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Having considered, in two previous essays, the origins, legality, and adverse consequences of the Scottish bank suspension, we’re now ready to ask whether, and in what ways, that episode compels us to reconsider the virtues of free banking, both as practiced in Scotland and in general.

If the Scottish bankers were indeed guilty of “violating the property rights of their depositors and noteholders,” as Murray Rothbard and some others charge, does that mean that it’s not legitimate to treat the Scottish episode as an example of the advantages of freedom in banking? Does it mean that free banking on a fractional-reserve basis is inherently unsustainable?

The Bank Notes Act of 1765

To answer: yes, the Scottish suspension does suggest that in important respects the Scottish system was not an ideal example of the nature and advantages of freedom in banking. But no, it doesn’t follow that fractional-reserve based free banking is inherently flawed.

Why not? Because the Scottish banks’ less-than-fully satisfactory response to the Bank Restriction, including both their violation of customer’s property rights and the harm that arose from it, might have been avoided altogether had it not been for two regulatory restrictions imposed upon the Scottish banks by Parliament several decades earlier, as components of the Bank Notes Act (Scotland) of 1765, the full title of which is “An Act to prevent the inconveniences arising from the present method of issuing notes and bills by banks, banking companies, and bankers, in that part of Great Britain called Scotland.”[1]

Although the 1765 Act recognized the right of both banking corporations (“chartered banks”) and private banking partnerships (“provincial banks”) in Scotland to issue circulating banknotes, it curtailed their note-issuing abilities in two important ways. It outlawed notes having a face value of less than £1 (or 20 shillings). And it outlawed notes bearing “optional” (or “option”) clauses allowing their issuers to defer their redemption for up to six months, with compensation consisting of a 5-percent interest on the unpaid sum, based on the actual length of the delay.

That these two regulatory impositions, rather than any inherent feature of free banking (including the practice of fractional reserve banking) were the ultimate cause of those blemishes that marred the record of Scottish free banking during the Bank Restriction is readily seen by reviewing  the nature of those blemishes. These consisted, once again, of (1) the Scottish bank’s own decision to suspend, which contravened their still-standing contractual obligation, as emblazoned upon their notes, to redeem those notes in specie on demand; and (2) the distress borne by Scottish citizens in consequence of no longer being able to convert banknotes into equal nominal sums of gold and silver coin.

The Small Note Ban

Regarding the second item, the distress in question was, as I noted in my previous post, almost entirely due to a sudden want of small change. The point is made especially clear in Andrew Kerr’s (1884) History of Banking in Scotland (pp. 106-7). “One of the most distressing features of the situation,” he writes concerning the state of things in Scotland at the onset of March 1797,

was the want of small currency. For sums of £1 and upward the bank notes were still available, but for smaller sums there was no medium of payment. The commonality, and indeed the whole community, were thereby placed in a most painful situation. Tradesmen could not pay wages, and small purchases could not be made. People resorted to the expedient of tearing £1 notes into halves and quarters, a practice which appears to have been tacitly recognized by the banks.

As we’ve seen, the situation improved dramatically after Parliament passed an Act that month  again allowing Scottish banks to issue notes of less than 20s, albeit for a limited period only, whilst indemnifying any bank that had resorted to issuing small notes before the emergency measure became law. Although this temporary relaxation of the Scottish small-note ban was originally supposed to expire on May 15th, 1797, a subsequent Act continued it until the 5th of July, 1799, after which the Scottish public’s needs were met by a combination of new British copper coin and silver Bank of England tokens.

Suspension by Contract

If much of the harm done by the Scottish bank suspension could have been avoided had it not been for the 1765 Act’s ban on small notes, the violation of property rights that the suspension itself entailed might itself have been unnecessary had Scottish banks still had recourse to notes bearing option clauses. In that case, the Scottish banks might have responded to the Bank Restriction simply by exercising their right to invoke those clauses. Indeed, as Tyler Goodspeed explains in his fine Harvard University Press book, Legislating Instability: Adam Smith, Free Banking, and the Financial Crisis of 1772 (p. 34), although certain Scottish banks first began including option clauses on their notes as means for protecting themselves against note redemption “raids” staged by rival banks, the main purpose such clauses served in practice before they were outlawed was that of protecting Scottish banks against English and other arbitrageurs “seeking to profit from the price differential between English and Scottish Bills of exchange.”

A distinct advantage of the option clause was that bankers could employ it with discretion against arbitrageurs whilst continuing to meet other note holders’ requests for specie. “Far from providing an easy means for suspending payment,” Goodspeed adds, the option clause “was conceived precisely to avoid the necessity of suspending payment by allowing for the threat of discriminate and orderly suspension” (ibid., p. 35). Because invoking the clause meant marking specific notes and then having to pay interest to their holders at 5 percent, which was also the maximum rate allowed by British usury laws, solvent banks had no incentive to resort to the clause except when faced with a genuine emergency. An insolvent bank, on the other hand, would be better-off closing its doors than invoking a clause that would only add to its total losses. In short, according to modern jargon, notes bearing optional clauses embodied “incentive-compatible” contracts — contracts that were in the interest of banks and their ordinary customers alike.[2]

Had option clauses remained in use in Scotland at the time of the Bank Restriction, the presence of those clauses alone would have done much to avert runs on Scottish banks, together with the panic that ensued once those banks announced their decision to altogether case paying out silver and gold. Note holders with ordinary requests for specie might then have had their needs accommodated, while others would have to decide whether it was worth waiting up to six months to have their marked notes redeemed. The delay would, in the meantime, have given Scottish bankers all the time they needed to acquire gold on the London market.

Blame the Bankers, Not Freedom in Banking

So it seems that the Scottish banks, far from having abused their freedom to victimize the Scottish public, were themselves innocent victims of Parliamentary encroachments upon that freedom.

Alas, the truth isn’t quite so simple. For it was Scottish bankers themselves who lobbied for, and got, the restrictions included in the 1765 Bank Act. The bankers were themselves to blame, in other words, for the fact that they were inadequately prepared to meet the crisis of February 1797, or were prepared to meet it only by both breaking the law and having the Scottish public go begging for small change.

The story of the politics leading to the Bank Notes (Scotland) Act of 1765 is one I can’t go into in any detail here. Instead, I’ll once again refer my readers to Goodspeed, whose book tells the whole, sordid story. In brief, to quote from that work, “though the stated intent of the Bank Act was to prevent excessive issuance of paper currency, in reality its underlying purpose was to achieve precisely what it did achieve, namely, to raise barriers to entry and limit competition in the Scottish banking sector.” And far from addressing any genuine causes of instability residing in the Scottish system in the years leading to its passage, the Act ended up “substantially amplified the level of systemic risk in Scottish credit markets” (p. 61). We’ve seen the damage done by the Act’s provisions during the course of the Bank Restriction. Goodspeed, for his part, argues, convincingly, that the same provisions also contributed to the severity of the Ayr Bank crisis of 1772.

So we must, after all, place a “black mark” on the record of Scottish bankers. But the mark belongs, not next to the entry for 1797, but next to that for 1765. More importantly, although it is a black mark for the Scottish bankers, it is not one for the principle of freedom in banking, which remains, so far as the events we’ve been considering are concerned, unsullied.

Nor ought it surprise us, finally, that Scottish bankers should themselves have conspired to adulterate what was in most other respects a shining example of the benefits of free trade in currency and banking. “People of the same trade,” Adam Smith famously observed, “seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.” It’s the responsibility of government, rather than of businessmen, to keep trade free, and competition open, and to keep them so whether businessmen like it or not.

_______________________
[1] Although most of its provisions had long since become inactive, this Act remained among the statutes until 1993, when it was finally repealed.

[2] For more on incentive-compatible contracts allowing banks to suspend payment in emergencies see Gary Gorton, “Bank Suspension of Convertibility” and George Selgin, “In Defense of Bank Suspension.”

[Cross-posted from Alt-M.org]

This is Part I in a two-part series in which I address the argument that: 1) index funds are seizing an outsized influence over publicly traded corporations, and 2) that they are wielding this influence so as to reduce intra-industry competition between firms in their portfolio. In this post, I summarize the argument and offer some criticisms as to why this influence may not be as significant as it appears. In Part II, I will proceed to argue that, to the extent that index funds have indeed acquired some influence over the firms in their portfolio, this may in fact be a salutary development.

I. “Common Ownership” and Anti-Competitiveness

Over the past two decades, “passive” funds which maximally diversify their portfolios by investing in an entire market index (e.g. the S&P 500) have acquired an increasing percentage of the total shares traded on these indexes. Such funds are passive insofar as they merely track the market as a whole, vs. actively managed funds which conduct market research so as to invest in undervalued firms and to short overvalued ones, thereby earning “alpha” (above-market returns). Yet the fact that just three index funds: Vanguard, BlackRock and State Street (the “Big Three”) represent a dominant share of the index fund industry, which is itself a rapidly growing portion of the overall stock market, has raised concerns over the influence which this concentration confers to these funds’ managers.

