Policy Institutes

Biden Should Not Have Apologized

Cato Op-Eds - Tue, 10/07/2014 - 11:55

Ted Galen Carpenter

Vice President Joe Biden has reportedly apologized to the leaders of Turkey, the United Arab Emirates, and other Middle East countries for his previous comments that they had, perhaps inadvertently, supported Sunni extremists in the Syrian civil war.  The uproar occurred because Biden had stated that Turkey, Qatar, and the UAE had given “billions of dollars and tens of thousands of tons of weapons” to Syrian Sunni fighters seeking to overthrow Bashar al-Assad’s regime.  Those governments, he charged, had been willing to give aid to “anyone who would fight Assad.  Except that the people who were being supplied were al-Nusra and al-Qaeda and the extremist elements of jihadis coming from other parts of the world.”  

It is unfortunate that Biden felt the need to retract those comments, because his criticism was quite accurate.  As I point out in a recent article on Aspenia Online,  the rise of ISIS is the latest phase of a regional struggle for power between Sunnis and Shiites.  The primary arena is Syria, where a fight rages between largely Sunni insurgents and Assad’s governing coalition of Alawites (a Shiite offshoot), Christians, and other religious minorities who are petrified about possible Sunni domination.  Saudi Arabia, Qatar, Turkey, and the UAE enthusiastically backed the insurgents, and although the Obama administration might prefer to forget its role in the rise of ISIS, the United States provided aid to them as well.

The other, closely related, arena is Iraq with its continuing sectarian animosity.  Eliminating Saddam Hussein’s rule ended decades of Sunni domination of that country’s politics and economy.  The new Shiite-led government was in no mood for conciliating the displaced elite that had stifled their faction for so long.  Instead, the regime seemed to go out of its way to marginalize and humiliate the Sunni minority.  Iraq has seethed for years because of sectarian hatred, drifting to the brink of civil war in 2006 and 2007, and finally exploding into a full-blown internecine conflict this year.  Some Iraqi Sunnis may harbor worries about the extremist nature of ISIS, but they also see the group as the one entity capable of mounting a serious armed challenge to the Baghdad government.      

Although the Saudi, Turkish and Gulf governments now refuse to admit their role, they did heavily back Sunni forces in both Syria and Iraq that subsequently went rogue and formed the core of ISIS.  Saudi Arabia’s involvement was especially malignant, since Saudi aid to Syrian and Iraqi factions was channeled primarily to the most radical elements.  That development was hardly accidental or surprising, given the Saudi government’s long-standing promotion of the extremist Wahhabi strain of Islam. Saudi leaders may now realize that they helped create a Frankenstein’s monster, but Washington’s belief that Riyadh, as a member of the anti-ISIS coalition, will work to strengthen “moderates” in Syria and elsewhere is extraordinarily naïve.  The Saudi government will more likely try to back other hard-line Sunni elements that, perhaps for sufficient financial inducements, might be willing to break with ISIS and take guidance from Saudi patrons. 

Biden was undoubtedly under pressure not to antagonize members of the ramshackle international coalition that President Obama has assembled to combat ISIS.  But truth is truth.  And the vice president’s original comments about the deleterious role that Riyadh, Ankara, and other capitals have played were the truth.

Categories: Policy Institutes

The U.S. Fall in Economic Freedom and the Rule of Law

Cato Op-Eds - Tue, 10/07/2014 - 11:27

Ian Vásquez

The United States is the 12th  freest economy in the world according to the new Economic Freedom of the World report. Co-published today by Cato and the Fraser Institute, it finds a strong relationship between economic freedom and human well-being.

The U.S. ranking is part of a worrisome decline in economic freedom that began more than a decade ago. For decades, the United States ranked in second or third place on the index. In 2000 it was #2, yet by 2005 it ranked 8 and it continued its precipitous fall until recently. On a 0-10 scale, the U.S. rating is now 7.81 compared to 7.74 last year, a slight improvement. The level of economic freedom in the United States is lower today than it was in 1980. Since 2005, Canada has ranked higher than the United States.

The authors of the report note that the United States has fallen in all five areas that they measure: size of government; legal system and property rights; sound money; freedom to trade; and regulation. But the rule-of-law indicator (legal system and property rights) has seen the biggest decline and, as the graph shows, it has been enormous.

The U.S. Decline

The measured deterioration in the rule of law is consistent with scholarship in that field and, according to the report, is a result of “increased use of eminent domain to transfer property to powerful political interests, the ramifications of the wars on terrorism and drugs,” and other property rights violations. Because the rule of law is of course a cornerstone not just of economic freedom but of all freedoms, and because there is a strong relationship between economic freedom and other liberties (civil and political), all Americans should be concerned with the findings of the report.

A deterioration in the rule of law should also be of special concern to Hong Kong, the top ranked territory in the index, where recent protests highlight the danger that Beijing’s interference in its legal system, including the perception of such, poses to the overall freedoms and economic success of Hong Kong.

Categories: Policy Institutes

Bush, Obama, and the Expansion of Government

Cato Op-Eds - Tue, 10/07/2014 - 11:14

David Boaz

A John Allison who is not the president of the Cato Institute makes a pretty good point in today’s Washington Post letters column:

Charles Krauthammer, in his Oct. 3 op-ed column, “Why winning the Senate matters,” wrote proudly about the “power of no,” which he advanced as key to blocking President Obama’s ideological agenda since 2010. “And Republicans should not apologize for it,” he said. “With an ideologically ambitious president committed instead to expanding entitlements, regulation and government itself, principle alone would compel the conservative party to say stop.” Whoa, Nellie. Let’s go to the tape.

Rewind to 2006, when Republicans controlled both houses of Congress. Here is the same sentence modified to reflect the 2006 reality: With an ideologically ambitious president (George W. Bush) committed instead to expanding entitlements (Medicare Part D, the largest expansion of the welfare state since the creation of Medicare and an unfunded program), regulation (under Mr. Bush, regulatory budget and staffing levels increased while the total regulatory burden continued to increase in absolute terms) and government itself (total government employment and total obligation authority both rose significantly under Mr. Bush), principle alone didn’t compel the conservative party to say stop at all. In fact, conservatives were behind the expansion in all three areas.

I am not sure what principle means to conservatives. Perhaps Mr. Krauthammer can define it for us in a later column.

John Allison, Williamsburg

Mr. Allison has a point about conservatives at the time, but my libertarian colleagues and I did point out President Bush’s offenses against the Constitution and the Republican Party’s professed principles a few times.

Categories: Policy Institutes

Foreign Investment Disputes in International Courts

Cato Op-Eds - Tue, 10/07/2014 - 10:22

Simon Lester

In a recent opinion piece, Washington Post columnist Harold Meyerson criticized something called the “investor-state dispute settlement” (ISDS) mechanism, which is included in some trade agreements. My colleague Dan Ikenson responded here; I wrote a letter to the Post, which said:

Harold Meyerson made valid points about the Investor-State Dispute Settlement (ISDS) clause in trade agreements in his Oct. 2 op-ed column, “A flawed trade clause.” However, with all the misinformation that exists on this issue, it is important to be precise. Foreign investors cannot sue “over any rules, regulations or changes in policy that they say harm their financial interests.”

Rather, they can sue if the host government has discriminated against an investor because it is foreign; if an investment has been expropriated, either directly or indirectly; or if the investor has experienced bad treatment of a more general sort (this controversial standard is known as “fair and equitable” treatment).

In a sense, the ISDS provision creates international judicial review of national laws and regulations, with such review available only to foreign investors. That is certainly a controversial proposition, but it is important to keep the debate focused on the facts, rather than on myths that have been put forward.

You only get so much space for these letters, so I thought I’d elaborate here.

ISDS allows foreign investors to challenge any and all domestic government actions before an international tribunal.  That includes local, state, and national measures, by legislators, regulators, or courts.  In terms of the substance of the claims that can be made, they look a lot like certain constitutional doctrines: Equal Protection, Takings, and Due Process.  What you end up with, in effect, is a special international “constitutional” court (of sorts), available only to foreign investors.  (It can’t strike down the domestic laws, of course, but it can award damages for violations.)

