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Chinese Company 3-D Prints a House for $4,800

Cato Op-Eds - Tue, 04/22/2014 - 11:37

Marian L. Tupy

To paraphrase Lord Peter Bauer, the first recipient of the Milton Friedman prize, each child comes to this world not only with an empty belly, but also with a brain. Put differently, people are not parasites living off finite resources (though exception needs to be made in the case of most politicians and bureaucrats). They are discoverers and innovators, who look for ways to achieve more with less. They are the creators of wealth and drivers of human progress.

As a reminder of human ingenuity, consider that a Chinese company was able use a massive 3-D printer to print 10 houses in 24 hours at the cost of $4,800 per house.

Let’s put that in perspective. There are 30 million people in Afghanistan, or 7.5 million families of four. At a cost of $4,800 per house (expect the cost to drop significantly over the next few years), it would cost $36 billion to build all Afghani families a new house. The current foreign aid to Afghanistan is $6.7 billion, which means that – using foreign aid money alone – it would take 5.4 years to have each Afghani family housed in a brand new Chinese-made home.

Will it happen? Probably not, since most of the foreign aid money to Afghanistan is devoured by parasitic government officials.  

Categories: Policy Institutes

Washington Should Focus on Protecting Americans, Not Reassuring Allies

Cato Op-Eds - Tue, 04/22/2014 - 10:29

Doug Bandow

The United States is busy in the world, but no function seems more important than acting as the world’s universal comforter, constantly “reassuring” friends and allies no matter the location.

For instance, after Russia’s annexation of Crimea, the administration undertook what Secretary of State John Kerry termed “concrete steps to reassure our NATO allies.”  The Military Times reported that Washington dispatched aircraft “to reassure NATO partners that border Russia.”

The process continues.  The Wall Street Journal entitled an article “U.S. Tries to Help Ukraine, Reassure Allies Without Riling Russia.”  Gen. Philip Breedlove said the transatlantic alliance would maintain new security measures throughout the year “to assure our allies of our complete commitment.” 

Beijing’s assertiveness has resulted in another gaggle of friendly states clamoring for reassurance.  Defense Secretary Chuck Hagel visited Asia in early April; the Washington Post reported that he sought “to reassure allies in Asia amid questions about U.S. commitment.”  The president headed to Asia in mid-April, explained Voice of America, “in a bid to reassure allies in the region.” 

As I point out in my new Forbes online column:  “Washington’s obligation always is to give.  The U.S. not only is supposed to guarantee the security of assorted friends and allies.  It also must constantly reassure them.  Americans must not only be prepared to die for anyone and everyone who wants protection, but Americans must always and in every way demonstrate that willingness.”

It’s a bizarre policy.  First, the overriding responsibility of Washington officials is to safeguard America—its people, territory, constitutional liberties, and prosperity.  The Department of Defense is not a charity created to protect the world, subsidize the improvident, calm the nervous, or save the indifferent.

Second, America’s broader foreign policies should be directed at advancing the interests of Americans.  The national government is the agent of those who fund, staff, and support it, the American people.  Their welfare is primary.  Washington should look after their interests, not those of some imaginary “international community” that exists only in the minds of social engineers who desire to escape even minimal national restraints.

Moreover, the tendency of political organizations to live out Lord Acton’s famous warning that “power tends to corrupt and absolute power corrupts absolutely” requires the U.S. government to build limits into its own institutions and especially those beyond its borders.

The notion that America has an obligation to constantly “reassure” others is particularly pernicious when applied to the military.  Washington’s principal obligation is to protect the American people, not those who desire to be defended by the world’s greatest military power.

There are occasions when it is in America’s interest to aid other states, but only rarely.  Today Washington collects allies like most people accumulate Facebook friends.

Unfortunately, almost all U.S. allies expect to be defended by America rather than to help defend America.  Some contribute small troop contingents to Washington’s unnecessary wars elsewhere, such as in Iraq, but that is not worth promising to face down nuclear-armed Russia on their behalf.

One of the worst consequences of America’s defense guarantees is discouraging prosperous and populous states from defending themselves.  Europe has eight times Russia’s GDP—why is it relying on America at all? 

Similarly, why is Japan, a wealthy state which until recently had the world’s second largest economy, expecting Washington’s help to assert control over contested islands?  Why does South Korea, with 40 times the GDP of North Korea, presume the U.S. will forever maintain military forces in the peninsula?

Now Washington is sending Cabinet secretaries and military forces hither and yon to “reassure” these same nations that it will continue to subsidize their defense.  Why should governments in Asia and Europe inconvenience their peoples when Washington is willing to burden Americans to pay for everyone’s defense?

It is time for Washington to start reassuring Americans.

Categories: Policy Institutes

More Drinking Hours, Fewer Accidents

Cato Op-Eds - Tue, 04/22/2014 - 09:14

Jeffrey Miron

Does restricting access to alcohol reduce traffic accidents? Not necessarily, according to a recent study by economists from the University of Lancaster: 

Recent legislation liberalised closing times with the object of reducing social problems thought associated with drinking to “beat the clock.” Indeed, we show that one consequence of this liberalization was a decrease in traffic accidents. This decrease is concentrated heavily among younger drivers. Moreover, we provide evidence that the effect was most pronounced in the hours of the week directly affected by the liberalization; late nights and early mornings on weekends.

The authors also suggest that the restrictive closing times caused more traffic congestion (everyone left the pubs at the same time), increasing the scope for accidents.

So more freedom seems to generate better outcomes, presumably because most people use increased freedom sensibly.

Categories: Policy Institutes

BLM vs. the Nevada Rancher

Cato Op-Eds - Mon, 04/21/2014 - 16:04

Chris Edwards

The battle between Nevada rancher Cliven Bundy and the Bureau of Land Management (BLM) might be viewed as an overly aggressive federal bureaucracy enforcing misguided environmental regulations vs. an oppressed individual and his overly enthusiastic supporters with guns.

However, like the ongoing battles in California between farmers and environmentalists over water, the Nevada story is more complex than that. The issues are not divided neatly along left-right political lines. In both cases, the property rights issues are complicated, and the federal government has long subsidized the use of land and water resources in the West. The first step toward a permanent solution in both cases is to revive federalism. That is, to transfer federal assets to state governments and the private sector.