Three recent academic articles in the law and economics discipline outline the dangers posed by this emerging paradigm. John C. Coates and Einer Elhauge of Harvard University Law School have published, respectively, The Future of Corporate Governance Part I: the Problem of Twelve (2017) and Horizontal Shareholding (2016). These pieces are joined by Richard Posner, Fiona Scott Morton, and Glen Weyl’s A Proposal to Limit the Anti-Competitive Power of Institutional Investors (2017).

This hand-wringing has leaked out of the ivory tower. These analyses have formed the basis of popular news coverage, “The Dark Side of Mutual Funds” - Slate, 2015; “Rise of Institutional Investors Raises Questions of Collusion”- New York Times, 2016; “Are Index Funds Evil?” - The Atlantic, 2017. In 2016, the antitrust division within the Department of Justice cited this research in expressing its interest to seriously investigate the issue.

The tone of this coverage is redolent of Progressive Era descriptions of an economy dominated by trusts and oligopolies, wherein a small coterie of businessmen exerted a malign, sub rosa influence on the wider economy at the expense of the rest of us. And just as that narrative generated enthusiasm for political remedies including the Sherman Antitrust Act, the Clayton Act, and a Federal Trade Commission, so all three of these academic pieces - and their amplificatory media appearances - explicitly argue for either new legislation or the novel application of extant legal mechanisms (e.g. Section 7 of the Clayton Act) to address this growing threat.

Their argument proceeds as follows: first, we observe the straightforward fact that an index fund is often the plurality shareholder (over two-thirds of all >5% equity stakes are held by one of the Big Three) in one of its portfolio firm’s stock, and together index funds frequently constitute a 15-20% stake in a given firm. This institutional position confers influence over a firm’s important strategic decisions, either via formal governance mechanisms such as shareholder votes on resolutions, managerial pay and board composition, or via informal consultation with management.

For Coates, this amount of influence wielded by so few hands (the eponymous Twelve) is concerning in and of itself. For Elhauge as well as Posner, Morton and Weyl, this influence is not malignant per se, but becomes so when coupled with the fact that these index fund managers have incentives which are at odds with not only the other shareholders of any given firm in their portfolio, but with the broader economy. Because an index fund is simultaneously invested in all of the major, publicly traded firms in a given industry, its incentive is not to maximize the share value of any given firm in that industry, but to maximize the aggregate share value of the entire industry. In a refashioning of the cross-shareholder models best explicated by anti-trust scholars Salop and O’Brien (2000), itself predicated on the intuitions Cournot oligopolistic competition, these papers argue that index funds will pursue the tried-and-true profit-maximizing strategy of suppressing intra-industry competition, and will leverage their institutional influence as dominant shareholders to select for compliant, unaggressive management for this purpose.

An article in the Fall 2018 issue of Regulation does an excellent job of criticizing the methodology and mechanisms undergirding the empirical evidence for the anti-competitive effects of “common ownership”. In this post, I aim to complement Lambert and Sykuta’s economic analysis by highlighting the ways in which the “common ownership” paradigm makes key mistakes in its assumptions about the nexus of corporate governance relationships which exists between index fund managers, portfolio firm managers, and minority shareholders. I will dispute both component claims: 1) that index fund managers wield an outsized influence over the firms in their portfolio, and 2) to the extent that they do wield influence, its net effect on the economy is negative.

II.  Index Fund Managers- Influence or Impotence?

All three articles argue that index fund managers will exercise their formal control rights qua shareholders to great effect. Shareholder resolutions, managerial compensation, and other significant governance questions are frequently decided by shareholder vote, and in this capacity index fund managers often do have a numerical advantage vis-a-vis any other single shareholder. Coates notes that even when they fall far short of a controlling bloc, index funds, either individually or as a group, often constitute the median voter, whose support is definitionally required for a resolution to succeed. This swing-vote role becomes particularly important when a contest for corporate control itself is at stake: when the composition of the board or the management is disputed, or when a merger is pending approval. In their capacity as the pivotal voter, index funds can select managers and board members who are willing to abide the suboptimal firm values resulting from the “soft” competition practiced in pursuit of intra-industry collusion.

Beyond the formal control mechanisms exercised qua shareholders, index fund managers are also capable of exerting informal pressure on the firms in their portfolio via “engagement”. Coates is worth quoting at length:

A second channel of influence is through what institutional shareholders call “engagements.” Their staffs “meet” – sometimes in person, more often by phone, sometimes just by email – with representatives of their portfolio companies. Through these meetings, they try to influence management, by informing them of their policies, their approach to new issues, and their perceptions of management and how it is responding to corporate challenges. These engagements can last a few minutes, or a few hours. Even if the out-of-pocket cost of an engagement is quite low, the impact of the information provided during the engagement have important effects on portfolio companies, as amplified through the managers of that company. That is because the engagements provide important signals to managers as to how the investors will behave should votes come up, on issues, or on other matters, including control contests, activist campaigns, or mergers. The prospect of such events – and the power of index providers in those events…provides a powerful incentive to portfolio company managers to respond to the desires, however economically expressed, of the index provider agents.

We can draw on a basic tenet of organization theory: the choice of exit vs. voice (Hirschman 1970), to demonstrate how proponents of the “common ownership” paradigm have overstated their case for index fund influence. Members of an organization may affect said organization’s decisions via formal voting mechanisms, informal pressure and persuasion (voice) or they may leave (exit). Exit not only has compositional effects by shifting the median voter of the remaining members, but may be exercised as a threat to induce cooperation. While the authors here outline two plausible mechanisms whereby index fund managers may possess a loud voice over a firm’s corporate governance decisions, they omit in their analysis the index funds’ unique weakness as investors: they cannot choose to exit (that is, sell) a firm’s stock if they disagree with its management. Because the voice and exit strategies are complementary, index funds’ lack of a credible exit threat makes their voice less stentorian than it at first appears.

A profit-seeking management team must appeal to the marginal, exit-capable shareholder in order to maximize share price. For the same reason that Apple doesn’t optimize its next iPhone to satisfy Apple die-hards, and Democratic presidential candidates don’t campaign on the coasts, management teams won’t be overly worried about catering to their captive shareholders.

Let’s dwell on the Apple analogy for a moment. In designing the newest iPhone, Apple may be weighing the choice between designing a faster processor or a better camera. Apple enthusiasts would value a faster processor much more highly. But the casual consumer, interested in taking the most flattering Instagram selfies, will place more value on the better camera when comparing the iPhone with the latest Samsung. Apple’s incentive, then, is to appeal to this marginal consumer. The enthusiasts, who are already willing to pay more for the iPhone than its sticker price - faster processor or not - are the inframarginal consumers. A firm’s management, with much of its own compensation tied to the firm’s share price, will be incentivized to pursue those strategies which the marginal shareholder believes to be value-maximizing, as reflected in the movement of the share price.

Deprived of the exit option, and with a precarious persuasive perch, index funds must utilize the formal component of their voice - voting in shareholder resolutions and, more importantly, control fights - to militate against a management otherwise incentivized to maximize share price. Yet even a cohesive bloc of the Big Three index funds, amounting to a hypothetical 20% stake in a given firm, will only be the median voter within a certain subset of shareholder votes. They will only be able to carry a vote in which the remaining shareholders are split more narrowly than 62.5-37.5. Within this range of sufficiently controversial choices, index funds managers, assuming they will vote cohesively, can have their way. But the “common ownership” argument means that this swing-vote role will be deployed to defend a management team, a board of directors or a major strategic initiative which will not maximize firm value. This 20% bloc can be assumed to be the only voters who are not trying to maximize firm value. Index funds will not be able to install their preferred management/directors/initiative if at least 62.5% of the profit-maximizing shareholders detect that this is not the profit-maximizing move. Even in a rational expectations model in which agents can only predict the expected value of a decision within some probabilistic distribution, nakedly non-profit-maximizing proposals will not garner the requisite 37.5% support from profit-maximizing shareholders. In the final analysis, index funds’ voice over corporate governance decisions sounds less baritone and more falsetto.

Some economists want to make it more expensive for the less well-off to enjoy a clear revealed pleasure: eating red and processed meat.

The average household in the poorest fifth of the income distribution dedicates 1.3 percent of spending towards it. That’s over double average household spending in the richest quintile. Yet meat is now a new “public health” target. Once, lifestyle controls stopped at smoking and drinking. They recently expanded to soda and even caffeine. Now, even the hallowed steak is not sacred.

Last week, a report by University of Oxford academics calculated supposedly “optimal tax rates” on red meat (lamb, beef and pork) and processed meats (sausages, bacon, salami etc.) For the U.S., the recommend rates were as high as 34 percent and 163 percent, respectively. Such taxes, the report claims, could save 52,500 American lives per year.

