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Small is Beautiful

Cato Op-Eds - Wed, 06/25/2014 - 16:46

Chris Edwards

Thank you for reading the Cato blog and doing what you do to help spread freedom. Now you have the chance to advocate liberty every day while you are going to work or running errands.

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And here’s a special deal for Cato blog readers: the first 25 people to email my assistant Nick (nzaiac [at] cato [dot] org) with their street address will receive a free sticker.

And there’s more: members of Congress and top White House aides are eligible for as many free stickers as will fit on their Lexus and BMW bumpers! More than anybody else, these folks need a daily reminder that Small is Beautiful When It Comes to Government.

Categories: Policy Institutes

Sugar from Mexico: Who's Being Injured?

Cato Op-Eds - Wed, 06/25/2014 - 15:47

Daniel R. Pearson

On March 28, 2014, the U.S. sugar industry filed antidumping and countervailing duty (AD/CVD) petitions against imports of sugar from Mexico.  From the time that NAFTA’s sugar provisions were fully implemented in 2008, Mexico has been the only country in the world with unfettered access to the U.S. sugar market.  Sugar interests now are hoping to clamp the fetters back on.  It is not at all clear whether that effort will succeed.

Both the Commerce Department and the U.S. International Trade Commission (ITC) play important roles in this process.  Commerce must determine the extent of any dumping margin (selling at “less than fair value” due to pricing practices of individual firms) and any countervailing duty margin (benefit received by Mexican exporters from subsidies provided by their government).  The estimated dumping margins for the preliminary phase of the investigation range from 30 to 64 percent; they are likely to be adjusted based on additional information gained in the final phase of the investigation.  Commerce has not yet had an opportunity to establish CVD margins.  Given the degree of government involvement in Mexico’s sugar business, a CVD margin at some level seems likely.

The job of the ITC is to determine whether the domestic sugar industry has been “injured” by the imported sugar.  In its preliminary determination, the commission voted unanimously in the affirmative, which means that the investigation will go forward into its final phase.  This vote was not at all a surprise.  The legal standard for a negative vote in a preliminary determination is quite high.  To have voted in the negative, the ITC would have had to conclude that there was no “reasonable indication that a domestic industry is materially injured or threatened with material injury.”  That is a very difficult standard to meet on the basis of the somewhat limited preliminary record – often with inconclusive evidence – that must be compiled not more than 45 days after the case has been filed. 

So Commerce can be expected to impose temporary AD/CVD duties this fall at a level equal to their preliminary margins. The ITC is likely to hold its hearing as part of the final-phase investigation sometime early in 2015, with the vote taking place about a month later. 

What issues will the commission deal with as it makes a final determination on injury?  The statute requires that findings be made on three key issues:  (1) Volume.  Was the absolute volume of sugar imports from Mexico, or the increase in volume, significant?  (2)  Price.  Have there been significant price effects – underselling of U.S. prices by imported sugar, or price depression or suppression in the U.S. market?  (3) Impact.  Has the U.S. sugar industry experienced negative impact, such as declines in output, sales, market share, profitability, employment, etc? 

The public (non-confidential) version of the ITC’s opinion (Investigation Nos. 701-TA-513 and 731-TA-1249 can be accessed for free on the ITC website by registering here) makes clear that the commissioners found evidence of volume and price effects, as well as some impact on the domestic industry.  However, a similar outcome in the final investigation is far from preordained.  One of the reasons is that the legal standard is different in the final.  Instead of finding only a “reasonable indication” of material injury, the commission actually has to determine that the domestic industry has been materially injured, or is threatened with such injury. 

Another difference is that the three-year “period of investigation” (POI) will change.  Instead of beginning Oct. 1, 2010, the POI in the final will begin a year later.  In other words, marketplace trends are likely to be different.  A three-year downtrend in world sugar prices appears to have bottomed out in December 2013, with prices higher since then.  United States’ sugar prices also have been stronger.  So, in its final determination, the ITC will be working with an updated record and a more rigorous legal standard.

Another important issue is the question of “causation.”  Was any injury experienced by the domestic sugar industry actually caused by imports of sugar from Mexico?  The record shows that the market share of U.S. producers rose 4.2 percentage points over the POI. Were U.S. producers injured by a smaller 2.4-percentage-point increase in the share of imports from Mexico–especially when the big losers appear to have been producers in other countries, who lost 6.6 percentage points? 

There also are doubts as to whether any price effects were caused by imports from Mexico.  The preliminary record shows underselling of U.S. sugar by Mexican imports in 65.8 percent of measured transactions.  However, making those price comparisons no doubt was difficult because most of the imports from Mexico are of a grade called “estandar” (“standard,” in English), which has an intermediate purity range not produced in the United States. Comparing prices of products that are not identical can be tricky. Parties are actively contesting this issue.  How it is resolved could have a big influence on the case. 

A final uncertainty is the possibility that the sugar industries on both sides of the Rio Grande could enter into a “suspension agreement,” which would suspend the AD/CVD investigation.  In this scenario, Mexican and U.S. producers would consent to some form of managed trade in sugar, agreeing to restrictions on the volume of trade or the price at which imports could be sold. This approach would need to be blessed by Commerce, which tends to listen closely to the preferences of U.S. industries.  There are a number of precedents for such an arrangement, including one regulating shipments of Mexican tomatoes into the United States. 

What to say about such a suspension agreement?  Managed trade always will limit the gains that can be achieved by open and competitive markets, thus causing deadweight losses to consumers and the broader economy.  However, an agreement that allows some imports from Mexico clearly is preferable to large AD/CVD levies that allow none. 

Those who support economic growth and opportunity should hope that no suspension agreement is reached, and that the ITC ends the threat of AD/CVD duties by concluding that Mexican sugar has not injured the U.S. sugar industry.  The real injury in this marketplace is caused by the barrier between producers and consumers created by the U.S. sugar program.  It’s time to end that injury by taking those fetters off.

Categories: Policy Institutes

Family Reunification and Other Explanations for the Border Surge of Unaccompanied Children

Cato Op-Eds - Wed, 06/25/2014 - 15:45

Alex Nowrasteh

There are two main issues surrounding the increase in the migration of unaccompanied children (UAC) and asylum seekers in recent years that have recently reached crisis proportions.  The first is the treatment of those children who are apprehended by Border Patrol and how American policy is reacting to the surge. 

The second is explaining why UACs are coming.  Below I will lay out three different theories that attempt to explain the surge in UACs.  Each theory has some merit and I present evidence in support and opposition to each one.  

First Explanation: Family Reunification

Immigration by stages and family reunification could explain part of the UAC border surge.  Stage migration works like this:  First, the single breadwinner of the family immigrates to find work in the United States.  After getting established, finding employment, and figuring out how to function in his new country, the initial immigrant then sends for the rest of his family.  Sometimes the initial immigrant’s spouse will come alone while leaving the children in the care of extended family.  Often times, after the second parent is working, they will then have the funds to send for the children to join them in the United States. 

This pattern of family separation through stage immigration and eventual reunification is a desperate strategy undertaken by poor people who don’t have any other options.  Regardless, it explains part of the surge in unaccompanied children who are joining their unlawful immigrant parents and families who previously arrived in the United States.

Smuggling prices for unauthorized immigrants from Central America are higher than for unauthorized Mexican immigrants.  Mexicans pay about $4000 to be smuggled to the United States by land and $9000 to be smuggled in by sea.  Guatemalans pay about $7000.  But since Guatemalans are so much poorer than Mexicans, on average, it can take many more years for them to save for the trip, often meaning that both parents are more likely to come to the United States first to work and send money back to Guatemala to finance the sending of their children.  As a result, many of the children would come alone. 

