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Reversing a trial court, the Third Circuit has ruled (McGann v. Cinemark) that a deaf/blind man is entitled to sue Cinemark under the Americans with Disabilities Act (ADA) demanding that it provide a “tactile interpreter” so that he can experience the movie Gone Girl. Each interpreter — two would be required because of the movie’s feature length — would narrate the film in American Sign Language (ASL) while McGann places his hand in contact with theirs to read the signs. The appellate judges rejected the argument that because of the need for subjective stylistic judgments about how to describe the movie’s action, on-the-fly translation would “fundamentally alter the nature of the good, service, facility, privilege, advantage, or accommodation being offered,” an exception that the law recognizes to its accommodation requirement. It sent the case back for further proceedings on whether the theater can plead “undue hardship,” a narrow defense that is often unavailable to large businesses which (it is argued) can cover even very high costs of accommodation with revenues earned from other patrons.

Like the Berkeley online courses fiasco, and the Main Street shakedown mills, and the emerging industry of web accessibility suit-filing, these are all developments to keep in mind when you hear people say that the courts are capable of working out the problems with the Americans with Disabilities Act by themselves and that Congress need not turn its attention to reform. (cross-posted and adapted from Overlawyered)

One of the big demands of the Trump administration is that trade, and trade agreements, must be “reciprocal.” Their concerns about reciprocity are misplaced, and miss the point about why we open our markets in the first place. Sure it’s great when other countries also open their markets, but there is more to be gained from unilateral opening than no liberalization at all. Frédéric Bastiat explained this peculiar desire for reciprocity in Economic Sophisms, where he wrote:

There are people (a small number, it is true, but there are some) who are beginning to understand that obstacles are no less obstacles for being artificial, and that we have more to gain from free trade than from a policy of protectionism, for precisely the same reason that a canal is more favorable to traffic than a “hilly, sandy, difficult road.” 

But, they say, free trade must be reciprocal. If we lowered the barriers we have erected against the admission of Spanish goods, and if the Spaniards did not lower the barriers they have erected against the admission of ours, we should be victimized. Let us therefore make commercial treaties on the basis of exact reciprocity; let us make concessions in return for concessions; let us make the sacrifice of buying in order to obtain the advantage of selling.

People who reason in this way, I regret to say, are, whether they realize it or not, protectionists in principle; they are merely a little more inconsistent than the pure protectionists, just as the latter are more inconsistent than the advocates of total and absolute exclusion of all foreign products. 

This principle applies not just to border measures such as tariffs, but also to internal measures such as government procurement. Closing our procurement market to foreigners ignores the value of greater choice and competition. Politicians tend to oversell the advantages of selling (exports) over buying (imports), and incorrectly frame imports as a loss and exports as a gain. In fact, increased competition from foreign firms bidding on government contracts can get more value out of taxpayer dollars by increasing efficiency and gains in quality. 

Nonetheless, if people are going to make these demands for reciprocity, they should at least have some reasonable basis for determining whether there is, in fact, reciprocity. To paraphrase a famous line from the Princess Bride: They keep using that word, but it does not mean what they think it means. A recent demand from the Trump administration in the NAFTA renegotiation, related to government procurement, distorts the concept of reciprocity beyond recognition.  Here’s a Politico report on Commerce Secretary Wilbur Ross’ remarks on the subject: 

Ross was pressed on whether he thought the U.S. proposal on government procurement access was fair, given that it might result in less market access for Canada and Mexico than is granted to other countries through the WTO.

The U.S. proposal would cap Mexican and Canadian access to U.S. government projects at the combined total access those two countries provide to U.S. firms.

“It’s very good faith, our market is 10 times the size of either of those markets, so if you gave equal percentage market share we’d be giving them 10 for one, how is that good arithmetic?” Ross said. “It is actually to the benefit of the parties because it is the cumulative total of two economies rather than the individual one.”

Ross said the proposal helps address “one of the fundamental flaws, the president feels and I agree, that exists in NAFTA to begin with.”

“The fact is we think it was absurd in general to give away 10 times as much market access as you are getting back,” he said.

Ross’ view appears to be that, in order for there to be reciprocity, the Canadian, Mexican, and U.S. procurement markets should all be open to foreign competition in the same nominal amounts. So, to take an illustrative example, if $10 billion of U.S. procurement is open to foreign competition, $10 billion of Canadian procurement and $10 billion of Mexican procurement should also be open. In his view, that is fair. And just to be nice, he says the U.S. will offer the combined amount that Canada and Mexico offer, so the U.S. will offer $20 billion. See, more than fair, right?

No, not at all! What he leaves out is that the differing size of the economies has an impact on outcomes. The share of the procurement market that each country has open to foreign competition is much different when the nominal amounts are the same, with a far smaller portion of the U.S. market open. And because the U.S. economy is much bigger, the United States has more companies that can compete for contracts.  So, if Canada opens up $10 billion of procurement to foreign competition, the U.S. is going to grab a big chunk of that. By contrast, if the U.S. opens up $10 billion (or even $20 billion) to foreign competition, Canada won’t take very much. The result is that the approach Ross is pushing won’t lead to reciprocity. Rather, with the nominal amount of market access the same, and the U.S. economy so much bigger, there will almost certainly be more sales by U.S. companies than by Canadian companies.

If you want to get somewhere close to reciprocity (again, not that we’re advocating it), the way to do so is to open up a percentage of the procurement market to foreign competition. For example, each country could open up 10% of its procurement contracts. This is roughly the approach governments usually take now. Opening up procurement markets on a percentage basis is the best way to get us to a result where roughly the same amount of procurement contracts flow in both directions.

Ross doesn’t like the current approach, saying that the U.S. has given away “10 times as much.” But we haven’t, for the reasons noted: There are fewer Canadian and Mexican companies, so they don’t have the same ability to compete for procurement contracts. 

Adding additional restrictions to the government procurement market, which is valued at $4.4 trillion annually, will be a step in the wrong direction. If the U.S. undertakes measures to further restrict its procurement market, it will be equivalent to a self-inflicted wound. It may also be inevitable that other countries will follow suit, reducing international business opportunities for both foreign and U.S. firms around the world. 

While Congress is rightly concerned about providing a pathway to citizenship for immigrant Dreamers without legal status, thousands of legal immigrants who are in the same position are being left behind. This decision to exclude legal immigrant Dreamers is not just inequitable. It is costly.

H-1B high-skilled foreign workers can bring their spouses and minor children with them to the United States on H-4 visas. The H-4 is a temporary visa that is valid for as long as the H-1B is. Once the child turns 21, however, the H-4 is canceled. Most employers also sponsor their H-1B employees for permanent residency (a “green card”), and their minor children can receive green cards with them. But again, if their children turn 21 while they are waiting, the law boots them from the line.

In a functioning immigration system, these situations would happen rarely, if ever. But because Congress has failed to update the limits on permanent residency since 1990 and because it discriminates against immigrants from populous countries, H-1B workers from India have to wait at least several decades for green cards. During this time, their children grow up as Americans, but then “age out,” losing both their H-4 status and their place in the green card line on their 21st birthday.

These kids are in almost the exact same position as those in the DACA program right now. Their parents brought them to the United States as young children; they grew up here; they have a temporary status now, but they will lose it if Congress fails to change the law. Yet the DREAM Act and other legislative solutions for immigrant Dreamers expressly and inexplicably exclude these legal immigrants. It is not hyperbole to say that the DREAM Act requires applicants to violate the law to qualify.

Why? Legal immigrant Dreamers would certainly qualify under the bill’s other requirements. Virtually all graduate U.S. high schools and enroll in U.S. colleges, and virtually none have criminal records that would disqualify them. Children of H-1Bs are some of the highest achieving children in American society today. In fact, 75 percent of the 2016 finalists for the Intel Science Talent Search—the leading science competition for U.S. high schoolers—had parents who were at one time on an H-1B visa.

This talent is a gigantic economic asset to the United States. According to the National Academy of Science’s 2016 report (NAS) on the fiscal effects of immigration, immigrants who enter as children and who have at least one college graduate parent—as all H-1B workers do—create a massive fiscal surplus. The NAS estimates that each H-4 child would have a 75-year net fiscal present value of between $143,000 and $316,000 to all levels of the U.S. government—federal, state, and local. Averaging NAS’s estimates from Table 8-14 for kids with college grad parents or parents with advanced degrees yields an estimated $252,000 net present value for each legal immigrant Dreamer.

Net present value estimates apply a discount rate to future costs and benefits on the (correct) theory that money today is more valuable than the same amount of money received three decades from now. One way to understand the net present value concept is to envision each one of these kids cutting a check to the government for $252,000 when they arrive in the country that would then be invested at 3 percent per year for the next 75 years.

The DREAM Act is already a big fiscal boost to the United States, but including the legal immigrant Dreamers would increase its fiscal benefits. The government doesn’t produce estimates of the number of children with H-4 status or how many are waiting in the backlog for green cards who could potentially qualify. However, DHS did estimate that 125,000 spouses of H-1Bs on H-4 visas had resided in the United States for at least 6 years as of 2015. Conservatively estimating that each married couple brought an average of one child with them, that’s a population of 125,000 kids. $252,000 multiplied by 125,000 kids is $31.4 billion in net fiscal benefits.

This number is likely low because it only counts H-4s. There are some, albeit fewer, legal immigrant Dreamers on the whole range of alphabet soup visas (E, O, J, L, P, etc.). All of these kids are children of skilled professionals in the United States, so their impacts are probably similar. The country likely will receive some of these benefits whether legal immigrants are included in the DREAM Act or not, as some kids will find a way to stay on their own, but to fully realize all of them, Congress needs to provide them with permanent residency.

The United States gains nothing from kicking legal immigrant Dreamers out or forcing them to maneuver America’s impossible immigration system to find other temporary statuses to stay in the country that is their home. And here’s the thing: the sponsors of the DREAM Act or any other proposal don’t need to add legal immigrant Dreamers or do anything special for them. They just need to not exclude them or go out of their way to treat them worse than other immigrants, as they have right now. All they need to do is strike the requirement that DREAM Act applicants break the law. Few changes so simple could benefit the United States so much.

Critics are saying that the Republican tax plan would give high earners the largest cuts. There has been a flood of news stories with that theme since the Tax Policy Center (TPC) released its analysis of the plan.

The TPC summary says, “Those with the very highest incomes would receive the biggest tax cuts,” and tables in the report encourage readers to come to that conclusion.

However, my parsing of TPC’s data reveals something different: the GOP plan would give the largest relative cuts to people in the middle. On average, middle-income earners would receive larger percentage tax cuts than higher-income earners.

