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Over at Cato’s Police Misconduct site, we have selected the worst case for the month of August. It’s the Baltimore Police Department (BPD). 

Although the misconduct has been festering for many years, our selection is based upon the investigative findings of the Department of Justice, which were published in a report last month.

Here are a few of those findings:

  • The BPD engages in a pattern or practice of making unconstitutional stops, searches, and arrests;
  • The BPD engages in a pattern or practice of using excessive force;
  • The BPD engages in a pattern or practice of retaliating against people engaging in constitutionally-protected speech;
  • The BPD has allowed violations of policy to go unaddressed even when they are widespread or involve serious misconduct;
  • The BPD has failed to take action against offenders known to engage in repeated misconduct.

Because the problems run deep, it would be a mistake to focus all of our attention on the police department itself. The political establishment of Baltimore knew there were problems, but failed to address them. It remains to be seen whether the reform rhetoric we have been hearing will be followed by real action.


No, I don’t mean sections 8 and 10 of the Constitution’s first article — though goodness knows a case can be made (and has been made recently, and most eloquently, by CMFA Adjunct Scholar Dick Timberlake), that it hasn’t adhered to the letter of that law, either. I’m referring to the law authorizing the Fed to pay interest on depository institutions’ reserve balances, or IOR, for short.

You see, according to Title II of the 2006 “Financial Services Regulatory Relief Act” — that law that originally granted the Fed authority, commencing October 1, 2011, to begin paying IOR — the Fed is allowed to pay interest, not at any old rate it chooses, but “at a rate or rates not to exceed the general level of short-term interest rates.”

As the name of the 2006 Act suggests, its purpose was to relieve financial institutions of unnecessary regulatory burdens. The fact that depository institutions’ reserve balances at the Fed, including minimum balances they were required to hold, bore no interest, had long been regarded as one such unnecessary burden. So long as reserve balances paid no interest, reserve requirements amounted to a distortionary tax on bank deposits subject to them. In the words of then Fed Governor Donald Kohn, who testified in favor of IOR back in 2004, the payment of interest on reserves, and on required reserves especially, would result in improvements in efficiency that “should eventually be passed through to bank borrowers and depositors.”

Since the original intent of IOR was to remove an implicit tax on deposits, and not to have the Fed subsidize those deposits, it’s easy to understand the law’s insistence that the Fed pay IOR only at “a rate or rates not to exceed the general level of short-term interest rates.” It also easy to see why most economists, including the Fed’s own experts, treat the federal funds rate as an appropriate proxy for the opportunity cost of reserve holding, and hence as one of the short-term rates that the rate of interest on bank reserves ought “not to exceed.” Indeed, because overnight lending involves some risk and transactions costs, while banks would earn IOR effortlessly and without bearing any risk, the IOR rate should logically be strictly below, rather than below or equal to, the federal funds rate.

Fast forward to 2008. Among its other provisions, the “Emergency Economic Stabilization Act” passed on October 3rd of that year “accelerated” the Fed’s authority to pay interest on bank reserves, making that authority effective as of the new law’s passage, instead of as of October 1 of 2011. Significantly, the 2008 measure did not otherwise alter the language of the original legislation. The rush to implement IOR was, nevertheless, based on motives quite different from those that informed the 2006 Act. As then-Chairman Ben Bernanke explained, in  an October 7th, 2008 speech he gave at the annual meeting of the National Association for Business Economics, in the wake of  Lehman’s failure, the extent of the Fed’s emergency lending

had begun to run ahead of our ability to absorb excess reserves* held by the banking system, leading the effective funds rate, on many days, to fall below the target set by the Federal Open Market Committee. This problem has largely been addressed by a provision of the legislation the Congress passed last week, which gives the Federal Reserve the authority to pay interest on balances that depository institutions hold in their accounts at the Federal Reserve Banks. The Federal Reserve announced yesterday that it will pay interest on required reserve balances at 10 basis points below the target federal funds rate, and pay interest on excess reserves, initially at 75 basis points below the target. Paying interest on reserves should allow us to better control the federal funds rate, as banks are unlikely to lend overnight balances at a rate lower than they can receive from the Fed; thus, the payment of interest on reserves should set a floor for the funds rate over the day (my emphasis).

Thus, although the Fed was now chiefly concerned, not with relieving banks of an implicit tax, but with reinforcing its ability to hit its federal funds target, its plan was to do so in a manner that nevertheless complied with the letter, if not the spirit, of the 2006 law, by having IOR serve as a new, non-zero lower bound to the federal funds rate.

Alas, things didn’t work out quite as Bernanke and other Fed officials intended. Instead, the “floor” they’d laid out so carefully turned out to be rotten, chiefly owing to the fact, although they keep balances with the Fed, Fannie and Freddie and other GSEs aren’t eligible for IOR.Consequently, their involvement created an arbitrage opportunity that Fed officials hadn’t anticipated, with banks borrowing funds from GSEs overnight at rates sufficiently below the IOR rate to turn the banks a tidy (if modest) profit.

The crux of the matter is that the effective federal funds rate — that is, the rate that was actually being paid for overnight funds — quickly ended up falling below the IOR “floor” and, therefore, below the  Fed’s target rate. In fact, as the red plot in the figure below shows, since December 2008, when the Fed set the IOR rate for both required and excess reserves at 25 basis points, the rate has always exceeded the effective federal funds rate, besting it on occasion by as much as 19 basis points.

Faced by this reality, the Fed made the best of a bad job by declaring (1) that instead of setting a fed funds rate target it would henceforth set a target “range;” and (2) that the rate of IOR was to define, not the lower bound (or “floor”) of the new target range, but the upper bound.

Man, I bet the Board of Governors makes some mean lemonade!

But while the Fed may have succeeded in saving face, it doesn’t follow that it managed to do so while still obeying the law. For converting the IOR rate from a floor to a ceiling meant setting it above rather than at or below “the general level of short-term interest rates,” taking that “general level” to be appropriately represented by the effective federal funds rate. Nor does letting the three-month T-bill rate proxy the “general level” of (risk-free) short term rates — a reasonable alternative — get the Fed out of hot water, since that rate (the green plot in the figure) has generally been even lower than the effective federal funds rate:

The situation hasn’t gone unnoticed by Congress. Bill Huizenga (R-Michigan), Chairman of the Financial Services Committee’s Subcommittee on Monetary Policy and Trade, drew attention to the matter following  Janet Yellen’s June 22, 2016, Humphrey-Hawkins Testimony:

HUIZENGA: Thank you, Mr. Chairman, and back here, Chair Yellen.

So, in response to the financial crisis, the Emergency Economic Stabilization Act accelerated its authority that had been granted to start paying interest on reserves from 2011 back to October 1 of 2008. And according to the New York District Bank, the Fed expected to set interest on reserves well below the Fed’s target policy rate, that is, the federal funds rate. Had the Fed created such a, quote, “rate floor,” it would have complied with the letter of the law.

Section 201 of the Financial Services Regulatory Relief Act of 2006 explicitly states that interest on reserves can, quote, “not exceed the general level of short-term interest rates.” However, as we learned in last month’s Monetary Policy and Trade Subcommittee hearing, interest on reserves is above the Fed funds rate.

This above-market rate not only appears to have gone outside the bounds of the authorizing statute, it may also be discouraging a more free flow of credit in an economy that can and should be flourishing. …

As if taking this as his cue, Jeb Hensarling (R-Texas), Chairman of the House Financial Services Committee, and one those responsible for introducing the 2006 legislation, grilled Yellen remorselessly on the subject:

HENSARLING: And as I think you know, Section 201 of the Financial Services Regulatory Relief Act says that payments on reserves, quote, “cannot exceed the general level of short-term interest rates.” Today, you are paying 50 basis points on interest on excess reserves. The fed funds rate yesterday, I believe, is 38 basis points. Is that correct?

YELLEN: Probably correct.

HENSARLING: So, you’re paying about — back to the (inaudible) calculation — a 35 percent premium on excess reserves. You’re paying a premium to some of the largest banks in America, is that correct?

YELLEN: Well, I consider a 12 basis point difference to be really quite small and in line with the general level of interest rates.

HENSARLING: OK. So, you believe you have the legal authority to do this, otherwise you wouldn’t do it, is that correct?

YELLEN: Well, I do believe we have the legal authority to do it…

HENSARLING: Madam Chair, would it be legal…

YELLEN: Our (ph)…

HENSARLING: Would it be legal for you to pay a 50 percent premium? You’re paying a 35 percent premium today. Would it be legal to pay 100 percent premium?

YELLEN: I believe it’s a small difference. And interest on excess reserves did not succeed as expected in setting a firm floor…

HENSARLING: And would it be legal…

YELLEN: … on the (inaudible) short-term interest rates…

HENSARLING: Would it be legal under the statute — would it be legal under the statute for you to pay twice the Fed’s fund rate as a premium on interest on reserves?

YELLEN: Well, I believe that the way we are setting it is legal and consistent with the act.

HENSARLING: No, I know. But that’s not my question.

YELLEN: It is — it is…

HENSARLING: What is the legal limit? What is the legal limit on which you can pay? What does the phrase exceed the general level of short-term interest mean? You’re saying that 12 basis points does not trigger the statute. At what point is the statute triggered?

