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Corporate Inversions, Tax Rates, and Tax Revenues

Tue, 08/05/2014 - 09:30

Chris Edwards

News outlets are running stories about the rise in corporate tax inversions. Inversions are financial reorganizations that place U.S. firms under foreign parent corporations. They are one of the many ways that companies are responding to America’s uniquely high corporate tax rate.

Liberal policymakers and pundits are outraged by inversions because they fear that the government will be starved of revenues. Treasury Secretary Jacob Lew has demanded new rules to stop inversions because “allowing these transactions to continue, we run the risk of eroding our corporate tax base and undoing the progress we have made to reduce our budget deficits.”

However, it is our high 40 percent tax rate that is eroding our corporate tax base. If we chopped the rate substantially, tax avoidance would fall and U.S. investment would rise. Over time, more income would be reported to the government, with the result that the government would probably not lose any money, and it could even gain some. Governments, businesses, and workers would all win from a corporate tax rate cut.

Here is some evidence that the government would win. For 19 OECD countries for which there is good data back to the 1960s, I plotted the average corporate tax rates and average corporate tax revenues. The chart illustrates the Laffer effect of cutting high statutory tax rates on a very mobile tax base.

Between the mid-1960s and mid-1980s, many countries had corporate tax rates of 40 percent or more. Governments in the 19 countries collected an average 2.5 percent of GDP from corporate taxes during those years.

Then came the Thatcher-Reagan tax-cutting revolution, and corporate tax rates began falling everywhere. Between 1985 and 2012, the average rate for the sample of 19 countries fell from 45 percent to 25 percent.

Did governments in these countries collect less revenue after that huge rate cut? The opposite occurred: corporate tax revenues soared during the 1990s and 2000s. Revenues did fall during the recent recession, but they are now starting to climb again. Even in the depths of the recession, average corporate tax revenues were still higher than they were prior to the beginning of the rate-cutting revolution in the 1980s.

For more on inversions, see my recent NYT article. For more on the mobility of corporate profits in the global economy, see Global Tax Revolution.

Data Notes:

  • OECD corporate tax revenue data is here. For three countries with missing 2012 data, I proxied the values with the 2011 figures.
  • OECD corporate tax rate data is available back to 1981. I have used the central government rates only because I have not found a good source for subnational (state/provincial) rates for years prior to the OECD data.
  • For this reason, the revenues (which include subnational governments) and the rates (which do not) are not an exact match, but that is not a big problem for the purpose of showing the rate/revenue trends over time.
  • The 19 countries included in chart calculations are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Spain, Sweden, United Kingdom, and the United States.
Categories: Policy Institutes

US-Africa Summit Will Not Solve Africa’s Problems

Mon, 08/04/2014 - 10:07

Dalibor Rohac and Marian L. Tupy

As the U.S. President Barack Obama prepares to meet 50 African leaders on Wednesday, August 6, it is worth reflecting on the factors behind the recent progress occurring in countries of Sub-Saharan Africa. As we write in our new paper,

The real gross domestic product [in Sub-Saharan Africa] rose at an average annual rate of 4.9 percent between 2000 and 2008 — twice as fast as that in the 1990s. […] As a result, between 1990 and 2010, the share of Africans living at $1.25 per day or less fell from 56 percent to 48 percent, while the continent’s population almost doubled in size. If the current trends continue, Africa’s poverty rate will fall to 24 percent by 2030.4 Since 1990 the per-capita caloric intake in Africa increased from 2,150 kcal to 2,430 kcal in 2013.5 Between 1990 and 2012, the proportion of the population of African countries with access to clean drinking water increased from 48 percent to 64 percent.

Although Sub-Saharan Africa is also becoming more democratic and better governed, a large gap between the quality of its institutions and those in the West persists. The continent remains, for example, economically unfree and heavily protectionist, not just vis-à-vis the outside world but also within the continent. For 25 African countries, the tariff costs of exporting or importing manufactured goods are higher within Africa than with the rest of world.

While international summits cannot not solve Africa’s internal problems, our paper argues that the upcoming meeting is a good opportunity for the U.S. administration to eliminate the existing trade barriers facing African exporters – regardless of whether they come in the form of explicit tariff barriers or implicit ones, such as agricultural subsidies:

[T]he elimination of the existing barriers to trade should be at the forefront of the efforts to help. Such barriers include tariffs, particularly on agricultural exports, which make it difficult for African economies to fully exploit their comparative advantage. As Brookings Institution researchers Emmanuel Asmah and Brandon Routman note, the structure of the tariff protection in the United States — but also in the European Union — is a significant part of the problem. The tariffs imposed up to a certain amount of imports may be low, yet the tariffs imposed for imports above the permitted quota might be very steep, in some cases up to 350 percent. Furthermore, agricultural subsidies in rich countries cause surplus production, which is often dumped on the world markets, depressing prices and undermining the livelihood of farmers in poor countries.

Categories: Policy Institutes

Undercurrents of Liberty in China

Mon, 08/04/2014 - 09:16

Doug Bandow

BEIJING, CHINA—Everything in China is big.  Including the battle over its future.

I recently returned from the People’s Republic of China.  It’s always a fascinating place with a future as yet unresolved. 

The country is growing economically, but no one really believes the government’s statistics.  The “one child” policy has created a birth dearth that may leave the PRC old before it grows rich. 

The PRC’s future is not yet determined.  Politics remains authoritarian, and it isn’t obvious that democracy would yield a meek Beijing. Nationalism could become an even more dangerous force without the current government’s power to close off discussion. 

Nevertheless, the young are restless.  Those I met had little patience with the Chinese Communist Party. 

Many hoped to go to America for school, for both its educational opportunities and personal freedoms.  Moreover, they weren’t afraid to speak out in front of others.

I was talking with some students about economic policy and how politics works (and fails!) in America.  One young man blurted out:  “I prefer elections, like in America for Congress.” 

No one spoke up for government control over what people could read or study.  I travel the world and normally have no trouble visiting any website, no matter how controversial, wherever I am. 

So I wasn’t thinking about the Great Firewall of China when I initially logged on after arriving.  But I couldn’t get onto Twitter—so much for tweeting about my experiences in the PRC. 

I mentioned my experience to a student heading off to the U.S. to attend university.  He snorted in disbelief:  “didn’t you know the PRC censored the internet?”  I said yes, but had forgotten.  After all, I’d been to Turkey, Egypt, Nigeria, and Kyrgyzstan, among other nations this year, and had enjoyed unimpeded access everywhere else. 

Another student offered me a program that disguised one’s browsing and allowed full access, even to nominally forbidden sites.  No passive acceptance of authority there!

I was talking with a group of Chinese university students and one of the women lamented government information controls and asked me what I thought.  While I said it wasn’t my place to tell the Chinese authorities what to do—I presumed the walls had ears and didn’t want to cause problems for those who got us together—I opined that most Americans believed openness to information and debate was the best strategy for economic, political, and social development.  I suggested that she should make her views known to her government. 

One young man asked where he could find my articles.  I gave him a couple of websites.  He then asked if he could actually view them in China and was relieved when I said yes. 

Perhaps the most dramatic moment was when a student asked me—in front of others during an economic discussion—about “the events of 1989.”  Why had the protestors gathered, he asked?  I kept my answer short and explained that they wanted political liberalization.  “Wow,” he exclaimed, and then seemed lost in thought. 

The PRC is a complicated civilization with a venerable heritage in rapid transition to somewhere, but no one is quite sure where.  China has shown how market liberalization creates growth and empowers the poor.

Alas, it is evident that market liberalization is not enough to create a free society.  But as I write in my new American Spectator article:  “the CCP seems to be losing the younger generation.  Those who make up the future of China want to decide their own futures.”

What this means for the PRC, its neighbors, and the rest of us remains to be seen.  “May you live in interesting times,” runs the famous Chinese curse.  We all are living in those times today.

Categories: Policy Institutes


Fri, 08/01/2014 - 14:35

Jim Harper

In response to my “Twitter fight!” blog post from Wednesday, Harvard Law Professor Lawrence Lessig charges me (in a post entitled “#Escapethe1990s”) with living in the campaign finance debates of the 1990s and urges me to escape them. There’s a better knock on me: I live in the 1790s, when the Bill of Rights was adopted, like some kinda freak!

Lessig really wants me to rely on modern Supreme Court precedents to argue that public funding of electioneering is unconstitutional: “And I challenge Harper to offer one bit of actual authority to counter that statement beyond his ‘this is the way I wish the Constitution were interpreted’ mode of argument,” he says, in “I-really-mean-it” bold.

