Policy Institutes

Simon Lester

This is from the White House blog, explaining that the Trans Pacific Partnership (TPP) will be “the most progressive trade agreement in history”:

They further explain:

If we don’t secure this trade agreement, Americans will be forced to accept the status quo – which is bad for small businesses, bad for American workers, and bad for our future leadership. 

Here’s why: 

We would fail to secure strong labor and environmental standards for trade in the world’s fastest-growing region: 

  • There’d be no enforceable rules ensuring countries set a minimum wage, end child labor, or enforce workplace safety.

So should those of us who are skeptical about the benefits of a minimum wage law panic here?  Will the TPP spread and promote minimum wage laws around the world?

My sense is that the answer is no (although no one has seen the full text of the TPP yet, so I suppose there could be some surprises). Instead, I think the TPP will say that countries have to enforce their own labor laws.  Thus, if you have a minimum wage law on your books, you have to enforce it (with credit to my colleague Bill Watson for this explanation).  That’s a lot less scary (but still a little scary).

At the same time, the whole idea of marketing trade agreements as “progressive” and making reference to minimum wage laws seems like an attempt to garner support from liberals (unlikely) that will quite possibly scare off free market conservatives.  I’m not sure exactly what the White House has in mind; this may very well backfire on them.

Daniel J. Mitchell

In my 2012 primer on fundamental tax reform, I explained that the three biggest warts in the current system:

  1. High tax rates that penalize productive behavior.
  2. Pervasive double taxation that discourages saving and investment.
  3. Corrupt loopholes and cronyism that bribe people to make less productive choices.

These problems all need to be addressed, but I also acknowledged additional concerns with the internal revenue code, such as worldwide taxation and erosion of constitutional freedoms an civil liberties.

In a perfect world, we would shrink government to such a small size that there was no need for any sort of broad-based tax (remember, the United States prospered greatly for most of our history when there was no income tax).

In a good world, we could at least replace the corrupt internal revenue code with a simple and fair flat tax.

In today’s Washington, the best we can hope for is incremental reform.

But some incremental reforms can be very positive, and that’s the best way of describing the “Economic Growth and Family Fairness Tax Reform Plan” unveiled today by Senator Marco Rubio of Florida and Senator Mike Lee of Utah.

The two GOP senators have a column in today’s Wall Street Journal, and you can read a more detailed description of their plan by clicking here.

But here are the relevant details.

What’s wrong with Rubio-Lee

In the interest of fairness, I’ll start with the most disappointing feature of the plan. The top tax rate will be 35 percent, only a few percentage points lower than the 39.6 percent top rate that Obama imposed as a result of the fiscal cliff.

Even more troubling, that 35 percent top tax rate will be imposed on any taxable income above $75,000 for single taxpayers and $150,000 for married taxpayers.

Since the 35 percent and 39.6 percent tax rates currently apply only when income climbs above $400,000, that means a significant number of taxpayers will face higher marginal tax rates.

That’s a very disappointing feature in any tax plan, but it’s especially unfortunate in a proposal put forth by lawmakers who wrote in their WSJ column that they want to “lower rates for families and individuals.”

What’s right with Rubio-Lee

This will be a much longer section because there are several very attractive features of the Rubio-Lee plan.

Some households, for instance, will enjoy lower marginal tax rates under the new bracket structure, particularly if those households have lots of children (there’s a very big child tax credit).

But the really attractive features of the Rubio-Lee plan are those that deal with business taxation, double taxation, and international competitiveness.

Here’s a list of the most pro-growth elements of the plan.

  • A 25 percent tax rate on all business income – This means that the corporate tax rate is being reduced from 35 percent (the highest in the world), but also that there will be a 25 percent maximum rate on all small businesses that file using Schedule C as part of a 1040 tax return.
  • Sweeping reductions in double taxation – The Rubio-Lee plans eliminates the capital gains tax, the double tax on dividends, and the second layer of tax on interest.
  • Full expensing of business investment – The proposal gets rid of punitive “depreciation” rules that force businesses to overstate their income in ways that discourage new business investment.
  • Territorial taxation – Businesses no longer will have to pay a second layer of tax on income that is earned – and already subject to tax – in other nations.
  • No death tax – Income should not be subject to yet another layer of tax simply because someone dies. The Rubio-Lee plan eliminates this morally offensive form of double taxation.

In addition, it’s worth noting that the Rubio-Lee plan eliminate the state and local tax deduction, which is a perverse part of the tax code that enables higher taxes in states like New York and California.

Many years ago, while working at the Heritage Foundation, I created a matrix to grade competing tax reform plans. I updated that matrix last year to assess the proposal put forth by Congressman Dave Camp, the former Chairman of the House Ways & Means Committee.

Here’s another version of that matrix, this time including the Rubio-Lee plan.

As you can see, the Rubio-Lee plan gets top scores for “saving and investment” and “international competitiveness.”

And since these components have big implications for growth, the proposal would – if enacted – generate big benefits. The economy would grow faster, more jobs would be created, workers would enjoy higher wages, and American companies would be far more competitive.

By the way, if there was (and there probably should be) a “tax burden” grade in my matrix, the Rubio-Lee plan almost surely would get an “A+” score because the overall proposal is a substantial tax cut based on static scoring.

And even with dynamic scoring, this plan will reduce the amount of money going to Washington in the near future.

Of course, faster future growth will lead to more taxable income, so there will be revenue feedback. So the size of the tax cut will shrink over time, but even a curmudgeon like me doesn’t get that upset if politicians get more revenue because more Americans are working and earning higher wages.

That simply means another opportunity to push for more tax relief!

What’s missing in Rubio-Lee

There are a few features of the tax code that aren’t addressed in the plan.

The health care exclusion is left untouched, largely because the two lawmakers understand that phasing out that preference is best handled as part of a combined tax reform/health reform proposal.

Some itemized deductions are left untouched, or simply tweaked.

And I’m not aware of any changes that would strengthen the legal rights of taxpayers when dealing with the IRS.

Let’s close with a reminder of what very good tax policy looks like.

To their credit, Rubio and Lee would move the tax code in the direction of a flat tax, though sometimes in a haphazard fashion.

 

 

P.S.: There is a big debate on the degree to which the tax code should provide large child credits. As I wrote in the Wall Street Journal last year, I much prefer lower tax rates since faster growth is the most effective long-run way to bolster the economic status of families.

But even the flat tax has a generous family-based allowance, so it’s largely a political judgement on how much tax relief should be dedicated to kids and how much should be used to lower tax rates.

That being said, I think the so-called reform conservatives undermine their case when they argue child-oriented tax relief is good because it might subsidize the creation of future taxpayers to prop up entitlement programs. We need to reform those programs, not give them more money.

Ilya Shapiro

It all depends on what the meaning of “by” is.

The four liberal justices clearly believe that an exchange established “for” or “in” a state by the federal government is the same as an exchange “established by the state,” to quote the relevant statute. Justices Scalia and Alito (and presumably the silent Thomas) equally firmly believe that words mean what they say.