I’ve been very skeptical of this.  I don’t want to go through all the arguments, but let me raise three three critical points about ISDS:

  • If we’re going to have this kind of international judicial review, why give it only to foreign investors? Why not oppressed minorities? It doesn’t look very good when you protect the rights of only the rich.
  • If we’re going to have international judicial review, shouldn’t we debate it more explicitly? It’s kind of a big deal. But when Congress and the Administration talk about issues related to these foreign investment rules, they don’t mention this aspect of it.
  • Some libertarian-ish people I’ve talked to see this procedure as another valuable check on excessive government actions. I’m not convinced. Sure, ISDS could be used to argue that the government has over-reached. But it could also be used to get the government to reach further. The “fair and equitable” treatment clause in particular offers the scope to argue that the government should do more. For example, companies who receive renewable energy subsidies have [$] sued or threatened to sue when governments try to cut back on those subsidies. Thus, it can also be used to get in the way of sensible, more limited government.
Categories: Policy Institutes

Supreme Court Shows Active Restraint in Not Taking Up Marriage Cases

Cato Op-Eds - Mon, 10/06/2014 - 14:23

Ilya Shapiro

Confounding the expectations of most commentators, the Supreme Court this morning denied petitions for review in all seven same-sex marriage cases pending before it. I wasn’t so bullish on the petitions’ chances – the justices are increasingly reluctant to entertain controversial subjects except when they absolutely must – but see a sort of practical wisdom in this noteworthy inaction. Although it’s unusual for the Court to deny review in those rare cases where all parties urge it, there’s no current “circuit split” – all appellate courts have struck down the challenges to various states’ marriage laws – so the justices’ demurral signals a desire to let public opinion shift even further in favor of allowing same-sex marriage before the Court wades in with a definitive constitutional ruling. By doing so, and thereby postponing any eventual ruling (perhaps until a circuit court goes the other way, if one does), the Court is lessening the chance that its involvement will warp American legal and political discourse the way Roe v. Wade did.

In the meantime, once today’s “decision not to decide” works its way through the lower courts, same-sex couples will be able to marry in 30 states and the District of Columbia. That’s a good thing.

Categories: Policy Institutes

Brazil’s Presidential Election: More Surprises to Come?

Cato Op-Eds - Mon, 10/06/2014 - 13:34

Juan Carlos Hidalgo

The first chapter of Brazil’s presidential election was a roller-coaster: It kicked off with the country’s demoralizing exit from the World Cup, then its economy entered into a recession and widespread corruption charges engulfed the ruling Workers Party (PT). In August, Eduardo Campos, the candidate of the Socialist Party and a rising star in Brazilian politics, suddenly died in a plane crash.  His VP candidate, Marina Silva, also a charismatic figure, ran in his stead and experienced a meteoric rise in the polls to the point that two weeks ago she looked certain to defeat President Dilma Rousseff in a runoff. But Silva’s support steadily eroded in the last week, and yesterday it was Aécio Neves, from the Social Democratic Party (PSDB), who finished a strong second and will challenge the president in a runoff three weeks from now.

With so many things going on, it’s difficult to pinpoint the precise factors behind the electoral result or predict what will happen next. But here are some of my impressions:

  • Dilma’s performance: The president received 42% of the vote, which at first looks like a poor showing for an incumbent seeking reelection. However, it doesn’t look that bad when taking into account Dilma’s lack of charisma, the bad shape of the economy, and the pervasive corruption charges surrounding her Workers Party. She still finished first, 7 percentage points ahead of Neves. Undoubtedly, the Workers Party has built a strong constituency around the millions of Brazilians who receive subsidies and handouts from the government. It’s been the tone of the latest presidential campaigns that the PT candidate accuses his/her rivals of trying to dismantle popular programs such as Bolsa Familia. Moreover, 12 years of incumbency have helped the PT to create a formidable electoral machine. She is still the favorite to win on October 26.
  • Neves’ comeback: In the last week polls indicated that Aécio Neves could actually finish second. But his strong showing —13 percentage points ahead of Marina Silva— took everyone by surprise. Neves did pretty well in the last debates, and most of the attacks from the PT in past weeks focused on Silva. So it seems that Neves’ surge came at the expense of Silva’s downfall. Can he count on most of Marina’s votes for the runoff? Not necessarily. A lot of her support came from voters tired of traditional politicians, such as Neves. Moreover, the PSDB candidate is a far easier target for PT attacks than Marina, whose humble background made it difficult to portray her as a heartless neoliberal. Neves belongs to the party responsible for the reforms of the mid 1990s that, although successful in bringing macroeconomic stability to Brazil, are not fondly remembered by many Brazilians.
  • Marina’s rise and fall: It could’ve been the stuff of Hollywood —or a Brazilian telenovela: the daughter of poor Amazonian rubber tappers who grew up illiterate, taught herself how to read while being a maid, became engaged in environmental activism that eventually led her to politics – first as a senator, then as a minister. She received 19% of the vote in the last presidential election in 2010. This year she joined the ticket of Eduardo Campos, the candidate of the Socialist Party, but found herself on top after his tragic death in a plane crash in August. She immediately skyrocketed in the polls, which showed her comfortably defeating President Rousseff in a runoff. But Brazilians began having second thoughts: she lacked an experienced team —or even a party of her own— to govern. The PT accused her of planning to cut social programs. Her past as a political maverick took a toll on Brazilians who want a competent manager. And even though she presented herself as the candidate of diversity, her evangelical faith led her to adopt conservative positions on gay marriage, abortion and drugs that alienated some of her potential voters. Still, her presence in the campaign was positive, particularly because she represented a segment of the electorate tired of corruption and cronyism while also espousing some free market ideas. She could still tip the election if she endorses Neves for the runoff.
  •  It’s going to be ideological: An external observer would perceive a lack of center-right electoral options in Brazil: A Workers’ Party, Social Democrat Party and Socialist Party. However, Aécio Neves’ platform openly calls for reducing the scope of government intervention in the economy: cutting spending and taxes, pursuing bilateral trade agreements irrespective of Mercosur, giving more independence to the Central Bank, etc. These are some of the reforms that Brazil badly needs to reignite its stagnant economy. But they will also provide ammunition for President Rousseff, who will demagogically try to portray Neves as the enemy of the poor. It will depend on Neves’ well-honed political skills to confront those charges.

The campaign for the runoff on October 26 starts with Aécio Neves riding the momentum of his strong second finish, but as we have seen during this election, three weeks are an eternity in Brazilian politics.

Categories: Policy Institutes

El-Sisi the Reformer?

Cato Op-Eds - Mon, 10/06/2014 - 12:11

Dalibor Rohac

Is Egypt’s economy taking a turn for the better? The government is hosting an economic summit in February next year, aiming to attract foreign investment, with the participation of not just private investors but also of the International Monetary Fund.

[Christine] Lagarde said Egyptian authorities’ “recent reform efforts” were “encouraging” and expressed her hope that participants in the upcoming summit will see how these reforms can “help restore durable economic stability and sustainable growth to Egypt.”

On the surface, it appears that Egypt’s government is making tangible progress addressing the country’s fiscal problem. The planned energy subsidies cuts are under way, although these are also accompanied by tax increases, mainly through a planned introduction of a value-added tax, hikes to tobacco and alcohol taxes and a new tax on capital earnings.

Experience from other countries, most notably from Europe in the aftermath of the global financial crisis, shows that fiscal consolidations that rely on revenue increases lead to worse outcomes than consolidations that consist of permanent reductions to government spending.