YELLEN: It depends on exactly what short-term interest rate you’re looking at. There are a whole variety of different rates and…

HENSARLING: OK. Do you have an opinion on whether…

YELLEN: … whatever…

HENSARLING: … or not it would be legal to pay 100 percent premium?

YELLEN: Whatever level we set, the interest on reserves…

HENSARLING: Madam Chair, please, it’s a simple question.

YELLEN: … at, it funds (ph) going to trade below that level.

HENSARLING: Madam Chair, please, it’s a simple question.

YELLEN: It funds going to — to trade below that level.

HENSARLING: Madam Chair, please. It’s a simple question. Would it be legal under the statute to pay a 100 percent premium? If you don’t know the answer to the question, you don’t know the answer to the question.

YELLEN: Well, my interpretation is that it is legal.

HENSARLING: It would be legal to pay twice the market rate? That would not exceed the general level of short-term interest?

YELLEN: There is likely to be for quite some time a small number of basis points gap…


YELLEN: … between interest on reserves and the Fed funds rate, and that is something that…

HENSARLING: I would simply advise discussing that with the legal counsel, because I think that, frankly, it (inaudible) common sense.

I’m going to go out on a limb and guess that Hensarling’s last “inaudible” word was “defies.”

Whatever the word was, it sure seems to me that, no matter how one slices it, an IOR rate “a small number of basis points” above the fed funds rate is one that “exceeds” that rate. But I’m not a Federal Reserve lawyer, so what do I know? Still, I wish someone deeply committed to making sure that financial institutions don’t get away with any hanky-panky (the CFPB, perhaps?) would go ahead and sue the Fed, so that Representative Hensarling and I can find out once and for all just what “not to exceed” really means.


*That is, it’s ability to “sterilize” its emergency loans by disposing of Treasury securities.

[Cross-posted from Alt-M.org]

The Center for American Progress Action Fund (CAPAF) has sounded the alarm: Donald Trump’s proposal to eliminate the U.S. Department of Education (ED) would be pure loss because a lot of people use federal education money. Lost jobs, lost college access, lost learning. Which makes sense if you assume that the federal government miracles money into existence, people can’t adjust to changing circumstances, and federal control can only help.

Of course, the federal government does not just will money into existence. It does spend far more than it has, but sooner or later someone is going to have to pay for that. And money arriving through taxation comes from people who may have used it for other, more productive things. Taxpayers may have spent it on new businesses, or housing, or food, or lots of other things that would have potentially grown the economy and created new jobs. Or heck, just made them happier. So there are costs—maybe big ones—that CAPAF ignored: opportunity costs.

Then there are costs to dealing with ED demands. Yes, as CAPAF points out, the department has a relatively small workforce—about 4,300 full-time equivalent employees—but that is in part because ED makes states do a lot of the administrative heavy lifting, forcing them to hire a lot of bureaucrats. There is also a sizeable compliance cost that goes with federal programs. The latest available numbers I could find were from a 1998 report—pretty old—but that precedes the No Child Left Behind Act, which greatly expanded federal management. That report suggested that for every dollar sent to Washington only 85 cents made it back to local districts, and noted that there were nearly three times as many state employees being funded by federal money as ED employees.

How would ED be eliminated? While it is unclear how Trump would do it—details do not seem to be his thing—he would likely phase the department out, not just kill it all at once. Of course, he could just move the programs elsewhere in the federal bureaucracy. But assuming that by killing ED he means to kill the programs, he would probably phase them out, leaving states, districts, colleges, and students time to adjust. And if he were to couple phasing out the programs with, say, proportionate tax relief, or even just block grants to states, that money could still be used for education! It would not necessarily mean any lost teacher jobs, student aid, or anything else. It could just mean that instead of losing 15 cents in bureaucratic processing for each dollar, taxpayers could keep the whole buck!

Would trimming what we spend necessarily even be bad educationally? Signs pretty clearly point to “no.” As the graph below shows, as well as this report on SAT scores, large spending increases haven’t come close to producing commensurate improvements in achievement, at least as measured by standardized tests for high school kids. Those scores have essentially sat still. Same for staffing: In roughly the same period as is covered in the graph, public schools went from about 14 students per staff member, to just 8 students, approaching a doubling of employees per child. Even the high-school graduation rate “all-time highs” that sound so nice aren’t: CAPAF cited a report based on only four years of data, and longer-term data show in 1969–70—close to when the feds first got heavily involved in education—the average freshman graduation rate for public schools was 78.7 percent. As of 2012–13—the latest data on the chart—it was 81.9 percent. Hardly a huge increase, and possibly one inflated by “credit recovery” and other dubious practices. Oh, and the feds coerced states to adopt a single curriculum standard—the Common Core—only to see tremendous backlash after the public finally became aware of what had been foisted on them. At the very least, great political acrimony and stomach-churning educational turbulence have been the result.

The evidence—more of which can be found here—suggests that in K–12 education, federal involvement may well be a loss, not a gain.

How about higher ed? Federal student aid, it is becoming increasingly certain, has largely translated into skyrocketing prices, major non-completion, credential inflation, and big student debt. Hardly the pure affordability effect that is all CAPAF discusses. You can get more in-depth on higher education here.

There is one other thing that ought to be mentioned, though it may seem passé: Washington has no constitutional authority to meddle in education outside of DC itself, federal installations, and prohibiting state and local discrimination in education provision. Yet the vast majority of what ED does goes far beyond those things. Ignoring the Constitution comes with costs all of its own, which CAPAF—and everyone else—may learn very quickly if there is a President Trump and he, among other things, unilaterally tries to change federal education policy. You know, like President Obama.

CAPAF portrays the U.S. Department of Education as all gain, and it’s possible ending all pain. But there is a whole other side to federal education meddling: costs. And they are big.

Kratom is a plant that, according to users, relieves pain, reduces anxiety, and aids withdrawal from opioids like heroin.

The Drug Enforcement Administration, however, believes kratom is dangerous and has no valid medical use. So the DEA is placing kratom in Schedule I of the Controlled Substances Act, which effectively bans legal use of the drug.

The DEA’s decision prompted one user to send me this email:

I’ve read many of your posts online, and remembered you today as I heard some news that, I fear, is going to change my life for the worse. I’m sure you are aware that very soon kratom is going to be banned nationwide.

Full disclosure: I do depend on kratom for anxiety and (very) occassional pain from back spasms. About five years ago kratom gave me my life back after finally weening myself from prescription pain medication. I take it every day, and I’ve never had to increase the amount. This amazes me.

I am a successful high school teacher, husband, and father. I have a master’s degree in education and I work hard to take care of my family. I have refused, and will continue to refuse, to become a ward of the pharmaceutical industry. Which I suppose, in the eyes of the DEA, now makes me a felon.

I am writing to ask you if you have any advice at all for how to fight this. I am writing writing writing … senators and health officials … posting on forums, donating money. This all feels quite futile.

So I guess I’m also, not so subtly, asking you if you believe there is any way you could help. You are an expert in this field. Your voice would be heard much more clearly than a high school teacher in Southwest Ohio. What you might say I do not know. But I do know there are thousands of people right now who are frightened and angry, and my gut tells me this ban could cause many to suffer. But of course I am also being selfish.

I replied that I did not have an obvious way to help, but that I would blog again about kratom. The sender in turn said:

Thank you so much for your reply. You may absolutely quote me, but I would appreciate if you did not use my name. Small-town malice is a reality around here.

I would like to link a short video that was posted online today by a Veteran who is upset about the DEA not allowing public comment on this matter. His story is heartbreaking. It made me feel a bit guilty about my whining.

My personal story aside, I just think it’s an overreach. The data they cite in their intent letter is incorrect (nearly all the deaths blamed on kratom have been shown to have resulted from users having multiple drugs in their systems – mainly tramadol, according to what I’ve read). And the very substance they wish to ban is so obviously helping thousands of people stop abusing heroin and all the so-called maintenance drugs prescribed to addicts. Evidently, the month after Alabama banned kratom, herion overdoses doubled. I think we may see this on a national scale come October.

Most of the information I’m finding is all anecdotal, of course. But Schedule 1 means kratom will never get properly researched. I’m no conspiracy theorist, but it all seems a bit fishy.

That was a rant. Sorry. It’s been a rough couple of days. Here is the video link, and thank you so much. Even if you can’t write the blog, you have been very kind.


And finally:  

One more link then I will get a life and leave you alone:

Two U.S. patents, the most recent one funded by the government, clearly stating the medical benefits of kratom. So the DEA is being a bit disingenuous.



One individual’s experience is not proof that kratom’s benefits outweigh its negatives; kratom may have significant risks for some users.

But in a free society, individuals, not the DEA, get to make that decision.

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

This week, all eyes have been on Hurricane, now-Tropical-Storm, Hermine.

Since the Hermine coverage has been non-stop and ubiquitous, instead of highlighting anything in particular on the intertubes, we thought we’d give you our specific take on the events of this (and next) week. Here goes.

