Cato Op-Eds

Individual Liberty, Free Markets, and Peace
Subscribe to Cato Op-Eds feed

As was widely expected, on Sunday Vladimir Putin was once again reinstalled (reconfirmed, re-enthroned) in the Kremlin. The term “elected” cannot be used in this case since nothing that happened on March 18, 2018, or in the months leading to this date, qualifies for the internationally recognized basic standards of the term “election.” 

In full control of the Kremlin for more than 18 years, Putin has already been at the top of the Russian state longer than any other Russian or Soviet leader in the last century—including Leonid Brezhnev—and is now left to compete only with the three-decade reign of Joseph Stalin.

The official numbers of the Central Electoral Commission (CEC) gave Putin 76.7% of the vote with a turnout of 67.5%, making up almost 52% of Russia’s electorate. According to the CEC, the official number of people who voted for Putin was 56.4 million. However, Sergei Shpilkin, the renowned expert in electoral statistics, has estimated that ballot stuffing this year amounted to at least 10 million. In each of the three previous cases of “presidential elections” (in 2004, 2008, 2012) Shpilkin and his colleagues calculated the number of added (falsified) votes at between 8.8 and 14.6 million. 

Whatever the actual level of Putin’s public support, the official numbers provide Putin with a level of legitimacy that Russian presidents never had before. The real question that now arises is how he is going to use it.

The general consensus is that Putin’s policy on the domestic front would be a still further tightening of his grip on the last remnants of civil society, a further destruction of the already almost-fully-destroyed rule of law, meager—if any—meaningful economic reforms, and definitely a new level of ideologization of Russian society based on anti-liberal, conservative, Orthodox religious values. Russia’s level of political rights and civil liberties in previous years has been sliding down to non-free status. Now its status is just one notch above the very bottom in Freedom House’s political freedom index, meaning that it is close to the level of the totalitarian regimes of Cuba and North Korea. Given Putin’s persistence and Russia’s rapid political deterioration, it is rather hard not to expect that Russia will soon sink to the lowest level in the political freedom index.

As for Putin’s possible foreign policy in the coming years, we can get a hint of it based on a number of his recent statements, comments, and interviews. It appears that Putin’s traditional interest in disturbing Russia’s immediate neighbors and grabbing pieces of land in Moldova, Georgia, and Ukraine has been visibly redirected towards Belarus, since Mr. Lukashenko’s dictatorship—lacking any serious foreign allies except for Russia—seems to be particularly vulnerable to absorption. In addition, the Russian “czar” has started to look for more ambitious targets beyond the borders of the former Soviet republics. Recently, his attention has been directed towards his key adversary—the United States—and the most irritating part for him within the United States, its democratic political system. In the documentary movie “The World Order, 2018,” which was prepared by the Kremlin propaganda team before the March presidential vote, Putin firmly articulated his two approaches to the United States: to be emphatically positive towards president Trump and to show strong “disappointment with the unpredictable [democratic] political system” of the United States.

Otherwise, in his interview with NBC anchor Megan Kelly, Putin appeared even more decisive—by naming (unprecedentedly) five times the most crucial problem for him and his key partner (president Trump): namely, the United States political system and the United States Congress. He blamed Congress for all of America’s alleged crimes, such as intervention into Russian internal affairs, different accusations of Russia, proclaiming Russia as an enemy, and the introduction of sanctions against Russia—something that Putin has never done before. It remains to be seen what particular instruments he is ready to apply towards this enemy—intervention into congressional elections this Autumn, cyber-attacks, propaganda, blackmail, or otherwise. But having seen Putin’s approach for years, it is hard not to foresee that one of the main targets of his aggressive foreign policy—either open, or clandestine, or both—in the coming years is going to be the democratic political system of the United States, with the United States Congress at its center.

A snowstorm has shutdown most of D.C. today, but Congress is working to pass a budget to keep the government open. Again.

As I’ve written before, there’s more at stake in the budget than just keeping the government up and running. For several years, Congress has refused to fund federal prosecutions of state-legal medical marijuana (a.k.a. “cannabis”) distribution through a rider to the annual budget known as the Rohrabacher-Blumenauer (originally Rohrabacher-Farr) Amendment.

Attorney General Jeff Sessions has previously asked Congress for the funds to go after the people who provide relief to terminally ill and chronic pain patients with cannabis. He’s already made his intentions clear to the Department of Justice that he wants more marijuana prosecutions. As Politico explained in an article today, Rep. Pete Sessions (R-TX)—no relation—has done his best to oblige the Attorney General’s request through his position on the House Rules Committee.

Both Sessions are remarkably out of step with not just American sentiment, but Republican feelings on medical cannabis:

Despite its perceived association with the political left, medical marijuana is not just a blue-state issue. Ten of the 29 states with legal medical marijuana—and 115 electoral votes—went for Donald Trump in the 2016 election. More than 200 million American residents, roughly 62 percent of the population, live in states where medical marijuana is legal. Nationwide, according to a 2017 CBS poll, 71 percent of Americans—including 63 percent of Republicans—oppose federal interference with state-legal marijuana. Perhaps most telling, a 2017 Quinnipiac poll found that 94 percent of American voters approve of adult medical marijuana use if prescribed by a doctor.

There is no guarantee that the Rohrabacher-Blumenauer will be in the final budget agreement before the Friday deadline. In the midst of the opioid crisis and with so much public (and corroborating scientific) support for medical cannabis as an opioid alternative, failure to attach the rider could be calamitous for suffering patients and an inexplicable unforced error by the Republican majority.  

President Trump’s announcement of new tariffs on imported steel and aluminum drew swift warnings from free traders, including here at the Cato Institute, that such naked protectionism will lead to job losses and reduced prosperity. But don’t just take our word for it. A new study released this week by the Coalition for a Prosperous America (CPA), a protectionist interest group, concludes that the tariffs will result in both net employment losses and reduced economic activity. While the CPA highlights the study’s finding that tariffs will lead to 18,859 new jobs in “iron and steel nonferrous metals,” it also concedes that these will be more than offset with losses in other sectors, including over 10,000 jobs in construction and nearly 7,500 in manufacturing, for a net loss of 411 jobs. Additionally, the study finds that the tariffs will leave Americans marginally poorer, predicting a decrease in U.S. GDP of $1.4 billion. 

In other words, the debate is no longer whether these tariffs will be harmful to the U.S. economy—the protectionists have effectively run a white flag up the pole on that question—but rather the magnitude of the damage. 

Also worth noting is that the CPA study presents a best-case scenario, using assumptions that are, if not questionable, perhaps overly optimistic. For example, the model’s apparent assumption of full employment—by no means obvious given that recent sizeable monthly employment gains have not led to a reduction in the unemployment rate—appears in tension with the study’s claim that steel and aluminum will see relatively restrained cost increases of 6.29 percent and 2.5 percent owing to “available U.S. capacity and competition.” Presumably, any increase in production to partially offset the decline in imports will require additional workers, which may be no easy task in a full employment economy. Furthermore, the study makes no mention of the impact of retaliation that is sure to follow from U.S. trading partners in response to Trump’s tariffs. The study’s finding that the tariffs will result in 464 new agriculture jobs, for example, is hard to square with retaliation threats from the European Union which include targeting American exports of corn, cranberries, rice, orange juice, and tobacco. 

In contrast, a recent analysis conducted by the Trade Partnership consulting group found that retaliation would contribute to net U.S. job losses of over 468,000. Even absent retaliation, the Trade Partnership found a net loss of 146,000 jobs in a previous study—one that the new CPA report was conducted in response to. 

The exact amount of the employment decline or loss in economic welfare, however, is almost a second order question on the steel and aluminum tariffs. Directionally, a consensus has been reached, with both free traders and protectionists in apparent agreement that they will cause harm to both jobs and the overall economy. Thus far, President Trump has not heeded the warnings of free traders and appears determined to proceed with his act of self-sabotage. Perhaps he will lend an ear to his fellow protectionists.  

Can the government force private parties to speak against their own interests and disparage the products they offer? The answer is yes when potential consumer harms are significant (think tobacco labels and other safety warnings) or there’s informational asymmetry (securities offerings)—and indeed fraudulent offerings (the prototypical snake oil) are prohibited altogether. But mandated disclosure regimes are proliferating far past these sorts of traditional disclosures, stretching the First Amendment to the breaking point regarding commercial speech.