I’ve had similar challenges to my starry-eyed and—I’ll confess—ideologically driven view of the Constitution. (I’m biased in favor of liberty.) For about a year, supporters of NSA spying bandied Smith v. Maryland “Supreme Court law,” saying that a person has no Fourth Amendment interest in phone calling data—until Judge Leon undercut them. Needless to say, the Court got its rationale wrong in Smith. Applying Smith to NSA spying is wrong. To the extent precedents might allow public funding of electioneering, they are wrong, too.

Professor Lessig devotes a good deal of time to the compromise he and others have made with conservative opponents since the ’90s. Perhaps because I’m not a conservative, but a libertarian, I don’t feel as though I owe it to them to come their way. To Lessig’s credit, he is not doubling-down on a bad idea, as others are, by seeking a constitutional amendment to allow government regulation of political speech. (The bill at the link was introduced Tuesday.)

What is most interesting is his utter certainty that an intricate scheme to mask government subsidy for political speech is good enough to slide over the First Amendment’s bar on “abridging the freedom of speech.” I thought I did a pretty good job on the subsidy question the first time, but I’ll do it again: Under Lessig’s plan, if you give money to a politician, you pay less in taxes. If you don’t give money to a politician, you pay more in taxes. Government tax policy would funnel money to politicians for their campaigns. That’s subsidy.

Lessig is right that his proposal doesn’t “abridg[e]” “speech.” But the First Amendment bars something more: “abridging the freedom of speech.”

As used in the phrase, “speech” is a mass, or non-count, noun. Modifying “freedom” from its prepositional perch, it makes “freedom of speech” non-count as well. “The freedom of speech” is a mass of freedoms—”this mass of freedoms right here,” the Framers said by putting a definite article (“the”) ahead of it. This should incline us to look at freedom of speech as practiced at the time of the Framing. Political campaigns were not government subsidized. (Incidentally? Sure. But Lessig says, “The whole purpose of the Post Office, originally, was to subsidize political speech.” Come now. Political speech follows commerce and communications, of course.)

Freedom of speech isn’t simply freedom to speak, which would be fulfilled when the greatest number of words were uttered. Freedom of speech gathers together the rights to speak, to record, to write, to type, to think, to sell books, to buy books, to pay for others’ speech, to operate a press or blog, to edit, to copy, to leaflet, to not leaflet, to refrain from speaking, and more. The right to refrain from speaking includes a right against being required to pay for others’ speech.

Chances are not good that Professor Lessig and I will convince one another on these issues. The effort is to entertain and persuade others, and for me to draw his audience to my side. I encourage readers—even those Lessigites whose starting point is to be really angry at me—to make their own decisions about what the Constitution and our traditions mean.

Given access to sufficient data, which many people are working on, I’m confident that the Internet—meaning all of us—can oversee the government much better than we do and produce better results. This makes transprency a more important, and speech friendly, reform than government management of political speech.

A final point, of utmost importance! (Facetiousness, ICYMI.) Professor Lessig came to Cato advocating for public funding, and splashing the phrase across Professor Richard Epstein’s face, in 2010.

Categories: Policy Institutes

Would We Start the Ex-Im Bank Today?

Fri, 08/01/2014 - 10:51

Simon Lester

One point that I think gets overlooked in the Ex-Im Bank debate is whether we would create the bank today, if it did not already exist. If there were no export credit agencies out there already, what would the discussion over whether to start one look like? I have a difficult time believing that, based on current understandings of finance markets, a proposal to start using government-run export credit banks would gain any traction today.

So what we really have is a program that was created many years ago, vested interests have emerged to fight its repeal, and the practice has spread around the world. It’s basically just status quo bias that is keeping Ex-Im around, as I argue in this HuffPo piece:

It is difficult to imagine that we would create an Ex-Im Bank today if none existed. Yet we cannot seem to get rid of it.

The Ex-Im Bank was created in 1934, at a time when finance markets were undeveloped and international trade was filled with uncertainty. This was also a time of growing economic intervention in the economy, centered around the New Deal. As the Ex-Im Bank itself explains, “The Export-Import Bank was established by President Franklin D. Roosevelt, in 1934, as a New Deal program and to support his foreign policy.”

In the ensuing decades, economic thinking has changed radically, as our understanding of markets has grown. While it is possible that financing was simply not available for certain transactions at the time of Ex-Im’s creation, it is difficult to believe this is the case today. Finance is a sophisticated field with numerous options. If financing is not available for a particular transaction, it is almost certainly because the sale is not commercially viable. As The Economist recently put it, “The scarcity of private financing for certain exports reflects genuine risks that taxpayers are forced to assume.”

Of course, this problem of overcoming the status quo occurs in other policy areas as well. No doubt this blog’s readers can think of many examples where programs exist and linger on, even though they could never generate the support to start them today.

Categories: Policy Institutes

Should the U.S. Take the Lead on Climate Change Policies?

Fri, 08/01/2014 - 09:38

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

Global Science Report is a feature from the Center for the Study of Science, where we highlight one or two important new items in the scientific literature or the popular media. For broader and more technical perspectives, consult our monthly “Current Wisdom.”


With its 2007 ruling in Massachusetts vs. EPA, the U.S. Supreme Court opened the door for the U.S. Environmental Protection Agency to regulate carbon dioxide emissions under the 1990 Clean Air Act Amendments. But to meet the Supremes’ criteria for regulation, EPA first had to find that the emissions of carbon dioxide and other greenhouse gases were an “endangerment” to public health and welfare. While the sitting Bush administration was reluctant to do this, President Obama’s EPA made the “preliminary” finding of endangerment a mere 94 days after his inauguration.

The “final” Endangerment Finding came on December 7, 2009, just in time to provide the United States credibility at the then-starting Copenhagen Conference, a United Nations affair at which a replacement to the failed Kyoto Protocol was to be enshrined. The meeting was the most disastrous yet for global warming hawks, but President Obama quickly declared victory and rushed off on Air Force-1, in order to beat what was to be the first of three bona fide blizzards in Washington that winter. He lost that race, too.

A torrent of regulations followed, “culminating” in EPA’s recent proposal to regulate greenhouse gas emissions from existing electric power plants. That controversial proposal, announced in early June, followed on the heels of EPA’s January proposal of regulations limiting greenhouse gas emissions from new power plants.

If adopted (and they will be), these proposed regulations will be the biggest diktats yet originating from Obama’s Climate Action Plan. Administration officials are already celebrating the salvation of mankind, even before the regulations are finalized.

The administration is holding “hearings” around the country so it can take your input to improve these already near-perfect rules. To help guide us, the White House just released a new report describing how the costs of climate change will skyrocket the longer we delay taking action to stop it.

According to EPA Administrator Gina McCarthy, the collection of administration actions on climate change is “changing the tone” in talks with foreign nations. No doubt encouraged by this “changing tone,” President Obama is scheduled to attend a UN climate “summit” in New York this September.

To what end? What benefit will “taking the lead” on climate change actually provide the United States?

It turns out to be very little. In fact, it will probably cost us.

The United States is not at great risk from climate change. The Obama administration’s Interagency Working Group tasked with establishing the social cost of carbon (SCC) determined that the SCC for the United States was only a few dollars per ton of carbon dioxide emitted—and that was calculated using overheated climate models. Taking into account new research that finds that the earth’s climate is less sensitive to greenhouse gas emissions, and the humongous body of literature demonstrating that enhanced carbon dioxide levels raise crop yields, the “social cost of carbon” in the United States becomes close to zero (or perhaps even negative, i.e., carbon emissions may actually provide a net benefit to the economy).

But that information is carefully concealed in Obama administration reports, such as the one that the Council of Economic Advisers (CEA) issued this week. Instead of focusing on the domestic cost of climate change—those affecting the United States—the reports discuss the global cost for carbon emissions (using a rather squirrely technique that is readily manipulated to provide any answer you want—so it’s ironic that EPA’s model to estimate temperature impacts is acronymed MAGICC).

It is a head scratcher as why U.S. policy to restrict carbon emissions (i.e., fossil fuel use)—which the administration’s own Federal Energy Regulatory Commission (FERC) says will result in higher energy costs to U.S. consumers—is justified by benefits that it says will largely accrue outside our borders.