We’re about to take the national Rorschach test that accompanies headline storms, as the leftovers from Hurricane Hermine are going to spin away for a week off the mid-Atlantic coast, generating humongous seas and climate change blathering.

Dealing with the former won’t be better informed by the latter—an uneccessary and largely unjustified interloper/distraction.

The storm will be the result of an unhappy marriage between a hurricane or tropical storm remnant and a garden variety upper-atmospheric low pressure system. For reasons having everything to do with bad luck, the jet stream is going to be “blocked” in place for nearly a week, so that anything that would normally be steered from west to east is just going to sit. And sit.

The waters off the mid-Atlantic coast are near their seasonal maximum, and they’re also several degrees above normal. (Note—in the northeastern Atlantic, they’re several degrees below average.) That’s going to provide a tad more energy to the storm as it stalls out, but that’s not going to last long. A huge donut of 50-70mph winds sitting in the same place will mix out the surface warmth pronto, and what will be the main event will be more like a strong winter northeaster that gets stuck in one place, like the Ash Wednesday storm of 1962, which caused a huge amount of coastal damage from Cape Cod to South Carolina

If that repeated now, owing to the tremendous coastal development since then, it would easily be among the most expensive storm in our history. Fortunately (at least as of this writing) it looks like the persistent strong winds are going to be coming from the north, resulting in only modest (two to four foot) storm surges.

This is hardly the first time that a decaying hurricane has been enmeshed with a stagnant upper air storm. In fact, the resemblance between Hermine and 1972’s Hurricane Agnes is astounding.

Both came ashore rated as 80mph storms on the Florida panhandle. Neither actually generated an observed hurricane-force sustained wind on land. Both then burbled northeastward, to emerge off the Outer Banks and briefly resurrected as tropical cyclones. Both then were captured by a stagnant jet stream.

Both produced tremendous amounts of rain, with one slight difference. The Agnes remnant did it over an extensive area of the northeastern U.S., killing 122 people. Sixteen of these were in Washington, as normally torpid Rock Creek rose to the rooftops of cars on the adjacent Parkway in a matter of a few minutes. The U.S. Office of Emergency Management calls it “the most massive flooding in the history of the eastern United States.”

Agnes did this while spinning a loop over land. The Hermine remnant is forecast to spin three, but out over the water, all the while chunking out tremendous amounts of rain. We can only hope this is true, because all that’s going to cause is a week of impressive winds and gigantic waves. If this happens onshore (or very near-shore)…we don’t even want to think about it.

With regard to that Rorschach test, it should be duly noted that both the Ash Wednesday storm and Hurricane Agnes occurred during a time of global cooling. You don’t need global warming, and, because the Hermine remnant is going to mix away any unusually warm water very quickly. The real culprit will be the dumb luck of a weak hurricane intercepting a stalled jet stream.

Dilma Rousseff was never as popular as the president who anointed her as his successor. Despite her intelligence and diligence in numerous official posts, she lacked his warm personality and flair for campaigning. But she ran a very professional presidential campaign, with lots of celebrity supporters, and the vigorous support of her predecessor, and she won the election and became Brazil’s first female president. In office she pursued policies of easy money, subsidized energy, and infrastructure construction, which initially boosted her popularity. As is so often the case, though, those populist programs eventually brought inflation and a slide into economic contraction. Simultaneously, allegations of corruption and cronyism hurt her reputation. Impeachment proceedings were brought against her, focused on her mismanagement of the federal budget, particularly employing budgetary tricks to conceal yawning deficits. ”Experts say Ms. Rousseff’s administration effectively borrowed some $11 billion from state banks, an amount equal to almost 1 percent of the economy, to fund popular social programs that have been a hallmark of the Workers Party’s 13 years in power.” Some said that such fiscal mismanagement and dishonesty were common in presidential administrations and should not result in impeachment. But the Senate convicted her and removed her from office, making her bland vice president the new president.

Thank goodness nothing like that could happen in our own country.

As Venezuelan socialism descends into tyranny, hunger, and chaos, a milestone came in July when a government ministry announced Resolution No. 9855, under whose provisions, quoting CNBC, “workers can be forcefully moved from their jobs to work in farm fields or elsewhere in the agricultural sector for periods of 60 days.” Amnesty International says the decree “effectively amounts to forced labor.” Strongman Nicolas Maduro has likewise imposed harsh legal penalties on businesses that close down their operations.

It all echoes the Directive 10-289 (all workers “shall henceforth be attached to their jobs and shall not leave nor be dismissed nor change employment,” with businesses similarly bound) from Ayn Rand’s novel Atlas Shrugged. Readers may assume that Rand based her fictionalized directive on the track record of the sorts of dictatorships that outlaw political opposition. But in fact elements of forced labor have cropped up in socialist experiments even in nations with strong track records of constitutional government and civil liberties, such as postwar Britain.

In 1947, two years after war’s end, the Labour government led by Prime Minister Clement Attlee decided to extend a wartime emergency measure by means of what was called the Control of Engagements Order, intended, as one sympathetic account put it, to correct the “failure of labour to go where it is most needed.” To quote a contemporary account, the order, applying with scattered exceptions to all men 18 to 50 and all women 18 to 40 not mothers, “compels employees seeking workers and workers seeking employment to use employment exchanges. Unemployed persons who, after having been offered a choice of jobs, refuse to accept essential work, will be given 14 days to think it over. If they still refuse, they are liable to be directed.”

Britain was of course a democratic nation and the Control of Engagements Order promptly became a topic of hot controversy, with critics of the Labour government arguing that it exemplified the prediction of Friedrich Hayek, in The Road To Serfdom (1944), that socialist control of the economy would lead by logical steps to a severe constriction of personal freedom. Whether or not because of the outcry, the measure was short-lived, and repealed within a couple of years. As of June 1949 only 95 persons had been subjected to explicit orders of coercion under the order. Some, like Milton Friedman in Capitalism and Freedom, have concluded that the quick demise of the order demonstrated that in a nation with a tradition of liberty like Britain, even a committed socialist government would not be willing to pursue the notion of “centralized allocation of individuals to occupations” to the point of “trampling rough-shod on treasured private rights.”

A young Conservative Party politician at the time, however, pointed out in an exchange with a Labour incumbent that the harshness of the order in practice must not be underestimated: 

The small number of cases in which compulsion has had to be applied is often acclaimed by the Socialists. The figures considered alone are misleading. It must not be forgotten that they relate only to the formal directions which the Ministry issues as a last resort. The majority of people, when threatened with direction, “go quietly;” but it is the existence of these powers which causes them to go. Such persons are in fact, though not in law, directed, and they are far more numerous than the hardy spirits who hold out until compelled to give in.

And further:

Less than 72 hours before I spoke to the Young Conservatives, my attention was drawn to a case of a person who was negotiating direct with another employer for a better job. He was informed that such action was prohibited under the Order, that he would require to secure his release from his present employment and apply through a labour exchange. There was then no guarantee that the exchange would send him to the job he wanted, but they might direct him to another. He considered the risk of not getting the post too great, and is still in his present work.

While it may be argued that that person was not legally prevented from taking the new job (though he may have been had he chosen to have gone through with it), the fact remains that owing to the existence of the Control of Engagement Order and the wide powers of direction held by the Minister of Labour, he is now one rung lower on the ladder than he would otherwise have been. This is only one instance. I could cite others of a similar nature.

That brisk account came from the pen of Conservative candidate Margaret Roberts, better known by her later married name of Margaret Thatcher.

From here in the United States of America, many of whose finest political thinkers have been associated with the principle of the freedom of labor, Happy Labor Day.

MIAMI, FL - NOVEMBER 02: Martha Lucia (L) sits with Rudy Figueroa, an insurance agent from Sunshine Life and Health Advisors, as she picks an insurance plan available in the third year of the Affordable Care Act at a store setup in the Mall of the Americas on November 2, 2015 in Miami, Florida. Open Enrollment began yesterday for people to sign up for a 2016 insurance plan through the Affordable Care Act. (Photo by Joe Raedle/Getty Images)

In opeds at Time and National Review Online, I discuss how ObamaCare’s health-insurance Exchange has collapsed in Pinal County, Arizona, throwing some 10,000 residents out of their ObamaCare plans. Charles Gaba of ACASignUps.net and Cynthia Cox of the Kaiser Family Foundation asked me to explain a claim I make in the NRO piece:

Obamacare will still penalize those residents if they don’t buy coverage — even if the amount they must pay increases tenfold or more.

Before I explain, let me first apologize on behalf of the Affordable Care Act’s authors for the complicated mess that follows.

ObamaCare’s individual mandate penalizes taxpayers who fail to purchase health insurance. But there are so many exemptions that of the 33 million or so people who lacked insurance in 2014, the IRS levied the penalty against only 6.6 million tax filers (which actually represents a larger number, maybe 17 million people).