The price of human smuggling has risen substantially due to increased U.S. border enforcement.  The higher price of migrating and the relative poverty of Central American migrants mean that families are more likely to be separated during the migration process, explaining part of the surge in UACs from Central America.  Ironically, increased border enforcement and crackdowns on human smugglers have probably caused more family separation and eventual reunification – partly explaining the scale of the current UAC migration.

Large numbers of unaccompanied children migrants surveyed in previous years mentioned “family reunification” as a justification for coming.  Thirty-six percent of all unaccompanied children surveyed prior to 2014 had at least one parent already in the United States.  This survey likely undercounts the family ties between these child migrants and their U.S.-based family because it excludes extended family connections.  Aunts, uncles, and cousins also provide a bridge for unaccompanied children to live in the United States.   


Nationality Percentage of Children with Both Parents in the U.S. Percentage of Children with One Parent in the U.S. Percentage of Children with At Least One Parents in the U.S. Percentage of Children with No Parents in the U.S. El Salvador

























Source: http://www.unhcrwashington.org/sites/default/files/1_UAC_Children%20on%20the%20Run_Full%20Report.pdf, pg. 63. 

During the Great Recession, the stock of unauthorized Mexican immigrants dropped in the United States.  A growing Mexican economy coinciding with a collapsing American one incentivized many unauthorized Mexican immigrants to return and stanched the flow of new arrivals.  According to Pew, there was a net decrease in the numbers of Mexicans in the United States from 2005 to 2010.  However, the stock of unauthorized immigration from other Central American countries shot up in 2010.

Source: http://www.dhs.gov/sites/default/files/publications/ois_ill_pe_2012_2.pdf

The large rise in UACs between 2011 and 2013 from Central American countries other than Mexico followed a large increase in the stock of unauthorized immigrants from those countries between 2009 and 2010.  Many of the UACs coming now are reuniting with their parents and extended families who unlawfully immigrated years before.


Source: http://www.dhs.gov/sites/default/files/publications/ois_ill_pe_2012_2.pdf and http://www.cbp.gov/newsroom/stats/southwest-border-unaccompanied-children

So far in 2014, Mexican UACs are down almost 33 percent from their peak in 2013.  By the end of the fiscal year, it is unlikely that Mexican UACs will rise to the level of 2013.  A small rise in the stock of unlawful Mexican immigrants from 2009 to 2010 was followed by a rise in the number of Mexican UACs in 2012 and 2013.  A decrease in the stock of unauthorized Mexican immigrants from 2010 to 2012 was followed by a fall in the number of Mexican UACs from 2013 to 2014.

Source: http://www.dhs.gov/sites/default/files/publications/ois_ill_pe_2012_2.pdf and http://www.cbp.gov/newsroom/stats/southwest-border-unaccompanied-children

Data collected at the end of this fiscal year will reveal how useful this theory is.  If the number of Mexican UACs in 2014 is less than in 2013, that would lend support to the family reunification hypothesis.  If the number of Mexican UACs by the end of 2014 climbs above that of 2013, then it would be evidence against the family reunification hypothesis.  If this hypothesis is correct, I would expect the number of UACs from Central America to increase this year over last year.  I lack data on the stock of unauthorized immigrants in the United States post 2012.  More data is required to properly evaluate this theory.

If the family reunification theory explains a large proportion of the increase in UACs, then legalizing the current stock of Central American unauthorized immigrants and allowing them to use the legal family based green card program to reunite with their families would decrease the numbers of UACs.  Furthermore, a large-scale lower skilled guest worker visa program available to Central Americans would incentivize circular migration, obviating the demand for family reunification in the United States.

Second Explanation: Violent Crime in Central America is Pushing Unaccompanied Children Out

This theory posits that UACs are being driven from their home countries due to violence.  The deteriorating crime situation has finally gotten so bad that the best choice for thousands of children and asylum seekers is to emigrate to the United States and other countries.  There is a lot of evidence to support this theory.  The United Nations High Commissioner for Refugees (UNHCR) survey of 404 UACs who arrived to the United States during and after October 2011 revealed that many decided to come because of escalating crime in their home countries.

Forty-eight percent of all the children interviewed said they experienced violence from organized and armed criminals like drug cartels, gangs, or state actors.  Sixty-six percent of the children from El Salvador cited violence from those organizations as their primary motivator for leaving and 21 percent discussed violence in the home.  Twenty percent of Guatemalans said violence from those groups was their primary motivator while 23 percent cited violence in the home.  Forty-four percent of Honduran children said they were threatened with violence or were victims of violence by organized armed criminal actors while 24 percent cited violence in the home.  Thirty-two percent of Mexicans cited violence in society while 17 percent complained of violence in the home.

The high murder rate in Central American countries is consistent with those tales of violence.  Since much of that violence is targeted against young people, it is consistent with why there has been a large increase in UACs.  The young are especially at risk of gang violence and homicides.  Sending young children before they are of age to be criminal targets seems prudent from the perspective of parents or family members in this situation.

Source: United Nations Office on Drugs and Crime https://www.unodc.org/gsh/en/data.htm

The increase in the number of Salvadorans, Guatemalans, and Hondurans seeking asylum in other Central American countries lends support to the criminal push theory.  The UNHCR has recorded a 712 percent increase in asylum claims in Central American countries from other Central American nationals.  There would not be an increase in asylum claims in other Central American countries unless there was a push factor in play.  However, the total increase in the number of asylum claims is very small.  It’s easy to see a large percentage increase in asylum claims when the starting numbers are so low.  While push factors are certainly in play, many UACs and asylum seekers are going to the United States.  There must be pull factors that are disproportionately attracting them.

Furthermore, the recent decline in homicide rates in Central American countries, 41 percent in El Salvador from 2011 to 2012, should not be accompanied with increased numbers of UACs if this theory is correct.  Perhaps other violence or criminal activity has become more pervasive in Central American countries and can explain the surge but homicides cannot do it alone.

Third Explanation:  U.S. Border Enforcement Policy is Pulling Immigrants Here

The most persistent theory attempting to explain the surge in unaccompanied children coming across the border is that they have been drawn here by the Obama administration’s so-called lax enforcement policy.  This is in addition to the usual economic magnet.    

Deferred Action for Childhood Arrivals (DACA), the program put in placed by President Obama in mid-2012 to temporarily defer deportations for some unauthorized immigrants who were brought here as children, could be a draw to unaccompanied children.  None of the children now coming across the border are eligible for DACA.  Regardless of the legal reality, there is clearly a building perception in some Central American countries that children will be able to stay in the United States because of DACA if they are apprehended by border patrol.

Survey data from the UNHCR survey of UACs from previous years showed that only 9 out of 404 of them mentioned that changes in U.S. immigration laws or enforcement was the reason they came.  Anecdotes certainly suggest that that number has increased in 2014, but by how much?  Interestingly, the surge began before DACA was announced by President Obama in mid-2012.  DACA could have fed the increase after 2012 though.  According to the survey of previous years, family reunification and violence were much bigger reasons for UACs to come to the United States.

Immigration enforcement along the U.S. border has not been gutted.  Beginning in 2005 there has been a large and sustained augmentation of Border Patrol resources and an expansion of their powers along the border.  Although apprehensions by Border Patrol have decreased during the Great Recession because fewer unauthorized immigrants are drawn to our lackluster economic growth, border enforcement has never been tougher and more apprehended border crossers have never faced harsher punishments.  The gate has clearly not been thrown open.