The new CEA report clarifies:

Climate change is a global problem, and it will require strong international leadership to secure cooperation among both developed and developing countries to solve it. America must help forge a truly global solution to this global challenge by galvanizing international action to significantly reduce emissions.

Hence McCarthy’s enthusiasm.

If McCarthy is to be believed and administration actions have led to a change in the “tone” of communications, then it probably sounds a lot like lip service.

Two big reasons for this stand out:

The first is that, in the developed world, putting in mandatory emissions caps and carbon taxes are good ways to lose your next election.

Analyses show that Congress’s 2009 vote for cap-and-trade cost the Democrats control of the House of Representatives in the succeeding 2010 election. Less than two months after it passed, the Liberal Party in Australia voted out its leader, Malcolm Turnbull, for his support of a similar scheme. The next year, Australian Labour Party Prime Minister Kevin Rudd resigned his portfolio over the scheme. Then, exactly four years after our House passed cap-and trade, Rudd’s successor, Julia Gillard, was voted out over her carbon tax. (The Australian Parliament repealed the tax on July 17 of this year.)

The second reason is that current-generation renewable energy technologies are simply incapable of meeting the enormous energy needs of developing countries like China and India. If “climate change” ranks low among priorities in the United States, imagine how popular carbon reduction policies will be in countries with large populations with little to no access to electricity at all.

So, even if there is sincerity behind the changed “tone” in international discourse, any resulting agreements to mitigate climate will undoubtedly be unsuccessful, both politically and technologically.

That leaves us “leading” on an issue that science says is overblown, and one that the big, developing nations surely will not adopt (or, at least, achieve).

To this, we say “no thanks.”

Categories: Policy Institutes

Most U.S. Manufacturers Victimized by Ex-Im's Hidden Costs

Thu, 07/31/2014 - 17:14

Daniel J. Ikenson

In an earlier post today, I described a reasonable methodology for estimating the hidden costs imposed on companies whose suppliers receive export subsidies from the Export-Import Bank. Ex-Im officials like to talk about how they “grow the economy” and create jobs by enticing foreign customers with low-rate financing to buy U.S. exports. As I described in that earlier post, when the cost to business of exporting is mitigated by subsidies, companies will likely export more. That may be good for them, but it’s not so good for their U.S. customers, whose foreign competition is now enjoying lower costs (courtesy of U.S. taxpayers). Delta Airlines’ complaint about subsidized Boeing sales to Air India having an adverse impact on Delta, who competes for passengers with Air India, is a fairly clear example of the problem.

As an approximation of the cost imposed on Downstream Industy A, (let’s call it the Delta Effect), I used the subsidies received by every industry whose output is used in Downstream Industy A’s production process, adjusted those subsidies by the importance of the input relative to the total of all intermediate goods inputs, and summed up the values.  I did this for every 6-digit NAICS manfuacturing code and presented tables of results in descending order from biggest victim to biggest beneficiary.  There were 236 industries – perhaps too much information, particularly for a blog post.

So for greater clarity, this table compiles the data at the broader, 3-digit NAIC industry level.  

As you can see, most aggregated 3-digit industries are victims of Ex-Im subsidies.  And most of the 6-digit industries within each broader 3-digit industry are victims, too. U.S. manufacturers of electrical equipment, appliances, furniture, food products, non-metallic metals, chemicals, computers, plastics, rubber, paper, primary metals, and many other goods should give Delta a call and get really busy during Congress’s August recess.

Categories: Policy Institutes

Florida Parents Fight for Educational Choice

Thu, 07/31/2014 - 13:17

Jason Bedrick

On what would have been the 102nd birthday of Milton Friedman—the godfather of educational choice—six families with children that have special needs are fighting back against Florida’s largest teachers union, which is seeking to kill the Sunshine State’s newest educational choice program.

The Florida Education Association is suing the state of Florida to eliminate the new Personal Learning Scholarship Account (PLSA) program, among other recent education reforms, including an expansion of the state’s scholarship tax credit law. Modeled after Arizona’s popular education savings account (ESA), the PLSA would provide ESAs to families of students with special needs, which they could use to pay for a wide variety of educational expenses, such as tuition, tutoring, textbooks, online learning, and educational therapy. Six families with special-needs children who would have qualified for the program are seeking to intervene as defendants in the lawsuit, represented by the Goldwater Institute’s Clint Bolick.

The union’s lawsuit argues that the legislation creating the PLSA, Florida’s Senate Bill 850, violated the state constitution’s “one subject rule” because it contained a variety of education reforms.

“FEA felt that somebody needed to say, ‘Wait a minute. You can’t do it this way. There’s a constitutional requirement that legislation be of a single subject and matters related to this subject,’” [FEA attorney Ron] Meyer said. “This is so far over the line, somebody needs to say, ‘You can’t do that.’ Otherwise this is going to become the norm.”

The question the court must decide is procedural: how closely must a bill’s provisions be related to avoid running afoul of the constitution’s “one subject” rule? The legislature held that a topic as broad as “education” sufficed. If the court disagrees, it could affect legislation far beyond the bill in question. The plaintiffs’ complaint notes that the challenged bill’s title extends over several pages, but it’s not unique in that regard. Several other recently-enacted bills also have lengthy titles, including Senate Bill 856 on “ethics” (four pages), Senate Bill 1012 on “financial services” (six pages), Senate Bill 1194 on “citizen support and direct-support organizations” (four pages), and Senate Bill 1238 on “family trust companies” (five pages).

The union’s lawyer referred to the PLSA as “a collateral casualty” of its lawsuit, as the union was most concerned with the expansion of the scholarship tax credit program that the union believes has “lost its focus” because it supposedly “was not intended to become a major enterprise.” In a press release from the Goldwater Institute, parents of special needs students took umbrage:

“All I can say is wow, I don’t feel like collateral damage, I don’t feel like my son is collateral damage,” said Ashli McCall, a certified teacher in Florida who’s son Emmil is autistic. “I feel like we’re people. And we’re precious and we matter. Is that wrong? That’s really hurtful and really infuriating…If we’re not convenient to their cause then we just don’t matter. We matter.” […]

“These children deserve high-quality educational opportunities that are customized to suit their unique needs, and we will stand up with their families and defend these scholarships from the very people who have failed these students in the public schools,” said Goldwater’s Vice President for Litigation Clint Bolick. “We will not allow these children to simply be left behind as the ‘collateral casualties’ in the aftermath of ends-justifies-the-means legal action.”

Categories: Policy Institutes

Suing the President: Maybe Legal, Likely Unwise

Thu, 07/31/2014 - 10:20

Roger Pilon

“So sue me,” said the president. Late yesterday, in a mostly party-line vote, the House authorized Speaker Boehner to do just that—to call President Obama over his repeated acts of constitutional dereliction. This is a close call, legally. But as I argued recently, I believe it would be unwise for Boehner to actually bring such a suit, much less to initiate impeachment proceedings, as some Republicans are urging him to do. With mid-term elections less than 100 days ahead, the nation’s attention should be focused on Obama’s sorry record, not on the legal merits of a partisan suit, as inevitably would happen given the legal problems surrounding such a suit.

Those problems are not insignificant. Under the Constitution’s Case or Controversy Clause, a plaintiff must have “standing” to bring a suit. In this case, the House must show some injury in fact that is fairly traceable to the president’s conduct and is redressable by the court. The theory the House is relying on here is novel: the idea is that Congress as an institution is injured when the president refuses to perform his constitutional duty to execute the law, as when he postponed Obamacare’s employer mandate, thus nullifying Congress’s act and leaving it no remedy—it’s power to withhold funds from the executive branch in this regard would have no effect on his failure to act, as it would had he acted contrary to the law.

That may get Congress over the standing hurdle. But again, if it doesn’t, and even if it does, attention will still be focused on the suit, not on Obama’s record. As for impeachment, that would be an even greater distraction, as we saw in the case of President Clinton, and would be a fool’s errand as well, given the Democratic Senate. Frustration over this lawless president is palpable, as the polls show. But at the end of the day, the remedy is likely to be political, not legal. Put plainly, there is a constitutional remedy for these constitutional wrongs: it’s in the voting booth.

Categories: Policy Institutes

House Lawsuit against Obama Has Legal Merit

Thu, 07/31/2014 - 10:08

Ilya Shapiro

When the president violates the Constitution, there has to be a remedy short of impeachment, which is a blunt political tool that does nothing to reverse the illegal actions at issue. Speaker Boehner’s proposed lawsuit seems measured to challenge what is perhaps President Obama’s most egregious extra-constitutional action, rewriting the Affordable Care Act to suit his political needs. 