To an economist, this approach might make theoretical sense. If the World Health Organization is right that eating meat increases risk of heart disease, cancer, stroke and diabetes (in some cases, very much disputed claims), then consumption could increase healthcare costs. Some of these costs will be borne by others, through higher government spending or healthcare premiums. Imposing a tax equal to the true external costs of the next steak, lamb chop or burger patty one eats forces consumers to face the full social costs of their eating decisions. In turn, then, the tax will somewhat reduce consumption to a supposed “optimal” level.

Yet, in reality, the presence of external effects is no slam-dunk to justify taxes. One must also consider costs, unintended consequences and the ability of government to assess risk and harm accurately. In these areas, the meat tax advocates appear off-base. The result is their proposed tax rates look way too high, even in theory, and it’s doubtful they are the best means of improving economic welfare.

First, the methodology appears to add up healthcare costs from extra meat consumption as if they are all costs imposed on others. But at least part of extra healthcare or medication costs of meat-eaters affected by disease would be personally financed, rather than funded through higher insurance premiums, or Medicaid or Medicare spending.

Second, the researchers seemingly ignore the health consequences of alternative foodstuffs. If taxes discourage eating red and processed meat, consumers will eat other things, as the report acknowledges. Yet the federal government’s own 2015-2020 Dietary Guidelines for Americans recommends we eat less fat, and the evidence is now strong that carbohydrates are dangerous, so—apart from white meat, vegetables and nuts—the government clearly thinks there are adverse health consequences of other foods. Yet this analysis does not consider the costs of this new consumption.

Third, even if more people lived healthier, longer lives as a result of this tax, this is not costless. In fiscal terms, they would receive more in Social Security or Medicare payments. If taxpayer costs of eating habits justify new taxes, then fiscal savings arising from mortality induced by meat-eating must also be considered against it. Yet public health campaigners seemingly calculate optimal taxes as if the alternative to lifestyle-induced illness is costless.

Finally, the paper adds “lost productivity” for working-age people as an external cost of poor health induced by meat-eating. Yet someone spending time out of the labor market due to illness would likely see resulting worse compensation. Any lost productivity for the working-age meat-eaters then will overwhelmingly be a private cost, rather than an external cost that needs accounting for through the tax.

Correcting for all this would see the supposed “optimal tax rates” fall dramatically. Yet even then, meat taxes would be highly regressive. In his 1937 book The Road to Wigan Pier, George Orwell commented that the poor eat “an appalling diet, but the peculiar evil is this, that the less money you have, the less inclined you are to spend it on wholesome food … You want something ‘tasty’.” Meat is a tasty pleasure, and governments should be wary of policy demonizing it.

In reality, sin taxes are rarely “optimal” anyway. Taxes are applied uniformly. Yet those who eat meat in healthy moderation impose no costs on others, but see the same cost uplift for a sausage as someone at high risk of requiring taxpayer healthcare support. Truly efficient taxes would recognize the differences in risks of types of consumers.

This all suggests a more effective approach would be targeted dietary guidance at a personal level. But the history of food science itself is littered by examples of governments sharing subsequently mistaken advice. On that basis alone, it is far too soon for governments to tax a whole major food group on the basis of speculative modelling and disputed science.

In any case, the history of lifestyles interventions suggests a sin tax on meat would be the thin end of the wedge. This research suggests, unbelievably, that 557,000 deaths per year in the U.S. are caused by red and processed meat consumption – over 20 percent of the total. One of its authors has previously suggested everyone must eventually go vegan.

With such figures bandied about, campaigners would not want to stop with a modest tax to account for external costs of consumption. Instead they would swiftly move on to try to fundamentally change eating habits using many other policy levers, from advertising bans and packaging regulations, through to higher taxes and restrictions on sales.

The author would like to thank Terence Kealey for his input to this post.

The high hopes and inflated expectations of U.S. diplomacy with North Korea set by Donald Trump after his summit with Kim Jong Un are quickly coming unraveled.

Trump confidently declared an end to the nuclear threat from North Korea on the heels of the Singapore summit, and has since repeatedly declared that the United States is making progress in its efforts to denuclearize North Korea.

However, many arms control and nuclear experts have warned that the actual substance of the agreement between the United States and North Korea leaves much to be desired. North Korean promises to denuclearize are vague at best and there is no real system in place for verifying the few steps Pyongyang has already taken, such as dismantling an engine test stand and closing its nuclear weapons testing site. While Kim declared a moratorium on ballistic missile and nuclear testing, he has not agreed to give up any missiles or warheads. In fact, in his New Year’s address he explicitly stated, “The nuclear weapons research sector and the rocket industry should mass-produce nuclear warheads and ballistic missiles.”  

There is a clear mismatch between Trump’s optimistic rhetoric and the actual state of U.S.-North Korea diplomacy. The North’s commitments are fuzzy at best and talks appear deadlocked as both sides refuse to budge until the other makes a concession. The discrepancy between rhetoric and reality risks turning unsurprising revelations about North Korea behavior into indictments that could sink U.S.-North Korea talks.  

One such unsurprising revelation that, thanks to Trump’s statements, is instead a politically potent cudgel is the news that North Korea has continued operations at undeclared missile bases while it has negotiated with the United States. This should not come as a surprise. None of the agreements North Korea has reached with the United States (or South Korea) since the start of 2018 mention anything about halting all missile operations. Furthermore, neither Kim’s New Year’s address nor his April speech to top officials in the Worker’s Party of Korea says that operations will cease.

However, Trump’s wildly inflated statements of success and victory mean that instead of a reasonable and measured reaction, media outlets are treating the news of ongoing operations at missile bases as a sign of North Korean perfidy. The New York Times, for example, said that the satellite imagery and report published by the Center for Strategic and International Studies (CSIS), “Suggest that the North has been engaged in a great deception.” The article makes no mention of the fact that Kim has never stated or agreed to a complete freeze or abandonment of his ballistic missile capabilities, but it does contrast the North’s behavior with Trump’s optimistic rhetoric.

Keeping a watchful eye on North Korea is valuable and important, and the CSIS report itself is detailed and objective. However, thanks to the unrealistically high expectations Trump set at the outset of talks, the report is being spun as a black mark against Trump’s approach to North Korea. This unfortunate outcome could have been easily avoided. Trump should have been honest about the limits of the agreement penned at Singapore, and he should have heralded the summit as the start of a long process rather than a kind of finish line.

U.S.-North Korean diplomacy isn’t dead yet, but it faces some tough sticking points that will take time to resolve. Revelations that North Korea is moving ahead with activities that haven’t been explicitly limited or proscribed shouldn’t come as a surprise and shouldn’t be an excuse for the United States to walk away from the table.

It’s possible for Trump to achieve significant, long-lasting results via negotiations, but in order to do that he needs to set realistic expectations and tone down the triumphalist rhetoric. Continuing to declare victory without real results will only turn run of the mill news about North Korean behavior into the ammunition that hawks within the administration need to sink negotiations.

Yesterday marked 100 years since the end of the First World War. The Washington Post’s Monkey Cage blog used the occasion to publish an excellent commentary, based on a longer academic journal article, by political scientists Alexander Lanoszka and Michael A. Hunzeker. They argue that the Great War could have actually ended long before the eleventh hour of the eleventh day of the eleventh month of 1918. Two years earlier, in December 1916, both “Germany and the United States issued peace overtures” that, if heeded, “could have spared countless lives and have helped Europe escape the financial ruin and deep-seated animosity that produced World War II,” Lanoszka and Hunzeker explain. “Unfortunately, the Entente — Britain, France and Russia — dismissed both offers, and the fighting continued.”

At the time, all sides were facing catastrophic losses, financial insolvency, and a virtual stalemate on the battlefield. An armistice then would have been a great relief to the warring parties. So why did the Entente powers reject peace? According to Lanoszka and Hunzeker, “Honor pushed the Entente to prefer war over peace despite the overwhelming costs and risks…[For the Entente,] Honor was worth the material price, no matter how high. Germany was unapologetic about its transgressions. Atrocities in Belgium and repeated frustrations on the battlefield to win and exact punishment made national honor take priority over national survival. War aims expanded; by December 1916, the Entente came to believe the only way to overcome dishonor was to destroy the German regime itself.”

Sociologists argue that honor is crucial to group self-esteem, involving an emotional investment in how groups define themselves and their place in social hierarchies. Honor leads actors to believe that others must respect these identities. It can enhance cooperation when mutual respect exists, but encourage severe escalation and undercut conflict resolution when it does not.

Accordingly, when identity faces an external threat, actors feel an intense psychological need to salvage their honor. To restore besmirched honor, either the transgressor apologizes or the victim punishes. The longer the transgressor refuses to apologize and resists punishment, the more the victim will dig in and perhaps even risk dying for honor’s sake.

Threats to honor can thus undermine rational behavior and make wars longer. Rationality means that an actor objectively assesses available information, selects which goals it will pursue and picks the most efficient and risk averse way to do so. However, when honor is at stake, leaders might begin to ignore disconfirming evidence, prioritize honor over survival and adopt strategies based on hope, not efficiency.