To understand the Nevada situation, it is useful to consider the history of federal land ownership in the West. From an essay by Randal O’Toole and myself:

“From the founding of the nation, the federal government began accumulating large tracts of land … As the federal government was accumulating land, it was also trying to unload it. The government’s general policy for more than a century was to sell or transfer its western lands to settlers, railroad companies, and state governments … With the rise of the Progressive movement at the turn of the 20th century, federal policy began to change toward land retention and land additions. Progressives believed that federal agencies would manage western lands better than states, businesses, or individuals.”

It turned out that the Progressives were dead wrong. In his book Public Lands and Private Rights, Robert H. Nelson describes how the Progressive ideas of scientific management and federal land planning have failed repeatedly. The last century of federal land management has been “filled with laws that had lofty purposes and achieved dismal results,” he concludes. He also notes that “federal ownership of vast areas of western land is an anomaly in the American system of private enterprise and decentralized government authority.” Federal policymakers should start fixing that anomaly.

The BLM faces a complex task in juggling all the competing uses of its timberlands, rangelands, minerals, watersheds, wildlife, water, and other resources located across a huge area. Livestock grazing, timber cutting, and mineral extraction all potentially conflict with wildlife habitat, watershed protection, and outdoor recreation.

The situation is made worse by BLM officials operating in a nonmarket environment. Essentially, they run a giant socialist enterprise in trying to centrally plan vast lands and resources. The decisions the agency makes are often infuriating to Westerners because they are made by unaccountable officials on the other side of the country.

The solution is to transfer most federal lands in Nevada to the State of Nevada. Charges for the use of the land—such as grazing fees—should be set in the marketplace. Where feasible, environmentally significant land should be owned and managed by private non-profit land trusts, as discussed here. But these sorts of decisions should be made by the Nevada legislature. Politicians in Washington lack the knowledge to make the crucial land-use decisions that affect the lives of people such as Cliven Bundy, and they are far too distracted with all the other issues on the federal agenda.

Categories: Policy Institutes

Freedom of Association in the Docket

Cato Op-Eds - Mon, 04/21/2014 - 15:51

Roger Pilon

I’ve got a piece just up at the Daily Caller, drawing on two brief stories earlier today that capture nicely the growing intolerance of the Left for people and groups holding views with which they disagree. One arises from a decision by Yale’s Social Justice Network (SJN) of Dwight Hall to deny membership to the school’s Choose Life at Yale (CLAY) group. The second concerns a proposed ban on judges affiliated with the Boy Scouts in California. Both illustrate how a bedrock American principle, freedom of association, is increasingly being gutted by the Left’s anti-discrimination agenda.

The Yale case is straightforward. As blogger Katherine Timpf writes, although CLAY was provisionally admitted to the network over the past year, during which its members did voluntary work with a local non-profit organization helping pregnant women, CLAY was voted out last week because, said the chair of the Yale chapter of the ACLU (itself a member), admitting CLAY would “divert funds away from groups that do important work pursuing actual social justice.”

That’s par for the course on today’s campuses. It’s training for the real world, as seen in the California case. Here, blogger Patrick Howley writes:

The California Supreme Court Advisory Committee on The Code of Judicial Ethics has proposed to classify the Boy Scouts as practicing “invidious discrimination” against gays, which would end the group’s exemption to anti-discriminatory ethics rules and would prohibit judges from being affiliated with the group.

Such a change in status could not be limited to the Boy Scouts, of course, but it’s a good start. That point was made in a letter to the committee from Catherine Short, legal director of the pro-life group Life Legal Defense Foundation. The Girl Scouts, numerous pro-life and religious groups, even the military practice “discrimination” of one kind or another, she wrote.

Years ago, when I was a scout leader as my son was growing up, I read a lengthy insert in the handbook meant for leaders. It concerned sexual exploitation and the need for scout leaders to take it seriously, prompted doubtless by experience. Given the nature of scouting activities, often isolated in the wild, and the need to assure both boys and their parents concerning the potential for abuse, even if the BSA had never taken an express position on sexual orientation, its decision to disallow gay scout leaders would not be gratuitous.

Go to the Daily Caller piece for a fuller discussion of the principles at stake here and a glimpse at how the distinction between private and public and the further distinction between reasonable and unreasonable discrimination are being undermined by a political agenda that has the freedom of private association as its ultimate target.

Categories: Policy Institutes

Federal Judge Says Thousands of Innocent Americans Behind Bars

Cato Op-Eds - Mon, 04/21/2014 - 13:51

Tim Lynch

 

Federal Judge Jed Rakoff:

“The criminal justice system is nothing like you see on TV — it has become a system of plea bargaining,” Rakoff said.

Today, only 2 percent of cases in the federal system go to trial, and 4 percent of cases in the state system go before a jury. As a result, accepting a deal from prosecutors — despite one’s guilt or innocence — has become a common choice for individuals accused of a crime.

“Plea bargains have led many innocent people to take a deal,” Rakoff said. “People accused of crimes are often offered five years by prosecutors or face 20 to 30 years if they go to trial. … The prosecutor has the information, he has all the chips … and the defense lawyer has very, very little to work with. So it’s a system of prosecutor power and prosecutor discretion. I saw it in real life [as a criminal defense attorney], and I also know it in my work as a judge today” …

Until extraordinary action is taken, Rakoff said little will change.

“We have hundreds, or thousands, or even tens of thousands of innocent people who are in prison, right now, for crimes they never committed because they were coerced into pleading guilty. There’s got to be a way to limit this.”

For related Cato work, go here.

Categories: Policy Institutes

California Shouldn't Be Able to Impose Regulations on Businesses Outside of California

Cato Op-Eds - Mon, 04/21/2014 - 11:59

Ilya Shapiro

One of the several failures of the Articles of Confederation was the incapacity of the central government to deal with trade disputes among the states. The Constitution resolved this problem by empowering the federal government to regulate interstate commerce. It has since become a basic principle of American federalism that a state may not regulate actions in other states or impede the interstate flow of goods based on out-of-state conduct (rather than on the features of the goods themselves).

That principle was axiomatic until the U.S. Court of Appeals for the Ninth Circuit upheld one particular extra-territorial California regulation. California recently established a Low Carbon Fuel Standard (“LCFS”) that attempts to rate the “carbon intensity” of liquid fuels, so that carbon emissions can be reduced in the Golden State. California considers not only the carbon emissions from the fuel itself being burnt, however, but also the entire “lifetime” of the fuel, including its manufacture and transportation.