However, there is mounting evidence that few UACs are actually deported after their apprehension – with the exception of Mexican UACs who are returned.  That could be the basis for a signal to others in Latin America that U.S. immigration enforcement is very lax or that there are exceptions for children unauthorized immigrants.  Even if border enforcement has not been gutted, many UACs are turning themselves in because they think they will be treated leniently.  If the UAC believes they will be granted some sort of legal status, the actual state of border patrol and border enforcement is irrelevant to their decision.

Remember, other Latin American countries have also recently experienced increases in asylum seekers from El Salvador, Honduras, and Guatemala. Clearly, an asylum seeker from Honduras who tries to enter Panama is not incentivized to move because of President Obama’s supposed lax immigration enforcement or pro-legalization policy.  However, the number of asylum seekers going to other Central American countries is small.  Mixed and misinterpreted U.S. immigration enforcement signals have certainly incentivized some of the UAC emigration from Central America but it is not the only explanation.

United States’ policy for child asylum seekers could also explain some of the surge, although there was a considerable time delay.  Legal changes, including several laws in the early 2000s and a settlement agreement in 1997, require the government to release the juveniles from custody without unnecessary delay to the parent, legal guardian, adult relative, or others who can take care of the child.  Many of these children will be able to make asylum claims while others will eventually be deported.


All three of these theories explain at least part of the sudden increase in UACs in recent years.  As more data is made available by the government and more surveys are conducted of current UACs, a more complete picture will unfold and explain why the sudden increase in UACs is occurring.  Only then will an effective administrative long term solution be possible.

Categories: Policy Institutes

The Truth about Military Spending

Cato Op-Eds - Wed, 06/25/2014 - 14:58

Christopher A. Preble

In April, the CBO projected – based on current law – that the Pentagon would spend roughly $606 billion dollars in 2015. The just-passed House defense budget spends $570.4 billion. Both figures assumed, among other things, that we we would spend about $79 billion for overseas contingency operations (OCO), which is mainly for the war in Afghanistan. We have since learned that the Obama administration’s actual OCO request is likely to be “substantially smaller” than $79 billion, so perhaps $560 or $565 billion in total Pentagon spending when combined with their earlier base budget request.

One glance at Cato’s latest infographic* will tell you that even the lowest of these figures is too high.

For a little perspective, CBO’s original estimate of $606 billion dollars is roughly $10 billion more – in inflation-adjusted dollars – than the Pentagon spent in 2005, when the United States was engaged in wars in Iraq and Afghanistan, and is close to the United States’ Cold War peak of $611 billion in 1985, when the Soviet Union was spending an estimated $590 billion. Today, however, the United States is out of Iraq and is winding down its war in Afghanistan, and its nearest competitors – Russia and China – combined spend less than half as much as the United States on their militaries. Yet, some on the right continue to believe that Pentagon cuts should be off limits, including House Budget Committee Chairman Paul Ryan (R-WI), who argues that the United States should be spending much more on its military.

Rep. Ryan’s budget proposal would have busted the current spending caps to a tune of nearly $50 billion a year for the next decade. This would have amounted to $500 billion more than is currently projected, and around $1.7 trillion more than was spent in the decade following the Cold War. Incredibly, Ryan called for more spending while admitting that “the Department of Defense has repeatedly revised downward its estimates of the budgetary resources necessary to meet the nation’s security objectives.” Think about that: The military says that it does not need additional funding to meets its objectives, yet Ryan insisted that it should receive more money anyway. Luckily, if the budget that recently passed the House is any indication, few of Ryan’s colleagues seem to agree. Indeed, it now seems almost certain that we will spend less than CBO projected, and far less than Ryan called for. 

Some could argue that the United States can ill afford to cut its military spending given the current state of the world. Such cuts would only serve to embolden our adversaries like China and Russia, and exacerbate the turmoil in the Middle East, North Africa, and southwest Asia.

But, if anything, many of the current security issues in the world have resulted from America being too involved militarily. The U.S.-led war in Iraq, for example, certainly contributed to the current chaos in the Middle East. The war also undermined American influence by revealing the limits of America’s military power. The operation in Libya destabilized a country in which the United States had no vital interest, and showed Iran and others what happens when you negotiate away your nuclear program. And arming Syrian rebels has prolonged a civil war in which ISIS gained the strength, experience, and gear needed to launch a successful offensive into Iraq. It turns out that having an unrivaled military only gets you so far.

Americans can and should spend less on the military, because the U.S. military can and should do less, even in the face of what is happening in the Middle East, Eastern Europe, and Asia. And others, especially our wealthy allies in Europe and Asia, can, and probably should, spend more, as illustrated by another Cato infographic.

Beyond the numbers, however, it is important to maintain perspective. Although one might not know it from the images on television every day, the world, as President Obama stated, is less violent than it has ever been. Moreover, the threats to America’s vital national security interests are modest and manageable, and prudent reductions in America’s military spending won’t change that. Indeed, curing our power problem should make us safer, because it would limit our ability to become embroiled in unnecessary wars.



* Thanks to Travis Evans for his help in assembling these statistics, and in supervising the production of the various figures. 


Infographic sources (in order of figures listed, top to bottom):

Figures in 2015 inflation-adjusted dollars, unless otherwise noted.

2015-24 Paul Ryan = $6 trillion ($6.469 nominal): House Budget Committee, “The Path to Prosperity: Fiscal Year 2015 Budget Resolution,” Table S5, April 2014, p. 93.

2015-24 Current Law = $5.5 trillion ($5.987 nominal): House Budget Committee, “The Path to Prosperity: Fiscal Year 2015 Budget Resolution,” Table S5, April 2014, p. 93.

1992-01 = $4.3 trillion ($4.281): Department of Defense, “Fiscal Year 2015 Green Book,” Table 6-8 – Dept. of Defense BA by Public Law Title, April 2014, p. 133.

2005 = $596 billion ($596.3): Department of Defense, “Fiscal Year 2015 Green Book,” Table 6-8 – Dept. of Defense BA by Public Law Title, April 2014, p. 134.

2015 = $606 billion ($521 + $85): House Budget Committee, “The Path to Prosperity: Fiscal Year 2015 Budget Resolution,” Table S5, April, 2014, p. 93.

All above figures include OCO funding.

Cold War Average (1948-90) = $457 billion: Department of Defense, “Fiscal Year 2015 Green Book,” Table 6-8 – Dept. of Defense BA by Public Law Title, April 2014, pp. 129-132.

U.S. 1985 = $611 billion ($610.86): Department of Defense, “Fiscal Year 2015 Green Book,” Table 6-8 – Dept. of Defense BA by Public Law Title, April 2014, p. 132.

USSR 1985 = $590 billion: State Department, “World Military Expenditures and Arms Transfers: 1989,” Table I, Released October 1990, p. 65. Author’s inflationary calculations.

U.S. 2013 = $600 billion (2013 dollars): International Institute for Strategic Studies, The Military Balance 2014 (London: Routledge, 2014), p. 42.

China 2013 = $169 billion (2013 dollars): IHS Jane’s, Chinese Defense Budget, March 2014. Author’s inflationary calculations.

Russia 2013 = $68 billion ($68.2) (2013 dollars):  International Institute for Strategic Studies, The Military Balance 2014 (London: Routledge, 2014), p. 180.

Iran 2013 = $18 billion ($17.7) (2013 dollars):  International Institute for Strategic Studies, The Military Balance 2014 (London: Routledge, 2014), p. 318.


Categories: Policy Institutes

Poland’s Alliance with America: Worthless to Whom?

Cato Op-Eds - Wed, 06/25/2014 - 14:54

Doug Bandow

The outspoken Polish Foreign Minister, Radoslaw Sikorski, apparently believes his nation’s alliance with America is “worthless.”  Washington should not race to reassure him.  Instead, Warsaw should demonstrate why it is worthy of Washington’s support.

