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Not entirely unsurprisingly, the Senate failed to reach cloture on Tuesday, falling eight votes shy of the 60 needed to start the timer on debate over Trade Promotion Authority (TPA), which will be needed to conclude the Trans-Pacific Partnership (TPP) negotiations and bring it to a timely vote in Congress.  The cloture vote concerned two of four pieces of trade legislation voted out of the Finance Committee two weeks ago (TPA and Trade Adjustment Assistance).  Senate Majority Leader Mitch McConnell excluded the other two bills, which contain language that would attract Democratic support. So, while I wouldn’t bet the ranch on TPA’s passage, there’s still room for horse trading.

In more surprising (and disappointing) news, one senator who will say “no” if TPA makes it to the floor for a vote is Rand Paul, who explained his reasoning on a New Hampshire television news broadcast:

We give up so much power from Congress to the presidency, and with them being so secretive on the treaty, it just concerns me what’s in the treaty.

Let me take Paul’s issues with power, secrecy, and content in order.

Certainly, this president has accelerated the trend toward executive aggrandizement and that warrants concern and correction. But it’s a stretch to conclude that TPA (despite containing the word “Authority”) gives the president power at the expense of Congress.  TPA is a compact between the legislative and executive branches, each of which has distinct constitutional authorities in the formulation of trade policy.  The way TPA works is as follows: Congress delegates the president as the point person responsible for conducting negotiations and requires him or her to fulfill a long list of congressional trade policy objectives in the course of those negotiations.  If the president brings back an agreement that satisfies Congress’s requirements, the agreement is given fast track consideration, which means a guaranteed up-or-down vote with no amendments within a set number of days after the signed agreement is announced. If the trade agreement is found to have not met the congressional objectives spelled out in the TPA legislation, it can be taken off of the fast track by way of a majority vote in the Senate Finance or House Ways and Means Committees.  Sen. Paul doesn’t seem to be invoking objections on any specific constitutional grounds, though he laments what he characterizes as a transfer of power from Congress to the president. 

The claim that the administration has been secretive about the negotiations and related processes has some merit, but access to the details of ongoing trade negotiations has always been limited.  Allegations of excessive secrecy have been thematic in the Far Left’s hyperbolic narrative that the TPP is about President Obama selling out labor, the environment, product safety, access to medicines, and regulating in the public interest for the benefit of those evil multinational corporations.  But as the president has belatedly and clumsily attempted to assuage the Left’s fears with assurances that the TPP is the most progressive trade agreement in history, complete with the most robust environmental and labor protections, including guaranteed minimum wages in partner countries, he has raised concerns among conservatives and libertarians about what exactly the president plans to spring on us.  That, I believe, justifies Paul’s reticence.

But the bottom line is this: Congress and the public will have the opportunity to scrutinize the TPP for 60 days before the agreement is signed, up to another 135 days during the “Reporting and Mock Markup” period, and up to another 90 days during the “Congressional Consideration and Implementation” period.  If Sen. Paul and his colleagues don’t like the contents of the agreement, they can vote “no.” 

So, if I were a senator and an advocate of economic freedom who happened to be understandably suspicious about the president’s agenda, I would vote “yes” for TPA, which opens the door to the possibility of even seeing a completed TPP.  Then, if after evaluating the TPP’s contents my worst fears were confirmed (or, more succinctly, if it were not net liberalizing), I’d vote “no” on its implementing legislation.  The error in voting “no” on TPA, though, is that if TPA fails to pass, we won’t see the TPP and we forgo the opportunity to pass a potentially good, net liberalizing trade agreement, which doesn’t come around all too often.

That’s why Rand Paul has it backwards.

The SEC has come under fire lately for its use – some might say overuse – of internal administrative proceedings.  The SEC’s use of administrative proceedings and administrative law judges (ALJs) is by no means unique within the federal government.  Thirty-four agencies currently have ALJs.  Nor is the SEC the heaviest user of administrative proceedings or ALJs; the Social Security Administration has that distinction, with more than 1,300 ALJs according to the most recent data available.  The SEC, by comparison, has only five ALJ positions, two of which are recent additions. 

The SEC’s ALJs have been in the spotlight due to a provision in Dodd-Frank that expands their ability to impose fines.  In the past, the SEC could impose monetary sanctions only on individuals and entities registered with the Commission – typically brokers, investment advisors, and similar entities and their employees.  By registering with the SEC, it was reasoned, these individuals and organizations had submitted to the SEC’s jurisdiction.  Others could be brought before the SEC’s tribunals for violating federal securities laws, and the ALJs could make findings of fact (that is, decide which side’s version of the facts was correct) and issue cease and desist orders, but could not impose fines.  Instead, the SEC’s lawyers would have to bring a separate case in federal district court.  Under Dodd-Frank, registered and unregistered persons are treated the same.

Administrative proceedings have their advantages.  Like a federal judge, an ALJ can issue subpoenas, hold hearings, and decide cases.  Because an ALJ’s cases deal with a very narrow area of law – only that related directly to the ALJ’s agency – the ALJ’s knowledge of that area tends to be deeper than that of a federal judge who hears a broad range of civil and criminal cases.  The proceedings before ALJs tend to be somewhat truncated, with fewer procedural requirements than federal district court, allowing the case to be decided more quickly. 

While administrative proceedings have some advantages, there are also disadvantages, especially for defendants. There are no juries, which raises questions about the constitutional right to a trial by jury, especially if ALJs impose quasi-criminal sanctions such as imposing fines.  (There are, more generally, also constitutional questions about whether there is appropriate separation of powers between the judicial and executive function in agency hearings, and whether the current method of selecting ALJs violates the appointments clause.)  The speed with which administrative proceedings move can also disadvantage a defendant; by the time the SEC has filed charges, it has already prepared its case, leaving the defendant to play catch-up.  In addition, because the discovery process in administrative proceedings is limited, defendants’ ability to obtain exculpatory documents from the SEC is also limited.  Finally, although ALJs are expected to remain neutral in fulfilling their duties, they are a part of the agency whose case they are hearing.  Justice demands not only actual impartiality from the court, but the appearance of impartiality as well.  As an agency’s ALJs approach a win rate of 100 percent, the appearance of impartiality fades.