But, whatever one thinks about this particular question, there are two additional reasons to be skeptical. First, putting aside the fuel price hikes that have already occurred, much of the praise directed at the Egyptian government presupposes that it will deliver on its promise to slash subsidies by one third in the fiscal year 2014/2015. That would be welcome news but it is worth remembering that similar reform targets were set in the past and were systematically missed:

According to the budget for the past fiscal year, 2013–2014, the subsidies to oil materials were already supposed to be close to EGP100bn ($14bn). Yet, the actual spending was drastically higher, perhaps by as much as an additional EGP70bn ($10bn)

Second, it is deceptive to look at the fiscal question in isolation, as a technocratic problem that can be solved by clever tweaks to existing policies. Egypt’s economic problem is political in nature, and will continue to plague the country as long it is governed by a kleptocratic, unaccountable elite.

The government – more specifically its military forces – own and run a large part of the economy, shielded from competition, and generating rents. The military coup last year led to the strengthening of the opaque network of cronyism that has long characterized military-run enterprises. Some estimates suggest that as much as half of last year’s stimulus, worth around $4bn and funded predominantly by funds from the United Arab Emirates, has been directed at military-controlled enterprises that became involved in road construction and other forms of infrastructure works, displacing the traditional construction companies.

Just as it was a mistake to see Vladimir Putin as a market reformer in the early 2000s, notwithstanding some of the real policy shifts (such as the introduction of a flat tax), it would be a mistake to see President Abdel Fattah el-Sisi as somebody aiming to open Egypt’s economy to competition and raise the living standards of Egyptians through increased economic freedom. If economic reforms occur, they will occur with the narrow goal of strengthening his hold on power and satisfying the material needs of the generals backing him.

In Egypt, as in other countries of the region, economic and political oppression go hand in hand and are mutually reinforcing. Nothing is a bigger threat to a military dictatorship than an economically empowered citizenry. For this reason, we should not expect genuine reforms to be very high on Mr. el-Sisi’s list of priorities.

Categories: Policy Institutes

Police Misconduct: The Worst Case in September

Cato Op-Eds - Mon, 10/06/2014 - 08:53

Tim Lynch

Over at Cato’s Police Misconduct website we have identified the worst case for the month of September.

The worst case goes to the still-unnamed police officer who shot John Geer in a Northern Virginia incident last year, and the police and federal investigators who have refused to release any information on the case a year after the shooting.

Fairfax County police officers responded to a call from Geer’s longtime girlfriend who called 911 because Geer had been drinking and throwing her possessions out onto the lawn after she told him she was moving out. When officers arrived, they trained their weapons at Geer as they spoke with him in the doorway of his home for almost 50 minutes. Friends and family gathered to watch the situation. One of Geer’s daughters shouted from a neighbor’s home “Don’t you hurt my daddy!”

Geer had been speaking calmly and holding his arms above his head, resting them on the doorframe from within, but when he moved his hands down the doorframe to about face-level, one of the officers abruptly fired a shot directly into Geer’s chest, as his best friend, father, and neighbors watched. Geer spun and closed the door before collapsing. The officers then waited an hour while Geer bled to death before sending in assistance. Over four hours later, Geer’s body was still left lying on the floor of his home.

Police handling of the incident and its aftermath haven’t improved in the year since the shooting. Geer’s family and friends still don’t know the name of the shooting officer—who has been on paid desk duty ever since—whether the shooting was declared justified or not, or why trained negotiators were not called. State and federal investigators have taken no substantial public action on the case, and the family, which exhibited incredible patience for the better part of a year, has finally had to resort to a lawsuit.

The refusal of the police to disclose even the name of the officer who shot and killed an unarmed man is just another example of the same troubling lack of transparency that we saw in the shooting of Michael Brown in Ferguson. Police officers are human, and yes they make mistakes, but what possible excuse is there for circling the wagons and denying the public—and worse, the victims’ family and friends—the right to know what their public servants have done and which of them needs to be to held accountable? The resulting feeling among those affected, as Geer’s father described it, is “Frustrating to say the least—not knowing anything and having a feeling of helplessness, sadness, anger. Just wondering what’s going on and why nobody would tell us anything.”

This is a case of one man shooting another unarmed man in the chest in front of dozens of witnesses. No complication can justify forcing that feeling of helplessness and anger on John Geer’s friends and family for over a year.

Categories: Policy Institutes

Ten Reasons Portland Transit Is Not a Model for Other Cities

Cato Op-Eds - Mon, 10/06/2014 - 08:52

Randal O'Toole

Secretary of Transportation Anthony Foxx came to Portland, Oregon last week to tell TriMet, the region’s transit agency, not to apologize for spending $204 million per mile on its latest light-rail line. Although that is eight times as much (after adjusting for inflation) as the region’s first light-rail line, Foxx noted that regions “need to have bold visions” and that, as a model for the rest of the country, Portland was “building for today and for the future.”

Residents of Austin, Durham, St. Petersburg, and many other cities are being told they need to emulate Portland by building their own expensive light-rail lines. Here are ten reasons why they should reject Portland as a model for their own transit and transportation systems.

1. Portland appears to be in a race with Seattle to build the nation’s most-expensive light-rail line. Opening in 1986, Portland’s first light-rail line cost about $25 million per mile (all dollars adjusted for inflation). Its second line, which opened in 1998, cost about $75 million per mile. In 2009, Seattle opened a 14-mile line that cost $185 million per mile. Not to be outdone, Portland is completing a new line (the one that Secretary Foxx said not to apologize for) at a cost of $204 million per mile. Seattle is currently working on a 3.3-mile line that will cost at least $625 million per mile. But Portland is talking about a new line with a tunnel that could cost $2 billion or more. None of these recent lines will carry significantly more passengers than Portland’s original $25-million-per-mile line–and many will carry less. The reason for these high-cost systems is that urban areas are competing to get “their share” of federal rail transit dollars.

2. Transit riders don’t benefit from all that spending. The Portland area has enjoyed significant population and job growth since 2008, yet despite opening a new light-rail line and a commuter-rail line, system ridership has been flat. This is partly because, in order to pay for rail construction, TriMet has raised fares and made severe cuts in bus service. According to the Census Bureau’s American Community Survey (table B08301), between 2008 and 2013 the Portland urban area gained 130,000 new residents and 21,500 new jobs, but the number of commuters taking transit to work declined by more than 1,000. This isn’t a new trend: in 1980, before building any light rail, 9.9 percent of Portland-area commuters took buses to work. By 2013, with five light-rail lines, a commuter-rail line, and a streetcar line, just 7.3 percent of commuters took transit to work.

3. Portland streets are falling apart. In order to help fund light rail and streetcar lines, the city of Portland is neglecting its street network. More than half the streets in the city are in poor or very poor condition (see p. 32), and the city is spending less than 13 percent as much as needed to keep the streets from declining still further (p. 34). Meanwhile, the city wants to build 140 miles of streetcar lines which–at the average cost of the most recent line built–would cost more than repaving all 4,842 miles of streets in the city. Since many people can walk faster than Portland’s streetcars, building new streetcar lines does nothing to improve the region’s transportation.

4. Portland’s light-rail lines are also falling apart. Rail advocates never mention that rail lines wear out and must be completely replaced after about 30 years. Transit agencies rarely budget for this, and TriMet is no exception. A recent audit by Oregon’s Secretary of State found that TriMet was doing only about half the maintenance work needed to keep its tracks, some of which are 28 years old, in a state of good repair. As a result, the system is suffering frequent breakdowns. After three service interruptions in three days recently, TriMet tweeted an apology to its customers–only to suffer another breakdown just 22 minutes later.

5. Portland’s transit-oriented developments require huge subsidies. One of the most powerful arguments Portland officials make in support of light rail and streetcars is that they generate billions of dollars worth of economic development. The reality is quite different. After opening Portland’s first light-rail line in 1986, Portland rezoned vacant land along the line for high-density, mixed-use transit-oriented development. Ten years later, Portland planners sadly told the city council that not one single transit-oriented development had been built, and all that land was still vacant. The city therefore decided to subsidize new development with tax breaks, tax-increment financing, below-market land sales, and other incentives for developers.