Honor is not “a relic of a bygone era in international relations,” the authors conclude. Indeed, it is still very much with us. I recently published an article in The Washington Quarterly arguing that concerns over America’s honor, status, and prestige discourage a much-needed shift in U.S. foreign policy away from the costly and counterproductive grand strategy of primacy and toward retrenchment. As the American diplomat James B. Foley put it, “public support for U.S. global leadership [since WWII] has been sustained by a romantic faith in America’s overseas mission – a kind of internationalized Manifest Destiny” that makes any suggestion of retrenchment “psychologically deflating.” Decision-makers thus remain committed to an extraordinarily activist foreign policy despite the dire costs, high risks, and the fact that America’s core security would remain intact with a much less ambitious set of strategic objectives. 

In Paris this weekend, world leaders commemorated the centennial. French President Emmanuel Macron rebuked  the brutish nationalism of the early 20th century that helped lead to the bloodbath, while indirectly (though not subtly) condemning President Trump’s hardline nationalist worldview as a dangerous throwback to that tragic era. Sure enough, Trump is very much preoccupied with honor and prestige, and it shows in his foreign policy. Much has been made of how well Trump fits into the “Jacksonian tradition” in U.S. foreign policy. According to the political scientist Walter Russel Mead, who coined the term in his 2001 book Special Providence, the Jacksonian tradition features “a deep sense of national honor” that “must be acknowledged by the outside world” and must be defended, including by going to war over “great things and small.” 

Trump rose to power complaining about “a tremendous lack of respect for our country,” a phrase he repeated countless times on the campaign trail. The sentiment reaches back decades. In a 1988 interview, when asked what his political platform would be should he run for office, Trump boiled it down to a single word: “Respect.” He added that our adversaries are “beating us psychologically, making us look like a bunch of fools.” Even more explicitly, in a 1990 interview with Playboy magazine, Trump explained that America was “suffering from a loss of respect,” adding that “people need ego, whole nations need ego. I think our country needs more ego” because our leaders have let other countries “literally out-egotise this country.”

“The key to understanding Trump’s foreign policy outlook,” according to the political scientist Reinhard Wolf, “lies in his extreme attention to symbolism,” where “questions of substance are eclipsed by an obsession with status and respect…[F]or Trump, America First is not so much about advancing the national interest measured in terms of material wealth or physical survival. It is, first and foremost, about the United States becoming the undisputed ‘number one’ again, and being treated with due respect.”

Critics of Trump’s foreign policy often decry his supposedly isolationist impulses and his withdrawal from the world stage. However, though the administration has pulled out of several international agreements, America’s global military commitments have not shrunk. In some ways, Trump has expanded them. He has overseen increased military spending, the expansion of NATO, higher troop deployments to Europe and the Middle East, and a less restrained use of air power and other uses of force in multiple countries under dubious legal authority. Trump has not withdrawn from a single one of America’s 60-plus security commitments and, despite a near universal regonition that the war in Afghanistan is unwinnable, he has surged troops there to finish an unachievable mission. 

As with the Entente powers, intangible psychological motivations are driving U.S. militarism at the expense of more material economic and security interests. In 1916, that cost Europe dearly. In 2018, it’s costing America dearly, too. 

The naming of Matthew Whitaker as acting head of the Department of Justice, following the forced resignation of Attorney General Jeff Sessions, has kicked off a mini-debate between legal scholars over the propriety of his appointment.  On Thursday, Neal Katyal and George Conway argued in The New York Times that Whitaker’s elevation ran afoul of the Constitution’s Appointments Clause, which requires that the president appoint “principal officers” of the United States, such as the Attorney General, only with the “advice and consent” of the Senate.  John Yoo, a conservative legal scholar who served at DOJ under the Bush Administration, told Axios he agreed, and that the Federal Vacancies Reform Act, which purports to authorize the appointment of unconfirmed interim officers to fill vacancies, was unconstitutional as applied to such “principal” offices.  Supreme Court Justice Clarence Thomas expressed a similar view in an opinion just last year.  On the other side, we have Steve Vladeck, a law professor at the University of Texas, who notes that the Supreme Court blessed temporary appointments without confirmation back in 1898, in United States v. Eaton.  

I’m not sufficiently steeped in the history or jurisprudence of the appointments clause to have a strong view either way on the legality of Whitaker’s elevation, but it does at least seem to run contrary to the spirit and intention of the Appointments Clause as articulated by Alexander Hamilton in Federalist 76, which gives the following rationale for requiring Senate confirmation for the highest posts in the executive branch:

To what purpose then require the co-operation of the Senate? I answer, that the necessity of their concurrence would have a powerful, though, in general, a silent operation. It would be an excellent check upon a spirit of favoritism in the President, and would tend greatly to prevent the appointment of unfit characters from State prejudice, from family connection, from personal attachment, or from a view to popularity. In addition to this, it would be an efficacious source of stability in the administration.

It will readily be comprehended, that a man who had himself the sole disposition of offices, would be governed much more by his private inclinations and interests, than when he was bound to submit the propriety of his choice to the discussion and determination of a different and independent body, and that body an entire branch of the legislature. The possibility of rejection would be a strong motive to care in proposing. The danger to his own reputation, and, in the case of an elective magistrate, to his political existence, from betraying a spirit of favoritism, or an unbecoming pursuit of popularity, to the observation of a body whose opinion would have great weight in forming that of the public, could not fail to operate as a barrier to the one and to the other. He would be both ashamed and afraid to bring forward, for the most distinguished or lucrative stations, candidates who had no other merit than that of coming from the same State to which he particularly belonged, or of being in some way or other personally allied to him, or of possessing the necessary insignificance and pliancy to render them the obsequious instruments of his pleasure.

 

The elevation of Whitaker to the role of acting attorney general seems as precise an instance as one could imagine of the scenario the Framers hoped to deter.  It is, after all, no secret why President Trump has been dissatisfied with Sessions: He has frequently made clear that he was infuriated by Sessions’ recusal (quite clearly required by DOJ rules) from overseeing the investigation into Russian election tampering—which has already seen legal penalties imposed on several of the president’s allies—and his insufficient enthusiasm for pursuing the president’s political adversaries.  Whitaker, formerly Sessions’ chief of staff, seems certain to be more accommodating.  He took that job only a year ago, after making a successful play to get noticed by the administration via editorials and television appearances in which he attacked Special Counsel Robert Mueller’s investigation, and asserted that he would have indicted Hillary Clinton over her private e-mail server, despite the consensus of DOJ attorneys that there was no sound basis for prosecution. Though he did serve a stint as U.S. Attorney during the George W. Bush administration, Whitaker had spent recent years running a nonprofit that produced partisan attack ads targeting Democrats.  Charitably put, his resume is a bit thin for the nation’s top law enforcement job, even in an “acting” capacity: His chief qualification for the post is being “personally allied” to Trump.  He might, under present circumstances, nevertheless muster the votes for confirmation in the Senate, but the confirmation process itself would doubtless be fraught, providing an opportunity for pointed questions about whether he’d signaled to the White House his eagerness to shut down investigations like Mueller, or pursue prosecutions of the president’s foes.  It seems quite plausible, in other words, that the Appointments Clause would have functioned as intended to deter the nomination of someone like Whitaker to head the Justice Department if he had to go through confirmation.

In the Federal Vacancies Reform Act, the White House has seemingly found a mechanism for, in effect, hacking the Appointments Clause:  Get a loyalist hired in a subordinate role to a Senate-confirmed “principal officer,” create a vacancy by forcing that officer to resign, and then promote the loyalist to the top job, circumventing the Senate for at least seven months.  Moreover, the seven-month clock is extended for the period during which the nomination of a permanent replacement is pending, and restarts if that nomination fails to win the Senate’s consent.  In theory, at least, that means Whitaker’s “temporary” leadership of DOJ could last for the remainder of Trump’s term, provided the Senate finds Trump’s nominees to replace him even less acceptable.  Given that Trump has been open about his desire to replace Sessions with a more “loyal” attorney general for more than a year, it’s even conceivable that the White House anticipated his eventual elevation back when he first joined the Justice Department.  

It’s anyone’s guess whether, in light of Eaton, the courts will balk at this circumvention of the Senate’s role in providing “advice and consent,” but if they don’t, the White House has drawn a convenient roadmap for circumventing a constitutional safeguard that seems ripe for further exploitation. 

President Trump signed an order today that requires the denial of all asylum claims from people who cross the border illegally. The most important thing to understand about this order is that it is not the beginning of a new policy keeping out asylum seekers, but the conclusion of an existing policy. Here are the steps to Trump’s asylum sham:

  • Step 1: The Department of Homeland Security (DHS) moves its agents to the exact U.S.-Mexico border line.
  • Step 2: DHS forcibly keeps asylum seekers in Mexico away from U.S. protection, letting no more than 2 or 3 families cross per day.
  • Step 3: DHS prohibits asylum claims from those who go around the port of entry to get on U.S. soil to turn themselves in and apply for asylum.
  • Step 4: Put the military on the border and have soldiers place concertina wire around the port of entry.
  • Step 5: DHS works with the Mexican government to evict homeless asylum seekers who wait in Mexico at the legal port of entry.
  • Step 6: America is great again.