Almost certainly in response to the recent criticism, this past Friday the SEC released guidance on how its enforcement division chooses whether to pursue a case in federal district court or before an ALJ.  The guidance is vague.  In general, the SEC tells us:

There is no rigid formula dictating the choice of forum.  The Division considers a number of factors when evaluating the choice of forum and its recommendation depends on the specific facts and circumstances of the case.  Not all factors will apply in every case and, in any particular case, some factors may deserve more weight than others, or more weight than they might in another case.  Indeed, in some circumstances, a single factor may be sufficiently important to lead to a decision to recommend a particular forum.   

These factors include: (1) the availability of the desired claims, legal theories, and forms of relief in each forum; (2) whether any charged party is a registered entity or an individual associated with a registered entity; (3) the cost‐, resource‐, and time‐effectiveness of litigation in each forum; and (4) fair, consistent, and effective resolution of securities law issues and matters.  Absent from the guidance is the recognition that it is the “availability of the…claims, legal theories, and forms of relief” that the SEC desires that factors into the determination. 

This “guidance” is troubling.  The fact that it is unlikely to be unique among federal agencies is also troubling.  The agency should not be able to choose to bring the case in the venue where it’s more likely to win (i.e., because it can use “desired…legal theories”).  It should not be able to choose a venue because certain “forms of relief” (i.e., punishments) are unavailable in the other venue.  To be sure, such “forum shopping” happens even outside of administrative proceedings.  A criminal case may be brought in federal court instead of state court because prosecutors believe they are more likely to prevail in federal court.  But such concurrent jurisdiction between state and federal court pits two sovereigns – the state and the federal government – against one another, creating certain checks on each other’s power.  In the case of an agency’s attorneys choosing an ALJ over a federal district court, you have simply increased the ways in which the government can win.

On November 20, 2014, President Obama unveiled DAPA, an executive policy that would defer the deportation of up to four millions illegal aliens and afford them work authorization. One week later, Texas, joined by 25 other states, filed a lawsuit against this unprecedented expansion of executive power.

Cato, joined by law professors Josh Blackman, Jeremy Rabkin, and Peter Margulies, filed an amicus brief supporting the challenge. While we broadly support comprehensive immigration reform, we argued that DAPA violated the president’s constitutional duty to take care that the laws were faithfully executed because this action went far beyond merely setting priorities on who will be pursued and deported given finite enforcement resources. It was highly unusual for Cato to file in a district court—amicus briefs of any kind are rare at this level—but this was a highly unusual situation.

On February 16, 2015, Judge Andrew Hanen blocked DAPA from going into effect, finding that the executive branch did not follow the proper administrative procedures—such as seeking comments from the public—before implementing what is effectively a substantive change in established immigration law.

The federal government appealed this judgment to the U.S. Court of Appeals for the Fifth Circuit (my old stomping grounds). It also filed for an “emergency stay,” arguing that Judge Hanen’s ruling causes irreparable damage to the United State and asking the appellate court to put it on hold. This was a cheeky maneuver given that Hanen’s ruling was itself a “temporary injunction” justified by the irreparable damage to the states that the judge determined would flow from DAPA’s operation. In effect, the government was asking for an “emergency” reversal of the district court, to which the Fifth Circuit panel didn’t seem particularly sympathetic at a hearing last month.

In any event, Cato has now filed a brief on the underlying appeal that again supports the 26 states and argues that President Obama’s action amounts to an illegal expansion of executive authority. While the lower court did not reach this constitutional issue, the president’s duty to faithfully execute the laws is a cornerstone of our separation of powers and provides the background architecture upon which the administrative state has been constructed.

Our message is simple: the implausible defense of the president’s unilateral executive action requires a level of legal sophistry that puts Humpty Dumpty to shame. As Justice Robert H. Jackson recognized six decades ago in the seminal case of Youngstown Sheet & Tube Co. v. Sawyer (the “Steel Seizure Case”), presidential lawmaking that lacks congressional support “must be scrutinized with caution.”

Such scrutiny will reveal that, even though Congress has previously authorized deportation deferrals and accompanying work permits, DAPA amounts to a deliberate effort to bypass Congress and conflicts with five decades of congressional immigration policy. The government implores the judiciary to believe that DAPA is a humdrum exercise of prosecutorial discretion based on modest new policy guidance that enable the Department of Homeland Security to prioritize resources. Don’t believe it. 

The Fifth Circuit has yet to set a hearing date for Texas v. United States but, assuming as expected that it denies the government’s motion for emergency stay, will likely hear argument this summer.

Former Arkansas Governor Mike Huckabee launched his presidential campaign last week. Huckabee highlighted his fiscal successes as governor during his announcement. He claims that he cut taxes 94 times while governor, and he promised to bring his tax-cutting experience to Washington, D.C. Huckabee’s statements do not tell the full story. While Huckabee cut some taxes, his time in office also included a rapid increase in Arkansas state spending and multiple tax hikes. 

Huckabee took office in July 1996 after Governor Jim Guy Tucker was convicted for his involvement in the Whitewater scandal. Shortly after taking office,  Huckabee signed a $70 million  package of income tax cuts. It eliminated the marriage penalty, increased the standard deduction, and indexed tax brackets to inflation. The broad-based tax cut was Arkansas’s first in 20 years.  Huckabee followed it with a large cut to the state’s capital gains tax. These tax cuts were popular, and they improved Arkansas’s economic climate.

