Policy Institutes

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.

Matthew Feeney

One week after it was reported that Ferguson, Missouri police officer Darren Wilson would not be indicted for killing of Michael Brown, President Obama announced that the federal government would spend $75 million on police body cameras. Wilson was not wearing a body camera when he shot Brown at least six times, and some have reasonably suggested that if Wilson had been wearing a body camera during his interaction with Brown that it would have been easier to determine if Brown’s killing was a justified or unjustified use of force.

Police in Missouri were in the news again after recently released dash camera footage revealed that an officer warned colleagues who were arresting a suspect that the camera was live before it was suddenly turned off. Both Brown’s killing in August and the footage of the April 2014 arrest highlight not only the fact that body cameras would provide investigators looking into allegations of police misconduct with valuable evidence, but also that there needs to be clear policies in place that relate to police and the cameras they use.

One lawmaker in Missouri proposed legislation that would make law enforcement camera footage policy clearer, but it should worry anyone concerned with law enforcement accountability and transparency.

Missouri State Senator Doug Libla introduced SB 331 at the end of last month. The bill would exempt footage captured by police cameras (whether attached to uniforms or vehicles) from public record requests except “upon order of a court in the course of a criminal investigation or prosecution or civil litigation.”

Libla’s bill would also ban lawmakers from requiring that law enforcement officers wear body cameras.

Taxpayers deserve to know how the police officers they fund behave. Yet Libla’s proposed legislation would make it prohibitively difficult for members of the public to view footage of police officers doing their job. Under Libla’s proposal, footage of serious police misconduct could be released by court order during an investigation.

However, if implemented, the legislation would mean that in cases in which a victim of police abuse or misconduct is unwilling or unable to sue or press criminal charges, the relevant body camera footage would not be made public. Suing the government is an expensive and time-consuming endeavor with no guarantee of success. Many people who live paycheck to paycheck simply cannot afford a lawyer’s retainer for several thousand dollars to just get into the courtroom to ask for the video to be released.  

A good police body camera policy is one that places greater burden on law enforcement officials, not the public, when it comes to the release of footage. At the very least, a member of the public should have access to any footage of his own encounter with police whether on the street, during a traffic stop, or at his residence, upon filing a formal complaint. A better policy would allow a person to access to any recorded interaction to which he is a party without a formal complaint, barring compelling interest to be shown by the government.

There is, of course, footage of police encounters that should be withheld from the public. For instance, given the potential for privacy violations, it would be inappropriate for members of the public to have access to police body camera footage of the interior of people’s homes. But police body camera footage that captures ordinary police interactions with the public and which does not compromise an ongoing investigation or a citizen’s privacy should be made available.

Lawmakers and law enforcement officials ought to be aware that many Americans do not have much confidence in police. Polling from Gallup shows that last year 53 percent of respondents claimed that they either had a “Great Deal” or “Quite a Lot” of confidence in the police, the lowest percentage of respondents since 1993. Other polling from Gallup shows that the lack of confidence in police is especially low among non-Hispanic blacks, only 34 percent of whom claim that they have a “Great Deal” or “Quite a Lot” of confidence in the police compared to 61 percent of non-Hispanic whites. 

Body cameras will not solve every problem that police departments have relating to community relations and trust. However, with a policy in place that allows members of the public to view police body camera footage, law enforcement officials will be able to demonstrate a commitment to transparency and accountability. There may also be other effects that would benefit communities. Indeed, some evidence suggests that outfitting police officers with body cameras significantly decreases the number of police use-of-force incidents.

An increasing number of lawmakers will be crafting police body camera policies in the coming years. Let’s hope that none of them use Libla’s bill as some sort of template.

 

Adam Bates

A quick glance at the Federal Register (Vol. 80, No. 37, p. 9987-88) today reveals that Attorney General Eric Holder, who earned cautious praise last month for a small reform to the federal equitable sharing program, has now delegated authority to the Director of the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF) to seize and “administratively forfeit” property involved in suspected drug offenses.  Holder temporarily delegated this authority to the ATF on a trial basis in 2013, and today made the delegation permanent while lauding the ATF for seizing more than $19.3 million from Americans during the trial period.

Historically, when the ATF uncovered contraband subject to forfeiture under drug statutes, it was required to either refer the property to the DEA for administrative forfeiture proceedings or to a U.S. Attorney in order to initiate a judicial forfeiture action.  Under today’s change, the ATF will now be authorized to seize property related to alleged drug offenses and initiate administrative forfeiture proceedings all on its own.