When Congress passes a law, it is the president’s duty to enforce it. The president has discretion in how to enforce it, to be sure, but he can’t suspend, waive, ignore, or change it. The House of Representatives is thus well-placed to sue over the institutional injury that the executive branch has foisted on the legislative branch. 

For more, see this week’s op-eds by David Rivkin and Elizabeth Price Foley in the Wall Street Journal and Washington Post.

Categories: Policy Institutes

The Export-Import Bank and Its Victims: Which Industries Bear the Brunt

Thu, 07/31/2014 - 09:54

Daniel J. Ikenson

The Export-Import Bank of the United States is a government-run export credit agency, which provides access to favorable financing for the foreign customers of some U.S. companies.  For several months, Washington has been embroiled in a debate over whether to reauthorize the Bank’s charter, which will otherwise expire on September 30.  While Republican House leadership remains publicly committed to shutting down the Bank, a bipartisan group of eight senators introduced reauthorization legislation last night, setting the stage for a post-August recess showdown.

Reauthorization buffs contend that Ex-Im fills a void left by private sector lenders unwilling to provide financing for certain transactions and, by doing so, contributes importantly to U.S. export and job growth.  Rather than burdening taxpayers, the Bank generates profits for the U.S. Treasury, helps small businesses succeed abroad, encourages exports of green goods, contributes to development in sub-Saharan Africa, and helps “level the playing field” for U.S. companies competing in export markets with foreign companies benefitting from their own governments’ generous export financing programs.  Accordingly, failure to reauthorize the Bank’s charter would be akin to unilateral disarmament.

But those justifications – two rationalizations, really, and a few token appeals to liberal sensibilities intended to create the illusion of a bipartisan imperative for reauthorization – are unpersuasive or non-responsive to Ex-Im’s critics.  By effectively superseding the risk-based decision-making processes of legions of private-sector, profit-maximizing financial firms with the choices of a handful of bureaucrats using non-market benchmarks and pursuing often opaque, political objectives, Ex-Im risks taxpayer dollars.  That Ex-Im is currently self-sustaining and generating revenues is entirely beside the point and is no more reassuring than a drunk driver rationalizing that he made it home safely last night so there’s no danger in drunk driving tonight.

The truth is that Ex-Im’s revenue stream is a function of fluid global circumstances and given its inadequately diversified portfolio (heavily concentrated in aircraft loans), the Bank is exposed to a decline in demand for air travel, which could prompt a slew of defaults on aircraft loans.  Recall that Fannie Mae and Freddie Mac also showed book profits for years until the housing market suddenly crashed and taxpayers were left holding the bag.

The second pillar of reauthroization rationalization – that Beijing, Brasilia, and Brussels subsidize their exporters so Washington must, too – sweeps under the rug the fact that there are dozens of criteria that feed into the ultimate purchasing decision, including product quality, price, producer’s reputation, local investment and employment opportunities created by the sale, warranties, after-market servicing, and the extent to which the transaction contributes toward building a long-term relationship between buyer and seller.  To say that U.S. exporters need assistance with financing to “level the playing field” suggests that U.S. exporters do not already have inherent advantages among the multitude of factors that inform the purchasing decision.  Moreover, by “leveling the playing field” – to continue with that euphemism – Ex-Im “unlevels” the playing field for many more U.S. companies competing at home and abroad. This adverse effect has been ignored, downplayed, or mischaracterized, but the collateral damage is substantial and should be a central part of the story.

When U.S. taxpayers provide foreign firms with low-rate financing to purchase U.S. exports, we are subsidizing the foreign competitors of downstream U.S. companies.  While Ex-Im helps some U.S. companies by reducing their costs of doing business, it hurts other U.S. companies by increasing their costs relative to their lucky foreign competitors’ costs. On that point, Delta Airlines has been vocal in its objection to Ex-Im-facilitated sales of Boeing jetliners to foreign carriers, such as Air India.  Delta rightly complains that the U.S. government, as a matter of policy, is subsidizing its foreign competition by reducing Air India’s cost of capital.  Money is fungible and that cost reduction enables Air India to offer lower prices in its bid to compete for passengers, which has a direct impact on Delta’s bottom line.  This is a legitimate concern and it is not limited to this example.

Consider the generic case.  A U.S. supplier sells to both U.S. and foreign customers.  Those customers compete in the same downstream industry in U.S. and foreign markets. The U.S. supplier is thrilled that Ex-Im is providing his foreign customer with cheap credit to make the purchase – so thrilled, in fact, that he might even extrapolate from his experience in a testimonial about how essential the Ex-Im Bank is to the U.S. economy.  Meanwhile, the foreign customer is happy to accept the advantageous financing terms for a variety of reasons, among which is the fact that his capital costs are now lower relative to what they would have been and relative to the costs of his U.S. competitors (aka the U.S. customers of the same U.S. supplier). Moreover, by subsidizing export sales, Ex-Im is diverting domestic supply and making U.S. customers less important to their U.S. suppliers. Especially in industries where there are few producers, numerous customers, and limited substitute products, Ex-Im changes the relationships between U.S. buyers and U.S. sellers by providing the latter with greater market power and leverage.  Ex-Im helps some companies (in the short run), but hurts others – very many others.

Delta was able to make the connection.  Others have connected the dots.  But most of the time, the downstream U.S. companies are unwitting victims of this cost-shifting.  These costly externalities are endemic features of Ex-Im’s model. 

Based on a review of Ex-Im Bank transaction data for the period 2007 through 2013:

  • Ex-Im authorized $167.8 billion in transactions over the 7-year period;
  • Manufactured exports accounted for $107.1 billion of those subsidies;
  • Aircraft and aircraft parts accounted for $57 billion of the manufacturing total;
  • Producers in all 21 broad manufacturing industries (3-digit NAICS) received subsidies;
  • Producers in 225 of 237 manufacturing sub-industries (6-digit NAICS) received subsidies.

Although subsidies like these have been shown to weaken firms over time by reducing their incentives to be efficient and competitive, assume for now that the subsidy amounts authorized are approximations of the “benefits” of Ex-Im.  In other words, start with the assumptions made by Ex-Im supporters. Over seven years, the U.S. manufacturing sector received $107 billion of benefits from Ex-Im in the form of export subsidies.  While most of the largesse went to aircraft and aircraft parts manufacturers (Boeing), subsidies were provided across the spectrum of industries. About $50 billion in authorizations was spread over exports of products in all 21 broad U.S. manufacturing industries – as defined by the 3-digit North American Industry Classification System – from food, textiles, and wood products to machinery, computers, and transportation equipment.

At the 6-digit level of specificity, manufacturers in 225 of 236 industries benefitted from that $50 billion in non-aircraft manufacturing authorizations.  Plotting the subsidies received by firms in each of the 236 industries on a horizontal axis, the range spans from $0 (for 11 industries receiving no benefits) to $5,213,669,271 (for “turbine and turbine generator set units”). The median value of benefits for the 236 industries was $39,926,778 and the mean (skewed far to the right by billion dollar-plus subsidies to 11 industries) was $213,853,857.

Now consider the costs.

While stimulating export growth has long been a fetish of policymakers, the consequences for downstream industries (industries that rely on other industries’ output as production inputs) in terms of domestic supply and price can be adverse.  If you receive an export subsidy, you benefit by exporting. If your supplier receives an export subsidy, he benefits by exporting, but you likely incur a cost. If that supplier accounts for 90 percent of your inputs, the cost to you is likely more significant than if he accounts for only 10 percent of your inputs.

With those basics in mind, the costs of Ex-Im’s subsidies can be estimated from input-output tables and Ex-Im authorization data.  On its website, the Bureau of Economic Analysis maintains a set of input-output tables, which map the relationships between U.S. industries throughout the economy. Among the information that can be discerned from those tables is the disposition of output from any and all industries and the input use requirements of any and all industries.

One quick takeaway from the BEA 2007 I-O Use Table is that fully two-thirds of the value of output of U.S. manufacturing industries is incorporated as intermediate inputs in the production of other industries. With that picture of industrial interdependence in mind, it is easier to see how artificial incentives aimed at changing the behavior of particular industries can have ripple effects throughout the economy.