So this case, as expected, turns on the views of Chief Justice Roberts and Justice Kennedy, who gave very little away at oral argument. If the government wins here, then not only will Obamacare continue to be rewritten by the IRS, but any executive agency – and any future president – will be able to rewrite any law. Accordingly, for the sake of the rule of law, I fervently hope that Roberts and Kennedy decide to enforce the Affordable Care Act as written and let Congress clean up its own mess.

Jim Harper

When the REAL ID Act passed in 2005, Senator Joe Lieberman (D-CT), no civil libertarian, called the national ID law “unworkable” for good reason. It seeks to herd all Americans into a national ID system by coercing states into issuing drivers licenses (and sharing information about their drivers) according to complex federal standards.

The hook REAL ID uses in seeking to dragoon states into compliance is the threat that TSA agents will refuse IDs from non-complying states at our nation’s airports. The threat is an empty one. Consistently over years, every time a DHS-created compliance deadline has come around, state leaders with spines have backed the Department of Homeland Security down. I detailed the years-long saga of pushed-back deadlines last year in the Cato Policy Analysis, “REAL ID: A State-by-State Update.”

DHS has stopped publishing deadline changes in the Federal Register–perhaps the endless retreats were getting embarrassing–and now it has simply said on its website that TSA enforcement will begin sometime in 2016. But it’s evidently back-channeling threats to state officials. Those folks–unaware that REAL ID doesn’t work, and disinterested in the allocation of state and federal power–are lobbying their state legislatures to get on board with the national ID program.

New Hampshire is one state where this has occurred. Worries about New Hampshirites ability to travel by air recently caused the Department of Public Safety (which houses New Hampshire’ motor vehicle bureau) to seek legislation that would move the state toward REAL ID compliance.

New Hampshire is special because it’s where the first volley in the REAL ID rebellion was thrown. In 2006, after a bill to reject REAL ID got a head of steam in New Hampshire, states across the country rejected the national ID law.

In testimony I delivered to the New Hampshire Senate Transportation Committee yesterday, I detailed this history, telling the story of how DHS has repeatedly backed off its threat to inconvenience travelers when states have rejected this unfunded federal surveillance mandate. The circumstances today are unchanged: If the TSA starts refusing IDs, the TSA, the DHS, and their supporters in Congress will take the blame. The DHS knows this, which is why they always back down before push comes to shove. States should have no fear of TSA interfering with their residents’ travels because of REAL ID.

Rejecting REAL ID is good security, too. If the nation were to spend billions of dollars on REAL ID compliance, undercutting all our privacy and autonomy a little more by putting us into a national identity system, we’d get nothing remotely comparable in security gains. Proponents of this national ID program have never shown how it would provide cost-effective security.

My testimony may have helped. The strong presence of the New Hampshire Liberty Alliance showed the committee that this was not a business-as-usual bill. And I think really excellent, persuasive testimony from New Hampshire Civil Liberties Union Executive Director Devon Chafee carried the day. The committee voted unanimously to reject the REAL ID compliance bill. Once they knew that the DHS is brandishing empty threats to inconvenience travelers at TSA checkpoints, they ended their state’s brief flirtation with REAL ID compliance.

This is information legislators across the country need. A number of states could emulate New Hampshire’s rejection of REAL ID. There are still many places where legislators labor under the impression that REAL ID imposes obligations on them, including South Dakota, California (see also), New Mexico (see also),  Hawaii (see alsosee also; see also; see also), Idaho, Oklahoma (see also), Arizona (see also), Rhode Island (see also; but see), Illinois, Iowa, New York, and Florida.

Benjamin H. Friedman

There is a lot to say about Israeli Prime Minster’s Benjamin Netanyahu’ speech to Congress today. I could object to his use of worst case scenarios and overstatements of Iranian power. Instead I’m taking issue with his treatment of Robert Frost’s The Road Less Traveled. My point, besides being pedantic, is that is that Frost’s realist sensibility makes him a poor reference for Bibi.

Netanyahu tells us that we face a crossroads. One path is the deal being negotiated, which may contain the Iranian nuclear program temporarily but will “lead to a nuclear-armed Iran whose unbridled aggression will inevitably lead to war.” Or we can do the difficult thing and hold out for a better deal, which “would prevent a nuclear-armed Iran, a nuclearized Middle East and the horrific consequences of both to all of humanity.”

To help us navigate the crossroads, Netanyahu references Robert Frost:

You don’t have to read Robert Frost to know. You have to live life to know that the difficult path is usually the one less traveled, but it will make all the difference for the future of my country, the security of the Middle East and the peace of the world, the peace, we all desire. 

One problem here is that Netanyahu’s evaluation of the options suggests that his preference is far less difficult. The path that obviously avoids inevitable war and horrific consequences is sure to be the more popular, easier one.

Another issue is that the poem doesn’t address difficulty. A harder road may be less popular, but the poem doesn’t say so. The traveler can’t see far down the roads, so he can’t know which is more difficult. The biggest issue with Netanyahu’s reading of the poem is typical of those that only read the end:  “Two roads diverged in a wood, and I—/I took the one less traveled by, / And that has made all the difference.”

That bit alone gives you the standard “be unconventional,” conclusion. But the speaker earlier says that he actually can’t tell what’s less traveled. Prior travelers have worn the two roads “really about the same.” But later (ages and ages hence) he’ll tell us (with a sigh) that bravely taking the road less traveled made all the difference. The sighing and stuttering and imprecision (was it a good difference?) are theatrics. A stab in the dark becomes a pat lesson about decision-making.

That authorial wink suggests that Frost would not see this poem, even correctly read, as a guide on whether to take a year off before enrolling at Vassar, let alone international politics. Still, he’d probably agree that its treatment of choice is at odds with Netanyahu’s.

The choice in the poem is uncertain and final. The traveler can’t know what will work out better, because he can’t see too far ahead. He wants to go both ways but cannot get back to the choosing point. So he has to pick irreversibly and sacrifice something. Frost here is with Auden: “Look if you like, but you will have to leap.” Not all choices are like that, but the easy ones aren’t much worth talking about.

This is a realist sentiment. The tragedy that realists describe is that politics, especially the international kind, requires choice between competing goods amid uncertainty. Risks are on both sides. Someone always insists otherwise—that one way reconciles values, maximizing liberty, humanitarianism and U.S. security and every other good thing. It is pleasant to believe that, as it removes tragedy from choice. Netanyahu’s rhetoric is like that. If you believe it, in doing his bidding, we ultimately sacrifice nothing. Then there’s really no choice at all. If there’s a lesson in The Road Not Taken, it’s to be wary of such advice.

Matthew Feeney

Yesterday, President Obama met with the Task Force on 21st Century Policing, which on the same day released an interim report outlining dozens of recommendations related to how policing can be improved. The report was released the day after police in Los Angeles shot and killed a man during an altercation in which, according to the LAPD, he and officers “struggled over one of the officer’s handguns.”

What makes the shooting notable is that at least one of the officers involved in the shooting was wearing a body camera. According to LAPD commander Andrew Smith, the officers who were at the scene were assigned to the LAPD’s Central Division and Safer Cities Initiative, which is outfitting officers with body cameras as part of the LAPD’s body camera pilot program. Smith has said that footage from the body camera will be used in the investigation along with footage of the shooting captured by a member of the public. 

