Policy Institutes

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.

Simon Lester

Yesterday, my colleague Dan Ikenson blogged here about an op-ed by Sen. Elizabeth Warren (D-MA) in which she was critical of investor-state dispute settlement (ISDS) provisions in trade agreements.

Jeff Zients, director of the National Economic Council, posted a response to Warren on the White House website.  In this post, I’m going to comment briefly on his response, going through item by item. His statements are in bold; my comments follow in bullet points. 

Zients: “The purpose of investment provisions in our trade agreements is to provide American individuals and businesses who do business abroad with the same protections we provide to domestic and foreign investors alike in the United States.”

• It’s important to be clear that these protections go both ways. Under ISDS, foreign investors can also sue the U.S. government. Of course, they could already sue under U.S. domestic law. In effect, ISDS means that foreign investors in America have two avenues for a lawsuit, while U.S. investors in America only have one.

• With regard to protections abroad, the result of ISDS is that American investors have protections in foreign countries, but non-Americans do not have protections in those countries. That seems like a bad signal to send: American investors get good treatment, but non-Americans do not. If the concern is expanding protections, there is a better way to do it: encourage these protections to be incorporated into domestic law, so that everyone gets them.

Zients: “ISDS is an arbitration procedure—similar to procedures used every day by businesses, governments, and private citizens across the globe—that allows for an impartial, law-based approach to resolve conflicts and has been important to encouraging development, rule of law, and good governance around the world. ISDS does not undermine U.S. sovereignty, change U.S. law, nor grant any new substantive rights to multinational companies.”

• I’m not aware of any evidence that ISDS encourages “development, rule of law, and good governance around the world.” To some extent, it may discourage it. Rather than encouraging reform of domestic political and legal systems, it just takes judicial governance out of the hands of domestic actors. It allows the foreign government to avoid domestic reform entirely and simply add a special procedure for foreign investors.

• All branches of government in the United States, at all levels, may be forced by an international tribunal to pay compensation as a result of their actions. Certainly that affects U.S. sovereignty. Of course, sovereignty need not be absolute, and I don’t think an effect on sovereignty means a treaty should be avoided. All treaties affect sovereignty. But there is no question that ISDS has an effect on sovereignty.

• ISDS grants foreign investors the right to sue in an additional forum (domestic investors can only use domestic courts). Access to an additional procedural right is, in a sense, a substantive advantage. Beyond that, the rights are so vaguely defined in ISDS that there is no way to be sure what the substantive rights are. That could mostly be fixed by taking out the “minimum standard of treatment” provisions, such as “fair and equitable treatment,” and drafting other provisions more clearly, but this is not being considered.

Zients: “ISDS has come under criticism because of some legitimate complaints about poorly written agreements. The U.S. shares some of those concerns, and agrees with the need for new, higher standards, stronger safeguards and better transparency provisions. Through TPP and other agreements, that is exactly what we are putting in place.”

• Again, the “minimum standard of treatment,” including “fair and equitable treatment,” is an example of a “poorly written” provision, but removal of that provision is not being considered. If governments were willing to consider substantive changes, such as focusing the provisions on prohibiting discrimination against foreigners, it could fundamentally alter the nature of ISDS. But for whatever reason, they have refused.

Zients: “It is an often repeated, but inaccurate, claim that ISDS gives companies the right to weaken labor or environmental standards, for example, suggesting that a trade agreement could result in the United States having to lower its minimum wage.”

• I don’t know whether an ISDS complaint could be made against U.S. minimum wage laws, but it is certainly the case that environmental regulation can be challenged. (A U.S. company is currently challenging Canadian fracking regulations.) For that matter, ISDS complaints could probably be brought in order to raise labor and environmental standards! Some ISDS provisions are broad enough to cover just about anything.

Zients: “The reality is that ISDS does not and cannot require countries to change any law or regulation.”

• It can’t require governments to change laws or regulations, but it can make them pay compensation for their actions. The Takings Clause of the U.S. Constitution also just requires compensation, but that doesn’t mean it has no effect! (And keep in mind, ISDS can require compensation for any actions deemed to violate the rules, not just expropriations.)

Zients: “Similarly, the investment provisions under TPP are designed to protect American investors abroad from discrimination and denial of justice.”