For example, the Affordable Care Act exempts “individuals who cannot afford coverage” from the penalty. You qualify for this exemption if your “required contribution” exceeds roughly 8.13 percent of your household income. For individuals who don’t have access to a suitable employer plan, the “required contribution” is equal to “the annual premium for the lowest cost bronze plan available in the individual market through the Exchange in the State in the rating area in which the individual resides,” minus “the amount of the credit allowable under section 36B for the taxable year (determined as if the individual was covered by a qualified health plan offered through the Exchange for the entire taxable year).” In other words, if you would have to pay more than 8.13 percent of your income for an ObamaCare plan, even after accounting for premium subsidies, then coverage is unaffordable for you and ObamaCare doesn’t penalize you for not buying coverage.

You would think this exemption would somehow apply to the 10,000 residents of Pinal County, for whom coverage will become dramatically more expensive when the Exchange collapses. If those folks are like Exchange enrollees in the rest of the country, the vast majority of them (85 percent or so) receive premium subsidies. When their Exchange coverage disappears next year, so will those subsidies. If they wish to purchase coverage off the Exchange, they will face, for the first time, the actual cost of ObamaCare coverage. Given that the amount Pinal County residents will have to pay for ObamaCare coverage could rise by several multiples, from a fraction of the premium to the full premium, given that the lowest-income enrollees will see the largest increases, given that the large year-to-year rate increases occurring nationwide will only add to the suffering, you would think the ACA’s unaffordability exemption would somehow cover those 10,000 Pinal County residents. But you would be wrong.

Remember, the ACA penalizes people if they fail to purchase insurance, unless they qualify for an exemption. The unaffordability exemption applies only if “the annual premium for the lowest cost bronze plan available in the individual market through the Exchange” in Pinal County, minus “the amount of the credit allowable under section 36B,” whether the individual enrolls in Exchange coverage or not, exceeds 8.13 percent of the individual’s household income.

You can’t do that calculation in Pinal County. The premium for the lowest-cost bronze plan in Pinal County is not $0.00. It’s not even a number. It’s the empty set. The “credit allowable under section 36B” is likewise the empty set. Section 36B “allow[s] as a credit…an amount equal to the premium assistance credit amount for the taxpayer.” To calculate the premium-assistance credit amount, you need to know either the premium for the health plan the taxpayer “enrolled in through an Exchange established by the State under [section] 1311,” or the premium for the “the second lowest cost silver plan” available to the taxpayer “through the same Exchange.” It would be awesome if all those premiums were $0.00. (Free health care!) But it’s not. Instead, no such premiums exist. Since there are no such premiums, there is no “required contribution.” Since there is no “required contribution,” there is no unaffordability exemption in Pinal County. Without an Exchange, there is no unaffordability exemption from the individual mandate.

Following the collapse of the Exchange, the ACA strips 10,000 Pinal County residents of their health coverage, strips them of any subsidies they had been receiving, and penalizes them if they fail to purchase coverage that everybody knows ObamaCare has made unaffordable for them. The ACA also denies the unaffordability exemption to any uninsured residents who had qualified or would have qualified for it. The ACA exempted them from penalties when coverage was somewhat unaffordable, yet penalizes them when coverage becomes very unaffordable.

But let’s suppose we had a government that didn’t care what the law says, and was determined to make the unaffordability exemption work for residents of Pinal County and any other county or state where the Exchange collapses. The government could pretend the lowest-cost-bronze-Exchange-plan premium actually is $0.00. But then the required contribution would be zero or negative, which is less than 8.13 percent of household income. So no exemption. Ooh, I know! The government could pretend the ACA allows them to use non-Exchange-bronze-plan premiums for the first part of the “required contribution” calculation. But then they would have to argue simultaneously that the ACA does not allow them to use non-Exchange-silver-plan premiums for the second part of the calculation. To put it differently, the government would have to argue the ACA allows them to pretend that non-existent Exchange plans exist but does not allow them to pretend that non-existent tax credits exist. I’m guessing that would be awkward.

It may be a blessing that we won’t have to watch ACA ObamaCare supporters put themselves through such contortions (again). The ACA gives the Secretary of Health and Human Services carte blanche to exempt anyone she pleases from the mandate penalty. All she has to do is claim they have “suffered a hardship [trying] to obtain coverage under a qualified health plan.” The people of Pinal County would certainly seem to qualify. To date, the Secretary has issued a raft of these “hardship” exemptions, none of which seem to apply to enrollees for whom coverage became unaffordable because their Exchange just plain collapsed. Since the Secretary hasn’t created such a hardship exemption yet, what I’m describing is here the law.

And even though it seems inevitable that the Obama administration will create such an exemption, the fact that they will have to take that affirmative step to protect ObamaCare’s intended beneficiaries from the law is significant. It will certainly be the most awkward the Obama administration has had to issue. It will be an admission that ObamaCare threw thousands of Pinal residents out of their pre-ObamaCare plans, stripped them of their guaranteed-renewability protections, turned their covered illnesses into pre-existing conditions, threw them out of their health plans again, left them with no affordable health-insurance options, and left many of them far worse off than they would have been if the president had never signed the ACA or had heeded Congress’ calls for repeal. Issuing hardship exemptions for Pinal County will be an admission that ObamaCare is inherently unstable, and that a similar fate could soon befall other Exchange enrollees. It will be an admission that the ACA’s architects suffered from a certain lack of foresight.

And it can’t come soon enough.

In his speech last night, Donald Trump stated that “immigration as a share of national population is set to break all historical records” and promised to restore a “historical norm.” It is the underlying premise behind his entire speech. His “deportation task force,” E-Verify, and all the rest is all about enforcing a lower rate of immigration and ending “an open border to the world.”  “We take anybody,” he said later. “Come on in, anybody.” He couldn’t be more wrong.

The United States has accepted roughly one million immigrants per year as permanent residents. As a share of the population, this number contributes 0.32 percent of the population. The historical average is 0.45 percent—nowhere close to extreme. As you can see, the immigration norm that we abandoned in the 1920s was much higher than the levels that we are seeing today. 

Figure 1: Historical Immigration Rate (Legal Permanent Residents as a Share of U.S. Population)

Source: Department of Homeland Security

Another way to view the rate of immigration is to look at the net increase in the total foreign-born population—which includes unauthorized immigrants—as a share of the overall population. The Census Bureau’s records on the foreign-born population only go back to 1850, but the annual rate of increase in recent years is also well within historical norms. The aberration was the 1930s to 1960s when the foreign-born population shrank in size. The United States is returning to its historical average of 0.21 percent. The rate in 2014 was 0.22 percent.

Figure 2: Annual Increase in the Total Foreign-Born Population as a Share of Total Population (Decadal Averages)

Source: Census Bureau

It is true that the immigrant share of population already in the United States has grown to its highest level in a century, but that is not the result of more immigrants entering the United States, but mainly of fewer Americans being born. A lower population growth rate for native-born Americans accounts for nearly two-thirds of the increase in the foreign-born share since 1965.  It’s just not true that historically abnormal immigration into the country is the primary cause of the higher immigrant share of the population.

The idea that the United States “takes anybody” flies in the face of the long waits that many legal immigrants face right now. As I’ve detailed before, there are millions of legal immigrants waiting for the chance to get a green card to live and work permanently in the United States, and they will not receive those visas under current law for decades. I can only imagine the looks on the faces of Indian immigrants who face century-long wait times for green cards when Trump claimed that America simply says “just come on in” to anyone who wants to immigrate here.

Perhaps Trump is making a comparison, arguing that America has an open door compared to other countries. If so, he’s also wildly off base. Again, as a share of the population, immigration to the United States is in the back of the pack compared to other developed countries (OECD). 

Figure 3: Immigration as a Percent of Population, 2013

Source: OECD

No matter how you look at it, the United States has low immigration flows for a country of its size and wealth. If Donald Trump wants America to return to its historical average, he would need to increase legal immigration. That would be a good thing for the country.

Trump’s speech last night in Phoenix confirmed that his supposed softening on immigration turned out to be wishful thinking.  After last night, nobody can claim that Trump’s position on immigration is too soft.  Trump reiterated his position paper on immigration that called for a large-scale increase in immigration enforcement along the border and in the interior of the United States through the building of a Great Wall, a tripling of ICE agents, the creation of another deportation force, and mandating the unworkable E-Verify program.  He also reiterated his support for slashing illegal immigration.

His listed deportation priorities included visa overstays who account for about 42 percent of all illegal immigrants and an increasing proportion of the total.  When combined with his call to revoke DACA, remove all violent and property criminals (wise policy to address a small problem that is already law), and for full enforcement of all immigration laws that means virtually all illegal immigrants will be deported under his plan.  

To remove any doubt of this, he also said that “no one will be immune or exempt from enforcement.”  Trump interprets enforcement as meaning, “Anyone who has entered the United States illegally is subject to deportation.  That is what it means to have laws and to have a country. Otherwise, we don’t have a country.” 

