On her radio show earlier today, Laura Ingraham discussed drug legalization with John Walters, the White House “Drug Czar” under George W. Bush.
Walters had nothing good to say about Cato, George Soros, legalizers in general, or me in particular. Walters’ view comes down to three claims:
1. Legalization will cause drug use to soar;
2. Increased drug use is bad;
3. The negatives of prohibition are more acceptable than negatives of greater use.
On point 1: No existing evidence suggests major increases in use from legalization. Some increase may occur, since drug prices will likely decline. But most drugs are already cheap enough that price is not a major deterrent.
On point 2: Drugs can indeed cause harm, but so can alcohol, tobacco, double-black diamond ski slopes, Ben & Jerry’s ice cream, and driving on the highway. Many current harms (e.g., accidental overdoses), result from prohibition, which makes it harder for users to determine quality. Walters view that all drug use leads to irresponsible intoxication is utterly inconsistent with the evidence.
And, many people derive a benefit from drugs. Walters thinks people take drugs only because they are addicted; an alternate view is that people choose to use drugs, whether to alleviate pain, aid relaxation, or become intoxicated. Under the second view, increased use is a benefit of legalization, not a cost. And in a free society, individuals, not government, get to make that determination.
On point 3: Drug prohibition generates violence and corruption; reduces quality control and spreads HIV; diminishes civil liberties; restricts medicinal uses of drugs; foments insurrection in source countries; foregoes tens of billions each year in tax revenue; and requires tens of billions more on police, prosecutors, and prisons.
John Walters may believe that all this is preferable to a modest increase in drug use (some of which benefits users); he is entitled to his view.
But I disagree.
The kidnapping of over 200 Nigerian school girls has captured international attention. Yet few outside of Nigeria paid attention as the terrorist group responsible, Boko Haram, killed thousands of people in previous attacks.
Americans understandably want to help, but as I point out in my new Forbes column, “Washington must avoid getting entangled in another interminable conflict, this one featuring relentless Islamic extremists battling brutal security forces.”
The Islamic extremist group Boko Haram began more than a decade ago. The government’s response often has been ineffective, even counterproductive. Unlawful killings, mass arrests, and other abuses help sustain support for the guerrillas.
So far this year 1500 have been murdered. The kidnapping highlighted the failure of President Goodluck Jonathan’s government.
After a month there is little hope of rescuing the girls, who probably have been dispersed throughout the remote region where Boko Haram operates. However, the burst of publicity caused the Obama administration to dispatch a multi-agency delegation.
The mission may meet an emotional need, but offers few benefits and many snares. After all, America can do little to save the girls or stop Boko Haram. State Department spokesman Jen Psaki explained that the U.S. group contained “law enforcement officials with expertise in investigations and hostage negotiations.”
But this is not a complicated “Who done it?” mystery. Moreover, dealing with Boko Haram is not like negotiating with a crew of bank robbers. Boko Haram cheerfully, even gleefully, kills en masse.
The U.S. might have some useful satellite intelligence and specialized equipment, which Abuja previously requested. But those could be transferred without a large and very public delegation.
No doubt the Nigerian army would benefit from professional training—which Washington is already providing. Alas, Nigeria’s military cannot be fixed by America. Worst is the lawless behavior of the security agencies, including police and intelligence agents.
So far Boko Haram has restricted its murderous activities to Nigeria. Active U.S. involvement, however, risks turning the conflict into one of international jihad, when Boko Haram may broaden its attacks to Americans.
Finally, what is the end point for American involvement? What if the girls aren’t located?
With failure almost inevitable, there will be pressure on the U.S. to do more, even enter the conflict directly. Secretary of State John Kerry already has talked of doing “everything possible to counter the menace of Boko Haram.”
Much the same process has occurred with the administration’s expanding mission to eradicate the so-called Lord’s Resistance Army [LRA], formed in 1987 in Uganda. The U.S. long provided money, intelligence, and logistical assistance for Kampala’s military operations against the organization. Three years ago President Obama deployed about 100 special forces to aid the Ugandan government in defeating the LRA and capturing its leader, Joseph Kony.
The group was much reduced by then. The LRA in no way threatened America, but the administration promised that the mission would be “short term.”
However, Col. Kevin Leahy, commander of the American troops, admitted last year that “This isn’t searching for a needle in a haystack. It’s like searching for a needle in 20 haystacks.”
Although the LRA is said to have dwindled to just 250 guerrillas, in March the administration announced that it was nearly trebling the number of personnel and deploying at least four CV-22 Ospreys. Will U.S. forces stay on for the rest of Kony’s life—and his successor’s?
The U.S. has been increasingly active across the continent. The Pentagon set up the U.S. Africa Command (AFRICOM) and has been steadily augmenting America’s military presence.
Washington’s default policy should be to stay out. The fact that there is conflict somewhere on earth does not require Washington to join it.
One can hardly imagine the pain felt by the families of young girls kidnapped by Boko Haram. But the U.S. can do little to help and Washington’s intervention risks are creating blowback Americans cannot afford. Only the Nigerian people can bring peace to Nigeria.
Technology vastly enriches our lives—sometimes free of charge. Consider Google’s search engine. It’s an incredibly complex algorithm that informs users about any topic imaginable faster than the blink of an eye. And it’s free. And it’s just one of millions of helpful online services provided for free to internet users around the world. For instance, you can Skype for free—that is, video chat with anyone in the world at any time (assuming, of course, that you have internet access). You can email for free—send and receive instantaneous messages and media content from one location to any other location on earth. You can host your own personal webpage that allows you to interact with your friends and family—share photos, videos, stories, and event invitations—for free—on social media websites like Facebook.
Sometimes technological advances are not only useful, but also uplifting. For a group of seniors in the United States, a new, free application helps to cure loneliness. A school in Brazil matches American senior citizens with adolescent Brazilians. Brazilians want to learn English, while elderly people want company. Everyone wins. Here’s the outcome:CNA - Speaking Exchange
Moreover, the internet and, consequently, all of the free goodies it offers that improve our lives, is spreading throughout the world. As you can see from data taken from the website HumanProgress.org, a majority of Americans and an increasing number of individuals in developing countries have web access:
I really shouldn’t have to write this anymore, because the basic facts should keep anyone from saying that state adoption of the Common Core was “absolutely voluntary.” Yet Chester Finn, president of the Thomas B. Fordham Institute, has made just this proclamation…again. And this time, he has done so right after having written that “the feds blundered into the middle of [Common Core] with ‘incentives’ that turned it into a sort of national piñata.”