President Obama’s Task Force interim report directly addresses police body cameras without explicitly recommending that they be required. Among the recommendations in the report is that the Department of Justice (DOJ) “develop best practices that can be adopted by state legislative bodies to govern the acquisition, use, retention, and dissemination of auditory, visual, and biometric data by law enforcement.”

The report also makes a worrying recommendation; that the DOJ’s Office of Community Oriented Policing Services (COPS Office) consider offering law enforcement agencies a financial incentive to adopt the national benchmarks and best practices they may propose. It is unclear that the COPS Office — the same office whose grants were sometimes used to fund the increased militarization of police — needs to take a lead in developing national benchmarks for police reform. As in most other policy areas, when it comes to police reform a decentralized approach is better than a centralized one.  

However, the report also says, “The implementation of appropriate technology by law enforcement agencies should be designed considering local needs and aligned with national standards.”

Of course, law enforcement agencies in the United States as well as the communities they serve are diverse in their needs. Some law enforcement agencies police predominantly urban areas, while others oversee more rural parts of the country. Police departments also range from the very large to the very small. According to data from 2008 cited in the interim report, roughly half of U.S. law enforcement agencies have fewer than 10 officers. Such a varied collection of police departments suggests that a localized, federalist approach should be adopted when considering police reform.    

The report goes on to say, “These model policies and practices should at minimum address technology usage and data and evidence acquisition and retention, as well as privacy issues, accountability and discipline.”

All of these issues need to be addressed in police body camera policies, and given the recommended consideration of financial incentives at the end of the report, it is especially important that the DOJ recommend prudent guidelines.

The last recommendation of the report outlines actions that the COPS Office should consider. Among these is the establishment of national benchmarks and best practices discussed above and prioritizing grants to “departments meeting benchmarks.” The DOJ does not have the authority to demand that non-federal law enforcement agencies comply with the recommendations in the interim report, but it can provide incentives.

The financial incentive will undoubtedly be attractive to some law enforcement agencies. If the benchmarks released by the COPS Office do not adequately address the issues mentioned above, then there is a risk of poorly considered policies not being contained to one agency. A better approach would be for the COPS Office to provide national benchmarks without a financial incentive attached to their adoption.

The recent LAPD shooting could lead to a high profile investigation into potential police misconduct aided by body camera footage. In the coming years it shouldn’t be surprising if more incidents of police officers using deadly force are caught on body cameras.

Once incidents like Sunday’s are caught on video, there needs to be policies in place detailing if and when the footage will be available to the public and what information will be redacted once that footage is released. In addition, there needs to be policies in place outlining when an officer’s body camera should be on and the disciplinary repercussions for failing to turn a body camera on at an appropriate time. Any policy tackling these issues and others related to police body cameras will be constrained by fiscal as well as legislative realities such as local budgets and state public record laws.

The COPS Office may do as the interim report recommends and consider establishing national benchmarks and practices for police departments. Yet the diversity of law enforcement regulations and legislation makes the incentives attached to the implementation of any possible benchmarks and practices unsuitable. Rather than offering to prioritize grant funds for departments that meet potential COPS Office national benchmarks, the DOJ ought to publish the benchmarks without financial incentives. This will allow local law enforcement officials and state legislators to examine police body camera policies without the possibility of some funding being attached to one of the proposals.

Patrick J. Michaels

Today’s Washington Post story by Darryl Fears on California drought frequency in a warming world compelled me to take a look at the Golden State’s temperature history. In my 2011 book Climate Coup,  I showed that the alarm over California warming was rather odd, as most of the changes had taken place thirty years previously. 

That was then, and this is now. But what about history?

Here are California temperatures, for the last 38 years, beginning in 1976.  That’s the year of “The Great Pacific Climate Shift,” a sudden and lasting change in both the surface and oceanic circulation patterns.  2014 is by far the warmest year in the California record, as is obvious:

Several things stand out. There’s obviously no warming through 2011 (when Climate Coup was published).  But the pop between 2013 and 2014 is pretty impressive, no?

Fast-backward to 1934. J.B. Kincer had just published the first systematic temperature analysis from locations around the planet, in the 1933 Monthly Weather Review paper titled “Is our Climate Changing?” The paper clearly demonstrated global warming, and people were starting to talk about the influence of increasing atmospheric carbon dioxide on surface temperature. The only thing that was different back then is that we didn’t have computers to simulate what should have been happening. But if we did, I suspect that Darryl Fears’ progenitors would have written a pretty similar story.

Why? Take a look at the 38-year period (the same length as in the above figure) 1896-1934:

 

What’s different here? Nothing. Also worth noting is the difference in mean temperature between the two periods, providing very strong evidence for the step-change in California temperature that occurred with the Great Pacific Climate Shift in 1976.

Armed with a computer model in 1935, one could probably have written the exact same story 80 years ago, prompted by the very similar outlier temperatures of 1934 and 2014.

Nicole Kaeding

Over the next several months the Pentagon will award the contract for the Long Range Strike Bomber. If the Department of Defense’s history repeats itself, cost overruns on the project seem likely.

According to 2010 estimates each new plane is officially expected to cost $550 million. More recent estimates are higher. A 2014 report from the Congressional Research Service included estimates of up to $810 million per bomber. The Air Force is expected to buy 100 planes, which would cost a total of $55 billion even if the low official estimate per plane panned out.

One reason for the projected overruns is that there are only a few suppliers of military aircrafts to the Department of Defense (DoD), and so companies take advantage. The Washington Post describes the situation:

‘Given the steep barriers to entry, it is not surprising that no one has disrupted the combat aircraft market,’ [Todd] Harrison [Director of Defense Budget Studies at the Center for Strategic and Budgetary Assessments] said. Unlike the space launch industry, which also flies commercial satellites, the market for combat aircraft is dominated by a single customer: the U.S. government.

The technical challenges are great, the costs high, the industry highly regulated. And barriers to exit are low: Lose one major contract and you could be out of an industry forever. All of which is why many companies have left the business but “nobody has entered the business of building aircraft since 1969 to any meaningful degree,” said Richard Aboulafia, an aerospace analyst with the Teal Group.

And so while Silicon Valley innovation and verve upends industry after industry, the companies vying for the bomber contract are the same stalwarts that have dominated military aviation for decades.

The Government Accountability Office (GAO) warned about this issue last year, and highlighted the interconnectedness of DoD and its contractors.

Concerns about cost overruns on the bomber project come in the wake of large cost overruns on the F-35 Lighting II or Joint Strike Fighter. GAO called this project DoD’s “most costly and ambitious acquisition program.”

When the program originally launched, costs were estimated at $233 billion with aircraft in production by 2012. The most recent projections estimate costs at $396 billion for 2,400 aircrafts, with full production delayed until 2019. Annual costs averaging $12 billion would continue until 2037 during production. A recent Pentagon report estimated the 50 year life-cycle costs to exceed $1 trillion for the advanced aircraft.

DoD is not expected to cancel this program even though it is $160 billion over budget. According to Lieutenant General Chris Bogdan, who now oversees the F-35 program, “I don’t see any scenario where we’re walking back away from this program… I would tell you we’re going to buy a lot of these airplanes.”