Trump’s proposed restrictions on LEGAL immigration could slash the number of green cards issued by up to 62.9 percent.  If you don’t believe me and Trump’s own position paper doesn’t convince you, just look at how happy Roy Beck of NumbersUSA is by Trump’s call for cutting legal immigration:



Dog Whistles to Restrictionists

Trump’s speech included numerous dog whistles to appeal to anti-immigration populists.  He cited the Center for Immigration Studies, an immigration-restrictionist think tank well known among Trump’s anti-immigration base.  Trump said there could be 30 million illegal immigrants in the United States, a wildly exaggerated number which was lifted from page 72 of Ann Coulter’s anti-immigration rant Adios America.  If there were really 30 million illegal immigrants in the United States, their already low crime rates would be even more minuscule relative to their proportion of their population. Trump mentioned Eisenhower’s immigration enforcement actions that are frequently and incorrectly cited by restrictionists.  He called for a “physical” border wall, which is popular among Know-Nothings who are skeptical of electronic border enforcement.  He also said he’d break the cycle of illegal immigration and amnesty which is a common point in restrictionist circles.  At its most lenient, Trump’s speech is an endorsement of the anti-immigration establishment’s position on the topic and therefore not a softening.     

Shoring up the Base – In August

The most remarkable part of Trump’s speech was not that he doubled down on his immigration views but that he felt he had to do so in late August.  This is usually when candidates are busy appealing to moderates rather than doubling down on minority positions.  His haphazard mention of the Second Amendment, repealing Obamacare, global warming, and other conservative issues in addition to his rejection of amnesty show just how desperate he is to shore up his support from reluctant conservatives.  If Trump loses in November, and all signs are pointing to that, this speech shows that nobody can reasonably claim that it was because he was “too soft” on immigration.  His probable November loss will be rightly blamed on his anti-immigration position.  

The Brazilian Senate impeached President Dilma Rousseff yesterday, bringing an end to the era of Worker Party rule, which began there in 2003.

Rousseff and her supporters have disingenuously denounced the impeachment, calling it a coup d’état. But it is likely that her removal from office will strengthen the country’s institutions and lead to an improvement in the policies that have led Brazil into its worst recession since the 1930s and that Latin Americans in recent years considered a model to emulate because it was seen to combine economic stability and enlightened social policies.

Let’s first of all dismiss the idea that Rousseff’s impeachment amounts to a coup. Whether we favored the political trial or not, it was conducted under the rule of law, and to assume otherwise weakens the legitimacy of the Congress and Brazilian democracy. As my colleague Juan Carlos Hidalgo has pointed out, the Constitution clearly delineates how and in which circumstances an impeachment should be carried out, and the Supreme Court has endorsed the legitimacy of this particular case. The fact that eight out of eleven members of the court were appointed by Rousseff and her Worker Party (PT) predecessor, Lula da Silva, undermines the credibility of coup claims.

The last time a Brazilian president was impeached was in 1992 and, as analysts Diogo Costa and Magno Karl observe, it was hailed as a “Victory of Democracy,” and ended up improving the country’s policies. (And it’s not that the PT does not believe in impeachments; the party attempted to impeach the three democratically elected presidents who preceded Lula.)

This trial may also have a positive impact. It will likely reduce to some degree the crony capitalism that was the essence of the Lula and Rousseff administrations. Alex Cuadros, who will speak at a Cato book forum on September 13, describes these policies well in his new book Brazillionaires. The PT’s policies have consisted of strengthening ties between the political and economic elite and were inspired by the idea of investing in strategic industries, generating high economic growth, and funding social welfare programs such as “Bolsa Familia.” Thus, the state granted easy credit to large companies and prominent businessmen. Subsidies from public banks increased from 0.4 percent of GDP in 2007 to 9.7 percent in 2013.

In practice, the unhealthy relationship that has long existed between Brazil’s politically and economically powerful deepened—one in which businessmen, with the aid of state credits, were financially supporting important politicians who also backed these business leaders. State subsidies were so important that by 2014 public banks had a market share larger than private banks, and participated in more than 700 large Brazilian firms.

These policies were not sustainable –and were even less so when the commodity boom came to an end—and led to an increase in government debt. According to Cuadros, what Rousseff “spent in one year on interest payments—money transferred to banks and wealthy families—exceeded twelve years of spending on the Bolsa Familia welfare program.” The Brazilian economy continues to shrink, which has led to cuts in social programs.

The PT’s economic model also encouraged large-scale corruption. The most prominent cases are “Mensalão,” in which legislators were bribed in exchange for votes; and “Lava Jato,” where billions of dollars in illegal transfers from the state-owned Petrobras oil company benefited leading businessmen and politicians.

The most surprising aspect of these corruption cases is that they have resulted in the arrest and conviction of numerous powerful people from the world of politics and business—a rather unusual outcome in Latin America. As I wrote about here, this is due to institutional and legal changes, such as allowing the use of some forms of plea bargaining, and the appointment over the course of many years of prosecutors, judges and police officers based on merit. Rousseff’s impeachment should also strengthen Brazil’s institutions, since the process increases the president’s and Congress’s accountability.

The new president, Michel Temer, seems to have control of the Congress in a way that Rousseff did not, and plans to carry out reforms to control public spending and open the economy to some degree.  We should not expect radical reforms, but rather policies that are somewhat better.

The City of Miami has come up with an ingenious plan: raise revenue without asking for a dime from taxpayers and make Wall Street banks pay for it, all under the auspices of fighting racial discrimination. Actually, it would be unfair to give Miami full credit for the idea: so far, it’s only one of more than a dozen cities, counties, and school districts that have tried the same scheme.

The plan works by engaging the services of plaintiffs’ counsel (who typically work on a contingency fee, requiring the city to pay nothing out of pocket) to sue mortgage lenders under the Fair Housing Act (FHA). The city claims that it has suffered from a diminished tax base, in addition to an increase in the need for its services, all thanks to lenders’ alleged discriminatory practices.

While this is an interesting theory, it falls well outside the problems the FHA was designed to address. It seems the Supreme Court may also question whether the FHA permits this type of suit as it has granted certiorari in the case Bank of America v. City of Miami. On Monday, the Cato Institute filed a brief in support of Bank of America and its co-defendant, Wells Fargo.

The FHA is a provision of the 1968 Civil Rights Act, and was designed to address discrimination in access to housing. It creates a cause of action for “aggrieved persons” to sue when they believe they have been subject to discrimination. Generally, “aggrieved person” has been understood to mean a person who has actually suffered the effects of discrimination. For example, by being guided to certain neighborhoods based on racial make-up, or being denied the chance to rent a certain apartment because of race. It has even been found to mean people who have been denied the benefits of living in a racially integrated environment because of discrimination directed at prospective neighbors. But in each of these examples, the harm is clearly one that relates to the effects of discrimination in housing access.

Miami’s argument, though, creates a much more attenuated relationship between the alleged discriminatory actions and the harm. Under Miami’s theory, the term “aggrieved person” can be extended to include a city that has a reduced tax base due to increased foreclosures that may have been caused by certain actions by lenders (and not, the city seems to feel, by the historic 2008-2009 financial crisis that rocked the world, causing unprecedented foreclosures all over the U.S.) and their specific interactions with certain borrowers who then faced a number of varied financial and economic challenges, which led to high numbers of foreclosures, which coincided with other economic stresses on the city’s budget. This long-winded chain of events extends beyond what the law typically recognizes as an actionable claim in any case, and certainly extends beyond the type of discriminatory harm the law was intended to address.

Aside from the problems that such an interpretive stretch creates with regard to the roles of the judiciary and legislature, Miami’s interpretation also creates a deeply problematic relationship between the City and its citizens. In general, when a government wants more money to spend, it must go before its electorate and obtain the people’s consent through increases in taxes. If instead a city can simply pursue a claim against several big banks, it can dispense with the people’s consent and instead reach right for the cash.

The Court has indicated that its past statements suggesting a wide interpretation of the FHA may have been ill-advised. We hope that the Court affirmatively constrains the FHA to its proper application: helping those who have been the victims of discrimination. Not helping governments dip into deep pockets.

[Cross-posted from Alt-M.org]

Maybe because Chevy Chase is in his state—the town, of course, not the actor—Maryland Governor Larry Hogan (R) yesterday signed an executive order essentially forbidding any school district in the state from starting the academic year before Labor Day, or from ending after June 15. That he announced it at an event in Ocean City, Maryland—a big summer beach destination—left no question that this was largely at the behest of the state’s tourism industry.

Marylanders, you will have more vacation time.

But what if you don’t want to travel the holiday road right up to Labor Day? What if you’d like to start school a week or three early, and maybe trade some summer days for a longer winter break, or heck, maybe some extra time off in April? Too bad: The governor knows what you need better than you do. Or, at least, he knows what other people—the tourism lobby—needs.

Of course this is a big violation of the local control many people think should be a hallmark of public schooling. It hasn’t been for a long time, but if you are going to have government schooling it makes sense for decisions to be made at the lowest levels possible so as to best serve the needs of unique communities. But what if your schedule doesn’t conform with a lot of people—maybe the majority—in your community?

All of this points to one solution if you want what you think is best for your family: educational freedom. Attach money to kids and let parents choose schools where educators might decide to start before Labor Day, or after Labor Day, or to have online content available 24/7, or to send you homeschooling curricula, or…you get the point.

Maybe you want to have your kids in school before Labor Day. Walley World shouldn’t get to tell you you can’t.

Republican presidential candidate Donald Trump’s visited Mexico yesterday and met with Mexican President Enrique Peña Nieto.  In a press briefing after the meeting, Trump spoke about immigration and trade in a much more civil tone than he typically uses on the campaign trail. 