These policies contradict the asylum statute (8 U.S.C. 1158) which states:

Any alien who is physically present in the United States or who arrives in the United States (whether or not at a designated port of arrival and including an alien who is brought to the United States after having been interdicted in international or United States waters), irrespective of such alien’s status, may apply for asylum.

The order pretends as if legal ports of entry will still be a viable option for people who want to seek asylum, but this is a sham. Here’s the reality. DHS is permitting no more than two or three families seeking asylum to enter at ports of entry each day. This forces them to either live homeless in Mexico for days or weeks or go around, turn themselves in to Border Patrol, and have their claim processed that way. The Daily Beast explained how this worked in a specific case:

Donelda, 35, and her daughter, 6 … are asylum seekers from Guatemala who were turned away by U.S. Customs and Border Patrol at the Paso del Norte port of entry on May 8, the day after Attorney General Jeff Sessions announced the Trump administration’s new “zero tolerance” immigration policy… . Like others who have been turned away since May 8, Donelda then tried to cross into the United States illegally, turning herself into Border Patrol. That’s when—under the new policy—she was prosecuted criminally and her daughter was taken from her and shipped to a detention center in the Midwest, thousands of miles away.

The New York Times reported on what happens to those kept out:

The bottleneck has produced a grim sight at the turnstiles where legally authorized border crossers step from Mexico into the United States. Families from El Salvador, Guatemala and Honduras huddle together on the ground near packages of donated diapers and cans of baby formula. Some have endured this limbo for nearly two weeks, sleeping on the ground at night and trying to stay cool during the day as temperatures in this outpost in the Sonoran Desert surpass 100 degrees.

“We made it here on foot and by bus,” said Justo Solval, 25, a laborer traveling with his 21-month-old son, Jonathan. They set out from Suchitepéquez in southwest Guatemala, escaping extortion gangs in an effort to request asylum in the United States, Mr. Solval said. But after arriving in Nogales about a week and a half ago, they have been sleeping on cardboard pizza boxes in a squalid entryway to a bathroom at the border crossing. “We depend on strangers for food, for water, for everything,” Mr. Solval said. “I wanted to do everything legally, to ask for asylum in the proper way, but this is a setback I did not expect for us.”

As the Atlantic explains, DHS now stations agents in the middle of bridges to prevent asylum seekers from stepping on U.S. soil, which would grant them the protections under 8 U.S.C. 1158 to submit asylum applications. Of course, even when they do appear to cross the line, as in this video from the Intercept, the agents still reject them.

DHS Secretary Kirstjen Nielsen has even told Laura Ingraham on Fox News about turning away asylum seekers:

Well, we’re ‘metering,’ which means that if we don’t have the resources to process them on a particular day, they’re going to have to come back, so they’re going to have to wait their turn, and we will process them as we can.

Yet that “turn” may not come for weeks or months or years if every family is forced to wait because, according to researchers at Human Rights First, no more than two or three families may enter any given port per day. There were nearly 161,000 people in family units who arrived at or between ports of entry in FY 2018. Nielsen later was confronted about this at a press conference and refused to admit that asylum seekers were being “turned away,” while explaining that that’s exactly what was happening. A spokesman for DHS also used this same doublespeak when explaining the policy to the New York Times.

Despite the family separation policy in May and June, families kept crossing illegally anyway—evading the blockade at ports of entry. In response to the fact that asylum seekers are avoiding the de facto ban on asylum at ports, this latest order will ban the only remaining option for them. Without any legal way to present their claims, hundreds of people are homeless in Mexico. This image naturally conflicts with the Trump administration’s messaging about how it will accept claims at ports, so what has it done? As Texas Monthly reported today:

Hours after the Trump administration invoked national security powers to change existing rules to deny asylum to anyone entering this country illegally, U.S. immigrant rights advocates in El Paso learned that immigration officials were going to start evicting migrants encamped on international bridges awaiting to legally apply for asylum. U.S. and Mexican authorities have reached an agreement to remove hundreds of asylum seekers, including children, from international bridges linking El Paso and Ciudad Juarez, representatives from the American Civil Liberties Union told Texas Monthly Thursday night… .

More than 450 would-be asylum seekers—mostly from Central America—are currently camped out on the Mexican side of three bridges linking the two cities… . The lines at the El Paso-Ciudad Juarez bridges have formed because CBP officers are preventing people from reaching the port of entry to apply for asylum, saying the port facilities lack capacity to process the number of asylum seekers now arriving.

This idea that ports of entry lack “capacity” to process 450 asylum seekers is the most absurd lie of all. The El Paso-Ciudad Juarez port of entry processes more than 50,000 north-bound pedestrians and personal vehicles every day. It is laughable to claim that 450 asylees can’t receive background checks and screenings immediately if the administration chose to. DHS could process them all, give them all ankle bracelets for monitoring them in the United States (if it wants), and be done before lunch.

The goal of the president’s new policy is manifestly just to keep out any asylum seekers at all. It’s clear that DHS intends to continue its practice of rejecting asylum seekers at ports of entry as well, as evidenced by the fact that the military is placing concertina wire around the ports of entry. This would obviously be totally unnecessary if they processed the claims at ports, and if the immigrants were trying to sneak in, they wouldn’t go to the port to begin with.

President Trump is violating the law, which was intended to protect asylum seekers in situations like the Jews on the St. Louis who were trying to enter the United States without proper documentation but whom the United States monstrously turned away. Any policy that would turn away the St. Louis—the exact situation that prompted the creation of the asylum statute—flunks the basic tests of legality and morality.

Here are numerous other cases of the illegal practice of turning away asylum seekers:

 

Just before his crushing defeat on Tuesday, Maine’s Republican Senate candidate Eric Brakey asked the following questions on Twitter:

There is much to object to here, but I’ll focus on this fact: California is not blue because of immigrants. In the 2016 election, for example, naturalized citizens cast 18.1 percent of the vote, according to the Voting and Registration Supplement to the Census’s Current Population Survey (CPS). The CPS doesn’t ask how they cast their votes, but even if every single naturalized citizen voter cast their ballot for Hillary Clinton, Trump still would have received 38 percent fewer votes in the state than Clinton if Brakey’s disenfranchisement plan went through. 

The voter registration information in the Public Policy Institute’s 2017 survey indicates that naturalized citizens in California voted about 78 percent for Hillary Clinton, 19 percent for Trump, and 3 percent for other candidates. That is definitely a significant benefit to Democrats, but as Figure 1 shows, naturalized citizens would not have affected the outcome of the election. Hillary Clinton still would have won California in a landslide. A forced exodus of every immigrant voter in California would move from a D+30 state to a D+24 state.

Figure 1: California Presidential Election Vote Share by Candidate and Citizenship Status
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Brakey might respond that this fails to consider the children of immigrants, who opponents of birthright citizenship contend are not real Americans. In 2016, there were about 1.7 million votes for president by children with two foreign-born parents, according to the CPS. We again don’t know exactly for whom they voted in 2016, and we don’t have a California-specific political identification survey for them, but using the General Social Survey party identification for all 2nd generation Americans, we can conclude that at most 63 percent voted for Hillary and 36 percent for Trump. Figure 2 shows the difference between the 1st, 2nd, and 3rd generations in California. Even without immigrants and their children, Trump still would have lost.

Figure 2: California Presidential Election Vote Share by Candidate and Citizenship Status
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Another fundamental problem with the immigration-turned-California-blue theory is that California has had a unified Democratic legislature almost continuously since 1959, so it was already a blue state. But nativists are right that something did happen in the mid-1990s that made Republicans much less competitive in statewide elections. In the three elections from 1990 to 1994, Democrats received an average of just 47 percent of the votes in statewide races for president, senate, governor, lieutenant governor, and attorney general (Figure 3). In the following three elections from 1996 to 2000, they received 54 percent. From 2002 to 2006, they fell back to 52 percent (thanks entirely to Arnold Schwarzenegger’s boost to the GOP), but Democrats’ results have shot up since, hitting 59 percent in the most recent three elections.

Figure 3: Vote Share for Democrats in California Statewide Elections
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So what happened? Immigration clearly doesn’t explain it. Republicans would still lose California without any 1st and 2nd generation Americans, let alone just those who became citizens after 1994. Taking out the net increase of 1.9 million 1st and 2nd generation voters from 1996 to 2016 would have lowered the Democratic share by just 2 percentage points in the 2016 election.

But just because immigrants don’t make California blue doesn’t mean that immigration politics didn’t play a role. California Republicans went from competitive statewide to big losers at exactly the time that Governor Pete Wilson decided to blame immigrants for the state’s budget problems and campaigned for Proposition 187 in 1994, which would have required state officers to report illegal immigrants to the federal government as well as ban public services to them. Wilson did win reelection in 1994 during a record year for Republicans nationwide, but the California GOP never recovered.