The benefit of Ex-Im to Industry A was calculated simply as the aggregate of Ex-Im authorizations for Industry A.  The cost of Ex-Im to Industry A is approximated to be the aggregated benefits accruing to Industry A’s upstream industries, weighted by the relative importance of each upstream industry to Industry A’s output.  Deriving the cost required the following steps:

  1. Industry A’s upstream industries were identified.
  2. Ex-Im authorizations were aggregated for each of those upstream industries.
  3. Each industry’s aggregate was weighted by the ratio of its use by Industry A over Industry A’s use of all intermediate inputs.
  4. All of Industry A’s upstream, adjusted benefits were aggregated to represent the costs of Ex-Im to Industry A.
  5. The costs for all other industries (Industry B, C, D, etc.) were calculated the same way.

Those adjusted, aggregated costs ranged from $8,024,418 for “Primary smelting and refining of copper” (331411) to $2,557,512,806 for “Broadcast and wireless communications equipment” manufacturing (334220) with a median value of $132,164,800.  Plotting these costs on the vertical axis and combining with the benefits on the horizontal axis, the following scatterplot tells the first part of the story.

First note that the axes are in logarithmic scales because otherwise the wide range of values for both metrics would have obscured the details.  That means that the distance between each point on each axis is larger than it appears as you move away from the origin horizontally or vertically.  Values on the X-axis represent benefits (dollar authorizations from Ex-Im) to each industry and values of the Y-axis represent costs (adjusted, aggregated benefits to each industry’s upstream supplier industries). The quadrants are formed by the intersection of the lines drawn at the median values of each metric.

With all that in mind, the 36 industries represented by dots in the bottom right quadrant are those industries that received above-median benefits and incurred below-median costs.  One might expect to find the “winners” of Ex-Im’s policies concentrated in this most desirable quadrant.  The 82 industries in the top right quadrant are those that received above-median benefits and incurred above-median costs. The 82 industries in the bottom left received below-median benefits and incurred below-median costs.  And the 36 industries in the top left received below-median benefits and incurred above-median costs, which by most definitions would constitute the “victims” of Ex-Im’s policies.

Indeed, each of the 36 industries in the top left quadrant is an Ex-Im victim because its “net benefit” (Benefit minus Cost) is negative. But the other quadrants are also heavily populated by industries with negative “net benefit.”  Twenty-four of 36 industries in the bottom right quadrant incurred costs in excess of benefits; 48 of 82 in the top right quadrant had negative net benefits; and 81 of 82 in the bottom left quadrant had larger costs than benefits.  All told, 189 of 236 U.S manufacturing industries can be characterized as Ex-Im’s victims, when a reasonable method to account for the unseen, unspoken costs of Ex-Im subsidies are taken into account.

Following is a table presented in ascending order of “net benefit,” which means that the biggest industrial victims appear at the top (click the table segments for larger, more readable versions).

It turns out that for nearly every Ex-Im financing authorization that might advance the fortunes of a single U.S. company, there is at least one U.S. industry – and often dozens or scores of industries – whose firms are put at a competitive disadvantage because supply is being diverted, market power is being shifted, and the cost of capital is being lowered for their foreign competition.

Among the biggest victims of Ex-Im’s policies are U.S. manufacturers of dog and cat food; coffee and tea; leather and allied products; synthetic dyes and pigments; synthetic rubber; paints and coatings; pesticides and other agricultural chemicals; plastic bottles; polystyrene foam products; ferrous metals; heavy gauge metal tanks; cutlery and hand tools; ball and roller bearings; fabricated pipes and pipe fittings; plastics and rubber industry machinery; photographic and photocopying equipment; heating equipment; mechanical power transmission equipment; office machinery; telephone apparatus; other communications equipment; printed circuit assemblies; computer storage devices;  batteries; carbon and graphite products; household refrigerators and home freezers; other major household appliances; motor homes; motor vehicle metal stampings; motor vehicle electrical and electronic equipment; motor vehicle bodies; motor vehicle steering, suspension component, and brake systems; motor vehicle gasoline engine and engine parts; wood kitchen cabinets and countertops; office furniture; institutional furniture; ophthalmic goods; dolls, toys, and games; office supplies; and, surgical appliance and supplies.

That list of manufacturing industries (defined at the NAICS 6-digit level of specificity) includes only 40 of the 189 manufacturing industry victims of Ex-Im identified according to the methodology described below.  Only 48 industries (out of a total of 237) do not qualify as victims.

There are hundreds and probably thousands of U.S. companies scattered over 189 industries that produce in the United States, employ American workers, pay federal, state, and local taxes, and contribute to the social fabric of the communities in which they operate, but are competitively disadvantaged by Ex-Im’s provision of low-rate financing to their foreign competitors. These are the unseen consequences – the collateral damage – of Ex-Im’s mission.

Categories: Policy Institutes

House Border Bill Would Treat Children Worse than Adults

Wed, 07/30/2014 - 17:34

Alex Nowrasteh

After much debate, the House finally rolled out its version of a supplemental appropriations bill to deal with the surge of unaccompanied children (UAC) entering the United States.  The bill would treat Mexican and Central American UAC equally under the law - meaning they all would have fewer due process protections than many adults.  

1.       Interviews: The bill would treat Central Americans the same as how Mexican children are already treated. But Mexican children are subject to fewer due process protections than adults in two ways. First, apprehended adults are interviewed by asylum officers who are trained in country-conditions and asylum law.  Under current law, Mexican children are interviewed by Border Patrol agents who are untrained in this area.  In one case, a United Nations report found that a Border Patrol agent believed that a child who had expressed a fear of being trafficked had to be returned “because the paperwork was already filled out.”  Children are also expected to describe their fears of persecution and descriptions of traumatic and violent experiences to a gun-carrying law enforcement agent, which in many cases is an unreasonable request. In fact, a 2011 study by the Appleseed Foundation concluded that “no meaningful screening is being conducted” by Border Patrol.

2.       Appeals: Second, under current law, adult asylum seekers can appeal a determination by an asylum officer that they lack a “credible” asylum claim to an immigration judge (IJ).  The IJ can reverse the decision.  Mexican children cannot appeal the decision of a border agent – they are simply summarily removed from the United States.  This bill would treat Central American children in the same way, denying them an appeal.  The importance of these provisions was recently highlighted by the case of a Honduran girl who was accidentally deported to Mexico.  The United Nations found that border agents are requiring children to “prove they are being persecuted or trafficked” on the spot despite the fact that they are supposed to simply screen out those without any claim at all.  IJs mitigate that problem. 

3.       Expedited Hearings: The bill would require a hearing on the case within seven days.  There is virtually no way to conduct an asylum hearing within seven days.  The applicant must find an attorney, compile the evidence, locate witnesses, and fulfill other requirements.   “Accelerated and truncated hearings force children to navigate the hurdles and the complexities of our immigration system in an unreasonably short timeframe,” concludes the American Immigration Lawyers Association. “Children cannot be expected to present a claim in mere days.”  A mere declaration that a hearing must be held in seven days will not make it so.

4.       Determinations: After this hearing, the IJ would have to determine within three days whether it is “likely” that the child will be granted admission to the United States.  There’s just one problem: most benefits under immigration law are not adjudicated by IJs, but by officers at U.S. Citizenship and Immigration Services (USCIS).  Currently, if an adult claims eligibility for a visa during a removal proceeding, the IJ determines if they have shown prima facie eligibility and will be given a stay of removal to allow for them to apply to USCIS.  This bill requires the IJ to make a determination that they are simply incapable of making.

Strangely, the bill includes procedures for screening by an asylum officer after the IJ concludes that the child is unlikely to be admitted.   If the asylum officer concludes that the child lacks a credible asylum claim, he or she can appeal to an IJ (possibly the same IJ that rejected them, which is confusing).  But these additional processes only occur after the limited process described above.

The problems this bill is attempting to fix could be rectified in other ways.  No matter what one thinks of the bill’s intent, it could be maintained without giving children fewer due process protections than adults.  The asylum system needs reform but it should not disregard the important processes intended to protect migrants from being returned to violent conditions that could threaten their lives.  

Categories: Policy Institutes

Ukraine Crisis Reminds Americans Why NATO Should Not Expand

Wed, 07/30/2014 - 14:24

Doug Bandow

The bitter conflict in Ukraine drags on.  Russia continues to destabilize Kiev and NATO remains divided on how to respond.

Washington has taken the lead against Moscow even though America has little at stake in Russia’s misbehavior.  In fact, the crisis has generated a spate of U.S. proposals to take military action and expand NATO.

