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Nicole Kaeding

The House of Representatives voted this week to establish rules for the 114th Congress. One rule change requires that the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) dynamically score legislation. The change is a much-needed reform to the federal budgeting process.

The current legislative scoring process completed by CBO and JCT is generally called static scoring. It currently incorporates some microeconomic behaviorial responses to projected changes in federal spending and taxes.

But static scoring misses a big piece of the puzzle. It assumes that the size of the economy is constant. It does not include an analysis of the economy-wide responses to  policy changes. By constrast, dynamic scoring  acknowledges the obvious fact that actions of Congress could effect gross domestic product (GDP). 

Consider a hypothetical income tax increase from 35 to 40 percent. The tax increase may cause  individuals to work fewer hours and businesses to reduce their capital investment. Those sorts of decisions will be made by millions of individuals and businesses in response to tax changes. In aggregate, these responses would affect GDP. Dynamic scoring includes these macroeconomic responses.

Contrary to some opponents, dynamic scoring is not new to CBO. CBO has used dynamic scoring before. The large immigration bill in 2013 was dynamically scored to show how less stringent immigration policy could foster economic growth. CBO estimated the economic growth effects of the 2009 stimulus. And CBO’s long run spending projections include supplementary forecasts that include the effects of future spending, taxes, and deficits on economic growth. The House rule change requires that CBO and JCT use dynamic scoring on all  legislative cost estimates above a certain magnitude.

Dynamic scoring is not perfect. Its results are influenced by the assumptions made by the models used to produce the results. For this reason, CBO should make its models, assumptions, and data available to outside experts so it can receive feedback from scholars and improve its methods. But static scoring is even less perfect than dynamic scoring. Its assumption of constant GDP leads to results that are biased against policies that lead to economic growth, such as tax rate reductions.

Dynamic scoring will not be a cure-all, but it will be a helpful tool so policymakers can better weigh  policy options. Providing Congress with the best information available on policies to help grow the economy seems like a no-brainer. Congress should understand how its actions affect economic output. This rule change starts the new Congress off on the right foot.

K. William Watson

Some of the most vocal criticism of the Transatlantic Trade and Investment Partnership, a proposed trade agreement between the European Union and the United States, is coming from Europeans worried that the agreement will liberalize parts of their economy that it actually won’t.  This is a very frustrating situation, because supporters of the agreement are then forced to assure critics that the TTIP will not, in fact, do this particular good thing they don’t want it to do.

For example, people have claimed angrily that the TTIP will require the UK to privatize its National Health Service and then prevent the government from “renationalizing” it—that would be great, but it’s not true.  At most, the UK would be required to allow U.S. companies to participate if the government chose to privatize parts of the NHS and then compensate them in any future taking, as it would surely do anyway.  If the UK ever reforms its health system, it won’t be because of TTIP.

Now a new boogieman has emerged, with European news media fretting this week that the TTIP could require Europe to relax protections for geographical indications on cheese and meat products.

As reported in the Financial Times:

Christian Schmidt, Germany’s agriculture minister, said in an interview with Der Spiegel: “If we want to seize the opportunities of free trade with the enormous American market then we can’t carry on protecting every sausage and cheese speciality.”

Food producers, politicians and campaigners against the trade deal seized on his remarks as evidence that the protection of regional brands would be sacrificed to globalisation.

[But] Daniel Rosario, spokesman for the EU, insisted that TTIP would not undermine European food brands or weaken intellectual property safeguards.

“On the EU side, we have made clear to our American counterparts that geographical indications are one of our main priorities and we have not agreed and will not agree to reduce the protection of our geographical indications in Europe,” he said.

Despite what a German official may have said, the EU is not only committed to maintaining its GI protection scheme but is intent on spreading it internationally.  If the TTIP does impact the use of geographical indications it will likely be to require the United States to recognize and protect European GIs in the U.S. market.

That’s a real shame, because Europe’s method for protecting GIs is bad for European consumers.  U.S. policymakers should avoid imitating it.

Sometimes when a product uses the name of a place, it’s to indicate origin.  For example, any consumer that purchased  Napa Valley wine, Wisconsin cheese, or Florida orange juice expects that some or all of the product was produced in those locations.  On the other hand, lots of place names are generic indicators of a product’s characteristics.  For example, no one thinks Philly cheesesteak, Boston cream pie, or Texas toast have to be made only in those places.

The proper way to distinguish between these different uses of place names is to gauge consumer expectation.  However, many countries in Europe, and the EU itself, protect GIs not to prevent consumer confusion but to secure advantages for traditional producers.  They use restrictions on language in order to prevent names from becoming generic, and are trying to claw back names that have already become generic in foreign markets.

Americans would be surprised to learn how many of the foods they eat have names that Europe thinks are GIs in need of protection.  The most well-known example of a term that is generic to Americans but not Europeans is champagne, which to most Americans simply means wine with bubbles.  But cheeses like asiago, parmesan, and gorgonzola are also regulated geographically in Europe as well as countless other descriptive terms like Cornish pasty and Greek yogurt.

The result for Europe is a market where quality and geography are legally tied together.  This system pleases local producers and politicians, but it also kills innovation and prevents the development of efficient supply chains.  Consumers may know just where their cheese came from, but without competition, they will have to pay more for it and it probably won’t taste as good.

David Boaz

Through Tammany Hall, the New York City Democratic political machine in the late 19th century, “Boss” William M. Tweed essentially controlled the city’s government and much of the state’s. Like most political leaders he never felt entirely secure, and he tried to bully his opponents, including journalists. He is famously reported to have been especially outraged by cartoonists such as Thomas Nast, and to have roared to his associates,

Let’s stop them damn pictures. I don’t care so much what the papers write about—my constituents can’t read—but damn it, they can see pictures.

It seems that Islamic extremists may feel the same way. Theo van Gogh was murdered after producing a film about Islam. The publication of cartoons about Muhammad in the Danish newspaper Jyllands-Posten generated much outrage and numerous death threats. And now we have the brutal murders of cartoonists and other journalists from the French newspaper Charlie Hebdo. At least Boss Tweed just used bribery and corrupt politics to ruin his enemies.

Walter Olson wrote eloquently in Time magazine yesterday about the Charlie Hebdo murders and the challenge they present to liberal society:

There is no middle ground, no soft compromise available to keep everyone happy–not after the murders at the satirical newspaper Charlie Hebdo. Either we resolve to defend the liberty of all who write, draw, type, and think–not just even when they deny the truth of a religion or poke fun at it, but especially then–or that liberty will endure only at the sufferance of fanatical Islamists in our midst. And this dark moment for the cause of intellectual freedom will be followed by many more.

Flemming Rose, the editor who commissioned the Jyllands-Posten cartoons, writes about threats to free speech in his book The Tyranny of Silence, published recently by the Cato Institute, and in various articles and interviews.

And herewith my favorite Thomas Nast cartoon, not primarily about Boss Tweed’s corruption, but about “Peace with a War Measure” – peace and liberty shackled by the income tax.