The DOJ claims this rule change doesn’t affect individual rights (and was thus exempt from the notice and comment requirements of the Administrative Procedure Act) and that the change is simply an effort to streamline the federal government’s forfeiture process.  Those who now stand more likely to have their property taken without even a criminal charge may beg to differ.

Further, the department claims that forcing the ATF to go through a judicial process in order to seize property requires too much time and money.  Whereas an “uncontested administrative forfeiture can be perfected in 60-90 days for minimal cost […] the costs associated with judicial forfeiture can amount to hundreds or thousands of dollars and the judicial process generally can take anywhere from 6 months to years.”  In other words, affording judicial process to Americans suspected of engaging in criminal activity takes too long and costs too much. 

Note that the above quote speaks of an “uncontested” forfeiture.  This refers to a situation in which the property owner fails to engage the byzantine process for recovering their property. Defenders of civil asset forfeiture often claim that such failures to contest amount to admissions of guilt, but there is substantial evidence that many victims of civil asset forfeiture simply lack the time, resources, and legal knowledge to fight the bottomless resources of government to get their property back.  This is especially true when it comes to the War on Drugs, within which the bulk of civil forfeiture targets are poor, lack legal education, and lack access to attorneys and other avenues to vindicate their rights.  There are also troubling examples of the government simply never initiating proceedings against the stolen property and thus never giving the owners a chance to “contest” anything at all.

At a time when Attorney General Holder himself has acknowledged the need for asset forfeiture reform, the authorization to take the property of American citizens should be shrinking, not expanding. A country that spoke itself into existence with assertions of the rights to life, liberty, and property can ill afford yet another government agency with the power to seize your property without so much as a criminal charge.

Chris Edwards

Americans are concerned about the performance of the federal bureaucracy. Many people think that federal workers are overpaid and underworked. Some recent news stories provide fresh input to the debate.

A story yesterday at GovExec.com regards pay and performance. The federal pay structure is less efficient than private pay structures because it is generally based on seniority, not job performance. But GovExec.com finds that attempts to introduce federal performance pay have not worked very well either:

Most federal agencies are not making meaningful distinctions in performance ratings and bonuses for senior executives, according to a new watchdog report. About 85 percent of career senior executives received “outstanding” or “exceeds fully successful” ratings in their performance reviews between fiscal years 2010 and 2013, at the same time that agencies have made smaller distinctions in the amount of individual bonuses, the Government Accountability Office found. This has created a system where nearly everyone is considered outstanding…

The level of federal pay is the focus of another recent story. GovExec.com reports on the large number of workers who enjoy high pay:

More than 16,900 federal employees took home in excess of $200,000 in base salary in 2014, according to a partial database of federal salary data.

The report is based on data from FedSmith.com, which is an excellent source of federal workforce information. Fedsmith’s database can list employees and their salaries by agency. For example, there are 159 people at the Small Business Administration who made more than $150,000 in wages in 2014. That’s 159 too many in my view, as the agency should be closed down.

Another recent article regards federal firing. The Federal Times confirms the extraordinarily low firing rate in the federal government compared to the private sector:

Even as lawmakers press for greater accountability within government, agencies have fired fewer employees than at any time in the last 10 years, according to data from the Office of Personnel Management.

Agencies fired 9,537 federal employees for discipline or performance issues in fiscal 2014, down from 9,634 in 2013 and down from a high of 11,770 in fiscal 2010, according to the data. The firing rate held at 0.46 percent of the workforce in both fiscal 2013 and fiscal 2014 — the lowest rate in 10 years.

The private sector fires nearly six times as many employees — about 3.2 percent — according to the Bureau of Labor Statistics, and whether the government fires too few people or just not the right people is the subject of continued debate.

For more on the federal workforce, see here.

Ilya Shapiro

This morning the Supreme Court ruled in Yates v. United States that Sarbanes-Oxley—the massive legislation prompted by the accounting scandals of the early 2000s—can’t be used to prosecute a fisherman who caught undersized grouper.  It makes eminent intuitive sense. Luckily, it’s also correct as a matter of statutory interpretation. That is, even though the relevant provision (Section 1519) punishes those who would knowingly destroy or conceal “any record, document, or tangible object” in order to impede an investigation, Justice Ginsburg is correct in writing for the plurality that “it would cut §1519 loose from its financial-fraud mooring to hold that it encompasses [objects not] used to record or preserve information.”

And Justice Alito, in a narrow concurrence that ultimately controls the case, is even more correct to apply traditional canons of statutory construction—the rules that guide judges in interpreting laws—and thereby find that “tangible object,” in the context of the list of nouns that are Sarbanes-Oxley’s target, refers to “something similar to records or documents.” In a colorful opinion rife with salamanders, crocodiles, and oil derricks, Alito asks the correct question: “How does one make a false entry on a fish?”