For instance, Sen. John McCain urged adding Ukraine to the “transatlantic” alliance.  Former UN ambassador John Bolton suggested including Georgia and Ukraine.  Other proposed candidates for the alliance include Armenia, Bosnia-Herzegovina, Finland, Kosovo, Macedonia, Moldova, Montenegro, and Sweden. 

Efforts to expand NATO are strikingly misguided.  The end of the Cold War eliminated the reason for creating the alliance. 

However, alliance advocates acted like nothing had changed and proposed new justifications for the old organization.  Member governments eventually turned NATO into a mechanism to integrate Central and Eastern European states.   

NATO has turned into a dole for indolent rich countries.  After Moscow’s collapse the Europeans steadily reduced their military outlays. 

Now the Ukraine crisis has reminded everyone that the alliance might be called upon to confront nuclear-armed Russia.  Several of the newest members are screaming for America to “reassure” them by establishing bases and deploying troops.

This ludicrous situation demonstrates the folly of NATO expansion.  The U.S. should not compound its earlier mistake by bringing in additional members with even less strategic value. 

The list of potential members suggests strategic madness in Washington.  For instance, tiny Balkan states Bosnia-Herzegovina, Macedonia, and Montenegro never have mattered for U.S. security. 

Kosovo is the product of NATO’s first aggressive war, the 1989 campaign to dismember Serbia, which had threatened no member of the alliance.  Finland and Sweden followed independent, neutralist policies during the Cold War and face no significant threats today. 

It’s impossible to concoct even a vaguely plausible argument that Armenia, locked in a bitter territorial dispute with neighboring Azerbaijan, has the slightest relevance to the security of America.  Why should Washington protect any of them?

Then there are Moldova, Georgia, and Ukraine.  As I point out in my latest Forbes online column, “attempting to defend them would dramatically degrade U.S. defense since all three have territorial disputes with nuclear-armed Russia that have triggered or could trigger war.” 

Moldova is a small nation nestled between Romania and Ukraine.  A piece of Moldova, Transnistria, broke away with Moscow’s support.  Chisinau’s difficult circumstances do not warrant American military involvement. 

Georgia long has wanted to join NATO.  In fact, Tbilisi sacrificed its soldiers in America’s Afghan and Iraqi misadventures hoping that providing cannon fodder for Washington would convince U.S. politicians to back Georgia in any war against Russia.

Tbilisi recklessly provoked Moscow to arms and attempted to drag Washington into war back in 2008.  Whatever America’s modest interests in the region do not warrant confronting Russia on its border, a region treated as a vital interest by Moscow. 

The only less appropriate NATO member would be Ukraine.  While Ukraine’s status is largely of theoretical interest to America, Russia views its connection to the former Soviet republic to be of critical security importance.  After preserving the peace with the Soviet Union throughout the entire Cold War, Washington should not risk conflict with Russia today over far lesser stakes.

Washington should turn Europe’s security back to Europe.  There’s no reason for Americans to threaten war over such tiny irrelevancies as Montenegro and Kosovo, distant obscurities as Armenia, and conflict magnets as Georgia and Ukraine.

The ongoing strife in Ukraine is a crime by Moscow and tragedy for Kiev.  It’s also a warning for America.  NATO is a military alliance, not a social club. 

Expanding NATO would make the U.S. less safe.  Instead, America should be shrinking its alliance commitments.

Categories: Policy Institutes

Playing Tourist in Beijing: Communing with the Greatest Mass Murderer in History

Wed, 07/30/2014 - 12:44

Doug Bandow

It isn’t often that I get to spend time with mass murderers, let alone the greatest mass murderer in history.  But in playing tourist in Beijing I had a chance to hang out with the Great Helmsman himself, Mao Zedong.

His mausoleum sits at the center of Tiananmen Square, facing the Gate of Heavenly Peace with its famous Mao portrait.  The facility’s hours of operation are few and the number of visitors many.  When I joined the line mid-morning it began at the building’s side, headed to the rear, then reversed course back toward the front.  The line moved at a steady slow walk, with individuals and groups constantly attempting to push by and gain a couple feet. 

The lines split apart going through a security check-point—no doubt, al-Qaeda has placed the mausoleum high on its target list.  The line then reformed and moved forward again.  Vendors sold flowers which people deposited on entering the mausoleum, in front of a statue of a sitting Mao, backed by a painting of a peaceful mountain scene.  He looked thoughtful, as if plotting his next madcap scheme, a la the “Great Leap Forward,” actually into the abyss, and the Cultural Revolution, which consumed even the most dedicated communists. 

In the next room the Great Man—assuming it really is him—lies under glass beneath a blanket decorated by a hammer and sickle. Two soldiers stood guard behind him, while mausoleum staff urged onlookers to move along.  No time to look at the body of the greatest mass murderer in history, who caused decades of human carnage.

The two lines reunited in the final room before exiting the mausoleum.  Outside were a variety of vendors offering Mao tchotchke. What home should be without a Mao picture, or even better, a Mao statue?

Then the viewers flowed back into Tiananmen Square.  How many revered the man, whom the government today claims was 70 percent right, 30 percent wrong, is impossible to know.  A number bought flowers, an obvious sign of respect.  The mausoleum reportedly is a favored destination of rural folks.  

Eventually the People’s Republic of China will have to confront Mao’s legacy.  The country has moved dramatically beyond him—he wouldn’t recognize his nation’s capital, highlighted by wide boulevards, modern office buildings, and frenetic economic activity.  His ruthless, unpredictable dictatorship has disappeared, but in its place has emerged a blander, more prosaic and bureaucratic authoritarian system.  Some day the Chinese people will bury Mao along with his legacy.  Then they truly will be free.

Categories: Policy Institutes

The EU’s Anti-Austerity Hypocrites

Wed, 07/30/2014 - 12:19

Steve H. Hanke

The European Union (EU) is still in the midst of an economic slump. Many members of the political class in Brussels claim that fiscal austerity is to blame. But, this diagnosis is wrong. The EU’s problem is one of monetary, not fiscal, austerity. Money matters. Just look at the accompanying chart. Private credit in the Eurozone has been shrinking since March 2012.

Never mind. The EU fiscal austerity bandwagon keeps rolling on with Matteo Renzi, Italian Prime Minister and current President of the EU, holding the reigns. Indeed, Renzi recently went so far as to form an anti-austerity coalition with France and Spain. According to the coalition, its members simply cannot impose further spending cuts. They assert that their budgets have been cut to the bone. This claim is ludicrous. 

There is nothing to cut in Italy? Get real. Senior civil servants are being paid over 12 times the national average salary. As for France and Spain, their civil servants are “well paid,” too. It’s time for the public to stop listening to the EU’s anti-austerity hypocrites and start looking at the numbers.

Categories: Policy Institutes

Raising Big Money to Fight Big Money?

Wed, 07/30/2014 - 11:25

David Boaz

In the latest of many enthusiastic National Public Radio reports on Professor Lawrence Lessig and his efforts to remove money from politics, Lessig outlines big plans:

In 2016, we want to raise a substantially larger amount of money - could be 200 million, could be 800 million - so that we can win a Congress committed to fundamental reform in the way campaigns are funded.

Well, if spending $800 million in billionaires’ contributions to “win a Congress” won’t knock out big money, what will?

But even if he does raise this kind of money, Lessig might find himself disappointed. You can’t always get what you want, even if you’ve got a lot of money to throw around. From John Connally’s “$13 million delegate” in 1980 to Ross Perot’s $65 million campaign in 1992 to Meg Whitman, Linda McMahon, and Jeff Greene in 2010, the candidates with the most money sometimes fail badly. Or take the billion dollars that Republican groups planned to spend in 2012 to take back the Senate and the White House. 

Given the consistently low priority Americans have placed on “campaign finance reform” for decades and up to the present – the lowest priority in this 2012 Pew poll, save for global warming – even $800 million may not be enough to sway the voters.

John Samples has raised many questions about the advisability of campaign spending restrictions in articles such as this one.

Categories: Policy Institutes

Second Verse, Same as the First

Wed, 07/30/2014 - 10:13

Jim Harper

Twitter fight!

Yesterday morning, a line in a New York Times article by Nick Confessore offered me the opportunity for mirthful needling that turned into a full-blown, impossibly brief exchange of views on Twitter.

The article was on Harvard Law Professor Lawrence Lessig’s plan to elect candidates who are committed to his version of campaign finance reform. It quoted Lessig saying, “Inside-the-Beltway people don’t think this issue matters, they don’t think voters vote on the basis of this issue, and they advise their politicians not to talk about it.”