DoD had similar cost overrun problems with its attempt to purchase new presidential-use helicopters following September 11th. The project began in early 2002 with hopes of new helicopters in the field by 2011. Subsequent requests from the White House wanted new helicopters by 2008. Costs doubled to almost $13 billion. In a striking move for a DoD acquisition project, the Navy scrapped the program in 2009, but not before $3.2 billion had been spent.

The Pentagon hopes the new Long Range Strike Bomber will allow it to replace part of its aging bomber fleet. But if it follows the path of recent procurements, taxpayers should expect a bill much larger than originally promised.

Alan Reynolds

This graph illustrates a few points made in my recent Wall Street Journal article.  First of all, the Piketty & Saez mean average of bottom 90% incomes per tax unit is not a credible proxy for median household income, particularly since the big reductions in middle-class taxes from 1981 to 2003.

Second, the red bars claiming bottom 90% incomes in the past six years have been no higher than they were in 1980 (Sen. Warren) or even 1968 (see the graph) is literally unbelievable.  If that were true then all other income statistics – including GDP – would have to be completely false.  

The Piketty & Saez estimates before 1944 describe total income as Personal Income less 20% (because not all income is reported).  Postwar data use a modified version of Adjusted Gross Income as a proxy for personal income, with no transfer payments or health benefits, and that measure has become less and less credible over time. This makes the estimates of bottom 90% incomes simply worthless, as well as related claims that the top 1% “captured” all the cyclical gains (and losses!).  If total income were calculated the same way it was in 1928, the the top 1% share would drop from 17.5% to 13.3%.  Grossly underestimating total income by greater and greater amounts created an artificial increase in top 1-10% shares of such increasingly understated income.

As the blue line in the graph shows, many measures of income in 2012 or 2013 were not yet back to the peak levels of 2007 or 2000.  But that definitely includes real incomes of the top 1%, which were 20.6% lower in 2012-2013 than they were in 2007. 

 

Daniel J. Mitchell

Back in 2012, I shared some superb analysis from Investor’s Business Daily showing that the United States never would have suffered $1 trillion-plus deficits during Obama’s first term if lawmakers had simply exercised a modest bit of spending restraint beginning back in 1998.

And the IBD research didn’t assume anything onerous. Indeed, the author specifically showed what would have happened if spending grew by an average of 3.3 percent, equal to the combined growth of inflation plus population.

Remarkably, we would now have a budget surplus of about $300 billion if that level of spending restraint continued to the current fiscal year.

This is a great argument for some sort of spending cap, such as the Swiss Debt Brake or Colorado’s Taxpayer Bill of Rights.

But let’s look beyond the headlines to understand precisely why a spending cap is so valuable.

If you look at the IBD chart, you’ll notice that revenues are not very stable. This is because they are very dependent on the economy’s performance. During years of good growth, revenues tend to rise very rapidly. But when there’s a downturn, such as we had at the beginning and end of last decade, revenues tend to fall.

But you don’t have to believe me or IBD. Just look at federal tax revenues over the past 30 years. There have been seven years during which nominal tax revenues have increased by more than 10 percent. But there also have been five years during which nominal tax revenue declined.

This instability means that it doesn’t make much sense to focus on a balanced budget rule. All that means is that politicians can splurge during the growth years. But when there’s a downturn, they’re in a position where they have to cut spending or (as we see far too often) raise taxes.

But if there’s a spending cap, then there is a constraint on the behavior of politicians. And assuming the spending cap is set at a proper level, it means that – over time – there will be shrinking levels of red ink because the burden of government spending will grow by less than the average growth rate of the private economy.

In other words, compliance with my Golden Rule!

Let’s look at other examples.

Why did Greece get in fiscal trouble? The long answer has to do with ever-growing government and ever-increasing dependency. But the short answer, at least in part, is that a growing economy last decade generated plenty of tax revenue, but rather than cut taxes and/or pay down debt, Greek politicians went on a spending binge, which then proved to be unsustainable when there was an economic slowdown.*

This is also why California periodically gets in fiscal trouble. During years when the economy is growing and generating tax revenue, the politicians can’t resist the temptation to spend the money, oftentimes creating long-run spending obligations based on the assumption of perpetually rapid revenue growth.These spending commitments then prove to be unaffordable when there’s a downturn and revenues stop growing.

And as you can see from the accompanying graph, this creates a very unstable fiscal situation for the Golden State. Revenue spikes lead to spending spikes. During a downturn, by contrast, revenues are flat or declining, and this puts politicians in a position of either enacting serious spending restraint or (as you might predict with California) imposing anti-growth tax hikes.

And, in the long run, the burden of spending rises faster than the private sector.

We have another example to add to our list, thanks to some superb research from Canada’s Fraser Institute.

They recently released a study examining fiscal policy in the energy-rich province of Alberta. In particular, the authors (Mark Milke and Milagros Palacios) look at the rapid growth of spending between the fiscal years 2004/05 and 2013/14.

By the mid-2000s, even though the province was again spending at a level that contributed to deficits in the early 1990s, after 2004/05 the province allowed program spending to escalate even further and beyond inflation and population growth. The result was that by 2013/14, the province spent $10,967 per person on government programs. That was $2,002 higher per person than in 2004/05.

Why did the burden of spending climb so quickly? The simple answer is that bigger government was enabled by tax revenue generated by a prospering energy industry.

Over a nine-year period, politicians spent money based on an assumption that high energy prices were permanent and that tax revenues would always be surging.

But now that energy prices have fallen, politicians are suddenly facing a fiscal shortfall. Simply stated, there’s no longer enough revenue for their spending promises.

This fiscal mess easily could have been avoided if the fecklessness of Alberta politicians had been constrained by some sort of spending cap.

The experts at the Fraser Institute explain how such a limit would have precluded today’s dismal situation.

Had the province increased program spending after 2004/05 but within population growth plus inflation, by 2013/14 the province would have spent $35.9 billion on programs. Instead, the province spent $43.9 billion, an $8 billion difference in that year alone. That $8 billion difference is significant. In recent interviews, Alberta Premier Jim Prentice has warned that the drop in oil prices has drained $7 billion from expected provincial government revenues. Thus, past decisions to ramp up program spending mean that additional provincial spending (beyond inflation and population growth) is at least as responsible for current budget gap as the decline in revenues.

And here’s a chart from the study showing how much money would have been saved with modest fiscal restraint.

Unfortunately, that’s not what happened. So now today’s politicians have to deal with a mess that is a consequence of profligate politicians during prior years.**

…the decision by the province to spend (on programs) above the combined effect of population growth and inflation between 2005/06 and 2013/14 inclusive built in higher annual spending obligations, that, once revenues declined, would open up a fiscal gap in the province’s budget. As of 2013/14, the result of spending more on programs than inflation plus population growth combined would warrant meant program expenses were $8 billion higher in that year alone. The province’s past fiscal choices have now severely constricted present choices on everything from balanced budgets to tax relief to additional capital spending. If the province wishes to have a better menu of choices in the future, it must, obviously, control expenditures more carefully.

Since I’ve shared all sorts of bad examples of how nations get in trouble by letting spending grow too fast over time, let’s look at a real-world example of a spending cap in action.

As you can see from the chart, Switzerland has enjoyed great success ever since voters imposed the debt brake.