 

Ilya Shapiro

Our immigration system is broken and Congress has shamelessly refused to fix it. Of course, this unfortunate circumstance doesn’t give the executive branch the power to institute reforms itself. Yet through a recently announced policy known as Deferred Action for Parental Accountability (DAPA), President Obama has given partial legal status to more than four million illegal migrants, entitling them to work authorizations and other benefits.

This unilateral action is good policy, bad law, and terrible precedent. Perhaps most importantly, it violates the separation of powers and is thus unconstitutional.

In what is becoming a routine occurrence under this administration, 25 states have sued the federal government in response to this executive action. The case is now before a federal district judge in Brownsville, Texas, who is entertaining the plaintiffs’ motion to enjoin DAPA.

Cato, joined by law professors Josh Blackman, Jeremy Rabkin, and Peter Margulies, has filed an amicus brief supporting the motion. It’s highly unusual for Cato to file at the district court level—indeed amicus briefs of any kind are unusual in this forum—but this is a highly unusual situation.

To be clear, we support comprehensive reform that would provide relief to the aliens protected by DAPA (among many other goals), but it’s not for the president to make such legislative changes alone.

President Obama has defended his action by citing past deferrals for (1) battered and abused aliens, (2) aliens involved in human trafficking, (3) foreign students affected by Hurricane Katrina, and (4) widows of U.S. citizens. But these deferred actions, to the extent they’re relevant here, served as temporary bridges from one legal status to another, not tunnels that undermine legislative structure or detours around the law to hitherto unknown destinations. Moreover, they were several orders of magnitude smaller than DAPA, in the tens of thousands not the millions. Most significantly, they were all approved by Congress.

None of these principles holds true for DAPA. The administration itself stated the applicable test in the memorandum setting out DAPA’s legal justification: “an agency’s enforcement decisions should be consonant with, rather than contrary to, the congressional policy underlying the statutes the agency is charged with administering.” This executive action represents a fundamental rewrite of the immigration laws that is inconsistent with the congressional policy currently embodied in the Immigration and Naturalization Act (INA)—a policy that, again, those who joined this brief by no means endorse.

As Prof. Blackman explains in a new law review article, DAPA is in palpable tension with the INA, implementing under the guise of executive discretion wholesale waiver/suspension/deferral that swallows the enforcement rule. Indeed, Congress rejected or failed to pass immigration-reform bills reflecting this policy several times, so executive power in this area is “at its lowest ebb,” to use Justice Robert Jackson’s famous formulation from the 1952 Steel Seizure Case.

In our constitutional architecture, executive action based solely on Congress’s resistance to presidential policy preferences has no place. While we agree that the immigration laws need to be overhauled and sympathize with the plight facing undocumented aliens, the path designed by the Framers for implementing needed reforms goes through the halls of Congress. Unilateral exercises of power such as DAPA undermine the separation of powers and ultimately the rule of law.

Judge Andrew Hanen, who was nominated by George W. Bush and unanimously confirmed by the Senate, will hold his preliminary injunction hearing in Texas v. United States on Jan. 15 in Brownsville, Texas.

Chris Edwards

The Washington Post reported that NASA spent $349 million on a rocket test facility that is completely unused. It is an impressive structure, a handsome monument to congressional folly, as the photo shows.

The story made me ponder an idea I’ve had for a while. Why not collect similar stories of federal waste and present them in a Museum of Government Failure in Washington?

About 18 million tourists visit D.C. each year. They view the grand government buildings, and they see the monuments to the great political leaders. They learn about the government’s successes in places such as the Air and Space Museum, and they read the pro-government history in places such as the Capitol Visitor Center. They also might notice the man-and-horse statue outside the FTC, which signifies the government’s heroic battle to strangle trade.

We need more balance in the D.C. tourist experience. Major failures are a fundamental part of the government’s story, but most of the boondoggles and scandals get forgotten. How many people remember the appalling scandals at HUD during the 1980s? Or the $2 billion down the drain on the Superconducting Supercollider, or the $10 billion down the drain on the Yucca Mountain waste site?

I envision a museum near the Smithsonian that would give tourists a reality-based perspective on the government. It could display a scale model of the NASA rocket facility with photos of the politician responsible, Sen. Roger Wicker (R-Miss.). It could explore failures in history, such as a diorama of a boondoggle Indian trading post from the 1790s. It could have a video screening room showing disgraceful moments caught on tape, such as the Abscam sting of the late 1970s. So if there is a philanthropist out there who wants to educate Americans on the government’s real track record, this is an idea to consider.

I Googled the other day, and was pleasantly surprised that someone is proceeding with such a project. Jim and Ellen Hubbard have proposed a Museum of Government Waste, and have filmed a related movie. I understand that their idea began as an investigation into pork barrel politics, but they are now considering an actual museum. Budget expert David Williams is also involved in the project.      

It will be interesting to see what these folks come up with. Good for them for taking the initiative. They should note that the problem in Washington is broader than just “waste” in the sense of porky projects. Instead, it is government failure on a grand scale, meaning the vast spending and regulation that costs us much more than it benefits us, while also reducing our freedom. I’m not sure how that can be captured in museum displays, but it is worth a try. A possible model is the private International Spy Museum in D.C., which gets 600,000 visitors a year.

One issue that a Museum of Government Failure would have to tackle: What should be sold in the gift shop? Perhaps a Lego kit of the Bridge to Nowhere? T-shirts with the humorous “I am not a crook” line? Science kits with experiments in ethanol and other wasteful energy sources?

One thing for sure is that the museum should not take any federal grants: that would guarantee that construction costs would soar!

Daniel J. Ikenson

President Obama is in Michigan today, which means his handlers at the White House recently consulted their very thin manila file folder labeled “Economic Successes or Anything That Might Pass for Such” to cull talking points about the auto bailout. Of course, nothing has been more celebrated as an economic policy success of this administration by this administration than the “rescue” of GM and Chrysler.   I spent a good deal of time in 2008-2010 analyzing, commenting, and testifying about the collateral damage–the often unseen but important externalities and longer term costs–that was being inflicted on third parties, the U.S. economy, and the rule of law, all for the purpose of ensuring that specific interests were insulated from the consequences of their behavior. So let me just summarize by repeating some previous thoughts.   It is galling to hear the auto bailouts characterized as “successful.” The word should be off-limits when describing this unfortunate chapter in U.S. economic history. GM and Chrysler, through their own relatively poor decisions with respect to labor contracts, product offerings, and quality management, failed by the market’s judgment and were rightful candidates for downsizing or liquidation. The bailouts essentially deprived the better auto companies of the spoils of competition and forestalled a capacity reckoning, which meaning that in the years ahead, auto workers in Alabama, Tennessee, South Carolina, Indiana, and even Michigan and Ohio may lose their jobs because GM and Chrysler were propped up beginning in 2009.   Calling the bailouts “successful” is to whitewash:
  • the diversion of funds from the Troubled Assets Relief Program by two administrations for purposes unauthorized by Congress;
  • the looting and redistribution of claims against GM’s and Chrysler’s assets from shareholders and debt-holders to pensioners;
  • the use of questionable tactics to bully stakeholders into accepting terms to facilitate politically desirable outcomes;
  • the unprecedented encroachment by the executive branch into the finest details of the bankruptcy process to orchestrate what bankruptcy law experts describe as “sham” sales of Old Chrysler to New Chrysler and Old GM to New GM;
  • the costs of denying Ford and the other more deserving automakers greater market share and access to GM’s and Chrysler’s best workers and capital;
  • the costs of insulating irresponsible actors, such as the United Auto Workers, from the outcomes of an apolitical bankruptcy proceeding, and;
  • the diminution of U.S. moral authority to counsel foreign governments against similar market interventions, to name some.
Acceptance of the president’s claim of auto bailout success demands profound gullibility or willful ignorance and virtually guarantees similar interventions in the future. 