So I tweeted: “I don’t think this issue matters.” Then I tweeted: “Voters don’t vote on the basis of this issue.” (I didn’t bother with the rest because I don’t advise politicians.)

I’m inside the beltway! I’m a people! How could I not?!

Responding to another NYT reporter’s question, I touted my own work as “speech-friendly reform,” linking to our upcoming event on congressional Wikipedia editing. Just think of the prospects if legislative staff—some of the foremost experts about the bills in Congress—contributed information about notable bills to Wikipedia for the public to peruse ahead of congressional debates.

Professor Lessig took the crumb of bait, asking me “how is more speech not speech friendly #Escapethe1990s.” (I still don’t know what the hashtag means.) Assuming he was still working on public/taxpayer funded campaigns—I’m not a follower of Lessig’s in the Twitter sense or any other—I tweeted about the wrong of forcing people to pay to money to support speech with which they disagree.

Lessig’s plan is not detailed on the website of his “Mayday PAC,” which only offers gauzy promises of “fundamental reform.” After some back and forth, I learned that Lessig’s reform plan is not direct public funding, in which taxpayer money goes from the Treasury to campaigns, but indirect. He would rebate $50 in taxes in the form of a “democracy voucher.” The taxpayer could give the voucher to any candidate who pledges only to take such vouchers, it could go to the political party of the taxpayer, or “if an independent, back to this public funding system.”

It seems clear from the description to which Lessig pointed me that if your preferred candidate is none of the above, your money will be used to fund political candidates that you don’t support. This is the evil of direct taxpayer funding of campaigns—taking money from a person to support speech of which he or she disapproves. But even when used, the voucher is thinly disguised taxpayer funding of campaigns.

With the federal government financing much of its activity through debt, a tax foregone, such as through this proposed voucher program, results directly in greater debt. That debt is a liability of all taxpayers, which must be financed and repaid by all, including the ones who prefer to support no candidate.

Progressives refer to this kind of thing as a “tax expenditure” because it’s so like spending. (I don’t use the term because it’s premised on the idea that all of society’s wealth is the property of the government, which, in failing to collect it, spends it.) The “democracy voucher” is a tax break that subsidizes political speech, something about which the Constitution says Congress shall make no law.

(It’s different from school vouchers. There is no First Amendment objection to funding of schooling like there is to government funding of political campaigning. Voucher-funding of religious schools that might offend the establishment clause can be sufficiently attenuated from government action by private choice.)

I know and work with a lot of good people who prioritize campaign finance reform of various stripes. Campaign finance transparency is a valid political demand, of course, because voters are entitled to draw negative inferences from opacity and from campaign funding that comes from sources they don’t like. But Lessig’s proposal is old wine in new bottles, barely masking the fact that it puts the government in the business of promoting political speech. There is just no role—no role—for the government in managing the terms of debate over who shall be elected. A thumb under one scale is no different from a thumb atop the other.

Why is this one process reform—campaign finance—so fascinating to such a large community? The funding of campaigns certainly does influence the experience, perceptions, and priorities of elected officials. But it is far from the only influence or even the most important one, and there is a limited foundation for the idea that campaign finance reform actually matters. I attended a dinner last night hosted by a member of Congress, at which his staffer—surely no high-dollar contributor—goaded the room into talk of war with China using bogus dollar-figures for U.S. intellectual property losses.

Rather than one input to policymaking—how representatives are elected—why not focus on improving the public’s access to information about outputs? At Cato, we’re producing data that reflects the content of bills.  It seems to me—and I lack validating research as well—that a public made aware of what is happening in Congress would be more inclined to get involved and take some position on legislation. People might even intervene with their legislators during their terms of office to seek the policies they want. Election day is not the one time the public gets to oversee the government.

Professor Lessig has advocated against transparency, though, because it might “push any faith in our political system over the cliff.” That’s rigging the game. Faith in our political system is not a legitimate goal. It might be produced by a political system that serves the American people better, of course. Is Lessig working to give the people what they want or to give the people what Lessig wants? Top-down rules aimed at controlling which “voices” have more and less power in electoral politics are highly suspect.

Professor Lessig’s pitch for “democracy vouchers” cites Cato Institute estimates on corporate welfare. But agreement on the ills of corporate welfare should be no sign that Cato or its scholars align with the campaign for government management of political speech. Professor Lessig has sought to portray Cato as an ally before. Others can speak for themselves, but I think that government transparency is far preferable to government participation in any part of electioneering.

Categories: Policy Institutes

Tonight, "Penn & Teller: Fool Us"

Wed, 07/30/2014 - 09:20

David Boaz

Cato Mencken Fellows Penn Jillette and Teller launch a new hour-long show, “Penn & Teller: Fool Us,” tonight at 8 p.m. on the CW television network. Here’s an enthusiastic review from Slashfilm:

Magician duo Penn & Teller are finally set to bring one of my favorite UK TV series, Penn & Teller: Fool Us, to broadcast in the States….

One of my favorite UK television television series was a show called Penn & Teller: Fool Us. It was basically a competition series where the world’s best magicians would perform in hopes of fooling Penn & Teller. After the performance, the magic duo would try to vaguely explain how the trick was done (without fully exposing the magic). If they were fooled, the magicians would get a gig as their starting act in Vegas.

Each show would also have Penn & Teller do a trick or two for the television audience. I’m a magic geek and this is probably one of my favorite magic series to ever air. I’ve shown it to a lot of non-magic geek friends, and they all ended up loving it. 

Until 8 p.m., you can listen to Cato’s podcast with Penn Jillette recorded in 2011.

Categories: Policy Institutes

Are Public Schools Safer Than Private Schools?

Wed, 07/30/2014 - 09:01

Jason Bedrick

There is no clearer sign that foes of educational choice have lost the battle of ideas than the Daytona Beach News-Journal’s desperate attempt to smear Florida’s choice law.

Annie Martin’s front-page story in the Sunday edition of the News-Journal contains numerous inaccuracies about Florida’s scholarship tax credit law, which helps tens of thousands of low-income kids attend the school that’s best for them. For example, Martin claims in the second paragraph that the scholarship law “diverted $1.3 billion from state coffers,” which is irresponsibly misleading given that the Florida legislature’s nonpartisan Office of Program Policy Analysis and Government Accountability found that the law saves $1.44 for every $1 in reduced tax revenue. She also repeatedly refers to “publicly-funded” scholarships, though the U.S. Supreme Court ruled that the scholarships consist private funding.

But Martin’s most shameful attack on the educational choice law is her insinuation that children at Florida’s private schools are less safe than children at government-run schools, based solely on a recent case of a private school teacher caught with child pornography:

Yet, the South Daytona school isn’t subject to the same public records laws as the public schools. Although the FBI said fifth-grade teacher Matthew Graziotti had thousands of sexually explicit images of children on his home computer, the school did not have to make his personnel file public.

But is it reasonable to expect private organizations to make their employee files public, even if they receive public funding? Mark Tress, the superintendent of the private school where Graziotti had worked, argues that it is not:

The public records law no more applies to private schools than it does to The News-Journal itself. Hundreds, perhaps thousands, of private businesses receive money from the state and from school districts for services rendered and are not subject to the law. In this case, we are gratefully cooperating with law enforcement officials and have handed over, among numerous school records, the teacher’s personnel file. It sheds no new light.

After briefly noting that private school teachers must go through the same background checks as goverment school teachers, Matin ominously quotes a professor from the University of North Florida:

Aside from the initial background check for private school teachers, parents generally must trust their private school is exercising due diligence when deciding who to hire, said Luke Cornelius, an associate professor of higher education administration at the University of North Florida.

“Unfortunately, it does create a situation of ‘buyer beware,’” said Cornelius, who also is an attorney. “I think a lot of parents assume private schools, especially a religious one, is an inherently safe place.”

But because they’re not required to be as transparent as the public schools, parents at private schools are “going on faith,” he added. 

Martin’s article contains no rebuttal to the professor’s absurd allegation, leaving readers with the impression that private schools are riskier than government schools. Yet the sad fact is that these sorts of crimes are not exclusive to any one type of school. The difference is that whereas the private school employing Graziotti promptly fired him, it is much more difficult to fire teachers from Florida’s government schools. Private schools are directly accountable to parents, which provides a strong incentive for private schools to take swift action when teachers engage in misconduct. By contrast, government schools are not directly accountable to parents, and misbehaving teachers can often count on multiple layers of bureaucratic red tape to protect them.