The table shows data from TPC’s analysis and from its current law estimates released in March. Households are split into quintiles, or fifths, by income level. The columns titled “change” present the effects of the GOP cuts in different ways.

 

Columns 1 and 2. These results from TPC’s report suggest that high earners would receive the largest cuts.

Column 3. These figures from TPC in March include all federal taxes—income, payroll, estate, and excise. Note that the higher quintiles have higher tax rates, so if we cut everyone’s taxes an equal percent, then the higher quintiles would receive the largest cuts.

Column 4. These results from TPC’s study show the GOP cuts as a percent of all current taxes paid. The top and bottom quintiles get the biggest cuts, and the middle and fourth quintiles the smallest. But there is a problem with TPC’s presentation—Congress is reforming income and estate taxes, but TPC includes payroll and excise taxes in these calculations, which slants the results. (My column 4 data are slightly different from data shown in TPC’s study because of rounding issues).

Column 5. This column shows current individual income, corporate income, and estate taxes, based on TPC’s March data. These are the taxes that Congress is reforming. Current tax payments are hugely tilted toward the top end. The bottom two quintiles do not pay any of these taxes, on average. If we cut everyone’s taxes an equal percent, then higher earners would get—and should get—the largest cuts.

Column 6. This column provides the best answer—in my view—to the question of which group gets the largest cuts under the GOP plan (at least the GOP plan as interpreted by TPC). The middle quintile gets a huge 20 percent tax cut, on average, which is much larger than the 12.0 and 12.7 percent cuts for the top two quintiles. Looked at this way, the middle-class would get the largest tax cuts under the GOP plan.

I have assumed so far that TPC’s underlying analysis is sound, but actually there are problems with it. The TPC analysis is not dynamic, and thus overstates revenue losses, particularly from corporate tax cuts. That factor combines with the TPC assumption (erroneous in my view) that the corporate tax burden mainly falls on shareholders, not workers. The result of those two factors is that TPC exaggerates the tax cuts going to the top end.

TPC has fine analysts and it produces an impressive stream of reports, but I wish they would present their results in a more even-handed way. As an example, when they publish a table showing that the top quintile would get income/estate tax cuts of $8,470 and the middle quintile would get $660 in 2018, on average, they should show that the former group will currently pay $66,701 of those taxes and the latter group will pay just $3,300, on average.

By the way, I do not think that the middle class should receive the largest tax cuts, so I do not agree with the rhetoric of either party on that issue. High earners should receive the largest cuts because they pay the highest rates, and reducing their rates would generate the most economic growth.

# # #

For more on the GOP tax plan, see here, here, and here. For a discussion of distribution tables, see this study by Jason Fichtner.

This continues Part 1 and Part 2 of my critique of the arguments for aggressive antitrust activism offered in Steven Pearlstein’s Washington Post article, “Is Amazon Getting Too Big,” which is largely based on a loquacious law review article by Lina Kahn of the Google-funded “New America” think tank. 

My previous blogs found no factual evidence to support claims of Pearlstein and Kahn that many markets (which must include imported goods and services) are becoming dominated by near-monopolies who profit from overcharging and under-serving consumers.  

Yet the wordiest Kahn-Pearlstein arguments for more antitrust suits against large tech companies are not about facts at all, but about theories and predictions.

Kahn makes a plea for preemptive punishment based on omniscient futurism. “The current market is not always a good indication of competitive harm,” she writes.  Antitrust enforcers “have to ask what the future market will look like.” But how could antitrust enforcers’ predictions about what might or might not happen in the future be deemed a crime or a cause for civil damages?  If the law allowed courts to levy huge fines or break-up companies on the basis of prosecutors’ predictions of the future, the potential for whimsical damages and political corruption would be almost limitless.

We have already experienced extremely costly federal (and European) antitrust cases based largely on incredible predictions about “what the future market will look like” – mostly obviously in the cases against IBM and Microsoft.

IBM was the subject of 13 years of antitrust “investigation” (harassment) before the suit was finally dismissed “without merit” in 1982.  My first article about antitrust was a 1974 critique of the IBM case in Reason magazine which remains the best explanation (aside from this book) of what I mean about antitrust being “for fun and profit.”

Pearlstein imagines “it was the government’s aborted prosecution of IBM … that made Microsoft possible.”  But IBM’s decision to offer three operating systems for the PC and allow Microsoft to sell MS-DOS to Compaq had nothing to do with the government’s antitrust crusade against IBM.  That crusade was a well-funded project of Control Data, Honeywell, NCR and Sperry Rand – competitors of IBM’s who hoped to do better in court than they had with customers.

 “In May 1998,” notes Pearlstein, “U.S. attorneys general filed an antitrust suit against Microsoft, which lurks in the background of the current debate” (about Amazon, Google and Apple).  Microsoft was said to have a supposedly invincible monopoly of “Intel-based” personal computers (inexcusably excluding Apple, Sun, Palm, Linux and others from the market), but the prosecutors could not deny that this dominance was achieved legally by consumer preference. The essence of the antitrust allegations was that Microsoft was accused of extending its legal dominance in PCs to achieve a monopoly of Internet browsers and assorted “middleware” (media players, email clients and instant messaging) that could supposedly serve as “alternative platforms” to Windows (or iOS) in some totally incomprehensible fashion.  In reality, the Internet was the alternative platform, and it is platform-independent. Online services also don’t know or care which media player you use to watch movies or listen to music. Online tax return services don’t care either.

The government’s technologically illiterate case against Microsoft became a decade-long, ever-changing battle waged by prosecutors and judges who were unable to even contemplate that (1) Apple, Amazon and Google could ever be competitive rivals of Microsoft in hardware, software or services, or that (2) cellphones and tablets could possibly serve as handy computers.  The Microsoft settlement “barred Microsoft from entering into Windows agreements that excluded competitors from [offering software installed on] new computers, and forced the company to make Windows interoperable with non-Microsoft software.” But Windows had always been far more welcoming to outside software than Apple.  And the browsers, search engines or media players preloaded on new computers became a non-issue once broadband made it easy to install any or all of them on PCs, tablets and phones.  Open-source VLC soon became a popular media player, and open-source Firefox is a popular browser. Instant messaging is dominated by Facebook, Snapchat and Skype.

Google’s Android, Apple’s IOS and Amazon’s Kindle (which is not counted in those shares) have greatly eroded Microsoft’s share of all relevant markets without help from antitrust cops.  By July 2017, Windows had only a 26.8% share of platforms used to access the Internet, and IE/Edge had an 8% share of browsers

Ms. Kahn now worries that antitrust must now shift focus toward Microsoft’s (previously unnoticed) rivals lest they prove to be just as firmly entrenched as DOJ wrongly predicted that Windows and IE would now be.  “Google, Apple and Amazon have created disruptive technologies that changed the world,” says Kahn. “But the opportunity to compete must remain open for new entrants and smaller competitors that want their chance to change the world.”  Sure, but the opportunity to compete was always open and still is.  New entrants explain why IBM gave up making PCs, and why few people use Microsoft’s capable Edge browser or Bing search engine. 

Rather than offer any evidence that new entrants are somehow excluded from [undefined] markets supposedly dominated by Google, Apple and Amazon, Kahn offers theoretical conjecture.  Paraphrasing her, Pearlstein says, “Chicago antitrust theory is ill equipped to deal with high-tech industries, which naturally tend toward winner-take-all competition. In these, most of the expenses are in the form of upfront investments, such as software (think Apple and Microsoft), meaning that the cost of serving additional customers is close to zero… What this “post-Chicago” economics shows [asserts?] is that in such industries, firms that jump into an early lead can gain such an overwhelming advantage that new rivals find it nearly impossible to enter the market… [emphasis added].”  

Tim Muris and Bruce Kobyashi, by contrast, find Post-Chicago economics is all about “stylized theoretical models, producing possibility theorems that largely eschew empirical testing.  [The] lack of empirical verification of these theories likely has limited the impact of Post-Chicago School economics on U.S. antitrust law.”

Consider the possibility theorem that early entrants into high-tech gained “such an overwhelming advantage that new rivals [found] it nearly impossible to enter the market.”  Anything might be possible in theory, but that claim has not been true in fact.  

  • In personal computers, Apple, Commodore and Sinclair were first, followed by Apollo and the IBM PC in 1981, Osborne and Sun in 1982, Compaq in 1983.  Contrary to what trustbusters predicted, IBM gave up the ThinkPad business in 2005.
  • Netscape had an overwhelming dominance of Internet browsing in 1995, but that not deter Opera and Internet Explorer from entering the market that year, nor Firefox in 2002, Safari in 2003, or Google Chrome in 2008. 
  • AOL was the dominant Internet portal in 1993 until challenged by Netscape in 1994, Yahoo in 1995 and later by Comcast, Google, Facebook and many more. 
  • AltaVista, Lycos and Yahoo were meta-search engines that “jumped into an early lead,” yet were soon trumped by Google, Bing and numerous specialized “vertical” search engines (Amazon, Yelp, eBay, Trip Advisor, Expedia…) and Comparative Shopping Engines (Nextag, Shopzilla… ) which lobbied for “the absurd EU antitrust case against Google.”
  • Palm, Nokia and Motorola jumped into an early lead in cellphones, yet were shoved aside by Blackberry, which in turn was shoved aside (for the moment) by Samsung and iPhone.
  •  Friendster, Linked-in and My Space jumped into an early lead in social networking in 2002-03, yet Facebook did not find it impossible to jump into that market in 2004, nor did Twitter in 2006, followed by Google+, Snapchat, Instagram, and others.

Ms. Khan would not only have antitrust czars prosecuting cases based on their technological predictions, but would have them “overseeing concentrations of power that risk precluding real competition.” This “structural” approach removes all annoying requirements for evidence that competition is impeded in any way.  All that would be needed is a prosecutor’s perception that apparent concentration of undefinable “power” might someday risk some undefinable vision of “real competition” or otherwise harm some undefinable “public interest.” 

Pearlstein quotes former antitrust authorities who view Ms. Kahn’s proposed carte blanche antitrust mandate as an invitation to “political and ideological mischief.”  President Trump, for example, threatened Jeff Bezos with “a huge antitrust problem” because Amazon owns The Washington Post “and he’s using that as a tool for political power against me.” 

Mr. Pearlstein began his piece by noting that, “Democrats cited stepped-up antitrust enforcement as a centerpiece of their plan to deliver ‘a better deal’ for Americans should they regain control of Congress and the White House.”  If such stepped-up enforcement follows the advice of Pearlstein and Kahn, it would add paralyzing uncertainty to business plans and decisions.  The Kahn-Pearlstein vision of stepped-up antitrust activism is a recipe for judicial fiat.  It would encourage interest group meddling in business planning and pricing, invite political corruption, and largely replace the rule of law with the rule of lawyers. 