David Boaz

While other matters dominate the headlines, American governments continue to spend more money, despite the presumed effects of the Great Recession. Washington Post reporter Abha Bhattarai lays out the latest details:

State and local governments in Maryland, Virginia and the District spent $7.82 billion more than they collected in revenue between 2007 and 2012, during the throes of the economic downturn, according to data released from the U.S. Census Bureau last month….

State and local governments in Virginia spent $1.03 billion more than they took in between 2007 and 2012, while expenditures in Maryland outpaced earnings by $6.07 billion….

Nationally, state and local governments spent $118.15 billion more than they collected between 2007 and 2012. Total expenditures during that period increased by 18.2 percent, from $2.7 trillion to $3.2 trillion, while total revenue declined 3.2 percent over the same five-year period, from $3.1 trillion to $3.0 trillion.

Over that five-year period, plenty of businesses, families, and nonprofits found their revenue declining by more than three percent, and most responded by spending less.

Of course, it’s often said that governments spend when times are good and the tax revenue is rolling in, then find themselves over-extended and facing painful cuts when growth slows down. But the evidence above suggests that governments just keep spending even as the money stops rolling in. It’s exceedingly difficult to get governments to spend less, especially when every government dollar helps to create pro-spending constituencies who will resist cuts. Spending interests never rest; taxpayer groups have to work twice as hard just to hold the line.

One side note: The online headline for this article is

State, local governments continue to spend more than they earn

Actually, I don’t think governments “earn” money. Merriam-Webster defines “earn” as “to receive as return for effort and especially for work done or services rendered.” Governments don’t earn, they take. Just try saying “I don’t find your services worth the money, and I won’t be renewing my contract.”

For more on state government spending, see Cato’s latest “Fiscal Policy Report Card on America’s Governors.”

 

Michael F. Cannon

Tomorrow, the Republican-controlled House of Representatives will vote on a measure that would alter the definition of full-time work, for purposes of the Patient Protection and Affordable Care Act’s employer mandate, from 30 hours per week to 40 hours per week. The measure is likely to pass. The House approved a similar measure last Congress, but it never went anywhere in the Senate, which was then under Democratic control. Now that Republicans have a majority in the Senate, there’s a chance the measure could clear both chambers of Congress. The president threatens a veto. Yuval Levin writes this change “seems likely to be worse than doing nothing.”

I have a few questions about this supposed threat to ObamaCare:

  1. This legislation would reduce the burden of ObamaCare’s employer mandatem but it would also increase government spending by making more workers eligible for health-insurance subsidies through ObamaCare’s Exchanges. How is that a policy victory?
  2. The legislation would therefore shift part of ObamaCare’s cost from an organized and influential interest group (employers) to a disorganized and less-influential interest group (taxpayers). How is that strategically smart?
  3. The legislation would make ObamaCare more tolerable for an organized and influential interest group (again, employers), thereby reducing their incentive to lobby for full repeal. How is that strategically smart?
  4. House Republicans say they are committed to repealing ObamaCare entirely. If so, why is this bill, rather than a full-repeal bill, the first item on their agenda? 
  5. House Republicans say this bill will show they can govern. But they also acknowledge the president will veto it. How is that governing?
  6. This legislation would merely lessen the burden of the employer mandate, and only for some employers. By June, however, the Supreme Court could completely invalidate employer-mandate penalties for all employers across 36 states. (See King v. Burwell.) How is this legislation a wise use of Congress’ time, when a Supreme Court ruling could go much farther in just a few months?
  7. A King ruling could also invalidate Exchange subsidies in 36 states, thereby exposing millions of Americans to the full cost of ObamaCare’s hidden taxes. That would give Congress more leverage than ever before to reopen and repeal the law. With this legislation, House Republicans are playing small ball with no leverage. How is that strategically smart?
  8. If enacted, this legislation would actually reduce the leverage a King ruling would give Congress to reopen and repeal ObamaCare. How is that strategically smart?
  9. The president has said he would veto this legislation. Given the above, should Republicans believe him?

Note that many of these questions also apply to repeal of the employer mandate before a King ruling, and sometimes after.

(Cross-posted at Darwin’s Fool.)

Marian L. Tupy

The horrific killing of 12 people who ran the French satirical magazine Charlie Hebdo, which published the controversial Mohammed cartoons in 2011, by suspected Muslim extremists is likely to have serious consequences. In the short run, it will result in shock, grief, and possibly counterattacks on some innocent Muslims living in France. The long-term consequences of the shooting could be monumental.

First, the French could get their first female head of state since Queen Anne’s regency during the minority of Louis XIV. Queen Anne faced a massive revolt of the nobles known as the Fronde and a subsequent civil war. Ms. Marine Le Pen’s presidency could be similarly eventful.

While, as libertarians, we despise much of what Ms. Le Pen stands for, the two mainstream political parties in France, Mr. Sarkozy’s socialist center-right UPM and Mr. Hollande’s Socialist Party, have totally failed to address the legitimate concerns of the French citizens, chief among them the failure of multiculturalism and high unemployment. The country is ready to hand the reins of power to someone else.

Second, the euro will end its role as a global currency and remain a legal tender in something akin to Großdeutschland greater Germany, composed of Germany and her satellites, like the hapless Slovakia. Ms. Le Pen is mistaken in thinking that the French withdrawal from the euro will revive the French economy. French economic difficulties are primarily structural (i.e., high taxes and over-regulation), not monetary.

Be that as it may, Ms. Le Pen has set her sights on exiting the euro and, at least as far as this author is concerned, the sooner she puts the euro out of its misery, the better. They might even build her a statue in Athens. (Perhaps 2,000 years from now, it will be admired with as much reverence as Venus de Milo is revered today, but I digress…).

Third, on day two of a Le Pen presidency, border guards will return to the French frontiers. Of course, the end of the freedom of movement will be in full breach of all sorts of European treaties and conventions. (The British, by the way, would love to do the same, but cannot, because the British, being British, follow the rules. In contrast, the French, being French, will do what they have always done: follow their national interest.)

France will not be stopped. Because as it is big and powerful, it is not subject to the same rules that govern the rest of the EU. That is why the French have been allowed to make mincemeat out of the Maastricht Treaty without any consequences.

That will cause a major crisis in the EU and lead to a clarification of what the EU is–a cooperative arrangement between sovereign states–and what the EU is not–the United States of Europe.

Peter Van Doren

The latest issue of Regulation, which has just been released, examines several public health topics.