As Cato wrote in our brief, words such as “record” and “document” modify the term “tangible object” to include things like hard drives and floppy disks (remember those?), not grouper. Moreover, an all-encompassing reading of “tangible object” would render the words “record” and “document” unnecessary. And the broader context of Sarbanes-Oxley illuminates the relevant meaning here: The Act focuses on financial fraud in the context of companies, not fauna. Thus, the words “tangible object” should be read differently in Sarbanes-Oxley than they would be in, say, the Federal Rules of Criminal Procedure.

If the term “tangible object” were read as broadly as the government wished, it could criminalize an unfathomable range of activities, from throwing away cigarette butts to washing away footprints in the sand. It wouldn’t provide adequate notice about potential legal violations, to which individuals have a right to so they can plan their actions accordingly and avoid getting caught in government nets.

After all, prosecutors and law enforcement officials can’t arbitrarily expand the range of criminal offenses as if they themselves were fishermen, exaggerating the size of their catches to a credulous legal system.

Doug Bandow

Christianity is thriving in China. There may be more religious believers than Communist Party members. 

Beijing’s sensitivities to religion are well-known.  Religion offers a competitive worldview to the Party.  The latter fears many Christians, especially Catholics, have loyalties beyond China’s borders.  Religion brings people together in ways that might eventually influence politics.

In its early days, the People’s Republic of China responded harshly to religious activity, but official policy has moderated over time.  There is an increasing amount of reluctant toleration of religious belief. 

Beijing appears to have a more relaxed policy.  Last year, I visited a church of around 800 in the capital.  It operated openly, attracted many young people, and hosted dozens of baptisms on the Sunday I attended.  I saw a car in traffic that sported the traditional Christian “fish.” 

Ironically, the lesson of the West’s experience with religion is that the best way for a government to avoid conflict between religious believers and political authorities is to provide the greatest freedom possible.  Obviously, there have been many strains of Christianity throughout the centuries.  However, the faith emphasizes a transcendent commitment to God while accommodating many different political perspectives.

The Apostle Paul, whose ministry benefited from the order imposed by the Roman Empire, urged submission to the ruling authorities.  There were exceptions, however, most obviously when secular rulers sought to impede the exercise of faith.

For instance, when the Jewish leadership in the Sanhedrin instructed the Apostles Peter and John to no longer preach about Jesus’s death and resurrection, they responded that they had to obey God rather than men.  The original disciples and their followers persevered despite episodic persecution. 

Ironically, the Romans found Christians to be good citizens.  Indeed, Christians helped ameliorate some of the social problems evident in the ancient world. 

Only when more abusive emperors demanded to be worshiped as gods did Christians resist, often at the cost of their lives. Contra the empire’s expectations, persecution did not extinguish religious faith. 

As Christianity became the majority faith in the West, the faithful began to play a much larger political role.  But in general they sought to shape, not overturn, the political order.  And their greatest concern always was the status of their faith, both individually and communally.  The worst battles between religious and government powers occurred when the latter sought to exercise spiritual authority.  

The PRC doesn’t easily fit into the Western experience.  However, one lesson clearly applies.  The best way to minimize political confrontations between church and state is to reduce government restraints on religion.  Christians have no unified view of politics, but believers everywhere agree on the importance of being allowed to worship God.

Interfering with the ability of people to live their faith guarantees, indeed, requires resistance.  Whatever the government’s objectives, the impact will be social conflict.  Believers will perceive the state to be challenging their core faith. 

As I point out on China-US Focus:  “The Party cannot win this battle.  For years Christianity’s growth was concentrated in rural areas, but recently has spread to the cities and reached a better educated population.  Based on existing growth rates there could be nearly 250 million Christians in China by 2030.” 

Beijing hopes to make Christianity conform to China.  Gu Mengfei of the Three-Self Patriotic Movement, which represents legal Protestant churches, explained that the PRC desired to “encourage more believers to make contributions to the country’s harmonious social progress.”  Such harmony is best achieved by eliminating the greatest source of potential conflict, barriers to religious practice. 

China increasingly is influencing Asia and the world.  But the PRC in turn will be influenced by developments within.  One of those is religion.  The government would best respond in a way that accommodates increased religious faith.

