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The chair of the White House Council of Economic Advisors, Kevin Hassett, visited Cato last week to talk about tax reform. Under Kevin’s leadership, the CEA has produced two reports discussing how corporate tax cuts can boost wages and growth.

The CEA explains the basic mechanism:

reductions in the corporate tax rate incentivize corporations to pursue additional capital investments as their cost declines. Complementarities between labor and capital then imply that the demand for labor rises under capital deepening and labor becomes more productive. Standard economic theory implies that the result of more productive and more sought-after labor is an increase in the price of labor, or worker wages.

And discusses how lower taxes attract investment from abroad:

One component of investment is foreign direct investment (FDI), and numerous empirical studies … have observed that FDI is highly responsive to cross-border differences in tax rates.

And describes how high corporate taxes hurt workers in the global economy:

The fact that capital can move relatively easily across borders while labor cannot serves to intensify the burden of the corporate tax on workers.

Essentially, the CEA studies update Adam Smith with new empirical data. Writing in his Wealth of Nations, Smith described how heavy taxes on mobile “stock,” or capital, in a world with open borders would cause losses to workers and the broader economy:

Secondly, land is a subject which cannot be removed, whereas stock easily may. The proprietor of land is necessarily a citizen of the particular country in which his estate lies. The proprietor of stock is properly a citizen of the world, and is not necessarily attached to any particular country. He would be apt to abandon the country in which he was exposed to a vexatious inquisition, in order to be assessed to a burdensome tax, and would remove his stock to some other country where he could either carry on his business, or enjoy his fortune more at his ease. By removing his stock he would put an end to all the industry which it had maintained in the country which he left. Stock cultivates land; stock employs labour. A tax which tended to drive away stock from any particular country, would so far tend to dry up every source of revenue, both to the sovereign and to the society. Not only the profits of stock, but the rent of land and the wages of labour, would necessarily be more or less diminished by its removal.

Today, people have much greater ability than in Smith’s time to move their capital across borders, and so taxes on capital are more damaging than ever.

Veronique de Rugy and I discussed these issues in a 2002 paper on international tax competition. Fifteen years later, it is gratifying that Congress may finally make reforms to attract capital rather than repel it.

In our recent study on the Low-Income Housing Tax Credit (LIHTC), Vanessa Brown Calder and I discussed how subsidized housing projects usually cost more than market-based ones. There is more bureaucracy, more delays, and more micromanagement of building requirements. As in education or health care, government intervention in housing undermines cost control.

This article discusses San Diego’s efforts to supply subsidized housing, and it focuses on the cost problem. The article discusses projects financed by a combo of the LIHTC and other programs, which is apparently called a “funding lasagna.” But a “subsidy lasagna” might be more accurate.

By any measure, the city government’s efforts to help low-income families are far behind the demand for subsidies, and losing ground.

High cost has been a major factor. In recent years the public has paid luxury price tags for a handful of subsidized construction projects, draining money to build more apartments.

“They are building Cadillacs,” said Alan Nevin, director of economic and market research at Xpera Group, a building-industry consulting group.

This outcome flows from a system that evolved over years to build projects whenever public money pops up, and isn’t necessarily focused on reducing costs or producing the maximum number of apartments.

The most extreme example of high-end cost is found in Barrio Logan, according to figures provided by the San Diego Housing Commission.

Operating under a city contract, developers spent $46.2 million from federal, state and local sources to build 92 apartments at the Estrella del Mercado on National Avenue, which was completed in 2012. That works out to $502,000 per apartment.

Setting aside the Mercado project, price tags of $400,000 per subsidized unit in new complexes are the rule lately, particularly downtown. This places public housing in the same league as luxury apartments downtown, and 35 percent higher than midrange private projects in other urban neighborhoods.

Higher costs in the public sector have multiple causes. Land prices play a role, because officials want to place subsidized projects in high-cost areas. This allows low-wage workers to live near jobs.

And developer fees are much higher. Unlike private apartment builders, who count on years of rising rent to recover their investments, developers of subsidized housing require the bulk of their profits up front, because they face 55 years or more of below-market rents.

These developers must submit bids to a state agency, but those who prevail typically are chosen based on added features rather than low cost.

A third factor is government requirements. Officials typically insist on solar energy features, meeting rooms and long-lasting exteriors that aren’t always included in private developments.

In 2011, the housing commission hired Keyser Marston Associates, an industry consultant, to compare three recent subsidized projects to the costs of nearly identical developments in the private sector. The study focused on construction and development — excluding land costs.

At the Mercado, Keyser projected costs totaling $388,300 per subsidized apartment, or 31 percent more than the $297,000 price tag for an equivalent complex built for the market.