Many economists argue that “choice architects” should “nudge” Americans toward healthier decisions about their diets and physical activity. These nudges can come from government in the form of food taxes, information requirements, and other mechanisms, or through markets in the form of diet plans, reduced-calorie products, and fitness programs. Cal Poly professor Michael Marlow questions the scientific evidence supporting the governmental nudges because many promote weight-loss strategies that have proven ineffective or even counterproductive.

Cigarette taxes are rationalized as providing public health benefits.  But Professors Kevin Callison and Robert Kaestner demonstrate that because smoking rates are now so low further cigarette tax increases will have very little effect on smoking rates.  Thus future tax increase proposals cannot be justified by health benefits and instead should be debated on traditional public finance criteria.

Thomas Hemphill and Syagnik Banerjee explore the effects of some states enacting mandatory genetically modified organism(GMO) labeling.  These requirements would raise food prices nationwide by requiring fully independent food distribution networks for GMO and non-GMO foods, while implicitly and falsely suggesting to the public that GMO foods are unsafe. 

An article by American University’s Lewis Grossman argues consumers are much more empowered now than 50 years ago in areas of life regulated by the FDA.  The availability of medicines—and even of information about their efficacy and use—were once tightly controlled so that only physicians would have access.  Today, an ever-growing number of drugs are available over the counter, drugmakers can advertise direct to consumers, and drug labels are intended to be comprehensible to the layman.

Two articles examine environmental policy.  Economists Art Fraas and Randal Lutter criticize the U.S. Environmental Protection Agency’s recently released Clean Power Plan for reducing carbon dioxide emissions from U.S. power plants for failing to specify how much it would lower global temperatures.  One estimate is 0.018 degrees Celsius—surprisingly little gain for such a costly and extensive rule.  Lawyers Brian Potts and David Zoppo describe the legal basis for the civil suit challenging the EPA’s authority to issue such a rule.

On more general regulatory matters, Sam Batkins and Ike Brannon examine delays in the publication of regulations in the Federal Register. Though publication can happen almost immediately after completion of OMB review, some agencies delay publication for political reasons. Pierre Lemieux asks whether the extensive regulatory burden has had obvious negative effects on U.S. economic growth.

M. Todd Henderson and Adam Pritchard describe the history of class action securities regulation.  The current system provides ripe opportunities for inefficiency and mischief because long-term shareholders pay damages and settlements in such class actions even though those shareholders didn’t profit from the alleged misstatement, while shareholders who sold during the purported fraud period (including dishonest actors) would not make such payments.  The authors propose a special arbitration procedure in the event of a fraud claim that avoids the failure of Congress and the courts to reform the status quo.

Finally Kenneth Button quantifies  the economic benefits that have resulted from the Open Skies agreement liberalizing air travel between Europe and the U.S.

For these articles and many others, including book reviews and my Working Papers column, click here.

This blog post was coauthored with Regulation editorial assistant Nick Zaiac. 

Peter Van Doren

On Friday, the New York Times ran an op-ed by University of New Hampshire historian W. Jeffrey Bolster describing the long history of the decline of the stock of cod off the coast of New England.  The article corrects the misperception that the decline is recent or the result of modern industrial fishing methods.  Instead the decline started more than 150 years ago and is the not the result of deliberate action by anyone in particular, but the “system” itself.  By “system” he means the exploitation of an open access resource, in which no one owns the rights to harvest the stock.  In such an environment overfishing is the inevitable result because all have incentive to take as much as they can because others will if you do not.  Thus individual efforts at conservation are irrational.

Unfortunately his essay ends there and does not describe policy innovations that would create a better “system.”  In the Spring issue of Regulation, Jonathan Adler and Nathaniel Stewart argue that the best way to regulate fisheries for sustainable exploitation over long periods of time is a system of individual transferable quotas (ITQs), better known as catch shares.  In ITQ systems, the total allowable catch in a fishery is set by biologists to allow sustainable fishing without degradation of the stock. The rights to particular shares of the total catch are allocated to individuals, who may fish themselves, or sell or rent the rights to others. These systems have been successfully in use in a number of countries for decades.  Implementing them in the New England cod fishery would yield similar results.

Mark A. Calabria

The growth of the U.S. subprime mortgage market was made possible only by the willingness of investors to fund that market.  The largest single investors in the market for private label subprime securities appears to have been Fannie Mae and Freddie Mac, whose market share reached almost 40% of private label subprime mortgage-backed securties (MBS) in 2004.  A less recognized driver was investment demand coming from the European Union.  Perhaps the role of EU has been less appreciated due to data limitations, which will soon become apparent.

What we do know is that as of June 30, 2008, just before the crisis hit, almost $460 billion in non-agency residential mortgage-backed securities (RMBS) was held outside the US (see table 24 here). This represented almost a fourth of total US-issued RMBS at that time.  Of course not all non-agency MBS is subprime.  For instance a significant share are jumbo prime mortgages.  Estimates suggest subprime were a little more than half of outstanding non-agency MBS.  This breakdown does not appear to be available for EU holdings, which were almost half of non-US holdings.  More than $30 billion was held by German institutions.

One reason Germany merits special discussion is that some research has been done on who exactly these institutions were.  Germany is also interesting because of the diversity of its financial system and the special role of state-owned banks.  Almost half of banking in Germany is conducted by the public sector.  The most prominent of this being the Landesbanken, which are owned by the German regional governments.  One study found losses from US subprime MBS to be “on average three times as large for state-owned banks compared to privately owned banks.” Overall about two-thirds of losses in Germany on US subprime MBS were from holdings by state owned banks.

What I find to be of particular interest is that the political nature of state-owned banks appears as a statisically significant driver of these losses.  The same study found that German state-owned banks had board of directors that were primarily politicians with little experience in finance and that drove losses.  Another study has found similar impacts of politics on banking lending in Germany.  Even the IMF warned before the crisis of dangers lurking in state-owned German banks.

This German experience offers a number of lessons for financial reform.  First, my friends who advocate for an expansion of “public banks” in the U.S. should give a close look to the dismal experience of such in the EU.  Second, it appears that a significant portion, perhaps more than half, of the ultimate global investor demand for US subprime MBS came from not from the private sector but from state-controlled institutions.  While these entities clearly lack sufficient market discipline, there is growing evidence that their very political nature leaves them open to greater losses with signicant harm to the larger economy. If we truly desire financial stability and economic growth, then a greater role for the private market in finance is badly needed.         

Michael F. Cannon

As an irony junkie, this New York Times article on the outrage among Harvard’s faculty that they should face greater cost-sharing in their health benefits – and the incredulity of Harvard’s health economists at their colleagues’ reactions – is one of the most wonderful things I have read in the course of my career. And it reminded me of another Ivy League health economist: Princeton health economist Uwe Reinhardt.

It has long been one of Reinhardt’s hobby horses that “the American public’s idea of ‘common sense’ in health care” is fundamentally irrational:

To be responsive, then, to the “simple common sense” of the American people, any proposed health reform must not reduce the revenue of hospitals, lest some neighborhood hospital may have to close; or of doctors, lest some doctors might refuse to see patients; or of the manufacturers of health products, lest they are unable to innovate; or of anyone on the supply side of the health sector, lest they go out of business and have to lay off employees.

