United States is not being threatened by refugees.

Yesterday, John Bolton had an op-ed in the WSJ criticizing the dispute settlement process used at the World Trade Organization.  He argued that this process “is often criticized for failing to deter violations of the WTO’s substantive trade provisions,” and it also exceeds its mandate “by imposing new obligations on one or more parties, particularly against American interests.”  Somehow, then, in his view, the process is both ineffective AND infringes on sovereignty, an impressive achievement.  My colleague Dan Ikenson systematically dismantles the piece here.

Talking about international dispute procedures in the abstract can be a little hard to follow sometimes, but something happened earlier this week that helps illustrate the value of the WTO dispute process.  This is from a Reuters report on an outbreak of bird flu in Tennessee which has led to some U.S. trading partners imposing import restrictions on U.S. products:

Top U.S. chicken and egg companies ramped up procedures to protect birds from avian flu on Monday, a day after the federal government confirmed the nation’s first case of the virus at a commercial operation in more than a year.

The U.S. Department of Agriculture said on Sunday that a farm in southern Tennessee that is a supplier to Tyson Foods Inc. had been infected with the virus. All 73,500 birds there were killed by the disease, known as avian influenza (AI), or have since been suffocated with foam to prevent its spread.

Already, U.S. trading partners, including South Korea and Japan, have restricted shipments of U.S. poultry because of the infection in Tennessee.

There are more details on the import restrictions here.

While some of Trump’s trade policy staff obsesses over trade deficits or the number of Americans working in manufacturing, the practical side of trade policy these days is often about regulatory trade barriers such as these, which are said to be about food safety but are sometimes just disguised protectionism.  In this case, our trading partners definitely have a reason to be concerned.  But are the actions they take in response based on sound science, or is the disease outbreak being used as an excuse for protectionism?  The restrictions may be justified now, but will they be removed when the threat is gone?  That’s one of the core functions of trade agreements:  Detailed rules and a neutral dispute process to decide whether regulatory measures are legitimate or are disguised protectionism.  In fact, the United States filed a WTO complaint against India in 2012 on these same issues, after India imposed restrictions that were purportedly to address concerns about outbreaks of bird flu.

There will continue to be pushback against the Trump administration’s misguided view of trade deficits and economics more generally.  But there is also the practical question of how this administration will approach day-to-day trade concerns like this one.  In the past, the staff at the U.S. Trade Representative’s Office has shown great skill in using the dispute process at the WTO to address these issues.  Hopefully the Trump administration will let them continue to do their work.

With steel industry lawyers and executives populating key trade policy positions in the Trump administration, we are witnessing the return of an old, rusty narrative that portrays the World Trade Organization as unaccountable global government intent on running roughshod over U.S. sovereignty.  On the Forbes website, today, I explain why that is a protectionist canard.

Here are the opening paragraphs:

John Bolton took to the pages of the Wall Street Journal yesterday to assert America’s interest in abandoning international institutions that threaten U.S. sovereignty. In identifying the World Trade Organization’s Dispute Settlement Body as such an institution, Bolton was reinforcing a central theme of the Trump administration’s recently-minted 2017 Trade Policy Agenda. That document is short on specifics, but makes one thing clear: Under threat of going rogue, the United States will leverage its indispensability to compel changes at the WTO that accommodate a more expansive, less surgical application of domestic trade laws.

“Defending our national sovereignty over trade policy” and “strictly enforcing U.S. trade laws” are, explicitly, the top two priorities on the agenda. Taken together, those priorities suggest the Trump administration will aggressively execute U.S. trade laws with little regard for whether that execution violates internationally-agreed rules established to prevent and discourage abuse of such laws. Agreeing that “all animals are equal,” then adding the famous caveat “but some are more equal than others” is what is meant by “defending our national sovereignty.”

Given the prominence of domestic steel industry representation in the Trump administration, these priorities aren’t surprising. High on the list of talking points of the Washington-swamp-savvy U.S. steel lobby is the assertion that the WTO’s DSB, by finding U.S. antidumping and countervailing duty practices in violation of WTO obligations on numerous occasions over the years, usurps U.S. sovereignty over its own laws. This is a complaint frequently made by Robert Lighthizer, Trump’s USTR-designate, who for decades has represented domestic steel interests in AD/CVD cases before U.S. agencies.

And here are the concluding paragraphs:

The prominence of the claim that U.S. sovereignty is threatened reflects the over-representation of steel interests in the Trump administration. It is intended to add credibility to the implied threat that the United States will ignore DSB rulings with which it disagrees unless and until there are changes made to the WTO texts that render compliant the United States’ non-compliant actions on trade remedies.  But it is irresponsible to risk blowing up the system, especially on behalf of an industry that accounts for less than 0.3 percent of the U.S. economy.

