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Daniel J. Ikenson

Last week the U.S. government settled a long-running trade dispute with Brazil, winning taxpayers the privilege of continuing to subsidize America’s wealthy cotton farmers in exchange for our commitment to subsidize Brazilian cotton farmers, as well. That’s right! We get to pay U.S. cotton farming businesses to overproduce, export, and suppress global prices to the detriment of Brazilian (and other countries’) cotton farmers provided that we compensate the Brazilians to the tune of $300 million.

Some background. Ten years ago, in a case brought by Brazil, the WTO Dispute Settlement Body ruled that the United States was exceeding its subsidy allowances for domestic cotton farmers and that it should bring its practices into compliance with the relevant WTO agreements. After delays and half-baked U.S. efforts to comply, Brazil sought and received permission from the WTO to retaliate (or, in WTO parlance, to “withdraw concessions” because opening one’s own market in a world of mercantilist reciprocity is, perversely, considered a cost or concession). Under the threat of such retaliation, instead of bringing its cotton subsidies into WTO compliance, the U.S. government agreed to pay $147 million per year to Brazilian farmers so that it could continue subsidizing U.S. farmers beyond agreed limits. That arrangement prevailed for a few years until the funds were cut during the budget sequester earlier this year – an event that triggered a renewed threat of retaliation from Brazil, which now has been averted on account of last week’s $300 million settlement.

The Peterson Institute’s Gary Hufbauer characterized the agreement as a “good deal” because it ends the specter of soured bilateral relations, which $800 million of targeted retaliation against U.S. exporters and intellectual property holders would likely produce, for a reasonable price of $300 million “spread widely across the US population, around 90 cents a person.” In Hufbauer’s opinion:

Money damages, paid in this way, are much fairer, and do not destroy the benefits of international commerce, unlike concentrated retaliation against firms that had nothing to do with the original dispute. The WTO system is only designed to authorize such retaliation, but the US-Brazil settlement points the way towards a better way of satisfying breaches of WTO obligations.

While I share Hufbauer’s desire to avoid retaliation and soured relations, his rationale for endorsing the settlement seems a bit strained. If the settlement is justifiable because the costs are spread across 300-plus million Americans, then Hufbauer can probably lend his support to most subsidies, tariffs, and other forms of protectionism, which endure because the concentrated benefits accruing to the favor-seekers are paid through costs imposed, often imperceptibly, on a diffuse base of unorganized consumers or taxpayers. Does the smallness or the imperceptibility of the costs make it right? No, but it makes it easy to get away with, which is why I think it’s pennywise and pound foolish to endorse such outcomes. There are all sorts of federal subsidies to industries and tariffs on goods that may be small or imperceptible as a cost on a standalone basis at the individual level.  But when aggregated across programs, the costs to individuals become more significant. It’s death by 10,000 cuts.

Hufbauer implies that $0.90 per American is not an unreasonable amount.  Does he have a threshold per-person cost above which he would consider the burden unjustified? As it stands now, the cost to taxpayers is well in excess of the $0.90 – a figure that accounts only for the subsidies to the Brazilians.  We know that the U.S. subsidies are approximately $800 million in excess of allowance, which means that the violating portion of taxpayer subsidies to cotton producers amounts to $2.40 per American.  For the “right” to spend that $2.40 per American, each American must spend $0.90 for a total of $3.30 each.  So, instead of saving $2.40 per American by bringing subsidies into compliance, taxpayers are in the red by $3.30 each – a $5.70 reversal. But, of course, the real cost to Americans is not the excess subsidies plus the cost of subsidizing Brazilians, but the overall cost of cotton subsidies, which were close to $2 billion per year for the period 1995-2012, or over $6.00 per American per year during that period. But why should Americans be forced to support wealthy U.S. cotton farmers in the first place?

Hufbauer’s point is that money damages spread over a broad base of payers is more fair than targeted retaliation, which would impose those costs on a few innocent U.S. industries and IP holders, and he writes that “the WTO system is only designed to authorize” such retaliation.  But I think Hufbauer is selling the system short. Compliance with the rules is preferable to both targeted retaliation and damages spread across a broad base, and the WTO system is designed to encourage such compliance without imposing on national sovereignty.

First of all, retaliatory trade measures are something most governments prefer to avoid because trade restrictions hurt businesses and consumers in the country imposing them. But the purpose of permitting a WTO member to withdraw concessions in response to another Member’s violations and persistent non-compliance is, ultimately, to encourage compliance by bringing otherwise dormant domestic pressures to bear on the offending government. The threat of retaliation along with publication of a target list essentially broadens the dispute by creating more stakeholders – specifically, domestic stakeholders with an interest in compliance.  In 2002, when the United States imposed restrictions on steel imports from most countries, which were found to violate the WTO Safeguards Agreement, the EU’s retaliation list included products known to be important to organized lobbies or states with particular relevance to congressional and presidential electoral outcomes – products such as citrus, textiles, and motorcycles. The credible threat of retaliation against these and other industries created a powerful political constituency encouraging compliance with the WTO ruling by ending the steel restrictions, which also brought U.S. producers and consumers the benefits of lower steel prices.