At the same time, the “simple common sense” of the American people dictates that any health reform that fails to bend down the growth curve of future health spending — the current jargon for controlling health spending better — is unacceptable, too.

At the time Reinhardt penned this particular expression of his exasperation (July 2009), I noted that the irrationality he decries is a direct result of policies he and other left-leaning health reformers have enacted into law:

The [explanation] is actually pretty simple: government has given us a health sector where everyone is spending someone else’s money.  In such an economy, individuals can make irrational demands (cut spending — but don’t reduce my access to care!) because they don’t bear the cost of their irrationality.

Emphasis added. People who pay for their own consumption don’t have the luxury of being able to pretend that tradeoffs don’t exist. Walk into a BMW dealership and announce, “I want a 7-series at Hyundai prices!”, and the dealer will laugh at you. When Medicare enrollees do the same thing – Keep Your Government Hands Off My Medicare! – the people who run Medicare praise and court them.

The seeds of such irrationality can also be seen in the case of Harvard University or any other employer-sponsored health plan, where the federal government imposes stiff tax penalties on anyone who does not (1) surrender $5,000 or $11,000 of their income to their employer and (2) let their employer use that money to select their health plan. Since this goverment policy means that workers don’t control that portion of their compensation, and don’t perceive the direct and negative relationship that employer-provided health insurance has on their wages (partly because they can’t get that money back by declining health benefits), workers end up demanding mutually incompatible things: comprehensive health-insurance coverage that doesn’t cost them anything. If that seems irrational, it is because, as I put it in that 2009 blog post, “Socialized Medicine Socializes the Cost of Irrationality, Too.”

Now that the Smartest People In The Universe – the faculty at Harvard University, naturally – are displaying the same behavior as the supposedly irrational American public, would Reinhardt still describe that behavior as irrational? Or is it Reinhardt and like-minded health economists who are irrational for expecting the lab mice to behave some other way? 

Christopher A. Preble

A new year offers a fresh start, an opportunity to reminisce about the year past, and to set goals for the future.

2014 was a busy year. Vladimir Putin hosted the world at Sochi, then reacted to a popular revolt in Ukraine by supporting a counter-revolution and annexing Crimea. Other civil wars raged in Libya and Syria, while Egypt’s military quashed any remaining semblance of democracy that had survived from the 2011 protests. The not-destroyed insurgency returned to Iraq with gusto, fueled by American weapons left behind by an Iraqi army unwilling to fight. And the United States continued its habit of conducting numerous tactical operations abroad without any overarching strategy.

The news wasn’t all bad: Germany and the world celebrated the 25th anniversary of the fall of the Berlin Wall; President Obama proposed normalizing relations with Cuba; and NATO operations in Afghanistan have (kind of) ended.

The lessons from these episodes suggest some useful resolutions for U.S. policymakers:

Avoid using the U.S. military to fix other nations’ politics

You would think that policymakers would know this by now. After all, our track record over the last dozen years is objectively terrible: Iraq is a mess, Libya is a mess, Syria is a mess, and Afghanistan is still, despite many years of effort, a mess. It says a lot that the advocates of U.S. nation building efforts have to go back over six decades, to the successful rebuilding of Germany and Japan, and the Marshall Plan in Europe, to make their case. Though these countries were deeply scarred by war, they retained institutions, and social and political norms, that allowed them to recover, some quite quickly. In other words, they weren’t failed states at all. Building healthy states out of weak or failed ones, it turns out, is actually really hard – and rarely worth the effort given that ungoverned spaces aren’t as ungoverned as they might seem.

President Obama seemed to understand this. He came into office in 2009 generally opposed to using U.S. military personnel for armed nation-building. Unfortunately, he is now ignoring those instincts, largely because of public reaction to the atrocities committed by ISIS in Iraq and Syria. ISIS’s barbarism, however, does not invalidate the lessons learned from 13+ years of post-9/11 wars. While the U.S. military retains the ability to assist those on the ground who are fighting back against ISIS and other extremist groups (e.g. al Shabaab in Somalia; Boko Haram in Nigeria), the men and women of the U.S. armed forces should not be sent into harms way when U.S. vital national security are not at stake.

Stop rooting for the collapse of the Russian economy

Western sanctions (along with falling oil prices) are having an effect on Russia. November saw the Russian economy contract for the first time since 2009, a trend that is expected to continue. And the ruble’s collapse appears to be accelerating. Those rooting for a full-scale economic catastrophe, however, should be careful what they wish for. An unstable political situation in Russia—a country with still thousands of nuclear weapons—is not in America’s (or anyone else’s) interests. 

The goal of the sanctions should be a negotiated settlement to the Ukrainian crisis that favors western interests. Economic pressure raised the costs of Russia’s revanchism in Ukraine and might deter Putin from trying to foment trouble elsewhere along Russia’s border. But while we can take some pleasure in Putin’s discomfort, the United States still needs Russia’s cooperation on a host of important issues, including Iran’s nuclear program and the Syrian civil war.

Put terrorism in context

In their 2014 Cato report, “Responsible Counterterrorism Policy,” John Mueller and Mark Stewart show that the odds of being killed in a terrorist attack in the United States are 1 in 4 million. Compare that to other fatality rates, like driving in a car (approximately 1 in 8,200) or drowning in a bathtub (1 in 950,000) and you start to realize that while terrorism may be frightening, it’s not a large threat. And yet, the United States spends about $100 billion per year seeking to deter, disrupt, or otherwise protect against, terrorism at home. Too much money chasing after too little threat is sure to be spent unwisely.

So, this year, let’s put the danger posed to Americans by terrorists in context, and demand accountability for taxpayer funds spent to fight it. Terrorism is a threat, but not a large one, and certainly not one that justifies all of the current policies enacted under the overly broad counterterrorism rubric.

Related, stop hyping threats in general

The world is a dangerous place, but it is not more dangerous than it has ever been, and most measurements of the quality of life and general human progress are trending up, not down.

You may be forgiven for thinking that we live in a uniquely dangerous world, but appearances can be deceiving. As Harvard’s Steven Pinker points out, “If you base your beliefs about the state of the world on what you read in the news, your beliefs will be incorrect.” After all, we are beset with daily stories of violence, but one’s chances of suffering a violent or premature death are very low, and still declining. And our prosperity and broader well-being are protected by a dynamic and resilient international economy, and by the spread of powerful ideas that have reduced poverty and disease.

A better understanding of what actually threatens us will help tame our tendency to overreact. An honest assessment of the threat environment—problems that lurk today and on the horizon—will allow us to redirect some of the money that currently goes to the national security state back to the taxpayers and private entrepreneurs.

Reform military spending

The 2011 bipartisan Budget Control Act (BCA) imposed caps on discretionary spending, and these caps have worked, to a degree: government spending has remained essentially flat since 2009, and spending as a share of GDP, according to figures compiled by Cato’s Dan Mitchell, experienced the biggest five-year drop since the end of World War II. Though some would lift the caps on the Pentagon’s budget going forward, the United States can maintain the finest military in the world without breaking the bank. The Congressional Budget Office projects that Pentagon spending under the BCA caps will average about $526 per year through 2021 (.pdf, Table 1-4, p. 13), and this figure omits funding for nuclear weapons spending in the Department of Energy; as well as the Departments of Homeland Security and Veterans Affairs, and overseas contingency operations (OCO). When one factors in those additional monies, total spending for national security in 2015 is likely to exceed $800 billion.