This has led to complaints from Midwestern ethanol producers, whose product—which is in all other ways identical to California-produced ethanol—being severely disadvantaged in California’s liquid fuel markets, simply because it comes from further away. Groups representing farmers and fuel manufacturers sued, arguing that the LCFS constitutes a clear violation of the Commerce Clause (the Article I federal power to regulate interstate commerce) by discriminating against interstate commerce and allowing California to regulate conduct occurring wholly outside of its borders. The Ninth Circuit recently upheld the LCFS, finding the regulation permissible because its purpose was primarily environmental and not economic protectionism (although judges dissenting from the court’s denial of rehearing pointed out that this is the wrong standard to apply).

The farmers and fuel manufacturer groups have now submitted a petition to have their case heard by the Supreme Court. Cato has joined the Pacific Legal Foundation, National Federation of Independent Business, Reason Foundation, California Manufacturers & Technology Association, and the Energy & Environmental Legal Institute on an amicus brief supporting the petition.

We argue that the lower court’s ruling provides a template for other states to follow should they want to evade Supreme Court precedents barring obstruction of interstate commerce and extraterritorial regulation. As the Founders fully recognized, ensuring the free flow of commerce among the states is vital to the wellbeing of the nation, and California’s actions—and the Ninth Circuit’s endorsement of them—threaten to clog up that flow. Not only does the appellate ruling allow California to throw national fuel markets into disarray, it invites other states to destabilize interstate markets and incite domestic trade disputes—precisely the type of uncooperative behavior the Constitution was designed to prevent.

The Supreme Court will likely decide whether to take Rocky Mountain Farmers Union v. Corey before it recesses for the summer. For more on the case, see this blogpost by PLF’s Tony Francois.

This blogpost was co-authored by Cato legal associate Julio Colomba.

Categories: Policy Institutes

Should Companies Do What’s Best for Government, or Should They Do What’s Best for Workers, Consumers, and Shareholders?

Cato Op-Eds - Mon, 04/21/2014 - 10:56

Daniel J. Mitchell

I’m in favor of free markets. That means I’m sometimes on the same side as big business, but it also means that I’m often very critical of big business. That’s because large companies are largely amoral. Depending on the issue, they may be on the side of the angels, such as when they resist bad government policies such as higher tax rates and increased red tape. But many of those same companies will then turn around and try to manipulate the system for subsidies, protectionism, and corrupt tax loopholes.

Today, I’m going to defend big business. That’s because we have a controversy about whether a company has the legal and moral right to protect itself from bad tax policy. We’re dealing specifically with a drugstore chain that has merged with a similar company based in Switzerland, which raises the question of whether the expanded company should be domiciled in the United States or overseas.

Here’s some of what I wrote on this issue for yesterday’s Chicago Tribune.

Should Walgreen move? …Many shareholders want a “corporate inversion” with the company based in Europe, possibly Switzerland. …if the combined company were based in Switzerland and got out from under America’s misguided tax system, the firm’s tax burden would drop, and UBS analysts predict that earnings per share would jump by 75 percent. That’s a plus for shareholders, of course, but also good for employees and consumers.

Folks on the left, though, are upset about this potential move, implying that this would be an example of corporate tax cheating. But they either don’t know what they’re talking about or they’re prevaricating.

Some think this would allow Walgreen to avoid paying tax on American profits to Uncle Sam. This is not true. All companies, whether domiciled in America or elsewhere, pay tax to the IRS on income earned in the U.S. 

The benefit of “inverting” basically revolves around the taxation of income earned in other nations.

But there is a big tax advantage if Walgreen becomes a Swiss company. The U.S. imposes “worldwide taxation,” which means American-based companies not only pay tax on income earned at home but also are subject to tax on income earned overseas. Most other nations, including Switzerland, use “territorial taxation,” which is the common-sense approach of only taxing income earned inside national borders. The bottom line is that Walgreen, if it becomes a Swiss company, no longer would have to pay tax to the IRS on income that is earned in other nations. 

It’s worth noting, by the way, that all major pro-growth tax reforms (such as the flat tax) would replace worldwide taxation with territorial taxation. So Walgreen wouldn’t have any incentive to redomicile in Switzerland if America had the right policy. And this is why I’ve defended Google and Apple when they’ve been attacked for not coughing up more money to the IRS on their foreign-source income. But I don’t think this fight is really about the details of corporate tax policy.

Some people think that taxpayers in the economy’s productive sector should be treated as milk cows that exist solely to feed the Washington spending machine.

…ideologues on the left, even the ones who understand that the company would comply with tax laws, are upset that Walgreen is considering this shift. They think companies have a moral obligation to pay more tax than required. This is a bizarre mentality. It assumes not only that we should voluntarily pay extra tax but also that society will be better off if more money is transferred from the productive sector of the economy to politicians.

Needless to say, I have a solution to this controversy.

…the real lesson is that politicians in Washington should lower the corporate tax rate and reform the code so that America no longer is an unfriendly home for multinational firms.

For more information, here’s the video I narrated on “deferral,” which is a policy that mitigates America’s misguided policy of worldwide taxation.

President Obama’s Deferral Proposal: Hamstringing American Companies, Reducing American Jobs

P.S. Many other companies already have re-domiciled overseas because the internal revenue code is so punitive. The U.S. tax system is so bad that companies even escape to Canada and the United Kingdom!

P.P.S. It also would be a good idea to lower America’s anti-competitive corporate tax rate.

Categories: Policy Institutes

Why Worry About Conspiracy When Incompetence Will Do?

Cato Op-Eds - Mon, 04/21/2014 - 10:44

Michael D. Tanner

Last week, the New York Times reported that the Census Bureau would be significantly changing the questions and methods it uses to determine who has health insurance. The redesign is an attempt to address some of the flaws in the current design that have long troubled the agency. A working paper from the Census Bureau had found that it provided an “inflated estimate of the uninsured” and was prone to “measurement errors” that diminished the reliability and usefulness of the measure.

The timing of this change could hardly be worse. The massive coverage provisions of the health care reform have just taken effect, and these new changes could make comparisons to past years difficult, or meaningless. Another document from the agency explains that the questions would elicit such different responses that “it is likely the Census Bureau will decide that there is a break in the series for the health insurance estimates.”

As the Times reports, the differences in responses between the two sets of questions are significant; in a trial run last year, the percentage of people without health insurance was 10.6 percent with the new questionnaire, compared with 12.5 percent using the old version, with similar effects across all demographic groups.