A recent example of this phenomenon involves Nationwide Biweekly Administration, whose business is saving customers a significant amount on their mortgages by structuring smaller biweekly payments in place of traditional monthly payments—allowing for an extra reduction of principal each year. To market its services, Nationwide uses public information to send potential customers mailers illustrating how much they might save over the life of their loans. Despite front-and-center statements that Nationwide is “not affiliated, connected, or associated with, sponsored, or approved by the lender listed above,” California decided that this information was insufficient to guarantee that consumers wouldn’t be confused. The state required the company to state on solicitations that they are “not authorized by the lender.”

Nationwide challenged this requirement in court, arguing that the state’s message itself was misleading (by implying that lenders have any power to “authorize” Nationwide’s actions) and forced the company to disparage its own services by suggesting that they were somehow not permitted to offer them. But the federal district court, and then the U.S. Court of Appeals for the Ninth Circuit, approved the mandated disclosure, citing the Supreme Court case of Zauderer v. Office of Disciplinary Counsel of Supreme Court of Ohio (1985).

Zauderer held that “purely factual,” “uncontroversial” disclosures could be required to directly combat consumer deception. While this is a lower form of constitutional scrutiny than most speech restrictions receive, it’s not without teeth. The government still needs to prove actual deception—and once that hurdle is crossed, those compelled government scripts must be both purely factual and uncontroversial, and take care not to burden the speaker any more than necessary.

The Ninth Circuit opted to ignore the Court’s instructions, conflate the prongs of the test, and eliminate the need to justify its reasons for compelling government-mandated scripts by declaring that, “in the interest of administrative simplicity, the state may reasonably decide to require disclosure for a class of solicitations that it determines pose a risk of deception.”

If that new and unfounded legal standard is allowed to stand, Zauderer means nothing at all, and governments can mandate almost any controversial or self-disparaging script for almost any reason. Mom ‘n’ Pop car lots could be required to announce in bold script that “the safety of this car has not been guaranteed by [insert car maker here].” Walmart could lobby a locality to require its competitors to display Walmart’s prices alongside their own, just in case consumers are unaware that retail prices fluctuate between sellers. Generic drug manufacturers could be required to insist in large type that “the safety of this drug is not guaranteed by the company that originally developed it,” and Sprint and T-Mobile could be forced to proclaim that their advertisements are “not authorized by Verizon.”

Speech compulsion violates the sphere of freedom protected by the First Amendment just as speech restrictions do, so Cato has filed an amicus brief supporting Nationwide’s request that the Supreme Court take up Nationwide Biweekly Administration v. Hubanks review and reverse the Ninth Circuit’s deeply flawed decision.

During his campaign, President Trump promised to target the “bad hombres” in the United States illegally. But Immigration and Customs Enforcement (ICE) statistics indicate that his administration has cast a much wider net. More than one in four immigrants that ICE arrested last year had no criminal convictions at all, and of the rest, their convictions were mostly victimless crimes—largely traffic infractions, immigration offenses, and drug offenses. Almost 90 percent were for nonviolent crimes. ICE cannot justify its broad crackdown based on these figures.

Figure 1 shows immigrants arrested by ICE by whether they had a criminal conviction (top left) and the distribution of the convictions by type of conviction (bottom right). ICE statistics only provide a list of all convictions that the entire population of criminal aliens committed, meaning that they only show the distribution of convictions, not the distribution of immigrants based on their most serious offense. That said, a majority of all convictions were for crimes with no private victims (i.e. not the government or “society”). Just 11 percent were violent crimes (just one percent were homicide and sexual assault).

Figure 1: Immigrants Arrested by ICE by Criminal Conviction and Distribution of Criminal Convictions

Immigrants and Type of Convictions

Source: Immigration and Customs Enforcement

Figure 2 shows the distribution within each broad category of convictions. Most violent crimes were assaults, which include simple assaults defined by the FBI to include assaults “where no weapon was used or no serious or aggravated injury resulted” and include “stalking, intimidation, coercion, and hazing” where no injuries occurred. The FBI excludes simple assault from its definition of violent crime, but ICE fails to break down this category, so we cannot. The plurality of property crimes were larcenies, which include “thefts of bicycles, motor vehicle parts and accessories, shoplifting, pocket-picking, or the stealing of any property or article that is not taken by force and violence or by fraud.”

Almost two-thirds of the “possible victims” category includes DUIs, which usually don’t have a victim but impose the threat of injury on people. This category also includes some nebulous categories like “privacy,” “threats,” and disturbing the peace, which are undefined in the ICE report. Nonviolent sex crimes include statutory rape as well as lude behaviors in public. Fraud and forgery could have victims or they could be crimes where immigrants allow their family members to use their identities to obtain work in the United States. Family offenses include “nonviolent acts by a family member (or legal guardian) that threaten the physical, mental, or economic well-being or morals of another family member” that aren’t classified elsewhere (e.g. violating a restraining order). Kidnapping convictions generally arise from custody disputes over children, so I included them in this category.

Figure 2: Distribution of Convictions of Criminal Immigrants Arrested by ICE

Source: Immigration and Customs Enforcement

Nearly 80 percent of nonviolent offenses were traffic infractions that were not DUIs, immigration offenses such as entering the country illegally, or “vice” crimes (drugs, sex work, or alcohol). Immigration “crimes” include illegally entering the country, reentering after a deportation, falsely claiming U.S. citizenship, and smuggling. Obstruction offenses mainly include parole and probation violations or failure to appear in court.

Cato Institute research has previously shown that illegal immigrants are less likely to end up incarcerated in the United States than U.S.-born individuals of the same age. A new paper by my colleague Alex Nowrasteh concludes that illegal immigrants in Texas are significantly less likely to commit a variety of crimes than U.S.-born adults. Illegal immigrants are not generally threats to Americans. Only certain serious criminals who happen to be immigrants are.

ICE provides a public service when it apprehends and removes immigrants from society who are threats to Americans. It fails the public when it deports other people and, by reducing the number of peaceful people in the society, actually increases the proportion of criminals. This strategy will not make Americans safer—indeed, it will make them less safe. Congress should again require ICE to focus on serious criminals.

Table: FY 2017 Total ERO Administrative Arrests Criminal Convictions

Criminal Category Criminal Convictions Traffic Offenses - DUI

59,985

Dangerous Drugs

57,438

Immigration

52,128

Traffic Offenses

43,908

Assault

31,919

Larceny

15,918

Obstructing Judiciary, Congress, Legislature, Etc.

11,655

General Crimes

10,702

Burglary

10,262

Obstructing the Police

9,976

Fraudulent Activities

8,922

Weapon Offenses

8,260

Public Peace

7,336

Sex Offenses (Not Assault or Commercialized Sex)

5,033

Invasion of Privacy

4,830

Stolen Vehicle

4,678

Robbery

4,595

Family Offenses

3,934

Forgery

3,768

Sexual Assault

3,705

Stolen Property

3,176

Damage Property

2,681

Flight / Escape

2,319

Liquor

2,313

Health / Safety

1,548

Homicide

1,531

Kidnapping

1,317

Commercialized Sexual Offenses

995

Threat

847

Source: Immigration and Customs Enforcement

On the unhappy 15th anniversary of the start of the Iraq War, the Charles Koch Institute’s William Ruger and Boston University’s Andrew Bacevich offer important and timely op eds.

Writing in the New York Times, Ruger sees Iraq as “just the worst in a string of failures” of U.S. foreign policy in the past quarter century, a range of missions that have cost nearly 7,000 American troops killed, tens of thousands wounded, and trillions of dollars spent, with precious little to show for it. “Underlying all of these failures,” Ruger writes, “is the view, endorsed by both parties, that we need an active military presence around the globe to shape what happens almost everywhere.” He calls for an “alternate approach to the United States’ role in the world,” a “constructive but realistic mind-set [that] would put our safety first while expanding America’s opportunities to engage productively with the world.”

Bacevich takes the occasion of this sad anniversary to comment on the disconnect between the American people and the elites who sold the war. He attributes Donald Trump’s victory in the 2016 election to the “blood sacrifice vote” – the “communities that paid a high price for the Iraq War in terms of casualties.” Hillary Clinton prevailed among those who preferred to let “someone else’s sons and daughters do the fighting.” It is the sort of scathing critique that Bacevich has come to be known for, but it is no less accurate or insightful for having been written before.