• If these obligations were only about carefully drafted “discrimination” and “denial of justice” provisions, there would be few cases and we would never hear about these issues. The problem is, they are so broadly written that they cover a wide range of government action and inaction, and we just don’t know the scope.

Zients: “Under our Constitution, the Government has wide powers to regulate on behalf of the public interest even if that impacts private property. But when government takes its citizen’s property from them—be it a person’s home or their business—the government is required to provide compensation. This is a core principle reflected in the U.S. Constitution and recognized under international law and the legal systems of many countries.

Unfortunately, foreign courts have not always respected this principle, and U.S. investors often face a heightened risk of bias or discrimination when abroad. That’s why governments have looked to international arbitration to resolve such disputes for centuries. Earlier in our history, the United States used gunboat diplomacy, sending our military to defend our economic interests abroad. The decision was made by our predecessors that it was better to rely on neutral arbitration instead.”

• No doubt there is some bad treatment of investors by foreign governments (including their courts), but the problem has not been studied empirically. How often does this occur? What exactly are governments doing? And in which countries? What is the problem we are trying to address? Assertions and anecdotes are not enough. Policy responses need to be evidence-based. To address a problem through government action, such as a treaty, we need to understand it. We really don’t have any sense of the purpose of ISDS today. Historically, it was about expropriation, but that has declined considerably. So what is ISDS about today? Defenders of the system haven’t really offered much evidence of the problem they are trying to fix. The fact that Argentina and Venezuela treat investors badly sometimes does not justify the global proliferation of treaties we are seeing.

Zients: “Over the last 50 years, 180 countries have entered into more than 3,000 agreements that provide investment protections, the vast majority of which have some form of neutral arbitration. European countries are party to more than 1400 of those agreements. The U.S. is party to about 50.

Those thousands of agreements contain a wide range of standards, some that strongly protect a government’s right to regulate, others that do not. The U.S. has been at the leading edge of updating, upgrading and clarifying these standards; protecting the right to regulate; and drawing lessons from previous agreements to ensure that our agreements have the highest possible standards. TPP incorporates and builds on those efforts and goes beyond them by:

- Further raising the standards: TPP will make it absolutely clear that governments can regulate in the public interest, including with regard to health, safety and the environment, and narrowing the definition of what kinds of injuries investors can seek compensation for.

- Adding safeguards: TPP will include the ability to dismiss frivolous claims quickly and award fees against the claimant to deter such suits; making it possible for governments to provide binding direction to the arbitrators; and creating additional filters for cases having to do with financial services.

- Closing loopholes: For example, TPP will prevent sham corporations from accessing the investment protections provided by the agreement.

- Creating transparency: All arbitration proceedings under TPP will be open and non-parties, including labor unions and civil society organizations, will be able to file briefs to inform the outcome of cases.”

• From what I’ve seen, these changes are just fiddling around the edges. Unless governments are willing to take a serious look at the substantive standards (e.g., obligations such as “fair and equitable treatment”), nothing much will change.

Zients: “There have only been 13 cases brought to judgment against the United States in the three decades since we’ve been party to these agreements. By contrast, during the same period of time in our domestic system, individual and companies have brought hundreds of thousands of challenges against Federal, state, and local governments in U.S. courts under U.S. law.

We have never lost an ISDS case because of the strong safeguards in the U.S. approach. And because we have continued to raise standards through each agreement, in recent years we have seen a drop in ISDS claims, despite increased levels of investment.”

• Defending these cases can be very expensive. In that sense, even winning has some costs.

• The fact that the U.S. wins all its cases suggests either that making ISDS available against the U.S. government is a waste of everyone’s time and resources, or perhaps that we just haven’t had the right cases come yet. Either way, it doesn’t help much with a defense of the system.

Zients: “Senator Warren also questions the integrity of the arbitrators who decide cases, suggesting that they are biased against governments. In fact, ISDS panels more frequently side with respondent governments. The U.S. government, for example, has won every single case concluded against it. The arbitration rules used under TPP require the independence of arbitrators and provide for challenge and disqualification in the event of conflict of interest or bias. They also provide a central role for the government being sued to determine which arbitrators hear the case.”

• The key point about the arbitrators is that they can act as litigators one day and judges the next. That’s not a feature of a credible legal system.