The bottom line is that the WTO dispute settlement system, though not perfect, offers a reasonable formula for balancing the simultaneous imperatives of preserving the rule of international trade law and national sovereignty.

But there are many paragraphs in between that I hope you will find time to read here.

If Republicans succeed in slashing the federal corporate tax rate from 35 percent to 20 percent or less, the tax base will expand as investment increases and tax avoidance falls. There is no need for a legislated expansion in the tax base, as the GOP is proposing with its “border adjustment” scheme. The tax base will broaden automatically over time to offset the government’s revenue loss from the rate cut.

New evidence comes from Britain, which has enacted a series of corporate tax rate cuts. A study by the Centre for Policy Studies includes this chart. It shows the tax rate falling from 35 percent to 20 percent since the late 1980s and corporate tax revenues as a percentage of gross domestic product (GDP) trending upwards. As the rate has fallen, the tax base has grown more than enough to keep money pouring into the Treasury.

Does legislated base broadening explain the increase in U.K. tax revenues? Not for the most recent round of rate cuts. In 2010-11, the government collected £36.2 billion from a 28 percent corporate tax. The government expected its corporate tax package—including a rate cut to 20 percent—to lose £7.9 billion a year by 2015-16 on a static basis. That large expected loss indicated that the package had little legislated base broadening. Study author Daniel Mahoney sent me a table confirming that the package included only modest base-broadening measures that were mainly offset by base-narrowing measures.

The government’s dynamic analysis of the corporate tax package projected a revenue loss of about half of the static amount over the long run. But that analysis was apparently too pessimistic: actual revenues in 2015-16 had risen to £43.9 billion. So in five years, the statutory tax rate fell 29 percent (28 percent to 20 percent) but revenues increased 21 percent (£36.2 billion to £43.9 billion). That is dynamic!

Looking at the longer term, the CPS study says, “In 1982-83 when the rate was 52%, corporation tax receipts yielded revenues equivalent to 2% of GDP. Corporation tax now raises over 2.3% of GDP when the headline rate is at just 20%.” The Brits have scheduled a further rate cut to 17 percent.

Canada’s experience also shows that when you slash the corporate tax rate, substantially more profits appear on corporate returns over time. Canada cut its federal corporate tax rate from 28 percent and higher in the 1980s to just 15 percent today, but it collects about the same amount of corporate tax revenues as a share of GDP now as then.

The British and Canadian experiences show that large corporate tax rate cuts lose governments little if any money. There is no need for risky changes to the corporate tax base, as House Republicans are proposing with border adjustments. That approach would disrupt the economy and invite retaliation from our trading partners for no economic gain.

The CPS study suggests that British industry has responded strongly to tax rate cuts, with rising investment and higher wages for workers. That’s what we want here. So Republicans should put aside their complex base-broadening plan, and just slash the corporate tax rate to the British-Canadian range of 15 to 20 percent.

The CPS study is here.

This past Monday, President Trump released a new executive order shutting down the refugee program for 120 days and banning immigration from six majority-Muslim countries for 90 days. President Trump attempted to justify these changes by stating in part that:

The Attorney General has reported to me that more than 300 persons who entered the United States as refugees are currently the subjects of counterterrorism investigations by the Federal Bureau of Investigation.

The government has refused to provide any additional details about these cases, but an investigation should not be seen as implying guilt. Almost all FBI terrorism investigations do not end with a terrorism conviction. Indeed, the numbers predict that of these 300 refugee investigations, only 1 will turn into a terrorism conviction and that conviction will not be for planning an attack against the United States. This claim about the FBI investigating refugees has turned out to be a groundless smear in the past, and history has shown that refugees have been less likely than others to commit acts of terrorism against the United States. 

These 300 represent less than 0.009 percent of all refugees admitted since 1975. As the Cato Institute’s recent report found, only 20 refugees from 1975 to 2015 have attempted, planned, or carried out a terrorist attack inside the United States. Only 3 carried out a deadly terrorist attack, and all of those were before 1980. During the 40 years from 1975 to 2015, the annual risk of death by a refugee terrorist to a U.S. resident was 1 in 3.64 billion. This makes them about 1,000 times less likely to kill a U.S. resident in a terrorist attack than other foreign-born people.