The San Diego Union-Tribune article is here.

Our study is here.

The House and Senate have passed bills cutting the federal corporate tax rate from 35 to 20 percent. This overdue reform will spur capital investment, strengthen the economy, and reduce tax avoidance. Republicans have long championed this reform, and President Trump had proposed an even lower rate.

So it was surprising that the president commented Saturday that a 22 percent rate would be fine. That would be snatching a defeat from the jaws of victory. Congressional Republicans should stick with their 20 percent. Senator Marco Rubio is incorrect that there is no economic difference between a 20 and 22 percent rate. Economics is all about decisions at the margin, and in an increasingly competitive world, every cost reduction for American businesses helps.

Policymakers need to remember that in America state taxes pile on top of federal. So while in Britain the federal rate of 19 percent is also the overall rate, our overall rate in California would still be 27 percent even as we cut our federal rate to 20.

A Council of Economic Advisors Report on corporate taxes noted that international investment flows are “highly responsive to cross-border differences in tax rates.” And further that “an additional margin along which changes in corporate tax rates are likely to affect growth is through profit shifting by U.S. firms to foreign subsidiaries … This profit-shifting has increased substantially since the 1990s.”

So for more investment flowing in, and less paper profits flowing out, we should cut our corporate tax rate as low as we can. Most other countries have figured this out, as the chart below shows.

According to KPMG, the average corporate tax rate across 171 countries today is just 24 percent. The United States with a federal-state rate of 40 percent is the outlier at the top of the chart. Rates have fallen in Africa, Asia, Europe, and Latin America. American businesses generally face their biggest competition from businesses in Asia and Europe, and those are the regions with the lowest rates.

Claims for unconstitutional takings of property against state actors should not be treated differently than other fundamental rights claims and relegated to second-class status. Thirty years ago, in Williamson County Regional Planning Commission v. Hamilton Bank, the U.S. Supreme Court pronounced a new rule that a property owner must first sue in state court to ripen a federal takings claim. As illustrated by Knick v. Township of Scott, Pennsylvania, in which Cato has filed a brief supporting the property owner’s petition to the Court—joined by the NFIB Small Business Legal Center, Southeastern Legal Foundation, and Beacon Center—this radical departure from historic practice has effectively shut property owners out of federal courts without any firm doctrinal justification.

Rose Mary Knick owns 90 acres in Scott Township in western Pennsylvania, a state known for its “backyard burials.” In 2012 a new ordinance required all “cemeteries” be open and accessible to the public during daylight hours. It also allowed government officials to enter private property to look for violations. In 2013, township officials entered Ms. Knick’s property without her permission and—after finding old stone markers on her property—cited her for violating the cemetery code. Fines are $300-600 per infraction per day. Ms. Knick took the township to court; the state court dismissed her claims as improperly “postured” because the township had not yet pursued civil enforcement to collect the fines. When Ms. Knick then turned to federal court, the district court dismissed her constitutional claims, citing Williamson County’s state-litigation requirement. The U.S. Court of Appeals for the Third Circuit affirmed this Kafkaesque process.

The failed attempt to gain meaningful review of a facially unconstitutional ordinance showcases the unique challenges faced by property owners asserting takings claims. If filing in state court, the best they can hope for is review from a judge who may be friendly to the government defendants responsible for the taking. And when pursuing that state-court remedy, property owners face the possibility of “removal” by defendants to federal court—where that court then dismisses the claims precisely because the property owner failed to fully pursue state litigation! Adding insult to injury, if a property owner complies with Williamson County’s requirement by seeking redress in state court, but receives an unfavorable decision, a combination of procedural barriers prevents federal courts from revisiting the claims.

The Fourteenth Amendment, which explicitly protects life, liberty, and property, cannot tolerate this state of affairs. And there is no reason to believe that this anomalous treatment of takings claims is what the Reconstruction Congress had in mind when, in the face of pervasive state abuse, it enacted the federal statute (42 U.S. § 1983) that guarantees access to federal forums to vindicate federal constitutional rights. As an unsound and impractical rule, Williamson County’s state-litigation requirement has earned a burial of its own in the graveyard of discarded precedent. 

The Supreme Court should take this case.

It’s never smart to bet on the outcome of Supreme Court cases, but if I had to wager on the big federalism case disguised as a dispute over sports books, I’d double-down on New Jersey in its fight against professional sports and the U.S. government. In Christie v. NCAA, argued this morning, I’ll give decent odds that the state will prevail on its claim that the federal law that prevents states from legalizing sports-betting is unconstitutional because it “commandeers” state officials to enforce federal policy. By my best count, the vote should be 6-3, with Justices Ruth Bader Ginsburg, Sonia Sotomayor, and Elena Kagan in dissent.