The media’s favorite analysis of the Big Six tax reform framework comes from the Urban-Brookings Tax Policy Center (TPC), which purports to estimate that the plan would increase individual income taxes by $471 billion over a decade (by slashing exemptions and deductions), while cutting business taxes by $2.6 trillion.  Predictably, this generated a tidal wave of outraged editorials and TV ads claiming the plan would do nothing for economic growth and benefit only “big corporations and the top 1%” (which is redundant, because individual taxes aren’t cut and the TPC wrongly attributes nearly all corporate tax cuts to the top 1%).

The Wall Street Journal has offered a powerful corrective to the TPC’s concealed analysis in “Where Critics of Tax Reform Go Wrong”, by Larry Kotlikoff of Boston College. It draws on his working paper with Seth Benzell of MIT and Guillermo Lagarda of the Inter-American Development Bank, which found “The [corporate] tax reform produces enough additional revenues to permit a reduction in personal income tax rates.”

The Tax Policy Center opines there will be “little macroeconomic feedback effect on revenues,” Kotlikoff explains, because they rely on an antique closed-economy model in which (1) investment can only be financed from some domestic “pool” of savings, and (2) higher taxes are equivalent to more savings because they supposedly reduce government deficits without reducing private savings. If government borrows more, this supposedly raises interest rates and “crowds out” private investment.

In reality, U.S. interest rates do not rise and fall with budget deficits, partly because arbitrage ensures the global bond yields move in tandem. Japan ran large chronic budget deficits for decades with super-low interest rates.  

The TPC nevertheless claims that lower corporate tax rates must add to the deficit because they will not raise investment and economic growth. And the reason lower corporate tax rates will not raise economic growth is because they will add to the deficit. Run those two sentences back and forth a few times to appreciate the magnificent circularity of this rhetorical trap for the unwary.

Unfortunately, Kotlikoff’s policy advice is not quite as careful as his analysis. He and his co-authors apparently “share critics concerns that [some unspecified aspect of] the plan would disproportionately benefit the top 1%. One way to rectify the fairness problem and address the country’s long-term fiscal gap would be to add, as the framework foresees, a fourth personal tax bracket for those with very high incomes.”   

Congress might take a clue from the Clinton-Gore campaign, for example, and add a 10% surtax on taxable income above $1 million. That would leave us with a 38.5% tax rate on income reported on individual income tax returns and a 20% tax rate on income reported on corporate tax returns. Contrary to Kotlikoff, that would not raise more revenue (to “address the fiscal gap”) for reasons explained by Kotlikoff himself: “If corporate tax rates are lower than personal income tax rates, people have an incentive to shelter their self-employment income (lower their personal tax bill) by incorporating.”  

In the 1980s, as the top tax rate on individual income fell from 70% to 28%, professionals and owners of closely-held businesses shifted en masse from reporting most of their income on corporate tax forms to reporting it on individual tax returns, as pass-through partnerships, proprietorships, Subchapter S corporations and LLCs.

A 2015 study by five Treasury economists and two Chicago scholars finds, “’Pass-through’ businesses like partnerships and S-corporations now generate over half of U.S. business income and account for [41%] of the post-1980 rise in the top- 1% income share.” If we now slam that process into reverse – by cutting corporate tax rate to 20% while leaving top individual rates of 35-40% – that would soon result in massive income-shifting out of pass-through entities back into C-corporations that pay no dividends and compensate owners with tax-free perks, company cars and condos, and lavish expense accounts rather than large salaries.  

In short, the wider the gap between top tax rates on individual and business income (including self-defined pass-through income on Schedule C) the more futile it would become to raise top tax rates on income reported on individual tax returns above 30% much less 38-40%. The fourth tax bracket is a really bad idea based on really bad estimates of who wins and loses from a lower corporate tax rate.

Kotlikoff, Benzell and Lagarda have no basis for evaluating the “fairness” of proposed tax changes for individuals because they explicitly “do not model” such changes – they are exclusively concerned with the corporate tax. But, their model estimates that cutting the corporate tax raises tax revenue and also raises real wages by about 8 percent.

Kotlikoff’s endorsement of a fourth individual tax rate higher than 35% is not because he believes the GOP Framework adds much to budget deficits, but because he apparently accepts the Tax Policy Commission’s static estimates that the top 1% benefits most, as shown in the Table.

TPC Estimated Static Change in Federal Taxes by Income Group from Republican Framework Tax Plan

Lowest Quintile

-10.4%

Second Quintile

-9.3%

Middle Quintile

-7.2%

Fourth Quintile

-5.5%

Top Quintile

-9.6%

      Top 1%  

-17.6%

The reason the top 1% appears to get the largest tax cut is not because of the plan’s trivial rejiggering of individual deductions and taxes (which go up rather than down), but because the Tax Policy Center arbitrarily “assumes” that owners of capital bear 80% of the corporate tax, and most capital is owned by people with high incomes.

The trouble is, the TPC assumption that labor bears only 20% of the burden of the corporate tax is totally inconsistent with Kotlikoff’s model predicting an 8% rise in real wages from cutting the corporate tax.  It is also totally inconsistent with all recent empirical studies on that issue. Congressional Budget Office economist William C. Randolph, for example, estimated U.S. labor bears 70% of the corporate tax, once we drop the TPC closed-economy fiction and allow capital to gravitate to countries with lower marginal tax rates. For tax-friendly countries attracting U.S. business and investment, Randolph explains, “Foreign workers benefit because an increased foreign stock of capital raises their productivity and their wages. Domestic workers lose because their productivity falls and they cannot emigrate to take advantage of higher foreign wages.”

A Tax Policy Center survey of the evidence likewise concluded that “Recent empirical studies… all conclude that wage earners bear most of the ultimate burden of the corporate tax.”  That means everything you have been reading about “Trump Plan Delivers Massive Tax Cuts to the 1%” is just made-up fiction – based on a key assumption the source (the Tax Policy Center) knows to be false.

             

Last month, the Supreme Court’s agreed to review Janus v. American Federation of State, County, and Municipal Employees, Council 31 (Cato filed a brief in support of the plaintiffs). The case is a First Amendment challenge to the “agency fees” that must be paid to a public-sector union by non-members. As a matter of existing First Amendment law, no employee may be compelled to join a union or contribute money to fund a union’s direct political activities, such as political ads. In roughly 22 states (the 28 “right-to-work” states outlaw agency fees), unions may compel non-members to pay agency fees that (ostensibly) only reflect the cost of the union’s representational activities, such as bargaining over wages and working conditions. The agency fee is the product of the Supreme Court’s decision in Abood v. Detroit Board of Education (1977), in which the Court prohibited public-sector unions from compelling non-members to support political speech, but allowed for the compelled support of the union’s other “non-political” activities.    The plaintiff in Janus—like the 2015 Friedrichs case that stalemated after Justice Scalia’s death (in which Cato also filed a brief)—claims that, for public employees, the distinction in Abood between “political” and “non-political” is illusory because the terms and conditions of public employment are inherently a matter of public concern. A teachers union negotiates with a school system over salaries and benefits packages, merit pay versus seniority, the standards for teacher evaluation, and the controversial “tenure” provisions that in some states make it nearly impossible to fire even serial abusers. Each of these represents a core, political issue in education policy, and a teacher who believes that, say, merit-based pay systems would improve the quality of teaching in the school system (where perhaps her own children may attend) can currently be forced to fund negotiations against it.   Abood upheld the agency fee based, in part, on the “free rider” rationale. The Court reasoned that, since unions are required expend resources for dissenters’ benefit, dissenters may be required to cover that expense because otherwise they would get a free ride on the supposed union gravy train. Recently, in Slate, attorney Daniel Horwitz—drawing on the argument of a pair of law professors—took the issue a step further, claiming that forcing unions to represent free riders is unconstitutional. Horwitz argues that unions should not have to abide by the duty of fair representation—meaning they have to fairly represent the interests of both members and non-members—if non-members are not made to pay (that is, if Mr. Janus wins). But unions aren’t compelled to abide by the duty of fair representation; they choose to.   Currently, a union that receives a majority of the votes of the relevant group of employees in an election may be certified as an “exclusive bargaining representative.” This provides the union certain rights, including imposing a duty on the employer to bargain in good faith with the certified union, and excluding competing unions and dissenting individual employees from the bargaining table. In return the union must shoulder a “duty of fair representation,” which requires the union act as a fiduciary to protect the interests of both members and non-members.   But unions can be members only, thus eliminating all the problems that come with forcing people to contribute to a union. In the words of two prominent labor scholars (one of whom is cited by Mr. Horwitz): Nothing in section 7 [of the National Labor Relations Act]—which grants employees the rights “to self-organization” and “to bargain collectively through representatives of their own choosing”—limits these rights to workplaces where a majority of employees choose one union. Moreover, nothing in section 9 (which provides a mechanism for choosing a union that enjoys the power of exclusive representation) limits the ability of a group to bargain on a members-only basis. The law currently allows members-only representation. Unions don’t usually pursue members-only representation because becoming the exclusive bargaining representative of all employees grants special privileges, namely an employer’s affirmative duty to bargain. Only a union that is certified as the exclusive bargaining representative must shoulder the burden of non-members. This makes sense. A member of Congress could be thought of as the “exclusive bargaining representative” of his constituency, which means he has a duty to represent both those who voted for him and those who did not. Non-members of a union are like those who voted for the other guy.   However, nothing compels a union to become the exclusive bargaining representative. In fact, the “exclusive bargaining” model is an American peculiarity, born of the particular zeitgeist of the 1930s. In Europe, unions are members only, with multiple unions in a given workplace, often tied to a particular political party or identity. Workers therefore gain the opportunity to associate with a union that represents all their interests, and champions the causes they value. And, as any American who has traveled Europe and encountered a transportation strike knows, European unions are pretty powerful.   For many workers who dislike unions, compelled support is often their biggest objection. Also, for many libertarians and First Amendment devotees, unions are only objectionable when they’re coercive and non-voluntary. In the long run, a decision for Mr. Janus could help unions move towards a potentially more popular members-only model.   