Unfortunately, this type of baseless fearmongering about FBI investigations into refugees is not new. The FBI told ABC News in 2013 that it was investigating “dozens” of refugees as terrorists. In the 26 months after the FBI made the claim, the agency arrested and convicted 31 individuals for “terrorism-related” offenses. Of these, a majority were U.S.-born citizens. Another 4 convictions were not even for terrorism offenses. In the end, the Bureau only arrested and put away for terrorism offenses 9 foreign-born residents total after it claimed “dozens” of open cases against refugees specifically. None of these individuals were planning attacks inside the United States.

So how often do FBI national security investigations actually turn into convictions?

According to the New York Times in 2016, the Bureau has averaged “7,000 to 10,000 preliminary or full investigations involving international terrorism annually in recent years.” This appears to contrast with Reuters, which reported this week that the 300 refugee investigations were part of 1,000 “counterterrorism investigations” into persons tied to “Islamic State or individuals inspired by the militant group.” Similarly, FBI Director James Comey said in May 2016 that there were “north of a thousand cases” that they were investigating of U.S. residents radicalized by the Islamic State online.

The best explanation that I see for this difference is that the Comey/Reuters number refers to a narrower subset of investigations involving the Islamic State and, more importantly, only reflects a snapshot in time. At any particular moment, there may be 1,000 or so investigations open, but there are between 7,000 and 10,000 investigations for the entire year.

This means that very few FBI investigations end in a terrorism conviction. In the 5 years from 2010 to 2014, the entire United States government averaged just 27 terrorism convictions per year. Taking the middle of the 7,000 to 10,000 range for the number of new FBI investigations (8,500) would mean that only about 0.3 percent of all terrorism investigations end in terrorism convictions.* 

If these individuals are involved with terrorism, it is very unlikely that they are attempting to harm the United States as opposed to supporting terror groups abroad. Less than 5 people per year were convicted of terrorism offenses in which they were targeting the United States in the five years from 2010 to 2014. This appears to be true today as well. Director Comey said in May 2016 that his main concern was people seeking to join the Islamic State overseas. This means that only 0.05 percent of all investigations end in the conviction of a person who was attempting terrorism in the United States.

Based on these percentages, we can predict that only 1 in 300 of these investigations will turn into a terrorism conviction and that it will not involve a domestic terror plot.

The FBI should continue to investigate people who it has reason to believe are involved in terrorism, but it is incorrect to assume that an investigation means that the person is guilty of a crime or even likely to be guilty of a crime. It is even more incorrect to jump to the conclusion that they pose a threat to anyone in the United States. The fact remains that refugees are less likely than others to commit acts of terrorism, and these new investigations do not change that fact.

*In the less likely scenario where the FBI opens only 1,000 terrorism investigations annually, 2.7 percent would end in terrorism convictions and 0.5 percent would end with convictions for an offense targeting the U.S. These numbers would predict that of these 300 refugees, only 8 will be convicted of a terrorism offense. Of these, only 1 will have planned an attack targeting people inside the United States.

From Kenneth Boulding, A Reconstruction of Economics (NY, Science Editions 1962) pp. 481-82:

“Economic ethics has been seriously distorted by static and short-run criteria of value. ‘Justice’ has been thought of too much in terms of division of a fixed pie than in terms of encouraging the baking of more pies… .The importance of this problem rests on a matter of simple arithmetic: that if redistribution toward any group causes a fall in the rate of growth of national income, no matter how slight, there will be some date beyond which the absolute income of the favored group will be less than it would have been if the redistribution had not taken place.”

Peter Navarro, director of the newly-established White House National Trade Council, gave a speech last week to the National Association for Business Economics, which he condensed into an opinion piece for the Wall Street Journal. The analytical errors and the fallacies portrayed as facts in that op-ed are so numerous that it is bewildering how a person with a Ph.D. in economics from Harvard University—and a potentially devastating amount of influence within the White House—could so fundamentally misunderstand basic tenets of introductory economics.

Almost every paragraph in the op-ed includes an error of fact or interpretation.  I’ll focus on a few, deferring to others’ noble efforts (Phil Levy, Don Boudreaux, Linette Lopez) at wading through the rest of Navarro’s confused and misinformed diatribe.

Consider Navarro’s portrayal of the national income identity as an economic growth formula.  He claims:

The economic argument that trade deficits matter begins with the observation that growth in real GDP depends on only four factors: consumption, government spending, business investment and net exports (the difference between exports and imports).

The sentence betrays a deep and troubling misunderstanding of the factors of economic growth. Real GDP growth (growth in the total value produced in the economy) depends on increases in the factors of production and increases in the productive use of those factors, which trade and specialization facilitate. What Navarro refers to as the drivers of growth are actually the channels that account for the disposition of our output – what we do with our output.