A weekly Polish publication received a recording of Sikorski’s conversation in which he declared:  “This Polish-American union is worthless.  It is even harmful because it gives Poland a false sense of security.  Complete [B.S.].  We get into conflicts with the Germans, with Russia, and we think everything’s great because the Americans like us.  Suckers.  Complete suckers.” 

There are suckers in the existing relationship, but they are American rather than Polish.

The United States spends more than four percent of its GDP on the military and accounts for three-fourths of total defense outlays by NATO members.  Poland has been patting itself on the back for recently hiking defense expenditures—to 1.8 percent of GDP.  Overall, America’s contribution to direct NATO expenditures is nearly ten times that of Poland.

The collapse of the Soviet Union exacerbated the discrepancy among alliance members.  While Washington preserved its globe-spanning military, the Europeans cut their armed forces significantly.

Worse, the alliance expanded willy-nilly to the Russian border, bringing in nations combining minimal military capabilities and serious potential disputes with Moscow.  None had ever mattered to American security, but Washington handed out security guarantees like hotels place chocolates on pillows:  everyone got one, including Poland.

American and European officials simply assumed that they would never have to make good on their promises.  Then came the crisis in Ukraine. 

The eastern-most members of the alliance started clamoring for reassurance.  No one was more insistent than the Poles.  Back before he thought the alliance was worthless, Sikorski stated:  “America, we hope, has ways of reassuring us that we haven’t even thought about.  There are major bases in Britain, in Spain, in Portugal, in Greece, in Italy.  Why not here?” 

As I point out in my latest article on National Interest online:  “The benefits to Poland of winning a defense commitment against Russia backed by a permanent garrison from the world’s superpower are obvious.  But what’s in it for America?  The relationship runs one-way.  Warsaw does not offer commensurate aid to the United States.”

As a substitute, Poland, like several other NATO members and member wannabes, participated in Washington’s foolish wars in Iraq and Afghanistan.  But even if the missions had been worthwhile, they didn’t compare to America promising to face down Poland’s potential nuclear-armed antagonist.  The United States could find itself facing catastrophic destruction if things went bad.

There is no security reason for the United States to risk war for Warsaw. Poland never was strategically important for Washington.  Even the Reagan administration did not consider military intervention in early 1982 when the Polish government cracked down on the Solidarity union after being threatened with a Soviet invasion.

Americans always felt sympathy for the plight of the Poles—for centuries stuck among avaricious empires.  Although unfortunate, even tragic, Poland’s situation is no casus belli for the United States.

Washington’s policy changed only when U.S. policymakers ceased thinking about NATO as a military alliance and began treating it as an international social club.  Thus Poland received a coveted Article 5 security guarantee.

The alliance is worthless only if the United States won’t back it.  Most administrations would see that as a threat to core commitments that could not be ignored.  Moscow would recognize that threatening Poland carried significant risks of confrontation with America.  That’s far from “worthless” for Poland.

Sikorski’s comments should be a wake-up call in America.  Washington has accumulated a host of welfare dependents in Europe and elsewhere.  Yet those whose teeth are most tightly clamped onto the U.S. teat show the least respect for America. 

The real sucker in this arrangement is Washington.  The United States should reconsider who it protects from whom, reserving “worthwhile” alliances for countries which offer something meaningful to America in return.


Categories: Policy Institutes

Riley and Wurie: Beyond "Get a Warrant"

Cato Op-Eds - Wed, 06/25/2014 - 14:45

Jim Harper

As Ilya noted earlier, the Supreme Court struck a blow for privacy and the Fourth Amendment today. It ruled that a warrant is generally required when law enforcement officers want to search a cell phone they have seized. Justice Roberts’ opinion for a unanimous court provides some crisp language:

Modern cell phones are not just another technological convenience. With all they contain and all they may reveal, they hold for many Americans “the privacies of life.” (citation omitted) The fact that technology now allows an individual to carry such information in his hand does not make the information any less worthy of the protection for which the Founders fought. Our answer to the question of what police must do before searching a cell phone seized incident to an arrest is accordingly simple—get a warrant.

In this case, we pretty well knew we were going to get a win. So let’s set aside the trumpets and talk about the margin of victory. Did we get improvements in Fourth Amendment doctrine that will bolster privacy protection in cases to come? Only a little.

OK, let’s trumpet the case a bit. This is a unanimous case with a bright-line rule. It’s about the best outcome you could hope for in Riley and Wurie themselves (argued separately, decided together), and it’s a great vindication of the constitutional status of cell phones and our data on them.

Chief Justice Roberts seems to have brought the Court together on this one (save a niggling Alito concurrence) to produce a strong opinion that doesn’t show gaps among the justices. (They may all have felt a need to huddle, avoiding an open fight or the tipping of hands on the NSA spying controversy, for example.)

And on the major privacy controversy of the day, the Court did not tip its hand. It distinguished Smith v. Maryland, the case the government uses to justify gathering records about every U.S. phone. Smith held that using a pen register to gather phone calling information was not a search. “There is no dispute here that the officers engaged in a search of Wurie’s cell phone,” Chief Justice Roberts wrote, punting for the Court in this case based on the consensus among parties.

The errant decision in Smith relied on the “reasonable expectation of privacy” test arising from the 1967 case, Katz v. United States. The very good news from this decision is that the Court once again declined to use the Katz test in resolving a Fourth Amendment issue, as our briefs invited the Court to do (or not to do, as it were). Instead, the Court implicitly found that there were searches in both cases and that those searches were of persons, houses, papers, or effects. Then it examined the reasonableness of searching cell phones.

That’s important because it means that the Court is interpreting the Fourth Amendment more like a law and not as the stack of doctrines that I’ve previously called a “jumble of puzzles.”

Did the Court go all the way our way? Certainly not. The Court didn’t do the simplest thing we invited, which was to state explicitly that a cell phone is an “effect” under the Fourth Amendment. (It’s essential to the holding that a cell phone is an item protected by the Fourth Amendment, but the Court should have said so to model behavior for lower courts.) The Court also did not distinguish cleanly between “search” and “seizure,” which is a distinction that courts will have to navigate if they are to get right the harder Fourth-Amendment-and-technology cases.

There are delightful hints of our briefs’ influence on the case, though. (And what is this kind of write-up but an exercise in searching for—if necessary, inventing—your role in the development of the law?)

As our Wurie brief invited, the Court re-interpreted the decision in United States v. Robinson (1973) in a subtle but important way. Robinson approved the search of a crumpled cigarette pack owned by a person subjected to a traffic-related arrest. The Court incautiously granted a general right to search arrestees, including things they held which could have no relevant or destructible evidence and which created no risk to arresting officers. Since then, the Court has had to curtail the “container” doctrine that Robinson spawned.

Our brief commended the more granular analysis of searches and seizures that Justice Marshall had argued for in his Robinson dissent. Chief Justice Roberts was more granular with Robinson in this case, calling the examination of the cigarrette pack a “reasonable protective measure.” The idea of a general right to search arrestees, arising from Robinson, is further curtailed. There must be a constitutionally valid reason for going into an arrestee’s things.

The delightful (if contrived) ego-booster in the case, though, is the opinion’s reference to what use law enforcement may make of keys they acquire from an arrestee. In our Wurie brief, we emphasized that government agents had taken Wurie’s keys and used them to unlock the door of a home where they suspected he stayed. Inside the home at the time were a woman and her baby, who were not suspects in the case. While illustrating how keys applied to locks can be investigatory tools like cell phones when their electronics are activated, we also illustrated the gross extent to which the warrantless investigation of Wurie went—unlocking the door of a home behind which innocent Americans rested.