Jeffrey Miron

On February 26, 2015, marijuana becomes legal (again) under the laws of Washington, D.C. The key rules are:

  • It will be legal to possess up to two ounces of pot.
  • It will be legal to smoke said pot on private property.
  • It will be legal to transfer (give) an ounce or less of pot to someone else.
  • It will be legal to grow and cultivate up to six pot plants—no more than three mature ones—in your home.
  • You must be 21 years old to possess, consume, or grow pot.
  • Selling pot will still be illegal.
  • As will be smoking pot in any public space, which includes restaurants, bars, and coffee shops.
  • And, of course, none of this applies to any federal land (which accounts for 22 percent of the District), which considers marijuana illegal.

Overall, this is progress.  But note that:

1. Federal marijuana prohibition still applies.

2. The age limit of 21 is misguided (just as with alcohol).  That limit guarantees that much marijuana use will remain outside the law.

3. The limit on possession amounts is silly; the ban on sale is idiotic.

4. Perhaps restaurants, bars, and coffee shops will circumvent the ban on smoking in public by offering free edibles.

5. The federal government owns 22 percent of the land in D.C.?  Geez.

 

Daniel J. Ikenson

Trade Promotion Authority (TPA or Fast-Track Negotiating Authority) is not an executive power grab.  It is a compact between the legislative and executive branches, which each have distinct authorities under the Constitution when it comes to conducting trade policy. The purpose of forging such a compact is that negotiations would be impracticable – and likely interminable – if each provision were subject to the whims of 535 legislators.

Opponents of trade liberalization have smeared TPA as a wholesale capitulation to the president, who allegedly is freed of any congressional oversight and given a blank check to negotiate unamendable trade deals in secret without any input from Congress – only the capacity to vote up or down on the final deal. In reality, though, TPA is the vehicle through which Congress conveys its trade policy objectives, conditions, and demands to the president, who negotiates with those parameters in mind. Provided the president concludes a negotiation that abides those congressional parameters, the deal is given fast track consideration, which means essentially that legislative procedures are streamlined and expedited.

The trade committees are reportedly close to introducing trade promotion authority legislation, although there remains some debate about what it should include. Enforceable provisions to discipline currency manipulation would be a bad idea, as would be including provisions to reauthorize the ineffective and misguided Trade Adjustment Assistance program (which is widely acknowledged to be a payoff to organized labor).

But one important provision (or set of provisions) that has created a bit of an impasse between Senate Finance Committee Chairman Orrin Hatch (R-UT) and its Ranking Member Sen. Ron Wyden (D-OR) concerns certification that an agreement abides the requisite congressional conditions to be afforded fast track treatment. Those of us who argue that TPA is not an executive power grab, but a practical, constitutional solution to a policymaking quandary must acknowledge the propriety of such a provision – or a provision that accomplishes as much. There must be a mechanism through which the president is held to account – that the deal reflects the broad wishes of Congress.

Under previous TPA legislation, Congress was afforded opportunities to offer “Resolutions of Disapproval” over procedural concerns (including whether the trade deal advanced the objectives and goals of Congress). Such resolutions were required to be reported to and approved by the respective trade committees in each chamber. Certainly, any new trade promotion authority legislation will include similar provisions. But Sen. Wyden is reportedly believes that stripping an agreement of fast track treatment should be easier to accomplish than it was under previous TPA legislation – perhaps by allowing for more channels through which such “resolutions” could come to the floor for a vote and requiring 60, as opposed to 67, votes in the Senate to pass the resolution.

Talk of an affirmative need to “certify” that the agreement comports with congressional objectives – as opposed to passing a resolution that it doesn’t comport – would also seem to present another bottleneck that would amount to a second TPA vote. Of course, many Democratic Party constituencies that oppose trade liberalization generally would appreciate these lower thresholds, which make derailing trade agreements easier.  And that concern explains Chairman Hatch’s view that Wyden’s position would “make it so that fast track won’t work … the whole purpose of fast track is to be able to get these things … either rejected or approved.”

Congress must have the authority to decide whether an agreement qualifies for fast track treatment, otherwise there is nothing to hold the president to account.  But that authority should not be so vast as to negate the purpose and effect of trade promotion authority. Ensuring necessary checks and balances should not be a partisan matter.

Benjamin H. Friedman

The Boston Globe kindly published a piece I wrote about the lack of strategy guiding Pentagon spending, but gave it the somewhat misleading title and subtitle:  “The Pentagon’s Bloat: Accounting tricks and self-interested politicians ensure that US military spending will remain immune from any real ‘hard choices.’”*

The article doesn’t really bemoan bloat, in the standard sense of wasteful or inefficient pursuit of objectives. It complains about excessive objectives—our overly capacious definition of security—and explains the cause.