As negotiations on the North American Free Trade Agreement (NAFTA) continue, many proposals seem to run counter to the goal of modernizing the deal, and some industry groups are taking the opportunity to advance their protectionist agenda. A recent op-ed by Mike Schultz, Vice President of R-CALF USA and COOL Chairman, and Martin Rosas, President of United and Food and Commercial Workers (UFCW) Local 2 in Kansas City, argued for the reinstatement of U.S. legislation that required meat products to bear a label that identifies the country of origin of the product, so-called COOL (country of origin labeling) rules. Supporters of this type of labeling scheme argue that it helps inform consumers of the products they are buying, and that consumers are willing to pay more for this information. In addition, supporters tend to claim that NAFTA hurt the U.S. beef industry.  All of these arguments are incorrect.

First, the COOL scheme that was established by the United States in 2008 was a complex set of requirements that set out when particular muscle-cuts of meat would require a label that identifies where the product was “born, raised, and slaughtered.” On its face, this may seem benign, but the way the legislation was crafted discourages U.S. meat producers from sourcing foreign meat because of the costs of tracing every step of the production process, including segregating herds by nationality.

Tracing of a piece of meat’s “nationality” is complicated by the fact that there is a lot of back and forth trade in the beef industry between Canada, Mexico and the United States. And there are additional barriers to tracing, like the fact that Alaska and Hawaii transship their cattle through Canada to get to the U.S. market to avoid the high costs of shipping imposed by the Jones Act.

Furthermore, the claim that consumers are willing to pay more for a country of origin label is not supported by the evidence. A 2013 study in the Journal of Agriculture and Resource Economics found an “absence of an increase in demand by U.S. consumers” for products covered by the COOL scheme, which “suggests that any attempt to maintain [COOL] would result in aggregate welfare loss not only within the United States but also with key trading partners.” Furthermore, a 2004 report by the U.S. Department of Agriculture found that “[t]he infrequency of “Made in USA” labels on food suggests suppliers do not believe domestic origin is an attribute that can attract much consumer interest.”

Finally, supporters of this protectionist measure sometimes claim (as the op-ed mentioned above does) that NAFTA hurt the U.S. beef industry. This is false. First off, barriers to the beef and cattle trade have been very low for a long time and this predates NAFTA. Second, while Canada is a top supplier of imported beef to the United States, it makes up 18.6% of the total share of imports, and just 2.5% of U.S. beef and veal consumption. Third, the U.S. beef industry is actually doing quite well, and expected to grow in 2018. In 2016, the U.S. was the top producer of beef and veal (by thousands of metric tons), totaling 11,507 metric tons, with Brazil coming in second with 9,284 metric tons. It is important to note that the U.S. is also the top importer of beef and veal because it is also the top consumer—Americans like their beef, so we need to purchase foreign beef to meet our domestic demand.

This country of origin labeling issue was brought to the World Trade Organization (WTO) by both Canada and Mexico in 2008. In November 2011, a WTO panel concluded that the COOL measure violated the United States’ obligations because it discriminated against imported livestock. This finding was upheld on appeal. Congress eventually repealed the legislation in December 2015 through H.R. 2029. Asking for this legislation would guarantee another dispute, and also disrupt the cattle and beef market again. Using the NAFTA negotiations to ramp up support for this legislation also runs counter to the reality of the beef and cattle trade in North America. Congress should not allow itself to fall prey to this form of regulatory protectionism yet again. 

Today, the Los Angeles Police Department (LAPD) civilian police commission voted to approve proposed guidelines for a one-year unmanned aerial vehicles (UAVs) pilot program. According to the LAPD’s guidelines, UAVs will not be equipped with lethal or nonlethal weapons and will only be deployed in a narrow set of circumstances. The guideline also requires officers to obtain a warrant before using a UAV “when required under the Fourth Amendment or other provision of the law.” This looks all well and good, except that the Fourth Amendment and California law provide little protection when it comes to aerial surveillance.

The Fourth Amendment protects “persons, houses, papers, and effects” from “unreasonable searches and seizures.” Many Americans could be forgiven for thinking that this constitutional provision would act as a shield against warrantless aerial surveillance. Sadly, this is not the case. California law is similarly of little help. California is not one of the states that require law enforcement to obtain a warrant before using a UAV, with Gov. Jerry Brown in 2014 vetoing a bill that would have imposed such a requirement.  

To the LAPD’s credit, routine surveillance is not included in its list of approved UAV operations. However, the LAPD has a history of using new surveillance gadgets, and it’s reasonable to be wary of UAVs being regularly used for surveillance as they become an everyday feature of police departments’ toolboxes.

Although the Supreme Court has yet to take up the issue of UAV surveillance, it did address aerial surveillance in a few cases in the 1980s. In Dow Chemical Co v. United States (1986) the Supreme Court ruled that the Environmental Protection Agency did not need an administrative warrant when it hired a commercial photographer using a mapping camera to inspect a 2,000 acre Dow Chemical plant from an aircraft.

The same year that Supreme Court ruled in Dow Chemical Co v. United States it also decided another case, California v. Ciraolo (1986). In that case police acting on an anonymous tip took to an airplane and without a warrant used naked eye surveillance to snoop on Dante Ciraolo’s backyard, which was unobservable from street level thanks to a couple of fences. The police spotted marijuana growing in Ciraolo’s backyard and arrested him. Ciraolo claimed that the police’s aerial inspection of his backyard violated the Fourth Amendment, but the Supreme Court ruled that such warrantless surveillance is constitutional.

In 1989, the Supreme Court dealt with another case involving police looking for marijuana from the sky. In Florida v. Riley (1989), the Supreme Court considered whether police had conducted a Fourth Amendment search when they looked into Michael Riley’s greenhouse from a helicopter at 400 feet without a warrant. A plurality on the Court found that Ciraolo controlled and that police had not conducted a Fourth Amendment search.

While those outside of courts and law schools might think that the government agents’ behavior at issue in DowCiraolo, and Riley, could reasonably be described as “searches,” the unfortunate reality is that for fifty years the word “search” has been defined by courts in a very particular way.  

Fifty years ago, in Katz. v. United States (1967), the Supreme Court ruled that the warrantless use of an eavesdropping device on the exterior of a public phone booth violated the Fourth Amendment. In his majority opinion, Justice Potter Stewart wrote that the Fourth Amendment “protects people, not places.”

Katz is notable not only because of Stewart’s opinion, but also because of a solo concurrence written by Justice John Harlan II. In his concurrence, Justice Harlan codified the two-pronged “reasonable expectation of privacy test.” According to the test, police have conducted a Fourth Amendment “search” if they 1) violate someone’s reasonable expectation of privacy and 2) that expectation is one that society is prepared to accept as reasonable.

Thanks to current Fourth Amendment doctrine the LAPD’s declaration that police will seek a warrant for UAVs “when required under the Fourth Amendment” is hardly reassuring.

In his Florida v. Riley dissent Justice William Brennan took the Court’s reasoning to its logical conclusion, using a “miraculous tool” that at the time was a hypothetical but now resembles a tool that will soon be in the hands of the LAPD and other police departments:

Imagine a helicopter capable of hovering just above an enclosed courtyard or patio without generating any noise, wind, or dust at all - and, for good measure, without posing any threat of injury. Suppose the police employed this miraculous tool to discover not only what crops people were growing in their greenhouses, but also what books they were reading and who their dinner guests were. Suppose, finally, that the FAA regulations remained unchanged, so that the police were undeniably “where they had a right to be.” Would today’s plurality continue to assert that “[t]he right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures” was not infringed by such surveillance?

The LAPD’s UAV guidance does include some praiseworthy provisions, including the ban on UAVs being equipped with weapons. However, the guidance doesn’t provide the privacy protections needed to prevent warrantless UAV snooping.

Later this week the Communist Party of China (CPC) will hold the 19th Party Congress, a major political event that happens just once every five years. Domestic issues will take center stage at the Party Congress, and China watchers will watch closely for news on the composition of a new Politburo Standing Committee, the likely inclusion of Xi Jinping Thought into the CPC’s constitution, and the future of economic development.

International relations will take a back seat to internal issues during the 19th Party Congress, but it will not disappear from the agenda entirely. Three important issue areas to follow are the progress of China’s military reforms, Taiwan, and North Korea. All three could come up during the congress, and all have important implications for U.S. strategy in East Asia and the U.S.-China relationship.

 

Military Reforms

Xi Jinping kicked off a massive reform of the Chinese military in late 2015 by cutting 300,000 personnel from the People’s Liberation Army (PLA) and changing its command and control system. Additional notable reforms over the past two years include changing from military regions to theater commands, the creation of a Strategic Support Force for space, cyber, and electronic warfare, and the growing prominence of the PLA Air Force and PLA Navy relative to the army. The overarching goal of Xi’s military reforms is to turn the PLA into a lean, mean fighting machine capable of winning wars on the modern battlefield.  

Some general information about military reform should be mentioned in the work report produced at the beginning of the 19th Party Congress, but before the report is released congress-watchers should pay attention to promotions and demotions within the PLA and Central Military Commission (CMC). In the weeks and months leading up to the Party Congress, Xi removed several high-ranking PLA generals from their posts and replaced them with new commanders. Changes to the CMC could include a reduction in the number of individuals on the commission and new members that are loyal to Xi and want to improve the PLA’s joint warfare capabilities.

The PLA reforms have two important and competing implications for the United States. On the one hand, once the reforms are completed and internalized the PLA should be a much more effective fighting force, which in turn raises the costs of U.S. military commitments in East Asia. On the other hand, these reforms are a massive and difficult undertaking that will take many years to fully implement. American policymakers should not inflate the threat posed by China in the short term, but it would be unwise to ignore the long-term political implications of a more capable PLA.

 

Taiwan

Relations across the Taiwan Strait have been relatively stable since the election of Tsai Ing-wen as president of Taiwan in January 2016. China is steadily applying pressure on Taiwan in response to Tsai’s “incomplete answer” on the 1992 Consensus, but the pressure has not been unusually onerous and it has not significantly escalated since Tsai’s election almost two years ago. Taiwan will be mentioned in the 19th Party Congress’s work report, but this will likely amount to a restatement of long-held CPC positions on eventual reunification and opposition to Taiwanese independence. The work report’s language could end up being more aggressive and it deserves close observation, but Taiwan is a relatively low priority for the Chinese leadership at the moment.

If the Party Congress produces a “steady as she goes” approach to Taiwan, it would behoove the United States to avoid taking high-profile actions that would damage the US-China relationship. One example of a counterproductive U.S. action is language in the 2017 National Defense Authorization Act allowing U.S. Navy ships to make port calls in Taiwan. Advocates for the port calls, which haven’t happened in Taiwan since 1979, argue that the action is essential for shoring up the U.S.-Taiwan relationship and preventing China from coercing Taiwan. However, Beijing will likely see this break with decades of past practice as a major event that worsens U.S.-China relations.