Using a cell phone to access cloud data, the Court wrote, “would be like finding a key in a suspect’s pocket and arguing that it allowed law enforcement to unlock and search a house.”

Whether Chief Justice Roberts or another justice picked up on our argument, we cannot know, but the decision used the key example to illustrate how possession of a tool or device does not allow any use of it law enforcement may wish to make.

There will need to be more cases that articulate details unexplored by the Court today, but the decision in Riley and Wurie are a solid vindication of the requirement that law enforcement wishing to examine the contents of cell phones must “get a warrant”—nice quote.

Categories: Policy Institutes

NIDA Director Has Misguided Views on Marijuana Legalization

Cato Op-Eds - Wed, 06/25/2014 - 13:06

Jeffrey Miron

Today’s Washington Post contains a Ruth Marcus interview of Nora Volkow, head of the National Institute on Drug Abuse.

Volkow opposes marijuana legalization; she believies it will generate a large increase in use, which will (allegedly) harm users and society.

No one knows how much use might increase under legalization; existing evidence suggests a modest change, but since few countries have fully repealed their drug (or alcohol) prohibitions, we do not have decisive evidence.

The fact Volkow ignores, however, is that if use increases substantially, this means many people perceive a significant benefit from increasing their use or from initiating use; that is a positive of legalization, not a negative!

Marijuana use can, of course, generate unwanted side effects, but Volkow exaggerates these enormously. And other goods, like alcohol, also generate negative spillovers; yet we keep them legal (in part) because they generate substantial benefits.

Volkow further ignores the fact that prohibition generates its own negatives, such as violence, corruption, poor quality control, civil liberties infringements, medical restrictions, enforcement costs, and foregone tax revenue (which forces other tax rates to be higher).

So even if legalization means far greater use, and even if this generates undesirable consequences, the sum of benefits for current and prospective users, combined with elimination of prohibition’s costs, makes legalization the right choice.

Categories: Policy Institutes

Unanimous Supreme Court Correctly Stops Police from Searching Peoples’ Entire Lives Willy-Nilly

Cato Op-Eds - Wed, 06/25/2014 - 11:54

Ilya Shapiro

In its ruling today in Riley v. California, the Supreme Court unanimously established a clear new rule for police-citizen interaction: The police can’t, without a warrant, search the digital information on cell phones they seize from people they arrest. This is a big deal because it means that being arrested for, say, not paying a speeding ticket, will no longer open you up to having your entire life examined by law enforcement. Unlike the satchels and billfolds of yore, people now carry essentially all their private documents with them at all times: address books, financial and medical records, photo albums, diaries, correspondence, and more. To allow police to review all of that information just because they happen to have arrested someone would violate the Fourth Amendment’s protection of personal papers and effects against unreasonable searches and seizures.

If the police have independent probable cause to access someone’s digital information, they can get a warrant. If they don’t, making an arrest shouldn’t give them license to go on a fishing expedition.

What’s really surprising about this ruling is that it’s both broad and unanimous. Sweeping rulings on high-profile subjects tend to split the Court, whether ideologically or, in criminal procedure cases like this one, between formalists and pragmatists. Unanimous rulings, meanwhile, tend to be cautious, splitting the baby in a way that doesn’t significantly change the law. Yet here we have a loud and unified “bright-line rule” that sets a major standard for the digital age. Kudos to the Court—and raspberries to the federal government, which has now had its expansive arguments rejected unanimously 11 times since January 2012.

Categories: Policy Institutes

Are Driverless Cars Fool-Proof? Not Quite

Cato Op-Eds - Wed, 06/25/2014 - 10:49

David Boaz

Randal O’Toole discussed the idea of safe, efficient, driverless cars in his book Gridlock: Why We’re Stuck in Traffic and What to Do about It and in this full-page Wall Street Journal essay in 2010. It wasn’t exactly a new idea – Norman Bel Geddes first imagined the idea 75 years ago at the New York World’s Fair of 1939 – but O’Toole was on the cutting edge of bringing it to more popular attention. And as he noted, one of the important benefits of driverless, or “self-driving,” cars is safety. As a driving-test site, citing British studies, says: “By far the biggest cause of road accidents is driver/rider error or reaction, which causes 68% of all crashes.” The loss of control, the reliance on mysterious computers, scares many of us. But there’s good evidence that computers can guide both airplanes and automobiles more reliably than human operators.

But maybe not all human operators.

Meredith Shiner of Yahoo! News reports:

Scientists from Carnegie Mellon University on Tuesday brought a prototype of a driverless car to Washington in an attempt to show Congress that it could embrace a future devoid of man-made errors. 

And then Congress broke that car.

It was not immediately clear whether the mere proximity to the Capitol created the series of events that led to an emergency switch being flipped, causing the car to shut down, or if an actual member of Congress did it….

In true Washington fashion, no one would take immediate responsibility for the developing car situation.

Okay, not entirely fool-proof. But getting there.

Update: NBC News reports: “D.C. Delegate Eleanor Holmes Norton hit the kill switch on the car before she was supposed to take a ride, and they couldn’t get it running again.”

Categories: Policy Institutes

Are Beef Prices at An All-Time High?

Cato Op-Eds - Wed, 06/25/2014 - 09:56

Marian L. Tupy

The press is reporting record prices for beef. According to a June 18 story in the New York Post,

“It’s a barbecue-season bummer! Meat, poultry and fish prices have spiked an average of 8 percent since last year — soaring to an all-time high, national data show. The cost of ground beef has gone up 11 percent… ‘Everything is going through the roof,’ said Jim Hopkins, 52, a supervisor at Associated Supermarket in the West Village, who has worked in the grocery business for 30 years. ‘I’ve never seen increases like this — where they jump as much as this.’”



Yet the World Bank data shows remarkable stability in the inflation-adjusted price of ground beef over the last half century. That is all the more remarkable considering that:

  1. There were 3 billion people in the world in 1960. Today there are 7 billion of us.
  2. In 1960, the average income per person was $3,000 (in inflation adjusted 2000 dollars). Today it is $7,500.
  3. More people earning more money = higher demand for meat, especially beef.
  4. Yet, beef prices are, roughly where they were in 1960.

So, cheer up and don’t let those pessimists spoil your barbecue-season.

Categories: Policy Institutes

When Does Defense Aid Work?

Cato Op-Eds - Tue, 06/24/2014 - 16:53

Jennifer Keister

The debate over an appropriate American response to Iraq’s resurgent violence and the threat of radical rebels has highlighted the challenges and risks of even limited U.S. assistance.

As I argue in a post at The National Interest, Iraq is emblematic of a larger challenge in U.S. foreign policy. President Obama’s West Point address last month emphasized the role of “partner nations” who may leverage US assistance to counter security threats within their own borders and regions. But the president’s speech and subsequent debate about it have largely failed to provide criteria for selecting these partners.

Both the threats (insurgency, instability, radical rebels) and the possible solutions (military advisers and training, direct intervention, pushing for better governance) have cropped up in discussion of numerous other events: Boko Haram’s kidnappings in Nigeria, Al-Shabaab’s siege of Westgate Mall in Kenya, unrest in northern Mali, continuing instability in Libya, and so on.

All of these policy suggestions constitute calls for foreign internal defense (FID) assistance. FID, or “Helping others defend themselves,” sounds like an attractive option while facing a fiscal and domestic political reality that limits prospects for direct intervention. However, the Iraq debate highlights a crucial question: how do we tell the difference between states we can “partner” into effective and self-sufficient stability, versus those that risk pulling the US into local quagmires or exacerbating security problems?

Policymakers, media, and the American public are asking these questions about Iraq, in part because we have a lot of information about Iraq’s internal dynamics. But we should ask these questions about other potential partners too.