Trump voters, Bacevich posits, supported him, despite the fact that they suspected his “America First” campaign to be “all but devoid of substantive content”:

because Trump said aloud what they themselves knew: that the Iraq War had been [a] monumental error for which they, and pointedly not members of the political elite, had paid dearly. In short, a vote for Trump offered them a way to express their disdain for establishment politicians whose dishonesty they considered far more odious than Trump’s own pronounced tendency to shave the truth.

I’ve written before of how the yawning gap between the foreign policy elite and the people who fight the wars and pay the bills paved the way for a person like Donald Trump to win the presidency (see especially here and here). But I do think it worthwhile to dwell, for a moment, on Iraq as a particularly important step along the process that turned that gap into a chasm.

We should also recall the arguments of those who actually made the case against war in 2002 and 2003. Donald Trump wasn’t one of them. But there was the advertisement in the New York Times paid for and signed by 33 respected academics. They concluded that the Bush administration had not presented conclusive evidence, and that a war against Iraq lacked sufficient justification. They disputed claims that the war would end quickly. “Even if we win easily,” they said, “we have no plausible exit strategy.” The statement envisioned a long-term U.S. presence because Iraq was “a deeply divided society” and would take “many years to create a viable state.” Lastly, the signatories of the New York Times advertisement saw the war in Iraq as a dangerous distraction from the more urgent concern: al Qaeda and transnational terrorism.

Within the Beltway, most foreign policy experts either endorsed Bush’s war, or kept their silence. Scholars at the Cato Institute, however, were particularly active in their opposition. Cato’s Chairman, William Niskanen, came forward with one of the earliest arguments against war with Iraq, in December 2001, in a debate at the institute with former CIA Director James Woolsey, and in a follow-up article in the Chicago Sun-Times under the headline “U.S. Should Refrain from Attacking Iraq.”

Other Cato scholars joined in. Ted Galen Carpenter challenged the war boosters’ optimistic predictions of a short and cheap engagement. “The inevitable U.S. military victory,” Carpenter predicted, would “mark the start of a new round of headaches.” “Iraq [is] a fissiparous amalgam of Sunnis, separatist Shiites and Kurds,” noted Gene Healy in the magazine Liberty. “Keeping the country together will require a strong hand and threatens to make U.S. servicemen walking targets for discontented radicals.”

In December 2002, Cato published a full-length study making the case against war. Authors Ivan Eland and Bernard Gourley concluded:

The United States deterred and contained a rival superpower, which had thousands of nuclear warheads, for 40 years; America can certainly continue to successfully deter and contain a relatively small, relatively poor nation until its leader dies or is deposed. An unprovoked attack on another sovereign state does not square with—and actually undermines—the principles of a constitutional republic.

This isn’t entirely self-serving. I joined Cato in early February 2003; by then, the die was pretty much cast. But I did manage to fire off one warning before the war started. And it still isn’t too late to learn the proper lessons from the Iraq War, and the problems with primacy, the underlying the foreign policy philosophy that gives rise to Iraq-type wars.

 

The front page of Monday’s New York Times featured a story about a dirty little police practice colloquially known as “testilying.” Testilying is the name police officers coined to describe lying in official statements, such as sworn affidavits, about particular facts to make a criminal case appear stronger. It happens most often in officer assertions of probable cause to conduct a search of a person or their property without a warrant. For example, an officer could say that contraband was “in plain sight” after he pulled a driver over, giving him the probable cause to suspect a criminal act and thus bypass the warrant requirement of the Fourth Amendment.

The most generous rationalization for this behavior is something like, “The suspect was guilty of a crime, I knew he was guilty but I couldn’t legally prove it, so I found a way around the rules and discovered the criminal evidence I needed to make an arrest.” Put simply, the ends (an arrest for criminal behavior) justifies the means (an unconstitutional search). But, very often, what the officers “know” is wrong and they violate the rights of perfectly innocent people. Even when they are right, illegal searches and the lies to cover them up corrupt the law in order to enforce it. That’s not how policing is supposed to work. Police are supposed to protect our rights, not violate them to make an arrest.

And as the Times story explains, the lie is not only used against people who are breaking the law:

There had been a shooting, Officer Martinez testified, and he wanted to search a nearby apartment for evidence. A woman stood in the doorway, carrying a laundry bag. Officer Martinez said she set the bag down “in the middle of the doorway” — directly in his path. “I picked it up to move it out of the way so we could get in.” The laundry bag felt heavy.

When he put it down, he said, he heard a “clunk, a thud.”

Officer Martinez tapped the bag with his foot and felt something hard, he testified. He opened the bag, leading to the discovery of a Ruger 9-millimeter handgun and the arrest of the woman. But a hallway surveillance camera captured the true story: There’s no laundry bag or gun in sight as Officer Martinez and other investigators question the woman in the doorway and then stride into the apartment. Inside, they did find a gun, but little to link it to the woman.

It took over a year for the woman, Ms. Kimberly Thomas, to clear her name with the help of surveillance video. In a way, she was very fortunate to even get that chance.

“There’s no fear of being caught,” said one Brooklyn officer who has been on the force for roughly a decade. “You’re not going to go to trial and nobody is going to be cross-examined.” The percentage of cases that progress to the point where an officer is cross-examined is tiny. In 2016, for instance, there were slightly more than 185 guilty pleas, dismissals or other non-trial outcomes for each criminal case in New York City that went to trial and reached a verdict. There were 1,460 trial verdicts in criminal cases that year, while 270,304 criminal cases were resolved without a trial.

The presumption that an officer will be able to swear a false affidavit and never be challenged in court is a casualty of a criminal justice system that has grown absolutely dependent on plea bargains. The justice system’s overreliance on plea bargains removes the safeguards and incentives that are supposed to hold the government and its officers accountable for lies and petty abuses.

You can read the whole piece here.

More than seven decades ago, litigation over the Emergency Price Control Act of 1942 left courts with an embarrassing black eye that would affect decisions for decades. In Bowles v. Seminole Rock & Sand Co. (1945), the Supreme Court decided to give controlling deference to administrative agencies’ interpretations of their own regulations. In Auer v. Robbins (1997), the Court unanimously doubled down on Seminole Rock. As the late Justice Antonin Scalia noted in a 2013 case when it seems he began having a change of heart, “[f]or decades, and for no good reason, [courts] have been giving agencies the authority to say what their rules mean.”

These “interpretations,” for which there are no standardized processes, can come in informal contexts, as was the case in Garco Construction v. Speer, where the government’s deferred to “interpretation” that didn’t come around until litigation was well underway. This year, the Supreme Court had a golden opportunity to finally do away or at least curb this problematic doctrine, but alas it was an opportunity it failed to seize, today denying Garco’s petition for review (which Cato had supported with an amicus brief).

There are a multitude of arguments for overturning Seminole Rock and Auer. Even when the cases were decided, the Court gave little justification for the doctrine beyond administrative and judicial convenient. To the contrary, giving agencies the authority to interpret (and reinterpret) their own rules violates principles of separation of powers, as well as the Administrative Procedure Act. As Justice Clarence Thomas pointed out in 2015, the doctrine combines “the power to prescribe with the power to interpret,” and the separation of those two powers was one of the primary goals of the Founders. Justices John Roberts, Scalia, Sam Alito, Thomas, and Neil Gorsuch have all written opinions questioning – or outright rejecting – the doctrine’s scope on that ground alone.

Further, the APA provides that it is for the reviewing court to “determine the meaning or applicability of the terms of an agency action,” and that all legislative rulemaking go through public notice-and-comment procedures. With Seminole Rock/Auer, however, agencies have been enabled to get around these requirements by simply “promulgat[ing] vague and open-ended regulations that they can later interpret as they see fit.” Even where regulations are not so vague, though, this doctrine rears its ugly head. In Duquesne Light Holdings v. Commissioner of Internal Revenue, in which Cato just today filed an amicus brief, a regulated entity followed controlling regulations to the letter, but was nonetheless penalized tens of millions of dollars after the Third Circuit deferred to the IRS’s countertextual reading of its own regulations.

It seemed that Garco Construction was a great vehicle for adjusting Seminole Rock/Auer deference. Garco Construction won a contract to build housing on an Air Force Base in Montana. The contract, and its prior contracts, allowed Garco to use employees who had criminal records. Base regulations, however, allowed officials to refuse entry to any workers who had any outstanding “wants and warrants.” After Garco began work on its contract, base officials suddenly began running full background checks on all workers, and refusing those with any criminal record, not just those with an outstanding want or warrant (whom Garco didn’t employ). This change forced the contractors to hire, train, and transport new workers who could pass the suddenly tightened rule. The contractors requested reimbursement of these costs, but were denied by the government.