There are better ways to preserve peace in the Taiwan Strait than adopting a high-profile, precedence-breaking policy of restarting U.S. Navy port calls. For example, U.S. arms sales to Taiwan may lead to angry Chinese press statements, but because they are a continuation of long-standing U.S. policy they reinforce the status quo. Restarting port calls to Taiwan would be a high-profile departure from past U.S. policy, which represents a break in status quo behavior that is worse for the U.S.-China relationship than continuing arms sales.

 

North Korea

The final major international relations issue that may come up at the 19th Party Congress is the ongoing nuclear crisis on the Korean peninsula. The growing tension between the United States and North Korea is China’s most pressing foreign policy problem. A war would prompt a massive influx of refugees into China and have serious implications for the security order in East Asia. Moreover, the Trump administration appears convinced that China needs to do more to pressure North Korea and has levied secondary sanctions against Chinese companies to convince Beijing to do more.

While North Korea looms large for China, it probably won’t get much attention in the 19th Party Congress’s work report. Domestic issues will take precedence at the Party Congress, and while military reforms and cross-strait relations have international implications the CPC views both as domestic concerns. However, a dramatic action by Pyongyang during the Party Congress, such as an ICBM test or an above-ground nuclear detonation, could prompt the CPC to issue a statement on North Korea.

Discussion on the North Korea problem will probably happen during the Party Congress, but absent a significant escalation on the peninsula North Korea will likely not be featured prominently in the official documents produced by the congress. Instead, Xi and the Chinese leadership will likely wait until Trump’s visit to Asia in early November to issue any adjustments to China’s policy toward North Korea.

Welcome news from the Environmental Protection Agency: Administrator Scott Pruitt is curbing often-collusive deals (“sue and settle”) by which the agency, sued by outside groups, agrees to adopt new policies or enact new regulations. (It also usually agrees to pay the outside groups handsomely in legal fees.)  As The Hill puts it, the new policy (full EPA release here) focuses especially on transparency:

“We will no longer go behind closed doors and use consent decrees and settlement agreements to resolve lawsuits filed against the agency by special interest groups where doing so would circumvent the regulatory process set forth by Congress,” Pruitt said, adding that he is also cracking down on attorneys’ fees paid to litigants.

Under Pruitt’s new directive, the agency will post all lawsuits online, reach out to affected states and industries and seek their input on any potential settlements.

The EPA is pledging to avoid settlements that would make for a rushed regulatory process, or that obligate the agency to take actions that the federal courts do not have the authority to force.

Cato adjunct scholar Andrew Grossman discussed the issue in 2015 Senate and 2017 House testimony, noting that “The EPA alone entered into more than sixty such settlements between 2009 and 2012, committing it to publish more than one hundred new regulations, at a cost to the economy of tens of billions of dollars.”  He observed that judicially enforceable consent decrees create “artificial urgency” for bulldozing through new regulations quickly, give favored outside organizations an added channel of influence not available to many of those directly regulated, and tie the hands of later administrations. And as I pointed out in this space a few years back, the issue is by no means confined to the EPA or environmental regulation, but serves as a way to expand government agency power while seeming to constrain it in education, social services, and many other areas.

But the next administration’s EPA chief could reverse Pruitt’s directive with the stroke of a pen. That’s one reason the U.S. Department of Justice – which has been doing its own welcome housecleaning of settlement practices lately – should continue to monitor and regularize litigation practices of this sort, and why Congress should proceed to consider legislation to curb sweetheart pacts on a more lasting basis. 

During the Western Han Dynasty (206 B.C. – A.D. 9), the question of monetary freedom was vigorously debated. There were as yet no banks or paper money in China — money consisted solely of coin.  Private mints competed with government mints, either in the shadow market or legally. In 81 B.C., the issue of whether the state or the market would be the best guardian of sound money came to a head in the famous “Discourses on Salt and Iron,” which were compiled by Huan Kuan in his book Yantie lun. The relevant chapter for our study is chapter 4, “Cuobi” (“Discordant Currencies”).

In this article, I provide some background for the debate between the Confucian scholars who favored private (competitive) coinage and the statesmen, particularly Sang Hongyang, who defended the government’s monopoly on coinage. I then consider the arguments of those engaged in the 81 B.C. debate over the role of government in coinage and the lessons learned.

Background

The first emperor of the Western Han Dynasty, Gaozu (202–195 B.C.), banned   government minting, legalized private mints — most likely because of the severe shortage of coins that impeded trade — and adopted the Qin Dynasty’s standardized bronze coin, the banliang (or “half ounce” = 12 zhu).[1] Its relatively heavy weight (about 8 grams) made it unsuitable for widespread use. The demand for lighter coins to facilitate trade led private mints to produce a large quantity of lighter “elm-seed” coins that weighed 0.2 to 1.5 grams. Those coins retained the conventional banliang inscription, making their face value much greater than their intrinsic value.[2]  Of course, merchants would not accept them at face value.

Banliang 4 Zhu Coin

In 186 B.C., Empress Lü reinstituted the Imperial Mint with the hope of gaining control over the monetary system. The first coin brought out by the government was a banliang coin weighing 8 zhu. Next, in 182 B.C., a new banliang coin called the wufen, which weighed only 2.4 zhu, was circulated. The demonetization of the 8 zhu coins, which allowed bronze to be restruck into a much larger nominal stock of money, led to inflation.  Consequently, in 175 B.C., Emperor Wen of Han increased the metallic content of the banliang to 4 zhu, and once again allowed private mints the freedom to coin money provided they complied with the standard weight of 4 zhu and produced only bronze coins. The see-saw between government and private mints continued when, in 144 B.C., Emperor Jing of Han ended competitive coinage and reinstituted the government’s monopoly. Private coining was made a crime and those convicted could face the death penalty.[3]

The substantial difference between the face value and intrinsic value of banliang coins during the early Han period provided fertile ground for counterfeiting.  However, money exchanges developed to discover the true value of banliang coins, adjusting their nominal value to reflect their weight (or intrinsic value), rather than passively accepting the fictitious value of 12 zhu. Eventually, in 120 B.C., a new bronze coin, the 3 zhu cash coin, replaced the old 4 zhu banliang coin — and its face value was made equal to its intrinsic value. Finally, in 119 B.C., Emperor Wu of Han introduced the wuzhu (or 5 zhu) bronze coin, which was extensively used until the 7th century.

At first, the wuzhu was minted by both the central government and the prefectures, but in 113 B.C. minting became the sole responsibility of the Imperial Mint.[4]

The 81 B.C. Debate Over Monetary Freedom

When Emperor Wen of Han legalized private mints in 175 B.C., Jia Yi, a former official, argued that competitive coinage would lead to debasement, a plethora of cash coins that would confuse the public, and result in the manipulation of money exchanges. He therefore recommended restoring the state monopoly on coinage and controlling the supply of copper.[5]  His advice was rejected but the debate over private coinage reemerged in 81 B.C.

The Main Arguments

Sang Hongyang, a statesman who had been a key advisor to Emperor Wu, took the lead role in arguing against private coinage and in support of government monopoly.  Meanwhile, more than 60 Confucian scholars (literati) from across China made the case for monetary freedom as the best way to provide sound coinage.

In his argument against monetary freedom, Sang Hongyang contended: “If the currency system is unified under the emperor’s control, the people will not serve two masters [the state and the market].  If coin issues from the ruler, the people will have no doubts about whether it is genuine or not.”[6]

The literati, who favored economic freedom, as opposed to the interventionist policies initiated by Emperor Wu, disputed that argument:

In high antiquity, numerous forms of currency existed, wealth circulated, and the people were happy.  Later, when the old types of currency were replaced with silver coins inscribed with tortoises and dragons, the people became deeply suspicious of the new coins. The more often the currency system changes, the more suspicious the people become.

Subsequently, all the old currencies circulating throughout the realm were demonetized and sole authority to mint coin was vested in the Three Officers of the Intendancy of Natural Resources. Officials and artisans alike steal from the profits of the mint. Moreover, they fail to ensure that coins are made to exact standards; some coins are too thin or too thick, too heavy or too light. Farmers are not expert at perceiving the qualitative differences between different coins. When comparing one coin to another, they trust the old coins but harbor suspicions about the new ones, without really knowing which is genuine and which is false. Merchants and shopkeepers pass off bad coins in exchange for good, taking in coins worth double their face value while fobbing off debased ones.  … If people must discriminate between different types of coin, then trade will be harmed, and consumers in particular will suffer.

Therefore, the sovereign provides for the people’s welfare by not restricting the use of natural resources … [and] he facilitates the use of currency by not prohibiting people from freely minting coins.[7]

It is clear from these passages that the literati based their case for monetary freedom on sound economics and the positive consequences competitive coinage was expected to have on human welfare.  As Richard von Glahn, an eminent historian of Chinese monetary history, notes,

The Confucian scholars arrayed in opposition to Emperor Wu’s policies of state intervention in the economy rejected the contention that a state monopoly on coinage is the best defense of sound money.  The market, they suggested, will compel private coiners to maintain proper standards of size, weight, and purity.  A state monopoly on coinage, in contrast, allowed the state to debase its own coin with impunity.[8]

They also thought that, from an ethical view point, a government monopoly is unjust, because it prevents free competition and allows officials to use their power to debase the currency for personal gain.

Although the literati had ethics, history, and logic on their side, they were unable to end the state monopoly on coinage.  Government officials’ inclination to abuse their power by manipulating the monetary system for fiscal purposes and their own profit was simply too strong. Consequently, “the court debate in 81 B.C. marked the last serious challenge to the principle of a [monopoly] sovereign currency.”[9]

A Catallactic View of Money

The proponents of competitive coinage held a catallactic (i.e., exchange) view of money. They held that money, as a medium of exchange, evolved from commodities that had an exchange value in barter economies. The literati argued: “The ancients had marketplaces but no coinage.  Everyone exchanged what they had for what they lacked … .  In later ages, tortoise and cowrie shells, gold, and bronze coins emerged as the media of exchange.”[10] They did so because those commodities had a nonmonetary value, were scarce enough and durable enough to serve as money, and engendered the people’s trust—not because the sovereign mandated their use as money. In Mengerian terms , they had wide “marketability” — not just personal use value.[11]

Knife-shaped money Spade-shaped money

The Confucian scholars who participated in the 81 B.C. debate over coinage no doubt were familiar with the writings of Sima Qian (c. 145–86 B.C.), the “Grand Historian,” who wrote: “When farmers, artisans, and merchants first began to exchange articles among themselves, manifold forms of currency — tortoise and cowrie shells, gold and bronze coin, and knife-shaped and spade-shaped money — came into being.”[12]

Sima Qian, the Grand Historian

According to von Glahn, Sima Qian and Confucian scholars “evoked an image of a spontaneous emergence of the market as a reproof of meddlesome rulers who manipulated the currency system for their own profit.”[13]  However, while Sima Qian criticized government intervention, he did not favor private coinage, which he thought could be disruptive.[14]

The catallactic (market-based) doctrine of the origin of money was not widely shared. Most authorities rejected it in favor of the long-held chartalist view that money originated from rulers who sought to improve the welfare of their people. As expressed in the Guanzi (a book by Guan Zhong, a 7th century B.C. statesman): “Tang [mythical founder of the Shang Dynasty] used the metal of Mount Zhuang, and Yu [founder of the Xia Dynasty] took the metal of Mount Li, to cast money, which they employed to redeem the children from bondage.”[15]

Lessons

A study of the monetary history of the Western Han Dynasty is instructive in showing the tension between state power and private initiative in meeting the demand for currency as the economy and population grow.  Government officials’ inclination to abuse their power when they have a monopoly on coinage is evident during the early Han Dynasty, as is the monetary chaos that can occur when there is a lack of a genuine rule of law.