My colleague Alex Nowrasteh has documented the now-extensive evidence that Wilson’s nativist campaign turned off Hispanic voters. This includes not just naturalized but also 2nd, 3rd, and 4th generation Hispanics. Wilson received nearly half of the Hispanic vote in 1990, but only a quarter in the 1994 election, and the GOP share remained low thereafter. But it was not just Hispanic voters who stopped voting GOP. Non-Hispanic whites also turned against Republicans at the same time, leading to a near total collapse in the state GOP.

As seen in Figure 4, Shaun Bowler, Stephen P. Nicholson and Gary M. Segura document the change in party identification following Prop. 187 (1994) and its successors Prop. 209 (1996) and Prop. 227 (1998). The share of Hispanics identifying as Democrats moved from 38 percent to 63 percent, while non-Hispanic whites moved from 30 percent to 37 percent, leading to a 14 percentage point swing against the GOP among whites.  

Figure 4: Party Identification Before and After California Propositions 187, 209, and 227
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Naturalized citizens and the children of immigrants certainly contribute to Democratic Party success in California, but they are not responsible for it. If Republicans want to win in the state, they need to realize that their rhetoric and policies on immigration not only offend new immigrant families in the state but also many Americans whose ancestors came to America during earlier waves, especially when public polling shows that Americans have never been more pro-immigration than they are right now. This has made the GOP far less competitive in California, and it may also have contributed to the exceptionally close Senate race in Texas this year. Rather than blaming immigrants for their failures, Republicans who want to reverse these trends should craft inclusive messages and policies that appeal to Americans regardless of the ancestry.  

The following is an excerpt from an op-ed I wrote explaining why the 2018 midterm election will not have a significant impact on how the Trump administration conducts its diplomatic outreach with North Korea: 

A divided Congress will likely serve as a brake against most of Donald Trump’s policy agenda. But in one critical issue area—the diplomatic efforts to denuclearize North Korea—congressional divisions will not have a significant impact. For better or worse, the executive branch in general and Trump in particular will be able to deal with North Korea as they see fit.

The new Congress is bound to have some effect on Trump’s approach to North Korea, but the impact of the legislative branch should not be overstated. At the end of the day, the executive branch still holds most of the power and control over the U.S.-North Korea diplomatic process. Most of Congress’s impact will therefore be constrained to the margins of U.S. policy.

To read the rest of the article, go to NK News

https://www.nknews.org/2018/11/democratic-gains-north-korean-pains-congresss-limited-impact-on-dprk-policy/

Ronald Reagan’s legacy-defining tax cuts passed through Congress in 1981 and 1986 with broad Democratic support. The Tax Cuts and Jobs Act of 2017 on the other hand, failed to garner a single Democratic vote before President Trump signed it into law. In the latter case, the lack of concomitant spending cuts might allow one to frame this opposition as an act of fiscal prudence on the part of the Democrats. But the counterfactual - that if the legislation had also included a scaling back of Medicare benefits and a partial Social Security privatization then the Democrats would have leaped on board - strains credulity.

More likely, Democratic opposition is motivated, at least in part, by an increasingly ideological commitment to a European style social welfare state. Many Western European governments collect 40% or more of their GDP in taxes, while the United States collects just over half of that figure. In urging us to emulate the European model, the progressive left wing of the Democratic party not only downplays the perverse economic effects of higher taxes, they have taken to morally justifying progressive taxation as the “fair share” owed to society by those who have been successful in the private sector, on account of the government-provided goods and services which undoubtedly necessary to that success.

In 2011, U.S. Senate candidate Elizabeth Warren, now among the front-runners for the 2020 Democratic presidential nomination, made this argument explicitly during a campaign event:

I hear all this, you know, ‘Well, this is class warfare, this is whatever.’ No. There is nobody in this country who got rich on his own — nobody. You built a factory out there? Good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police-forces and fire-forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory — and hire someone to protect against this — because of the work the rest of us did. Now look, you built a factory and it turned into something terrific, or a great idea. God bless — keep a big hunk of it. But part of the underlying social contract is, you take a hunk of that and pay forward for the next kid who comes along.

In a 2012 campaign speech, President Obama reinforced this sentiment:

If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business – you didn’t build that.

These remarks no doubt build upon a foundation of truth: that some basic degree of public goods provision might be necessary to generate the conditions within which the private sector can thrive. But beyond illuminating a very basic economics insight, this line of argumentation falls far short of its goal: to justify progressive taxation as a part of the “underlying social contract” whereby private actors reimburse the government for the goods and services which they utilized en route to their success.

A Tale of Two Commuters

Imagine two commuters living equidistant from a downtown city law firm. One is an attorney at the firm, the other is her secretary. Each drives to work, thereby obtaining some value from the use of public roads. Each, in turn, imposes a roughly equal amount of depreciation on those roads, the cost of which must be defrayed via taxes. But what about the value “built” by each of them once they reach their office?

The attorney will almost certainly command a far higher salary than will her secretary. Insofar as these salaries emerge from a competitive market for labor, they reflect, at least within an order of magnitude, the respective marginal products of these commuters’ labor. But, crucially, the attorney’s higher salary is not attributable to a greater consumption of public goods. She traversed the same roads on the way to work as did her secretary. The two of them rely on the same police and fire departments. They may have even attended the same local, public K-12 schools. The attorney’s higher salary is instead attributable to her command over a set of skills and human capital which are more scarce - and more valuable - on the market than are secretarial skills. The salary differential, and the difference in productivity it reflects, cannot be explained by differential public goods consumption. In each case, some degree of public goods and services may be a necessary complement to these employees’ labor, but they are not sufficient to explain their differential success in earning taxable income. In what way is society justified in expropriating a greater percentage of the attorney’s income because her labor is more productive, and therefore commands a higher salary?

Imagine, next, two rival international shipping companies. They operate an identical tonnage of merchant ships. They make equal use of publicly subsidized port facilities. They make equal use of the protection of the U.S. Coast Guard, and each benefits equally from the placidity of international shipping lanes due to the presence of the U.S. Navy.

Company A has cultivated an efficient corporate culture: its CEO has designed an innovative process for acquiring talented managers, who in turn are capable of literally running a tight ship. Embezzlement and misfeasance are minimized. Company B, on the other hand, is dysfunctional at every level of analysis. The incompetence of its senior executives percolates into inept middle-management, who in turn fail to properly motivate their employees. For every ton of merchandise shipped, each relying to the same degree on the aforementioned public goods, Company B generates less taxable profit than Company A. But Company A’s greater tax burden cannot be attributable to greater public goods consumption by Company A. It is instead attributable to smarter management, more innovative practices, and an overall more functional corporate culture. In what way do Company A’s unique characteristics which make it competitive and profitable justify extracting from it a larger tax burden? These are not society’s contributions, for which the government is entitled to collect additional reimbursement.

The logic of “you didn’t build that” leads unavoidably to the following conclusion: few forms of proportional taxation, and certainly no progressive marginal rates, can be justified on the basis of public goods consumption. Not only does this line of reasoning fail in principle, but it would be utterly compromised during the actual practice of determining fiscal policy. Even if a wise philosopher-king were able to determine the precise percentage of a wealthy individual or a successful firm’s income which was attributable to their use of public goods, our Congress falls far short of that Platonic paragon. The statutory tax rates which emerge from the political process are a function of just that - politics. They reflect the relative balance of power at a moment in time between pro-tax and anti-tax constituencies, imperfectly filtered through their representatives and adulterated by a nauseating amount of interest-group influence. To expect them to reflect, instead, the amount of a person’s wealth which society helped “build” is simply fantasy.

Last year’s Tax Cuts and Jobs Act created “Opportunity Zones,” which are neighborhoods chosen by politicians to receive special tax breaks. The Wall Street Journal recently published on an op-ed and a news story on O-Zones. Here is my unpublished response:  

Steve Glickman provided lobbyist talking points in “Opportunity Is Coming to a City Near You” (Oct. 24), but the reality of the new “opportunity zones” was reported by Peter Grant the same day in “Tax-Break Zones Lure Buyers.”

Grant’s article indicates that the 8,700 tax-favored O-Zones were a get-rich-quick bonanza for current landowners as the tax breaks were rapidly capitalized in prices. Many thousands of landowners saw their property values jump by as much as 50 percent, but that means that many thousands of other landowners just outside the O-Zones got the shaft. Politicians have drawn lines down streets in cities across the nation bestowing wealth to people on one side and bypassing people on the other.

The whole exercise is unseemly and distortionary, and it has set in motion a lobbying frenzy for years to come as landowners near O-Zones will demand that the lines be redrawn. The get-rich bonanza for O-Zone lobbyists has just begun.