Huckabee’s fiscal policies then changed direction. Huckabee used the state’s tobacco settlement money to expand Medicaid, and he supported a large bond initiative to increase spending for infrastructure. These and other spending policies came with a hefty price tag.

When Huckabee was in office during fiscal year 1997, Arkansas general fund spending was $2.6 billion, according to data from the National Association of State Budget Officers. By 2007, Huckabee’s last year in office, general fund spending had grown by 54 percent to $4 billion. Total state spending–which includes spending from federal aid and other non-general sources–grew even faster. Over the same period, it rose from $8.3 billion to $16.1 billion, an increase of 94 percent.

Huckabee relied upon multiple tax increases to fund this rapid spending growth. According to data from the state of Arkansas, examined by the Washington Post, net taxes increased by $505 million during Huckabee’s tenure. Huckabee supported increases in the state gasoline, cigarette, and sales taxes. He instituted a three percent personal income surtax.

Huckabee’s scores on Cato’s Fiscal Policy Report Card show his growing embrace of big government. Cato’s report card includes various measures of tax and spending restraint, and assigns governors grades on an A through F scale. Below are Huckabee’s scores:

In 2006 Huckabee tied for the worst-rated Republican governor. The authors of the report summarized Huckabee’s fiscal record: “Like many Republicans, his grades dropped the longer he stayed in office…Huckabee’s leadership has left taxpayers in Arkansas much worse off.”

If elected president, Huckabee promises not to increase taxes and to control federal spending. However, given his proclivity for raising taxes and spending while governor, his promises ring hollow.

Note: This post is part of a series on the fiscal records of governors running for president. Previous editions covered include Martin O’Malley and Jeb Bush.

The Common Core War, over the last few months, has been fought on a largely new front: whether students can be forced to take state tests – in the vast majority of cases, Core-aligned tests – or whether parents and students can refuse. It is perhaps an even more fundamental question than whether the federal government may constitutionally coerce standardization and testing generally, and with Common Core, specific standards and tests. The testing battle is to a large extent about whether a child, in seeming opposition to the seminal Supreme Court ruling in Pierce v. Society of Sisters, is indeed a “mere creature of the State.”

The opt-out numbers are hard to pin down, though there is little question that some districts have seen very large percentages while others – probably the large majority nationwide – have seen few. It is also probably reasonable to conclude that the leader of the opt-out crusade has been New York State, where animosity toward the Core has been high since the state first rushed implementation and state officials, in an effort to calm things, actually inflamed them with a condescending approach to public engagement that launched weeks of recriminations. Last year the state saw an estimated 60,000 students opt out, which leapt to nearly 200,000 this year.

The root question, of course, is should students and parents be able to opt out without fear of punishment? And since punishment would be coming from a government institution – yes, that is what a public school is – that means without fear of punishment by the state. If children are, in part, creatures of the state – and Pierce did not say there is no legitimate state role in education – than punishment is legitimate. If, however, the public schools exist to serve fully free citizens, then punishment cannot be meted out for refusing the test; it is up to parents to freely decide whether or not their children are subjected to the tests.

So far the answer to whether students may opt out without fear of punishment has been muddled. In part this is for a good reason: federalism allows states – and within states, local control allows districts – to decide for themselves what they want their policies to be. Unfortunately, another part of the confusion lies with Washington, which has a law on the books – No Child Left Behind – that says 95 percent of students in a district must take state tests. The Obama administration, however, has issued waivers out of parts of NCLB to numerous states with various provisions, and it is unclear to whom the 95 percent requirement actually applies. Exacerbating this – and illustrating why a few clear laws beat rule by waiver, regulation, and cabinet secretaries – is that even if the 95 percent rule should technically apply, U.S. Secretary of Education Arne Duncan has mainly invoked the specter of federal force rather than stating clearly what he will do to under-95-percenters. Of course, there are likely political calculations behind this: he wants to push states and districts to force testing while being able to technically say, “Washington didn’t require anything.”

To a large extent, the opt-out conflict is no different than the seemingly endless battles over countless matters into which public schooling forces Americans. As we at CEF never get tired of saying – and politicians never get tired of ignoring – all children, families, and communities are different. They have different needs, desires, abilities, values, educational philosophies, and on and on, and no single system can possibly treat them all equally.  That is why educational freedom – connecting educational funding and decisions to individual children – is the essential reform. That said, if parents are allowed to opt their children out of government-dictated tests it would be a welcome move in the right direction. It would loosen the state’s grip on the children, at least a little bit.

Since before the Declaration of Independence, equality under the law has long been a central feature of American identity—and was encapsulated in the Constitution. The Fourteenth Amendment expanded that constitutional precept to actions by states, not just the federal government.

For example, if a state government wants to use race as a factor in pursuing a certain policy, it must do so in the furtherance of a compelling reason—like preventing prison riots—and it must do so in as narrowly tailored a way as possible. This means, among other things, that race-neutral solutions must be considered and used as much as possible.

So if a state were to, say, set race-based quotas for its construction contracts and claim that no race-neutral alternatives will suffice—without showing why—that would fall far short of the high bar our laws set for race-conscious government action.

Yet that is precisely what Montana has done. Montana’s Disadvantaged Business Enterprise (“DBE”) program implements a federal program aimed at remedying past discrimination against minority and women contractors by granting competitive benefits to those groups. While there may be a valid government interest in remedying past discrimination, in its recent changes to the program, Montana blew through strict constitutional requirements and based its broad use of racial preferences on a single study that involved weak anecdotal evidence—a study that recommended more race-neutral alternatives, not fewer.

Even worse, Montana’s federal district court upheld the new provisions. Although Montana did not show which race-neutral alternatives were considered, tried, or rejected as insufficiently addressing past discriminatory practices, the court upheld the DBE’s grant of benefits to groups that were not shown to have ever been discriminated against. The contracting company that brought the suit has appealed the case to the U.S. Court of Appeals for the Ninth Circuit.