I’ll say, “incentives”! At the low point of the “Great Recession,” Washington told states that to fully compete for hundreds-of-millions of Race to the Top dollars – money that state citizens had no choice but to send to DC – states, among other things, had to adopt the Common Core. Later, the feds told states that if they wanted a waiver from the irrational, punishing, No Child Left Behind Act, they had but two standards choices: either adopt the Core, or have a state university system certify state standards “college- and career-ready.” And this came after most states had already promised to adopt the Core for RTTT.
There’s simply no way to call Core adoption “absolutely” voluntary, unless you think bribing someone with money you took from them, or giving them just two ways to stop your throttling them, is absolute voluntarism.
Making matters worse, after boldly denying reality about the Core, Finn continues the cheap-shot, debate-destroying tactic of demonizing Core opponents. He writes that those who oppose the Core are primarily:
interest groups that really don’t want to change how they’ve always done things, whether or not such change would be good for kids or the country. I have in mind textbook publishers, test-makers, teacher unions, and political opportunists of every sort, lately and most prominently of the “tea party” persuasion, who will do and say anything to take down Obama and everything he’s for.
No doubt people have numerous motives for supporting or opposing the Core, and I wouldn’t presume to say I know what they are. I will, though, say I have no reason to suspect Finn and Fordham have anything but the best interest of the nation at heart.
If only they would accord the same presumption to tea party types! Or, at the very least, provide some evidence that tea partiers only oppose the Core because they are obsessed with bringing down President Obama. But Finn offers not a speck of evidence, ironically at the same time the general impression is that tea party types are far too willing to sacrifice political success for principle. And what are tea party principles? Some are quite time-honored, among them that the federal government should not interfere in education, and that education should be controlled by parents.
And let’s be careful who we say is obsessed with taking Obama down over the Core. Fordham has quite prominently blamed the Obama administration (go to the 6:45 mark) for Washington’s “absolutely voluntary” coercion. This despite the fact that the creators of the Core called for federal coercion in 2008, before there was either an official Common Core or Obama Administration, then called for it again after officially launching the Common Core State Standards Initiative.
Apparently, the sign that you want what’s “good for kids or the country” is you attack the President to advance the Core. Oppose the Core, in contrast, and it’s self-evident you actually just despise Mr. Obama.
At this point, Core supporters really need to stop insulting both the tea party and the public’s intelligence. Instead, maybe they should try engaging in factual, reasoned debate.
The REAL ID Act is a federal law that calls on states to knit their driver licensing systems together into a national ID. Congress passed it nine years ago yesterday, setting a three-year deadline for state compliance.
You might think that a program would be dead if it failed to materialize after more than triple the time Congress gave for its implementation. But REAL ID is walking dead.
After the law passed, half the states in the country passed resolutions objecting to REAL ID or laws barring their states from complying. And the Department of Homeland Security has pushed back the deadline again and again and again. But the federal government keeps funding REAL ID, and state bureaucrats keep plodding forward with the national ID system.
In a Policy Analysis released today, we examined the progress of REAL ID in states around the country. REAL ID: A State-by-State Update reveals that some states’ legislatures have backtracked on their opposition to the national ID law. Some motor vehicle bureaucrats have quietly moved forward with REAL ID compliance contrary to state policy. And in some states, motor vehicle bureaucrats have worked to undercut state policy opposing REAL ID and the national ID system.
Louisiana recently reversed course and embraced the national ID law. The District of Columbia began requiring drivers to get REAL ID-compliant licenses effective May 1st.
Funds for implementing REAL ID come from DHS annual budget, which is appropriated by the House and Senate Appropriations Committees’ homeland security subcommittees. Congress has put around $50 million a year toward REAL ID in recent years, part of $300 to $500 million a year it spends on identification and tracking programs.
The alternative is better: Congress could save money and protect liberty if it fully defunded REAL ID. State political leaders should check to see if the administrators who work under them are building a national ID contrary to state policy, or if bureaucrats are lobbying to put the legislature behind the national ID program.
It hasn’t been implemented, but because it hasn’t been repealed or defunded, REAL ID awaits the day when the political winds blow in favor of a national ID.
Classical liberals and libertarians have always sought a world in which people are judged as individuals, not as members of groups. Over the centuries most societies have been arranged as hierarchies, with people assigned to classes by birth. The great liberal historian Henry Sumner Maine wrote that the history of civilization was a movement from a society of status to a society of contract — that is, from a society in which each person was born into his place and was defined by his status to one in which the relationships among individuals are determined by free consent and agreement. Liberals argued for “la carrière ouverte aux talents” (“opportunity to the talented”).
Individuals may also be classified by race, religion, sexual orientation, or other characteristics. One of the great achievements of American society has been the progressive extension of the promises of the Declaration of Independence – life, liberty, and the pursuit of happiness – to people who had been excluded from them. That process has included the abolition of slavery, the civil rights revolution, the women’s liberation movement, more recently the gay rights movement.
Lately some people have proclaimed victory in the battle for equal treatment of gays and lesbians. Last month a group of gay marriage supporters urged their allies to be magnanimous in the final period of the “hard-won victory over a social order in which LGBT people were fired, harassed, and socially marginalized” and not to seek to punish remaining dissenters from the new perspective.
But this past weekend has reminded us that we haven’t quite achieved “opportunity to the talented.” Michael Sam was the Co-Defensive Player of the Year in the country’s strongest football conference, yet many people wondered if any NFL team would draft the league’s first openly gay player. Turns out they were right to wonder. Here’s a revealing chart published in yesterday’s Washington Post (based on data from pro-football-reference.com and published alongside this article in the print edition but apparently not online).
Every other SEC Defensive Player of the Year in the past decade, including the athlete who shared the award this year with Michael Sam, was among the top 33 picks in the draft, and only one was below number 17. Does that mean that being gay cost Michael Sam 232 places in the draft, compared to his Co-Defensive Player of the Year? Maybe not. There are doubts about Sam’s abilities at the professional level. But there are doubts about many of the players who were drafted ahead of him, in the first 248 picks this year. Looking at this chart, I think it’s hard to escape the conclusion that Sam paid a price for being openly gay. That’s why classical liberals – which in this broad sense should encompass most American libertarians, liberals, and conservatives – should continue to press for a society in which the careers are truly open to the talents. That doesn’t mean we need laws, regulations, or mandates. It means that we want to live in a society that is open to talent wherever it appears. As Scott Shackford writes at Reason, Sam’s drafting is “a significant cultural development toward a country that actually doesn’t care about individual sexual orientation. The apathetic should celebrate this development, as it is a harbinger of a future where such revelations become less and less of a big deal.” Let’s continue to look forward to a society in which it’s not news that a Jewish, Catholic, African-American, Mormon, redneck, or gay person achieves a personal goal.