In the cotton case, instead of achieving compliance and reducing burdens on U.S. taxpayers, the targets of Brazilian retaliation managed to get themselves out of harm’s way, but at the expense of U.S. taxpayers. Any leverage to compel the U.S. government to do the right thing and rein in the cotton subsidies has been spent. Hufbauer’s outlook differs:

Brazil’s agreement to drop its WTO case against US cotton subsidies (specifically an export credit program known as GSM-102) and not to launch a new case expires at the same time that the US Agricultural Act of 2014 expires in 2018. What this means is that the US Congress in 2018 will face pressure not to renew a subsidy program that enriches a few already rich American farmers.

The problem with that logic is that the same “pressure” existed this year, before Congress passed the farm bill.  Yet, the Agricultural Act of 2014 includes the same offensive provisions for cotton.  Moreover, what incentives exist for Congress “not to renew a subsidy program that enriches a few already rich American farmers” if the price of buying four more years of peace is a comparably reasonable $0.90 per person?”

Settlements like these may appease the primary governments involved in the dispute, but they leave unresolved the original sins, which impose a lot of collateral damage on a variety of interests.  In that regard, settlements are failures.

Finally, if the cotton settlement and the tobacco settlement (the latter is described by Bill Watson here today) – which both, essentially, release the United States from its WTO commitments in exchange for some form of payment to the complainant – are portrayed as trade policy successes, it will be just a matter of time before WTO adjudication devolves into a claims court before descending into irrelevance.

K. William Watson

The World Trade Organization’s judicial body determined over two years ago that a U.S. law banning clove cigarettes while leaving domestically produced menthols on the shelf was protectionist discrimination.  Now the U.S. and Indonesian governments have reached a “settlement” in which Indonesia agrees to drop the case in exchange for nothing.

Technically, the settlement, as reported, includes a few promises from the United States, but these are so weak as to be practically meaningless.  For example, the United States agrees to refrain from “arbitrary discrimination” against Indonesian cigars (which is already not allowed) and to “postpone” filing its own case against Indonesian export restrictions (which no longer impact U.S. companies).

American refusal to comply with global trade rules against regulatory protectionism is both unfortunate and, in this case, unsurprising.  There were two basic ways that the U.S. government could have come into compliance: 1) by dropping the ban on cloves, or 2) by extending the ban to menthols.  Neither of those options was politically feasible, so the United States did nothing.

Normally, the WTO dispute settlement process can be very helpful in overcoming political barriers to trade liberalization.  When one country loses a case at the WTO and fails to comply, the complaining country has the right to retaliate by raising tariffs on goods from the losing country.  This creates concentrated losses that have much greater political impact than the generally diffuse costs of protectionist policies.  The ultimate goal is to “induce compliance”—the losing country discontinues its offending practice so that the retaliation will stop. 

But the United States is very big and powerful, so that for most countries cutting off imports from the United States is not only ineffective at swaying Washington policymakers but also very harmful to their own economy. Indonesia appears to have decided that dropping the case and walking away makes more sense than continuing to press forward with costly, futile retaliation.

Unfortunately, the clove cigarette settlement joins a growing list of similar cases in which the United States has taken advantage of its economic and political power to avoid complying with WTO rules.  These include a successful challenge by the tiny island nation of Antigua against U.S. restrictions on cross-border online gambling that Antigua has no way to enforce. 

Perhaps the most embarrassing example of noncompliance is the deal between the United States and Brazil reached after Brazil won a case against U.S. cotton subsidies.  The United States managed to avoid retaliation and keep the subsidies by agreeing to send Brazilian cotton farmers a check for $147 million every year. That arrangement appears to be coming to an end with the United States providing one final payment of $300 million and keeping the cotton subsidies indefinitely.

The United States doesn’t always refuse to comply with WTO decisions.  The threat of retaliation from Canada and Mexico may very well make a difference in the ongoing fight over protectionist U.S. regulations related to origin labels for meat.  A big difference between that case and clove cigarettes is that Canada and Mexico are the two largest export markets for U.S. products. 

There’s reason for optimism, but the reputation of the WTO dispute settlement process is being put at serious risk by this administration’s lack of commitment to the rules of the international trading system.

Doug Bandow

Hong Kong is part of China.  But administered separately from the rest of the People’s Republic of China, the territory respects civil liberties while hosting the world’s freest economy. 

Demonstrators are pressing Beijing to make good on its promise of  democratic rule and free elections.  But the PRC will not, indeed, cannot, give residents of Hong Kong what it refuses to give the rest of its citizens.  The city’s future depends on finding a compromise that preserves Hong Kong’s freedom and peace.

The British colony grew out of imperial China’s weakness.  London seized Hong Kong Island, then the Kowloon Peninsula, and later “leased” the New Territories.  In 1997 the latter’s 99-year term ran out.  At which point Beijing was legally entitled to take back the New Territories.