• The win-loss record of investors and governments misses the point. You need to focus on the nature and substance of the obligations. The system is biased in the sense that foreign investors have access and others do not. Some governments treat people badly—foreign investors, yes, but also other people. Under ISDS, big foreign investors have access to an international tribunal when they believe they have not received “fair and equitable treatment.” The local dry cleaner does not. That’s the bias in the system, and the win-loss record doesn’t tell you much.

Zients: “We share a number of the theoretical concerns Senator Warren raises. But we disagree with her suggestion that we leave it to the free market to put in place basic rule of law and protections. That hasn’t worked in the past and government has a role to play.”

• In what sense does the market not work here? If you let the market run things, companies will not invest in countries with weak rule of law. That will give these countries an incentive to provide better rule of law. This change has been happening in recent years on its own, and many governments are now much friendlier to foreign investment than in the past.

Doug Bandow

Will America ever again be at peace? Pressure is building for the U.S. again to intervene in Libya.

Less than three years after Libya’s civil war the country has ceased to exist. This debacle offers a clear lesson for American policymakers. But denizens of Washington seem never to learn.

The administration presented the issue as one of humanitarian intervention, to save the people of Benghazi from slaughter at the hands of Libyan dictator Moammar Khadafy.

Although he was a nasty character, he had slaughtered no one when his forces reclaimed other territory. In Benghazi he only threatened those who had taken up arms against him.

In fact, the allies never believed their rhetoric. They immediately shifted their objective from civilian protection to slow motion regime change. Thousands died in the low-tech civil war.

Alas, Libya was an artificial nation. When Khadafy died political structure vanished. The country split apart. Today multiple warring factions have divided into two broad coalitions.

“Operation Dignity” is a largely secular grouping including Gen. Khalifa Haftar’s “Libyan National Army” and the internationally recognized government. Last May Haftar launched a campaign against the Islamist militias with covert support from Egypt and the United Arab Emirates.

“Libya Dawn” is a mix of Islamists, moderate to radical, and conservative merchants which now controls Tripoli. They are backed by Qatar, Sudan, and Turkey, and deny that the Islamic State poses much of a threat.

Now Libya has become an ISIL outpost. Three jihadist groups have formally claimed allegiance to the Islamic State. These forces have attacked oil installations, killed journalists, and conducted bombings. Some of these militants were responsible for the murder of U.S. Ambassador J. Christopher Stevens.

ISIL’s slaughter of Egyptian Coptic workers triggered retaliatory airstrikes by Cairo, and then new Islamic State attacks. The national wreckage known as Libya is being pulled into the regional sectarian maelstrom.

Obviously, Khadafy’s continued rule would have been no picnic. Nevertheless, he offered an ugly stability which looks better than chaos, civil war, and terrorism. British envoy Jonathan Powell warned of the emergence of “Somalia by the Med.”

In Libya, as with most other failed interventions, war advocates say the problem was that America didn’t stick around. But as I point out on Forbes:  “the allies only played a supporting role; the Libyans liberated themselves through their own boots on the ground. The militias fighting now would have resisted any foreign occupation.”

Alas, this disastrous history hasn’t precluded new proposals for Western involvement. Abdullah al-Thinni, Libya’s official prime minister, wants the West back. Italian Prime Minister Matteo Renzi advocated that the UN run a “stronger mission.”

Unfortunately, there’s no reason to believe that the second (or third) time would be the charm. The Atlantic Council’s Karim Mezran observed:  “There are no good guys or bad guys there—both sides have been acting in bad faith.”

The West naturally favors the internationally recognized government. But intervening against the Islamist-oriented government would make enemies of many Libyans not linked to the Islamic State.

The best outcome would be a national unity government as backed by the U.S. and European governments. But months of mediation have led nowhere.

More practical would be to acquiesce in the partition of what never was an organic nation. In the meantime the West should consider selectively lifting the arms embargo to aid groups likely to combat jihadist forces.

Moreover, Libya’s neighbors should act rather than wait helplessly for Washington to do something. The region’s stability is these nations’ business.

Libya’s collapse has been almost total. But so far no one has been held to account.

As problems metastasize with the rise of ISIL in Libya, however, the American people may be more inclined to critically assess the judgment and competence of Washington policymakers. Voters should hold officials accountable for the disaster they created in Libya.