Garco was never given a reason for the sudden change – until litigation seven years later, when base officials justified the denials by testifying that they interpreted “wants and warrants” to mean, as Justice Thomas pointed out in his dissent from denial of certiorari, “wants or warrants, sex offenders, violent offenders, those who are on probation, and those who are in a pre-release program.”

Justice Thomas, who was joined by Justice Gorsuch, is right. Garco Construction would have been a good case to reconsider Seminole Rock, “as it illustrates the problems that the doctrine creates … an agency was able to unilaterally modify a contract by issuing a new ‘clarification’ with retroactive effect.” “This type of conduct ‘frustrates the notice and predictability purposes of rulemaking, and promotes arbitrary government.’” In declining to hear the case, the Court has “passed up another opportunity to remedy ‘precisely the accumulation of governmental powers that the Framers warned against.’”

Perhaps the other justices shied away because Garco involved the military, which generally gets more deference than other governmental institutions. But regardless, this issue isn’t going away and, as Justice Thomas put it, “Seminole Rock deference is constitutionally suspect.”

The seven-year saga of Madden v. Midland began as a dispute over a four-figure consumer debt. But billions of dollars’ worth of loans, and the future of consumer lending markets, now hang in the balance.

Madden began in 2011 as a lawsuit based on a claim of usury. The plaintiff, Saliha Madden, a New York resident who had defaulted on $5,000 worth of credit card loans. The balance owed was later acquired by Midland Funding, a debt collector headquartered in California. Midland attempted to collect the debt with a default interest rate of 27 percent. Although the loan contract stipulated that it would be governed by Delaware law, which does not have a usury cap, Madden sued Midland, alleging unfair debt collection practices under federal law and usury under New York law — which considers interest rates above 25 percent usurious.

The Southern District Court for New York ruled in favor of Midland, rejecting the claim of unfair collection practices and finding that the National Bank Act pre-empted the application of state usury law. But the Second Circuit Court of Appeals — which covers Connecticut and Vermont as well as Madden’s home state of New York — reversed the District Court ruling, finding that the National Bank Act pre-emption did not apply to Midland because Midland is not a national bank. Therefore, the opinion went, applying state usury law in this instance would not hinder any national bank’s powers. The Second Circuit thereby remanded the case back to the District Court, which in turn found that New York law should apply since applying Delaware law, which provides for no usury limit, would “violate a fundamental public policy of the state of New York.”

Should the District Court’s decision stand, Madden would jeopardize the long-standing judicial precedent of “valid-when-made,” which holds that non-usurious debt remains valid when acquired by a third party, even if the interest rate implied in the latter transaction is usurious. Not surprisingly, the uncertainty sparked in the aftermath of the Second Circuit’s ruling has prompted policymakers to turn to a legislative fix to restore the “valid-when-made” precedent by making it federal law governing consumer credit markets.

U.S. courts have long recognized the potential that usury caps might make the credit market more illiquid. The Supreme Court’s 1833 ruling that cemented the valid-when-made doctrine stated that:

by converting a sale on a discount into a loan on usury, and thus rendering null and void the act of endorsing it, a contract wholly innocent in its origin and binding and valid upon every legal principle is rendered at least valueless in the hands of the otherwise legal holder, and a party to whom the provisions of the act against usury could never have been intended to extend would be discharged of a debt which he justly owes to someone.

Back then, private promissory notes were used as collateral for transactions, both within and across state lines. But, as the notes changed hands, acquirers might discount them more steeply than the original lender, sometimes exceeding state usury limits. Valid-when-made ensured that the original validity of a loan would not be affected by changes in its implicit interest rate in subsequent transactions.

More recently, courts have tended towards a liberal interpretation of the National Bank Act, holding that it pre-empts state usury laws in all cases and not just for national banks. Georgetown law professor Adam Levitin has argued that this interpretation is inappropriate and that the pre-emption should only apply to national banks, which are subject to a specific federal statute.

Levitin states that a broader pre-emption only goes back to 1978. This date is significant because the late 1970s marked a turning point in U.S. consumer credit markets as banks started to consolidate and expand beyond state boundaries, credit card use became widespread, and loan securitization took off. The case Levitin cites, in fact, concerned a credit card dispute and the applicability of different state usury statutes. As trade in loan instruments grew and participating institutions became more varied, allowing for valid-when-made to overrule state usury laws was important to ensure these transactions could take place.

Note that the elements which gave rise to the change in judicial doctrine are in and of themselves positive. A secondary market for loans enables financial institutions to offload risky assets and free up capital to lend to new borrowers. Securitization, for its part, achieves this while also creating diversified instruments and thereby lowering loan risk. Both tend to lower the cost of credit to borrowers.

Last month, the House of Representatives passed the Protecting Consumers’ Access to Credit Act with bipartisan support. The bill, now with the Senate Banking Committee, acknowledged that “the valid-when-made doctrine, by bringing certainty to the legal treatment of all valid loans that are transferred, greatly enhances liquidity in the credit markets by widening the potential pool of loan buyers and reducing the cost of credit to borrowers.” Legislative change will, it is hoped, put an end to any lack of clarity as to the ability for consumer loans to be subsequently transferred across firms and states. The freedom to transact is essential for consumer lending markets to operate efficiently. To understand this, we must move from legal to economic principles.

The interest rate on any loan is composed of two parts. The first part represents the time value of money, that is, the fact that access to funds today is more valuable than access tomorrow, or next year. Secondly, there is a risk premium that compensates the lender for delays and potential non-repayment of the loan. Other things equal, the greater the likelihood of non-repayment, the higher the risk premium and so the total interest rate.

When loans are backed by collateral, such as a house or a car, the interest rate can be lower because lenders can always recoup at least some loan value by seizing the collateral. Collateral also acts as a signal: only borrowers with confidence that they will repay would place their possessions as guarantee. Consumer credit, such as credit card debt, is typically unsecured, so it carries a higher risk premium.

More variable earnings, a higher chance of unemployment, propensity to incur unexpected costs, and the absence of a financial cushion to fall back on are all credit risk factors. Because they are more common among lower-income households, loan interest is viewed by some as regressive: those of lesser means will pay more for a given amount of credit. This is how modern proponents of usury laws have often justified them.

Yet, as with other price controls, the consequences are often the opposite of those intended. A high interest rate is the only way that a high-risk borrower can compete for funds with a lower-risk borrower. In the absence of adequate compensation for additional risk, lenders eschew the high-risk borrowers — who are often those most in need of credit. Not only that, but credit risks can change as a loan matures. If a borrower fails to repay on time, her credit score will change and interest rates on future borrowing will adjust upwards.

This is what happened to Madden: her default created additional monitoring and collection costs, and it also revealed information about her likelihood to repay future borrowing. In the eyes of any lender, Madden had become a higher-risk borrower than previously anticipated. Her interest rate went up.

Last year’s Second Circuit decision surely made Madden happy, but it is unlikely to benefit future borrowers who find themselves in her position. Riskier applicants are more likely to be among those rationed out of the borrower pool. There is, in fact, already evidence that Madden has changed the fortunes of borrowers in the three states covered by the Second Circuit’s ruling. Those with low credit scores saw loan volumes decline by half in the months after the ruling; for similar borrowers elsewhere in the country, loan volumes more than doubled.

Madden has thrown consumer lending markets in the three states affected into disarray, so it is appropriate for Congress to provide clarity through legislation and ensure access to credit is available to those who can and are willing to pay for it. Not just legal precedent but economic reality demand a move in this direction.

[Cross-posted from Alt-M.org]

Saudi Arabia’s prodigal son returns to Washington this week, beginning a tour through the United States apparently aimed at drumming up investment in the country. Mohammed bin Salman (MBS) is young with big ideas: he wants to reform Saudi society and wean the Saudi economy off oil. He also wants to build up Saudi as a foreign policy player – with or without the United States – and cement Saudi dominance in the Gulf.

It’s small wonder then that profiles and articles about the prince typically either laud him as a great reformer or simply criticize his foreign policy blunders. The truth is an accurate portrayal of Muhammed bin Salman must include both. And policymakers and businesses should be wary of the potential pitfalls of his proposed reforms, even as they hope for their success.  