Cato has joined the Pacific Legal Foundation and Center for Equal Opportunity in filing a brief supporting that appeal. We argue that Montana doesn’t meet the high standard of narrow tailoring in its approach to the DBE program because it (1) failed to establish that race-neutral measures were insufficient, (2) failed to seriously consider race-neutral alternatives, and (3) extended benefits to groups who never even suffered past discrimination. We point out that Montana also failed to adequately establish the very existence of the discrimination that its program purportedly intends to remedy.

By cutting corners and paying lip service to race-neutral solutions, Montana and the lower court have each done a disservice to the hard-won principle of equality under the law. We urge the Ninth Circuit to correct those mistakes when it takes up Mountain West Holding Co. v. Montana this summer.

On Friday, May 8, the public comment period closed for the new 2015 Dietary Guidelines issued by the U.S. Department of Agriculture (USDA) and the Department of Health and Human Services (HHS). In a nutshell, the new dietary guidelines are to eat a diet richer in plant-based foods and leaner in animal-based products. One of the considerations used by the USDA/HHA in their Scientific Report used to rationalize these new dietary guidelines was that such diets are

“associated with more favorable environmental outcomes (lower greenhouse gas emissions and more favorable land, water, and energy use) than are current U.S. dietary patterns.” [emphasis added]

Throughout the Scientific Report whenever greenhouse gases are mentioned, a negative connotation is attached and food choices are praised if they lead to reduced emissions.

This is misleading on two fronts. First, the dominant greenhouse gas emitted by human activities is carbon dioxide which is a plant fertilizer whose increasing atmospheric concentrations have led to more productive plants, increasing total crop yields by some 10-15 percent to date. The USDA/HHS is at odds with itself in casting a positive light on actions that are geared towards lessening a beneficial outcome for plants, while at the same time espousing a more plant-based diet.

And second, the impact that food choices have on greenhouse gas emissions is vanishingly small—especially when cast in terms of climate change. And yet it is in this context that the discussion of GHGs is included in the Scientific Report. The USDA/HHS elevates the import of GHG emissions as a consideration in dietary choice far and above the level of its actual impact.

In our Comment to the USDA/HHS, we attempted to set them straight on these issues.

Our full Comment is available here, but for those looking for a synopsis, here is the abstract:

There are really only two reasons to discuss greenhouse gas emissions (primarily carbon dioxide) in the context of dietary guidelines in the U.S., and yet the USDA and HHS did neither in their Scientific Report of the 2015 Dietary Guidelines Advisory Committee (DGAC).

The first reason would be to discuss how the rising atmospheric concentration of CO2—a result primarily of the burning of fossil fuels to produce energy—is a growing benefit to plant life. This is an appropriate discussion in a dietary context as atmospheric CO2 is a fertilizer that promotes healthier, more productive plants, including crops used directly as food for humans or indirectly as animal feed. It has been estimated that from the atmospheric CO2 enrichment to date, total crop production as increased by 10-15 percent. This is a positive and beneficial outcome and one that most certainly should be included in any discussion of the role of greenhouse gases emissions in diet and nutrition—but is inexplicably lacking from such discussion in the DGAC report.

The second reason to discuss greenhouse gas emissions in a diet and nutrition report would be to dispel the notion that through your choice of food you can “do something” about climate change.  In this context, it would be appropriate to provide a quantitative example of how the dietary changes recommended by the DGAC would potentially impact projections of the future course of the climate. Again, the DGAC failed to do this.  We help fill this oversight with straightforward calculation of averted global warming that assumes all Americans cut meat out of their diet and become vegetarians—an action that, according to the studies cited by the DGAC, would have the maximum possible impact on reducing greenhouse gas emissions and thus mitigating future climate change.  Even assuming such an unlikely occurrence, the amount of global warming that would be averted works out to 0.01°C (one hundredth of a degree) by the end of the 21st century.  Such an inconsequential outcome has no tangible implications.  This should be expressed by the DGAC and mention of making dietary changes in the name of climate change must be summarily deleted.

We recommend that if the DGAC insists on including a discussion of greenhouse gas emissions (and thus climate change) in it 2015 Dietary Guidelines, that the current discussion be supplemented, or preferably replaced, with a more accurate and applicable one—one that indicates that carbon dioxide has widespread and near-universal positive benefits on the supply of food we eat, and that attempting to limit future climate change through dietary choice is misguided and unproductive.  These changes must be made prior to the issuance of the final guidelines. 

We can only guess on what sort of impact our Comment will have, but we can at least say we tried.

Free speech can get awfully expensive when billionaires are involved. Just ask the International Crisis Group, a charity that seeks to prevent war and related atrocities by monitoring conditions in the world’s most dangerous regions.

In 2003, ICG published a report on the political and social climate of Serbia following the assassination of Zoran Đinđić, the country’s first democratically elected prime minister after the fall of Slobodan Milošević. One of the issues noted there was the concern of “average Serbs” that powerful businesses were still benefiting from corrupt regulatory arrangements that dated back to the Milošević regime.

One of several oligarchs mentioned was Milan Jankovic, who also goes by the name Philip Zepter. With an estimated net worth of $5 billion, Jankovic is widely believed to be the richest Serb (and one of the 300 wealthiest men in the world). His holdings include Zepter International, which sells billions of dollars of cookware each year and has more than 130,000 employees.

One might think that a man responsible for running a vast business empire would have better things to do than suing a charity, but you’d be wrong. For the last decade, Jankovic has hounded ICG, relentlessly pressing a defamation suit, first in Europe and now in the United States. After 10 years of litigation, the case finally comes down to a single question: Is Milan Jankovic a public figure?

The Supreme Court has long held that the First Amendment’s protection of speech (and political criticism) requires libel plaintiffs who are public figures—like politicians and celebrities—to show that potentially defamatory statements were not only false but also published with “actual malice.” Under this standard, the defendant must have actually known that the statements were false; a negligent misstatement or the innocent repetition of another’s falsehood isn’t enough.