Some defenders of the decision have pointed out that these new questions will also give data for 2013, so there will be at least one year of pre-ACA data to compare to. This is true, and having at least one data point will be helpful to some extent, but what we really want to evaluate when analyzing the law would be the longer term trend, for two reasons. One, there is a decent amount of variation in these surveys that make single data points less informative. Two, while the major coverage provisions of the law take effect in 2014, the law has already been influencing the insurance market in smaller ways since its passage, and more than half of the reduction in the uninsured will occur after 2014, according to the Congressional Budget Office. This is why having a stable baseline would be useful, so we could examine the longer term trends in insurance coverage, and why now is close to the worst time to incorporate this change. The Census Bureau acknowledged as much in a paper, admitting that “[i]deally, the redesign would have had at least a few years to gather base line and trend data.”

Some critics of the law have voiced some suspicion as to possible political motivations for the timing of this change, seeing it as an attempt to obscure the effects of the law and make it harder to get reliable estimates. They cite the fact that some of the new questions were requested by the administration, and that senior officials had knowledge and approved of these pending changes.

I do not think conspiracy is the answer, but the real reason for this Census change is just as troubling, if not more so: incompetence.

The sheer amount of negative attention that these planned changes have gotten likely outweighs whatever political gains the administration could have hoped to capture in the first place. Aside from that, there are numerous other organizations, like Gallup, that measure health insurance coverage, so skeptics of the law will have other sources of data to turn to. If anything, it would appear that the White House was trying too hard to make sure they did not appear to be meddling in the affairs of the Census Bureau, which had unwisely planned to roll out these changes at an inopportune moment. Why this change was the line in the sand that the administration dared not cross when it has shown no such restraint in delaying many aspects of the law itself, such as the employer mandate, is hard to comprehend, but paints a picture more of an administration flailing to put out fires as they arise, rather than one even capable of pulling of the long term planning and coordination required for such a scheme.

While it appears the administration could have intervened and delayed the rollout of the new questions, they were not the driving force behind the changes. If anything, this was a mistake of what they chose not to do, rather than what they did.

These problems of coordination and competence within the government, where one government agency appears to be proceeding along with little to no regard or understanding for the broader context in which it operates, is in some ways more troubling, especially when we are talking about the massive new government foray into a sector that consumes almost 18 percent of our economy.

If they cannot even coordinate the measurement of health insurance effectively, how can they implement the law itself? 

The administration has a chance to partially remedy their mistake. Republicans in both chambers have already introduced legislation to either delay the new questions or to use both sets concurrently for the next few years to establish a better baseline to look at the effects of the law on health insurance coverage.

Government, as inefficient and incompetent as it often is, can sometimes make honest mistakes, which I think this likely is; however, these mistakes should raise serious concerns about government’s abilities as it seeks to spread into even more aspects of the economy and our lives.

 

Categories: Policy Institutes

Virginia Is for Gay Lovers Too!

Cato Op-Eds - Mon, 04/21/2014 - 06:00

Ilya Shapiro

In an attempt to prove that Virginia is indeed for lovers, two couples have recently gone to federal court to get their marriages recognized in their home state. One of the couples has been together for more than 20 years and the other got married in California and have a teenage daughter together, yet the Commonwealth of Virginia will not recognize their marriages because the couples are—you guessed it—same-sex.

These couples don’t see why their sexual orientation should keep them from enjoying the equal right to marry a partner of their choice, so they filed suit in federal district court to challenge the Virginia’s anti-gay-marriage state constitutional amendment. They argued that the provision violates both equal protection and the fundamental right to marriage, as protected by the Fourteenth Amendment. This February, the district court agreed with them, and now they’re defending that ruling before the U.S. Court of Appeals for the Fourth Circuit.

Following on the heels of last term’s Supreme Court ruling in United States v. Windsor—which struck down the part of the Defense of Marriage Act that denied federal benefits to lawfully married same-sex couples—this case adds Virginia to the list of states (which now includes Utah, Oklahoma, Texas, Kentucky, Michigan, and Ohio, and seems to grow with each passing week) that have the constitutionality of their marriage laws before a federal appeals court. 

Reprising our collaboration in Perry v. Hollingsworth—the California Prop 8 case in which the Supreme Court avoided ruling on the merits—and the Tenth Circuit gay marriage cases Kitchen v. Herbert and Bishop v. Smith, Cato and the Constitutional Accountability Center have filed a brief supporting the plaintiffs’ fight for equality under the law in the Old Dominion. We argue that the Fourteenth Amendment’s Equal Protection Clause protects against the arbitrary and invidious singling-out that the Virginia gay marriage ban effects, that the clause’s original meaning confirms that its protections are to be interpreted broadly, and that the clause provides every person the equal right to marry a person of his or her choice.

We believe that the Virginia constitutional amendment conflicts with the equal rights of those same-sex couples whose unions are treated differently than those of opposite-sex couples. To the extent that states recognize marriage, every person has the right to choose whom to marry and to have that decision respected equally by the state in which they live.

Especially in the wake of Windsor, it is becoming clearer that laws that force same-sex unions into second-class status have no place in a free society. After the Fourth Circuit hears argument in Bostic v. Rainey later this spring, it should affirm the district court’s decision.

Categories: Policy Institutes

TV Broadcasters Should Have Same Rights As Everyone Else

Cato Op-Eds - Fri, 04/18/2014 - 13:31

Ilya Shapiro and Trevor Burrus

Remember broadcast television? Amid the avalanche of new streaming services, DVRs, and Rokus, not to mention cable TV, some people may have forgotten—or, if they’re under 25, never known—that there are TV shows in the air that can be captured with an antenna. The Supreme Court certainly hasn’t forgotten, given that it maintains an outdated rule that broadcast TV gets less First Amendment protection than cable, video-on-demand, or almost anything else–a rule dating to the 1969 case of Red Lion Broadcasting Co. v. FCC.

That lower standard of protection comes from the belief that the broadcast-frequency spectrum is scarce, and thus that the Federal Communications Commission is properly charged with licensing the spectrum for the public “interest, convenience, and necessity.” But if newspapers or magazines were similarly licensed, the First Amendment violation would be obvious to all but the most hardened censor.

Hence the case of Minority Television Project v. FCC. Minority Television Project is an independent, noncommercial license-holding TV station in San Francisco. Unlike most noncommercial license holders, Minority TV receives no PBS money. Because it’s an over-the-air broadcaster, however, it must comply with the restrictions placed on the licenses by Congress and the FCC, including prohibitions on paid commercials and political ads. Minority TV challenged these restrictions as violating the First Amendment.

Applying Red Lion’s lower First Amendment standard, the district court, a panel of the U.S. Court of Appeals for the Ninth Circuit, and even the en banc Ninth Circuit (11 judges rather than the usual 3) all ruled against Minority TV. On petition for certiorari to the Supreme Court, Minority TV argues that Red Lion’s rationale for reducing broadcasters’ rights is outdated and should be overruled.