The Crown Prince’s social reforms are a welcome step in the right direction, though they will be difficult to complete. Thus far, there has been a crackdown on the religious police, robbing them of much of their power over morality issues. Cinemas have been permitted to screen movies for the first time in decades. Women can now attend sporting events, and legal changes are in progress that will allow them to drive.

Likewise, the innovative economic reforms that MBS has proposed – notably using an IPO of Aramco stock to shift the government’s primary income source away from oil and towards investment gains, paired with an attempt to reform the domestic economy and attract inward investment – could potentially reshape and improve the state of the Saudi economy.

There is no doubt that U.S. policymakers should welcome these changes and encourage Saudi Arabia to continue down this path.

Unfortunately, on the flip side, the assertiveness shown by MBS at home has been matched by an extremely bellicose foreign policy. The young prince’s foreign policy overreach has already helped to create the world’s worst humanitarian crisis in Yemen. The Saudi blockade of Qatar has been spectacularly ineffectual and has hardened into stalemate.  

Worse, both incidents reflect the prince’s worst quality: his hardline stance on Iran and his willingness to see Iranian tentacles behind every crisis, no matter how unrealistic this view is. In his interview on CBS’ 60 Minutes, for example, he blames Shi’ite Iran for the rise of Al Qaeda and other Sunni militant groups and for the civil war in Yemen. His fixation on Iran risks destabilizing the Middle East still further. 

Nor are the bad parts of MBS’ record limited to foreign policy. He has cracked down heavily on corruption inside Saudi Arabia, a seemingly praiseworthy campaign that in reality saw him imprison other prominent royals and businessmen in the Ritz Carlton hotel until they agreed to sign over many of their assets to the state. And the prince has ruthlessly centralized power into his own hands, shifting Saudi Arabia from a relatively consensual system of government within the royal family, to a system of one-man rule closer to that of Egypt or Syria.

Policymakers – and indeed, businesses and potential investors – should also be wary of the flaws and potential problems in MBS’ ambitious reform plans. Reform is a slow process, and thus far, there have been no moves to fix some of the worst injustices in the Saudi system, notably the guardianship system for women and ongoing repression of Saudi Shi’ites.

Economic reform is certainly not guaranteed to work either; as with many other oil-rich states, Saudi Arabia will find it brutally hard to wean itself off of oil. Some of the biggest developments in the reform plan thus far are fantastical. The proposed high technology city of Neom sounds impressive till one questions why tech companies would choose to relocate to somewhere with Saudi Arabia’s poor climate, workforce, legal and regulatory systems.

Meanwhile, the much-touted IPO of Aramco will only be able to happen on Western exchanges if substantial changes are made to Aramco’s record-keeping, transparency and perhaps even ownership structure.

And none of this is to mention the issue that combines business and national security concerns in one tight package: civilian nuclear power. Though MBS is seeking U.S. cooperation in building civilian nuclear plants ostensibly to reduce Saudi dependence on domestic oil production, he is also open about the fact that he sees civilian nuclear energy and enrichment capabilities as a potential path to a Saudi nuclear weapon.

For all these reasons, policymakers and investors should be wary of profiles which portray Mohammed bin Salman as either a great reformer, or a callow youth. His proposed reforms for Saudi society are in many ways far-sighted; they carry the potential to fix many of the country’s underlying structural and social problems and should be encouraged.

But at the same time, we can’t overlook his many mistakes and poor choices in domestic and foreign policy, nor ignore the risks inherent in his ongoing reform plans. Being an apparently genuine reformer doesn’t absolve MBS of his aggressive foreign policy steps or domestic authoritarian tendencies.

A complete picture of the young prince’s record suggests caution on the part of investors – and pushback on foreign policy and domestic crackdowns by policymakers – remains by far the best choice.

The Trump administration is proposing to privatize two airports owned by the federal government in Virginia, Dulles and Reagan National. William Murray discussed some of the advantages in the Washington Post, and noted that Australia provides a good model for such reforms.

Policymakers can also look to Europe, which has embraced airport privatization since Margaret Thatcher privatized London’s Heathrow in 1987. Today half of Europe’s commercial airports are private, including the main airports in Antwerp, Birmingham, Brussels, Budapest, Copenhagen, Edinburgh, Glasgow, Lisbon, Liverpool, Naples, Rome, Vienna, and Zurich.

Some of the advantages can be:

  • Self-financing without government subsidies.
  • Higher productivity, more innovation, reduced delays, and better service.
  • More competition between airlines and for gate space, to the benefit of passengers.
  • Airport expansion as aviation demand rises with fewer political/bureaucratic/funding roadblocks.

Airports Council International says there is “no denying the tangible benefits” of market-based reforms in Europe’s airport industry, including “significant volumes of investment in necessary infrastructure, higher service quality levels, and a commercial acumen which allows airport operators to diversify revenue streams and minimize the costs that users have to pay.”

Privatizing D.C.’s airports would be back to the future. The main airport serving D.C. during the 1930s was the private Washington-Hoover Airport in Virginia. The main airports serving many U.S. cities at the time were private, including the airports in Los Angeles, Philadelphia, and Miami.

What happened to America’s private-sector commercial airports? In city after city, they were pushed aside by government airports, which benefited from a range of subsidies.

Today, Dulles and National are operated by the same government authority. For what reason? Economists of all political stripes believe that monopoly is inferior to competition with respect to efficiency, innovation, and customer service. So, at minimum, the Trump administration should push to split the two D.C. airports into separate entities and induce them to compete against each other.

Better yet, Dulles and National should be privatized separately, either by share offerings or sales to airport operating companies.

 

More on airport privatization here. More on the general benefits of privatization here.

The eighth round of negotiations on the North American Free Trade Agreement (NAFTA) are expected to take place sometime next month. While progress has been made, the thorniest issues have yet to be addressed. One of the most contentious issues is dispute settlement. There are three main types, and all are controversial. The most fundamental dispute provision is Chapter 20, the Agreement’s state-to-state dispute settlement mechanism, which allows the government of any NAFTA country to file a complaint when it believes another government is violating the Agreement. The future of Chapter 20 is particularly uncertain. In October last year, the U.S. pushed a proposal that would make Chapter 20 “non-binding” by allowing parties to a dispute to ignore the findings of an independent body of jurists (referred to as a panel). This change would take Chapter 20 in the wrong direction, as it would make NAFTA less useful as an instrument to promote and enforce trade liberalization.

In a recent paper, my colleague Simon Lester and I examine the history of NAFTA Chapter 20, showing that the mechanism has not been used all that much. While there have been twenty-one disputes initiated since 1994, only three have gone to a panel and had decisions rendered. Strikingly, no panel has been composed since 2000. Why? We argue that NAFTA’s state-to-state dispute settlement chapter has a fundamental flaw in its provisions, which effectively allow the responding party to the dispute (the country being complained against) to block the formation of a panel.

In the late 1990s, Mexico initiated a dispute against the United States related to restrictions on sugar imports, and soon discovered the glitch in the system.  Basically, in order for a panel to be composed, there has to be a list of individuals to choose from. This list, or roster, as it’s referred to, is supposed to be established by the parties when the agreement enters into force (to be updated over the years). However, a problem arises when there is no roster.  In that situation, the responding party can block any of the complainant’s proposals for panelists. Thus, if one of the parties fails to appoint people to the roster, the panel process breaks down and the dispute settlement mechanism cannot function.

To find a remedy to this problem, we look at recent developments in state-to-state dispute settlement chapters in other trade agreements, notably, the Trans-Pacific Partnership (TPP) (now the recently signed CPTPP), the Canada-European Union Comprehensive Economic and Trade Agreement (CETA), and the draft of the Japan-European Union Economic Partnership Agreement (JEEPA), which is still being negotiated. These modern trade agreements have all attempted to address the problem of lapsed rosters and panelists appointments, in their own way. Some have provisions that give the complaining party the authority to appoint panelists when the responding party refuses to cooperate, while others give this authority to an independent third party, or the co-chairs of a joint committee, who are high-ranking government officials of each party, and must arrive at a decision together.

We conclude that much of the problems with state-to-state dispute settlement in the NAFTA could have been resolved if the U.S. had stayed in the TPP, as that agreement, on the whole, appears to address the problem of panel composition. However, since there is no indication that the U.S. will rejoin the TPP anytime soon, we note some key principles that could help guide the NAFTA renegotiation of Chapter 20:

[T]he roster should not be a hurdle to appointing panelists; an independent third party can act as a facilitator in the panel appointments; and, without an independent third party, the complainant should have the power itself to appoint, in order to prevent the respondent from delaying panel formation (p. 15).