In an amicus brief filed in the U.S. Court of Appeals for the D.C. Circuit, Cato, along with a diverse group of organizations including the Brookings Institution, Council on Foreign Relations, and PEN American Center, argues that while Jankovic is not a politician or other government official, he should still be treated as a public figure for the purpose of this case.

Under the “limited public figure” doctrine, the Supreme Court holds that private citizens become public figures when they “thrust themselves to the forefront of particular public controversies in order to influence the resolution of the issues involved.” As we argue, Jankovic is in his own words one of Serbia’s most powerful and influential citizens, whose vast wealth and political connections gives him a near-unparalleled ability to shape the outcome of public debates. What’s more, Jankovic has played an active role in Serbian politics. He describes himself as one of the men responsible for overthrowing Milošević, and he once hired American lobbyists to represent the Serbian government in Washington. He’s even rumored to have used his own money to fund the government during a budget crisis!

In short, Jankovic is the very definition of a public figure—and criticism of public figures, whether they be elected officials like Frank Underwood or shadowy powerbrokers like Raymond Tusk, must be privileged. Unless the weakest are free to criticize the most powerful, democracy is nothing but a house of cards.

The D.C. Circuit will hear argument in Jankovic v. International Crisis Group later this spring or summer.

One consequence of the financial crisis of 2008-09 has been renewed interest in the merits of contingent convertible debt as a mechanism for equity bail-ins at moments of acute financial distress. Should it fail, a financial institution’s contingent bonds are automatically converted into equity shares. History suggests that convertible debt can help to preserve financial stability by limiting the spillover effects of individual financial institution failures.

A particularly revealing historical illustration of this advantage of contingent debt comes from the Scottish free banking era. From 1716 to 1845, the Scottish financial system functioned with no official central bank or lender of last resort, no public (or private) monopoly on currency issuance, no legal reserve or capital requirements, and no formal limits on bank size, at a time when Scotland’s was a classic emerging economy with large speculative capital flows, a fixed exchange rate, and substantial external debt. Despite this, Scotland’s banking sector survived many major shocks, including two severe balance of payments crises arising from political disturbances during the Seven Years’ War.

The stability of the Scottish banking system depended in part on the use it made of voluntary contingent liability arrangements. Until the practice was prohibited in 1765, some Scottish banks included an “optional clause” on their larger-denomination notes. The clause allowed the banks’ directors to convert the notes into short-term, interest-bearing bonds. Although the clause was seldom invoked, it was successfully employed as a means for preventing large-scale exchange rate speculators from draining the Scottish banks’ specie reserves and remitting them to London during war-related balance of payments crises–that is, as a private and voluntary alternative to government-imposed capital controls.

Contingent debt also helped to make Scottish bank failures less costly and disruptive. If an unlimited liability Scottish bank failed, its shorter-term creditors were again sometimes converted into bondholders, while its shareholders were liable for its debts to the full extent of their personal wealth. Although the Scottish system lacked a lender of last resort, the unlimited liability of shareholders in bankrupt Scottish banks served as a substitute, with sequestration of shareholders’ personal estates serving to “bail them in” beyond their subscribed capital. The issuance of tradeable bonds to short-term creditors, secured by mortgages to shareholders’ estates, served in turn to limit bank counter-parties’ exposure to losses, keeping credit flowing despite adverse shocks.

A particularly fascinating illustration of how such devices worked came with the spectacular collapse in June 1772 of the large Scottish banking firm of Douglas, Heron & Co., better known as the Ayr (or Air) Bank, after the parish where its head office was located. The Ayr collapsed when the failure of a London bond dealer in Scottish bonds caused its creditors to panic. The creditors doubted that the bank could could meet liabilities that, thanks to its reckless lending, had ballooned to almost £1.3 million. The disruption of Scottish credit ended quickly, however, when the Ayr’s partners resorted to a £500,000 bond issue, secured by £3,000,000 in mortgages upon their often vast personal estates—including several dukedoms. By this means the Ayr Bank managed to satisfy creditors, at 5% interest, as the Ayr’s assets, together with those of its partners, were gradually liquidated. In modern parlance, the Ayr Bank had been transformed into a “bad bank,” whose sole function was to gradually work off its assets and repay creditors while the immense landed wealth of its proprietors’ personal estates provided a financial backstop. Creditors were thus temporarily satisfied with fully secured, negotiable bonds, which were eventually redeemed in full, with interest.

We are unlikely today to witness a return to unlimited liability for financial institution shareholders. The extensive and effective use of contingent liability contracts during the Scottish free banking episode nevertheless offers important evidence concerning private market devices for limiting the disruptive consequences of financial-market crises. When compared to the contemporary practice of public socialization of loss through financial bail-outs, such private market alternatives appear to deserve serious consideration. Most importantly, perhaps, by encouraging closer monitoring of financial institutions by contingently liable creditors and equity holders, these private alternatives appear, in the Scottish case at least, not only to have made crises less severe, but also to have made them far less common.

This post is based on Tyler Goodspeed’s doctoral dissertation, a revised version of which is under consideration at Harvard University Press under the title Legislating Instability: Adam Smith, Free Banking, and the Financial Crisis of 1772.

My op-ed today at The Federalist discusses exciting developments in Canada and Britain regarding personal savings. Both nations have implemented universal savings vehicles of the type I proposed with Ernest Christian back in 2002. The vehicles have been a roaring success in Canada and Britain, and both countries have recently expanded them.

In Canada, the government’s new budget increased the annual contribution limit on Tax-Free Savings Accounts (TFSAs) from $5,500 to $10,000. In Britain, the annual contribution limit on Individual Savings Accounts (ISAs) was recently increased to 15,240 pounds (about $23,000). TFSAs and ISAs are impressive reforms—they are pro-growth, pro-family, and pro-freedom.