Cato has filed an amicus brief in support of Minority TV, agreeing that it’s time to give broadcast TV full First Amendment protection. Just as we argued in 2011’s FCC v. Fox Television Stations—where the Court chose to evade the question—it’s time to update our law to fit current realities. The way that people consume information and entertainment has changed dramatically since 1969. Rather than three broadcast networks, we have hundreds of channels of various kinds, and increasingly people are forgoing traditional TV altogether. The FCC can still license broadcasters—that system isn’t going away anytime soon regardless of the next mind-boggling innovation—but the conditions it places on those licenses have to satisfy strict First Amendment scrutiny, especially when they pertain to political speech.

The Supreme Court should take this case in order to update its treatment of broadcasters’ speech rights, including a requirement that the government offer a truly compelling justification any time it wants to restrict them. 

Categories: Policy Institutes

Copyright on the (Cato) Docket May 7th

Cato Op-Eds - Fri, 04/18/2014 - 09:41

Jim Harper

This week, the U.S. Patent and Trademark Office and the National Telecommunications and Information Administration announced four upcoming hearings on issues raised in the Department of Commerce Internet Policy Task Force’s July 2013 paper, “Copyright Policy, Creativity, and Innovation in the Digital Economy.” The hearings will be held in or near Nashville, Boston, Los Angeles, and San Francisco in May, June, and July.

Cato will host its own hearing early next month on Tom W. Bell’s new book Intellectual Privilege. That event will occur May 7th at the Cato Institute in Washington, D.C.

In the book, Bell treats copyright as a statutory privilege that threatens not just constitutional rights, but natural rights, too. He argues for a new libertarian view of copyright that reconciles the desire to create incentives for creators with our inalienable liberties. Bell’s vision is of a world less encumbered by legal restrictions and yet richer in art, music, and other expressive works.

Register now for what is sure to be a lively discussion of this perennially interesting issue on May 7th!

Categories: Policy Institutes

Judge Rebukes Labor Department Over Shoddy Case

Cato Op-Eds - Thu, 04/17/2014 - 12:56

Walter Olson

It seems every week or two another federal agency gets smacked down in court for trampling the rights of regulated parties in enforcement litigation. This week it’s the Labor Department’s turn:

The U.S. Department of Labor must pay more than $565,000 in attorney fees to an oilfield services company it accused of wage-and-hour violations totaling more than $6 million, a federal judge has ruled….

Officials, who opened their investigation in 2010, alleged the business [Texas-based Gate Guard Services, LLC] improperly classified 400 gate attendants as independent contractors.

The agency would have learned that the guards weren’t employees had it talked to more than just a few of them, [federal judge John] Rainey wrote in a 24-page order. Because the probe was not “substantially justified,” Gate Guard was entitled to recover its attorney fees, he said.

“The DOL failed to act in a reasonable manner both before and during the course of this litigation,” Rainey wrote.

Goaded by labor unions and other interested parties, the Obama Labor Department has made wage-and-hour law a big priority, with the President himself pushing the law into new ways of overriding private contractual choice. As for the overzealous enforcement, it’s coming to look less like inadvertence and more like systematic Administration policy.  Last year we noted an Eleventh Circuit decision rebuffing as “absurd” a Labor Department claim of authority regarding the H-2B guest worker program. The pattern extends to agency after agency, from the EPA (ordered to pay a Louisiana plant manager $1.7 million on a claim that hardly ever succeeds for defendants, malicious prosecution), to white-collar enforcement, to a series of Justice Department prosecutions under the Foreign Corrupt Practices Act

Probably the agency to suffer the most humiliating reversals is the Equal Employment Opportunity Commission, nominally independent but in fact reshaped in recent years into a hyperactive version of its already problematic self. You can read here about some of the beatings the EEOC has taken in court in recent years, including a case last summer where the federal judge dismissed the commission’s lawsuit over a Maryland company’s use of criminal and credit background checks using words like “laughable,” “unreliable,” and “mind-boggling.” And just last week, as reported in this space, the Sixth Circuit memorably slapped around the commission’s amateurish use of expert testimony in another credit-check case, this time against the Kaplan education firm. As I noted at Overlawyered

The Sixth Circuit has actually been one of the EEOC’s better circuits in recent years. For example, it reversed a Michigan federal judge who in 2011 had awarded $2.6 million in attorneys’ fees to Cintas, the employee-uniform company, and reinstated the lawsuit. In doing so, the appellate panel nullified what had been the lower court’s findings of “egregious and unreasonable conduct” by the agency, including a “reckless sue first, ask questions later strategy.” The commission hailed the reversal as one of its big legal wins — although when one of your big boasts is getting $2.6 million in sanctions against you thrown out, it might be that you don’t have much to brag about….

If you wonder why the commission persists in its extreme aggressiveness anyway, one answer may be that the strategy works: most defendants settle, and the commission hauled in a record $372 million in settlements last year. 

 Perhaps it is time for defendants to start settling less often.

 

Categories: Policy Institutes

Making an International Deal: Iran Should Stop Persecuting Religious Minorities

Cato Op-Eds - Thu, 04/17/2014 - 12:04

Doug Bandow

Nuclear negotiations with Iran continue in Vienna.  Skeptics remain many:  everything depends on whether the ruling elite, and not just President Hassan Rouhani, is serious about reform.  Iran should demonstrate its commitment by respecting religious liberty.

The most celebrated case of persecution today is Saeed Abedini, an American citizen born in Iran and sentenced to eight years in prison last year for “undermining national security” by the Iranian government.

A Muslim convert to Christianity, his “crime” in Tehran’s view apparently was aiding house churches.  He went to Iran in 2012 to set up an orphanage, with the government’s approval.  Since then he was abused and tortured while held at two of Iran’s worst prisons. 

Unfortunately, Abedini represents far broader religious repression.  The U.S. Commission on International Religious Freedom has routinely labeled Tehran as a Country as Particular Concern.  The Commission’s 2013 report concluded:  “The government of Iran continues to engage in systematic, ongoing, and egregious violations of religious freedom, including prolonged detention, torture, and executions based primarily or entirely upon the religion of the accused.” 

Tehran’s brutal persecution has been getting worse.  The State Department reported that violations of religious liberty increased again 2012, as Tehran increasingly was “charging religious and ethnic minorities with moharebeh (enmity against God), ‘anti-Islamic propaganda,’ or vague national security crimes for their religious activities.” 