Indeed, while many other European nations are in fiscal crisis because of big increases in the burden of government spending, the Swiss have experienced economic tranquility in part because the size of the public sector has gradually declined.

The key lesson isn’t that spending restraint is good, though that obviously is important. The most important takeaway is that spending restraint appears to be sustainable only if there is some sort of permanent external constraint on politicians. Like the debt brake. Or like Article 107 of Hong Kong’s Basic Law.

Remember, there are many nations that have enjoyed good results because of multi-year periods of spending restraint. But many of those countries saw their gains evaporate because policies then moved in the wrong direction.

If you want a sustainable solution, you need a sustainable constraint.

*Greek politicians also took advantage of low interest rates last decade (a result of joining the euro currency) to engage in plenty of debt-financed government spending, which meant the economy was even more vulnerable to a crisis when revenues stopped growing.

**Some of today’s politicians in Alberta are probably long-term incumbents who helped create the mess by over-spending between 2004/05 and today, so I wouldn’t be surprised if they opted for destructive tax hikes instead of long-overdue spending restraint.

Juan Carlos Hidalgo

Two weeks ago I had an article in The National Interest where I made the case against the Obama administration’s proposal to deliver hundreds of millions of dollars in aid to Central American governments to help them fight organized crime, promote security and foster economic development. In my piece, I wrote that “…giving $1 billion to governments with dubious records on transparency and human rights will empower corrupt officials to the detriment of ordinary Central Americans.”

Last week, Jesse Franzblau had a revealing exposé in The Nation that proves how counterproductive this sort of aid can be. In his article, Franzblau publishes unclassified documents that show how U.S. authorities continued to deliver millions of dollars in aid to Mexican security agencies despite knowing that those same forces were infiltrated by drug cartels. This money came under the auspices of the Plan Mérida, a $2.6 billion program aimed at helping Mexico fight drug cartels. In some instances, the documents seem to show efforts by U.S. officials to cover up or downplay serious human rights abuses committed by Mexican security forces so it wouldn’t affect the continuity of Plan Mérida.

As Franzblau points out:

While US laws explicitly prohibit the delivery of aid to foreign individuals and units implicated in systematic human rights violations, internal reporting on the implementation of Mérida programs reveals that institutional connections to organized crime are consistently overlooked, ignored or kept hidden from public scrutiny as counter-drug money continues to flow.

This is serious stuff. Instead of helping the fight against drug cartels, U.S. aid might be empowering them. As I mentioned in my article, there is well-documented evidence about how the security agencies and judicial system Central American countries have been infiltrated by powerful criminal organizations, from drug cartels to youth gangs.

Franzblau’s article also shows a well-documented phenomenon regarding aid: once it starts flowing, the bureaucracy in charge of delivering it has an incentive to disregard the evidence of whether it is accomplishing its goals or being counterproductive since discontinuing the aid would compromise the bureaucracy’s own existence. In this particular case, Franzblau mentions that “US officials were well aware of the effect that reports of abuse could have on Mérida assistance.”

There is no reason to believe that the Obama administration’s massive aid plan for Central American governments won’t suffer from the same flaws that Jesse Franzblau exposes in his article.

Michael F. Cannon

This week, the Supreme Court will hear oral arguments in King v. Burwell, one of four legal challenges to an IRS regulation that purports to implement the Patient Protection and Affordable Care Act, but in fact vastly expands the IRS’s powers beyond the limits imposed by the Act. Just in time for oral arguments before the Court, Vox’s Sarah Kliff has produced what I think may be the best history of King v. Burwell and related cases I’ve seen. Still, there are a few important errors and omissions, listed here in rough order of importance.

1. Kliff refers to the birth of my “twin daughters.”

My beautiful and long-suffering wife indeed gave birth to twins, but only one of them was a girl. As you can see, the other one is more than little upset by the snub.

Definitely not a girl.

I would have expected Kliff, who herself has a twin brother, to take greater care in reporting this crucial element of the history of King v. Burwell.

2. The twins’ birth did not cut into my efforts to dissuade states from establishing Exchanges.

They were born after the deadline for states setting up Exchanges had passed.

3. “As anyone who covered it at the time…remembers, the law’s passage was an absolute mess,” Kliff reports, and the “messy language and loose ends that legislators expected to get ironed out simply became part of the law.”

Nevertheless, Kliff reports that all congressional staff involved with the drafting of the Patient Protection and Affordable Care Act swear they meant to authorize the disputed taxes and subsidies in states with federal Exchanges. She also reports that all journalists who reported on the drafting process swear that every time the topic arose, Democratic staffers always said these provisions would be authorized in states with federal Exchanges.  (Well, except these members of Congress and this journalist.)

Kliff neglects to mention that there is absolutely zero contemporaneous evidence of any kind that supports those recollections. Or that contemporaneous discussions of that issue, like this one by Jonathan Cohn, show (A) that even the sharpest journalists weren’t paying attention to this issue, and (B) to the extent they did, their impressions were consistent with the subsidies being conditional.

Thus, the only contemporaneous evidence that speaks directly to the question presented to the Court is the explicit statutory text clearly limiting subsidies to Exchanges “established by the State.” That’s probably something Kliff should have mentioned. You know, so readers can decide whether to take the “if you like your health plan, you can keep it” crowd at their word.

4. According to Kliff, in August 2011, Jonathan Adler suggested told me that the ACA only authorizes subsidies through state-established Exchanges and suggested I fold that into the case I was making to state officials that they not implement the ACA.

Hey, wait a minute. The first part is true, but the second part is not. I didn’t need that Adler guy to tell me how to do my job. I needed him to tell me how to do his job.

5. Kliff commits the same rookie (or Freudian?) error every other reporter does by claiming the disputed taxes and subsidies are part of ObamaCare, that a victory for the government is a victory for the ACA, and to rule for the plaintiffs would be “to rule against the Affordable Care Act.”

That is the government’s argument, which Kliff treats as fact. The plaintiffs argument is that they are trying to uphold the law. The two lower court opinions that went against the government said they were upholding the ACA.

By framing the case the way the Obama administration does, Kliff is essentially winking at her readers as if to say, ‘Natch, the government is right.

6. Kliff quotes former Democratic staff director of the Senate Health, Education, Labor, and Pensions (HELP) Committee John McDonough as saying, “There is not a scintilla of evidence that the Democratic lawmakers who designed the law intended to deny subsidies to any state.”

That is flatly untrue.

As even the government concedes, the Democratic senators on the HELP Committee—which McDonough ran—approved a bill that withheld Exchange subsidies in states that did not implement that bill. Kliff has quoted McDonough in the past making the same invalid point, and I have corrected her, to no avail.

Kliff should have informed readers that McDonough himself helped the authors of the ACA do what he now says they never considered doing. Instead, she once again allowed McDonough to misrepresent the legislative history and what the ACA’s authors were considering.

7. Kliff leaves the reader with the impression that the statutory requirement that subsidy recipients must enroll “through an Exchange established by the State”—the only language in the statute that speaks directly to the question presented in King v. Burwell—was a “drafting error.”

Not even the government makes that claim.