Trevor Burrus

The Armed Career Criminal Act (ACCA) increases the minimum criminal penalty for defendants convicted of illegal firearm possession who also have three prior violent crime convictions. While the Act lists many crimes as qualifying as “violent”—such as burglary, arson, and extortion—it also contains a catch-all provision, a “residual clause,” that includes crimes that “otherwise involve conduct that presents a serious potential risk of physical injury to another.”

While that language may seem clear, its precise meaning has bedeviled courts for decades. In fact, Johnson v. United States represents the fifth time since 2007 that the Supreme Court has been asked to clarify what the residual clause means. For example, does drunk driving count? How about fleeing from officers in a high-speed chase? Even though the high court only hears about 75 cases per year—and it rarely revisits a law within such a short time-span—the ACCA’s residual clause keeps coming back. As Justice Antonin Scalia quipped in the last such case, “We try to include an ACCA residual-clause case in about every second or third volume of the United States Reports.” Justice Scalia’s comment came in a dissent in which he argued that the residual clause is unconstitutionally vague, and it seems that the rest of his colleagues paid attention. This is the second time this term that this case will be argued before the Court.

Last November, the issue was whether merely (illegally) possessing a short-barreled shotgun is a crime that fits into the residual clause. In January, however, the Court ordered that the case be re-argued on the larger question of whether the residual clause is itself unconstitutionally vague. Apparently, in discussing the law for the fifth time, the justices got tired of trying to answer questions that Congress should have addressed by writing a clearer law.

Cato now joins the National Association of Criminal Defense Lawyers, the National Association of Federal Defenders, and Families Against Mandatory Minimums in arguing that the clause should indeed be void for vagueness. Despite four previous attempts to clarify the law, lower courts are as confused as ever about how the ACCA interacts with, among other offenses, attempted crimes, battery of police officers, and statutory rape cases. This vagueness is not just a problem for defendants like Mr. Johnson here; it raises concerns about the separation of powers. The Supreme Court has said that overly vague statutes impermissibly draft judges into a legislative role. Quite so: vague language forces the judiciary, not the legislature, to define criminal offenses and establish their penalties.

Legislation—especially when it implicates individual liberty—must be clear and understandable enough that the general public can ascertain the conduct it prohibits. If trained and experienced judges can’t even figure out what a law means, clearly it’s too vague for an average person to understand. If at first, and second, and third, and fourth you don’t succeed in clarifying vague language, perhaps it’s time to throw out the legal text and try again. As another Samuel Johnson might say, injuries are revenged, crimes are avenged, and vague laws are rewritten.

Patrick J. Michaels and Paul C. "Chip" Knappenberger

U.S. Secretary of the Interior Sally Jewell was in Alaska last week at the invite of the Alaska Federation of Natives to discuss climate change and other issues. During her visit, she made a side trip to the 400 or so person town of Kivalina, located on a low-lying barrier island along Alaska’s northwest coast. The settlement sprung up about a century ago when the Interior Department decided to erect a school there under a program to promote the “education of natives in Alaska.” The same program established schools in other coastal location such as Golovin, Shishmaref, and Barrow.

Now these locations are in the news (see this week’s Washington Post story for example) because they are being threatened by coastal erosion coming at the hands of global warming—and are discussing relocating and who should be responsible for the footing the bill (incidentally, the courts have ruled out the energy industry).

With or without human-caused climate change, bluffs and barrier islands along the coast of northwestern Alaska are inherently unstable and not particularly good places to establish permanent towns. This is probably one of the reasons the natives were largely nomadic.

“Were,” we say, because ironically, as pointed out by the Post’s Chris Mooney, research indicates that the abandonment of the nomadic ways was encouraged/hastened by the establishment of government schools!

Nor are unstable Alaskan shores anything new.

Several major environmental studies were carried out in the mid-20th century and all found extremely high rates of erosion resulting from frequent and intense storm systems. One, from nearly 50 years ago, even went as far as to suggest that a warming climate from enhanced carbon dioxide emissions would make erosion worse and gave this advice:

[C]are should be exercised in the selection of building sites and construction methods. The best sites would be at least 30 feet above sea level and either inland or along a coast which is not eroding. If a site which is low and near the ocean must be used, then a protected position leeward of a point or island would be best.  