Trump’s remarks about trade and NAFTA were especially interesting.

NAFTA is a 22-year old agreement that must be updated to reflect the realities of today.  There are many improvements that could be made that would make both Mexico and the United States stronger and keep industry in our hemisphere.  We have tremendous competition from China and from all over the world.  Keep it in our hemisphere.  … Improving pay standards and working conditions will create better results for all and for all workers in particular.  There is a lot of value that could be created for both countries by working beautifully together.  And that, I am sure, will happen.

Keep manufacturing wealth in our hemisphere. When jobs leave Mexico, the US or Central America, and go overseas, it increases poverty and pressure on social services as well as pressures on cross border migration.

After claiming repeatedly that increased trade with Mexico “destroyed” the American economy, this is a whopper of a change in rhetoric. 

Trump didn’t stop treating trade as a zero-sum game, but he added Mexico to our team.  He said “our hemisphere” where he would normally say “America.” 

An unfortunate reality of politics is that international trade is almost always discussed as a competition between us and them.  They see protectionism as way to “level the playing field” instead of as the special interest rent-seeking that it realy is.  Politicians use the term “outsourcing” to ostracize members of team us who employ members of team them.  Even when making a pitch for free trade, President Obama has said that we need the Trans-Pacific Partnership so that “the rules of trade” will benefit us (America) instead of them (China). 

One big problem with this approach is that there is no economically rational or morally justified line to tell us who belongs in the us group and who is them.  Nationalism is a politically convenient sort of tribalism, but there’s no objective reason why Michigan and California should be considered economic friends on a team that fights against Mexico.  Just as socialists have to claim that class lines are hard and objective, nationalists have to convince people that some lines on a map matter more than others. 

It’s easy for politicians to draw a bigger circle (say, North America) or smaller circle (say, Ohio steel workers) when it serves their purposes.  That’s just what Trump did yesterday in Mexico.

When you change who counts as us and who counts as them, interesting things can happen.  Trump was willing to include Mexico in the us team but still needed a bad guy, so he warned of competition from China.  Now that we’re on the same team, we can work (“beautifully”) together to protect ourselves against competition from them.  It makes it possible for Trump to support NAFTA (once it’s vaguely “improved”) as a way to strengthen our team.

Even if politicians are set on dividing the world into us and them, there’s room for progress as long as the us keeps getting bigger and the them keeps getting smaller and farther away.  The U.S. economy will be better off if our politicians confine their belligerence to countries we don’t trade very much with.  That’s why even though everything Trump says about trade is wrong, it’s better if his scapegoat isn’t Mexico.

Now if we could just get Trump to visit China.

Working the world of public policy, I’m used to surreal moments.

Such as the assertion that there are trillions of dollars of spending cuts in plans that actually increase spending. How do you have a debate with people who don’t understand math?

Or the oft-repeated myth that the Reagan tax cuts for the rich starved the government of revenue. How can you have a rational discussion with people who don’t believe IRS data?

And let’s not overlook my personal favorite, which is blaming so-called tax havens for the financial crisis, even though places such as the Cayman Islands had nothing to do with the Fed’s easy-money policy or with Fannie Mae and Freddie Mac subsidies.

These are all example of why my hair is turning gray.

But I’ll soon have white hair based on having to deal with the new claim from European bureaucrats that countries are guilty of providing subsidies if they have low taxes for companies.

I’m not joking. This is basically what’s behind the big tax fight between Apple, Ireland, and the European Commission.

I did several TV interviews on the topic yesterday, all of which can be seen here, but the Wall Street Journal did a great job of summarizing the issue today. Let’s look at that editorial, starting with the European Commission’s galling decision to use anti-trust laws to justify the bizarre assertion that low taxes are akin to a business subsidy.

Even by the usual Brussels standards of economic malpractice, Tuesday’s €13 billion ($14.5 billion) tax assault on Apple is something to behold. …Apple paid all the taxes it owed under existing tax laws around the world, which is why it hasn’t been subject to enforcement proceedings by revenue authorities. …Brussels now wants to use antitrust law to tell Ireland and other low-tax countries how to apply their own tax laws. …Brussels is deploying its antitrust gnomes to claim that taxes that are “too low” are an illegal subsidy under EU state-aid rules.

This is amazing. A subsidy is when government officials use coercion to force taxpayers (or consumers) to pay more in order to line the pockets of a company or industry. The Export-Import Bank would be an example of this odious practice, as would ethanol handouts.

Choosing to tax at a lower rate is not in this category. It’s a reduction in government coercion.

That doesn’t necessarily mean we’re necessarily talking about good policy since there are plenty of preferential tax laws that should be wiped out as part of a shift to a simple and fair flat tax.

I’m simply pointing out that lower taxes are not “state aid.”

The WSJ also points out that it’s not uncommon for major companies to seek clarification rulings from tax authorities.

Brussels points to correspondence between Irish tax officials and Apple executives to claim that Apple enjoyed favors not available to other companies, which would be tantamount to a subsidy. But all Apple received from Dublin, in 1991 and 2007, were letters confirming how the tax authorities would treat various transactions under the Irish laws that applied to everyone. If anyone in Brussels knew more about tax law, they’d realize such “comfort letters” are common practice around the world.

Indeed, the IRS routinely approves “advance pricing agreements” with major American taxpayers.

This doesn’t mean, by the way, that governments (the U.S., Ireland, or others) treat all transactions appropriately. But it does mean that Ireland isn’t doing something strange or radical.

The editorial also makes the much-needed point that the Obama White House and Treasury Department are hardly in a position to grouse, particularly because of the demagoguery and rule-twisting that have been used to discourage corporate inversions.

As for the U.S., the Treasury Department pushed back against these tax cases, which it rightly views as a protectionist threat to the rule of law. But it’s hard to believe that Brussels would have pulled this stunt if Treasury enjoyed the global respect it once did. President Obama and Treasury Secretary Jack Lew have also contributed to the antibusiness political mood by assailing American companies for moving to low-tax countries.


It’s also worth noting that the Obama Administration has been supportive of the OECD’s BEPS initiative, which also is designed to increase corporate tax burdens and clearly will disadvantage US companies.

A story from the Associated Press focuses on the European Commission’s real motive.

The European Commission says…it should help protect countries from unfair tax competition. When one country’s tax policy hurts a neighbor’s revenues, that country should be able to protect its tax base.

Wow, think about what this implies.

We all recognize, as consumers, the benefits of having lots of restaurants competing for our business. Or several cell phone companies. Or lots of firms that make washing machines. Competition helps us by leading to lower prices, higher quality, and better service. And it also boosts the overall economy because of the pressure to utilize resources more efficiently and productively.

So why, then, should the European Commission be working to protect governments from competition? Why is it bad for a country with low tax rates to attract jobs and investment from nations with high tax rates?

The answer, needless to say, is that tax competition is a good thing. Ever since the Reagan and Thatcher tax cuts got the process started, there have been major global reductions in tax rates, both for households and businesses, as governments have competed with each other (sadly, the US has fallen way behind in the contest for good business taxation).

Politicians understandably don’t like this liberalizing process, but the tax competition-induced drop in tax rates is one of the reason why the stagflation of the 1960s and 1970s was replaced by comparatively strong growth in the 1980s and 1990s.

To conclude, it’s worth noting that Apple is just the tip of the iceberg. If the EC succeeds, many other American companies will be under the gun.

And when politicians - either here or overseas - raise taxes on companies, never forget that they’re actually raising taxes on worker, consumers, and shareholders.

P.S. Just in case you think the Obama Administration is sincere about defending Apple and other American companies, don’t forget that these are the folks who included a global corporate minimum tax scheme in the President’s most recent budget.

Twenty years ago last week, Congress enacted the most extensive welfare reform law since the 1960s, the Personal Responsibility and Work Opportunity Reconciliation Act. Cato scholars have long championed a particular aspect of the reform bill that excluded recent legal immigrants from federal means-tested public benefits and have argued for extending the law’s restrictions. Welfare reform was successful: immigrants thrived without government support.

The theory behind welfare reform was that depriving benefits from immigrants would incentivize those already here to find jobs and encourage only those who wanted to work to come. This theory has appeared to work out in practice. Following the law’s enactment, immigrants who were most likely to be targeted by its restrictions responded by working more, which decreased the prevalence of poverty in their households.  

While the 1996 reform restricted welfare in some ways for both native-born citizens (natives) and naturalized citizens, the law imposed the harshest restriction on noncitizens, barring them from any means-tested public benefits until they became eligible to apply for citizenship—5 years after receiving lawful permanent residency in the United States. The Census Bureau’s Current Population Survey details the unemployment among noncitizens and native-born or naturalized citizens.

All groups saw reductions in unemployment post-welfare reform, but noncitizens saw the greatest reduction in unemployment from 1996 to 2016. In 1996, natives had an unemployment rate that was 3 percentage points lower than the rate among noncitizens. By 2016, the rates for each group had converged. While unemployment among naturalized citizens also declined during this time, the noncitizen unemployment dropped much further (3.4 percent compared to 0.9 percent).