Ultimately, a functioning state-to-state dispute mechanism is an essential feature of any trade agreement, because if the obligations cannot be enforced, then the cost of noncompliance would be low. This undermines the impact of trade agreements, and is why making Chapter 20 non-binding would seriously weaken any benefits that can be accrued from a modernized NAFTA. We hope that the NAFTA negotiators take these considerations into account.

The Fight Online Sex Trafficking Act (FOSTA), an anti-sex trafficking bill with grave implications for an open internet, has passed in the House and will likely receive a Senate vote later this week. Senator Ron Wyden has proposed an amendment that would blunt the worst of its harms.

At present, FOSTA holds hosts of user-generated content liable for “knowingly assisting, supporting, or facilitating” prostitution or the promotion thereof. Attempts to police illegal content posted on a platform could render moderators aware of its existence. If they do not eliminate all of it, they could find themselves for legal purposes “knowingly facilitating” whatever illegal activity continues. This standard might criminalize good-faith moderation efforts and foster removing innocent content along with the guilty.

Wyden’s well-crafted amendment reduces the risk of removing, by explicitly distinguishing moderation from facilitating criminal activity.

The fact that a provider or user of an interactive computer service has undertaken any efforts (including monitoring and filtering) to identify, restrict access to, or remove material the provider or user considers objectionable shall not be considered in determining the criminal or civil liability of the provider or user for any material that the provider or user has not removed or restricted access to.

This bill raises other issues. FOSTA might give established tech companies an unwarranted advantage in the future by imposing previously unknown moderation and legal compliance costs on their upstart competitors. On this point Wyden’s amendment says its protections are not contingent upon a service provider’s decision to moderate, or to use any “particular content moderation practices,” thereby preventing a passing understanding of “best practices” from crowding out other forms of moderation. 

Wyden’s amendment falls in line with the Department of Justice recommendation concerning FOSTA, which states that “the Department believes that any revision to 18 U.S.C § 1591 to define ‘participation in a venture’ is unnecessary” and would create additional barriers to the successful prosecution of actual sex traffickers. FOSTA’s expansion of grounds for criminal or civil action also increases the number of facts which prosecutors must prove in court, facilitating punitive fishing expeditions and frivolous lawsuits without making it any easier to put traffickers behind bars.

Senator Wyden’s amendment would go a long way toward reducing the risk FOSTA currently poses to an open internet.

In 1984, George Orwell famously defined “doublethink” as “holding two contradictory beliefs in one’s mind simultaneously, and accepting both of them.” But even Orwell would blush at claims made by the Internal Revenue Service that one can somehow both follow the law and violate it with the same activity. Amazingly, this seems to be the exact argument employed against Duquesne Light Holdings and subsequently upheld by the U.S. Court of Appeals for the Third Circuit.

In the early 2000s, Duquesne filed a series of consolidated tax returns along with its wholly owned subsidiary AquaSource. Despite initially declining to challenge the company’s deductions in a 2004 audit, the IRS later determined that the losses claimed constituted a double deduction. Even though the company painstakingly followed the tax code and regulations to the letter, the IRS relied on a strained interpretation of an 80-year-old case, Charles Ilfeld Co. v. Hernandez (1934), to disallow $199 million in losses, demanding a $36.9 million payment.

The Third Circuit’s endorsement of this odd use of Ilfeld creates a broad new view of federal agency power. Rather than understanding Ilfeld as a background presumption for evaluating ambiguous agency rules, this new doctrine allows agencies to override their own regulations to penalize those who violate some unarticulated, uncodified policy principle. Duquesne followed the rules, which did not prohibit the deductions it claimed. But rather than allowing deductions that were legally authorized, the court imposed a “triple-authorization requirement” mandating an additional okay, specifically stating that the deductions may be taken together. In other words, the court said that it isn’t enough for the law to say “you may take deduction A” and elsewhere “you may take deduction B”; the law must then also explicitly say “you may take deduction A and deduction B at the same time.”

The court’s decision continues the long march toward unrestrained administrative power via judicial abdication. First came Chevron deference, whereby courts must defer to the statutory interpretation of the agency that enforces the relevant statute. Then came Auer deference, requiring that courts defer to an agency’s interpretation of its own ambiguous regulations. But the Third Circuit has now gone a step further, ruling that an agency can reinterpret its own unambiguous regulations to mean whatever it wants. If Auer deference is a jurisprudential black eye, then the Third Court’s decision here is an ocular enucleation.

The ruling against Duquesne amplifies three particular concerns that are endemic to Auer deference. First, both Auer deference and this case implicate separation-of-powers concerns. While Auer deference allows an agency to interpret the regulations that the agency itself promulgated, this new “Duquesne deference” would enable an agency to create, enforce, and adjudicate while at the same time completely ignoring the rules it previously created in its legislative capacity.

Second, both Auer and would-be Duquesne deference undermine the Administrative Procedure Act. By requiring that courts only give deference to agency interpretations of ambiguous regulations, Auer creates the perverse incentive to avoid APA rulemaking procedures by intentionally drafting vague, open-ended regulations that can later be interpreted as the agency sees fit. But this new deference would allow agencies to invoke policy concerns as an easy means of overriding even unambiguous regulations. Under that view, APA rulemaking is not just subject to potential agency abuse, it’s irrelevant.

Third, all this deference deprives regulated entities of fair notice of the rules they must follow. Auer deference at least allows those being regulated to attempt an educated guess about the meaning of an ambiguous regulation, but its expansion to covering even unambiguous regulations would allow agencies to convert regulatory certainty into unpredictability without any warning at all.

Because violations of unwritten rules are not legally punishable and the current deference given to administrative agencies is already bad enough, Cato has filed a brief asking the Supreme Court to review Duquesne Light Holdings v. Commissioner of Internal Revenue. The Court should clarify that no agency may use presumptions to penalize actions that are authorized by the express terms of that agency’s own regulations.

Yi Gang, an American-trained economist who taught at the University of Indiana, will take over as governor of the People’s Bank of China. Since 2008, he has been deputy governor under Zhou Xiaochuan, who became head of the bank in 2002. The unexpected appointment of Mr. Yi will provide continuity at the PBOC and lend credibility to the pledge for financial liberalization.

Following his appointment, Yi Gang declared: “The main task is that we should implement prudent monetary policy, push forward the reform and opening-up of the financial sector, and maintain the stability of the entire financial sector.”

In November 2007, Yi Gang spoke at Cato’s Annual Monetary Conference, and his speech, “Renminbi Exchange Rates and Relevant Institutional Factors,” was published in the Spring/Summer 2008 Cato Journal, which also included an article by Fed Chairman Ben Bernanke. That special issue of the CJ raised important questions about the types of monetary regimes that best protect the value and stability of money while promoting economic freedom.

 

Yi Gang speaking at Cato’s Annual Monetary Conference in 2007

In his article, Yi Gang, then deputy governor of the PBOC, gave a detailed view of the evolution of China’s exchange rate regime and argued that real reform takes time, so the West should be patient. He concluded:

The RMB exchange rate is an economic issue. The best way to bring about an equilibrium exchange rate is further reform. Constructive dialogue will help speed up the reform process and make the convergence to a new equilibrium smoother. However, it should be noted that it takes time to establish an efficient market… .

To move toward equilibrium, coordinated policy measures are needed for structural adjustment. To resolve China’s large trade surplus and restore external balance, measures are required for promoting domestic demand, increasing imports, investing abroad, and accelerating urbanization—in addition to currency appreciation. In fact, many measures can generate impacts similar to currency appreciation, such as imposing environment protection requirements, enhancing labor standards, strengthening labor protection, and upgrading the judiciary system. All these measures mean higher costs, lower competitiveness, and a reduced trade surplus, which will move the economy toward equilibrium. Also, it is important to recognize that it will take time for these measures to bring about structural changes. Policymakers in Washington and elsewhere should therefore be patient as China makes its way toward a full-pledged foreign exchange market [Yi Gang 2008: 195–96].

As governor, Yi Gang will work closely with Liu He, the newly appointed “economic czar” and vice premier, who is also in favor of economic reform.  By making these appointments, President Xi Jinping is signaling that he intends to address structural problems in China’s economic system. The question is whether he can do so while maintaining an iron grip on political power and preventing a free market in ideas.