Since then, the city has given more than $1.3 billion in subsidies to developers along its rail lines (see indebtedness on p. 16), and even more subsidies have been provided by Portland’s suburbs. More than $430 million of these subsidies went to developments along Portland’s first streetcar line, while a portion of the streetcar route that received no subsidies also saw almost no new development. Officials never mention the subsidies when they show off developments to out-of-town guests, so taxpayers in other cities need to be aware that, if they approve light rail, they will have to subsidize not just the trains but the redevelopment.

6. Portland’s transit-oriented developments aren’t really transit oriented. Since Portland began offering subsidies, developers have built scores of four- and five-story apartment buildings, often with ground-floor shops. Though planners call these “transit-oriented developments,” they aren’t really any more transit-oriented than anything else in Portland. Research (100-MB PowerPoint presentation) by the Cascade Policy Institute has shown that the people who live in most of these developments are just as likely to drive, and just as unlikely to take transit, as anyone else in the region.

Moreover, planners often limit parking near the mixed-use developments, yet businesses can’t survive just on customers who walk or take transit. As a result, many storefronts have remained vacant and developers ended up converting some to apartments.

7. Portland’s unfunded pension and heath-care obligations threaten to shut down transit service. Many public agencies have unfunded pension and health-care obligations, but Portland and TriMet have taken unfunding to extremes. According to a survey by Pew Charitable Trusts, Portland has funded only half of its pension obligations, making it worse off than any state and all but three of the nation’s 61 largest cities. It has also funded just 4 percent of its health-care obligations.

TriMet is no better, having funded 59 percent of its worker pension obligations but 0 percent of its much-larger health-care obligations (p. 51). It’s total unfunded obligations amount to more than 300 percent of its annual operating budget, more than any other major transit agency. The situation is so bad that TriMet’s general manager, Neil McFarlane, warns that the agency will have to cut all rail and bus service by 70 percent by 2025 unless unions renegotiate benefits packages–which they refuse to do. But McFarlane still wants to build at least three more billion-dollar light-rail lines.

8. Portland schools and other urban services are suffering. Tax-increment financing, which Portland has used both to help build rail transit and to subsidize development along those transit lines, effectively takes money that would otherwise go to schools and other property-tax-supported entities to spend on urban planners’ rail fantasies. One result is that Portland schools are some of the worst in the nation. Only two out of three high school students in the city of Portland graduate within four years, which puts Portland lower than most other school districts in a state that has the fourth-lowest high-school graduation rates in the nation.

Schools are not the only services suffering from budget cuts. Portland used to have a nationally known community policing program as well as a variety of mental health programs that were cut in 2001 so the city could continue to subsidize developers. The elimination of these programs contributed to the death of James Chasse, a mentally-ill man who was beaten to death by police who thought he was on drugs when instead he was merely–justifiably as it turned out–afraid of the police.

9. Portland really is where young people go to retire. Portland planners argued that all the rail lines and high-density developments they were subsidizing would attract a creative class of people to the city whose high earnings (and the resulting taxes) would make all the spending worthwhile. Instead, as Oregon economist Randall Pozdena notes, Portland has attracted “a lot of young, enthusiastic people who aren’t particularly well trained and who aren’t bringing a lot of human capital to the region.” Or, as the IFC television satire Portlandia says, Portland is where “young people go to retire.”

This turns out to be more than just a joke. More than 22 percent of residents of Multnomah County (which is mainly Portland) are on food stamps, compared with 15 percent nationwide. According to a study by the Portland Business Alliance, Portland per capita incomes have declined by 10 percent, relative to the national average, and almost all of this decline was due to people in the 25-34-year-old age class, who are working fewer hours for lower pay than their counterparts elsewhere.

10. Portland-area voters hate the model. Portland-area voters supported light rail in 1992, but since then they have increasing turned against it. In 1998, they voted against funding lines to north Portland and Milwaukee, but TriMet built them anyway. In 2010, TriMet put a measure on the ballot to raise taxes to buy new buses, but voters rightly saw this as a way of freeing up funds to build more rail and turned the measure down. Voters in Lake Oswego and other Portland-area suburbs have elected anti-rail city councils while voters in Tigard, Tualatin, and other suburbs have voted to forbid their cities from participating in any light-rail plans without a vote of the people. Yet the region’s planners are proposing to build rail lines to those areas anyway.

Skyrocketing rail costs, anemic transit ridership, neglected infrastructure, budget cuts to essential city services, pension and health-care shortfalls, and growing voter animosity show that Portland really is a model for the nation–a model for how not to design a transit and transportation system.

Categories: Policy Institutes

Court Is Back in Session: No Huge Cases Yet, but Blockbusters Loom

Cato Op-Eds - Mon, 10/06/2014 - 06:37

Ilya Shapiro

While it seems like just yesterday that the Supreme Court went on vacation after its controversial (but correct) ruling in the Hobby Lobby contraceptive-mandate case, summer is over even for The Nine. Today is First Monday, the traditional start of the new Supreme Court term.

As of this writing, the Court has 50 cases on its docket, which is about on par with recent practice, such that we can expect 70-75 opinions at term’s end once the Court sets more cases for argument later in the term. Here are some of the issues: whether a policeman’s mistaken belief that someone had committed a traffic violation can form the basis for a lawful search (Heien v. North Carolina – Cato’s brief); whether a prison can prohibit a Muslim inmate from growing a beard (Holt v. Hobbs); whether a fisherman can be prosecuted under Sarbanes-Oxley’s recordkeeping provision for throwing undersized fish overboard (Yates v. United States - Cato’s brief); whether Congress can force the State Department to recognize Jerusalem as part of Israel on U.S. passports (Zivotovsky v. Kerry); the circumstances under which criminal charges can attach to Facebook posts (Elonis v. United States Cato’s brief); and whether an occupational-licensing board gets immunity from liability for anticompetitive behavior (North Carolina Board of Dental Examiners v. FTC Cato’s brief). These cases don’t yet reach the high profile of recent terms, but if the Court takes up one of the same-sex marriage or Obamacare-subsidies lawsuits now at its doorstep, all bets are off.

For more detail on these and other cases, see the “Looking Ahead” essay in this year’s Cato Supreme Court Review, as well as these two previews.

Categories: Policy Institutes

Cato Maintains Opposition to IRS Lawlessness in Obamacare-Subsidies Case

Cato Op-Eds - Mon, 10/06/2014 - 05:07

Ilya Shapiro

To encourage the purchase of health insurance, the Affordable Care Act added a number of deductions, exemptions, and penalties to the federal tax code. As might be expected from a 2,700-page law, these new tax laws have the potential to interact in unforeseen and counterintuitive ways.

As first discovered by Michael Cannon and Jonathan Adler, one of these new tax provisions, when combined with state decision-making and IRS rule-making, has given Obamacare yet another legal problem. The legislation’s Section 1311 provides a generous tax credit for anyone who buys insurance from an insurance exchange “established by the State”—as an incentive for states to create the exchanges—but only 16 states have opted to do so. In the other states, the federal government established its own exchanges, as another section of the ACA specifies. But where § 1311 only explicitly authorized a tax credit for people who buy insurance from a state exchange, the IRS issued a rule interpreting § 1311 as also applying to purchases from federal exchanges.

This creative interpretation most obviously hurts employers, who are fined for every employee who receives such a tax credit/subsidy to buy an exchange plan when their employer fails to comply with the mandate to provide health insurance. But it also hurts some individuals, such as David Klemencic, a lead plaintiff in one of the lawsuits challenging the IRS’s tax-credit rule. Klemencic lives in a state, West Virginia, that never established an exchange, and for various reasons he doesn’t want to buy any of the insurance options available to him. Because buying insurance would cost him more than 8% of his income, he should be immune from Obamacare’s tax on the decision not to buy insurance.  After the IRS expanded § 1311 to subsidize people in states with federal exchanges, however, Klemencic could’ve bought health insurance for an amount low enough to again subject him to the tax for not buying insurance. Klemencic and his fellow plaintiffs argue that they face these costs only because the IRS exceeded the scope of its powers by extending a tax credit not authorized by Congress.