But while that much money can buy a lot, it can’t buy everything. Even the richest country in the world must make choices. So far, that hasn’t happened. The cost to implement the Pentagon’s 2014 Quadrennial Defense Review, according to Secretary of Defense Chuck Hagel, is $115 billion above sequestration levels in 2016 alone. The National Defense Panel, tasked with scrutinizing the QDR, calls for even more spending, presuming that the strategic requirements cannot or should not be constrained by fiscal or political reality.

Instead, the spending caps should be maintained, and the U.S. military’s global posture should be adjusted accordingly. Restraint was a wise policy, even when the United States was flush with cash. It is imperative now, when the costs of maintaining global primacy are rising, and the American people’s will to sustain them are declining.

Policymakers should also seek to end the slush fund known as OCO funding. Funding for overseas military operations should be included in the DoD’s base discretionary budget. That was how it was done for most of the nation’s history, and it’s time to return to pre-9/11, pre-Afghanistan, pre-Iraq spending practices. 

Alex Nowrasteh

Shortly before Christmas the Department of Homeland Security (DHS) released a report detailing deportations (henceforth “removals”) conducted by Immigration and Customs Enforcement (ICE) during fiscal year 2014.  Below I present the data on removals in historical context – combined with information from the Migration Policy Institute and Pew.  See my previous writing on this topic here and here.       

ICE deported 102,224 unauthorized immigrants from the interior of the United States in 2014, down from a peak of 188,422 in 2011.  Removals from the interior are distinct from removals of recent border crossers.  Removals from the interior peaked during the Obama administration and have since fallen to a level equal to that of 2007. 

Source: MPI and DHS.

The number of interior removals under the last six years of the Bush administration (the first two years is unavailable so far) was about 475,000.  From 2009-2014, the Obama administration has removed about 950,000 from the interior of the United States.  

President Bush’s administration removed an average of about 276,000 unauthorized immigrants per year for the years available and an average of 79,000 of them annually were interior removals.  President Obama’s administration has removed an average of 405,000 unauthorized immigrants a year, an average of 158,000 of them annually were interior removals.  There were a large numbers of unknowns during the Bush administration that decreased as the years progressed. 

 

Source: MPI and DHS.

The Obama administration’s decrease in the number of interior removals is not the whole story.  The best way to measure the intensity of immigration enforcement is to look at the percentage of the unauthorized immigrant population removed in each year.  Based on estimates of the total size of the unauthorized immigrant population, 0.89 percent of that population was removed from the interior of the United States in 2014 – down from 1.15 percent in 2013. 

 

Source: MPI, Department of Homeland Security, Pew, Author’s Calculations. 

For every year for which data was available, the Bush administration removed an average of 0.7 percent of the interior unauthorized immigrant population.  President Obama’s administration has removed an average of 1.39 percent of the interior unauthorized immigrant population every year of his presidency – about twice the rate as under the Bush administration.  Even when focusing on interior removals, President Obama is still out-deporting President Bush based on the data available.

The unauthorized immigrant population increased under the Bush administration from 9.4 million in 2001 to a peak of 12.2 million in 2007 and then declined to 11.7 million in 2008.  During Obama’s administration, the number of unauthorized immigrants has, so far, stayed at or below 11.5 million.    

Obama’s interior removal statistics show a downward trend beginning in 2012 through to 2014.  The Obama administration has also focused immigration enforcement on criminal offenders (not all unlawful immigrants are criminals) but the data is a little difficult to disentangle for 2014 so I left it out of this blog post – stay tuned for a future one on that topic. 

The Obama administration has clearly not gutted interior immigration enforcement as their 2014 figures for interior removals are higher than they were for every year of the Bush administration except for 2007 and 2008.  

Jason Bedrick

State legislatures across the nation are considering an innovative new education reform: education savings accounts. Hailed as “School Choice 2.0,” ESAs empower parents to customize their child’s education beyond the school walls—a development that could substantially alter the way students are educated. There is “no reason to expect that the future market will have the shape or form that our present market has,” observed Nobel laureate economist Milton Friedman in a 2003 interview, “How do we know how education will develop? Why is it sensible for a child to get all his or her schooling in one brick building?”

Two states have already enacted ESA laws. In Arizona, parents of eligible students that opt out of their assigned district school can access 90% of what the state of Arizona would have spent on those students. The Arizona Department of Education deposits the funds directly into a privately managed bank account that parents can access through a restricted-use debit card. The parents can then spend the ESA funds on any qualifying education-related service or provider they choose. In the first year, eligibility was restricted to students with special needs. Since then, Arizona has expanded eligibility to include children in foster care, children of military personnel, and children assigned to low-performing district schools. Last year, Florida adopted a special-needs ESA law similar to Arizona’s except that it is privately managed.

Today, National Affairs published an essay I coauthored with Lindsey Burke of the Heritage Foundation. Our essay explores the administrative, regulatory, and constitutional issues that policymakers will have to address when designing an ESA law. Policymakers should consider crafting a privately managed and privately funded ESA law that offers tax credits in return for donations to scholarship organizations that manage the ESAs. Florida’s privately managed model is already proving to be more operationally efficient and effective than Arizona’s government-run model. A privately managed ESA would be less susceptible to capture by hostile parties than a government agency, more likely to generate and retain best practices, and more likely to have the ability and incentives to be responsive to the needs of families. Privately funded ESAs also have several advantages over government-funded ESA laws. In particular, they are more likely to pass constitutional muster in states with restrictive “Blaine amendments” and less likely to include burdensome regulations that undermine the effectiveness of the program.

We conclude:

Most school choice programs offer significant but not revolutionary changes to the traditional educational model. But true educational choice, and the educational market it could help foster, promise to radically improve education for many children. As Milton Friedman observed, “not all ‘schooling’ is ‘education’ and not all ‘education’ is ‘schooling.’” Charter schools and voucher programs still conflate the two, but education savings accounts embody a more expansive understanding of education.

ESAs offer several key advantages over traditional school choice programs. Because families can spend ESA funds at multiple providers and can save unspent funds for later, ESAs incentivize families to economize and maximize the value of each dollar spent in a manner similar to spending their own money. ESAs also create incentives for education providers to unbundle services and products to better meet students’ individual learning needs. […] These laws hold great potential to expand educational opportunity and remake the entire education system in ways that better and more efficiently meet the needs of children.

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

You Ought to Have a Look is a feature from the Center for the Study of Science posted by Patrick J. Michaels and Paul C. (“Chip”) Knappenberger. While this section will feature all of the areas of interest that we are emphasizing, the prominence of the climate issue is driving a tremendous amount of web traffic. Here we post a few of the best in recent days, along with our color commentary.