Dividing Hong Kong would have been a practical nightmare.  And Beijing might not have continued to honor territorial cessions forced more than a century before.  So in 1984 London agreed to the full territory’s return.

One wonders:  What if Prime Minister Margaret Thatcher had scheduled a referendum in which the territory’s residents could freely express their decision?

At the time a still weak and isolated Beijing probably would have felt little choice but to accept an adverse vote.  However, the PRC might have chosen to bide its time, as it has done with Taiwan, and now would be demanding the territory’s return.

Returning Hong Kong meant transferring millions of people to communist China.  The PRC committed to respect Hong Kong’s uniqueness for a half century. 

However, Beijing never promised to hold fully free elections.  Rather, it stated:  “The chief executive will be appointed by the Central People’s Government on the basis of the results of elections or consultations to be held locally.” 

The Basic Law (essentially the territory’s constitution), approved six years later by Beijing, provided for “nomination by a broadly representative nominating committee in accordance with democratic procedures.”   The PRC claims that is what it is implementing. 

As of 2017 residents will be able to elect their ruler, but only from candidates vetted by Beijing.  It won’t be real democracy, but then, there never was much chance that the Chinese Communist Party would institute real democracy in any area under its control.

That’s not fair to Hong Kong’s residents.  So it’s impossible not to admire the protestors.  However, their very passion threatens their objective.  They have divided over tactics and sparked criticism from some other residents. 

The greatest risk is that the Chinese leadership might believe it must choose between repression and either chaos or democracy.  In 1989 the CCP sent in tanks to clear democracy-minded demonstrators out of Tiananmen Square.

Beijing would pay an even higher price for cracking down in Hong Kong.  Still, the Chinese regime places self-preservation above everything else.

Moreover, if China violently dispersed the protestors, it would not likely stop there.  Media freedom and judicial independence also would be at risk. 

This week tensions eased as demonstrators and government officials agreed to talks.  Democracy advocates should temper their idealism with an acute sense of pragmatism. 

Beijing might sacrifice the territory’s chief executive, Leung Chun-ying, and make other concessions, such as broadening the nomination process.  But the PRC will insist that Chinese officials, not Hong Kong residents, be in charge. 

Unfortunately, as I write in Forbes online, “Nothing the U.S. does can bring democracy to the territory.  To the contrary, the more Washington attempts to intervene, the more likely China is to perceive the demonstrators to be threats.” 

Democracy advocates have moral right on their side.  Still, raw power is likely to prevail in any showdown.  The protestors must temper idealism with prudence.  They must not allow the perfect to become the enemy of the good for their own sake—and ultimately that of Hong Kong and China as well.

Steve H. Hanke

Recent reportage in the New York Times reminded me of my 95 Percent Rule: “95 percent of what you read about economics and finance is either wrong or irrelevant.” In her piece on the Bulgarian elections, Mariana Ionova wrote:

“[Bulgaria’s] economy is growing at an annual rate of about 1.6 percent, but that is the slowest pace in the union, and about half the European average.”

These alleged facts aren’t even in the ballpark (see the accompanying chart). Bulgaria is neither the slowest growing economy in the European Union, nor is it growing at half the European average. In fact, Bulgaria is growing slightly faster than the European average.

Once again, the 95 Percent Rule rules.

Steve H. Hanke

The leading political lights in Europe – Messrs. Hollande, Valls and Macron in France and Mr. Renzi in Italy – are raising a big stink about fiscal austerity. They don’t like it. And now Greece has jumped on the anti-austerity bandwagon. The pols have plenty of company, too. Yes, they can trot out a host of economists – from Nobelist Krugman on down – to carry their water.

But, with Greece’s public expenditures at 58.5% of GDP, and Italy’s and France’s at 50.6% and 57.1% of GDP, respectively – one can only wonder where all the austerity is (see the accompanying table). Government expenditures cut to the bone? You must be kidding. Even in the Unites States, where most agree that there is plenty of government largess, the government (federal, plus state and local) only accounts for a whopping 38.1% of GDP.

As Europe sinks under the weight of the State, it’s austerity, not anti-austerity, that should be on the menu.

Ted Galen Carpenter

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

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

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

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

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

Ian Vásquez

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

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

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

The U.S. Decline

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

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

David Boaz

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

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

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

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

John Allison, Williamsburg

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

Simon Lester

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

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

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

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

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

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

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

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

Ilya Shapiro

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

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

Juan Carlos Hidalgo

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

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

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

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

Dalibor Rohac

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

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

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

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

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

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

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

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

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

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

Tim Lynch

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

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

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

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

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

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

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

Randal O'Toole

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ilya Shapiro

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

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

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

Ilya Shapiro

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

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

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

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

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

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

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

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

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

Jason Bedrick

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Steve H. Hanke

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

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

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

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

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

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

Nicole Kaeding

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

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

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

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

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

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

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