Most striking was Justice Anthony Kennedy’s first question to the sports leagues’ super-lawyer Paul Clement. To paraphrase: How can it be that states don’t want a particular state law and Congress tells them they can’t repeal it? Justice Kennedy is known for being a big fan of constitutional structure as a goalkeeper of individual liberty, so if he views this as that kind of case, then here he will not be the “human jump-ball” of his critics’ description.

The newest member of Supreme Court bar discusses the argument.

Chief Justice John Roberts had similar qualms about the plays that the federal law’s defenders ran. Is it really the case, he seemed to say, that sports-betting becomes federally illegal only if made legal under state law? In other words, it’s a constitutional end-run for Congress to tell states they have to maintain bans rather than enacting a federal ban (assuming that’s within the lines of the Interstate Commerce Clause).

Perhaps the biggest tell regarding this case’s outcome was provided by Justice Stephen Breyer, who tends to wear his cards on his (robe’s) sleeve. During the opening drive by Ted Olson, lawyer for the Garden State and Clement’s former boss from the early Bush years, Breyer restated the bizarre nature of a federal law that purports to regulate states instead of individuals.

It’s possible that the vigorish argument by the deputy solicitor general Jeff Wall (my law school classmate) on behalf of the United States could give some of the justices pause, but his skilled working of the refs will likely fail to change the bottom-line result on the scoreboard.

One last-minute note: Before argument, Olson moved the admission of New Jersey Governor (and name plaintiff) Chris Christie to the Supreme Court bar. I look forward to seeing the guv around the water cooler in the lawyers lounge, where we can discuss a case that alas will no longer bear his name. Christie’s term ends Jan.16, so when the Court comes down with its decision, it will be announced as Murphy v. NCAA.

In case you missed it over the weekend, Cato scholar Ryan Bourne wrote about the Republican tax reform plan in an op-ed featured in The Hill. He responds to the argument that corporations will use money saved from the reduction in the federal corporate tax rate to increase dividends, buy back shares, or other strategies that benefit their shareholders. 

Major companies, including Cisco Systems, Pfizer and Coca-Cola, have said they will use most of the gains from proposed corporate rate cuts to increase dividends to shareholders or buy back their own shares. This has been reported and shared on Twitter as a slam dunk against the Republican tax plan.

After all, a major claim of the administration has been that corporate rate cuts would benefit workers through wage rises, rather than flowing exclusively to capital owners.

Yet, the reaction of these companies is nothing unexpected, at least in the short term. Any substantial cut to the corporate rate provides an immediate windfall to so-called “old capital.”

But even though the initial beneficiaries of changes in the corporate tax rate will indeed be corporate shareholders, Bourne points out that those savings have to go somewhere. 

If existing firms have excess capital in the short-term, distributing it to shareholders in some way makes sense. This money is unlikely to sit dormant afterwards. In all likelihood, that money will be deployed elsewhere to find new value.

The market for growth industries through venture capital and angel investment is huge, and these windfalls can be invested in the start-ups and industries of the future.

The key point though is that the lower corporate rate improves the after-tax profitability of investment across the economy, and as such generates new activity. Other things given, domestic companies will have greater incentive to invest.

Foreign companies will be more likely to expand their investments in the U.S. — or even shift their operations here. U.S. companies will repatriate profits earned by their foreign subsidiaries rather than leaving them abroad, and more capital will flow from other less productive U.S. sectors into the U.S. corporate world. 

Read the op-ed here

Terance Gamble was convicted of second-degree robbery in Alabama in 2008. That’s a felony, so he was barred from possessing a firearm under both federal and state law. Seven years later, Gamble was pulled over for a broken taillight. Smelling marijuana, the police officer searched the car and found, among other things, a 9mm handgun. Alabama prosecuted Gamble under its “felon-in-possession” statute and he was ultimately sentenced to a year in prison. Concurrent with the state’s prosecution, however, the U.S. attorney charged Gamble with the same offense under federal law. He was sentenced to 46 months in prison and will be released early in 2020, nearly three years after he would have been released from state prison.

At both the trial and appellate level, Gamble argued that the federal prosecution violated his Fifth Amendment right against being placed twice in jeopardy for the same crime. But given the “dual sovereignty” exception to that Double Jeopardy Clause, which the Supreme Court created 60 years ago—the idea that federal and state prosecutions have to be counted separately—the courts had to ignore that objection. Cato has joined the Constitutional Accountability Center in filing a brief urging the Court to review Gamble’s case and overturn this misguided exception—as we’ve done before in Walker v. Texas and Tyler v. United States, which presented the same issue.