I have posted an updated plan to cut spending by one fifth and balance the federal budget. These cuts are not the only ones needed, but they are a mix of reasonable reforms spread broadly across the government.
A new poll discussed in Govexec.com finds that “Americans have more confidence in the abilities of individuals and local organizations to effect positive political and social change in this country than they do in the federal government … Fifty-eight percent of respondents said they believed the federal government was ‘mostly hurting’ the country with respect to the ‘major issues and challenges’ confronting America today.”
My fellow Americans, you have it exactly right. The enormous size of the federal government is harming the economy, society, individual freedom, and good governance in the nation. That is why spending cuts would be a good idea whether or not the federal government was running budget deficits.
Some economists claim that cutting government spending would hurt the economy, but that idea is based on faulty Keynesian theories. In fact, federal spending cuts would shift resources from often mismanaged and damaging government programs to more productive private sector activities, thus increasing overall productivity, output, and incomes.
The federal government’s fiscal mess is an opportunity to make reforms that would both spur growth and expand freedom. My new plan includes a menu of cuts to individual subsidies, business subsidies, so-called entitlements, aid to the states, and the military. There are also numerous activities that can be removed from the federal budget by privatization, such as air traffic control, passenger rail, and electric utilities.
These and other reforms are discussed further in essays at DownsizingGovernment.org.
John H. Cochrane
Gordon Crovitz has a nice piece in the Wall Street Journal, Monday May 5, titled “The end of the permissionless web” which sparks several thoughts.
What has made the Internet revolutionary is that it’s permissionless. No one had to get approval from Washington or city hall to offer Google searches, Facebook profiles or Apple apps, as Adam Thierer of George Mason University notes in his new book, “Permissionless Innovation.” [Available free and ungated here. - JC]
The central fault line in technology policy debates today can be thought of as ‘the permission question,’ ” Mr. Thierer writes. “Must the creators of new technologies seek the blessing of public officials before they develop and deploy their innovations?”
This brings to mind a recent discussion I’ve had with Glen Weyl and Eric Posner on their proposal for a financial FDA, in which financial companies have to get prior approval for any new products (here and here). I don’t think I ever expressed well just how much it strangles growth and innovation for companies to have to prove ahead of time, to the satisfaction of discretionary regulators and politicians, that their products are good. The following examples make the point forcefully.
That strangulation is especially clear in these examples since they show that so much regulation serves to prop up the profits of incumbents and to protect them from competition. If Uber had to ask permission ahead of time, it never would have happened, because the point of regulation is to protect the taxi industry. Uber only happened now because it grew so fast and so well that its customers became a political force, in a way that (say) jitney customers never did.
In a recent New York Times opinion article, New York Attorney General Eric Schneiderman…argues: “The only question is how long it will take for these cyber cowboys to realize that working with the sheriffs is both good business and the right thing to do.”
“Working with the sheriffs.” What a nice way to express the trade of regulatory blessing and protection in return for political support that poisons our economy and democracy.
Mr. Schneiderman has targeted Airbnb, an online service that lets users easily rent homes or apartments for short-term stays, giving travelers a new option. The hotel industry, concerned about being disrupted, is lobbying hard to kill the upstart. …costly regulatory overreach will inevitably suppress new startups from trying to compete.
I think we can find a better word for “competitors eating your lunch by providing better cheaper service” than “disrupted.”
Like Airbnb, mobile-phone app Uber creates a marketplace directly linking buyers and sellers—in its case, passengers and drivers—outside the ornate regulations of analog-era municipal taxi commissions. Brussels, Seattle and Miami have banned or strictly limited Uber cars. New York’s Mr. Schneiderman objects to the company’s practice of pricing more when demand is heavy. The alternative is severely restricted supply, as anyone knows who has tried to hail a cab in the rain.
The drone industry in the U.S. has been grounded because the Federal Aviation Administration has banned commercial use of drones pending new regulations. Meanwhile, countries such as Canada and Australia encourage drones. “As American regulators struggle to come up with a rulebook for the fast-moving industry,” Toronto’s Globe and Mail bragged recently, “Canada has emerged as perhaps the center of commercial drone technology—from Ontario farmlands to Alberta’s oil sands.”
Other examples include the Food and Drug Administration’s scrutiny of 23andMe’s marketing, which forced the company to stop offering health data from its at-home $99 genetics-analysis kit, and prohibitions against selling self-driving cars, which have left the U.S. in the dust behind less regulated Europe.
“left the U.S. in the dust behind less regulated Europe” is not a phrase I thought I’d hear in my lifetime. (Monday morning and already grumpy…)
This sparks a second and larger thought. The big macroeconomic question is, why is US growth so stagnant? The Keynesian side has one simple answer: lack of “demand,” easily curable by spending a lot of money, even if that spending is totally wasted. None of these stories matter. The “supply” or, better, “equilibrium” answer is that we have thrown a lot of sand in the gears, and maybe we should take the same market-liberalization diagnosis and cures that we offer Greece and Italy.
The hard question for both sides is to quantify their frictions. How much of the perceived shortfall in GDP or GDP growth comes from your mechanism? Keynesians have not, that I know of, come up with any independent measure of lack of demand. Likewise, how much of our stagnant GDP growth comes from these regulatory impediments? At least here we all know the sign. We can all see regulatory strangulation as a major factor in foreign countries. But it is devilishly difficult to come up with a solid number. I think equilibrium macro (or macro as micro, or macro as growth theory) gets short shrift just because it’s hard to come up with the numbers, and so much easier to say “well, it must be lack of demand.” But coming up with a serious measurement strikes me as a very useful exercise. Hence, I added the “thesis topics” label.
James A. Dorn
In his best-selling book Capital in the Twenty-First Century (Harvard University Press), French economist Thomas Piketty is concerned with equality of outcome, not equality under a rule of law safeguarding one’s unalienable rights to liberty and property.
He finds that inequality of income and wealth is increasing as the return on capital assets exceeds the growth of real GDP. His policy for reducing inequality is to use the power of government to impose very high marginal tax rates on the incomes of the rich and near rich, and also impose an annual wealth tax. His goal is “to put an end to such incomes.”
Piketty’s leveling schemes in the pursuit of “social justice” would undermine the primacy of property rights under the U.S. Constitution, adversely affect incentives to save and invest, stifle entrepreneurship, and slow economic growth. He seems more interested in penalizing the rich than in thinking of ways to create wealth by expanding opportunities for market exchange.
Underlying his approach to equality is the false idea that the rich get richer at the expense of the poor. He ignores the reality that voluntary exchanges in the marketplace make parties to the trades better off—and wealth is created.