America should create a version of these accounts, which Christian and I dubbed Universal Savings Accounts (USAs). As with Roth IRAs, individuals would contribute to USAs with after-tax income, and then earnings and withdrawals would be tax-free. With USAs, withdrawals could be made at any time for any reason.

USAs, TFSAs, and ISAs adopt the principle that saving for all reasons is important, not just reasons chosen by the government. When people can use such accounts for all types of saving and for any length of time, it increases simplicity, flexibility, and liquidity.

In the United States, the government chooses which savings to favor, with the result that we have a mess of separate accounts with different rules for retirement, health care, and education. Everyone agrees that Americans don’t save enough, and one reason is the complexity of savings accounts. The creation of large accounts for all types of saving would simplify personal financial planning and encourage more saving.

There are differences between the Canadian and British accounts. While the annual contribution limit is lower for TFSAs than ISAs, unused contribution amounts can be carried forward under the TFSA, but not the ISA. Also, the TFSA is simpler because it is a single type of account. By contrast, the Brits created unneeded complexity by having separate “cash” and “stocks and shares” versions of ISAs.

Dividends, interest, and capital gains earned within TFSAs and ISAs are completely tax-free. Some U.K. news articles say that higher-earners may face a 10 percent dividend tax on shares held within ISAs. That is not correct, as Richard Teather confirmed to me. The U.K. has a complicated system for non-ISA dividends, which involves the use of a 10 percent dividend credit. That seems to have confused some reporters about dividends within ISAs.

If legislation to enact USAs moves ahead in America, we might expect complaints that such accounts would only benefit high earners. Such complaints would be both short-sighted and incorrect. In this new report, HM Revenue and Customs data show that ISAs have broad-based appeal in Britain. The columns in the chart below show that 13 million of the 23 million ISA account holders earn less that 20,000 pounds (about $30,000) a year. That high level of use by moderate-income individuals is great news.

 

The red line shows that the average value of accounts rises with income. That is not surprising given that people with higher incomes do more saving, which, by the way, is good for the overall economy. But note that the relative level of holdings is higher for people nearer the bottom. For example, earners in the 10,000-19,999 income range hold about 18,000 pounds of assets in their ISAs, so the average holding is about as high as annual income. But for higher earners, average account holdings are only a fraction of annual income.

In sum, policymakers in the United States have put too much emphasis on giving certain groups narrow tax breaks. USAs would be a better policy approach because they would help all Americans help themselves through their own thrift.

For more on universal savings accounts, see my op-ed with Amity Shlaes.  

Interested in how to advance economic growth? Join the Cato Institute’s Center for Monetary and Financial Alternatives in New York on June 2nd for a day examining the current state of U.S. capital markets regulation at Capital Unbound: The Cato Summit on Financial Regulation.

We’ve assembled an impressive list of distinguished speakers to discuss efficient capital markets and offer proposals to unleash a new engine of American economic growth.

Our lineup includes such notables as Commissioner of the U.S. Commodity Futures Trading Commission J. Christopher Giancarlo, Commissioner of the U.S. Securities and Exchange Commission Michael Piwowar, and our very own CMFA Director George Selgin.

The speakers will explore a wide variety of topics, including alternative vehicles for small business capital, the failure of mathematical modeling, and alternative solutions to monetary and financial instability.

Click here for the full schedule and to register for the event. We hope to see you in New York on June 2nd!

The ceasefire in eastern Ukraine is under strain as Kiev presses the West for more financial and military aid. Americans’ sympathies should go to both Ukrainians and Russians suffering in Vladimir Putin’s deadly geopolitical games, but Washington should stay out of the battle.

Putin obviously bears immediate responsibility for the conflict. However, Washington and Brussels consistently disregarded Russian security interests.

That still didn’t justify Putin’s actions and the results have been a horror for many Ukrainians, though Kiev’s military and nationalist militias have contributed to the unnecessary carnage. However, Moscow views the war less about expanding Russia’s “empire” than about protecting Russia from America’s expanding “empire.”

The U.S. should not intervene and treat Moscow as an adversary. To the contrary, Washington should stay out of the conflict and maintain a passable relationship with Russia.

After all, the latter, with a substantial nuclear arsenal, is the one power capable of annihilating America. Moscow also matters at the United Nations and in policy toward Afghanistan, Iran, North Korea, Syria, and terrorism.

Moscow’s behavior in Ukraine, though atrocious, poses no threat to America. Some emotional Ukrainian expatriates compare Putin to Hitler, but Russia isn’t a reincarnation of the Soviet Union, let alone Nazi Germany. Moscow is a declining, not rising power.

Ukraine obviously matters more to Europe than America. But Europe has a greater GDP and population than America (and much larger advantages over Russia). Yet almost all European states continue to disarm. No one is prepared to fight for Ukraine.

There also is a humanitarian call for action, but Ukraine ranks below many conflicts elsewhere. Some Ukrainians point out that Kiev gave up its nuclear weapons, leftovers from the Soviet arsenal, in return for international guarantees.  But Washington never promised to act militarily.

Anyway, the allies have no cost-effective way to force Moscow to back down. Iraq, Russia, a major power with nuclear weapons and a deep sense of grievances, is certain to prove intractable and respond with great force.

Of course, the U.S. and European militaries are more powerful than Russia’s armed forces. However, the latter possesses the great equalizer of nuclear weapons. Moreover, with far more at stake, the Kremlin will bear greater costs and take greater risks.

Kiev wants additional military aid. But Moscow likely would respond in kind, just as it intervened more directly last year when Ukrainian forces began winning on the field. The stakes for Moscow are too high to yield.

Arming Kiev would put U.S. credibility at issue. If greater American efforts only led to higher Ukrainian losses, pressure would build for additional weapons and training, and perhaps much more, including airstrikes and ground personnel.