Join us to discuss the challenges and opportunities of Foreign Internal Defense aid next month at our Cato Policy Forum on the topic. Register here.

Categories: Policy Institutes

23andMe Closer to FDA Approval

Cato Op-Eds - Tue, 06/24/2014 - 15:42

Matthew Feeney

 23andMe, the Google-backed personal genomics company ordered by the Food and Drug Administration to stop marketing its health-related services in November last year, is closer to a reconciliation with the government agency. The FDA did not object to the ancestry information 23andMe provides, but rather the information on inherited risks it released to customers.

Before halting the release of health information 23andMe had provided its customers with information on their ancestry and health. 23andMe gathered genetic information from customers by having them send saliva in a $99 kit.

What had the FDA concerned was the possibility that a false result from a 23andMe test could lead to customers undergoing drastic procedures such as “prophylactic surgery, chemoprevention, intensive screening, or other morbidity-inducing actions.” Reason magazine’s Ron Bailey pointed out such a fear is misplaced because not only is the biochip used by 23andMe and researchers around the word very accurate, anyone who received worrying health news from a 23andMe test would almost certainly consult a doctor and/or get a more comprehensive screening done before undergoing any surgery or procedure.

Last week 23andMe’s Chief Legal and Regulatory Officer, Kathy Hibbs, wrote on the company’s blog that the FDA had “accepted for review 23andMe’s submission for a new 510 (k) application,” which Reuters describes as “a regulatory process that applies to most medical devices sold in the United States.” The FDA considers the 23andMe saliva collection kit a device.

Although 23andMe’s submission focuses on one condition — Bloom Syndrome — Hibbs wrote the following:

Once cleared, it will help 23andMe, and the FDA, establish the parameters for future submissions. More importantly, for our customers, it marks a baseline on the accuracy and validity of the information we report back to them. The submission includes robust validation data covering major components of our product such as the genotyping chip, software and saliva kit.

While it is good news that 23andMe seems to be on its way to being in good standing with federal regulators, Stephanie M. Lee of SFGate.com notes that 23andMe could potentially face months of questions and data requests before being granted FDA approval.


Categories: Policy Institutes

Senseless in Seattle: The Minimum-Wage Follies

Cato Op-Eds - Tue, 06/24/2014 - 14:56

Roger Pilon




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Meet the Marxist behind Seattle’s wage hike,” read the headline of the lead item at CNN Money late this morning. It seems that one Kshama Sawant, an immigrant from India who earned a Ph.D. in economics from North Carolina State University before taking a teaching position at Seattle Central Community College, is credited by the local press with being the political force behind the city council’s recent vote to raise the minimum wage there to $15 an hour, phased in for large businesses by 2017 and all businesses by 2021.

A self-described Marxist, Ms. Sawant went from Occupy Wall Street to occupying Seattle City Council, the story says, adding that she was “radicalized politically by the gaping inequality she observed upon arriving in the world’s richest country.” Thus, she ran for city council last year “under the banner of Socialist Alternative, an organization that calls for ‘international struggle’ against global capitalism.”

Say this for Ms. Sawant: Whatever she learned about economics in the course of getting her degree, at least she’s not hiding her views. But what can we say about the Seattle City Council, which passed her proposal unanimously? Perhaps there’s something in the coffee out there. Or perhaps they really believe, as Ms. Sawant does, that this measure will “transfer $3 billion from businesses to low-wage workers over the next decade.”

Well it turns out that you don’t need a Ph.D. in economics to understand that economies are not static. That elementary insight from Econ 101 was captured, in fact, in an earlier lead item at CNN Money, “Seattle $15 wage plan is unfair to me.” Quoting several small business owners on what’s in store for them—and their employees—here we find Subway franchise owner Matthew Hollek lamenting that, although he has only eight employees, he’ll have to start paying them 60 percent more by 2017—while the sandwich shop next door will be immune from the law for another four years. The reason? The law counts him as a large employer because he’s part of a national chain. It looks like these “gaping inequalities” are more difficult to close than Ms. Sawant seems to have realized.

Indeed, not only are economies dynamic and is Seattle not an island, but if the benefits of a minimum wage were as good as its advocates believe, then why stop at $15? Why not $20, or $30, or more? You never hear an answer to that because there is none. For a sampling from Cato of a more serious approach to the subject, see here, here, and here.




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Categories: Policy Institutes

Resources for a Potential Ruling Today in Halbig v. Sebelius

Cato Op-Eds - Tue, 06/24/2014 - 10:11

Michael F. Cannon

The D.C. Circuit is due to rule any day now, quite possibly today, on Halbig v. Sebelius. For those who haven’t been watching the vigil I keep over at DarwinsFool.comNewsweek calls Halbigthe case that could topple ObamaCare.”

First a little background. The Patient Protection and Affordable Care Act offers refundable “premium-assistance tax credits” to qualified taxpayers who purchase health insurance “through an Exchange established by the State.” The PPACA contains no language authorizing tax credits through the 34 Exchanges established by the federal government in states that declined to establish one themselves, nor does it authorize the Internal Revenue Service to treat those federally established Exchanges as if they had been “established by the State.” Offering benefits only in compliant states was proposed by numerous Republicans and Democrats in 2009, for obvious reasons: Congress cannot force states to implement federal programs, but it can create incentives for states to act, such as by offering health-insurance subsidies to residents of compliant states.

Halbig is one of four cases challenging the IRS’s decision to rewrite the statute and offer tax credits in the 34 states with federal Exchanges. The plaintiffs are individuals and employers who are injured by the IRS’s overreach because, due to the PPACA’s many inter-locking pieces, issuing those illegal tax credits subjects them to illegal penalties.

Since a ruling may come today (or some Tuesday or Friday hence, as is the D.C. Circuit’s habit), here are some materials for those who want to hit the ground running.

Update: The D.C. Circuit has handed down rulings for today, and Halbig is not among them. Click here to check on the court’s most recent rulings.

Categories: Policy Institutes

IRS IT: $2.4 Billion But Not World-Class

Cato Op-Eds - Tue, 06/24/2014 - 10:05

Chris Edwards

Perhaps the most suspicious thing about the disappearance of Lois Lerner’s emails is that the IRS is not a small business operation that cannot afford high-quality computer, email, and backup systems. It is a huge modern bureaucracy that has computer technology at the core of its operations. The IRS IT budget in 2014 is a massive $2.4 billion (page 149 here).

Here is what the administration’s most recent IRS budget says (page 150) about its IT strategy:

IT is a key enabler for efficient and effective tax administration … To ensure the public trust, the IRS also is making significant investments to secure infrastructure, data, and applications. With continued investment in new technologies and the modernization of existing IT systems, the IRS is improving service to taxpayers, achieving productivity gains, and distinguishing itself as a model of tax administration around the world. The IRS also has established world-class practices and tools to manage and implement its portfolio of IT investments more efficiently.

There is no doubt that the IRS has distinguished itself recently, but not as a model of world-class practices.

Obamacare FYI: Page 147 shows that IRS IT costs for the ACA will be $345 million in 2014. Page 32 shows that IRS IT costs for the ACA over 2010-2018 will be $1.9 billion.

Categories: Policy Institutes

Obama Administration Should Keep U.S. Out Of Iraq’s Revived Killfest

Cato Op-Eds - Mon, 06/23/2014 - 16:55

Doug Bandow

The uber-hawks and neocons who led America into the disastrous invasion of Iraq are campaigning for a repeat.  If only the U.S. will go to war along the Euphrates a second time, they promise, everything will turn out well.