That said, the government’s claim that “[t]he phrase ‘Exchange established by the State under Section [1311]’ is a term of art that includes an Exchange established for the State by HHS” is scarcely more defensible.

8. Kliff reports that Adler told me in August 2011 that the ACA offered Exchange subsidies only in state-established Exchanges, but: “There wasn’t much that Cannon and Adler could do with their discovery at that point. The federal government still hadn’t published the rules governing how the insurance subsidies would work; it was still possible that the Obama administration might come out and agree with them, saying state exchanges were the only bodies authorized to dole out funds. The Obama administration eliminated that possibility in May 2012.”

Actually, the Obama administration announced its plan to issue subsidies in federal Exchanges almost immediately after Adler told me they couldn’t. The IRS issued its proposed tax-credit rule in mid-August 2011.

9. Kliff reports that “everyone expected” the IRS to offer tax credits in federal Exchanges.

Having read the law, that was not what I expected. Call me naïve, but I was surprised the IRS was violating clear statutory text.

10. Kliff writes, “The whole point of the federal exchanges, after all, was to make sure Obamacare worked in states that wouldn’t or couldn’t build an exchange of their own.”

How does Kliff know that? This is an assumption, which she appears to make without any contemporaneous support.

I don’t know how Kliff rules out Vanderbilt law professor Jim Blumstein’s alternative theory that the federal Exchanges were nothing more than an “oops” provision to protect the ACA against charges that Congress was commandeering the states. I hope she has more to go on than assurances from the “if you like your health plan, you can keep it” crowd.

Between Kliff’s theory and Blumstein’s theory, the latter is more compatible with the ACA, which explicitly authorized unlimited funds for the establishment of state-run Exchanges but zero funds for the establishment of federal Exchanges.

11. Kliff writes: “Congress always meant for residents of all 50 states to have access to financial help. It was never a question, during the five years I’ve spent writing about Obamacare, whether this would be the case.”

Regarding the first claim, Congress also meant for residents of all 50 states to have access to the ACA’s Medicaid expansion. That doesn’t mean Congress didn’t intend to condition Medicaid subsidies on state cooperation.

Regarding the second claim, all that tells us is that journalists should ask more questions and/or members of Congress and congressional staff should read bills more closely.

12. Kliff writes, “For about two years, [Adler, Cannon,] and other challengers made a purely textualist argument.”

Actually, it was less than one year before we learned the plain text of the statute reflected Congress’ intent. We wrote in July 2012: “We were both surprised to discover this flaw in the law, and characterized it as a ‘glitch.’ Yet our further research demonstrates this feature of the law was intentional and purposeful, and that the IRS’s rule has no basis in law. This supposed fix is actually an effort to rewrite the law and provide for something Congress never enacted, and indeed that PPACA’s authors intentionally chose not to include in the law.”

13. Kliff misrepresents Adler’s and my argument that Congress intended to condition subsidies on states establishing Exchanges.

Fortunately, to her and Vox’s credit, she let me make that case in my own words in a previously published interview (read the whole thing):

Sarah Kliff: Are you 100 percent convinced it was Congress’s intent to withhold subsidies in the federal exchange?

Michael Cannon: There are two ways to interpret that question. Did the people who wrote this language mean to withhold subsidies in federal exchanges? My answer to that is, I’m 100 percent convinced that they meant to do that.

The other way to think about it is, “Did the people who voted for this law intend to withhold subsidies in federal exchanges?” That’s a different question, but the answer is the same. I’m 100 percent convinced that’s what the members of Congress who enacted this law meant to do, just the same way I’m 100 percent convinced they meant to throw people off of their existing health plans even though they said, “If you like your health plan, you can keep it.”

What members of Congress might have ideally wanted is different from congressional intent, which is determined by what they actually vote on. If the language of a statute is clear, then that constitutes congressional intent.

14. Kliff writes that when Oklahoma became the first plaintiff to challenge the IRS rule, it “couldn’t scrounge up additional plaintiffs before the deadline to amend its case and ultimately went it alone.”

In fact, Oklahoma had additional plaintiffs lined up, but the court wouldn’t allow those plaintiffs to join the suit.

15. Kliff writes, “And on July 22, the subsidies argument got its first positive news. In the span of two hours — and by pure coincidence — the appeals courts for the District of Columbia and the Fourth Circuit issued conflicting rulings.” (Emphasis added.)

If Kliff can substantiate the claim that this was a coincidence, she should share it.

16. Kliff writes, “[Jonathan] Gruber has disavowed the remarks [in which he told audiences that the law conditions subsidies on states establishing Exchanges], saying that he spoke ‘off the cuff’ and made a mistake. There’s reason to believe him: Gruber spoke regularly to dozens of reporters during this period and never mentioned this idea to any of them.”

Kliff should have mentioned there is also reason not to believe Gruber’s disavowals. Gruber made that claim multiple times, and his attempts to explain those comments away reveal, um, inconsistencies.

17. Finally, Kliff writes that the government’s argument “has remained consistent throughout the process.”

No, it hasn’t. When King v. Burwell reached the Supreme Court, the government unveiled a new argument: “The phrase “Exchange established by the State under Section [1311] is a term of art that includes an Exchange established for the State by HHS.” The government also called the phrase a “technical term” that “reflects style and grammar—not a substantive limitation” on the IRS’s power.

The government had never previously called that phrase a “term of art.” The only statutory provision it had described as a term of art was the term “Exchange,” and the government described that as a “defined term of art” (emphasis added) because, unlike “Exchange established by the State,” the ACA actually bears a definition that gives the word “Exchange” a meaning other than its ordinary meaning.

I meant what I said at the beginning. This really was the best history of King v. Burwell and related litigation that I’ve seen.

Doug Bandow

The United States Postal Service lost $5.5 billion last year. That is the eighth annual loss in a row and the third highest ever. The only good news is that it remains below the red ink tsunami of $15.9 billion in 2012.

Why does the federal government deliver the mail? Why does it have a monopoly over delivering the mail?

The Postal Service one of the few government programs with actual constitutional warrant. Alas, America’s revolutionaries turned the system into a fount of federal patronage.  Local postmasters became perhaps the president’s most important appointments. The Postmaster General was a member of the Cabinet from 1829 to 1971.

With politics rather than service the PO’s priority, Congress took the next step and approved the Private Express Statutes, preventing anyone from competing with the government in delivering first class mail.   

That left the system ill-equipped to adapt to changing circumstances. In 1971 Congress turned the Post Office into the semi-independent USPS but retained its control over postal policies and, of course, preserved the system’s delivery monopoly.

Banning competition could not preserve the postal market.  The number of pieces of mail peaked in 2001 and continues to fall despite a rising population. USPS’s last profitable year was 2006.

With characteristic understatement, observed the Government Accountability Office:  “Given its financial problems and outlook, USPS cannot support its current level of service and operations.”

The postal unions insist that nothing is wrong—at least, nothing which a federal bail-out wouldn’t solve.  They reserve particular ire for the requirement that USPS prefund workers’ retirement.

But prefunding protects taxpayers. Washington’s unfunded (government) retirement liability is about $800 billion, growing every year.  Only USPS must prefund, which is unfair to taxpayers, not the postal service. 