The court debate in 81 B.C. shows that there was support for competitive coinage and that the literati from across China believed that, under just laws that were enforced, private mints could bring about monetary harmony. The debate also shed light on the importance of market forces in understanding the origin (or early history) of money. They thus give us another bit of evidence in the long-standing controversy over the state theory of money (chartalism) and the exchange (catallactic) theory of money, also known as “metallism”.[16]

_________________

[1] Nishijima Sadao, “The Economic and Social History of Former Han,” p. 586; in The Cambridge History of China: Volume 1, The Ch’in [Qin] and Han Empires, 221 B.C.–A.D. 220, edited by Denis Twichett and Michael Loewe, New York: Cambridge University Press, 1986.

The Han banliang was effectively a monetary unit, the actual metallic equivalent for which tended to change over time, while the zhu was a stable weight unit, equivalent to so many grams. Thus coins that bore a banliang value were given a nominal rating equal to12 zhu/banliang. The difference between the nominal and actual value was the difference between that rating and the coins actual weight in zhu.  For an excellent history of coinage during the Qin and Western Han Dynasties, see http://www.calgarycoin.com/reference/china/china2.htm.

[2] Nishijima, p. 586.

[3] Ibid.; see also Richard von Glahn, Fountain of Fortune: Money and Monetary Policy in China, 1000–1700, p. 35, Los Angeles: University of California Press, 1996.

[4] Nishijima, p. 587; Walter Scheidel, “The Monetary Systems of the Han and Roman Empires,” Princeton/Stanford Working Papers in Classics, Paper No. 110505 (February 2008), p. 8.

[5] Jia Yi’s commentary was preserved in the Hanshu (History of the Former Han) compiled by Ban Biao,  Ban Gu, and Ban Zhao. It appeared in 111 A.D.  See Scheidel, p. 8.

[6] Huan Kuan, Yantie lun, 4, “Cuobi,” p. 16; English translation in von Glahn, p. 36.

[7] Yantie lun, pp. 16–17; in von Glahn, pp. 36–37. “Currency” refers to so-called cash coins, not to paper currency.

[8] Von Glahn, Fountain of Fortune, p. 36.

[9] Ibid., p. 37.

[10] Yantie lun, p. 16.; in von Glahn, p. 27.

[11] See Carl Menger, Principles of Economics (1871), chap. 8, “The Theory of Money.” Translated by J. Dingwall and B. F. Hoselitz, with an introduction by Friedrich A. Hayek. New York: New York University Press, 1981.

[12] Sima Qian, Shiji (Records of the Grand Historian), 30.1442. Beijing ed.; von Glahn, p. 26.

[13] Von Glahn, p. 27.

[14] Ibid., p. 35.

[15] Guanzi, 75, “Shanquanshu,” III: 73 (Guoxue jiben congshu edition); in von Glahn, p. 26.  Accordingly, von Glahn (p. 28) notes: “By the late imperial times, the Guanzi version of the origin of money prevailed over catallactic theories.”

[16] On the case against chartalism (also known as cartelism), see Lawrence H. White, “Why the ‘State Theory of Money’ Doesn’t Explain the Coinage of Precious Metals,” Alt-M (August 24, 2017), and George Selgin, “‘Lord Keynes’ Contra White on the Beginnings of Coinage,” Alt-M (August 30, 2017).

[Cross-posted from Alt-M.org]

As Republicans flesh out details of their tax plan, one target for reform should be the “required minimum distribution” (RMD) rules for retirement accounts. The rules generally require that people begin withdrawing from their 401(k)s, 403(b)s, and traditional IRAs at age 70½ whether they need the cash or not.

The RMD rules are misguided, and policymakers should repeal them.

In writing this study on savings, I came across a Wall Street Journal piece arguing for liberalizing the RMD rules. Accountant Ed Slott says that the “government should raise the age for required minimum distributions to at least 80—if not eliminate it altogether.”

Here are Slott’s points:

  • People are living longer today than before, so the RMD rules should be updated “to more accurately reflect today’s increased longevity.”
  • Many people want to keep working, but “RMDs are particularly onerous for seniors who still have employment income and don’t need to tap savings for living expenses … No one should be forced to pull money out of an IRA while they are still working. When combined with a paycheck, these distributions can substantially increase taxable income … resulting in a higher overall tax bill that prematurely eats away at retirement balances.” The government should not discourage seniors from working, and the RMD rules can do that.
  • Policymakers who resist tax cuts would likely oppose RMD repeal. But Slott argues, “Uncle Sam won’t be denied his cut, even if the funds are never withdrawn during our lifetimes. The income-tax bill never goes away since there is no step-up in tax basis at death with IRAs or 401(k)s, as there is with nonqualified retirement funds and other assets. Whoever withdraws the taxable IRA or other retirement funds will pay the income tax whenever it is withdrawn.”
  • Slott notes that a round number such as 80 would make for simpler RMD rules than the current 70 ½. The half age thing is just one way that RMD rules are complex, as this WSJ article discusses. Full repeal of the RMD rules and penalties would be a great way to simplify the tax code.

Here is the most important issue: the RMD rules are anti-saving. By requiring withdrawals, they encourage consumption. Yet it is good for everyone when people save more. It increases financial security, reduces dependence on government, and generates larger pools of savings to support economic growth.

So repealing the RMD rules is a winner. Simpler tax code. Support for thrift, saving, and continued earning. Greater flexibility in retirement finances. More freedom with less government rules.

For a further discussion of the RMD rules see here and here.

For more on spurring savings with tax reform, see this report on Universal Savings Accounts.

Should judges consider evidence that’s inadmissible at trial when deciding whether to certify a class for class-action litigation? Particularly given the serious consequences of certification—most defendants settle class actions to avoid greater liability, and non-certified cases are often not worth pursuing—due process should require that evidence presented at the class-certification stage meet the same standards as that presented at trial.

One case out of California illustrates how allowing inadmissible evidence in any part of a legal proceeding not only violates the due-process rights of defendants and absent class members, but contradicts recent Supreme Court rulings and the Federal Rules of Civil Procedure. Maria del Carmen Pena is the lead plaintiff of a group of agricultural employees alleging that they were denied breaks due them under the governing law. Pena tried to gain class certification by presenting a spreadsheet summarizing work hours, but this evidence was inadmissible for trial purposes because it was created by her attorney.

Nevertheless, the district court certified the class and the U.S. Court of Appeals for the Ninth Circuit affirmed. Cato has now filed a brief supporting the employer’s cert. petition, urging the Supreme Court to address just that evidentiary issue.

If, as the Supreme Court recently said in Walmart Stores, Inc. v. Dukes (2011), “mere allegations” are insufficient to support certification, then it is also wrong to allow otherwise inadmissible evidence to provide the foundation for certification. Because the Court insisted in Dukes that “certification is proper only if the trial court is satisfied, after rigorous analysis, that the prerequisites of Rule 23(a) [laying out the requirements for class certification] have been satisfied,” lower courts should consider examinations of both fact and legal merits when determining if certification is appropriate.

Adhering to the 1974 decision of Eisen v. Carlisle, in which the Court held that, “for purposes of determining certification, allegations made in the complaint are taken as true and the merits of the claim are not considered,” many lower courts avoid considering any issue at the certification stage that may overlap with a question on the merits—and thus have avoided requiring that evidence used to certify a class meet the normal standards for admissibility.

But Dukes established that due process demands a rigorous inquiry (which sometimes may go beyond the bare pleadings) before certification. When courts accept inadmissible evidence to support class certification, the basic requirements of due process are compromised. Once certified, expenses and risks often compel settlements divorced from merit considerations; certification is, as the Eleventh Circuit has explained, “the whole ball game.”

Absent class members also suffer because it is the act of certification that determines whether they are bound by a settlement or adverse judgment that wipes out their individual claims. Unfortunately, confusion over the decades-old holding in Eisen lingers; a refusal to view it in light of the Court’s more recent decisions has resulted in an inconsistent application of evidentiary standards.

The Court should take up Taylor Farms v. Pena, dispel confusion among lower courts, and protect due-process rights by clarifying that evidence submitted at the class-certification stage must meet the same time-tested standards as evidence submitted at trial.

The Republican tax reform framework envisions cutting the federal corporate tax rate from 35 to 20 percent. There may be pressure in coming weeks to scale-back some of the framework’s pro-growth provisions in order to hit revenue targets, but policymakers should stick with their corporate rate target.

Various groups have modeled the revenue effects of proposed corporate rate cuts, but they generally do not account for the full dynamic effects of reform. We can get an idea of the full effects by looking at actual reforms abroad.

Sharp corporate tax rate cuts in Canada and Britain do not seem to have lost those governments much, if any, revenue. That is likely because companies responded with a wide range of real and paper changes that increased their reported income. The same would happen in the United States, which is why dropping our rate to 20 percent would probably not lose revenue over the long term.   

Here is some evidence. For 19 OECD countries with good rate and revenue data back to the 1960s, I calculated the average corporate tax rates and average corporate tax revenues as a share of GDP. The chart illustrates the Laffer Curve effect of chopping high tax rates on a mobile tax base—rates go down, the tax base expands, and revenues remain strong.

From 1985 to 2005, corporate tax revenues as a share of GDP soared even though the average tax rate across the 19 countries fell from 45 to 29 percent. Then there is a sharp drop in revenues in 2010, presumably because of the recession or slow growth in many countries at the time. But note that even in the poor economic climate of 2010, corporate tax revenues were the same or higher than in years prior to the 2000 boom year.