The district court rejected that argument, ruling that, under the highly deferential test courts apply to actions by administrative agencies, the IRS only had to show that its interpretation of § 1311 was reasonable—which the court was satisfied it had. On appeal, a panel of the U.S. Court of Appeals for the D.C. Circuit held that the plain language of the ACA precluded the federal government from subsidizing the premiums of insurance policies obtained through federally established exchanges. Later that same day, the Fourth Circuit in King v. Burwell took the opposite position on the same question—from which ruling there is now a cert petition pending in the Supreme Court.

This circuit split did not last long, however, as the D.C. Circuit decided to vacate the panel opinion and rehear Halbig en banc (meaning all the court’s judges, not just a three-judge panel). Federal appellate rules say that such review “is not favored” and the D.C. Circuit has a particularly high bar, on average taking only one case per year en banc. Judge Harry Edwards, who dissented in the Halbig panel ruling, has taken great pains to reduce the number of en banc hearings. Even before he served as the D.C. Circuit’s chief judge, Edwards wrote in Bartlett v. Bowen (1987) that “the institutional cost of rehearing cases en banc is extraordinary” and that it “substantially delays the case being reheard, often with no clear principle emanating from the en banc court.” Nevertheless, the court took this step, vindicating President Obama’s strategy of packing the underworked D.C. Circuit after the Senate eliminated the filibuster for judicial nominees.

Cato and the Pacific Research Institute have filed a brief continuing our support for the plaintiffs on their appeal. While it is manifestly the province of the judiciary to say “what the law is,” where the law’s text leaves no question as to its meaning—as is the case here with the phrase “established by the State”—it’s neither right nor proper for a court to replace the laws passed by Congress with those of its own invention, or the invention of civil servants.

If Congress wants to extend the tax credit beyond the terms of the ACA, it can do so by passing new legislation. The only reason for executive-branch officials not to go back to Congress for clarification, and instead legislate by fiat, is to bypass the democratic process, thereby undermining constitutional separation of powers.

This case ultimately isn’t about money, the wisdom of individual health care decision-making, or even political opposition to Obamacare. It’s about who gets to create the laws we live by: the democratically elected members of Congress, or the bureaucrats charged with no more than executing the laws that Congress passes and the president signs.

The en banc D.C. Circuit will hear argument in Halbig v. Burwell on December 17.

Categories: Policy Institutes

Junk Polling: Democrats for Public Education Edition

Cato Op-Eds - Fri, 10/03/2014 - 16:45

Jason Bedrick

Yesterday, Democrats for Public Education (DFPE) released the results of a poll that supposedly shows a high degree of public support for their agenda:

All of the progressive reforms elicit solid majority endorsement (ranging from 60% to 80% buy-in), while none of the conservative reforms come remotely close to a majority (ranging from 40% to 10% buy-in). Note the steep drop-off from the last progressive reform (increase teacher pay) to the top conservative reform (test scores for teacher evaluations). [Emphasis in the original.]

What an amazing coincidence! The public favors exactly what DFPE proposes!

But let’s look at how they phrased the “proposed reforms”:

Notice how all the so-called “progressive reforms” sound positive (“engaging curriculum” “overcome challenges”) and sometimes even explicitly connect the reform to some positive outcome (“help disadvantaged students”). Are teachers’ “due process rights” (read: tenure) really about their ability to “advocate for the things that students need” or more about protecting incompetent teachers from being fired

And of course voters favor increased spending and higher teacher pay in the abstract. That’s consistent with the more credible polling from Education Next, but leaves out the key fact that Americans vastly underestimate how much we now spend on schools. As the EdNext polling shows, public support for increasing spending and teacher salaries drops precipitously when informed of how much is currently being spent.

Likewise, the public supports “smaller class sizes” in the abstract, but in the real world there are tradeoffs and limited resources. The research on reducing class size is mixed, and hiring more inexperienced teachers to lower the class sizes can actually have a net negative effect. Indeed, the evidence suggests that having superior teachers with somewhat larger classes will produce better outcomes on average than having more mediocre teachers with slightly smaller classes.

By contrast, the poll describes so-called “conservative reforms” with negatively charged words like “eliminate” and “at taxpayer expense” and omit any connection to the outcomes that “reducing costs” or tenure reform seek to accomplish (never mind running schools “like businesses”). One could easily rewrite all of the polling questions and come up with entirely different results. As I noted in the wake of a similar, union-funded poll:

Fortunately, we don’t have to imagine how the public would respond to fairly worded questions. Harvard University’s Program on Education and Governance conducts an annual survey of the public’s views on education policy that meets the highest standards for fairness and rigor. The survey eschews language designed to push respondents in a certain direction and often asks the same question with multiple wordings. According to the 2012 Harvard poll:

  • 54% of parents favor giving all families a “wider choice” to “enroll their children in private schools instead, with government helping to pay the tuition” compared with 21% opposed.
  • 46% of parents favor giving low-income families a “wider choice”  to “enroll their children in private schools instead, with government helping to pay the tuition” compared with 21% opposed.
  • When not given a neutral option, 50% of parents favor giving low-income families a “wider choice”  to “enroll their children in private schools instead, with government helping to pay the tuition” compared with 50% opposed.
  • When the question omits the words “a wider choice” and only asks about using “government funds to pay the tuition of low-income students who choose to attend private schools,” 44% of parents are in favor with 32% opposed.

Note that while support fluctuates depending on the wording, no matter how Harvard asked the question there was still more support among parents for school choice than opposition.

Moreover, when asking about scholarship tax credits instead of vouchers, the support was even higher:

  • 57% of parents supported “a tax credit for individual and corporate donations that pay for scholarships to help low-income parents send their children to private schools” compared with 16% opposed.
  • When not given a neutral option, 73% of parents supported “a tax credit for individual and corporate donations that pay for scholarships to help low-income parents send their children to private schools” compared with 27% opposed.

As with the earlier poll, the DFPE poll produced the results that its sponsors wanted.

Categories: Policy Institutes

Bulgaria’s October 5th Elections: A Flashback at the Economic Records

Cato Op-Eds - Fri, 10/03/2014 - 13:39

Steve H. Hanke

Bulgarians will go to the polls on October 5th to elect new members of its parliament and thus a new government. Before casting their votes, voters should reflect on the economic records of Bulgaria’s governments since 1995.

Every country aims to lower inflation, unemployment, and lending rates, while increasing gross domestic product (GDP) per capita. Through a simple sum of the former three rates, minus year-on-year per capita GDP growth, I constructed a misery index for each of Bulgaria’s six governments since 1995 (see the accompanying table).

The first government documented in the table is that of Zhan Videnov’s socialist government. It was a disaster. Hyperinflation occurred on Videnov’s watch, with the monthly inflation rate reaching 242% in February 1997. The misery index soared by 529% during Videnov’s short-lived reign.

Bulgaria clearly lacked an “economic constitution”—one that would provide fiscal discipline and monetary stability. So in the midst of the turmoil of the 1996–97 hyperinflation episode, Bulgaria took an important first step toward what would become an economic constitution.

As an adviser to President Stoyanov, I played a role in ending Bulgaria’s hyperinflation nightmare. Six short months after I presented my blueprint for a Bulgarian currency board to the president, the currency board was born (July 1997). With the currency board in place, Bulgaria’s misery index fell like a stone, falling by 97% during the conservative Kostov government’s tenure. Fiscal discipline and monetary stability were finally established.

Since the Kostov years, Bulgaria has had four governments and the misery index has fluctuated around a reading of 20. The currency board has clearly given Bulgaria fiscal discipline and monetary stability. The misery index readings in the table attest to that fact. The other thing that the misery index readings make clear is that the socialist-led governments in Bulgaria have delivered misery (Videnov 1995–97, Stanishev 2005–09, and Oresharski 2013–14).