Apparently, in places like Kivalina, this advice went unheeded.

We reviewed the situation along the Alaskan shoreline in a piece we wrote back in 2007. What we concluded then remains the case today:

Clearly, erosion has been gnawing away at the Alaska coast for many, many decades and this fact has been known for equally as long. Wind and waves acting on soil held together by ice acts through a positive feedback to expose more frozen soil to the above-freezing temperatures of summer and the warm rays of sunshine, softening it for the next round of waves and wind. And so the process continues. A decline in near-shore ice cover helps to exacerbate the process. Ignoring these well-known environmental conditions has led to the unfortunate situation today where Inuit villages are facing an imminent pressure to relocate. This situation has less to do with anthropogenic climate change than it does to poor planning in the light of well-established environmental threats—threats that have existed for at least the better part of the 20th century.

Despite periodically cycling into the news, nothing really is new.

Jim Harper

Yesterday, the New York Department of Financial Services (NYDFS) issued the second draft of its “BitLicense” proposal, a special, technology-specific regulation for digital currencies like Bitcoin. For a second time, the NYDFS claims to have a strong rationale for such regulation, but it has not revealed its rationale to the public, even though it is required to do so by New York’s Freedom of Information Law.

If you’re just joining the “BitLicense” saga, the NYDFS welcomed Bitcoin in August 2013 by subpoenaing every important person in the Bitcoin world. A few months later, New York’s Superintendent of Financial Services announced his plan for a special “BitLicense,” which would be required of anyone wanting to provide Bitcoin-based services in New York.

About a year later, Superintendent Lawsky released the first draft of the “BitLicense” proposal, to strongly negative reviews from the Bitcoin community. It didn’t help that after a year’s work the NYDFS offered the statutory minimum of 45 days to comment. Relenting to public demand, the NYDFS extended the comment period.

In announcing the regulation, the NYDFS cited “extensive research and analysis” that it said justifies placing unique regulatory burdens on Bitcoin businesses. On behalf of the Bitcoin Foundation, yours truly asked to see that “extensive research and analysis” under New York’s Freedom of Information Law. The agency quickly promised timely access, but in early September last year it reversed itself and said that it may not release its research until December.

December has come and gone, of course. It is now late February 2015, and the department’s “extensive research and analysis” has yet to see the light of day.

The NYDFS has produced a new draft of its regulation, though. The document announcing the new draft says, “The Department has extensively considered the need to regulate virtual currency business activity and the appropriate way to do so, and it has concluded that a new regulation under the Financial Services Law is necessary to protect New York consumers and users of virtual currency-related services.”

It may be true that the department has considered the need for special regulation of this financial technology. It is obviously true that it has concluded in favor of regulating. But New York’s Freedom of Information Law—and sound regulatory practice—require the NYDFS to share the analysis it has produced in support of its regulatory proposal. Having access to this material will allow the Bitcoin community and others to see how well the NYDFS is applying regulatory means to consumer protection ends.

It’s clear from his speeches that Superintendent Lawsky “gets” Bitcoin and sees its potential to revolutionize financial services for the benefit of consumers and the economies of New York, the United States, and the world. What his department has yet to make clear is how special regulation of Bitcoin advances universal goals like financial innovation and consumer protection. We should be able to see why Superintendent Lawsky wants to single out this financial technology for treatment that is different from conventional financial services.

The NYDFS should release the “extensive research and analysis” behind the “BitLicense” immediately—certainly well before the close of comments on the current “BitLicense” draft. And it should prepare to issue a new draft based on comments that are enlightened by public analysis of the department’s rationale for this technology-specific regulation.

David Boaz

Donald Keough, who was president of Coca-Cola, has died at age 88. All the obituaries lead with his role in the New Coke debacle. On April 23, 1985, Coca-Cola replaced its amazingly successful product with a new formula, called New Coke. Some people liked the new flavor, but many did not. On July 11 the company reversed its decision and reintroduced the original formula, called for a time Coca-Cola Classic. Wikipedia reports, “ABC News’ Peter Jennings interrupted General Hospital to share the news with viewers.”