In his article “Hot Stuff, Cold Logic” from the January/February 2015 issue of The American Interest, University of Sussex professor of economics Richard Tol takes us through the logical fallacies used to support arguments for aggressive regulation of greenhouse gas emissions from fossil fuel use in the name of mitigating climate change. These range from “if there is a human impact, it must be regulated,” to “future catastrophe awaits.” Tol effectively debunks these claims with historical examples.

Here is a taste:

Just as there is no logical or scientific basis for thinking that climate change is new, there is no self-evident reason to assume that the climate of the past is “better” than the climate of the future. With just as little logic, we might assume that women’s rights, health care, or education were necessarily better in the past. Any such judgment also contradicts Hume’s Law and, perhaps worse, is grounded in a fallacious appeal to nature understood in a very slanted wy. There is no prima facie reason to assume that any given past climate was better than the prospective one. The climate of the 21st century may well be unprecedented in the history of human civilization; the number of people living in countries with free and fair elections is unprecedented, too. So what? “Unprecedented” is not a synonym for “bad.”

Scientist/political scientist Roger Pielke Jr. recently announced that Tol’s article topped his list of the Top 5 Climate Essays of 2014. If Tol’s name seems familiar, recall that back in 2013 he made headlines by withdrawing from the United Nation’s Intergovernmental Panel on Climate Change (IPCC), deriding their irrational negativity. Tol frequently points out (and does so in this essay), that the costs incurred by moderate climate change are equivalent to (or perhaps even less than) the costs associated with trying to mitigate it—a point of view that the IPCC and many others do not want to admit.

While we may not agree with everything in Tol’s most recent analysis, there is a lot of good stuff in the article and you ought to have a look to see why he believes that “politically correct climate change orthodoxy has completely destroyed our ability to think rationally about the environment.”

Along the same lines—that overly simplistic logic leads to incorrect conclusions—is a piece by Georgetown University’s Arik Levinson for the National Bureau of Economic Research. In his study “How Much Energy Do Building Energy Codes Really Save? Evidence from California,” Levinson describes the results of his look into the effect of efficiency standards on residential energy usage.

His findings may be surprising to some. 

Levinson starts by citing the experts:

New building codes will reduce the energy “used in typical buildings by at least 80 percent.”

          - California Energy Commission, 1979. 

 

“New houses in California now use one-fourth of the energy they used 25 years ago.”

          - Tom Friedman in the NY Times, April 13, 2014

He ends with his (quite different) conclusions:

[T]here is very little evidence that homes constructed since California instituted its building energy codes are using less electricity today.

The reason the predictions are overly enthusiastic is that real-world human behavior is much more complex than rather simplistic model assumptions of “everything else being equal.”

Lenison explains the difficulties involved:

It seems like a straightforward empirical question: How much energy has been saved by state and local regulations that require newly constructed homes to meet energy-efficiency building standards? When the codes were first enacted, regulators projected enormous savings—like the 80 percent reductions promised for California’s nation-leading late-1970s building codes. Today, advocates of tightening those standards claim that those initial promises have been realized.

But answering that question requires knowing how much energy would have been used in the absence of the building codes, a far more difficult calculation than is sometimes suggested. We cannot just take engineers’ ex ante estimates of how much less energy a given building will use, because that ignores the ex post response by the building’s occupants. We cannot simply compare energy use by residents of efficient and inefficient buildings because that ignores the selection by people into those buildings in the first place. We cannot easily compare jurisdictions with more and less strict energy-efficient building codes because those jurisdictions presumably chose to enact the codes based on the energy-using characteristics of their residents. These problems—the selection of occupants into efficient homes, the behavioral response to having an efficient home, and the endogeneity of the policies—represent some most difficult problems in empirical microeconomics.

Levison’s article is a good example of how naïve—but logical sounding—expectations not only can be grossly wrong, but worse are used to drive policy goals.

Levison warns:

We should be concerned that a large fraction of our national climate strategy rests on the types of policies that have not delivered on past promises.

Not only is this true of the climate strategy, but also for the justifications for climate policies in the first place.

Marian L. Tupy

Cancer, we are told, lurks everywhere: popcorn, non-organic fruit, canned tomatoes, processed meats, farmed salmon, potato chips, foods (salted, pickled, and smoked),  GMOs (of course), candy, artificial sweeteners, diet soda, alcohol, red meat; even white flour can kill you.  

Enough already!

In fact, a recent study by researchers from the Johns Hopkins University School of Medicine in Baltimore contends that most occurrences of cancers are simply a result of bad luck. To wit, “Plain old bad luck plays a major role in determining who gets cancer and who does not, according to researchers who found that two-thirds of cancer incidence of various types can be blamed on random mutations and not heredity or risky habits like smoking.”

So, why do we obsess about what we eat and drink? Why do we see death lurking in every sip of coffee and every piece of bacon (the latter surely being the best proof yet that God truly loves us)?

Well, maybe it is due to evolution. For most of our existence on this blue dot hurtling through the universe, skepticism was perfectly warranted. Sometimes a delicious-looking berry was just a berry, and sometimes it made your stomach explode (I exaggerate, but only a little).

(As a side note, in some places skepticism about food and drink continues to be appropriate. Those who spend sleepless nights worrying about big, faceless corporations infusing us with poison may find it illuminating that in Zimbabwe it is generally safer to drink a can of Diet Coke than a glass of tap water.)  

Interestingly, obsession about the purity of food and drink seems to be much more prevalent among one (and, according to the MSNBC, the most highly evolved) sub-group of our species. I am, of course, talking about Homo Progressivensis.

As described by the Guardian,the magnificently evolved Gwyneth Paltrow, to give one example, wrote that she was moved to write a cookbook because “she nearly died after eating too many french fries…and so went to a doctor, submitted herself to more medical tests than a sufferer of Munchausen’s syndrome and came up with the diagnosis that her body was in crisis. A doctor duly decreed that she is allergic to pretty much everything, including peppers, corn and aubergine, and should eat next to nothing. Except quinoa. And maybe some pomegranate on special occasions.”

To explain this peculiar behavior of our social betters, we must consult Jonathan Haidt, the NYU Professor and former speechwriter for John Kerry. As the good professor writes in his ground-breaking book The Righteous Mind: Why Good People are Divided by Politics and Religion, progressives tend to moralize food. They obsess about food in much the same way that conservatives obsess about sex. Eating, like copulating, is a potential source of impurity. As such, the search for that locally sourced and organically grown tomato serves the same purpose as a pilgrimage to Lourdes or Mecca. It is a quasi-religious form of purification.

The fact is, as we discussed in a recent policy forum, just about everything–including our collective health–is getting better.

From now on, I am staring my day with butter-fried bacon and a strong cup of coffee.

Daniel J. Ikenson

Though a monument to the ravages of Soviet central planning, the barren Magnitogorsk steel works complex still inspires America’s industrial policy proponents.  “Failure to plan is a plan for failure,” said comrade Rep. Dan Lipinski (D-IL), as he described the “pro-manufacturing” legislation he helped slip into the mammoth Cromnibus bill, which became law this month.