We make three principal arguments. First, none of the Framers would have contemplated such a large exception to Double Jeopardy protection. Even before the Founding, English jurist and legal theorist William Blackstone wrote that it was considered a “universal maxim of the common law of England, that no man is to be brought into jeopardy of his life, more than once, for the same offence.” And in congressional debates before the enactment of the Fifth Amendment, Rep. Roger Sherman observed that “the courts of justice would never think of trying and punishing twice for the same offence.” Second, the practical magnitude of the dual-sovereignty exception is much greater today than it was 60 years ago. For most of our nation’s history, the federal government left most criminal matters to be handled by the states; there were relatively few offenses punishable by both authorities. But in recent decades, there has been “a stunning expansion of federal criminal jurisdiction into a field traditionally policed by state and local laws,” as Justice Clarence Thomas wrote in dissent in Evans v. United States (1992). Now that nearly every state crime has a federal analog, the dual-sovereignty exception risks entirely swallowing the Double Jeopardy rule. Finally, the Supreme Court created the dual-sovereignty exception a decade before it held that the Double Jeopardy Clause fully applies to the states. Now that we know that it does, there’s no reason why a state prosecution shouldn’t “count” when a defendant objects to having been prosecuted twice.

As Justice Hugo Black once put it, also in dissent, “If double punishment is what is feared, it hurts no less for two ‘Sovereigns’ to inflict it than for one.” Bartkus v. Illinois (1959). The Court should take this common-sense advice and put an end to the misguided dual-sovereignty exception, at least as it works in practice in modern times.

The outrage du jour is a newspaper column entitled “Your DNA is an Abomination” published by a student newspaper at Texas State University. The case is no doubt difficult politically and practically for the people involved. But it really is not an interesting case concerning free speech. As Nancy Reagan said, we should “just say no.”

The column was taken down from the newspaper’s website. It should not have been. How can the rest of us assess its arguments absent an authoritative version of the writing? The student body president has called for defunding the student newspaper. He should not be advocating punishing speech he does not like. A few hundred people have signed an online petition calling for the paper to be defunded. But let’s say I proposed an online petition to take away the right to petition the government “for redress of grievances.” If several hundred people sign my petition, would it be right? No, it would deeply offend the First Amendment.

Texas State President Denise M. Trauth has said the column was “racist” and said its themes were “abhorrent.” So far so good. She is responding to speech with more speech. But she also said, “I expect student editors to exercise good judgment in determining the content that they print.” That is a sensible view but also could be taken as a threat. The president adds, “The Star’s editors have apologized for the column and are examining their editorial process.” But what exactly went wrong in the editorial process? And what precisely are the editors apologizing for? The main issue seems to be that the essay offended or angered people. Of course, Paul Robert Cohen’s jacket that said “F— the Draft” angered and offended people. It was protected speech. Gregory Lee Johnson offended many people (including a couple Supreme Court justices) by burning an American flag. His symbolic speech was also protected by the First Amendment. Living in a free society means you risk occasionally being angered or offended. The important thing is that we can have a reasoned debate about whatever the content of this essay was.

Now imagine there was a “hate speech” exception to the First Amendment. Would such an exception allow public officials to censor “Your DNA is an Abomination?” The author apparently wrote:

Ontologically speaking, white death will mean liberation for all. To you good-hearted liberals, apathetic nihilists and right-wing extremists: accept this death as the first step toward defining yourself as something other than the oppressor. Until then, remember this: I hate you because you shouldn’t exist. You are both the dominant apparatus on the planet and the void in which all other cultures, upon meeting you, die.

So does using the verb “hate” in regard to a group of people constitute “hate speech?” Or are such statements only subject to censorship if the speaker is an “oppressor” but not if they are one of “the oppressed?” Who decides which speakers belong in which categories and thus who can use the verb and who cannot? The courts? Legislatures?

We do know this. Absent a hate speech exception to the First Amendment, this essay has been pulled from a website, its editors have apologized, and the highest-ranking public official involved seems to be obliquely threatening the newspaper and the author of the essay. If “hate speech” were not protected by the Constitution, what would have happened?