Currently the regime appears to be most concerned about conversions.  Christians traditionally were minorities, especially Armenians and Assyrians, who speak a different language.  However, HRWF reported that charges against those arrested last year included “conversion from Islam to Christianity, encouraging the conversion to Christianity of other Muslims, and propaganda against the regime by promoting Christianity as missionaries.” 

Iran is a theocratic state whose laws are to be based on “Islamic criteria.”  The constitution formally accords “full respect” to Christians, Jews, and Zoroastrians, who are allowed to worship “within the limits of the law.”  Proselytizing and converting are barred, however.  Moreover, according to the State Department, Jews are “regularly vilified” and the government “regularly arrests members of the Zoroastrian and Christian communities for practicing their religion.” 

Worse is the treatment of other groups, such as Baha’is and other Muslims, including Sufis, Sunnis, and non-conformist Shia.  All are considered to some degree to be apostates.  Explained State, “The government prohibits Baha’is from teaching and practicing their faith and subjects them to many forms of discrimination not faced by members of other religions groups.”  Sunnis face double jeopardy since many are ethnic minorities, such as Arabs and Kurds. 

Government hostility encourages private discrimination as well.  Said State:  “The government’s campaign against non-Shias created an atmosphere of impunity allowing other elements of society to harass religious minorities.” 

The U.S. government has little direct leverage, having already targeted Tehran with economic sanctions over its presumed nuclear ambitions.  However, Washington (and the Europeans) could indicate to Iran that a deal is more likely if it quiets Western skeptics.

In fact, public pressure works.  The UN’s Ahmed Shaheed reported last year that “At least a dozen lives were saved because of the intervention of international opinion.”  Encouraging Tehran to respect the freedom of conscience of its citizens might even more effectively come from the most fervent advocates of engagement, who are resisting proposals for new Western sanctions. 

As I conclude my latest article in American Spectator online:  “Tehran should release Rev. Abedini, pardon imprisoned Baha’is, allow Sufis and Sunnis to worship, and more.  ‘The international community is watching,’ observed Dwight Bashir, deputy director of USCIRF.  Iran should act accordingly.”

Categories: Policy Institutes

The Zombie National ID

Cato Op-Eds - Wed, 04/16/2014 - 14:27

Jim Harper

Like some sort of zombie from a 1950s B-movie, the REAL ID Act shambles forward, awaiting the day when some national emergency can bring it back to life.

In the District of Columbia, the city government has announced that they will begin to issue REAL ID compliant driver’s licenses from May 1, 2014 onwards. The city’s “REAL ID Credential” page sings every note in the pro-national-ID song book. It says that REAL ID is “not a national identification card,” a claim debunked on this blog long ago. It also says that REAL ID will help “inhibit terrorists’ ability to evade detection by using fraudulent identification.” That’s true, as far as it goes. But inconveniencing wrongdoers this way provides a tiny sliver of security compared to the costs in dollars and privacy, not to mention the inconvenience about to be visited on D.C. residents.

The D.C. government says that the change is being made “to ensure our residents will have access to federal facilities and the ability to board airplanes.” Never mind that the federal government has caved over and over again after threatening to disrupt air travel. D.C. plans to put all 540,000 or so licensed drivers into the national ID system over the next few years, including many federal policymakers.

In Louisiana, meanwhile, state legislators have advanced a bill to repeal the state’s 2008 ban on participation in the REAL ID program. The bill’s proponents also say that they must put Louisianans into the national ID system or they won’t be able to fly. Again, the federal government will never cut off Americans’ right to travel because they live in states that don’t comply with REAL ID. It’s been threatened over and over again, and the federal government always backs down.

But there may yet be a stake that goes through the heart of the national ID program. A bill to repeal REAL ID has been introduced in both the House and Senate. H.R. 4073, introduced by Rep. Steve Daines (R) of Montana, and S.2121, introduced by Daines’ rival in the current Montana Senate race, Sen. John Walsh (D), both would repeal the REAL ID Act.

It is refreshing to see some pushback against REAL ID during the current Congress. But is it enough to kill the zombie national ID?

 

Categories: Policy Institutes

Washington’s Inconsistent Stance on Territorial Integrity

Cato Op-Eds - Wed, 04/16/2014 - 11:29

Ted Galen Carpenter

U.S. officials scarcely miss any opportunity to denounce Russia for severing Crimea from Ukraine and then annexing the peninsula. Yet Washington’s own track record regarding respect for the sovereignty and territorial integrity of countries is inconsistent, to say the least. Critics have noted that the position the United States and its NATO allies adopted toward the issue of Kosovo is at sharp variance with the current denunciation of Moscow’s conduct in Crimea. Not only did NATO launch an air war against Serbia to detach one of its provinces in 1999, but it proceeded to encourage and defend Kosovo’s subsequent unilateral declaration of independence in 2008 from what had become a fully democratic Serbia. 

The insistence of U.S. officials that the Kosovo situation was unique and, therefore, did not set any precedent, barely passed the laugh test. Russia explicitly cited Western policy in Kosovo for its own actions in Georgia, detaching two of that country’s secessionist-minded territories, South Ossetia and Abkhazia, later in 2008. More recent efforts by staunch critics of Russia’s amputation of Crimea to argue that Western actions in Kosovo were entirely different are scarcely more credible than Washington’s original justifications. The reality is that the Kosovo, Georgia, and Crimea episodes were all acts of aggression.

Cyprus is another case that undermines Washington’s professed reverence for the territorial integrity of nations. NATO ally Turkey invaded the island in 1974 and proceeded to occupy the northern 37 percent of Cypriot territory. At the very least, the U.S. government looked the other way while its ally committed a blatant act of territorial theft. And a provocative new book, Kissinger and Cyprus: A Study in Lawlessness, by former Nixon Administration official Eugene Rossides, makes a solid case that the administration aided and abetted Ankara’s aggression. 

The Turkish government certainly has never paid a significant price for invading and partitioning its neighbor. Nor has it done so for later establishing a secessionist entity, the Turkish Republic of Northern Cyprus, in the occupied territory and bringing in tens of thousands of settlers from the Turkish mainland. 

It would be charitable to describe Washington’s response to these repeated violations of international law as anemic. Although an angry Congress imposed sanctions against Turkey following the invasion, the executive branch did everything possible to evade and undermine those restrictions. That was doubly true of subsequent administrations. There was not even an effort to exclude Turkey temporarily from its role in NATO. United States policy in the succeeding decades has been more critical of the victims of Ankara’s ongoing aggression than it has of Turkey’s conduct. Indeed, Washington’s primary goal has been to pressure the Cypriot government and public into signing an agreement that would accept the Turkish Republic of Northern Cyprus in all but name and legitimize the continued presence of Turkish occupation troops in the north.