By 2015, revenues were rising again even as the average tax rate continued to fall to a new low of 24 percent. The average revenue for these countries in 2015 at 2.9 percent of GDP is below 2000 and 2005, but above all prior years when rates were much higher.

 

Data Notes:

The 19 countries are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Spain, Sweden, United Kingdom, and the United States.

OECD revenue data is here and rate data is here. I used the central government rates because I have not found a source for subnational rates prior to the OECD data, which goes back to 1981. As a result, the revenues (which include subnational) and the rates (which do not) are not an exact match, but that is not a big problem for illustrating trends over time.

A decade after the start of the 2007-2008 financial crisis, and seven years after the passage of Dodd-Frank, it seems both the legislative and executive branches may be making small steps toward financial regulatory reform. Earlier this month, the Treasury Department released the second in a series of reports on the U.S. financial sector, this one focused on the capital markets. And last week, the House Financial Services Committee passed a suite of bills aimed at reforming many areas of financial regulation. 

While passing out of committee is only the first of many steps toward legislation, it is encouraging that several of the House bills passed with either unanimous or bi-partisan support. Although the House notably passed the CHOICE Act earlier this year, a bill that would serve effectively as a repeal-and-replace template for Dodd-Frank, that bill passed on a strict party-line vote, with only Republicans voting in favor. Therefore the fact that many of the most recent bills had some support from Democrats may bode well. Of course, any action will require the Senate as well. There has not yet been a Senate answer to the House CHOICE Act, although there is still time in the year.

As for the Treasury report and recent suite of House bills, they’re a mixed bag. On the whole, they take up several recommendations that many of us have been pushing for a while now. For example, the Treasury report recommends that all companies considering an initial public offering (IPO) be permitted to file confidentially and “test the waters,” that is, sound out potential investment interest before pulling the trigger on a costly IPO. Right now, only companies below a certain size are permitted to do this. There has been widespread concern about how few IPOs have taken place in recent years, and how few public companies now exist. Given the fact that investment in privately-held companies is tightly restricted, if companies eschew the public capital markets, average investors lose out. This change is one that may entice more companies to go public, with little risk to either investors or the markets.

Other changes would be half-measures, better than the status quo but still short of the mark. For example, both the Treasury report and one of the House bills address the restrictions on investment in private companies. Under current securities laws, investment in private offerings is effectively limited to institutions and wealthy individuals, defined as those who either earn at least $200,000 per year or have at least $1 million in assets excluding their primary residences. Both the Treasury report and the House bill would expand the definition, including individuals who can show financial sophistication through licensure or other means.

Expanding the definition is certainly a start. As it stands, existing regulation has absurd results. For example, an investment advisor who advises wealthy clients can recommend investments she herself cannot make since current law deems her insufficiently sophisticated if she is not also wealthy. Expanding the definition to remedy this would at least make the results less ridiculous. But this change doesn’t go far enough. Why should there be any restriction on how a person can spend money he has actually in hand? After all, anyone can spend money on all kinds of silly purchases thankfully without government interference. But if a person would prefer to make an investment with that money, current regulation is patently paternalistic: if the person is not wealthy, he, for the most part, cannot use that money to invest in private companies. 

Another half-measure concerns a bill that would repeal the controversial Department of Labor rule governing broker advice for the sale of retirement investments. This rule, which would require those providing advice while selling certain investments to adhere to the very stringent “fiduciary duty” standard, has been criticized on two grounds. First, that the Department exceeded its authority, shoe-horning the rule into its limited jurisdiction over employer-sponsored retirement accounts. Second, that the rule itself would result not in better advice for moderate income Americans, but no advice as brokers abandon low-value accounts due to the increase in compliance costs the rule would impose. Repealing the rule is a good place to start. However, the bill passed by the House committee would only remove the rule from the Department of Labor’s (DOL) jurisdiction. While it does not expressly impose a fiduciary standard, as the DOL’s rule does, it still uses language suggesting a heightened duty of care. Brokers are in reality salespeople who give recommendations incidental to that role. There may be some argument for requiring that such brokers disclose the fact that they may be paid based on a commission structure, to ensure that investors are not confused about their role. But any rule must ensure that the compliance costs of a higher duty of care does not outweigh the benefits, or place inappropriate requirements on those in a sales role. Otherwise the result is likely to be reduced access to information for the people who need it most. In fact, some initial reports show that this has already begun to happen in some firms under the current DOL rule.

The efforts by Treasury and the House Financial Services Committee are welcome. It is encouraging that some of the House bills passed with considerable support from both political parties. Given the breathtaking scope of Dodd-Frank’s changes, and the harmful effects it has had on the economy, any change is welcome. But there is still much, much more that can and should be done. 

 

As any child of five can tell you, taking a toy away in exchange for the promise of some future benefit does not change the fact that the toy was taken in the first place. This is also true of real property: A token gift of potential unknown value in no way changes the character of the initial taking. Under Supreme Court precedent, when all value of real property is regulated away, a taking has occurred and just compensation is due.

Gordon and Molly Beyer found themselves in just such a situation when they were informed that the nine-acre island in the Florida Keys they bought in 1970 for $70,000, intending to build a retirement home, had been reclassified as a bird rookery, requiring them to leave it in its natural state. Their island was zoned for general use at the time of purchase, but various regulatory actions restricted use over the years until the Beyers were informed that their property rights had quite literally gone to the birds. In exchange for the loss, they were awarded 16 nonmonetary, rate of growth ordinance (ROGO) points that might be sold to another property owner who wished to develop their land.

The Beyers pursued administrative review and inverse-condemnation proceedings, where a state court ultimately determined that no uses other than primitive camping and picnicking were allowed on the property, but that no taking had occurred. This was because the Beyers had no reasonable, investment-backed expectations for use of their property and because the award of ROGO points satisfied any expectations they had (if this is confusing to you, you’re not alone).

A series of fruitless appeals followed until finally in 2016, the Florida Supreme Court declined to hear the case. The Beyers―through their estate’s representative; the litigation dragged on so long that they’ve both passed away―are now requesting that the Supreme Court take their case. Cato has filed an amicus brief* supporting their petition and urging the Court to provide desperately needed clarity to regulatory-takings jurisprudence.

We argue that the Beyers were subject to a total taking and deserve just compensation for that loss. Giving them ROGO points does not change that analysis. Additionally, when engaging in an ad hoc, factual inquiry, courts must follow the Supreme Court’s instructions to consider three factors—economic impact, interference with investment-backed expectations, and the nature of the government action—rather than inappropriately focusing on just one of the three. Courts must consider how and when property owners form “reasonable” investment-backed expectations rather than assuming that property restrictions (or lack thereof) at the time of purchase play no role in shaping expectations.

Regulatory-takings jurisprudence is a quagmire that Florida courts further contort to ensure that state authorities can regulate without the constitutional responsibility to provide just compensation for burdened property. If the Court fails to take this case, it is not just property owners who will suffer. Allowing the state-court ruling to stand—blessing theft of property without compensation—may work directly against the purpose of the regulations; rather than providing effective conservation, lack of compensation may create a race to develop.

Consider the Beyers’ situation: if they had known in 1970 that they would not be able to build their retirement home one day, their best course of action would have been to develop the island to its highest allowable limit. Refusing compensation in cases that clearly fall under the Supreme Court’s total-deprivation-of-use rule will merely provide incentives to investors who want to avoid the risk of total loss to develop as much as possible, as quickly as possible.

The Court will decide whether to take the case of Ganson v. City of Marathon later this fall.

*This is the first brief that Cato research fellow Trevor Burrus has officially signed. He’s contributed to more than 100 over the years, but only recently became a member of the bar. Now he can get the public credit he richly deserves.

This study explored why there is so much failure and mismanagement in the federal government. Federal agencies lack incentives for efficiency and quality, and the environment in some workplaces seems to breed unethical behavior. The government has also become far too large to manage effectively and for Congress to oversee adequately.

A new investigation by USA TODAY reveals a pattern of rather disgraceful mismanagement in the Department of Veterans Affairs:

… the VA—the nation’s largest employer of health care workers—has for years concealed mistakes and misdeeds by staff members entrusted with the care of veterans.

In some cases, agency managers do not report troubled practitioners to the National Practitioner Data Bank, making it easier for them to keep working with patients elsewhere. The agency also failed to ensure VA hospitals reported disciplined providers to state licensing boards.

In other cases, veterans’ hospitals signed secret settlement deals with dozens of doctors, nurses and health care workers that included promises to conceal serious mistakes—from inappropriate relationships and breakdowns in supervision to dangerous medical errors–even after forcing them out of the VA.

USA TODAY reviewed hundreds of confidential VA records, including about 230 secret settlement deals never before seen by the public … In at least 126 cases, the VA initially found the workers’ mistakes or misdeeds were so serious that they should be fired. In nearly three-quarters of those settlements, the VA agreed to purge negative records from personnel files or give neutral or positive references to prospective employers.

This study on privatization discussed how the “public” sector is often less transparent than the “private” sector. The VA is certainly not transparent:

The secret settlements obtained by USA TODAY represent a fraction of the problem doctors and other employees the VA has discovered over the past 10 years.

Each year, the agency fires hundreds of medical workers and pays out hundreds of malpractice claims.

The providers’ names remain secret. USA TODAY asked to inspect the records for thousands of those cases, but the VA blacked out or would not release the identities of the providers or the details of what took place.

You may think that we have “government of the people, by the people, for the people” in America, but it does not seem that way when federal agencies behave like this.

For more on federal government failure, see here, here, and here.

For ideas on reforming the VA, see here.

President Trump today signed an executive order that urges executive-branch agencies to take steps that could free millions of consumers from ObamaCare’s hidden taxes, bring transparency to that law, and give hundreds of millions of workers greater control over their earnings and health care decisions.

Background: ObamaCare’s Hidden Taxes

Since the Affordable Care Act took full effect in 2014, premiums in the individual market have more than doubled. The average cumulative increase is 105 percent, equivalent to average annual increases of 19 percent. Family premiums have increased 140 percent. In Alabama, Alaska, and Oklahoma, premiums have more than tripled. Analysts predict an average increase of 18 percent for 2018; premium increases will average 24 percent in Washington State and 45 percent in Florida. Maryland Insurance Commissioner Al Redmer predicts that if these trends persist, the Exchanges “will implode.”

ObamaCare’s skyrocketing premiums are not due to rising health care prices. They are due to the hidden taxes ObamaCare imposes. The law’s community-rating price controls increase premiums for the healthy in order to reduce premiums for the sick. The law also requires individuals and small employers to purchase a government-defined set of “essential health benefits,” including coverage (e.g., maternity care) that many consumers do not want.