He also ignores the wisdom of the late development economist Peter Bauer who warned: “The unholy grail of economic equality would exchange the promised reduction or removal of differences in income and wealth for much greater actual inequality of power between rulers and subjects.”
Capital is best understood as a bundle of ownership rights—in particular, the right to sell one’s property and the right to receive the income from that property. When those rights are attenuated, capital is destroyed.
Gary Becker, the late Nobel laureate economist, showed the importance of human capital (i.e., the skills individuals acquire through education and training) for a person’s future income and economic growth. High marginal income tax rates and wealth taxes dampen incentives to invest in human and non-human capital—and when investment slows so will economic growth.
Imposing a 50 percent marginal tax rate on individuals with incomes starting at $200,000 and increasing that rate to 80 percent at $500,000, as Piketty proposes, would heavily penalize those who have invested in their human capital and discourage others from doing so.
Likewise, Piketty’s proposed wealth tax would translate into a very high tax on the income from non-human capital. For example, with some simplifying assumptions, a 2 percent wealth tax is equivalent to a tax rate of 67 percent on capital income if the discount rate is 3 percent. Piketty proposes a 5 to 10 percent annual tax on the net worth of individuals with at least $1 billion in assets. A 10 percent wealth tax translates into a tax on capital income of 333 percent (assuming a discount rate of 3 percent).
Such confiscatory tax rates would not raise much revenue because the rich would move to low tax regimes like Hong Kong that relish economic freedom. That is why Piketty wants a global wealth tax—but that’s pie in the sky.
The high taxes on capital would ultimately harm workers in those countries that followed Piketty’s policies, as incomes grew more slowly. Rich capitalists are not the enemy of poor workers. Capital freedom and private property allow for upward mobility.
Piketty does the economics profession a disservice by focusing on outcomes rather than institutions, incentives, and processes. He believes more in the power of government than in the power of markets to transform people’s lives. History has shown that individuals have a natural desire to improve themselves and that economic freedom—not the redistributive state—is the key to human progress.
Instead of calling for higher taxes to reduce the return on capital, Piketty would be on firmer ground by arguing for an increase in economic freedom and more limited government to increase the range of choices open to people.
Robert A. Levy
Nothing in the Constitution requires voter ID laws. Nor does any provision bar voter ID laws, except: (1) the 14th Amendment forecloses state denial of equal protection of the laws to any person, and (2) the 15th Amendment forecloses discrimination by race in determining who can vote.
Accordingly, a voter ID law would be unconstitutional if it discriminated by race without a compelling state justification. Put differently, to justify a discriminatory voter ID law, a state would have to show: (a) there’s significant voter fraud, (b) the law would fix the problem; and (c) there’s no other way to accomplish the same ends without discriminating.
The convicted felon problem is more complicated. Rand Paul argues that 180,000 convicted felons in Kentucky should be allowed to vote. Does the constitution support that view? Of course, prisoners can be denied the right to vote while in prison. By committing a felony, they forfeit certain rights, which can even include the most fundamental right – the right to liberty. But after a felon completes his sentence, his voting rights should (in my view) be restored.
Indeed, if the law denying his voting rights were passed after his commission of the felony, that law would be unconstitutional because it’s ex post facto. If the law were passed prior to his commission of the felony, it would still be subject to the test noted above. That is, government would have to show a compelling need for the discriminatory law, its effectiveness at satisfying that need, and no less discriminatory means of accomplishing the same ends. Frankly, I doubt that many, if any, states can make that showing.
To complicate matters still further: The threshold question is whether there’s discrimination. The constitutional test is based on discriminatory intent – i.e., whether the purpose of the law is to discriminate. Some legal authorities argue, however, that section 2 of the Voting Rights Act prevents states from passing laws that are neutral on their face but have a discriminatory impact. For example, a law that applied neutrally to all convicted felons may not have been intended to discriminate by race, but because a disproportionate number of felons are African Americans, the law would have a discriminatory effect.
Notwithstanding the legal controversy: From a policy perspective, I would restore voting rights to felons who have completed their prison terms. I see no compelling reason to deny such rights. Decreasing the number of Democratic voters is not a legitimate reason.
Ideally, states (not the feds) should enact such laws. Federal re-enfranchisement is constitutionally suspect. Any federal statute to remedy state discrimination would have to be congruent and proportional to the discrimination. A one-size-fits-all federal remedy probably wouldn’t pass muster. Individual states might even prefer a limited rather than blanket restoration, based on (say) the nature and severity of the crime, any history of recidivism, and the length of time since release from prison.
[As an aside, you’ll likely hear some of these same arguments with respect to restoring gun rights to non-violent felons. Predictably (and somewhat hypocritically), many legislators switch roles, with conservatives favoring and liberals opposing restoration.]
Peter Van Doren
In the last few days, some commentators have praised the role of federal regulation in enhancing the health of fishing stocks. Brad Plumer at Vox.com, Paul Krugman at the New York Times, and Kevin Grier at Cherokee Gothic, have all weighed in.
The current issue of Regulation features a cover story that offers insight into what government interventions work and what doesn’t in the management of fisheries.
Authors Jonathan Adler and Nathaniel Stewart argue that fisheries are a classic example of what economists call the “Tragedy of the Commons.” Open access resources such as fishing stocks are overharvested because no one owns the rights to the harvest. Instead, everyone has an incentive to grab what fish they can before another boat does.
The traditional policy response to the commons problem has been regulating the length of the fishing season or limiting the total amount of fish that can be caught. The problem is these policies don’t change the incentives that lead fishermen to race after and grab as many fish as they can. For example, codfish quotas in the Gulf of Maine and Georges Bank were cut 77% and 61%, respectively in 2013. Such regulations do not fix the problem because the incentives for boats to get faster or bigger remain.
A better solution would be a system of Individual Transferable Quotas. These quotas assign to individuals a right to a small portion of the total allowed catch in a fishery. This “catch share” ends the incentive to race and grab because a fisher owns the rights to a defined amount of fish, and no one can take that right from him. A 2012 study of 15 catch-share programs in the United States and Canada found that, because the programs worked so well, fishinging seasons were lengthened from 63 to 245 days. And the introduction of the catch-share systems allowed fish populations to recover from previous overharvesting. After five years of catch share implementation, catch limits increased 13 percent on average.
Fishery property rights a vast improvement over traditional fisheries regulation.
Recent news reports have zeroed in on Washington’s next “cliff,” the “transportation cliff” that is expected to happen when the federal Highway Trust Fund runs out of money sometime this summer. Most of those articles have a hidden agenda: to increase spending for transit even though transit now gets 20 percent of federal surface transport dollars but carries little more than 1 percent of the travel carried by automobiles (about 55 billion passenger miles by transit vs. 4.3 trillion passenger miles in cars and light trucks). This post will explain some of the politics of the transportation cliff.