Given that record, it is difficult to regard the U.S. opposition to Russia’s actions in Crimea as based on sincere respect for international law. There appears to be a disturbing double standard. Washington certainly has not held itself or its allies to the behavioral standards that it demands of other countries.

Categories: Policy Institutes

No Honor Among Cronies: Maryland's House of Cards Sequel

Cato Op-Eds - Wed, 04/16/2014 - 10:50

Walter Olson

The state of Maryland has doled out more than $26 million in tax-credit subsidies to the hit Netflix series House of Cards, which films in the state. Last month in this space, my colleague David Boaz compared the arrangement itself to a House of Cards plot line: “It’s hard to imagine a better example of rent-seeking, crony capitalism, and conspiracy between the rich, the famous, and the powerful against the unorganized taxpayers.”

Shortly after he wrote, the plot began taking further twists reminiscent of fiction. In response to demands from the show’s producers for even steeper subsidies as the price of staying to film more seasons, some lawmakers decided to remind the Hollywood crowd who held the guns in the relationship:

Responding to a threat that the “House of Cards” television series may leave Maryland if it doesn’t get more tax credits, the House of Delegates adopted budget language … requiring the state to seize the production company’s property if it stops filming in the state. …

Del. William Frick, a Montgomery County Democrat, proposed the provision, which orders the state to use the right of eminent domain to buy or condemn the property of any company that has claimed $10 million or more credits against the state income tax. The provision would appear to apply only to the Netflix series, which has gotten the bulk of the state credits.

This smash-‘n’-grab approach to the use of eminent domain power is something of a local specialty in the Old Line State. In 1984, a bill was introduced in the Maryland legislature authorizing an eminent domain takeover of the Baltimore Colts, which had been eyeing the exits. In reaction, the owner packed the team into vans at night and moved to Indianapolis. In 2009, Gov. Martin O’Malley threatened eminent domain to keep the famed Preakness Stakes horse race, including its trademarks, copyrights, and contracts, from leaving Baltimore. (It stayed.)

On one level, it might seem like poetic justice for businesses that profit at taxpayer expense to come to grief through gross abuse of government power. But we should fear letting the power of eminent domain, dangerous enough when applied to land and rights of way, be asserted over intangible and movable assets. Once the state gets used to flexing that power, it will assuredly think of using it to seize enterprises whose entanglement with subsidies is less blatant and perhaps nonexistent. (Part of the answer, of course, is to stop the subsidy giveaways in the first place. And if the state can show that the producers somehow violated the terms applied heretofore to the deal, it would have a claim against them in more conventional litigation anyway.)  

Cato adjunct scholar Ilya Somin discussed eminent domain over moveable and intangible assets in this 2009 post. He writes, “condemning mobile assets is a losing proposition for state and local governments – even if courts will let them do it,” noting that “businesses would quickly flee any jurisdiction that started using eminent domain in this way. … Moreover, other firms would forego the opportunity to move into the area in the first place.”

But on to the sequel: Legislators in Annapolis killed the eminent domain proposal in conference committee, and then frantic negotiations on extending the subsidies failed to reach agreement as to a final $3.5 million before the end of the legislative session last week, which means the state’s taxpayers may save that money (or save even more, if the show decides to leave).  

Isn’t it nice when negotiations between two sets of rogues to fleece the rest of us break down? And it’s a credit to the structure of our constitutional system that it often succeeds in blocking such negotiations.

 

Categories: Policy Institutes

Kathleen Sebelius Sticks American People With Higher Costs, Fewer Choices, and Lost Jobs

Cato Op-Eds - Tue, 04/15/2014 - 16:23

Doug Bandow

Congress passed the misnamed Patient Protection and Affordable Care Act four years ago.  It was a signal political achievement.  Alas, ObamaCare is proving to be a policy bust as Kathleen Sebelius leaves her job as Secretary of Health and Human Services. 

For instance, health insurance premiums are rising dramatically, especially for the young.  The federal government now mandates expensive “benefits” that many people do not need or desire.

Even more dramatic is the reverse Robin Hood redistribution from the generally lower-income young to the mostly wealthier old.  As I point out in my new Forbes online article:  “By requiring coverage irrespective of health status and limiting risk-based premium differentials ObamaCare shifted costs from gray-haired investment bankers to newbie sales associates.  Despite the administration’s faux shock at the huge premium increases for the young, the legislation is working precisely as intended.” 

Along with higher premiums came the destruction of existing plans.  The president’s promise that if people liked their policies they could keep them was a calculated and cynical deception.  The legislation explicitly overrode private choice to impose Washington’s preferred “benefit” mix.

Another impact of the ACA, discussed in a new report from the American Health Policy Institute, is to increase business costs through new taxes, mandated benefits, and administrative costs.  Moreover, companies ultimately will end up paying indirect costs, such as a share of new taxes on others, such as for medical devices.

In 2012 large employers spent about $580 billion to cover employees and their dependents.  AHPI figured these companies would have to spend an extra $4800 to $5900 per employee.

Some amount of this new expense will be shifted onto customers.  How much depends on consumer demand and industry competitiveness.  Moreover, companies will lose revenue as higher prices reduce sales.

Firms also will more aggressively shift costs onto employees.  Between 1999 and 2013 the cost of employer-provided health insurance trebled, causing business to look for ways to cut corporate outlays.  That effort will continue. 

The third consequence of the ACA’s cost increases is to raise the price of hiring workers, which will reduce the number of jobs.  The principle is simple:  the more expensive government makes it for companies to add workers, the fewer workers companies will add. 

Unfortunately, the administration is hiking business costs in more areas than just health care.  Last year the Heritage Foundation’s James Gattuso and Diane Katz estimated that annual regulatory costs jumped roughly $70 billion during President Obama’s first term. 

Explained Gattuso and Katz:  “While historical records are incomplete, that magnitude of regulation is likely unmatched by any administration in the nation’s history.”  In its fourth year alone the administration issued 2605 new rules, with annual regulatory costs jumping more than $23.5 billion.  On top of that was another $4.6 billion in one-time implementation costs.

Unfortunately, there are thousands more proposed rules in the federal pipeline.  Obviously, regulations have benefits as well as costs.  However, public choice economics warns of perverse public incentives, with government agencies acting to advance their own interests—in particular, their influence, workforce, and budget—even if contrary to the public interest. 