_____________________

Here are other commentaries on the new zones:

www.downsizinggovernment.org/opportunity-zones-fuel-corruption

www.downsizinggovernment.org/opportunity-zones-will-help-connected-developers-not-poor

www.downsizinggovernment.org/o-zones-fragment-america

www.cato.org/blog/opportunity-zones-whom

 

One hundred years ago Sunday, at the eleventh hour of the eleventh day of the eleventh month of 1918, the bloodiest war in history ended. In the New Yorker, historian Adam Hochschild writes about the senseless beginning of the war in an “epic chain of blunders, accusations, and ultimatums” and about its senseless end: “In the five weeks since the Germans first requested peace negotiations, half a million casualties had been added to the war’s toll…. Worse yet, British, French, and American commanders made certain that the bloodshed continued at full pitch for six hours after the Armistice had been signed [at 5 a.m., with the news immediately radioed and telephoned to commanders on both sides].”

Cato senior fellow and historian Jim Powell wrote about the blunders and consequences of World War I in his book Wilson’s War: How Woodrow Wilson’s Great Blunder Led to Hitler, Lenin, Stalin, and World War IIHe summarized his argument in Cato Policy Report four years ago:

World War I was probably history’s worst catastrophe, and U.S. President Woodrow Wilson was substantially responsible for unintended consequences of the war that played out in Germany and Russia, contributing to the rise of totalitarian regimes and another world war. 

Indeed World War I was a catastrophe, a foolish and unnecessary war, a war of European potentates that both England and the United States could have stayed out of but that became indeed a World War, the Great War. In our own country the war gave us economic planning, conscription, nationalization of the railroads, a sedition act, confiscatory income tax rates, and prohibition. Internationally World War I and its conclusion led directly to the Bolshevik revolution, the rise of National Socialism, World War II, and the Cold War. 

On this weekend as we celebrate the end of this tragedy we should mourn those who went to war, and we should resolve not to risk American lives in the future except when our vital national interests are at stake.

Welcome to the Defense Download! This new round-up is intended to highlight what we at the Cato Institute are keeping tabs on in the world of defense politics every week. The three-to-five trending stories will vary depending on the news cycle, what policymakers are talking about, and will pull from all sides of the political spectrum. If you would like to recieve more frequent updates on what I’m reading, writing, and listening to—you can follow me on Twitter via @CDDorminey.  

  1. Navy can’t build fast enough to reach 355 in time. So how will it get there?,” David Thornton. The Navy’s 30-year shipbuilding plan calls for an increase to a 355-ship force—but it seems that the plan misjudged the shipbuilding industry’s capacity to produce ships on the service’s desired timeline. Simply put, the 355-ship Navy will either require an adjustment to the plan with a slower production model, or the government will have to expand shipbuilding capacity (which is neither cheap nor easy). 
  2. Nuclear modernization programs could face renewed scrutiny in Democrat-controlled House,” Rachel Cohen. When the election on Tuesday flipping the House, it created a valuable opportunity for Democrats to exert influence on the defense budget—including the long-term nuclear modernization program. 
  3. Saudi Arabia’s War in Yemen. I want to bring your attention to this is upcoming event hosted by the Cato Institute featuring Rep. Ro Khanna, Kate Kizer from Win Without War, Scott Paul from Oxfam America, and myself—with John Glaser from Cato moderating. Register via the link to join us on December 7th. 

The other day, I wrote about the disadvantages of state and local governments issuing general obligation debt. Those governments currently have more than $3 trillion in overall debt outstanding. Government borrowing enriches financial firms, encourages corruption, and magnifies the ultimate tax burden that citizens will bear for the related spending.

It is prudent and practical for states to operate with very little debt, as Idaho, Wyoming, and a few other states have shown.

Here is an inspiring editorial in The Gazette, published in Janesville, Wisconsin, home of outgoing House Speaker Paul Ryan. Walworth County is near Janesville.

Local government officials everywhere take note: Walworth County is proving you can run a government and undertake capital projects without carrying any debt.

The concept—saving money instead of issuing bonds to pay for something you need—is radical in our debt-happy society.

Walworth County has been debt free since March, despite the construction of a $24 million health and human services building.

Taxpayers will be rewarded with a 2.8 percent drop in the tax levy—no small trick at a time of rising inflation and interest rates.

The county’s recent decision to pay off $9.1 million in debt while resisting the temptation to borrow is particularly praiseworthy. As a result, Walworth County might be the only debt-free county in Wisconsin.

Think about the significance of Walworth County’s accomplishment: It is spending within its means while saving money in anticipation of future needs.

It’s unheard of, for example, for a school district to save the money it will need for a new school. School district referendums calling for more bonding are as predictable as they are numerous.

Many of these referendums pass because taxpayers don’t realize they’re paying far more than the advertised price for a project, as Chris Edwards, director of tax policy studies at the Cato Institute, noted in his Monday column. He describes bonding as a hidden tax.

If Walworth County had decided to issue bonds to pay for its health and human services building (assuming a 4 percent interest rate over 30 years), taxpayers would have had to fork over nearly $23 million in interest, including an estimated $550,000 in underwriting and advisory fees, according to a municipal bond calculator at the website for Municipal Capital Markets Group.

By planning ahead, Walworth County is saving taxpayers millions of dollars.

Any unit of government wanting to follow Walworth County’s lead needs to be forewarned: Saving for a future project requires discipline and clear communication with voters. Many of the fiscal challenges this nation faces are a result of politicians viewing the world in one- or two-year increments, from one election to the next. Unfortunately, politicians don’t plan to be in office when the bills come due and the financial wreckage becomes apparent.

But once in a while, politicians surprise us by exercising restraint. When that happens, like a comet’s orbit approaching the sun, we should all take notice. Kudos to Walworth County for demonstrating government can function debt free.

 

A split Congress could affect Donald Trump’s negotiating strategy vis-à-vis North Korea, but the legislative branch’s impact will mostly come at the margins of U.S. policy. Trump’s control over the two major levers of U.S. pressure on North Korea—sanctions implementation and the military—means that he has significant discretion over negotiations with Pyongyang. By controlling the sources of U.S. pressure, Trump can adjust either and impact negotiations with little concern for what Congress thinks or wants. Congress does have the ability to prevent either extreme outcome of war or peace, but neither of these seem likely given the current conditions on the peninsula.

The two primary ways the new Congress could influence North Korea policy is through investigations and appropriations. House investigations could absorb much of Trump’s time and political capital, making it harder for him to find the time to negotiate with North Korea. Appropriations battles between the White House and Capitol Hill could restrict the former’s latitude in talks with Pyongyang, but any potential restrictions are unlikely to suffocate the president’s efforts. For better or worse, the executive branch in general and Trump in particular will be able to deal with North Korea as they see fit, even with a Democrat-controlled House.

An additional but very uncertain way that the midterms could affect U.S. policy toward North Korea is by creating a window of opportunity for both Trump and Kim Jong Un. If Trump comes away from the midterms thinking his prospects for re-election are grim, then he may push harder to break the current impasse in negotiations in order score a major foreign policy win that he can point to on the campaign trail. Likewise, Kim could take a similar lesson from the midterms and try to maximize diplomatic gains while Trump is still in the White House if Kim thinks a new president would want to return to a “maximum pressure”-like policy. There is no guarantee that the two leaders will have this interpretation, however, and even if they did they may decide that continued engagement is not worthwhile.

 

In this election, journalists following the immigration beat will focus on the outcomes of individual races. Dave Brat, the Virginia nativist whose defeat of House Majority Leader Eric Cantor in 2014 doomed hopes of immigration reform, lost in a previously safe GOP seat. Democrats blew out Corey Stewart in Virginia and Lou Barletta in Pennsylvania, the most anti-immigrant Senate candidates. Kris Kobach, the author of state anti-immigrant laws across the country, cost Republicans the governorship in Kansas.

But the two most important outcomes of this election are in the big picture. First, nativists have officially squandered their last, best chance to restrict legal immigration. There may never be another moment like the one in 2017 and 2018, where the House, Senate, and White House were all controlled by Republicans with nativist agendas. They held multiple votes in the House and Senate on various measures to make legal immigration cuts, and all their efforts went down in flames.

The second outcome is even more important: the House of Representatives is now the most pro-immigrant that it has been since the 19th century. Current House Democrats would not only pass the broadest legalization in the history of the United States—they also would greatly expand legal immigration. No elected House Democrat is opposed to legalization, even if they would want it paired with some enforcement measures. 

The last Democratic House from 2007 to 2010 did pass the Dream Act for a very small portion of the illegal population—only a subset of the Dreamers qualified—but it didn’t even reach a majority of the House (216, not 218, voted yes). House leadership lost 38 “blue dog” Democrats and got the votes of just five Republicans. Today, the Dream Act would easily pass the House with more than a dozen Republicans voting for it, even after moderate-Republican losses.

The last Democratic-majority House could not—and did not—pass any comprehensive immigration reform bill that would offer a path to citizenship for most illegal residents or expand legal immigration. From 1995 to 2006, the GOP majority bookended its tenure by passing the two harshest immigration enforcement bills since the 1920s: the Sensenbrenner enforcement bill in 2005 and the Illegal Immigration Reform and Immigrant Responsibility Act in 1996.