Ian Brzezinski of the Atlantic Council recently urged Congress to authorize NATO’s Supreme Allied commander “to deploy in real time against provocative Russian military operations,” that is, offer combat and start a war. Yet no policymaker of note in the West is prepared for war over Ukrainian separatism.

Finally, ramping up sanctions on banking and energy wouldn’t likely change Moscow’s behavior. There’s little European support for such a course. Putin could respond by expanding economic controls, political repression, and foreign adventurism.

Nor is a domestic crisis likely to yield a liberal, pro-Western government. Putin actually appears to be a pragmatic nationalist compared to more radical forces.

The best outcome would be a negotiated settlement recognizing Ukraine as nominally whole while according the Donbas extensive autonomy and guaranteeing no NATO membership or other Western-oriented military relationship for Ukraine.

Ukrainians insist that these decisions should be up to them. Kiev should set its own policy, but then bear the cost of doing so. Washington and Brussels should not support permanent confrontation and potential war with Moscow.

As I argue on Forbes online: “Hopefully the tattered ceasefire in the Donbas will hold and both sides will accept a compromise solution. In any case, the U.S. should keep its arms and troops home. Ukraine is not America’s fight.”

To capitalism’s detractors, Nike symbolizes the Dickensian horrors of trade and globalization – a world ripened for mass exploitation of workers and the environment for the impious purpose of padding the bottom line. They are offended by President Obama’s selection of Nike headquarters as the setting for his speech, last week, in which he touted the benefits of the emerging Trans-Pacific Partnership agreement. But Nike exemplifies the redeeming virtues of globalization and illustrates how self-interested capitalism satisfies popular demands – including, even, the demands of its detractors.

Fealty to the reviled bottom line incentivizes companies like Nike to deliver, in a sustainable manner, what those genuinely concerned about development claim to want. U.S. and other Western investments in developing-country manufacturing and assembly operations tend to raise local labor, environmental, and product safety standards. Western companies usually offer higher wages than the local average to attract the best workers, which can reduce the total cost of labor through higher productivity and lower employee turnover. Western companies often use production technologies and techniques that meet higher standards and bring best practices that are emulated by local firms, leading to improvements in working conditions, environmental outcomes, and product safety.

Perhaps most significantly, companies like Nike are understandably protective of their brands, which are usually their most valuable assets. In an age when people increasingly demand social accountability as an attribute of the products and services they consume, mere allegations – let alone confirmed instances – of labor abuses, safety violations, tainted products, environmental degradation, and other objectionable practices can quickly degrade or destroy a brand. Western brands have every incentive to find scrupulous supply chain partners and even to submit to third party verifications of the veracity of all sorts of practices in developing countries because the verdict of the marketplace can be swift and unambiguous.

Nike remembers the boycotts and the profit losses it endured on account of global reactions to its association with “sweatshop” working conditions in the past. Mattel’s bottom line took a beating when some of its toys manufactured in certain Chinese factories were found to contain dangerous levels of lead paint. There have been numerous examples of lax oversight and wanting conditions, but increasingly they are becoming the exception and not the rule.

Obviously, most Americans would find developing country factory conditions and practices to be, on average, inferior to those in the United States. But the proper comparison is not between wages and conditions in a factory in Ho Chi Minh City and Akron, Ohio or between Akron in 2015 and Akron in 1915. Trade and globalization scolds who would hamper investment flows to developing countries by demanding that poor countries price themselves out of global supply chain networks by adopting rich-country standards should stop and ponder the conditions that would prevail in those locations without Western investment because that’s where their demands ultimately lead.

Even New York Times columnist Nicholas Kristof – an icon of the Left – has argued that factory work offers a step up the ladder for billions of impoverished people around the world.  His stories about the limited options for subsisting among Cambodian women before the arrival of apparel factories, which included picking through garbage dumps, backbreaking agricultural work, and prostitution, remind us that development is a process and not one that is prone to use of magic wands. What employment options would exist in the absence of Western investment? How much accountability would there be if locally-owned factories were the only choices? Without Western investment, there would be much less opportunity and much less scrutiny of labor and environmental practices.

Globalization has brought greater accountability by assigning globally recognizable brand names to otherwise anonymous, small-scale, production and assembly operations. Brands have the most to lose from the discovery of any unscrupulous practices, so the incentives are aligned with the goals of development. An important lesson of capitalism and markets is that even corporate behavior that meets the disapproval of consumers gets punished and corrected.

Unfortunately, a lesson that too many on the Left fail to heed is that capitalism and trade are making life much better for people around the world. Calling globalization a “race to the bottom” may make for a hip bumper sticker, but it has no bearing in reality.

You Ought to Have a Look is a feature from the Center for the Study of Science posted by Patrick J. Michaels and Paul C. (“Chip”) Knappenberger.  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.

Two papers were announced this week that sought to examine the sources of bias in the scientific literature. They could not be more starkly opposed.

First off is a doozy of a new paper by Stephan Lewandowsky, Naomi Oreskes and colleagues that complains that skeptical viewpoints are disproportionately influencing the science of climate change. Recall that Lewandowsky and Oreskes are quixotic climate change denialslayers—conspiracy theorists of somewhat ill-repute.

According to a story in Science Daily (the Lewandowsky et al. paper was not available at the time of this writing) Lewandowsky and Oreskes argue that:

Climate change denial in public discourse may encourage climate scientists to over-emphasize scientific uncertainty and is also affecting how they themselves speak – and perhaps even think – about their own research.

Lewandowsky and Oreskes fret:

The idea that ‘global warming has stopped’ has been promoted in contrarian blogs and media articles for many years, and ultimately the idea of a ‘pause’ or ‘hiatus’ has become ensconced in the scientific literature, including in the latest assessment report of the Intergovernmental Panel on Climate Change (IPCC).