1. Why are we about to go off a transportation cliff?
Since 1956, federal highway programs have been financed with federal gasoline taxes. Those revenues go into the so-called Highway Trust Fund (“so-called” because it’s no longer very trustworthy) and then are distributed to the states for highway construction and maintenance. In 1982, Congress began dedicating a small but growing share of gas taxes to transit. Today, more than 20 percent of federal gas taxes are spent on transit, and there is no guarantee that the remaining 80 percent goes for highways, as Congress often diverts some of that money to such things as bike paths, national park visitor centers, museums, and other local pork barrel projects.
Congress reauthorizes this spending every few years. Traditionally, an authorization bill provides a spending ceiling. But the 2005 reauthorization bill made spending mandatory, meaning the ceiling was also the floor. (In 2012, Congress passed another reauthorization bill. That one didn’t mandate spending, but Congress went ahead and spent to the limit anyway, knowing full well that this would mean the Highway Trust Fund would be exhausted by sometime in 2014.)
When the 2008 financial crisis led to a reduction in driving, gas tax revenues failed to keep up with spending. Since then, Congress has had to supplement gas taxes with about $55 billion in general funds in order to keep the Highway Trust Fund from running out of money.
Anti-auto interest groups often portray these supplements as highway subsidies. But they would not be necessary if Congress weren’t diverting 20 percent of gas tax revenues to transit. Although more money goes to highways than to transit, because highways are so much more heavily used, federal subsidies to transit are about 80 times as great, per passenger mile, as federal subsidies to highways.
2. What will happen if we go over the transportation cliff?
In the past, states made their highway and transportation budgets assuming they will get a steady flow of federal dollars. But as transportation expert Ken Orski has shown, states have already realized they can’t count on a steady stream of federal funds and at least half have taken steps to back away from federal dependence.
If Congress goes over the transportation cliff, it won’t mean a sudden halt to highway projects and transit systems. Instead, states will spend money out of their own accounts, possibly getting short-term loans until the federal funding situation is resolved. Rather than a transportation cliff, it would be more accurate to describe current events as a “transportation pothole.” But while everyone expects Congress to soon supplement the Trust Fund, this particular pothole will give more states incentives to find alternative sources of funding.
The cliff isn’t the real issue. Instead, it is the reauthorization bill. Though most transportation reauthorization bills last six years, the 2012 bill expires this September. All of the posturing about the cliff is really an effort to promote changes in a new reauthorization bill.
3. What is the Obama administration’s position?
President Obama has proposed to replace the 2012 law with the “GROW AMERICA Act,” which absurdly stands for “Generating Renewal, Opportunity, and Work with Accelerated Mobility, Efficiency, and Rebuilding of Infrastructure and Communities throughout America.” This bill would increase overall transportation spending by 38 percent, including a 22 percent increase in highway spending and a whopping 70 percent increase in transit funding.
Where would all that new money come from? Obama has also proposed to reform corporate taxes, which is supposed to reduce them in the long run but somehow produce a $150 billion one-time increase in revenues over 10 years. Obama proposes to spend four years of this increase on transportation. After that, the Highway Trust Fund would go over another transportation cliff.
There are a lot problems with this proposal. Congress hasn’t agreed to corporate tax reform, nor has it agreed to dedicate any revenues from that reform to transportation. The one-time injection of funds still leaves federal transportation programs unsustainable in the long run. Perhaps most important, increasing transportation’s dependence on general funds will make it less accountable to users and more accountable to pork-barrel politicians.
Historically, most federal transportation money is in “formula funds,” meaning it is distributed to states based on such factors as state populations, land areas, and road miles. Such funds are hard to use as pork. But Obama wants much, if not most, of the new spending in competitive grant programs, which supposedly allows the money to be spent where it is most needed. But in reality, competitive grants give the administration enormous power to reward the faithful and punish opponents. For example, Obama’s last grant of $2.5 billion to the California high-speed rail project came with a mandate that the money be spent in the congressional districts of two Democrats who were facing stiff opposition in an election that took place a few weeks after the grant was awarded. (They narrowly won re-election.)
4. What is Congress’ position?
Most observers assume that the GROW AMERICA bill is DOA. While House Transportation and Infrastructure Committee Chair Bill Shuster has promised to have a new reauthorization bill “on time,” there is still likely to be a major fight in Congress.
In 2012, the House Transportation Committee passed a bill that reduced spending to little more than revenues. But they couldn’t get the House as a whole to approve the bill because Republicans representing big cities objected to reduced federal spending on transit. So Congress eventually passed a version of the Senate bill, which spent about $15 billion a year more than revenues. That’s why we’re headed for a transportation pothole today.
The 2012 election failed to change the balance of power that led to those conflicts, so Congress is unlikely to pass a long-term bill in 2014. Instead, the push will be to supplement the trust fund and pass another two-year bill that continues the status quo. Unfortunately, the status quo means more congestion and more wasteful spending on obsolete rail projects.
5. Do we need to increase spending to keep America’s highways from crumbling?
For several years, there has been an almost continuous drumbeat about “crumbling infrastructure” which naturally carries over into the Highway Trust Fund debate. “Nearly one in four of America’s bridges [are] either structurally deficient or functionally obsolete,” says the Washington Post.
In fact, state highways are in excellent condition. The number of bridges that are “structurally deficient,” meaning worn out and requiring extra maintenance, has steadily declined from nearly 119,000 in 1992 to less than 67,000 in 2012, and now stands at less than 11 percent of the total. “Functionally obsolete” bridges represent the other 14 percent of the Post’s “one in four,” but these are simply bridges that have lower clearances, narrower lanes, or other issues that might slow traffic but not create serious problems. As for the 11 percent that are structurally deficient, few are in any danger of falling down: the recent bridge collapses in Minnesota and Washington states were due to design flaws, not maintenance failures.
A disproportionate share of the structurally deficient bridges are locally owned, not state owned. While states pay for most of their roads out of gas taxes, tolls, and other user fees, local governments rely heavily on sales taxes, property taxes, and other general funds. This underscores the importance of funding transportation out of user fees, not general funds.
6. Do we need to increase spending on transit?
Many of the groups most eager to portray the transportation pothole as a crisis are really interested in increasing transit spending. Yet there is virtually no relationship between transit subsidies and transit ridership. Since 1970, federal, state, and local governments have collectively spent more than a trillion dollars (in today’s dollars) subsidizing transit, yet transit ridership has declined from nearly 50 annual trips per urban resident in 1970 to around 44 annual trips today.