The national income identify is expressed as: Y=C + I + G + X – M.  It tells us that our national output is either consumed by households (C); consumed by business as investment (I); consumed by government as public expenditures (G); or exported (X). Those are the only four channels that can account for the disposition of national output.  We either consume our output as households, businesses and government or we export it.

Imports (M) are not a channel through which national output is disposed.  We don’t import our output. But M appears in the identity and is subtracted because we consume – as C, I, and G – both domestically produced and imported goods and services.  If we didn’t subtract M in the national income identity, we would overstate GDP by the value of our imports.

But Navarro believes – or wants the public to believe – that the national income identity is an economic growth formula or function, where Y (GDP) is the dependent variable, C,I,G, X, and M are the independent variables, and the minus sign in front of M means that imports are inversely related to (or detract from) GDP.  That’s wrong and a Harvard Ph.D. economist should know that.

Reducing a trade deficit through tough, smart negotiations is a way to increase net exports—and boost the rate of economic growth.

The evidence is overwhelming – month after month, quarter after quarter, year after year – that the trade deficit and GDP rise and fall together. The largest annual decline in the trade deficit ever recorded was between 2008 and 2009, during the trough of the Great Recession. The largest annual increase in the trade deficit occurred between 1999 and 2000, when the economy grew by 4.7 percent – the strongest annual economic growth in the past 33 years.

When the economy grows, households, businesses, and government tend to spend more, and they spend more on both domestic and imported goods and services.  When the economy contracts, there is less spending on both domestic and imported goods and services.  For the past 42 straight years, the United States has registered trade deficits.  In 40 or those 42 years, annual changes in the value of imports and the value of GDP moved in the same direction.

Navarro either believes, or would have the public believe, that imports detract from GDP and that our national security requires all of the gears of U.S. trade policy be put to the service of eliminating our trade deficit. This is a fool’s errand and a Harvard Ph.D. economists should know that.

Suppose America successfully negotiates a bilateral trade deal this year with Mexico in which Mexico agrees to buy more products from the U.S. that it now purchases from the rest of the world. This would show up in government data as an increase in U.S. exports, a lower trade deficit, and an increase in the growth of America’s GDP.

First, note the implication that Navarro expects U.S. trade agreements to include commitments by our trade partners to meet certain outcomes – “…Mexico agrees to buy more products from the U.S.”  This kind of managed trade is unprecedented and utterly defies the purpose and spirit of trade liberalization.  Trade agreements are intended to reduce barriers to competition, not to preempt competition by anointing the winners at the outset.  But, okay, the administration believes it has a mandate to blow things up on the trade front.

But, here’s another problem with Navarro’s scenario.  If Mexico agrees to buy from the United States some of what it now purchases from other countries (Navarro’s key to decreasing the bilateral trade deficit with Mexico), then won’t those other countries have fewer dollars with which to purchase U.S. exports?  Wouldn’t that, all else equal, increase bilateral trade deficits or reduce bilateral surpluses the United States has with those other countries?  Yes and yes.  What Navarro is suggesting is a game of trade policy whack-a-mole. Bilateral trade accounting is utterly meaningless, and a Harvard Ph.D. economist should know that.

Now, what about the investment term in the GDP equation? When U.S. companies offshore their production because of America’s high taxes or burdensome regulations, that shows up in government data as reduced nonresidential fixed investment—and a growth rate lower than it would be otherwise.

Intentionally or not, Navarro is presenting only part of the picture in this example.  If a U.S. company completely shutters operations in the United States and moves those operations offshore, then the expenditures of that business that registered this year in the investment term of the national income identity will not register next year.  Granted.  But Navarro’s example is unrepresentative of the true nature of offshoring, outsourcing, or – as it is called by the Bureau of Economic Analysis – outward foreign direct investment.

First, while shuttering a factory in Indiana and moving the operation rafter-by-rafter, bolt-by-bolt down to Mexico to produce and export back to the United States is the common portrayal and popular perception of outsourcing, such examples are highly unrepresentative of the nature and purpose of outsourcing.  Even though such examples capture the public’s attention, they are the exception and not the rule. 

At the enterprise level, outsourcing and domestic production are not substitutes.  They are complements.  The BEA data reveal that when U.S. multinational corporations invest more in foreign operations (production, assembly, R&D, hospitality service provision, etc.), they invest more in the parent operations at home.  My research shows positive correlations between a U.S. parent companies’ and its foreign affiliates’ capital expenditures (i.e., when a U.S. MNC spends more/less on capital investment in its foreign affiliates, it spends more/less on capital investment in its parent operations), value-added, R&D expenditures, compensation, employment, and compensation per employee. 

The data suggest that when companies shift particular operations abroad, resources are freed up to invest in other company operations stateside.  When U.S. multinationals expand their operations abroad, greater demand is placed on headquarters and other complementary operations in the United States, which results in new domestic investments as well.