At a time of slow economic growth and high unemployment, the most painful consequence of hyper-regulation may be lost jobs.  ObamaCare has a particularly pernicious impact because it directly raises the costs of hiring additional workers.  And the president wants to inflate that burden still further by, for instance, raising the minimum wage and expanding regulations covering overtime pay.

The Affordable Care Act is many things, but it certainly is not affordable.  “Vote for ObamaCare so people can find out what is in it,” declared then-House Speaker Nancy Pelosi.  Now we know and most people are appalled at what they discovered.  Higher costs, fewer choices, and lost jobs.  Heckuva job, Barack!

Categories: Policy Institutes

Your Freedom Is Someone Else's Hell

Cato Op-Eds - Tue, 04/15/2014 - 09:19

Randal O'Toole

Yonah Freemark, a writer over at Atlantic Cities–which normally loves any transit boondoggle–somewhat sheepishly admits that light rail hasn’t lived up to all of its expectations. Despite its popularity among transit agencies seeking federal grants, light rail “neither rescued the center cities of their respective regions nor resulted in higher transit use.”

Not to worry, however; Atlantic Cities still hates automobiles, or at least individually owned automobiles. Another article by writer Robin Chase suggests that driverless cars will create a “world of hell” if people are allowed to own their own cars. Instead, driverless cars should be welcomed only if they are collectively owned and shared.

The hell that would result from individually owned driverless cars would happen because people would soon discover they could send their cars places without anyone in them. As Chase says, “If single-occupancy vehicles are the bane of our congested highways and cities right now, imagine the congestion when we pour in unfettered zero-occupancy vehicles.” Never mind the fact that driverless cars will greatly reduce congestion by tripling roadway capacities and avoid congestion by consulting on-line congestion reports.

Chase’s motives are obvious: as the co-founder of several carsharing programs, including ZipCar and BuzzCar, she stands to make enormous profits if everyone adopts her model. Just why Atlantic Cities buys into her vision is less clear, but the love Atlantic Cities writers seem to have for transit and car sharing suggests a collectivist mentality, while the hatred they have for individually owned cars implies a dislike of giving other people freedom.

Of course, Chase has an explanation for why single- or zero-occupant vehicles are to be abhorred. “People consider the cost of individual car trips to be just the cost of gas,” she says, “and we won’t think twice about asking a driverless robot car to do our bidding.” In other words, people are too stupid to own their own cars; it would be much better to have a sharing system that forces people to see the “full cost” of driving (including profit for the owners of ZipCar).

Personally, I happily imagine sending my dog to a vet without me accompanying it. Even more likely, I look forward to sending my car in for servicing or to take an appliance to a shop for repair without wasting my time. People could be more productive if they didn’t have to be stuck behind the wheel of a car all the time, and everyone would be better off. But to Chase, such people would somehow pose a burden on everyone else.

Her solutions are, first, to make sure that “the cost for autonomous vehicles be high enough that each vehicle will need to be used well.” In other words, keep them out of the hands of ordinary people who might “misuse” them.

Second, she wants highway agencies to charge an extra per-mile fee to people whose cars run around without an occupant. Why? Zero-occupant cars impose no more costs on society than multi-occupant cars. The people who own the cars should get to decide when and where they go and how many people they will carry, not some central planner who hates cars and the freedom they offer.

There’s nothing wrong with car sharing if people want to do it, but it shouldn’t be imposed on people. The great thing about mass-produced automobiles is that nearly every household in American can afford one. Collectivists would send us back to the nineteenth-century two-class society in which a few wealthy people have freedom and mobility and everyone else is dependent on some collective form of transport–then they’ll demonize the people with freedom. That’s the wrong way for America to go.

Categories: Policy Institutes

Revisiting Central Clearing for Derivatives

Cato Op-Eds - Mon, 04/14/2014 - 17:50

Louise Bennetts

The Dodd-Frank requirement that over-the-counter derivatives be centrally cleared is one of the (slightly) less controversial provisions of the Act, at least in spirit if perhaps not always in substance. But for a time, a few observers have worried - myself included - that concentrating derivatives clearing activities in one or two single-purpose entities may increase, rather than reduce, the risk to the broader economy posed by the default of a counterparty.

As it turns out, we skeptics are not alone. In yesterday’s Wall Street Journal, the good folks at BlackRock are cited as having raised concerns in a recent study about the lack of clarity regarding where the risk ultimately falls in the event of default by a large counterparty. Banks and investors want the clearinghouses themselves to backstop some of this risk. The BlackRock study notes that “post-crisis rules have forced a large swath of risky trades… and this risk needs to be addressed.”

It is perhaps, therefore, a good time to hark back to Craig Pirrong’s Cato Policy Analysis from 2010, released on the day the Act was signed into law. In it, Mr. Pirrong argues that central clearing leads to better and more efficient risk pricing ONLY if the clearinghouse has perfect information. He notes the risk sharing that occurs through the clearinghouse mechanism encourages excessive risk taking, which creates moral hazard. Pirrong also highlights that “if the clearinghouse has imprecise information, the margin levels it chooses will sometimes overly constrain the trading of its members and sometimes constrain them too little…all of these factors mean that it is costly for the clearinghouse to control moral hazard.” As Pirrong notes, a clearing mandate reduces market efficiency and poses “its own systemic risks in a world where information is costly.”

One of the major criticisms of the previous or “bilateral” approach to derivatives clearing was that banks and investors could not adequately monitor their own risk exposure to counterparties (with some side complaints about banks mispricing risk etc.). However, as the BlackRock study notes, it is not clear that the central clearing approach addresses this concern, especially since the rules governing outcomes in the event of a major default have yet to be finalized. In particular, if a major counterparty defaults and the clearinghouse is not holding sufficient collateral to cover that counterparty’s trades, who loses out? Is it the members? The Federal Reserve? (Remember, one of the Board’s first actions under Dodd-Frank was to allow clearinghouses to borrow at the discount window in the same way that commercial banks do). Will the clearinghouse perhaps declare bankruptcy (and, if so, what impact will the failure of a major utility have on operational stability)?

More importantly, just when counterparties have realized these products must be treated with caution, the system is incentivizing the market participants with the best information (the members) to pool and therefore increase the riskiness of their activities. Derivatives are an important economic tool and vital to most companies’ (financial or otherwise) risk management. But we should not assume that the framework created by Dodd-Frank will eliminate risk in the derivatives trade, real or perceived.

Categories: Policy Institutes

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