The real goal of increased transit spending is to build new rail lines. Such lines mean increased profits for rail contractors and excuses for urban planners to increase urban densities because people living in dense housing are supposedly more likely to ride transit than drive.
At the same time, while highways and bridges are in pretty good shape, our transit systems are not. Rail transit lines suffer from a $60 billion maintenance backlog. That backlog is growing because transit agencies are putting less money into maintenance than is needed to keep transit lines in their current state of poor repair.
The problem is that politicians prefer to fund new transit lines rather than maintain existing ones. Peter Rogoff, who until recently was the head of the Federal Transit Administration, even complained that transit agencies with crumbling systems still applied for funds to build new rail lines that they couldn’t afford to maintain. “If you can’t afford to operate the system you have,” he asked, “why does it make sense for us to partner in your expansion?” Having said that, he continued to give out grants for new rail lines because Congress effectively required him to do so.
In 2012, about 30 percent of the money spent on highways came from general funds, mostly at the local level, but 75 percent of the money spent on transit came from general funds. That made transit agencies far more responsive to unions, rail contractors, and other special interests than to transport users, which is the main reason why transit systems are in such poor shape.
7. Should we raise gas taxes?
Raising federal gas taxes by 10 cents per gallon over the current 18.4 cents could allow Congress to continue to spend on both highways and transit at current or increased levels. Rep. Earl Blumenauer (D-OR) has even proposed a 15-cents-per-gallon tax increase. Proponents of such an increase, including Blumenauer, want to see even more money flowing into transit and the construction of new rail projects.
In the long run, however, such an increase will still run into a transportation cliff. This is partly because Congress is likely to fully spend whatever revenues come in, and partly because a combination of inflation and increasingly fuel-efficient cars will reduce long-term revenues no matter what the tax.
Gas taxes function more of a user fee than sales, income, or other general taxes. But they are an imperfect user fee, as they don’t give signals to users about the costs of the facilities they use and don’t give signals to highway providers about the real demand for the roads they build.
8. What’s the solution?
In the immediate term, Congress will no doubt supplement the Highway Trust Fund with another $8 billion to $10 billion in general (meaning borrowed) funds. Beyond that, Congress needs to curb transportation spending so that it is no more than revenues.
In the long run, we need to find a better way to pay for transportation than gas taxes. For highways, that means mileage-based user fees. That will not only assure adequate funds for maintenance and improvements, but also enable the use of variable fees, which could virtually eliminate the traffic congestion that costs Americans $200 billion per year. One issue is that, if roads are funded out of mileage-based fees, there won’t be any need for federal involvement, which is good for those who want to devolve federal power to the states but bad for members of Congress who want to get credit for giving people money.
Meanwhile, most if not all transit costs should be funded out of fares, not taxes. Funding transit out of fares means relying more on buses and halting all or nearly all rail expansions. The best way to do this is to privatize transit, as private operators will be focused on serving users while public agencies end up serving mainly transit unions and suppliers. If Congress or the states feel the need to support low-income transit riders or other transit-dependent people, they should do so using transportation vouchers, not by subsidizing unresponsive transit agencies.
None of this will happen so long as Congress remains focused on increasing revenues to spend on special interest groups. Instead, Congress needs to recognize that transportation facilities are primary for transportation users, not unions, not rail car manufacturers, and not engineering and design firms.
Side-by-side obituaries in the Washington Post on Sunday were an interesting juxtaposition.
One obituary was for Efrem Zimbalist, Jr., a fine actor known for playing an agent in the television series “The F.B.I.,” which ran from 1965 to 1974. I never saw this show, but it sounds like many shows over the decades that have portrayed government agencies as super-efficient, laser-focused on the public interest, and always getting the bad guys.
By the end of each episode, “Mr. Zimbalist’s character, Inspector Erskine, and his fellow G-men had captured that week’s mobsters, subversives, bank robbers, or spies.” That surely helped to burnish the FBI’s image, as did the “stunning good looks” of Zimbalist.
The Washington Post notes: “Perceiving that the series could provide the real FBI with an important P.R. boost, [J. Edgar] Hoover opened the bureau’s files to the show’s producers and even allowed background shots to be filmed in real FBI offices.” Hmm, I wonder whether that influenced the show’s portrayal of the agency?
The other obituary was for Al Feldstein, a pioneering editor of Mad magazine, which had a circulation of 2.8 million by the 1970s and “shaped” many young minds. I had one of those young minds, and was influenced by the magazine’s “mockery of adult hypocrises.”
Feldstein saw his magazine “as a form of civic education” for young people. He said “it was their pipeline into the truth about what was happening in the country.” It “taught them skepticism,” which was certainly true for me.
While “The F.B.I.” was apparently portraying the FBI as beyond reproach, Mad magazine was busy “puncturing pomposity.” And here is where the two obituaries collide. Mad “asked readers to write FBI Director J. Edgar Hoover to request an ‘Official Draft Dodger Card,’” and many did. One would think that the agency would have been too busy catching mobsters to pay attention to such a prank. But no: “In a predictably bizarre encounter, FBI agents paid a visit to Mad’s offices in New York, dropping hints that Hoover didn’t take kindly to such shenanigans.”
Later on, America found out that it was Hoover who was committing the real shenanigans. In 1971 a group of skeptical young people “broke into a Bureau branch office outside of Philadelphia, seeking evidence for what they’d long suspected: that Hoover’s FBI was engaged in a secret, illegal campaign of surveillance and harassment of American citizens. The documents they found revealed massive abuses of power and helped lead to new legal checks on domestic surveillance.”
They probably didn’t find any files on Mad in that Philadelphia office, but apparently FBI HQ had accumulated 36 of them over the years.
The Washington Post says that Mad “warped the sensibilities of America’s youth” and exerted a “subversive” influence. But there is nothing warped about teaching skepticism. The real warping comes from all the Hollywood portrayals of government as a benevolent force led by technocratic experts who can solve all our problems.
In the Washington Post, Paul Kane reports that recent experiences with ultra-conservative Senate candidates have made Republican leaders fearful of candidates like Rep. Paul Broun in Georgia. There may be reasons for party leaders or voters to have doubts about Broun, but I hope they aren’t actually concerned about the purported problem that Kane identifies:
Broun is prone to fiery speeches invoking the Founding Fathers and applying those 1789 principles to issues 225 years later.
Seriously? He thinks the Constitution is still the law of the land? And that the framework it established for individual rights and limited government is still relevant today? Do Republican leaders really think that’s a bad message? Or does the Washington Post?