Cracking down on dissent will be the job of Yang Xiaodu, who has been appointed to head the new National Supervisory Commission (a super “anti-corruption” body), designed to ensure that officials and public-sector workers adhere to the Chinese Communist Party line.   

President Trump and his advisors should listen carefully to the PBOC’s new governor and Mr. Liu and work with them to help move China toward a more liberal trading regime, including a larger scope for trade in ideas as well as in goods and services.

Meanwhile, President Xi, who now has absolute power for life, should remember the words of Lao Tzu:  “The more restrictions and limitations there are, the more impoverished men will be… . The more rules and precepts are enforced, the more bandits and crooks will be produced. Hence, we have the words of the wise [sage or ruler]: Through my non-action, men are spontaneously transformed. Through my quiescence, men spontaneously become tranquil. Through my non-interfering, men spontaneously increase their wealth” [Chap. 57, Tao Te Ching, translated by Chang Chung-yuan].

           

It’s often been noted that regulations can impose larger relative costs on small businesses and can serve to protect incumbent firms from new competitors. Goldman Sachs CEO Lloyd Blankfein noted that new regulations created a “moat” around his firm:

That all industries are being disrupted to some extent by new entrants coming in from technology. We, again, being, you know, technology-oriented ourselves, try to disrupt ourselves and try to figure out what’s the new thing, and come up with new platforms, new forms of distribution, new products. But in some ways, and there are some parts of our business, where it’s very hard for outside entrants to come in, disrupt our business, simply because we’re so regulated. You’ll hear people in our industry talk about the regulation. And they talk about it, you know, with a sigh: Look at the burdens of regulation. But in some cases, the burdensome regulation acts as a bit of a moat around our business.

The Washington Post reports on a new example: the legalized marijuana market in California. Libertarians have long urged the legalization of marijuana and other drugs. Certainly I expect better results from a legal regime where people are not arrested for buying, selling, or using marijuana. But governments can’t just repeal laws and stop arresting people; instead, they prefer to set up a regime of taxes and regulation. And that’s having an effect on the small marijuana growers in the state’s “Emerald Triangle.” As Scott Wilson reports in the Post:

Humboldt County, traditionally shorthand for outlaw culture and the great dope it produces, is facing a harsh reckoning. Every trait that made this strip along California’s wild northwest coast the best place in the world to grow pot is now working against its future as a producer in the state’s $7 billion-a-year marijuana market.

A massive industry never before regulated is being tamed by laws and taxation, characteristically extensive in this state. Nowhere is this process upending a culture and economy more than here in Humboldt, where tens of thousands of people who have been breaking the law for years are being asked to hire accountants, tax lawyers and declare themselves to a government they have famously distrusted. 

Wilson estimates that “Fewer than 1 in 10 of the county’s estimated 12,500 marijuana farmers are likely to make it in the legal trade….Less than 1 percent of the estimated 69,000 growers statewide have received a permit to farm marijuana since the beginning of the year.”   As many experts on drug prohibition predicted, prices are dropping in the legalized market. But for Humboldt and neighboring counties, the price drop is happening

at a time when small growers most need the money to begin complying with California’s stiff regulatory demands. At the same time, the state’s licensing of retail shops has been slow, leaving a lot of legal product without a legal place to be sold.

Marijuana from Humboldt that used to sell for $1,200 a pound three years ago is now selling at a 75 percent discount. State officials and many growers predict the vast overproduction will be curtailed by the new rules, likely by consolidating cultivation among large agriculture companies that can afford the regulations.

Humboldt countians feared this sort of effect. Wilson notes the history:

The population grew and changed in the 1970s, when disaffected hippies migrated north, a “back to the land” exodus from the Bay Area that brought a contempt for government ethos here. Marijuana emerged as the county’s next-generation commodity.

There is no reason people chose Humboldt to grow marijuana other than that Humboldt, as a society, allowed it to be grown. The same was true for neighboring Trinity and Mendocino counties. Collectively, the three are known as the “Emerald Triangle,” a globally renowned pot paradise.

And so in 2014 a lot of Emerald Triangle growers opposed Proposition 64, the legalization initiative, because they foresaw that it would lead to bigger companies squeezing out small growers.

It’s definitely a good thing to stop arresting people for marijuana. But once again regulations are going to serve to concentrate an industry and thus concentrate wealth. Chances are, a few people are going to get rich in the California marijuana industry, and fewer small growers are going to earn a modest but comfortable income. Just one of the many ways that regulation contributes to inequality.

 

 

A recent story by Pauline Bartolone in the Los Angeles Times draws attention to some under-reported civilian casualties in the government’s war on opioids: hospitalized patients in severe pain, in need of painkillers. Hospitals across the country are facing shortages of injectable morphine, fentanyl, and Dilaudid (hydromorphone). As a result, trauma patients, post-surgical patients, and hospitalized cancer patients frequently go undertreated for excruciating pain.

Hospitals, including the ones in which I practice general surgery, are working hard to ameliorate the situation by asking medical staff to use prescription opioid pills such as oxycodone and OxyContin instead of injectables, when possible. But many patients are unable to take oral medication due to their acute illness or post-operative condition. In those cases, we are often asked to use injectable acetaminophen, muscle relaxants, or non-steroidal anti-inflammatory agents. But many times those drugs fail to give adequate relief to these patients—which is why they are not the first line of drugs we use.

The shortage is uneven across the country. Some hospitals are feeling the shortage worse than others. According to the American Society of Anesthesiologists, the shortage is so severe in some hospitals that elective surgeries—such as gallbladder and hernia operations—have been postponed.

Some hospitals have resorted to asking nursing staff to manually combine smaller-dose vials of morphine or other injectable opioids that remain in-stock as a replacement for the out-of-stock larger dose vials. Dose-equivalents of different IV opioids vary and are difficult to accurately calculate. This increases the risk of human error and places patients at risk for overdose, as was explained in a letter to the U.S. Drug Enforcement Administration by representatives of the American Hospital Association, American Society of Anesthesiologists, American Society of Clinical Oncology, American Society of Health-System Pharmacists, and the Institute for Safe Medication Practices. The letter asked the DEA to adjust its quota on the manufacture of opioids to help mitigate the shortage.

As part of the effort to address the opioid overdose crisis—which is really a fentanyl and heroin overdose crisis—the DEA, which sets national manufacturing quotas for opioids, ordered a 25 percent reduction in 2017 and another 20 percent reduction this year.

National shortages of drugs are not confined to injectable opioids. Over the years, various drugs in common use have gone on national “back-order” and health care practitioners have had to develop workarounds. The causes of these recurring shortages, not unique to the US, are complex and multifactorial.

For example, regulations and market forces have led to consolidation in the pharmaceutical industry and, for some drugs, have reduced the number of manufacturers to just one or two. Reimbursements to manufacturers of generics by Medicare and other third parties have reduced profit margins to levels that, in some cases, have caused manufacturers to leave the market.

The Food and Drug Administration also plays a major role. FDA regulations of manufacturing facilities add to costs and sometimes lead to temporary plant closures in order remediate the findings of FDA inspections. According to testimony given to Congress in 2011 by Scott Gottlieb (now the FDA Commissioner), many of the FDA’s drug production safety policies are outdated and inflexible: “…The FDA and the manufacturers often don’t understand the drug-production processes well enough to detect the root cause of problems. Instead of calling for targeted fixes of troubled plants, the agency has often required manufacturers to undertake costly, general upgrades to facilities. As a result, in 2010, product quality issues – and the subsequent regulatory actions taken by FDA to address these problems – were involved in 42% of the drug shortages.”

In February 2017, an FDA inspection found significant violations in Pfizer’s McPherson, KS manufacturing facility, where injectable opioids are manufactured, which was followed by a cutback in production at that plant in June 2017. Pfizer controls roughly 60 percent of the injectable opioid market. This production cutback has played a major role in the current injectable opioid shortage.

Another factor is the FDA’s generic drug approval process. While Commissioner Gottlieb is committed to streamlining the process, it has been historically slow with large backlogs in applications. The median time to approval in 2016 was 47 months.

Also, disruption in the production supply chain—sometimes by natural disasters such as Hurricane Maria in Puerto Rico—can lead to temporary shortages, although this has not been a factor in the present opioid shortage.