The experience was generally regarded as one of the biggest stumbles by a major corporation in memory. But what struck me at the time, and what I’m reminded of now, is how fast the company realized its error and reversed it – less than 11 weeks.

How well do governments do at realizing their errors and reversing them? The obvious comparison at the time was the Vietnam War. It took the U.S. government about 14 years, from 1961 to 1975, to realize and reverse that mistake.

Today we might think of the Iraq War. The United States invaded Iraq in March 2003, based on mistaken intelligence reports, a hazy sense that somehow Saddam Hussein was involved in al Qaeda’s 9/11 attacks, and deeply flawed assumptions about the ease of the undertaking. The war officially ended in December 2011, though of course we still have 3,000 troops there and are contemplating further involvement in response to the ISIS insurgency. Taking the official end of the war, the U.S. government continued that mistake for about 8 years and 9 months.

What about other government failures? How fast were they reversed? Let’s consider:

Alcohol prohibition – 13 years

Marijuana prohibition – approximately 84 years and counting

War on drugs – 44 years or 101 years and counting

The Pruitt-Igoe housing project – 18 years

Airline price and entry regulation – 47 years

Soviet communism – 74 years

And that’s without even counting the mistaken programs that aren’t yet widely agreed to be failures, from the Federal Reserve to the welfare state

Incentives are different in business and government. Some critics of capitalism suggest that democratic government is more responsive than corporations are. But voting is a flawed way to register dissatisfaction. When businesses make mistakes, they tend to lose customers. And they know that very quickly. Because business owners have their own money at stake, they have a strong incentive to correct mistakes promptly. Government officials run little risk of losing their jobs for failure. Indeed, government officials who fail to solve a problem – poverty, homelessness, dropout rates – may be rewarded with more money and staff. No wonder government failures last so long.

A diamond is forever? Government failure is forever. 

Daniel J. Ikenson

Sen. Elizabeth Warren takes to the Washington Post op-ed pages today to warn about the dangers of the so-called Investor-State Dispute Mechanism, which is likely to be a part of the emerging Trans-Pacific Partnership deal.  In substance, if not style, Sen. Warren’s perspective on ISDS is one that libertarians and other free market advocates should share. At least, my colleague Simon Lester and I do

ISDS grants foreign investors the right to sue host governments in third-party arbitration tribunals for treatment that allegedly fails to meet certain standards, such as new laws, regulations, or policies that might have a discriminatory effect on foreign investors that reduces the value of their assets. Certainly, investors – and in this context we’re talking mostly about multinational corporations (MNCs) – should have recourse to justice when these situations arise. But under ISDS, U.S. investors abroad and foreign investors in the United States can collect damages from the treasuries of their host governments by virtue of the judgments of arbitration panels that are entirely outside of the legal structure of the respective countries. This all raises serious questions about democratic accountability, sovereignty, checks and balances, and the separation of power.

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.

As a practical matter, investment is a risky proposition. Foreign investment is even more so. But that doesn’t mean special institutions should be created to protect MNCs from the consequences of their business decisions. Multinational companies are savvy and sophisticated enough to evaluate risk and determine whether the expected returns cover that risk. Among the risk factors is the strength of the rule of law in the prospective investment jurisdiction. MNCs may want assurances, but why should they be entitled to them? ISDS amounts to a subsidy to mitigate the risk of outsourcing. While outsourcing shouldn’t be denigrated, punished, or taxed – companies should be free to allocate their resources as they see fit – neither should it be subsidized.

A persistent myth that has proven hard to dispel is that trade benefits primarily large corporations at the expense of small businesses, workers, taxpayers, public health, and the environment. That is where Sen. Warren and I part ways.  She would use the existence of an ISDS provision to impugn trade liberalization, broadly, as a tool of corporatism. Unfortunately, ISDS plays right into that narrative. But the fact is that trade is the ultimate trustbuster, ensuring greater competition that prevents companies from taking advantage of consumers. Small business, consumers, taxpayers, and especially 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.

So, while inclusion of ISDS would constitute a deep pockmark on the TPP and on subsequent trade agreements, one should consider the final agreement holistically before deciding whether to support or oppose it. The deal will certainly include a lot of liberalization.  And if particularly egregious ISDS cases emerge, the issue can be revisited with real evidence to marshal in support of change.

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