Thomas Jefferson and his followers hailed “the principles of ‘76” or “the spirit of ‘76” in their battles with Federalists. As historian Joseph Ellis put it, “Jefferson’s core conviction was that what might be called ‘the spirit of ‘76’ had repudiated all energetic expressions of government power, most especially power exercised from faraway places, which included London, Philadelphia or Washington.” Good thing there isn’t an actual Jeffersonian running!
But the principles of 1789, or actually of 1787, also protect freedom from government power and are just as essential today as they were at the Founding. The Framers knew their history. They knew that people with power tend to abuse it and to restrict freedom. In his last letter, 50 years after the Declaration of Independence, Jefferson wrote:
All eyes are opened, or opening, to the rights of man. The general spread of the light of science has already laid open to every view the palpable truth, that the mass of mankind has not been born with saddles on their backs, nor a favored few booted and spurred, ready to ride them legitimately, by the grace of God.
Because they feared the exercise of power, the Framers wrote a Constitution that established a government of delegated, enumerated, and thus limited powers. Then the people insisted on a Bill of Rights to further protect their rights even from the very limited federal government established in the Constitution. Then, after identifying specific rights that individuals retained, they also added, “for greater caution,” as James Madison put it, the Ninth Amendment to clarify that “The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.”
One would hope that all members of Congress – and voters, and political reporters – believe that those principles and those constitutional rules should be applied to issues of today. Surely the First Amendment remains relevant. And the Fourth. And the limits on unconstrained power in the basic structure of the Constitution. The merits of any particular candidate aside, support of the Constitution and the principles it embodies seems like a good, even minimal, qualification for public office.
Yesterday, we had a very interesting discussion of copyright at our event on Tom W. Bell’s book, Intellectual Privilege. (Video will be available soon.) Today, I received an email that reflects how the copyright statute can be misused.
In a 2009 blog post about an $18,000,000 U.S. government web site, I pointed to the web site, Recovery.org, which was then hosting the same information as the government site, and doing it for free. Since then, the Recovery.org domain has evidently been transferred to an organization specializing in recovery from addiction (to alcohol and drugs, not government spending).
The email I received today purports to be from an attorney named “Rick Smith” of the “Law Offices of Rick Smith & Associates”—no web site or phone number, and only a Gmail account. It asks me to remove the link to http://www.recovery.org/, claiming to have “received numerous complaints” from readers of the 2009 blog post.
It goes on: “If you fail to respond by May 13 we will be forced to serve you with a formal DMCA take down notice. A copy can also be sent to the hosting provider and major search engines that can exclude this and other pages from organic search rankings.”
The notice-and-take-down provision of the Digital Millennium Copyright Act allows aggrieved copyright holders to attack the wrongful Internet posting of material over which the law gives them control. It is not there to help people seeking correction of web site inaccuracies, much less for them to threaten suppression of access to material in which they do not hold the copyright.
I know this, of course, but many people don’t. Emails like this can fool people into thinking that they have to make demanded changes.
I’m going to make the change because there’s no sense in preserving a bad link. I’m also going to contact the folks at Recovery.org to see if they’re aware that someone purporting to be their attorney is misusing copyright in their name.
Juan Carlos Hidalgo
Last night Venezuela’s Bolivarian Intelligence Service (SEBIN) arrested Rodrigo Diamanti, president of “Un Mundo sin Mordaza” (A World Without Gag), an NGO that promotes human rights and freedom of expression in that country. Diamanti is also a good friend of the Cato Institute and attended the Cato University that we co-hosted in Venezuela in 2009.
No charges have been filed, although reportedly he had an arrest warrant against him. Two weeks ago, while visiting Caracas to run another Cato University and speak at a conference of the pro-liberty think tank Cedice, my colleague Ian Vásquez and I got to talk to Rodrigo and other Venezuelan friends who were part of the student movement that defeated Hugo Chávez in a referendum in 2007. They told us how the government was increasingly harassing NGOs. Sadly, we noticed that many of the guys that attended that Cato University in 2009 have left Venezuela. Those who stayed and continue to fight against the increasingly authoritarian government face the consequences.
Also, early this morning the Bolivarian National Guard violently took over two camps in downtown Caracas where students had been staging a permanent protest against the government. The authorities claim they arrested 243 people. I visited both camps and met several of the students there. One of them, Maria Alejandra, 23, told me she had an arrest warrant against her and woke up every day not knowing whether she would be free –or even alive—by the end of the day. I haven’t been able to contact her today and I’m afraid she’s among those detained during today’s raid.
The crackdown comes at a time that the government is holding phony dialogue meetings with a sector of the opposition. Yesterday a poll by Datanálisis found that 78% of Venezuelans are pessimistic about the situation of the country and 59% thinks that president Nicolás Maduro is doing a bad job. The trend is clear: As the popularity of the regime dwindles, its authoritarianism increases.
It doesn’t pay to be number two in North Korea. In December the young dictator Kim Jong-un executed his uncle, Jang Song-taek, supposedly Kim’s top advisor. Now Vice Marshal Choe Ryong-hae, who climbed atop Jang’s corpse, has been relieved of his important positions.
Choe’s fall is particularly important because, though he was an aide to Kim’s father, Kim Jong-il, he rose rapidly under the younger Kim. Dumping Choe reshapes the political environment of Kim’s making.
While Kim’s dominance in Pyongyang does not guarantee the regime’s survival, it dampens hope for any change outside of Kim. Today’s Korean Winter isn’t likely to give way to a Korean Spring.
Moreover, nothing suggests that the North’s communist monarchy is about to give way. Many observers have waited a long time for regime collapse in the North. They probably will have to wait a lot longer.
So far Kim Jong-un doesn’t appear to be much interested in reform. If anything, he is more committed to his government’s nuclear weapons program and confrontational foreign policy than were his predecessors.
North Korea’s policy toward the South has oscillated wildly, but has headed mostly downward. The North also appears to be preparing a fourth nuclear test. The DPRK recently test-fired two medium-range missiles, predicting “next-stage steps, which the enemy can hardly imagine.”
The Obama administration obviously is frustrated, and reportedly is considering easing preconditions for resuming the long-stalled Six Party Talks. However, it’s unlikely that renewed negotiations would lead anywhere. Which has left the major U.S. response to tie itself closer to its South Korean ally, loudly reaffirming that America will defend the Republic of Korea if necessary.
Washington needs to reflect first on why the North is such a problem for America. A small, impoverished, and distant state, even with a handful of nuclear weapons (but no delivery capacity), obviously is no match for the globe’s superpower. Ordinarily the former wouldn’t be interested in the latter.
But the U.S. maintains a defense treaty with and garrison in the ROK, routinely deploys naval and air units around the DPRK, regularly conducts military exercises in the South, and constantly threatens war against the North. Pyongyang can’t very well ignore America.