As I point out on Forbes online:  “Americans should ignore these Sirens of Death.  Attempting to forcibly transform Iraq never was Washington’s responsibility.  Having botched the job once, U.S. policymakers should not try again.” 

There was much to despise about Saddam Hussein’s Iraq, but he helped constrain Iran and enforced an ugly stability at home, suppressing sectarian violence and al-Qaeda.  As many analysts, including yours truly, warned, his forced departure would be welcome in principle but bloody in practice. 

Prime Minister Nouri al-Maliki ruled with a harsh hand, favored his Shia supporters, and rejected a permanent U.S. military garrison.  Nor would an American presence have saved Iraq from internal collapse. 

U.S. troops could not have forced positive political change.  Employing U.S. troops against Baghdad’s opponents, such as the Islamic State of Iraq and al-Sham (ISIS), would have been far worse. 

Washington nevertheless helped arm the Iraqi military, but a secret program begun last year to aid Baghdad against Sunni militants foundered.  The Maliki government simply failed to maintain an effective force.  As a result, Iraqi military units melted away in the face of ISIS attacks.

Yet the situation is not nearly as threatening for Washington as for Baghdad.  So far ISIS has acted as an insurgency in both Syria and Iraq, not a terrorist group targeting America.  In fact, the organization’s break with al-Qaeda reflected the latter’s focus on the “far enemy,” that is, the U.S. 

In contrast, ISIS is seeking to establish a real state and may not want to risk its practical gains in a war against the U.S.  Obviously this could change, but Washington should not encourage retaliation against Americans by needlessly striking the group.

Moreover, Iraq will not fall under ISIS control.  The radicals lack the resources necessary to conquer Iraq or even take Baghdad.  Moreover, by making the conflict into a religious war ISIS has galvanized Iraq’s Shia majority.  A bitter and potentially long struggle between essentially lawless paramilitaries impends.

Into this violent and unpredictable imbroglio President Obama is sending “up to 300” Special Forces.  Even worse, he maintains the possibility of “targeted, precise military action,” presumably meaning air and drone strikes. 

However, Baghdad’s military lacks leadership and commitment while the Iraqi state lacks credibility and will.  These Washington cannot provide, especially with the Iraqi people having so little faith in their government.

The administration now is not so subtly attempting to oust Maliki from power.  But Maliki has pointedly rejected demands for his scalp, even as a condition of aid.  Many Shiites have rallied around Maliki and Iran continues to back him.  Many possible successors are untested or even less credible than Maliki. 

Military action is even more problematic.  Airpower offers no simple solution. 

Air strikes have limited effectiveness in urban warfare and cannot liberate captured cities.  To minimize “collateral damage” airpower best relies on ground support for targeting, something that could not be left to sectarian Iraqi forces. 

Unfortunately, another war on Muslims would make even more enemies of America.  Indeed, targeting Sunni areas would kill people, including noncombatants, who once allied with Washington against al-Qaeda.  De facto partition, perhaps with autonomous Shia, Sunni, and Kurdish zones within a highly federalized state, might offer the best possibility of peaceful coexistence. 

The Middle East appears to be a tragedy permanently set on repeat.  That is a reason for America to stay out, not jump in. 

After blowing up the country, the U.S. obviously did not leave behind “a sovereign, stable and self-reliant Iraq,” as President Obama claimed in 2011.  America cannot put Humpty Dumpty back together again.  Washington should learn a little humility and leave the clean-up to others.

Categories: Policy Institutes

Should Taxi Medallion Owners Be Compensated?

Cato Op-Eds - Mon, 06/23/2014 - 15:59

Peter Van Doren

The Sunday Washington Post published a very interesting long article on the effects of Uber and other similar ride-sharing services on the value of the medallions required for operation of conventional taxis in Chicago and other cities.

The medallions have value because the supply of rights to operate taxis, restricted by city regulation, is low relative to demand. The Post article presents data on the number of taxis per 100,000 residents. Washington D. C. licenses cabs, but does not restrict the number of cabs operating through a medallion requirement, and has almost 900 taxis per 100,000 residents. In contrast, Chicago and New York, which have medallion restrictions, only have approximately 230 to 250 taxis per 100,000 residents.[1] The supply restrictions in Chicago and New York lead to excess profits, which reveal themselves in the bids for medallions in the secondary market. The present value of the profits from owning the “rights to cruise for passengers” relative to the profits of other investments is the market value of the medallions, which until recently ranged from $500,000 to a million dollars depending on the city and the severity of the medallion restrictions.

Uber, which supplies luxury town-car service, and especially UberX, which supplies service similar to cabs, in effect, have increased the supply of taxis to eliminate some, if not all, of the difference between the number of vehicles per capita in Washington D.C. and those cities with medallion supply restrictions. This increased supply reduces the market value of the medallions. The article asks whether reductions in the value of the medallions are a “taking” by the government that deserves compensation like any normal taking of “property” by government action.

I (along with Richard Sansing, a Professor at Dartmouth Business School) wrote an article in the Journal of Policy Analysis and Management (volume 13, issue 3, Summer 1994 pp. 565- 570) that analyzed the question of whether governments should compensate those citizens who lose wealth because public policies change. (Here is a version published in Regulation in Winter 1997)

We analyzed data on lease versus purchase of tax medallions in New York City. If there were no risk, the purchase price of a medallion would reflect the present value of leasing in perpetuity. Unlike other assets the medallion’s only value is the entry restrictions created by government. At the time we conducted our analysis the present value of leasing in perpetuity at 5 percent interest was $240,000 whereas the sale price of medallions was only $100,000. That is the purchase price of a medallion at that time amortized the cash flows over a period of 20 years as if they would go to zero in year 21. Unlike other investments the only reason that cash flows might go to zero was the possibility of deregulation or reduction in enforcement of the entry restrictions. If policy change created any reduction in cash flows in years one through 19 investors made less than normal profits. Investors made “excess” profits if any reduction in cash flow occurred after year 20. Thus the medallion market was like a fairly priced lottery ticket that took into account the possibility of deregulation, even though at the time we did this calculation no change in taxi regulation had ever taken place since it was instituted in the late 1930s. We concluded that no compensation was required to preserve equity or fairness because the price for medallions reflected the risk investors faced from policy change.

We then analyzed the efficiency consequences of a no-compensation regime. The lack of compensation for policy change increases the riskiness (variance) of returns on assets even though it does not change the average return. Investors handle risk by diversification: owning assets whose returns do not all increase or decrease at the same time. As long as the risk of policy change in taxi medallions does not occur at the same time as the risk to assets in all other markets, the risk of taxi medallion policy change can be managed through asset diversification. Thus in the case of taxi medallion deregulation due to changes such as the advent of Uber and Lyft, compensation is not required for efficiency either.

[1] Chicago has 6904 medallions according to the Post article and 2,718,782 population in 2013 for 254 cabs per 100k people. NYC has 13,605 medallions http://en.wikipedia.org/wiki/Taxicabs_of_New_York_City  In December 2011, Governor Cuomo signed law allowing 18,000 new outer borough medallions. 6, 000 of the outer borough medallions have been issued. Thus New York City has 19,605 medallions and 8,405,837 people in 2013 according to the census, which equals 233 cabs per 100k people.

Categories: Policy Institutes

Several States Expand Educational Choice

Cato Op-Eds - Mon, 06/23/2014 - 15:26

Jason Bedrick

On Friday, Gov. Rick Scott signed legislation that expands eligibility for the Florida’s longstanding scholarship tax credit (STC) program and creates a new education savings account for students with special needs. Earlier this year, Oklahoma expanded its STC program and Arizona expanded both its STC and education savings account programs. Kansas Gov. Sam Brownback signed legislation creating a new STC program, though unfortunately it is limited only to low-income students assigned to government schools that are designated as “failing” by the state’s board of education. Students in “non-failing” schools that are nevertheless failing to meet their needs are not eligible to receive scholarships.