The Revitalize American Manufacturing and Innovation Act directs the Secretary of Commerce to establish a “Network for Manufacturing Innovation” to:

  • improve the competitiveness of U.S. manufacturing and increase production of goods manufactured predominately within the United States;
  • stimulate U.S. leadership in advanced manufacturing research, innovation, and technology;
  • accelerate the development of an advanced manufacturing workforce; and
  • create and preserve jobs

Of course, the verbs “revitalize,” “improve,” “stimulate,” “accelerate,” “create,” and “preserve” are euphemisms for protect, subsidize, regulate, and intervene.

From Lipinsky’s perspective:

This is a big victory for a sector of our economy that over the years has provided so many high quality jobs in my district, in our region, and across the nation, but has taken many hits over the past couple of decades, especially during the recent recession. While manufacturing is by-and-large a private, market endeavor, few can disagree that government policy impacts manufacturing in countless ways.

Yes, government policy has affected manufacturing in countless–usually adverse–ways. Excessive regulations enabled by irresponsible agency cost-benefit analyses, a burdensome tax system, endemic exposure to frivolous lawsuits, exorbitant health care costs, inefficient union work rules, tariffs on industrial inputs, absurd restrictions on immigration, subsidization of chosen firms, and other forms of corporate favoritism are all drags on manufacturing (and other economic sectors, too). U.S. manufacturing would benefit from less Washington, not more.

The Revitalize Act is a solution in search of a problem – and a bad solution at that. American manufacturing does not need revitalizing. Despite Washington’s many meddling interventions, and despite the persistence of the myth of U.S. industrial decline, U.S. manufacturing is thriving–and always has been. Year after year, with the exceptions of during cyclical recession, new records are set with respect to most relevant industry health metrics.  The most recent official data reveal all-time highs for manufacturing sector output, value-added, revenues, exports, profits, and foreign direct investment–all in real terms and all achieved, largely, in the absence of top-down planning.

Moreover, for a country whose consumers spend twice as much on services than on goods, and where 90 percent of the workforce is employed outside the manufacturing sector, official obsession over the future of manufacturing is more than a bit overplayed. Many with this obsession dwell on the past, evoking the good old days of 1979, when the sector employed almost 20 million workers, or 1953, when manufacturing accounted for a record 28 percent of U.S. GDP.  But today’s manufacturing worker produces an average of $170,000 of value-added per year, as compared to $28,000 in 1979–a more than quadrupling of output in real terms. And, although manufacturing’s share of the economy has declined to about 12 percent today, the absolute value of U.S. manufacturing output, in real terms, has increased more than six-fold since 1953.  The facts that the sector supports far fewer jobs today and accounts for a smaller share of the U.S. economy say absolutely nothing about the state of the manufacturing.

What matters is whether there is continued growth in value-added, revenues, foreign direct investment, research and development expenditures, capital expenditures, and productivity. By each of those measures, U.S. manufacturing is robust.  When it comes to the question of the condition of U.S. manufacturing, which is likely to be a more credible barometer: legislators who benefit from the perception of fixing “manufactured” problems or investors revealing their preferences through their own actions? As of 2013, nearly $1 trillion of foreign direct investment was parked in U.S. manufacturing, by far the number-one manufacturing investment destination in the world. That’s a rather strong endorsement of the state of U.S. manufacturing.

How on earth would U.S. manufacturers–the world’s most advantaged with their unparalleled access to idea incubators, research universities, R&D laboratories, and broad and deep capital markets to commercialize the ideas that make it through a rigorous vetting process–benefit from the Commerce Department’s participation in mapping out the future?  Sure, some firms in some manufacturing industries–those that succeed in convincing the government that they are worthy of public support (i.e., those that commit more resources to political, rather than economic, activities)–may benefit.  But others, which rely upon and adapt to the verdicts of consumers in a market environment, will be disadvantaged.

Industrial policy is anathema to the market.  It short-circuits a selective, evolutionary process that has undergirded the world’s most successful innovation machine and reduces chances of worthy ideas, firms, and industries leading the next commercial wave. Did the last generation’s policymakers anticipate the arrival of Steve Jobs, Bill Gates, or Mark Zuckerberg and the revolutionary products and services they delivered? Did Washington bureaucrats foresee the advent of specific life-extending medicines and devices, like swallowable, pill-sized cameras? Had those proposing industrial policy in response to a rising Japan in the 1980s and early 1990s prevailed, much of the technology and medical advances taken for granted today would have never come to fruition. American manufacturing and the broader U.S. economy have been successful by shunning, more than embracing, industrial policy.

With its pre-eminence in innovation and entrepreneurship still intact, the United States is situated at the top of the global value chain. Staying there will require Americans to remain skeptical of top-down industrial policy. It could propel the United States above Kazakhstan as the world’s greatest producer of potassium, but at unthinkable costs.

David Boaz

The media are full of headlines about war, sexual assault, inequality, obesity, cancer risk, environmental destruction, economic crisis, and other disasters. It’s enough to make people think that the world of their children and grandchildren will be worse than today’s world.

But the real story, which rarely makes headlines, is that, to paraphrase Indur Goklany’s book title, we are living longer, healthier, more comfortable lives on a cleaner and more peaceful planet. (Allister Heath summed up his argument in a cover story for the Spectator of London, without all the charts and tables.) Fortunately, beyond the headlines, more people do seem to be recognizing this.

The Cato Institute, for instance, has created an ever-expanding website on human progress, known simply as HumanProgress.org.

Here’s Steven Pinker expanding on the information in his book The Better Angels of Our Nature: Why Violence Has Declined in Slate:

The world is not falling apart. The kinds of violence to which most people are vulnerable—homicide, rape, battering, child abuse—have been in steady decline in most of the world. Autocracy is giving way to democracy. Wars between states—by far the most destructive of all conflicts—are all but obsolete. 

He has charts of the data in each of those areas. And here’s Pinker at the Cato Institute discussing why people are so pessimistic when the real trends are so good:

Fraser Nelson, editor of the Spectator, writes that

2014 has been the best year ever – just as 2013 was, and just as 2015 will be. It is something that is, now, true every year but the point cannot be made enough. We’re living through a period of amazing progress – in medicine, prosperity, health and even conquering violence.

Nelson offers this brilliant graphic from the Lancet, a British medical journal:

And just today we learn in a new report from the American Cancer Society that cancer rates have fallen 22 percent in two decades. At Spiked Online, editor Brendan O’Neill points out “10 Kickass Things Humanity Did in 2014.”

Andres Martinez at Zocalo Public Square:

The “good old days” are a figment of our imagination. Life–here, there, everywhere–has never been better than it is today. Our lives have certainly never been longer: Life expectancy in the U.S. is now 78.8 years, up from 47.3 years in 1900. We are also healthier by almost any imaginable measure, whether we mean that literally, by looking at health indices, or more expansively, by looking at a range of living-standard and social measures (teen pregnancy rates, smoking, air-conditioning penetration, water and air quality, take your pick).

Martinez notes:

I’ll concede, very grudgingly, that all this whining can be a good thing. As Yuval Noah Harari, the author of Sapiens: A Brief History of Humankind, has written, we’re hard-wired to be disgruntled. It’s the only way we achieve progress. Evolution requires us to demand more and better, all the time.

So on Monday let’s go back to demanding more and better. But for tonight, Happy New Year!

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