Categories: Policy Institutes

The Pension Burden on State Budgets

Cato Op-Eds - Fri, 10/03/2014 - 11:53

Nicole Kaeding

Cato’s “Fiscal Policy Report Card on America’s Governors” focuses on short-term tax and spending decisions made by governors. But governors and legislatures also make important decisions that will affect state budgets over the longer term.

As Chris Edwards and I discuss in the Report Card, one area of particular concern is compensation for state workers, particularly retirement benefits.

Total wages and benefits for state and local workers was $1.3 trillion in 2013, which accounted for 53 percent of all state and local spending. That is a huge cost that could rise substantially in coming years, particularly in those states that have large funding gaps in their retirement plans. Governments have promised their workers generous pension and retirement health benefits, but most states have not put enough money aside to fund them.

In recent years, many states have modestly trimmed benefits and increased worker contributions for retirement plans. However, more reforms are needed, as recent studies have shown. A study by the Center for Retirement Research (CRR) at Boston College found that the average funding level—the ratio of assets to liabilities—for public employee pensions was just 72 percent in 2013 after declining substantially over the past decade. Based on the usual accounting for these plans, the unfunded liabilities in state and local pensions total $1.1 trillion, according to CRR.

Those numbers understate the size of the problem. Most financial economists think that the discount rate used in official valuations of government pension liabilities is too high, or too optimistic. When CRR used a lower discount rate of 4 percent instead of the average official rate of 7.7 percent, the value of unfunded state and local pension liabilities skyrocketed to $3.8 trillion. Our Cato colleague, Jagadeesh Gokhale, argues even that is too conservative as it only includes currently accrued pension costs. He estimates that the funding gap for accrued benefits plus future accruals under today’s generous pension rules is about $10 trillion.

Many states have made modest reforms to pensions in recent years, but larger reforms are needed. Without reforms, state budgets will be put under increasing stress and part of the burden of pension benefits will land on future taxpayers.

Categories: Policy Institutes

Should Intellectual Property Be in Trade Agreements?

Cato Op-Eds - Fri, 10/03/2014 - 11:46

Simon Lester

After I complained recently that arguments for including intellectual property (IP) in trade agreements needed to specify what level of protection is desirable, Tom Giovanetti responded by asking for my view on a more basic question: Should IP—regardless of the level of protection—be in trade agreements at all? My colleague Bill Watson has previously set out a political argument for removing it, which is that achieving free trade is becoming very difficult when IP issues get inserted into trade negotiations. Let me add to his argument the following: If IP is in, then there is really no boundary to what can be in, and the result is trade agreements that look like “global governance” agreements.

Returning to Tom’s question, I should say at the outset that Tom doesn’t really say explicitly why IP should be in trade agreements. He doesn’t explain how IP rules fit within the general concept of trade liberalization, or what scope he sees for trade agreements. What are his limits for what should be covered in trade agreements? I’m really not sure. Instead, the main focus of Tom’s argument for including IP in trade agreements seems to be that the United States exports lots of IP-related goods, and therefore it is in the nation’s interest to have IP rules in there.

With this argument, it seems to me that Tom is trying to portray strong IP protection as something that helps U.S. industry at the expense of its foreign competition. This doesn’t have a very trade-liberalizing feel. Moreover, looking at the bigger picture, what stronger IP protection does is help U.S. industry at the expense of consumers (U.S. and foreign). In terms of appropriate IP policy, it seems to me, the focus should be on giving incentives to innovate, but not to the detriment of consumers. Some argue that stronger IP protection promotes innovation, but others contest this.

Turning back to trade agreements, Tom’s argument misses a fundamental point: What is the purpose of trade agreements? For decades, this purpose was fairly clear: to provide a framework of mutual restraints on protectonist trade barriers, such as tariffs, quotas, and discriminatory laws and regulations.

But in the 1980s and early 1990s, the scope expanded. Suddenly, any issue that had some effect on, or relationship with, trade was being put forward as a candidate for inclusion in trade agreements. The business community pushed for IP rules and provisions that offer compensation for expropriation, and left-leaning NGOs responded with demands for rules on labor and the environment. They all won, in the sense that all of those issues are now standard parts of trade agreements.

Here’s the problem, though: While these policy areas do affect trade, so does every policy to some extent. If these policies are included, is there any line as to what should be in, or do we just regulate everything through global trade rules? That seems like a big mistake to me.

Let me offer two examples of how far this could be taken. The examples come from different sides of the political spectrum, to make the point that no matter what your politics are, and what role you see for international law, you shouldn’t clutter up trade agreements with other issues.

Tom’s posts seem very focused on exports, so let’s think about policies that could lead to an increase in exports, focusing on industries where the United States is very competitive. Here’s one:

U.S. firearms manufacturers will export some $4.4 billion worth of guns and ammunition to other countries this year. The biggest customers are Canada, the United Kingdom, and Australia, who accounted for nearly 40 percent of exports in 2012 (it’s mainly law enforcement and military agencies doing the buying, as private gun ownership is heavily regulated in those nations). IBIS World expects exports to keep surging in the coming years, with ammunition and ordnance being an especially popular item overseas.

No doubt, those export numbers are limited by tough gun control laws in other countries. One could argue, and many libertarians do, that such laws are too strict and should be liberalized. So should trade agreements have provisions guaranteeing gun rights, in order to increase U.S. exports of guns? You certainly could make that argument, using the inclusion of IP protection as a model.

Shifting to the other side of the political spectrum, another area where U.S. exports are strong is goods and services related to health. As a result, U.S. industry would benefit if people in other countries used more of those goods and services. To further that goal, it could be argued that foreign governments should subsidize or mandate certain medical care, perhaps through a right to health (not a libertarian view, obviously!). This would be another way to boost U.S. exports.

Are those examples realistic? Of course not. No one is proposing anything remotely like this. Neither one would be politically viable.  

Perhaps, then, Tom would say this is the factor that limits the scope of trade agreements: You can’t just throw anything in there. It has to be able to generate political support, which IP protection can.

Or could, anyway. These days, it’s becoming quite challenging to get IP protection in trade agreements. The critics are starting to overwhelm the supporters. The politics are changing. Conceptually, gun rights, health care rights, and IP protection are very similar as they relate to trade. The question of including them in trade agreements is just about how the politics play out.

Just to be clear, I don’t have much of an opinion on international agreements in gun rights or health care. If people in those fields, from whichever side of the spectrum, think there are benefits to having a treaty, they can try to work out an international consensus on the issue. I’m just saying, if you put everything into trade agreements, you get one big global governance entity, and I don’t think that’s the right path. So, any such treaties should be separate from what’s going on in the trade arena.

There’s also a broader issue: Even if you believe IP should be included in trade agreements, the reality is that you can’t get just IP in there. If the business community gets its tougher IP protections, the left-wing critics will have to get something of their own in order for there to be a deal. What they want is enforceable labor and environmental rules. Thus, IP is part of a bigger package. So even if you favor strong IP rules, you may not want governments bringing complaints that labor and environmental rules are too weak, but that’s a price you will pay. Furthermore, another price you pay by demanding stronger IP protection is less trade liberalization. If you use up your political capital on IP, you get less in terms of reducing tariffs.

Summing up, the basic point is this: If you think of trade agreements as covering issues related to trade, or areas that could increase U.S. exports, there’s just no limit to what could be included. The agreements lose their focus as agreements to reduce protectionism, and become tools for global governance. We have already gone down that road quite a way, and turning back is proving difficult. But in recent years, the prospects for success based on this model have dimmed. It may be time to rethink the current approach.

Categories: Policy Institutes

Public Oversight of Congress, One Click at a Time

Cato Op-Eds - Fri, 10/03/2014 - 08:45

Jim Harper

In mid-August, using Cato Deepbills data, the Legal Information Institute at Cornell University started alerting visitors to its U.S. Code pages that the laws these visitors care about may be amended by Congress.

The most visited bills are an interesting smattering of issues.