The changes to Florida’s scholarship program were mostly positive. Florida eliminated the requirement that students first spend a year at a government school before being eligible to receive a scholarship. Also, starting in 2016-17, the income eligibility cap for first-time recipients will increase to include middle-income families (from 185 percent of the federal poverty line to 260 percent), with priority given to lower-income students. Students from middle-income families will receive smaller scholarships. Students in foster homes will be eligible regardless of their foster family’s income.

Unfortunately, the law adds new rules regulating the operation of scholarship organizations. Florida already has the most regulated scholarship program in the nation, which explains why the state has only one scholarship organization while other states have dozens or even (in the case of Pennsylvania) hundreds.

Back in March, the bill’s prospects seemed dim. The Florida Speaker of the House and Senate President battled over whether to mandate that private schools administer the state test (i.e. – Common Core) as a condition of receiving scholarship students. As a result, the bill’s sponsor withdrew the legislation. That poison pill would have severely restricted school autonomy and parental choice. Fortunately, the resurrected bill that the governor signed into law did not mandate state tests. Participating schools must still administer nationally norm-referenced tests.

Florida’s new education savings account for students with special needs is based on Arizona’s highly popular program, but with a twist: nonprofit scholarship organizations will administer the program rather than the state, though the accounts will still use public funds.

Parents will be able to use the funds to pay for a variety of educational services, including private school tuition, tutoring, online education, curriculum, therapy, post-secondary educational institutions in Florida, and other defined educational services. … The maximum amount for the Personal Learning Scholarship Account shall be equivalent to 90 percent of the state and local funds reflected in the state funding formula that would have gone to the student had he or she attended public school.  

Students qualify if they reside in Florida and are eligible to enroll in kindergarten through 12th grade who have an Individualized Education Plan or have been diagnosed with one of the following: autism, Down syndrome, Intellectual disability, Prader-Willi syndrome, Spina-bifida, Williams syndrome, and kindergartners who are considered high-risk. 

Unfortunately, New York legislators ended the session without passing an educational choice bill, despite majority support in both chambers of the legislature and a promise by Gov. Andrew Cuomo to Timothy Cardinal Dolan that he would support STC legislation. Given the legislative support, the New York Post faulted Gov. Cuomo for the failure to pass the legislation:

The human tragedy, of course, is who will pay the price for Cuomo’s alliance with the Working Families Party & Co.: i.e., the children of actual working families, who have no avenues of escape from rotten public schools where they aren’t learning.

Categories: Policy Institutes

Refusal to Set Military Priorities Creates Strategic Bankruptcy

Cato Op-Eds - Mon, 06/23/2014 - 15:24

Doug Bandow

The U.S. government is financially bankrupt and can ill afford to police the world.  Unfortunately, U.S. policymakers refuse to reconsider even the most antiquated security promise.  The result is strategic bankruptcy as well.

In the aftermath of World War II the U.S. effectively took over the defense of much of Asia and Europe, fought or supported combatants in several Third World proxy wars, engaged in nation-building, and otherwise routinely intervened around the globe.

Despite a changed world, the U.S. continues to defend now wealthy Asian and European client states.  American military personnel continue to die fighting in Third World conflicts, only in different nations.  Washington continues to attempt to micromanage the globe.

On the day President Barack Obama announced America’s return to Iraq’s conflict, Air Force Lt. Gen. Jan-Marc Jouas said Air-Sea Battle was the Pentagon’s new war-fighting doctrine in the Korean peninsula.  Is there anywhere America is prepared to say does not warrant military intervention?

For a time President Barack Obama followed his predecessors in acting as if there were no limits to U.S. capabilities.  However, the so-called “pivot” to Asia suggested that the administration finally realized some choices had to be made.  Yet Washington’s commitment of more resources and attention to Asia appeared to have little effect on American policy elsewhere in the world. 

Administration officials continued to treat a U.S.-dominated NATO as essential.  The war in Afghanistan went on.  Last year the president proposed to launch air strikes against Syria, backing away only after failing to win congressional approval.  

More dramatically, Russia’s absorption of Crimea prompted manifold administration efforts to “reassure” the Europeans, including shifting ground, air, and naval units to the region.  Washington even appeared open to proposals for adding permanent U.S. garrisons to NATO’s eastern-most members. 

Now the president is sending limited ground forces to Iraq, with the added possibility of air and drone strikes.  He may find it hard to limit U.S. involvement in a complex and evolving conflict. 

Yet military officials are discussing their war doctrines for Korea.

U.S. foreign and military policy has a mad quality to it, suggesting that involvement everywhere should be forever.  If President Obama is unwilling to keep America out of any conflict in any part of the world, he should at least set priorities within regions. 

In the Middle East, for instance, the president should halt incremental escalation in Syria.  The battle is tragic, but no one knows what would emerge if Bashar al-Assad is ousted.  Almost certainly fighting would continue, reprisals would be made, and radical forces, such as ISIS, would be empowered. 

In Europe Ukraine remains far from the continent’s population and economic centers which the U.S. spent decades defending.  Kiev’s situation is unfortunate, even tragic, but the country matters not strategically to America.  There should be no thought of military involvement by the U.S or NATO. 

In Asia there is no more dramatic disparity than on the Korean peninsula, where the South has a GDP and population respectively forty times and twice those of the North.  The Republic of Korea could deploy a military capable of deterring North Korea.  Instead of concentrating on defense, in the past Seoul has shipped cash, food, and other goods north in an attempt to buy goodwill—even as the Democratic People’s Republic of Korea was building nuclear weapons. 

As I point out in my latest article on National Interest online:  “These should be just the start.  In a world of diminishing resources—Washington faces a debt tsunami in the years ahead, with more than $200 trillion in accumulated unfunded liabilities—the U.S. no longer can be expected to solve every international problem, especially through military means.  American policymakers should begin to make tough choices.  Now.”

Categories: Policy Institutes

Why Piketty Was Mistaken for Endorsing the Zucman & Saez Slide Show

Cato Op-Eds - Mon, 06/23/2014 - 15:10

Alan Reynolds

I will have more to say about this fairly soon, but this might serve as a preview.

Thomas Piketty is now advising innocent readers of his book to (1) not demand a refund or dump the book used on Amazon, and (2) ignore his own flawed estimates of top 1% U.S. wealth shares and instead utilize a PowerPoint by Gabriel Zucman and Emmanuel Saez.  Zucman and Saez use capital income reported on individual tax returns (dividends, interest, rent and capital gains) to infer ownership of capital assets, and not just greater realization of gains or portfolio shifts from tax-exempt bonds to dividend-paying stock.

That might be semi-plausible if businesses and professionals were not free to report income on either corporate or individual tax forms, and if tax rates never changed. But this methodology can’t possibly work after the huge tax rate reductions of 1986 (for partnerships & SubS corps), 1997 (capital gains) and 2003 (dividends and capital gains).  The reason it can’t work was fairly well explained by Piketty, Saez and Stantcheva in the original unsanitized version of a paper they published this February (which I have cited beforebut also critiqued):

There is a clear negative overall correlation between the [reported] top 1% income share and the top marginal tax rate: …  [T]he top 1% income share has increased significantly since 1980 after the top tax rate  has been greatly lowered… . [T]he top 1% income share more than doubled from around 8% in the late 1970s to around 18% in last five years, while the net-of-tax (retention) rate increased from 30% (when the top marginal tax rate was 70%) to 65% (when the top tax rate is 35%).”

Categories: Policy Institutes