There’s no other obvious way for USPS to become solvent.  Over the last half century the postal authorities raised rates 50 percent faster than the rate of inflation.  Pushing hikes even faster in the future would encourage more people to use alternatives. 

USPS has reduced costs through facility closures and staff reductions despite strong opposition.  Cuts in compensation, retirement benefits, and workforce levels and improvements in productivity also are obvious responses, but must overcome union opposition. 

Proposals for reducing services abound.  All of these anger consumers, encouraging them to go elsewhere—including to Federal Express and UPS, which offer better options for packages.  Irritated workers and customers also complain to Congress, creating political roadblocks for USPS.

Instead of attempting to save an unnecessary political monopoly, Congress should look abroad where numerous countries, some pushed by the European Union, have introduced competition and innovation into their postal markets. 

The Organization for Economic Co-operation and Development reported that such reforms had yielded “quality of service improvements, increases in profitability, increases in employment and real reductions in prices.”  Only in the supposed laissez faire paradise of America—where a union-led “Grand Alliance to Save Our Public Postal Service” just formed to ensure that whatever has been will forever be—do such ideas seem radical. 

Yet even President Barack Obama admitted a few years back that “it’s the post office that’s always having problems.”  In contrast, “UPS and FedEx are doing just fine.” 

Better management and less politics would help.  In fact, revenue was up a bit last year, despite the bigger loss.  But over the long-term USPS cannot escape from a seeming death spiral of bigger losses, higher rates, poorer services, fewer customers, bigger losses, and so on.

As I contend in the Freeman:  “Uncle Sam should ease out of the postal business.  Privatize USPS and drop the federal first class monopoly.  No one can say for sure what would happen.  But history suggests that innovative entrepreneurs would be more likely to find a cost-effective solution than will today’s mix of politicians and bureaucrats.”

Jason Bedrick

If a study shows the benefits of school choice, but you don’t read it, does it really exist?

Apparently not, at least according to Americans United for Separation of Church and State (AU), an organization ideologically committed to opposing school choice. In a blog post today, AU makes this demonstrably false claim:

For example, voucher boosters often assert that students who receive vouch­ers excel academically in private schools. In fact, no objective study has shown this to be the case. Several studies show that voucher students perform the same or worse academically as their peers in public schools.

In reality, there have been 13 randomized controlled gold standard studies of the effect of school choice policies, all but one of which found a statistically significant positive impact. One study found no discernible impact and none found any harm. For AU’s benefit, here is a sampling:

  • William G. Howell and Paul E. Peterson, The Education Gap: Vouchers and Urban Schools, Brookings Institution, 2002, revised 2006. – After two years, African-American voucher students had combined reading and math scores 6.5 percentile points higher than the control group.
  • Jay P. Greene, “Vouchers in Charlotte,” Education Next, Summer 2001. – After one year, voucher students had combined reading and math scores 6 percentile points higher than the control group.
  • Jay P. Greene, Paul E. Peterson, and Jiangtao Du, “School Choice in Milwaukee: A Randomized Experiment,” in Learning From School Choice, ed. Paul Peterson and Bryan Hassel, Brookings Institution, 1998, pp. 335-56. – After four years, voucher students had reading scores 6 Normal Curve Equivalent (NCE) points higher than the control group, and math scores 11 points higher. NCE points are similar to percentile points.

None of these findings are earth shattering, but each study found a statistically significant positive outcome overall or for certain subgroups, particularly low-income African-Americans who are currently the most choice-deprived. Moreover, these studies were conducted by experienced researchers at some of the most widely respected academic and research institutions in the world, including Harvard, Princeton, the University of Chicago, and the Brookings Institution.

In another blog post, AU does point to the one gold standard study that found a null result, a reexamination of the Peterson/Howell study of New York’s private scholarship program. However, AU never mentions that this reexamination employed unorthodox methods and classifications, or that a further reexamination of the data by other researchers at Harvard and the Cleveland Clinic Foundation confirmed the initial findings.

The AU staff can continue to close their eyes and stick their fingers in their ears, but they should stop making the false assertion that there is “no evidence” that students benefit from school choice.

Steve H. Hanke

For some years, hot money flowed in, adding massively to China’s foreign reserve stockpile. Speculators borrowed cheaply in U.S. dollars and bought yuan-denominated assets in anticipation of an ever-appreciating yuan. Well, this carry trade has shifted into reverse, with $91 billion in net outflows in the last quarter of 2014. And with that, the ever-appreciating yuan story has come to a close, too. Indeed, the yuan has lost 1.8% against the greenback since the New Year.

A clear picture of the drag that the hot money outflows are putting on China is shown by inspecting the annual growth rate in the People’s Republic of China’s net foreign assets. With the reserve of the carry trade, the slowdown in net foreign assets growth has been pronounced.   

This, in turn, has reduced the foreign asset component of the growth in China’s money supply, putting a squeeze on the economy’s fuel supply. Indeed, China’s money growth rate has fallen well below its trend rate since mid-2012.

In an attempt to reverse the slump in China’s money supply growth, the People’s Bank has just reduced its benchmark interest rates for the second time in three months. A wise move.

Dalibor Rohac

The murder of Boris Nemtsov in the immediate proximity of the Kremlin seems to be an important milestone in Russia’s descent into darkness. As Deputy Prime Minister in the late 1990s and as an opposition politician during the era of Vladimir Putin, Mr. Nemtsov was a voice for a more liberal, open, and democratic Russia.

Notwithstanding a certain degree of restraint in his criticism of the Russian government, his work as one of the central figures of Russian opposition reflected great personal courage. In spite of a history of frequent arrests, in the past year, he positioned himself as an important domestic critic of Russia’s war against Ukraine.

He was not a stranger to free market ideas or to the work of the Cato Institute, which has been trying to support the transition of Soviet Russia to markets since its landmark 1990 Moscow conference, Transition to Freedom: The New Soviet Challenge.  One decade later, Mr. Nemtsov spoke at a Cato conference on the privatization of pension systems around the world.

The circumstances of Mr. Nemtsov’s death are extremely disconcerting, especially in the light of the track record of Mr. Putin’s regime. Mr. Nemtsov was killed two days before the planned demonstration against Mr. Putin’s war against Ukraine. He feared for his life as he was preparing to publish new evidence on the presence of Russian troops in Eastern Ukraine. And the ‘investigation’ of his murder started on Friday night, with the police ransacking his apartment and confiscating his documents and hard drives.

Mr. Putin’s facetious promise that he will “personally oversee the investigation” strongly suggests we will never learn the names of Mr. Nemtsov’s murderers. But it is safe to say that a country in which opposition politicians of Mr. Nemtsov’s stature have to fear for their lives is a on a very dismal path.

David Boaz

On CNN’s GPS, Fareed Zakaria declared The Libertarian Mind “the Book of the Week.” Here’s the transcript:

This week’s book of the week is David Boaz’s “The Libertarian Mind: A Manifesto for Freedom.” People often wonder what it means when someone describes himself or herself as a libertarian. And that includes people like Rand Paul, Alan Greenspan and Peter Thiel. David Boaz does a superb job of explaining the ideas that animate an important philosophical tradition, and he does it with passion. For anyone interested in politics, this is a valuable resource and a well-written book.