Thus, going home should be the foundation of U.S. policy toward the Koreas. When Washington agreed to a defense treaty with the South 61 years ago the latter was in no condition to defend itself from renewed attack. But everything has changed since the end of the Cold War. Today Seoul doesn’t need conventional back-up.
Nor does the U.S. military commitment help solve the nuclear issue. American forces have become nuclear hostages, conveniently placed within striking distance of the North. They also reinforce Pyongyang’s natural paranoia, increasing its perceived need for nuclear weapons.
Washington should loosen military ties with South Korea and extricate itself from a potential Korean conflict. The U.S. should terminate the “mutual” defense treaty, withdraw the permanent garrison, and end the periodic threats.
Doing so would knock Washington down several notches on Kim’s enemies list. Withdrawal also would reduce Beijing’s perception that the U.S. is seeking to contain China in cooperation with the ROK.
As I point out in my latest article on National Interest online: “Having demilitarized America’s role on the peninsula, Washington then could engage the North with less controversy—opening simple consular relations, for instance. U.S. policymakers would gain a small window into an alien society, as well as a direct communications channel.”
North Korea, so full of human tragedy, marches on with a new communist king at the nation’s head. There’s little any other country can do to bring peace, stability, and prosperity to the DPRK.
However, the U.S. could, and should, reduce the possibility of the North interfering with America’s peace, stability, and prosperity. By going home. Where America’s soldiers and other military personnel belong.
Today is the 115th anniversary of the birth of F. A. Hayek, who honored the Cato Institute by serving as a Distinguished Senior Fellow, and in whose honor the Institute’s F. A. Hayek Auditorium is named. “It is hardly an exaggeration to refer to the twentieth century as the Hayek century,” John Cassidy wrote in the New Yorker. If we’re lucky, the 21st century will also be a Hayek century.
Hayek spoke at Cato several times. Before his 1982 Distinguished Lecture, he sat down for an interview with Cato Policy Report. Here’s another interview by our late board member Jim Blanchard that appeared in Cato Policy Report. Senior fellows Tom Palmer and Gerald O’Driscoll have offered appreciations of his work. O’Driscoll more recently applied Hayek’s business cycle theory to the 2008 financial crisis.
Cato adjunct scholar Ilya Somin ponders Hayek’s continuing relevance in this essay from just before the crisis announced itself last fall. Somin notes that Hayek’s critique of socialism gets most attention from scholars, but his critique of conservatism is also worth pondering.
In 2011, on the occasion of the publication of a definitive edition of Hayek’s great book The Constitution of Liberty, his work was discussed in the Hayek Auditorium by Ronald Hamowy, Bruce Caldwell, Richard Epstein, and George Soros. I discussed that event, with a link to the video and transcript, here, concluding
Hayek was not just an economist. He also published impressive works on political theory and psychology.
He’s like Marx, only right.
As the world suffers from the aftereffects of another Federal Reserve-created bubble, it’s a good time to reread Hayek on the boom-and-bust cycle. But it’s also a good day to reflect that Hayek lived just long enough to see the demise of the totalitarian socialist system that he spent his life analyzing and criticizing. The world is freer today, partly because of Hayek’s great work.
I testified yesterday to the Senate Finance Committee regarding federal highway and transit funding.
I appreciated the committee’s willingness to hear views different than the usual pro-spending positions of the Transportation Establishment, which includes nearly all Democrats, many Republicans active in transportation, and dozens of business, engineering, and construction lobby groups. I discussed reasons why decentralizing transportation funding and decision making would be the best policy approach.
Politically, the highway issue will be very interesting to watch in coming months. Congress needs to act because the Highway Trust Fund faces a huge gap between spending and revenues of at least $14 billion annually. The revenues mainly come from the federal gasoline tax, which everyone agrees is not going to be raised anytime soon.
What should Congress do? To believers in budget restraint, federalism, and efficient infrastructure investment, the answer is obvious: policymakers should reduce federal spending to match revenues. Heritage scholars examine the federalism angle in this piece. I discuss efficient infrastructure investment in this piece.
However, some Republicans apparently want to raise revenues to match today’s high spending levels. If Republicans go in that direction, it will be one more failure to align their policy actions with the fiscally conservative language that peppers their speeches and media comments.
Joseph Rago of the Wall Street Journal reports on an outrageous enforcement action by the Federal Energy Regulatory Commission against brothers, Rich and Kevin Gates. Excerpt:
[FERC] began demanding information and taking depositions in fall 2010. At first, the Gates brothers tried to adhere to the insider playbook and hired an attorney from White & Case, a D.C.-based law firm that does frequent business in front of FERC. The insular Washington energy bar trafficks in political connections, but those aren’t so useful for clients who maintain their innocence.
Things started to turn for Kevin Gates, he recalls, during his second full-day deposition with the lead FERC enforcement lawyers on the Powhatan matter, Steven Tabackman and Thomas Olson. “I would suggest that it was intimidation tactics, aggressive behavior, which I guess is natural for a federal prosecutor, maybe what you would expect,” he says. “But there were also a lot of questions asked and behavior that suggested to me that we were seeing the world very differently and—I would suggest—they didn’t know what they were talking about.”
Mr. Gates was asked to leave the room and sat in the hallway while his lawyer conferred with the feds. The lawyer emerged to relate what the FERC enforcement team had proposed: “Kevin’s a businessman, isn’t he? He knows that it’s cheaper to settle than it is to fight this investigation.” Right then, Mr. Gates says, “I realized that we had a big problem on our hands. This was unlike anything we’d ever seen before at a regulatory agency.”
The Gates brothers fired the white-shoe practice and brought on Bill McSwain of Drinker Biddle, a Philadelphia-area lawyer who “didn’t interface much with FERC. He also used to be a Marine sniper, so he had a different approach to the world.” Mr. McSwain introduced himself to FERC by calling their conduct contrary to “established law, as well as common sense,” and that was one of his subtler letters…
[FERC’s regulators] have specialized in retroactive punishments for conduct that was legal at the time. Most of these cases never go to court and end with settlements against politically disfavored defendants like J.P. Morgan (that one, like Powhatan, was led by Mr. Olson). Most companies roll over because their future business interests depend on preserving good regulatory graces and favorable FERC rulings. The Gates brothers are unusual in that their livelihoods are elsewhere, but the illogic, intimidation tactics and erosion of due process in their investigation are typical. [Emphasis added].
Read the whole thing. As the article notes, most business people surrender to the bullying tactics of regulators. By taking their case public and fighting back, the Gates brothers may not only win their case, but might establish some favorable legal precedents that will help others in the future. And for that, they deserve our thanks.