Meanwhile, Navarro’s example precludes discussion of the opposite of outsourcing – insourcing.  The trade deficits Navarro so desperately wants to curtail are the sources of massive amounts of inward foreign direct investment.  When we run trade deficits, foreign companies have more resources to invest in U.S. operations, which increase the value of the investment component of the national income identity.  In 2016, the stock of foreigners’ (mostly Western Europeans, Canadians, and Japanese) investments in U.S. manufacturing was valued at $1.2 trillion – more than twice the amount of FDI in Chinese manufacturing.  And foreign companies operating in the United States directly employed over 6.4 million American workers.

When writing about the effects of trade and investment on GDP, it is inadequate and misleading to focus on one part of one side of the ledger. A Harvard Ph.D. economist should know that.

Justice Clarence Thomas yesterday signalled that the abusive practice of civil asset forfeiture is ripe for expanded constitutional scrutiny.

The case is Lisa Olivia Leonard v. Texas.  James Leonard (the petitioner’s son) was stopped by police for a traffic infraction in 2013 “along a known drug corridor.”  Police searched Mr. Leonard’s vehicle and discovered a safe containing $201,100 and the bill of sale for a home. Arguing that the money was either proceeds from a drug sale or going to be used in such a sale, the state initiated forfeiture proceedings and took the money.  The safe actually belonged to James’ mother Lisa, who brought suit to protect her property from the government seizure.

The Supreme Court denied certiorari for procedural reasons, but Justice Thomas had some harsh words for civil forfeiture anyway, and suggested that it’s time for the Supreme Court to take another look at the practice:

Civil proceedings often lack certain procedural protections that accompany criminal proceedings, such as the right to a jury trial and a heightened standard of proof.

Partially as a result of this distinct legal regime, civil forfeiture has in recent decades become widespread and highly profitable. And because the law enforcement entity responsible for seizing the property often keeps it, these entities have strong incentives to pursue forfeiture.

This system - where police can seize property with limited judicial oversight and retain it for their own use - has led to egregious and well-chronicled abuses…

Justice Thomas also noted the disparate impact these types of abuses have on the poorest and most vulnerable communities:

These forfeiture operations frequently target the poor and other groups least able to defend their interests in forfeiture proceedings.  Perversely, these same groups are often the most burdened by forfeiture. They are more likely to use cash than alternative forms of payment, like credit cards, which may be less susceptible to forfeiture. And they are more likely to suffer in their daily lives while they litigate for the return of a critical item of property, such as a car or a home.

The opinion goes on to explain that while the court has historically upheld the constitutionality of civil forfeiture, the modern practice of forfeiture has strayed far from its narrow historical use and purpose:

I am skeptical that this historical practice is capable of sustaining, as a constitutional matter, the contours of modern practice, for two reasons.

First, historical forfeiture laws were narrower in most respects than modern ones. Most obviously, they were limited to a few specific subject matters, such as customs and piracy. Proceeding in rem in those cases was often justified by necessity, because the party responsible for the crime was frequently located overseas and thus beyond the personal jurisdiction of the United States courts. These laws were also narrower with respect to the type of property they encompassed. For example, they typically covered only the instrumentalities of the crime (such as the vessel used to transport the goods), not the derivative proceeds of the crime (such as property purchased with money from the sale of the illegal goods).

Second, it is unclear whether courts historically permitted forfeiture actions to proceed civilly in all respects. Some of this Court’s early cases suggested that forfeiture actions were in the nature of criminal proceedings…

Lastly, while agreeing with the Court’s refusal to hear the case for procedural reasons, Justice Thomas nonetheless expressed his interest in taking another look at civil forfeiture:

Whether this Court’s treatment of the broad modern forfeiture practice can be justified by the narrow historical one is certainly worthy of consideration in greater detail.

In his opinion, Justice Thomas refers to the Institute for Justice’s Policing for Profit survey of forfeiture laws around the country, and also to Sarah Stillman’s expose Taken, documenting several instances of forfeiture abuse. Both of those sources are worth reading for a better idea of just how bad the incentives of civil forfeiture are and the abuses that have resulted.  

It’s heartening to have a Supreme Court Justice so squarely acknowledge and raise questions about a predatory government practice that has proceeded unchecked for so long.

One of the most common questions I receive when I talk about civil asset forfeiture is “why does the Supreme Court allow this?” My answer has always been “because these laws predate the country and the court has never seen fit to re-examine them.”  

This opinion is a clear signal that at least one member of the Supreme Court is ready to take a fresh and skeptical look.

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