My argument is that it would be terrific if Ashton Carter, the new Secretary of Defense, and the military service chiefs were correct in their contention that they cannot execute the U.S. security strategy without exceeding the $499 billion cap that law imposes on 2016 Pentagon spending. They made that claim in requesting a budget that requires raising the cap by $34 billion or eliminating it, another $51 billion for war and relief from future years’ caps.

Our current “strategy” isn’t really one. Strategy, by definition, requires prioritization among competing threats and methods of defending against them. Our government uses that word to rationalize the avoidance of those choices. The primacy theory that best describes our approach to security is really a justification for a log-roll of disparate military interests and goals, most only vaguely related to our safety. A poorer state facing more pressing threats would have to choose among those objectives, which is what strategy does. Poverty demands choices that wealth avoids. And as realists explain, big threats unify preferences, lowering obstacles to strategy formation.

The United States has long been rich and safe enough to minimize choices among defenses and avoid strategy. So we get the phony, listicle sort: recitations of nice things that we hope U.S. military power might accomplish, justified as security objectives. That has the effect of conflating safety with values, and promoting a sense of insecurity.

I argue that the current austerity—the Pentagon budget is down almost 25 percent, in real terms, including the wars, since 2010—will not cause us to change course and pick among allies or region to defend, military services to fund, and possible wars to fight. My article’s subtitle notwithstanding, that’s not because of politicians’ self-interest, which, incidentally, is both desirable and imperishable in a democracy.

I blame three other culprits. One is the monopolistic behavior of the military services. If they competed more for each other’s share of the budget, they might offer alternative strategic concepts. Another is the beliefs of the Pentagon civilians who might encourage that sort of competition. They think interservice conflict is always bad, even though it can enhance their management ability, and embrace primacy. Elsewhere I explain why.

A third culprit is the shallowness of the current austerity. The cuts underway take us only back to about 2004 levels of military spending, and two-thirds of that is just declining war costs. So the pressure to make hard choices in the base (non-war) budget is limited. Plus the uncapped war budgets (Overseas Contingency Operations or OCO funding) increasingly include funds that belong in the base. That “accounting trick” pads the budget against austerity and the need for hard choices. Note also that OCO is, like the 2001 Authorization of Military Force, a tool of executive wars powers. Vague AUMFs provide legal authority for wars presidents want to start without further democratic check; OCO provides the funds. Because wars should be hard to start, we should get rid of both.

These factors lead me to conclude pessimistically:

With a trim here and an accounting trick there, the Department of Defense will muddle along its present course, while elected leaders justify it with paeans about American military power’s indispensability to every pleasant noun that “global” can modify. We that object might take solace in the fact that our hubris is a luxury that our fortune affords. Only blessed nations can worry so much about their safety while confusing it with everything they want.

*An article Justin Logan and I wrote for Orbis a few years ago includes a similar but more developed version of this argument. 

Steve H. Hanke

Since the New Year, Ukraine’s currency – the hryvnia – has collapsed, losing 51 percent of its value against the U.S. dollar. To put this rout into perspective, consider that the Russian ruble has only lost 8 percent against the greenback during the same period.

Like night follows day, the hryvnia’s meltdown has resulted in a surge of inflation. The last official Ukrainian year-over-year inflation rate is 28.5 percent. This rate was reported for January and is out of date. That said, the official inflation rate has consistently and massively understated Ukraine’s brutal inflation. At present, Ukraine’s implied annual inflation rate is 272 percent. This is the world’s highest inflation rate, well above Venezuela’s 127 percent rate (see the accompanying chart).

When inflation rates are elevated, standard economic theory and reliable empirical techniques allow us to produce accurate inflation estimates. With free market exchange-rate data (usually black-market data), the inflation rate can be calculated. Indeed, the principle of purchasing power parity (PPP), which links changes in exchange rates and changes in prices, allows for a reliable inflation estimate.

To calculate the inflation rate in Ukraine, all that is required is a rather straightforward application of a standard, time-tested economic theory (read: PPP). At present, the black-market UAH/USD exchange rate sits at 33.78. Using this figure and black-market exchange rate data that the Johns Hopkins-Cato Institute for Troubled Currencies Project has collected over the past year, I estimate Ukraine’s current annual inflation rate to be 272 percent – and its monthly inflation rate to be 64.5 percent. This rate exceeds the 50 percent per month threshold required to qualify for hyperinflation. So, if Ukraine sustains its current monthly rate of inflation for several more months, it will enter the

So, if Ukraine sustains its current monthly rate of inflation for several more months, it will enter the record books as the world’s 57th hyperinflation episode. 

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