Getting top clicks is H.R. 570, the American Heroes COLA Act. Would it surprise you to learn that beneficiaries of Social Security’s Old Age, Survivors and Disability Insurance program are looking to see if veterans’ disability compensation will get the same cost-of-living increases? The relevant section of the Social Security Act on the Cornell site points to the bill that would grow veterans’ benefits in tandem with Social Security recipients’.

S. 1859, the Tax Extenders Act of 2013, is the second bill with the most referrals from Cornell. People looking into federal regulation of health insurance—or myriad other statutes—are finding their way to this complex piece of legislation. We know visitors to the Cornell site are legally sophisticated. They just might be able to follow what S. 1859 does.

Immigration is a hot-button issue, and Deepbills links at Cornell such as the code section dealing with reimbursement for detaining aliens are sending people to S. 744, the Border Security, Economic Opportunity, and Immigration Modernization Act.

Another hot-button issue and top source of clicks from Cornell’s site: federal gun control. People looking at gun control law are following links to Senator Dianne Feinstein’s (D-CA) bill to ban assault weapons.

As of Thursday morning, 674 people had clicked 855 times on links to the bills in Congress that affect the laws they’re interested in. Those numbers aren’t going to instantaneously revive public oversight of the government. But usage of these links is rising, and Tom Bruce at Cornell says he plans changes that may increase clicks by 3 to 5 times. He guesses that people see Cato’s sponsorship of the data they can access 20,000 times a day. (“I should have asked you for a penny per impression ;),” he says. Funny guy.)

A lot more people are aware of work Cato is doing to increase government transparency, but, more importantly, a small but growing cadre of people are being made aware of what Congress is doing. This positions them to do something about it. Public oversight of Congress is increasing one click at a time.

Categories: Policy Institutes

At a Minimum, Transatlantic Trade Negotiations Should Ditch Investor-State Provisions

Cato Op-Eds - Fri, 10/03/2014 - 08:41

Daniel J. Ikenson

Some exaggeration notwithstanding, Harold Meyerson, with whom the occasion to agree is rare, does a reasonably good job describing some of the pitfalls of the so-called Investor-State Dispute Settlement mechanism in his Washington Post column yesterday.  ISDS has become a source of growing controversy, which threatens to derail the Transatlantic Trade and Investment Partnership negotiations, which are reported to be floundering during the seventh “round” of talks taking place this week in Chevy Chase, Maryland.

“Under ISDS,” Meyerson writes, “foreign investors can sue a nation with which their own country has such treaty arrangements over any rules, regulations or changes in policy that they say harm their financial interests.”  That is more or less correct, but the implication that the threshold for bringing a suit is simple harm to a foreign investor’s financial interests is misleading.  What is being disciplined under ISDS is not harm to financial interests of foreign investors, but harm that comes from discriminatory treatment of foreign investors.  Thus, ISDS avails foreign investors (i.e., U.S. companies invested abroad, foreign companies invested in the U.S.) of access to third-party arbitration tribunals as venues for determining whether and to what extent the plaintiff suffered economic damages on account of host-government actions or policies that fail to meet certain minimum standards of treatment.

Meyerson suggests that ISDS provisions be purged from the TTIP negotiations because they subordinate U.S. courts to unaccountable tribunals, which “invites a massive end-run around national regulations.” Though I firmly believe the U.S. economy is racked with superfluous and otherwise unnecessary regulations, I do believe that a successful foreign challenge of U.S. laws, regulations, or actions in a third-party arbitration tribunal (none has occurred, yet) would subvert accountability, democracy, and the rule of law.  For those and several other reasons, I’m on board with Meyerson’s suggestion to purge ISDS from TTIP, and would extend the purge to all trade agreements.  In fact, I developed eight reasons for purging ISDS from the trade negotiations in this paper earlier this year.

First, ISDS is overkill. Investment is a risky proposition. Foreign investment is usually more risky. But that doesn’t necessitate the creation of institutions to protect multinational corporations – who are among the most successful and sophisticated companies in the world – from the consequences of their business decisions. They are quite capable of evaluating risk and determining whether the expected returns cover that risk. Moreover, MNCs can mitigate their own risk by purchasing private insurance policies.

Second, ISDS socializes the risk of foreign direct investment. When other governments oppose, but ultimately concede to, U.S. demands for ISDS provisions, they may be less willing to agree to other reforms, such as greater market access, that would benefit other U.S. interests. That is an externality or a cost borne by those who don’t benefit from that cost being incurred. In this regard, ISDS is a subsidy for MNCs and a tax on everyone else. Moreover, what may be too risky an investment proposition without ISDS for Company A is not necessarily too risky for Company B. By reducing the risk of investing abroad, then, ISDS is a subsidy for more risk-averse companies. It is a subsidy for Company A and a tax on Company B.

Third, ISDS encourages “discretionary” outsourcing. While ISDS may benefit U.S. companies looking to invest abroad, it neutralizes what was once a big U.S. advantage in the competition to attract investment. Respect for property rights and the rule of law have been relative U.S. strengths, but ISDS mitigates those U.S. advantages. Access to ISDS could be the decisive factor in a company’s decision to invest in a research center in Brazil, instead of the United States. Why should U.S. policy reflect greater concern for the operations of U.S. companies abroad than for the operations of U.S. and foreign companies in the United States? While we should not denigrate, punish, or tax foreign outsourcing, neither should we subsidize it.  ISDS subsidizes “discretionary” outsourcing.

Fourth, ISDS exceeds “national treatment” obligations, extending special privileges to foreign corporations. An important pillar of trade agreements is the concept of “national treatment,” which says that imports and foreign companies will be afforded treatment no different from that afforded domestic products and companies. The principle is a commitment to nondiscrimination. But ISDS turns national treatment on its head, giving privileges to foreign companies that are not available to domestic companies. If a U.S. natural gas company believes that the value of its assets has suffered on account of a new subsidy for solar panel producers, judicial recourse is available in the U.S. court system only. But for foreign companies, ISDS provides an additional adjudicatory option.

Fifth, U.S. laws and regulations will be exposed to ISDS challenges with increasing frequency. The number of cases is on the rise. Most claims have been brought against developing countries—with Argentina, Venezuela, and Ecuador leading the pack—but the United States is the eighth-largest target, having been the subject of 15 claims over the years. As the percentage of global Fortune 500 companies domiciled outside the United States continues to increase, U.S. laws and regulations are likely to come under greater scrutiny.

Sixth, ISDS is ripe for exploitation by creative lawyers. There is a lot of latitude for interpretation of what constitutes “fair and equitable” treatment of foreign investment, given the vagueness of the terms and the uneven jurisprudence. Thus, ISDS lends itself to the creativity of lawyers willing to forage for evidence of discrimination in the arcana of the world’s laws and regulations. Among the complaints worldwide in 2012 were challenges related to “revocations of licenses, breaches of investment contracts, irregularities in public tenders, changes to domestic regulatory frameworks, withdrawals of previously granted subsidies, direct expropriations of investments, tax measures and others.”

Seventh, ISDS reinforces the myth that trade primarily benefits large corporations. A persistent myth that has proven hard to dispel permanently is that trade benefits primarily large corporations at the expense of small businesses, workers, taxpayers, public health, and the environment. The fact is that trade is the ultimate trustbuster, ensuring greater competition that prevents companies from taking advantage of consumers. Lower-income Americans stand to benefit the most from trade liberalization, as the preponderance of U.S. protectionism affects products and services to which lower-income Americans devote higher proportions of their budgets. But by granting special legal privileges to multinational corporations, ISDS reinforces that myth and is a lightning rod for opposition to trade liberalization.

Eighth, dropping ISDS would improve U.S. trade negotiating objectives, as well as prospects for attaining them. Dropping ISDS would assuage thoughtful critics of the trade agenda, who do not oppose trade, but who believe trade agreements should be more modest and balanced. Meanwhile, what now appears to be an angry mob protesting trade generally will be thinned out, exposing the unsubstantiated arguments of the professional protectionists who benefit by impeding Americans’ freedom to trade.