The cost of ObamaCare’s hidden taxes is substantial. The Department of Health and Human Services commissioned (and then, oddly, suppressed) a study from the consulting firm McKinsey & Co. estimating their impact. McKinsey found ObamaCare’s essential health benefits mandate has increased premiums for 40-year-old males by up to 23 percent over four years. Even more startling, McKinsey found community rating has increased premiums for 40-year-old males by a further 98 percent to 274 percent since 2013. Community rating’s impact on premiums has been three to nine times greater than the overall trend in health care prices and spending. Community rating has also been the driving force behind ObamaCare’s narrow provider networks, which McKinsey found have largely or entirely erased the benefit from requiring consumers to purchase additional coverage.

Finally, insurers are fleeing the Exchanges, leaving consumers with little or no choice of carriers. At last count, 49 percent of counties and 2.7 million Exchange enrollees (29 percent) will have only one carrier in the Exchange. Exchange coverage is also eroding because ObamaCare literally penalizes insurers for providing high-quality coverage to the sick.

Short-Term Plans

Fortunately, Congress explicitly exempted one category of health-insurance products from ObamaCare’s crushing hidden taxes. While those provisions apply to individual health insurance coverage, the Public Health Service Act states, “The term ‘individual health insurance coverage’ means health insurance coverage offered to individuals in the individual market, but does not include short-term limited duration insurance.” Congress did not define “short-term limited duration insurance,” but HHS had traditionally defined them to be health plans with a term of less than 12 months and that were not guaranteed renewable.

After ObamaCare took full effect in 2014, the market for short-term health insurance policies grew by 50 percent as many consumers sought to avoid the law’s hidden taxes. In 2016, the Obama administration tried to cut off that escape hatch and force consumers to pay those hidden taxes by prohibiting short-term plans with terms that exceeded three months.

Today’s executive order directs executive-branch agencies to “consider allowing such insurance to cover longer periods and be renewed by the consumer.”

If the Trump administration allows insurers to offer guaranteed renewable short-term plans, it would be truly revolutionary. Consumers could avoid ObamaCare’s hidden taxes and low-quality coverage by purchasing relatively secure insurance that protects them against the long-term financial cost of illness, and that protects them against their premiums rising if they get sick. Premiums would be far lower than they are in the Exchanges. If the administration gets the regulations right, this change could even allow innovations that reduce the cost of health-insurance protection by a further 80 percent. In effect, the Trump administration could enact Sen. Ted Cruz’s (R-TX) compromise repeal-and-replace proposal via regulation.

Health Reimbursement Arrangements

The federal tax exclusion for employer-sponsored insurance effectively penalizes workers unless they surrender a sizeable chunk of their income to their employer and let their employer choose their health plan. Workers with family coverage lose control of an average $13,000. Overall, employers get to control $700 billion per year that rightfully belongs to their employees.

Health savings accounts (HSAs), flexible spending accounts (FSAs), and health reimbursement arrangements (HRAs) allow workers to control a portion of their health care dollars without penalty, but different rules apply to each. Only HSAs give workers true ownership of their health care dollars. But HRAs have the potential to allow workers who purchase health insurance on the individual market to avoid the effective tax penalty the federal government has traditionally levied on workers who purchase such coverage.

President Trump’s executive order directs executive-branch agencies “to increase the usability of HRAs, to expand employers’ ability to offer HRAs to their employees, and to allow HRAs to be used in conjunction with nongroup [i.e., individual-market] coverage.” Presumably, this means the administration is thinking of rolling back the Obama administration’s rule that employers could not use HRAs to make tax-free contributions to their employees’ individual-market premiums.

If the agencies get the rules right, they could reduce taxes by reducing the penalty the federal government imposes on workers who want to control their health care dollars, and free workers to purchase relatively secure coverage (e.g., on the short-term market) that does not disappear when they change jobs.

Association Health Plans

The federal government imposes different rules on coverage for individuals, small employers, and large employers. It also imposes different rules on employers who purchase coverage from an insurance company versus employers who “self-insure” by bearing that risk and basically running their own insurance company. As a rule, large employers and those that self-insure are subject to less regulation.

Association health plans, or AHPs, are a way for multiple individuals or employers to purchase insurance together. Trump’s executive order directs the Department of Labor to “consider proposing regulations or revising guidance, consistent with law, to expand access to health coverage by allowing more employers to form AHPs.” It appears the goal is to allow AHPs to let groups of small employers qualify as large employers (and therefore become exempt from federal regulations such as ObamaCare’s essential health benefits mandate) and to let them self-insure (and therefore become exempt from state health-insurance regulations).

The AHP changes the executive order envisions would not be as clear a win for consumers. They seek to build on existing government favoritism toward employer-sponsored health insurance, a type of coverage that has the curious feature that it disappears when you get sick and can’t work anymore. Employer-sponsored insurance therefore does not solve but instead exacerbates the problem of preexisting conditions. It also operates under community-rating price controls that are similar to those in ObamaCare, and that produce similar effects. (Oddly, while the Trump administration is trying to free consumers from community rating, it boasts that AHPs would have that feature.) If the AHP-related changes allow employers to avoid ObamaCare’s hidden taxes, that is a step in the right direction. But to the extent they would move even more authority for regulating health insurance from states to the federal government, that would be a step in the wrong direction.

And note: expanding AHPs is not what free-market advocates have in mind when we talk about allowing consumers and employers to purchase insurance across state lines. The idea is to allow employers and individuals to purchase insurance licensed and regulated by a state other than their own, not by the federal government.

Working within the Law, Not Undermining It

Despite all the hype on both sides, Trump’s executive order is not radical, nor would it undermine ObamaCare. Indeed, by itself the executive order does literally nothing. It merely indicates what some in the administration would like executive-branch agencies to do.

The changes this executive order envisions would not, as some suggest, be the most significant changes the Affordable Care Act has seen. All three branches of government have already altered the constraints imposed by the ACA to a greater extent than these changes would.

  • Congress and President Obama actually repealed parts of the ACA, including the “1099 tax” and the CLASS Act.  
  • Congress and President Obama curtailed the law’s tax cuts and subsidies by increasing premium-assistance-tax-credit clawbacks and limiting risk-corridor subsidies.
  • In NFIB v. Sebelius, the Supreme Court radically rewrote the ACA by making the Medicaid expansion optional.
  • President Obama unilaterally exempted people from the ACA’s health-insurance regulations when he created “grandmothered” plans.

The changes this executive order envisions would not go nearly so far. They would not alter the constraints imposed by the ACA or other federal statutes. They would work within those constraints.

It is therefore not accurate to claim these changes would somehow “undermine” ObamaCare. They would allow many consumers to avoid the Exchanges and ObamaCare’s hidden taxes—but then again, so did President Obama when he created “grandmothered” plans. They would make the costs of community rating, essential health benefits, and other hidden taxes more transparent—but so did “grandmothered” plans, as well as the steps President Obama took with Congress to increase premium-assistance-tax-credit clawbacks and to limit risk-corridor subsidies.

When healthy consumers flee the Exchanges, premiums could rise even faster than they already are, and the Exchanges could indeed collapse as Maryland’s insurance commissioner predicts. If so, we must understand that as a manifestation of ObamaCare’s unpopularity. If community rating and other provisions of the law were as popular as ObamaCare supporters claim, consumers would be lining up to pay the resulting hidden taxes. But they won’t–and even Democrats know it. So when Democrats object to reforms that would let consumers avoid ObamaCare’s hidden taxes, they are actually implicitly conceding that even the ObamaCare provisions that they claim are popular are actually unpopular. What Democrats appear to mean when they complain this executive order “undermines the law” is that it could undermine their illusions about ObamaCare’s popularity and sustainability. 

 

Yesterday, the President tweeted:

With all of the Fake News coming out of NBC and the Networks, at what point is it appropriate to challenge their License? Bad for country!

— Donald J. Trump (@realDonaldTrump) October 11, 2017

He then followed up with this:

Network news has become so partisan, distorted and fake that licenses must be challenged and, if appropriate, revoked. Not fair to public!

— Donald J. Trump (@realDonaldTrump) October 12, 2017

It is true that the U.S. Supreme Court has long upheld the awarding or withholding of broadcasting licenses by the Federal Communications Commission (FCC). In 1968, Richard Nixon thought the networks were hostile to his bid for the presidency. After his narrow victory, the Nixon administration contrived a plan to indirectly sanction the speech of the networks, as I noted in my Cato Policy Analysis on the Fairness Doctrine:

In December, after the [1968] election, Clay T. Whitehead, the head of the White House Office of Telecommunications Policy, delivered a speech in Indianapolis proposing changes in the Communications Act of 1934. When their licenses were up for renewal, local stations would be required to demonstrate that they were “substantially attuned to the needs and interests of the community” and had offered a reasonable opportunity for the “presentation of conflicting views on controversial issues.” Local station managers and network officials would be held responsible for “all programming, including the programs that come from the network.” Those who did not correct imbalances or bias in network political coverage would be “held fully accountable at license renewal time.” The policy would have bite. If a station could not demonstrate meaningful service to all elements of its community, the license should be taken away by the FCC. Along with that threat came two offers: the license period for stations would be extended, and challenges to license renewal would become harder to sustain.

The Nixon administration argued that the government should make the network news monopoly offer various viewpoints. They invoked that now defunct Fairness Doctrine, which required a balance of views on public issues from broadcast license-holders. The media struck back:

A Washington Post editorial captures the spirit of the harsh response that met Whitehead’s speech: “the administration is endangering not simply the independence of network news organizations, but the fundamental liberties of the citizens of this country as well.”…Robert G. Fichtenberg, chairman of the freedom of information committee of the American Society of Newspaper Editors, called the proposed licensing standards “one of the most ominous attacks yet on the people’s right to a free flow of information and views.”

The Nixon administration began to back off. In March 1973, they introduced legislation that would extend the term of a broadcasting license from three to five years. The other proposals mentioned at the start of Nixon’s first term “were not included in the proposed legislation nor were they mentioned again by the administration.”

More recently, in 2004, seventeen U.S. Senators bullied the Sinclair Broadcasting Group out of showing a documentary harshly critical of presidential candidate John Kerry. In this case, the media lost: Sinclair backed down for fear of its affiliates losing their licenses. The Kerry documentary went unseen.

President Trump’s tweets promise unconstitutional attacks on freedom of speech and of the press. Not for the first time, the tweets show illiberal passions dominating a man whose job demands rationality, discipline, and a respect for fundamental law. Absent those, President Trump might consider Richard Nixon’s failure to bring the press to heel. Perhaps prudence might serve as a substitute for absent virtues. 

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