The Science Daily article continues:

Recent warming has been slower than the long term trend, but this fluctuation differs little from past fluctuations in warming rate, including past periods of more rapid than average warming. Crucially, on previous occasions when decadal warming was particularly rapid, the scientific community did not give short-term climate variability the attention it has now received, when decadal warming was slower. During earlier rapid warming there was no additional research effort directed at explaining ‘catastrophic’ warming. By contrast, the recent modest decrease in the rate of warming has elicited numerous articles and special issues of leading journals.

This asymmetry in response to fluctuations in the decadal warming trend likely reflects what the study’s authors call the ‘seepage’ of contrarian claims into scientific work.

And according the Lewandowsky, this is a problem because:

“It seems reasonable to conclude that the pressure of climate contrarians has contributed, at least to some degree, to scientists re-examining their own theory, data and models, even though all of them permit – indeed, expect – changes in the rate of warming over any arbitrarily chosen period.”

So why might scientists be affected by contrarian public discourse? The study argues that three recognised psychological mechanisms are at work: ‘stereotype threat’, ‘pluralistic ignorance’ and the ‘third-person effect’.

‘Stereotype threat’ refers to the emotional and behaviour responses when a person is reminded of an adverse stereotype against a group to which they belong. Thus, when scientists are stereotyped as ‘alarmists’, a predicted response would be for them to try to avoid seeming alarmist by downplaying the degree of threat. Several studies have indeed shown that scientists tend to avoid highlighting risks, lest they be seen as ‘alarmist’.

‘Pluralistic ignorance’ describes the phenomenon which arises when a minority opinion is given disproportionate prominence in public debate, resulting in the majority of people incorrectly assuming their opinion is marginalised. Thus, a public discourse that asserts that the IPCC has exaggerated the threat of climate change may cause scientists who disagree to think their views are in the minority, and they may therefore feel inhibited from speaking out in public.

Research shows that people generally believe that persuasive communications exert a stronger effect on others than on themselves: this is known as the ‘third-person effect’. However, in actual fact, people tend to be more affected by persuasive messages than they think. This suggests the scientific community may be susceptible to arguments against climate change even when they know them to be false.

We humbly assert that Lewandowsky, Oreskes, and colleagues have this completely backwards.

When global warming was occurring faster than climate models expected during the 1990s, there was little effort by the mainstream climate science community to look into why, despite plenty of skeptic voices (such as our own) pointing to the influence of natural variability.  Instead, headlines proclaimed “Global warming worse than expected,” which fueled the human-caused climate change hysteria (favored by the 1990s White House) and helped build the push for calls to regulate greenhouse gas emissions from fossil fuels.  But since the late 1990s, there has been no statistically significant warming trend in the highly-cited HadCRU4 temperature record, and both the RSS and UAH satellite records are now in their 21st consecutive year without a significant trend.  This behavior contrasted with, and called into question, the veracity of climate model projections. And it was these projections upon which rested the case for a dangerous human influence on the climate. Again, skeptic voices were raised in objection to the mainstream view of climate change and the need for government intervention. But this time, the skeptic voices were accompanied by data that clearly showed that rather than “worse than expected,” climate change was actually proceeding at a quite modest pace.

It was only then, with the threat of losing support for actions to mitigate climate change—actions that a top U.N. climate official, Christine Figueres, described as an effort “to intentionally transform the economic development model, for the first time in human history” —that the mainstream climate community started to pay attention and began investigating the “hiatus” or “pause”—the words so despised by Lewandowsky and Oreskes.

Through these research efforts, we have learned a lot about the role of natural variability in the broader climate system and how such variability impacts of projections of human-caused climate change (such as through a better understanding of the equilibrium climate sensitivity—how much warming results from a doubling of atmospheric carbon dioxide concentration).

In other words, science has been moved forward, propelled by folks who didn’t take the mainstream climate science at face value, and instead questioned it—i.e., Lewandowsky’s and Oreskes’ “deniers.”

The outcome of all of this is, in fact, the opposite of what Lewandowsky and Oreskes assert has occurred.  Rather than “skeptic” ideas “seeping” into science and leading to a false narrative, skeptic ideas instead have spurred new research and therefore new knowledge. Such was not the case when skeptics were being shut out. The only thing different now vs. 20 years ago, is that this time around, the existence of a profoundly inconvenient truth (a “hiatus” in global warming) gave public credence to the skeptics which forced them to be taken seriously by the scientific consensus-keepers. Incontrovertible evidence that threatened to tear down the meme of climate alarmism clearly required some sort of response.

Science is biased not by the inclusion of skeptical voices, but rather the exclusion of them.

In fact, this week, we announced the framework for an investigation into the existence of such bias.

We teamed with Dr. David Wojick to produce a Cato Working Paper titled “Is the Government Buying Science or Support? A Framework Analysis of Federal Funding-induced Biases” we describe:

The purpose of this report is to provide a framework for doing research on the problem of bias in science, especially bias induced by Federal funding of research. In recent years the issue of bias in science has come under increasing scrutiny, including within the scientific community. Much of this scrutiny is focused on the potential for bias induced by the commercial funding of research. However, relatively little attention has been given to the potential role of Federal funding in fostering bias. The research question is clear: does biased funding skew research in a preferred direction, one that supports an agency mission, policy or paradigm?

An interested reader may want to review the fifteen bias-inducing scientific practices that we identify and compare them with the “three recognised psychological mechanisms” that Lewandowsky and Oreskes assert are at work to see which seem to make the most sense.

Essentially, our project seeks to determine if the dog is wagging the tail. Lewandowsky and Oreskes propose the tail is wagging the dog.

Hopefully, in the not too distant future, we’ll be able to report back what we find in our investigations. We’ll be surprised if we find that exclusionary practices drive science forward more efficiently than inclusive ones!

Reference

Lewandowsky, S., N. Oreskes, J. S. Risbey, B. R. Newell and M. Smithson, 2015. Climate change denial and its effect on the scientific community. Global Environmental Change, (in press) 

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