Figure 1: Unemployment Rate among Noncitizen, Native-Born and Naturalized Citizens

Source: Current Population Survey

Unemployment did not decline as a result of immigrants abandoning the labor force either. In fact, the labor force participation rate (LFPR) among noncitizens rose rapidly after 1996. The native LFPR was nearly 2 percentage points above that for noncitizens in 1996. In 2016, it was 3.7 percentage points higher for noncitizens. Again, naturalized citizens improved, but not as greatly (0.6 percentage points).

Figure 2: Labor Force Participation Rate among Noncitizens, Native-Born and Naturalized Citizens           

Source: Current Population Survey

But the most important trend is this: not only did poverty decline among noncitizens from 1994 to 2014, they were the only group of the three citizenship classes to see a decline in poverty. Noncitizens experienced an 5.1 percentage point decrease in their rate of poverty (an 18.4 percent drop in their 1996 rate), compared to a 2.1 percentage point increase for naturalized citizens (20.2 percent growth) and a 0.3 percentage point increase for natives (2.6 percent growth). Because this poverty statistic includes all cash public benefits, this means that noncitizens performed best even after welfare payments to citizens.

Figure 3: Poverty Rate among Noncitizen, Native-Born and Naturalized Citizen Households         

Source: Current Population Survey, March Supplement

If these increases in employment and labor force participation were partially the result of welfare reform, we would expect two conditions to hold. First, the main effect of the law would be felt in the first five years after enactment as the first cohorts of immigrants enter without benefits. After five years, the population of immigrants becoming eligible for benefits each year roughly matched the population entering without benefits, so the rate of welfare receipt among legal immigrants would remain roughly constant.

And this is exactly what we see. Nearly all of the gains in labor force participation, unemployment, and poverty occurred between 1996 and 2000. Of course, the absolute gains during that time were a result of the late 1990s booming economy, but the relative gains for noncitizens compared to naturalized and native-born citizens also occurred during this period and were maintained later, just as the theory predicts.

The second prediction is this: the gains should have occurred most strongly among noncitizens who arrived within the prior five year period because, as mentioned before, noncitizens are ineligible for federal benefits only in their first five years in the country. Unfortunately, the Current Population Survey data on year of entry that I found using its Data Ferret tool only extends through 2004, but this slice reveals that noncitizens who were barred from federal benefits once again did better than other noncitizens.

In 1996, the unemployment rate among recent immigrants was 5.5 percentage points more than the unemployment rate among the established immigrants. By 2004, the difference was just a half a percentage point. The vast majority of the gains occurred in the recent immigrant group.

Figure 4: Unemployment Rate among Noncitizens Who Arrived in Prior 5 Years and Other Noncitizens    

Source: Current Population Survey, March Supplement

The same pattern can be seen in the labor force participation rate data. Noncitizens of both types improved from 1996 to 2004, but immigrants barred from benefits did better. Recent immigrants were 8.4 percentage points less likely to be working or looking for work in 1996 than established immigrants. They were 5.3 percentage points less likely to do so in 2004.

Figure 5: Labor Force Participation Rate among Noncitizens Who Arrived in Prior 5 Years and Other Noncitizens 

Source: Current Population Survey, March Supplement

Noncitizen outcomes reflect their increased employment. Those without access to public benefits saw the greatest reduction in poverty of any group in the United States. From 1996 to 2004, the poverty rate among noncitizens who arrived in the prior five years declined 9 percentage points compared to 5 percentage points for other noncitizens.

Figure 6: Poverty Rate among Noncitizen Households Whose Head of Household Arrived in Prior 5 Years and Other Noncitizen Households 


Source: Current Population Survey, March Supplement

The theory is not complicated by the fact that the trends for noncitizens outside of the five-year bar were also positive (though much less so). Other research has shown that noncitizens who were eligible for benefits also used them less following the 1996 act. Social scientists have debated the reasons for this “chilling” effect—confusion over the law or community norms could have a role—but in either case, they also appear to have benefited from the law.

The unambiguous lesson of this story is that welfare reform did not decimate the immigrant poor. It is impossible to know for sure the full reasons for these trends, but although exceptions undoubtedly exist, it is clear that the vast majority of immigrants can thrive without federal benefits. The United States could financially afford to accept many more immigrants if it further restricted such benefits, allowing it to be even more welcoming to another generation of hardworking immigrants. 

After last week’s release of Education Next’s 2016 survey of education opinion (see Jason Bedrick’s and Neal McCluskey’s responses), Phi Delta Kappa yesterday released its own poll (see Neal’s take on that here). Once again, the poll sheds light on the public’s understanding (or misunderstanding) of school financing.

In an open-ended question, Americans for the 15th consecutive year designated “lack of money/financial support” the biggest problem facing public schools. Perhaps as a result, most Americans—53% in support to 45% opposed—favored increasing property taxes to boost school funding. However, there was broad skepticism (47% of respondents) that increases would spur quality improvements. What explains this apparent inconsistency?

It turns out support for increased property taxes is correlated with how respondents ranked local public schools. Those that viewed their public schools more favorably were more likely to support property tax hikes and be confident that increased funding would improve schools. Conversely, those that rated local schools lower were more resistant to hikes and skeptical that increased funding would result in improvements. While two-thirds of those that gave their local schools an A grade were confident that increased funding would help, only 17% of those that gave their schools an F agreed.

In what PDK calls its most “lopsided” result, Americans overwhelmingly preferred keeping a failing school open to closure, 84% to 14%, but 62% favored replacing teachers and administrators to increasing funding in the turnaround. Americans, it seems, agree that increased funding will not improve underperforming schools. Furthermore, 26% of those that gave their schools a failing grade thought school closure was the more appropriate response, compared to only 13% of the general public.

Listing funding as a problem also does not necessarily result in support for increased property taxes. In the latest poll, 19% of respondents cited school funding as the biggest problem, down from a record high of 36% in 2010 and 2011, the peak of the recession years. But the Education Next poll demonstrates that support for property tax hikes declined dramatically during those years.

Another reason so many respondents cited “lack of funding” as a major problem? The open-ended nature of the question allowed up to three responses, increasing the likelihood that many respondents would include school funding as one of their answers. That only 19% of respondents included it seems low given that that majority of respondents favored property tax increases. Moreover, the EdNext pollsters theorize that support for increases in funding rises in election years, when this issue is most hotly debated, and it’s therefore unsurprising that it was seen as the biggest problem in public education.

An important caveat to these findings is that support for increased funding dramatically drops when an individual is informed of real spending. In the EdNext poll, uninformed respondents estimated average per-pupil spending at $7,020, a little more than half the actual average of $12,440. When uninformed respondents were asked if they favored an increase in school funding, 61% supported the idea; when a separate group of respondents was told the actual per-pupil expenditure, support dropped to 45%.

These results lead to a number of conclusions. First, support for increased schooling taxation comes disproportionately from the wealthy, already well-performing public schools, where parents are confident that spending is put to good use. The poll results shouldn’t be seen as supporting property tax hikes in communities with failing schools where the effectiveness of more funding is suspect. Second, because the public appears uncertain about funding as a tool to turn around schools, perhaps a better alternative is to give parents more control over their children’s education via school choice policies, as minority groups favor. Finally, these studies together reinforce the importance of a well-informed public. Support for spending increases drops for all groups—teachers, Republicans, Democrats, and the general public—when given accurate information.

Despite large numbers of respondents favoring property tax increases, the PDK poll demonstrates a broad skepticism of more funding for failing schools. And there is no powerful  link between spending and academic performance, making it heartening that the public appears intuitively aware of this.

As a battered and weary country peers into the hellmouth of Election 2016, contemplating the “bleak choice between a ‘liar’ and your ‘drunk uncle,’” along come two of (Anglo-) America’s premier public intellectuals with a plan for getting honest, sober policies out of our next president. “We urge the next president to establish a White House Council of Historical Advisers,” Niall Ferguson and Graham Allison write in this month’s Atlantic. Modeled on the Council of Economic Advisers, the CHA would bring together the country’s finest historical minds, backed by a professional staff, to help close the “history deficit” at 1600 Pennsylvania.

It’s one of those buzzworthy notions that seems ingenious on first airing—a presidential “Dream Team of Historians”!—but gets less shiny the closer you examine it. 

Arthur Schlesinger, Jr.: speaking truth to JFK’s power

“I think there would be more than enough work for a council of applied historians,” says Harvard’s Allison. What kind of work? As Ferguson and Allison envision it, the Council could help presidents avoid unforced historical errors, like the invasion of Iraq. When Bush “chose to topple Saddam Hussein,” they write, “he did not appear to fully appreciate either the difference between Sunni and Shiite Muslims,” and “he failed to heed warnings that the predictable consequence of his actions would be a Shiite-dominated Baghdad beholden to the Shiite champion in the Middle East—Iran.”

It’s a fair critique, but neither Ferguson nor Allison is in a great position to make it. It wasn’t what either of them were saying at the time.