While U.S. trade policy under the Trump administration has become a confusing mix of bluster, posturing, threats, and uncertainty, China has gone in the other direction, at least incrementally by lowering some of its tariffs unilaterally. On November 24, China’s Ministry of Finance announced that it would cut tariffs on 187 consumer products. The lower duty rate took effect on December 1, so Chinese consumers are now benefitting from more competition and lower prices. As noted in the announcement, the average tariff on the covered products will be brought down from 17.3% to 7.3%. To give some specific examples, the tariff on cosmetics will be reduced from 10% to 5%; 30% to 10% for electronic toothbrushes; 32% to 10% for coffee makers; and 20% to 10% for mineral water. Baby formula and diapers will no longer face tariffs at all, dropping from 20% and 7.5%, respectively.

Of course, China is far from perfect on trade policy. There is plenty of Chinese industrial policy and protectionism remaining. The World Trade Organization can probably handle more of these trade practices than people think, but new rules may be necessary to deal with certain issues.

Nevertheless, the tariff reduction is a positive development. Commentary on this policy change suggests that the Chinese government’s goal here was, in part, to satisfy the demand of Chinese consumers and to improve the efficiency of Chinese production by introducing foreign competitors. These days, it is nice to see any government basing decisions on this kind of thinking. (And it may contribute to China soon becoming the world’s largest importer, as one report suggests.)

One can imagine that the Trump administration would try to take credit for this tariff reduction. All that badgering of China paid off, right? In reality, this is the fourth tariff cut since 2015. The previous three tariff cuts reduced tariffs on 152 consumer products totalling $11 billion per year in imports. This time the tariff cut has an even broader impact: Imports under this tariff cut are valued at up to $14 billion per year.

While a unilateral tariff cut is always welcome, it is worth noting that taking action unilaterally also means the tariff cut is not bound by an international agreement, and therefore the decision can be reversed at any time. For greater stability and predictability, these tariffs cuts could be incorporated in a trade agreement, as some other countries have already negotiated with China, and which the United States should consider as well. This would provide the predictable and stable framework both businesses and consumers need. 

It isn’t very often that free traders at the Cato Institute and the anti-corporate left agree on matters of trade policy. We free traders oppose barriers and subsidies and seek straightforward, nonintrusive rules to ensure an equality of opportunity for businesses, workers, investors, and consumers. The left tends to see those rules as asymmetrically beneficial to business and seeks to leverage trade barriers and subsidies to achieve what it defines as a greater equality of outcome. Those fundamental differences explain why you would see very little overlap in a Venn diagram depicting the policy objectives of Cato’s trade center and, say, Joseph Stiglitz or Public Citizen’s Global Trade Watch.

But a shaded intersection does exist. It exists because free traders are not “pro-business” to the left’s “anti-business.” We are “pro-market.” Accordingly, we are skeptical of rules or policies that tip the scales in favor of one interest group over another. That’s called protectionism. 

Investor-State Dispute Settlement (ISDS) is one such example. ISDS provisions are intended to ensure that foreign investors—usually companies that have acquired or established operations abroad—are protected from actions or policies of the home government that fail to meet certain standards of treatment and that cause the investor economic harm. ISDS confers special legal privileges on foreign-invested companies, including the right to sue host governments in third-party arbitration tribunals and win damages for failing to meet those standards. 

One might immediately understand why the left would take issue with special provisions that enable multinational corporations to challenge governments’ efforts to regulate them, but there are many problems with ISDS from a free-market perspective, as well. 

Join us tomorrow on the Hill for a discussion. Panelists include:

  • Joseph Stiglitz, Nobel Prize-winning economist and professor at Columbia University
  • Dan Ikenson, director of Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies
  • Bruce Fein, Fein & DelValle, PLLC constitutional law expert and associate deputy attorney general under President Ronald Reagan
  • Lori Wallach, director of Public Citizen’s Global Trade Watch
  • Moderator: Adam Behsudi, trade reporter for Politico


Democrats have been relentlessly attacking the pro-growth elements of the GOP tax bills, such as the corporate tax rate cuts. They label efforts to improve incentives for working and investment as “trickle-down economics.”

Here are some recent examples:

  • Sen. Pat Leahy (here): “Even these huge corporate tax cuts are not structured in a way that would truly encourage investments here at home and boost workers’ wages.”
  • Sen. Kirsten Gillibrand (here): “After the tax plan was released, a lot of talking heads on TV dredged up the talking points about the virtues of “trickle-down economics”—the myth that if only corporations had more money, it would help everyday American families.”
  • Rep. Tim Ryan (here): “Instead of fixing our broken tax system, the so-called tax ‘reform’ legislation the Republican Majority just rushed through the House relies on the same supply-side, trickle-down economics that has failed in the past.”
  • Rep. Nancy Pelosi (here): “Their trickle-down economics has always been in their DNA. It has never created jobs…”

The House and Senate tax bills include numerous provisions that will not spur growth. But there are plenty of supply side elements as well, and they received support in yesterday’s Joint Committee on Taxation (JCT) dynamic modeling report.