And here’s the 30-second video:

The show ran last Sunday, so today is probably the last day of its reign as “Book of the Week.” Buy The Libertarian Mind today.

K. William Watson

One of the European Union’s highest priorities in trade negotiations is to globalize its restrictions on the use of place names as generic product descriptions. When they negotiate a trade agreement, they insist that the other country adopt regulations requiring that, for example, all champagne come from Champagne and all parmesan cheese come from Parma. The United States, worried that these rules limit access for U.S. products, is trying to use its own trade agreements to contain the effects of Europe’s push to protect “geographical indications” (GIs) in countries around the world.

Europe’s GI protections restrict the flow of accurate information while reducing competition and innovation. GI protection is not about preventing consumer confusion or false advertising; European rules forbid the use of place names even when phrases like “style” or “type” are added. 

One often overlooked but essential aspect of GI regulation is that use of a protected name requires not only physical location in that place but also adherence to government-mandated production practices.  “Authentic” champagne is therefore not only made in Champagne, but made a specific way required by law. 

By operating this way, the system functions not only to capitalize on a collective brand but also to reduce competition among producers. Once all the producers in a particular country (say, France) are divided by region and style, the industry starts looking a lot like a cartel. There may be multiple producers, but they all agree to keep making the same thing in the same place forever. They no longer have to compete on product quality.

U.S. trade negotiators are rightly resisting efforts to spread this anticompetitive regulatory scheme to other countries. As it stands, there is almost no chance that the United States could convince the EU or its member states to drop their GI regulations. But it is also unlikely that the United States will acquiesce to European demands to adopt such a system here, especially for meats and cheeses.

The battle over GIs is therefore being waged in other countries as the EU and the United States both use trade agreements to influence how GIs are protected in foreign markets. Commercially, the question is whether U.S. companies can continue to sell their generic brands abroad.

Right now the United States is losing.  At this point, the most U.S. negotiators are hoping for is coexistence between protected GIs and trademarked U.S. brands.  According to Inside U.S. Trade ($), U.S. negotiators may not even get that much in the Trans-Pacific Partnership:

The United States, Australia and New Zealand are pushing rules in the IP chapter that would, among other things, require TPP countries to maintain a domestic process that allows for applications for GI protection to be rejected or canceled under certain circumstances. The proposal is aimed at countering the European Union’s drive to protect such food names in countries around the world.

But TPP countries have been at odds over the extent to which international agreements between TPP countries and other parties such as the EU would be excluded from having to comply with these GI rules, and if so, what would be the scope of such an exception. TPP ministers considered this question at their October ministerial in Sydney but did not reach any resolution.

One informed source said Japan in particular is being defensive on the GI issue, as it does not want the TPP rules to prevent it from offering to protect EU GIs in a bilateral trade agreement that is currently under negotiation. If Japan was prevented from doing so, it might not be able to get as good of a deal on market access from the EU, this source said.

Jonathan Blanks

Yesterday, the international aid organization Health Poverty Action released a new study on the effects of the global drug war. The report is entitled, “Casualties of War: How the War on Drugs Is Harming the World’s Poorest.”

From its introduction:

Since the mid-twentieth century, global drug policy has been dominated by strict prohibition, which tries to force people to stop possessing, using and producing drugs by making them illegal.

This approach, which has come to be known as the ‘War on Drugs’, has not only failed to achieve its goals—it is fuelling poverty, undermining health, and failing some of the poorest and most marginalised communities worldwide.

Both in the United States and around the world, the War on Drugs has been a humanitarian catastrophe and a financial money pit. Interdiction often harms indigent farmers who grow the coca and poppy plants for meager financial return while the global drug marketplace continues to meet high demand. Prohibition-fueled violence among rival cartels and gangs invariably spills over to claim innocent lives. For those reasons, it is no exaggeration to say that the $100 billion spent on global drug prohibition annually takes food off the tables of the poor and leaves many more dead from violence.

Well-meaning people can disagree about what is best to spend that $100 billion on—vaccines, food aid, micro-loans, infrastructure, clean water projects, drug treatment, etc.—but a growing number of people would say it would be better spent not fighting the Drug War.

Read the whole report here.

Chris Edwards

Tomorrow at CPAC, I will discuss some advantages of infrastructure privatization. Perhaps the largest advantage is innovation. Unlike government bureaucracies, private firms in a competitive environment are eager to maximize the net returns of projects, so they find new ways to reduce costs and improve quality.     

The benefits of innovation are obvious in fast-moving industries such as high-technology. But innovation can also be important in long-established, hard-hat industries such as highway building. Numerous countries are ahead of the United States in privatizing and partly privatizing (“public private partnerships” or “P3s”) government assets such as highways, airports, seaports, passenger rail, and air traffic control. Experience around the world shows that much innovation is possible after such industries are liberated from the bureaucratic yoke.

A House hearing last year looked at the international experience with privatization. The head of a provincial P3 agency in Canada said that P3 projects are more likely to be completed on time and on budget than traditional government infrastructure projects. And he said, “Competition and the profit motive can lead to startling results, where the winning proposal provides solutions that the public owner never contemplated. This happens over and over again.” Isn’t that interesting?

In his latest newsletter, Robert Poole provides more evidence of the “innovative effect” of P3s. He discusses $2 billion of cost savings from P3 highway projects in Texas, which are examined in a paper by Fidel Saenz de Ormijana and Nicolas Rubio:

Texas DOT has been gradually increasing the extent of design flexibility it gives project developers, via two methods. One is to encourage P3 developers to submit “alternative technical concepts” (ATCs) as part of their proposals in response to an RFP. The other is to encourage potential developers to present innovative ideas during the industry review meetings that precede issuance of the RFP. In the latter case, those ideas may be included in the RFP as options for all potential bidders to consider.

The largest cost savings discussed in the paper concern the LBJ (I-635) project in Dallas, where TxDOT’s conceptual design called for the express lanes to be constructed in a new tunnel beneath the existing general-purpose lanes, due to severe right of way constraints. During design review, the authors’ companies (Ferrovial and Cintra) suggested the alternative of a depressed center section for the express lanes, with the rebuilt general-purpose lanes partly cantilevered over the express lanes. This was presented in the RFP as an option, and the authors’ consortium’s bid that used this approach came in at substantially lower cost, contributing a large fraction of the resulting $1.3 billion construction cost savings.

The other cases described in the paper deal with several phases of the North Tarrant Express project in Fort Worth. In these cases, the developer-proposed changes were of two types. Some were changes in the design and placement of lanes and ramps, to provide better traffic flow (and generate more toll revenue). Others were changes in phasing, so as not to incur premature construction costs for lanes needed only in the ultimate configuration (10 to 20 years in the future), while designing now to facilitate their later addition within the long term of the concession agreement. These changes saved $480 million in NTE 1 and 2W and another $150 million in NTE 35W.

… By looking at the LBJ and NTE projects as businesses, the team was strongly motivated to come up with alternative designs and more-careful phasing of improvements to make the projects financially feasible. And to its great credit, Texas DOT was willing to accept many of those changes, resulting in projects that will provide very tangible benefits, without putting taxpayers at risk.

For more on infrastructure P3s and privatization, see here.

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