The TTIP has run into a firestorm of opposition – particularly in Europe where there seems to be growing support for dropping ISDS.  Doing that, in my estimation, is a necessary but insufficient condition for rescuing TTIP.  Going back to square one, as has been suggested as a possibility by EU trade commissioner-designate Cecilia Malmström, might also be a good idea.  In case fresh thinking become contagious, perhaps this “Roadmap” for TTIP success will come in handy.

Categories: Policy Institutes

Grading America’s Governors

Cato Op-Eds - Thu, 10/02/2014 - 08:51

Nicole Kaeding

This morning, Cato released the 12th edition of the “Fiscal Policy Report Card on America’s Governors.” The report card uses statistical data to grade the governors on their tax and spending performance from a limited-government perspective. The governors who cut taxes and spending the most receive an “A,” while the governors who increase taxes and spending the most receive an “F.”

Four governors were awarded an “A” on this report card: Pat McCrory of North Carolina, Sam Brownback of Kansas, Paul LePage of Maine, and Mike Pence of Indiana.

The common theme among these Republican governors is fiscal restraint. All four proposed or signed into law large tax cut packages in their state while also holding the down the growth of state spending.

At the other end of the fiscal spectrum, eight Democrat governors were awarded an “F.” These governors substantially increased taxes and spending within their states. They were: Mark Dayton of Minnesota, John Kitzhaber of Oregon, Jack Markell of Delaware, Jay Inslee of Washington, Pat Quinn of Illinois, Deval Patrick of Massachusetts, John Hickenlooper of Colorado, and Jerry Brown of California.

Over the years, the data-driven Cato report cards have shown that Republican governors are more fiscally conservative, on average, than Democrats. However, there are some Democratic centrists who have recently made important tax reforms, including Andrew Cuomo of New York and Lincoln Chafee of Rhode Island, who both earned a “B.”

Fiscal decisions made by governors matter to state economies. Much attention is paid to the uncompetitive federal corporate income tax, which collected $274 billion in 2013. But state and local taxes cost businesses $671 billion in 2013. The largest state taxes on businesses are property taxes of $242 billion and sales taxes on business inputs of $140 billion. The good news is that some governors are working hard to reduce these job-killing burdens.

The airwaves are full with pundits making observations about the political situation of various governors. The Cato report card allows you to sidestep the noise and see what the data shows about whether a governor is growing or restraining government.

Curious how your governor scored? Check out the full rankings.

Categories: Policy Institutes

Cargill v. Syngenta: Biotechnology and Trade

Cato Op-Eds - Wed, 10/01/2014 - 15:00

Daniel R. Pearson

On September 12, Cargill, a major commodity trading and processing firm, filed a lawsuit in a Louisiana state court against Syngenta Seeds for selling genetically engineered MIR 162 (also known as “Agrisure Viptera®”) seed corn to farmers. China has not yet approved importation of corn containing MIR 162, so U.S. exports to that country of corn and corn products have come to a halt. Demand for U.S. corn has fallen. Cargill believes its losses exceed $90 million. 

Syngenta’s view?  “Syngenta believes that the lawsuit is without merit and strongly upholds the right of growers to have access to approved new technologies …”. The company’s position is that it has been legally selling seeds containing MIR 162, a trait that provides useful insect resistance, to U.S. farmers since 2010.  Other major corn importers – including Japan, South Korea, Mexico, Colombia and the European Union – have approved importation of corn with the MIR 162 trait. Syngenta has been seeking approval in China since March 2010. MIR 162 has not raised any health or environmental safety issues. 

Cargill’s view is that Syngenta has rendered U.S. corn supplies ineligible for export to China. Corn containing MIR 162 has spread throughout the U.S. marketing system to the extent that it would be expected to be present in any ocean vessel loaded for export:

“Cargill is a supporter of innovation and the development of new GMO seed products.  But we take exception to Syngenta’s actions in launching the sale of new products like MIR 162 before obtaining import approval in key export markets for U.S. crops.  Syngenta’s actions are inconsistent with industry standards and the conduct of other biotechnology seed companies.” 

China’s decision to inspect imports for MIR 162 has led to the rejection of several corn cargoes since November 2013.  In January 2014, the National Grain and Feed Association (NGFA) and the North American Export Grain Association (NAEGA) issued a joint statement urging Syngenta not to sell seed with the MIR 162 trait for planting until such time as China had granted the required regulatory authorization.  Syngenta continued to sell MIR 162 for planting in 2014.  NGFA followed up in April with an economic analysis indicating that grain-handler losses from MIR 162-related trade disruptions in the 2013-14 marketing year would amount to between $1.0 and $2.9 billion.  In addition, the study estimates a $1.1 billion loss to U.S. corn farmers in 2013-14 due to an 11-cent-per-bushel decline in the price of corn in response to reduced demand. 

As recently as September 2013, USDA had projected Chinese corn imports of 7.0 million metric tons (MMT) in the 2013-14 marketing year.  The final figure now is expected to be about 3.5 MMT, with most of the decline representing lost sales opportunities for U.S. corn.  Exports to China of distillers dried grains with solubles (DDGS), a co-product of ethanol production, also have stopped due to MIR 162.  In 2013, China was the largest foreign buyer of DDGS, accounting for one third of U.S. exports–more than 3 MMT.  Loss of this much business genuinely hurts the corn sector. 

So why is China being so difficult regarding importation of MIR 162?  That country has a process for reviewing and approving biotechnology products that often has worked fairly well; lack of progress with MIR 162 is noteworthy.  Perhaps the most likely explanation is that China’s domestic corn production has been expanding rapidly. The crop in the world’s second-largest producer has grown 37 percent over five years; USDA projects it to reach 217 MMT for the harvest now underway. (By comparison, the current U.S. crop is projected to be 365 MMT.)  Chinese policies have had the effect of raising domestic corn prices to more than twice the level in the United States. Farmers have responded to that strong incentive by boosting output, and the government has kept the market price from falling by buying and storing surplus supplies. The Chinese government now has the dubious distinction of holding 77 MMT of corn in its grain stocks, some 40 percent of the world’s total.

Given this rather awkward juxtaposition of flawed policies and market realities, it isn’t hard to imagine Chinese officials looking for ways to discourage corn imports. After all, the price gap between domestic and world prices creates a strong commercial incentive to import.  Delaying approval of the MIR 162 trait makes most of the world’s corn supplies ineligible for importation into China. 

Now, back to the lawsuit. There is no commercial agreement between Cargill and Syngenta, so Cargill can’t sue for breach of contract.  Syngenta made a conscious decision to market MIR 162 despite knowing that such action had the potential to cause large losses to others involved in the supply chain. Does that constitute a legitimate basis for this legal action? It’s unclear, but the disgruntlement of Cargill and other grain handlers is not difficult to understand. Stay tuned as this case works its way through the court.

Stepping back a bit from the specifics of this situation, it’s reasonable to ask whether Syngenta can maintain a successful long-term biotech seed business if it insists on acting primarily to maximize its short-term earnings. Yes, the company no doubt spent several years and millions of dollars in developing MIR 162, so its interest in commercializing the technology is obvious. But the potential benefit to Syngenta from marketing MIR 162 in the current year likely would be measured in millions of dollars. The loss in value to the rest of the agriculture/food supply chain–including farmers– is being measured in billions. The potential costs could multiply quickly due to Syngenta’s decision to allow limited planting in 2014 of a newer trait–Agrisure Duracade–that is not approved for importation by either China or the European Union.  Syngenta seems to be rolling the dice.

Corn prices have fallen 35 percent in the past four months and are now at their lowest level since 2010. Low prices may prompt farmers to question the wisdom of seed companies acting in ways that reduce demand for corn. At a minimum, selling MIR 162 and Duracade under these conditions seems like a questionable strategy for promoting customer satisfaction. Syngenta may yet conclude that building a constructive relationship with growers over time could prove to be of more value than a year’s earnings from selling seeds not approved by importers.

Categories: Policy Institutes

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