Here are a few findings:

  • “Overall, the net effect of the changes to the individual income tax is to reduce average tax rates on wage income by about one percentage point, while reducing effective marginal tax rates on wages by about 2.4 percentage points.” The marginal rate cuts “provide strong incentives for an increase in labor supply.”
  • “The projected increase in GDP during the budget window results both from an increase in labor supply, in response to the reduction in effective marginal tax rates on wages, and from an increase in investment in response to the reduction in the after-tax cost of capital.”
  • “The macroeconomic estimate projects an increase in investment in the United States, both as a result of the proposals directly affecting taxation of foreign source income of U.S. multi-national corporations, and from the reduction in the after-tax cost of capital in the United States due to more general reductions in taxes on business income.”

So the JCT views GOP efforts to reduce marginal tax rates and improve investment incentives with favor. The problem is that many of the proposed tax changes would add to deficits and not spur growth, combined with the JCT’s off-base assumptions about “crowding out.” The JCT assumes large reductions in investment as deficits from tax cuts supposedly raise interest rates.

J.D. Foster challenges those assumptions here. He notes, “The national debt doubled, and then doubled again, under President’s George W. Bush and Barack Obama, respectively, while real interest rates remain astounding low.” Despite that, the JCT assumes that a modest increase in borrowing for tax cuts would raise interest rates so much that it would choke off investment.

That does not make sense. The solution is to combine tax cuts with spending cuts to limit deficits, and to focus more of the tax changes on pro-growth reforms.

There’s yet more strangeness afoot in the world of financial regulation.  No, it’s not the CFPB this time.  It’s the generally more staid Securities and Exchange Commission (SEC).  Earlier this week, the Department of Justice weighed in on Lucia v. SEC, a case challenging the constitutionality of the SEC’s in-house judges, known as Administrative Law Judges (ALJs).  What is strange is that the DOJ sided with Raymond Lucia and against the SEC.  Seemingly in response, the SEC took action and ratified the appointment of its ALJs, a move it had been resisting for some time. 

The case is currently with the Supreme Court where the Court is considering whether it will hear and decide the matter.  The question is whether ALJs are “mere employees” or are instead “inferior officers.”  If the latter, their appointment is subject to the appointments clause in the Constitution, which permits Congress to “vest the appointment of such inferior officers, as they think proper, in the President alone, in the courts of law, or in the heads of departments.”  Since the process for appointing ALJs has (until recently) not been done by any of these, if they are indeed inferior officers, their appointment would be unconstitutional. 

Cato has filed an amicus brief in support of Lucia.  Given the great discretion that ALJs wield – hearing and ruling on both the admissibility and credibility of evidence, presiding over hearings, and issuing opinions – it is strange to say they are not inferior officers.  Resting on the finality of the decisions alone seems insufficient.  And indeed in another case arguing the same issue, whether SEC ALJs are inferior officers, a federal appeals court in Colorado ruled that they are.  Since there is now a circuit split, with appeals courts in two circuits issuing opposite rulings, it seems likely the Supreme Court will hear the case to decide the issue.

The appeal to the Supreme Court is of a decision by the federal court of appeals in D.C., which ruled that, because ALJs’ opinions are not final and can be reviewed by the SEC commissioners, the ALJs are not in fact inferior officers.

The problem for the D.C. Circuit Court of Appeals is that it already ruled on this question.  In Landry v. FDIC, the D.C. Circuit found that ALJs at the FDIC are not inferior officers because their opinions are not final.  This is the case on which the D.C. Circuit relied in Lucia.  Landry was also appealed to the Supreme Court, but the Court did not take it up. 

Speaking of Landry. When Landry was pending before the Supreme Court, just as Lucia is now, the Department of Justice weighed in on that case, just as it did recently in Lucia.  But that time, the DOJ sided with the FDIC, arguing that the lack of finality in ALJ decisions makes them mere employees and not inferior officers.  Exactly the opposite of what DOJ is now arguing in Lucia.

Although it is generally unusual for the government to be on both sides of a case, it is not the first time this DOJ has weighed in opposite a government agency.  In another case that is still pending before the D.C. Circuit, the DOJ submitted a brief in support of PHH, a mortgage company challenging the constitutionality of the structure of the CFPB.  PHH has argued that the CFPB’s structure, with a single director at its head that is arguably not removable except for cause by the president, is unconstitutional.  Cato has also submitted a brief in this case, supporting PHH’s challenge to the CFPB’s structure. 