Indeed, had Martin spent just a few minutes on Google, she would’ve learned about numerous incidences of teacher misconduct in Florida’s government schools that went unaddressed for years or resulted in mere slaps on the wrist or even reinstatement.  

For example, it took 15 years of documented problems before a Florida school board took the “first steps” to fire a high school teacher:

He is described as a nightmare teacher, one who called his students idiots and morons, made racially insensitive remarks, and locked them out of class.

And school administrators knew about it. Even though problems involving Broward math teacher Steven Yerks surfaced more than a decade ago, he was allowed to remain a teacher.

After his first unsatisfactory evaluation at Cooper City High in 2000, administrators let him transfer to Boyd Anderson in Lauderhill, where he had one troublesome incident after another, including:

•Yelling at a student to shut up before grabbing her and causing an injury;

•Allowing students to sleep in class;

•Making hostile remarks to coaches in front of students;

•Being accused by students of throwing some of them out of class for asking questions. 

“Nowhere you work can you misbehave for 15 years and keep your job,” said School Board member Rosalind Osgood. ‘I try to be fair, and I know people need income, but some things are egregious, and he had gotten away with it so long.”

The School Board finally voted in June take the first steps to fire Yerks, whose salary is $75,000.

One Florida teacher’s reign of terror lasted more than three decades, even though so many parents complained about her misconduct that more than 80 of 130 students transferred out of her class in a single year:

In 33 years as a Pinellas County teacher, her performance has been repeatedly scrutinized and admonished. School officials terminated Whipple from her first teaching contract in 1978; nudged her out of an elementary school in 1984; pushed her out of a high school in 1997. In October, they began investigating her for undisclosed reasons.

Yet until she went on medical leave on Jan. 24, she was still teaching (at $60,798 a year) and, at least through last fall, still drawing a barrage of complaints.

It took another Florida school more than a year to fire a middle school teacher who ordered students to physically attack a 7th grader:

Dehart is accused of encouraging six students to fight with Williams after the boy allegedly threatened her. The male students, ranging from ages 11 to 15, were arrested for “hitting” and “kicking” Williams, WPBF-Tv reported at the time.

Radravious claims that after he told his teacher that he “wished he could curse out teachers someday,” Dehart encouraged the attack, even telling the group to “teach him a lesson.”

“They picked him up, carried him, holding him by the neck, took him down to her classroom and forcibly made him apologize to her,” Latasha Darrisaw, Williams’ mother, told the station after the attack. “And [Dehart’s] remarks to him were, ‘I’ve got my eighth-grade boys on you; you’re not so tough now.”

Last December, a Florida judge reinstated a special needs teacher who had been fired for force-feeding hot-sauce laced crayons and Play-doh to an autistic child. The teacher claims that she only used the hot sauce “to deter the student from eating art supplies,” but the National Autism Society of America says that’s no excuse:

“There are also hundreds of school teachers and professionals across the country who can handle challenging behaviors such as pica [eating inedible objects] in a sensitive, human manner that upholds the dignity of each child,” said the Autism Society’s spokeswoman Ashley Parker. “A behavior like eating crayons in a child with autism should not automatically be viewed as a delinquent behavior.”

Last year, another judge reinstated a Florida teacher who had been fired for “ignoring an episode of oral sex in her kindergarten classroom.”

Earlier this month, a Florida middle school teacher was merely suspended after being “accused of drinking alcohol, twerking with students and receiving a lap dance from a student” at a soccer team party, even though the lap dance was caught on video.  

Though subject to laws supposedly granting greater transparency and accountability, Florida’s government schools nevertheless failed to protect students from their teachers’ misconduct. Even worse, once the misconduct was discovered, the schools too often also failed to take swift enough action to protect additional students. Yet Annie Martin and the News-Journal not only failed to provide this context, but they also misleadingly depicted such misconduct as a problem exclusive to the private sector—a charge that is completely unsubstantiated by any evidence.

Such “journalism” is reckless at best.

[Hat tip to Ron Matus of and Matthew Frendewey.]

Categories: Policy Institutes

DACA Did Not Cause the Surge in Unaccompanied Children

Tue, 07/29/2014 - 15:41

Alex Nowrasteh

In June, 2012 the Obama Administration announced that it had authored a memo deferring the deportation of unauthorized immigrant childhood arrivals in the United States, a program known as deferred action for childhood arrivals (DACA).  The memo directed then Secretary of the Department of Homeland Security to practice prosecutorial discretion toward a small number of unauthorized immigrants who fulfilled a specific set of characteristics.  In essence, some unauthorized immigrants who had come to the United States as children were able to legally stay and work–at least temporarily. 

Did DACA Cause the UAC Surge?

Some politicians contend that DACA is primarily responsible for the surge in unaccompanied child (UAC) migrants across the border in recent years.  A recent House Appropriations Committee one-pager stated that, “The dire situation on our Southern border has been exacerbated by the President’s current immigration policies.”  Proponents of this theory argue that DACA sent a message to Central Americans that if they came as children then the U.S. government would legalize them, thus giving a large incentive for them to come in the first place.  Few facts of the unaccompanied children (UAC) surge are consistent with the theory that DACA caused the surge.

First, the surge in UAC began long before the June 15, 2012 announcement of DACA.  It is true that DACA had been discussed in late May 2012 but the surge was underway by that time.  From October 2011 through March 2012, there was a 93 percent increase in UAC apprehensions over the same period in Fiscal Year 2011.  Texas Governor Rick Perry warned President Obama about the rapid increase in UAC at the border in early May 2012 – more than a full month before DACA was announced.  In early June 2012, Mexico was detaining twice as many Central American children as in 2011.  The surge in unaccompanied children (UAC) began before DACA was announced.

Second, the children coming now are not legally able to apply for DACA.  A recipient of DACA has to have resided in the United States continuously from June 15, 2007 to June 15, 2012, a requirement that excludes the unaccompanied children coming now.   

Third, if DACA was such an incentive for UAC to come from Central America, why are so few Nicaraguan children coming?  They would benefit in the same way as unaccompanied children from El Salvdaor, Honduras, and Guatemala.  The lack of Nicaraguans points to other causes of the surge.

The timing, legal exclusion of the UAC from DACA, and lack of Nicaraguans indicate that DACA was not a primary cause of the surge.  Of the 404 UAC interviewed by the United Nations High Commissioner for Refugees since 2011, only 9 mentioned that U.S. laws influenced their decision to come to the United States.  Other American laws could have influenced the unaccompanied children to come but DACA is not the main culprit.           

Details on DACA

The DACA beneficiaries, at the time of the memo, would have to fulfill all of these requirements to have their deportations deferred:

  • Under the age of 31,
  • Arrived to the United States before reaching their 16th birthday,
  • Entered the United States without inspection or overstayed a visa prior to June 15, 2012,
  • Continuously resided in the United States from June 15, 2007 to the time of the memo,
  • Physically present in the United States on June 15, 2012, as well as at the time of requesting deferred action from United States Citizenship and Immigration Services (USCIS),
  • Been in school at the time of application, or have already graduated or obtained a certificate of completion from high school, or have obtained a general education development (GED) certificate, or are an honorably discharged veteran of the U.S. Coast Guard or the U.S. Armed Forces
  • Not been convicted of a felony, significant misdemeanor, or three or more other misdemeanors, and do not otherwise pose a threat to national security or public safety.

Beneficiaries of DACA were also allowed to apply for employment authorization according to the Code of Federal Regulations.  There is a debate amongst legal scholars over whether the administration’s grant of deferred action was legal.  Those who argue that DACA was illegal contend that the President overstepped his constitutional authority to defer the deportation of some unauthorized immigrants.  Those who argue that DACA was legal point to the general power of the Secretary of the Department of Homeland Security to defer enforcement action.  They argue that the Supreme Court has ruled that decisions to initiate or terminate enforcement proceedings fall within the authority of the Executive – an enforcement power used since the early 1970s.  Here is more of their argument.  This disagreement has not been settled.     

By the end of September, 2013, 580,000 requests for DACA were accepted by the U.S. government and 514,800, or 89 percent, were approved.  Seventy-six percent of the requests came from Mexicans.  Twenty-nine percent of the requests were filed from California, 16 percent from Texas, and 6 percent from Illinois.

Categories: Policy Institutes