During the war fever of 2002-03, Ferguson wasn’t urging the administration to rethink the Iraq adventure, lest they inadvertently empower Iran–he was cheering the disaster on. “By showing them just how easily Saddam’s vicious little tyranny could be overthrown,” he wrote in the Daily Mail (“Empire of the Gun,” June 21, 2003), “Mr. Bush has made it clear to the leaders of Iran, Syria and Saudi Arabia that he is in deadly earnest. If their countries continue to sponsor terrorism as all three notoriously do, Saddam’s fate could befall them too. Such saber-rattling evidently works.” Further: “Historians may well look back on 2003 as a turning point in the troubled politics of the Middle East. And they will give much of the credit for that transformation to the courageous and undoubtedly risky strategy adopted by President George Bush.” Just the hard truths Bush needed to hear!

In fairness, Ferguson could sometimes be heard to strike a cautionary note: “Consider some history,” he urged those advocating a time-limited occupation: “the British ran Iraq for the better part of 40 years.” As a ”fully paid up member of the neoimperialist gang,” Ferguson worried about America’s imperial “stamina.” A “successful” occupation might take a million troops, he warned in 2005, plus “around 10 years to establish order in Iraq, 30 more to establish the rule of law, and quite possibly another 30 to create a stable democracy.” But like Madeleine Albright, he thought “the price is worth it.” If Bush had taken a dose of Ferguson’s “applied history,” we’d have ended up spending even more blood and treasure on a futile project.

Graham Allison was much less exuberant about the Iraq War, but he wasn’t against it. When you’ve got “rattlesnakes in your backyard, backing off and hoping they slink away is not the answer,” he wrote in October 2002. Even so, Allison believed that Saddam’s WMD arsenal was so fearsome we might need a crash program to bolster America’s biodefenses before launching the attack: “Have you gotten your anthrax and smallpox vaccinations yet?” Over the next 14 years, he’s spent much of his time predicting that jihadists are about to graduate from crotch-bombs to functional nukes.

So when Ferguson and Allison write in the Atlantic that “applied historians will never be clairvoyants with unclouded crystal balls,” they’re putting it mildly, especially where present company is concerned. If they’d had the president’s ear at the time, he’d have gotten extra doses of alarmism and delusions of grandeur, pathologies that weren’t exactly in short supply in the Bush White House.

In fact, there was a top-flight Middle East scholar, fully up to speed on the differences between Sunnis and Shiites, who had the administration’s attention in the run up to the war. That was Bernard Lewis, “Bush’s historian,” who “deliver[ed] spine-stiffening lectures to Cheney over dinner in undisclosed locations” and pro-war thinkpieces in the Wall Street Journal.

Lewis also had thoughts about Iran, and let them fly in another WSJ op-ed, “August 22,” published on August 8, 2006. In it, he warned that the Iranians might nuke Israel within the next two weeks, to mark the anniversary of “the night flight of the prophet Muhammad …. to heaven and back.” “This might well be deemed an appropriate date for the apocalyptic ending of Israel and if necessary, of the world,” Lewis wrote. No crystal ball there either, thankfully. 

So one potential problem with the CHA idea is that the president would get to pick the historians. Personnel is policy, and presidents might staff the Council with scholars who feed them even crazier ideas than they’ve already got.

Still, it’s probably a safer bet that the CHA wouldn’t have much influence at all. In one of the recent stories on the Ferguson/Allison proposal, Rep. Tom Cole (R-OK), a former history professor, makes the obvious point that “the council would have value only if the president wanted its advice.” Presidents have mostly used their pet scholars as ambassadors to academia and the chattering classes: they’re valued less for their influence on executive-branch decisionmaking than for their ability to put an intellectual veneer on whatever it is the president’s already decided to do. If implemented, the CHA might be yet another useless appendage to the Executive Office of the President, an institutionalized kaffeeklatsch of court historians.

Even that might not be totally harmless, however. Presidents already have an unhealthy obsession with their legacies—wandering the halls, gazing at the portraits (sometimes even talking to them), and wondering how they’ll stack up in the rankings game: “In 1996 Clinton privately grouped his presidential predecessors into three tiers, then spent a long Sunday morning with consultant Dick Morris discussing what he could do to join the top group.

The academic consensus on that question seems to be that, to become a great president, you need to dream big, break stuff, and “leave the presidency stronger than you found it.” Given historians’ generally demented judgments about which presidents belong in the top tier, we should probably be grateful Bill didn’t have a Council of Historical Advisers around to consult.

Earlier this month, the New York Times ran a headline “Trial by Jury, a Hallowed American Right, Is Vanishing.”  This is very true.  It’s a trend that we at Cato have been lamenting for many years.  Despite the clear language of the Sixth Amendment, that the accused shall enjoy the right to trial by jury in “all criminal prosecutions,” the government manages to oversee a system where jury trials are quite rare–only about 1 percent of the criminal cases will be decided by juries.

Fortunately, there’s a new book that calls attention to this problem, The Missing American Jury, by Professor Suja Thomas.  Entrepreneur Mark Cuban recommends the book, saying jury trial “is a right that you never think you will need … until you do.”  Precisely.  Beyond the criminal area, the administrative state is also trampling the right to jury trial in the civil area

For a podcast interview with Suja Thomas, go here.

For related Cato scholarship, go here and here.

My previous attempts at asking a Trump trade adviser directly about trade policy failed. I’m now going to try another approach: Interpreting something surprising two other Trump advisers said.

Here’s what Wilbur Ross and Peter Navarro wrote recently:

The saddest fact here is that Hillary Clinton doesn’t know the difference between a good trade deal and a bad one. Exhibit A is the Central American Free Trade Agreement (CAFTA-DR).

In her economic speech in Detroit, Clinton bragged that she voted against the one multilateral trade deal that came before the Senate while she was there. That was indeed CAFTA-DR, a multilateral deal involving the U.S. along with Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic.

Here’s what Clinton did not confess to: She was wrong to oppose CAFTA-DR. In 2014, we had a favorable trade in goods balance with the CAFTA-DR countries of $2.7 billion. By 2015, that jumped to $5 billion. This pattern continued in the first half of 2016 with a surplus of $2.4 billion.

Did you catch that?  Trump’s trade advisers are praising a U.S. trade agreement.  That doesn’t sound very Trump-like, as Trump has been saying NAFTA is a “disaster” and has been calling the Trans Pacific Partnership (TPP) the “rape” of our country.  

So why do they like the CAFTA-DR?  Because in 2014 (9 years after the deal went into effect), there was a U.S. surplus in trade in goods with the various members of CAFTA-DR.  That by itself tells them it was a good deal. 

They follow this up with their typical criticism of NAFTA and the US-Korea FTA, complaining that these agreements led to a trade deficit:

Now what about the very poorly negotiated trade deals Hillary Clinton did support? Take NAFTA, which she lobbied for and her husband, former President Bill Clinton, signed in 1993. At the time, our trade in goods with Mexico was roughly in balance, with a small surplus of $1.7 billion. Today, we run a trade deficit in goods of roughly $60 billion — an astonishing leap. 

NAFTA is hardly a bad trade deal outlier in the Clinton oeuvre. As Secretary of State, Hillary Clinton helped draft the South Korea Bilateral Agreement, describing it as “cutting edge.” She was right. It cut 75,000 American jobs, according to the EPI, rather than the 70,000 gain promised by the White House. Meanwhile, our trade deficit with South Korea has doubled.

So the argument seems to be this: There are good trade agreements that lead to trade surpluses and bad trade agreements that lead to trade deficits. A good negotiator can get you an agreement with a surplus; with bad negotiators, you will end up with a deficit.

In reality, this is complete nonsense. These agreements were all negotiated by basically the same people (the U.S. Trade Representative’s Office), and they all say basically the same thing: They all lower tariffs; they all open services and procurement markets to some degree; they all protect intellectual property; and they all have rules on investor protection. There wasn’t some tricky maneuver the U.S. trade negotiators carried out it in the CAFTA-DR context to get a trade surplus, but forgot to use in the other trade agreements.

So why the variation in trade flows between agreements? Well, it’s complicated. These trade numbers actually fluctuate quite a bit from year to year.  See below for tables showing the U.S. trade balance over the years with several CAFTA-DR countries:

There are a lot of reasons for these fluctuations. Among other things, there are overall trends in the global economy and in specific national economies; and there are the decisions of private actors operating in the marketplace (it is these actors who are the ones actually doing the trading), which affect particular sectors over time. Thus, citing a trade surplus with CAFTA-DR countries – especially when it focuses on only the brief period 2014-2016 – as a reason for the success of the agreement vastly oversimplifies the impact of trade agreements on trade flows. Again, it is not the skill of the CAFTA-DR negotiators vs. the incompetence of the NAFTA or US-Korea FTA negotiators that led to the different results here.  As noted, it was basically the same people on each.  This is not like baseball. Trade negotiators do not have an off year and negotiate a bad trade agreement one year, but then come back a couple years later and have a career year by negotiating a good trade agreement.

But Trump’s advisers don’t realize that, probably because they don’t really know much about the substantive details of trade agreement.  They are simply looking at U.S. trade deficits or surpluses that arise after the fact, which generally matter very little (as my colleague Dan Ikenson has explained), and certainly don’t matter much at all in the context of trade between the U.S. and individual countries.