Both PHH and Lucia present similar threats to executive power and in both cases the DOJ is making a similar argument: certain structures in each limit the president’s ability to fulfill his constitutional duty to “take care that the laws be faithfully executed.”  In the case of the CFPB, it is the president’s inability to remove the director except for cause that DOJ argues frustrates the president’s ability to fulfill his duty.  In the case of the SEC, it is both the fact that ALJs are not directly appointed by the head of the SEC (who are in turn appointed by the president) and that they are subsequently only removable for cause that limits the president’s authority.

I am certainly not one to argue for an overly powerful executive.  However, the president is at least an elected official and therefore accountable to the people.  As I have argued (over and over again), the structure of the CFPB offers almost no accountability to the people, and the SEC’s method for selecting ALJs has presented similar issues.

So has the SEC fixed the problem by ratifying the appointment of its ALJs?  Sort of, but it may have caused other problems.  The question of whether ALJs are properly appointed has been percolating for awhile.  There are likely two reasons that the SEC didn’t just ratify the ALJs’ appointments when the issue arose.  First, the ratification could be seen as an admission that ALJs were not previously appointed properly, and it could therefore call into question all decisions already issued by SEC ALJs in the past.  Indeed, Lucia’s case remains live because the ALJ issued the opinion in that case before the ratification.  Second, the SEC has only five of the more than 2,000 ALJs in various federal agencies, who are selected through the same process.  Admitting that the SEC’s ALJs are not properly appointed could call into question both the appointment of and decisions made by the thousands of other ALJs throughout the federal government.  The SEC’s action may therefore had wide-ranging consequences in the days and months ahead.

Beyond the highly technical question of whether ALJs have been properly appointed is the bigger question of whether their current employment at enforcement agencies like the SEC is good policy.  In many cases, there is concurrent jurisdiction between ALJs and federal courts.  Federal courts, of course, are established under Article III of the constitution and are subject to certain safeguards as our judicial branch.  Allowing the government’s lawyers to choose whether to bring a case against someone in federal court or before the agency’s own ALJ, while the defendant has no such option, presents if not a question of actual constitutional due process at least a question of fairness.  That, however, will be a fight for another day as it is not a question presented to the Court in Lucia.  Although it is one that the SEC would be well advised to consider on its own, especially while its ALJ program is in its current state of flux. 

This morning the House Committee on Education and the Workforce released its legislation to reauthorize the Higher Education Act, the source of most of what the federal government does in higher ed, especially provide hundreds-of-billions of dollars in student aid. The new legislation is called the Promoting Real Opportunity, Success and Prosperity through Education Reform—or PROSPER—Act. (Oh, these names!) It will take a while to comb through in detail—it’s 542 pages long—but here is a quick reaction to some core parts from a rapid skimming of the bill (and some reporting on a leaked draft):

  • What needs to happen, ultimately, is for federal student aid to be phased out. It fuels tuition inflation, credential inflation, and noncompletion, and students with a demonstrated ability to do legitimate college-level work in in-demand fields would almost certainly be able to find private loans; both borrower and lender would likely profit. This bill, not surprisingly, does not phase aid out. It does, though, consolidate aid programs, and takes some small steps forward, capping total amounts students and their families can borrow from Washington, and letting schools say they won’t let students borrow a lot if the program doesn’t seem to justify it. The federal loan limits aren’t low—from a cap for undergraduate dependent students of $39,000, to a grand possible limit for certain borrowers of $235,500—but just saying there should be caps below the “cost of attendance”—basically, whatever colleges charge plus other expenses—is a start.
  • Other efforts to curb prices and noncompletion include making schools responsible for paying back some of the debt of students who are struggling to repay, and conditioning some funds for minority-serving institutions on at least 25 percent of students completing their programs or successfully transferring to other institutions. Both of these changes appear to put blame on institutions while ignoring the root problem—the federal government gives people money to pay for college without any meaningful assessment of their ability to do college-level work—but it might have some positive effects on prices and completion.
  • The law would end “gainful employment” regulations targeting for-profit colleges, and would also end a requirement that for a school to be accessible online in a state, it must be approved by that state even if its physical home is somewhere else. These things would free the system up a bit, but how much is unclear.

There is a lot else in there—provisions on TRIO programs, accreditation, a data “dashboard” on school and program outcomes, and more—and I’ll really have to scrutinize the thing to make sure I have all the details right. But from a quick look, this bill would generally move in the right direction, though with many miles to go to reach good higher education policy.

Republicans are scrambling to adjust their tax bill to satisfy concerns of lawmakers worried about budget deficits. The Joint Committee on Taxation (JCT) released a report yesterday finding that the government would lose $1 trillion over a decade in revenue even including the dynamic growth effects. Numerous economists (e.g. here and here) have criticized the JCT’s modeling for undercounting the growth benefits.