But the above elements already existed before the DEA decided to help “fix” the opioid overdose problem. The DEA’s decision to make deep cuts in the national quota for opioid production only exacerbates the situation. The DEA made the quota determinations based upon the fatal conceit (an attribute of all central planning) that the agency can know how many opioids will satisfy the needs of this nation of 325 million people. Ms. Bartolone quotes the agency as saying, “DEA must balance the production of what is needed for legitimate use against the production of an excessive amount of these potentially harmful substances.”

Non-US injectable opioid manufacturers have received numerous requests to relieve the shortage but importing heavily regulated narcotics from other countries is complicated and difficult, requiring federal approval.

To address the alarming and steadily rising rate of overdose deaths, policymakers seem intent on reducing the prescription and supply of opioids by doctors to patients. Failing to recognize that the deaths are the result of nonmedical users accessing dangerous and potentially tainted drugs in a black market caused by drug prohibition, they charge full speed ahead, blinders tightly fastened. Patients in pain—and the doctors who want to help them—are the collateral damage in this futile war.

 

In a new study, economist Mickey Levy included a chart illustrating the inaccuracies of Federal Reserve economic forecasts. Levy is with Berenberg Capital Markets and a member of the Shadow Open Market Committee.

The chart shows the Fed’s year-ahead projections for real GDP (gray bars) and actual GDP (red bars). The projections are often way off, which is remarkable since the Fed has hundreds of skilled economists and access to unparalleled statistical and anecdotal economic data. The Fed generally overestimated growth until 2016, but for 2017 it underestimated.

 

Levy’s study concludes:

“The clear pattern of the Fed’s forecasting errors reflects the Fed’s tendency through 2016 to over-estimate the stimulative impact of extending its unprecedented monetary ease well after the recovery was self-sustaining, and tendency to under-estimate the economic impacts of the government’s fiscal and regulatory policies and other nonmonetary factors.” By the latter items, Levy means “the government’s tax and regulatory policies that increased business operating costs, raised uncertainties and dampened business confidence.” 

More recently, “There has been a marked change in regulatory and tax policies that have changed the economic landscape, and the Fed’s perspective on the economy seems to be lagging behind. The Fed’s forecasts understated the dampening impacts of tax policy and growing web of burdensome regulations through 2016, and those policy thrusts have now reversed. The pickup in economic growth—both business investment and consumption—beginning in 2017 has been supported by the shift toward deregulation and the associated sharp rise in confidence.”

I have noted that CBO economic projections are also pretty bad. The agency missed the onset of the last recession, and over a recent 15-year period its projections of real growth for the following year were 1.7 percentage points off, on average. That indicates huge errors given that the average growth rate during the period was 2.1 percent. (Discussed here.)

If the government cannot predict the future, it won’t be able to successfully micromanage the future through interventionist monetary and fiscal policies. That is especially true because government is such an inflexible institution and has trouble changing course. I discuss these themes in this study on government failure.

What then should policymakers do? Economist Adam Smith advised them to adopt the “simple system of natural liberty.” By removing government interventions “the sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society.”

Levy penned a recent study for Cato Journal here.

At the Washington Post, Rachel Chason reports on how the Washington, D.C. suburb of Seat Pleasant, Md. has just levied an eight-fold tax hike on five local businesses, with one seeing its $5,991 tax bill jump to $55,019. Several of the owners are suing, but the town says it went through the proper procedures needed to adopt a special tax, which is supposed to be predicated on the provision of amenities such as sidewalk improvements that are of special benefit to the taxed properties. One business owner says he and others didn’t learn about a hearing on the measure until it was too late.

Whoever wins in the court challenge, the episode symbolizes a wider problem. Specialists in local and state government policy are full of ideas for business-by-business and location-by-location tinkering with tax rates, both downward (as part of incentive packages to lure relocating businesses) and upward (to finance special public services provided in some zones, such as downtown revitalization). But there is a distinct value in terms of both public legitimacy and the rule of law in having uniform and consistent taxation that does not depend on whether a property owner or business is on the ins or on the outs with the tax-setting authorities. It is not necessarily wrong for your tax bill to vary based on services rendered—but it should not vary based on political clout.

On March 11, China’s National People’s Congress made official what had been rumored for more than two weeks, voting to abolish the two-term limit on the presidency. Current president Xi Jinping is now able to serve in that post indefinitely. That decision is merely the latest in a series of ominous developments that have occurred since Xi took office in 2013. 

Ending term limits significantly alters China’s political system. Deng Xiaoping, the architect of the country’s radical economic reforms beginning in the late 1970s, also implemented that crucial political reform. He and his followers did so to guard against a repeat of the horrid abuses committed during the long, tyrannical rule of Mao Zedong. And the restriction did achieve a limited success. China hardly became a democratic state, but within the context of a one-party system, Deng’s successors served more like chief executive officers, with other members of the party elite acting as a board of directors that could, and did, serve as a check on the president’s power. Removing the limit on presidential terms means that an incumbent now has abundant time to accumulate more and more personal power. The threat of strongman rule, with all its potential abuses, has returned.

As I point out in a recent article in Aspenia Online, Xi was exhibiting troubling behavior even before pushing through the legislation ending term limits. Under the guise of combatting corruption (admittedly a very real problem in China), he systematically purged officials who showed signs of independent views. There has been a troubling hardline ideological aspect to his rule as well. Xi initiated a campaign to revitalize the Party, aiming at achieving a renewed commitment to Maoist principles. Even pro-market academics felt the chill of the new political environment, with crackdowns directed against several prominent reformers, including economist Mao Yushi, the 2012 recipient of the Cato Institute’s Milton Friedman Prize for Advancing Liberty. 

Internet censorship has steadily intensified in the past three years. Such intolerance of dissent culminated during the weeks leading up to the National People’s Congress vote on term limits. Authorities quickly silenced domestic critics of the planned constitutional revision—and there were a surprising number of them in the blogosphere and beyond

The consolidation of Xi’s personal power, especially if it continues to exhibit neo-Maoist characteristics, not only has ominous domestic implications, it has worrisome implications for China’s external behavior. Indeed, the hardening of Beijing’s stance on several international issues has tracked closely with Xi’s inexorable moves toward strongman rule. 

China has accelerated its land-reclamation efforts on several partially submerged reefs in the South China Sea. Some of the projects have become so extensive that Beijing has installed military installations on the expanded surfaces, and in a few cases, built military airstrips. The Xi government also has engaged in complete defiance of a 2016 international tribunal ruling rejecting most of China’s expansive territorial claims in that body of water. Finally, Beijing’s warnings to the United States about U.S. “freedom of navigation patrols” in the South China Sea have become increasingly strident.

China’s growing assertiveness toward Japan regarding disputed islands in the East China Sea (called the Senkakus in Japan and Diaoyus in China) is evident as well. In July 2017, Beijing escalated bilateral tensions dramatically when it sent six nuclear-capable bombers over the islands, and responded to Tokyo’s protests by telling Japanese leaders to “get used to” more flights of that nature. A few months earlier, Beijing warned the new Trump administration not to back Japan in the territorial dispute, despite established U.S. policy to support the claim of its longstanding ally.

It is the Taiwan issue, though, where Xi’s government has shown the most worrisome signs of uncompromising behavior. Over the past two years, the PRC has intensified its efforts to lure the small number of nations that still maintain diplomatic relations with Taipei to switch ties to Beijing. Warnings that China will use force if necessary to prevent any “separatist” initiatives by Taiwan have become more insistent, if not downright threatening. The sharp increase in the number and scope of provocative Chinese military exercises in the Taiwan Strait and other nearby waters suggests that Xi’s government is not bluffing. 

Any one of the above domestic or foreign policy developments would be cause for concern. Taken together, they suggest that China might be reverting to a virulently authoritarian country determined to pursue an abrasive, perhaps even an aggressively revisionist, foreign policy. Granted, China potentially would have much to lose economically by engaging in such behavior, and that factor might be enough to deter Xi from embarking on such a course.

But the mounting evidence that Xi Jinping intends to be an unconstrained strongman instead of merely being the head of a collective leadership should cause U.S. officials to conduct a comprehensive policy reassessment. Since the onset of China’s market-oriented economic reforms in the late 1970s, U.S policy has been based on two assumptions. One was economic reforms would lead to a more open, tolerant political system, perhaps ultimately culminating in China evolving into a full-fledged democracy. The other belief was that a less autocratic China, fully integrated into the global economy, would become, in the words of former Deputy Secretary of State Robert Zoellick, a “responsible stakeholder” in the international diplomatic and economic systems. Both of those assumptions now are very much in doubt.

Pages