Still, the JCT’s $1 trillion figure is within the $1.5 trillion that Republicans allotted themselves for the tax bill. So it is surprising that some senators are moving the goalposts and demanding more revenue. But adding triggers or tax increases makes little sense because rising deficits in coming years will be mainly driven by rising spending, not revenue shortfalls—with or without a tax bill.

The chart below shows CBO’s baseline projections of spending and revenues as a share of gross domestic product (GDP). Revenues (red line) are set to rise from 17.7 percent of GDP this year to 18.4 percent by 2027, while outlays (blue line) will jump from 20.5 percent to 23.6 percent. Revenues creep upwards partly because of “real bracket creep” as people move into higher tax brackets. The chart clearly shows that deficits will rise because of rapid spending growth.

The green line shows revenues including the JCT’s projected effects of the Senate tax bill. Revenues fall in the short run, then rise as a result of numerous tax breaks expiring, and as the economy expands modestly per the JCT estimate. The Senate bill would add debt in the near term, but by year 10 would begin reducing deficits.

Even with the JCT’s lowballed growth estimates, projections show that spending restraint is the key to deficit reduction. Rather than adding tax increases, deficit worriers in the Senate should work to replace no-growth provisions in the tax bill, such as child credits, with pro-growth provisions, such as further rate cuts. And rather than holding up the tax bill, they should redouble their efforts in the new year to cut discretionary spending and reform entitlement programs.


Note: the green line is rough estimate as the JCT does not breakout dynamic revenue effects from its estimate of spending increases due to a rising interest rate.

It is no secret that Secretary of State Rex Tillerson and President Trump haven’t been getting along. According to the New York Times, the administration has developed a plan to replace Tillerson with current CIA director Mike Pompeo. If ousted, Tillerson would have one of the shortest stints as secretary of state in U.S. history—not the worst consequence of that position, though an embarrassing one for Tillerson, and perhaps the administration. But the most troubling consequence of Tillerson’s departure would be to replace Pompeo with Senator Tom Cotton as CIA director.

To begin with, it’s difficult to believe Cotton is being considered for the position because of his qualifications. Cotton is a freshman senator with no experience in intelligence. Instead, it seems he is being considered for the prestigious role as director because of his “easy” relationship with President Trump. His support for Trump has indeed been unfaltering: he consistently endorses the president’s incoherent foreign policy, and exhibits what seems like blind loyalty rather than objective analysis. For example, on October 9, on The Global Politico podcast, when speaking about Iran, Cotton seemed to indicate that Tillerson and Defense Secretary Mattis should resign if they are unwilling to execute the president’s policies. Trump’s promotion of Cotton also highlights the president’s own desire to surround himself with yes-men who will tell him what he wants to hear.

Second, he supports torture and other extreme interrogation techniques, like waterboarding, and voted against anti-torture safeguards. Cotton has gone as far as to say that waterboarding, currently illegal, is not torture. If Cotton becomes CIA director, he may push to end restrictions around it, which would contradict the assessments of experienced intelligence professionals.

Third, even though his support for the prison at Guantánamo Bay—referred to as Gitmo—is along party lines, it indicates his erroneous thinking on terrorism. Not only does he routinely inflate the threat of terrorism, but his 2015 statement that  “there are too many empty beds and cells there right now” ignores the fact that the prison has served as a rallying call for terrorist groups, and has undermined U.S. counterterrorism efforts worldwide. Also, his support for Gitmo in general is puzzling considering his legal background: he’s a graduate of Harvard law, clerked for a federal judge Jerry Smith of the 5th Circuit, and practiced law at Gibson, Dunn & Crutcher before joining the Army and holding political office. His defense of a detention facility whose very existence and jurisdiction has caused the Supreme Court to step in at least four times raises questions about his positions on the executive’s power during wartime.

And fourth, his commitment to a hawkish foreign policy is unwavering. For example, his opposition to Iran is so strong that in 2015 he penned an open letter to Iran’s leadership, directly contradicting and undermining ongoing U.S. diplomacy. This summer, he said, “The policy of the United States should be regime change in Iran.” As head of the CIA, his hawkish tendencies will likely result in more military intervention, risking similar disasters like the never-ending wars of Iraq and Afghanistan. Also, intelligence should be driven by objectivity and empirical evidence, and when it is not, disasters like Iraq occur. 

In other words, the administration should take pause before appointing Senator Cotton, an overtly hawkish politician, to the coveted position of CIA Director.