Except for one Congress from 1933 to 1994 Democrats controlled the House and during that time the House did pass several bipartisan immigration bills, a mix of expansive and restrictive measures. The Immigration Act of 1990 expanded legal immigration, while hiring more Border Patrol Agents. The Immigration Reform and Control Act of 1986 provided for amnesty, but it was generally seen as a restrictive measure (which is why most of the Hispanic Caucus voted against it) because it made it illegal to hire someone without a valid photo ID, which naturally led to discrimination against Hispanic workers.

Prior to that, a Democratic-majority House passed the Refugee Act of 1980 which increased legal immigration for refugees. The Cuban Adjustment Act of 1966 legalized the status of Cubans who made it to the United States, and the Immigration Act of 1965 replaced the old national origin quotas and expanded legal immigration (though more than anyone expected at the time). Before 1965, House Democrats did only very slight liberalizations, ending the Asiatic Bar Zone and allowing some Jewish refugees to resettle in the United States. They mostly maintained the restrictive system created by Republicans in the 1920s.

House Democrats today would not just protect every expansive immigration measure enacted from 1965 to 1990—they would greatly build upon them if they could reasonably expect them to be signed into law. The starting place for reform for them is the 2013 comprehensive immigration reform bill, H.R. 15, a version of which the Senate had passed. At the time, every House Democrat except two cosponsored the legislation. The bill would legalize more than 8 million illegal residents and at least double permanent legal immigration.

However, the bill also had some provisions that are unlikely to remain. In particular, while it expanded immigration overall, it ended the Diversity Visa Lottery and cut so-called “chain migration,” two issues that President Trump has championed. Because the lottery disproportionately benefits African immigrants—who Trump reportedly referred to as coming from “shithole” countries—many Democrats are now opposed to repealing it as a matter of principle.

Rather than cutting family-sponsored immigration, Democrats will seek to expand it. The legalization provisions were also very restrictive, covering just three quarters of the illegal resident population. Democrats would certainly go further now. Especially after seeing how their colleagues did in this midterm, the remaining moderate Republicans would likely sign onto these measures if tied to stricter enforcement.

As importantly, this House will have the backing of the most pro-immigration general public in recorded history. More Americans oppose cuts to immigration and favor expanded immigration than at any point since at least 1965. Because the Senate is still in GOP hands, however, Democrats will have to focus on chipping away at the numerous legal immigration restrictions and enforcement measures that the Trump administration has implemented or has plans to implement. Republicans would be wise to work with them in a bipartisan manner.

President Trump has repeatedly called for an immigration system like Canada’s. Unlike the president’s plans for immigration, however, the Canadian government announced last week that it would increase legal immigration by 13 percent from 310,000 in 2018 to 350,000 new legal permanent residents in 2021. This amounts to 0.9 percent of its 2021 population. By contrast, the United States allowed a rate of 0.3 percent of its population in 2017.

Figure 1 provides the breakdown of the Canadian and U.S. immigration rates right now by type of immigration. In 2017, Canada permitted virtually the exact same rate of family-sponsored immigration, double the rate of humanitarian immigration, and 11 times the rate of economic-focused immigration as the United States did. If the U.S. rate remains steady as it has, America will fall further behind in the international competition for labor. 

Legal Immigration to Canada and the U.S.
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Despite the overwhelming focus on economic-based immigration, Canadian immigrants are not more educated than U.S. immigrants, as I’ve described before. Canada is also not unusual in having a higher immigration rate. As I’ve written before, most other wealthy countries have higher immigration rates than the United States does. 

Unless the United States adjusts its outdated immigration quotas, these disparities will only increase. Yet President Trump has endorsed proposals to cut legal immigration in half, meaning that Canada would be allowing in on a per-capita basis five times more immigration than the United States. Indeed, every proposal supported by the president so far has amounted to reduction in legal immigration. Cutting legal immigration would harm economic growth and make America less competitive economically.

If Congress wants to emulate Canada, it would double humanitarian immigration and increase economic-focused immigration by tenfold or more, while not cutting family-sponsored immigration as the president has suggested

On November 2 the Food and Drug Administration announced the approval of Dsuvia, a sublingual tablet containing the powerful fentanyl analog, sufentanil. Sufentanil has been used for years in the hospital setting, primarily in intravenous form for anesthesia. It is roughly 5 to 10 times more potent than fentanyl, and thus has a significant overdose potential. The FDA reached this decision following a 10-3 vote in favor of the drug’s approval by the Anesthetic and Analgesia Drug Products Advisory Committee (AADPAC), based on data from multicenter trials. It was not approved for outpatient use, but for use only in medically supervised settings, and may be of particular benefit to military health care practitioners.

FDA Commissioner Gottlieb’s announcement stated:

Dsuvia, which was previously approved by the European Medicines Agency in July under the brand name Dzuveo, has some unique features in that the drug is delivered in a stable form that makes it ideally suited for certain special circumstances where patients may not be able to swallow oral medication, and where access to intravenous pain relief is not possible. This includes potential uses on the battlefield. For this reason, the Department of Defense (DoD) worked closely with the sponsor on the development of this new medicine. This opioid formulation, along with Dsuvia’s unique delivery device, was a priority medical product for the Pentagon because it fills a specific and important, but limited, unmet medical need in treating our nation’s soldiers on the battlefield. The involvement and needs of the DoD in treating soldiers on the battlefield were discussed by the advisory committee.

The announcement was met with criticism from numerous quarters, including Anesthesiology Professor Raeford Brown of the University of Kentucky, who chairs the AADPAC, Senator Edward Markey (D-MA), and the advocacy group Public Citizen. They questioned the need for the development of a new and potent opioid in the presence of the opioid overdose crisis, and raised concerns about the potential for the drug’s diversion to the black market for non-medical users. These objections were trumpeted by the media.

The concerns raised by critics are unfounded. According to the Drug Enforcement Administration, most fentanyl and fentanyl analogs found on the streets are in an illicit powdered form, made in labs overseas and smuggled into the US via the mail, Fedex, and UPS, or using Mexican drug cartel infrastructure. While much of it is mixed in with heroin or cocaine, many dealers own pill presses and press the powder into counterfeit oxycodone or hydrocodone pills that are sold to unsuspecting nonmedical users. That’s how the artist known as Prince died. He liked to use Vicodin (hydrocodone) recreationally. Records show he never obtained any prescriptions from doctors. His dealer sold him what was believed to be Vicodin but was actually counterfeit and made from fentanyl, which caused his overdose death.

Recrudescent opiophobia now evokes positions held at the zenith of President Nixon’s war on drugs. The fact remains that opioids can be highly effective in treating pain, especially in the acute setting. Hysteria-driven policy should not stifle innovations in this or other forms of pain management.

Commissioner Gottlieb also stated in the FDA announcement:

We owe an answer to patients with medical pain, and the innovators who take risks to develop products to help address their needs. We owe it to Americans who want the FDA to do our part to help end one of the biggest addiction crises of modern times, while we carefully balance these grave risks against patient needs.

Commissioner Gottlieb made the right call here.

Maine Governor Paul LePage announced that he will be moving to Florida at the end of his term.

LePage is a staunch fiscal conservative and has received an “A” on the past three Cato fiscal policy report cards. He fought for spending and tax cuts throughout his tenure, and he often decried the negative effects of big government.

Why is LePage moving to Florida? One of the reasons is that Florida has lower taxes than Maine:

I’ll tell you very, very simply: I have a house in Florida. I will pay no income tax and the house in Florida’s property taxes are $2,000 less than we were paying in Boothbay … At my age, why wouldn’t you conserve your resources and spend it on family (rather) than spend it on taxes?

Why indeed.

Florida has the most net in-migration of any state in the nation, as discussed in this study. It has no income or estate tax. Its state and local tax burden is much lower than the burdens in the Northeast. Maine is high-tax state, but New York is even worse. I wonder whether Governor Andrew Cuomo is considering Florida when he retires?

Relative to personal income, Florida runs its government at just half the cost of New York’s. Half the cost! That is like a Honda dealer trying to sell the Accord for $50,000 while the Toyota dealer across the street has the Camry for $25,000. It wouldn’t make any sense.

Perhaps the 2017 Tax Cuts and Jobs Act is on Paul LePage’s mind. Because of the law, millions of households will become more sensitive to tax differences between the states. That may prompt an increased outflow of people from higher-tax to lower-tax states.

How should high-tax states respond to the outflows? It’s straightforward. They should run leaner governments with more efficient services to give taxpayers more value for their money. The Accord may have some features that the Camry doesn’t, but that would not double the cost.

WCBS NewsRadio New York reports

Two New York lawmakers are working to draft a bill that would propose a social media check before a gun purchase.

Brooklyn Borough President Eric Adams and state Sen. Kevin Palmer’s proposal would allow authorities to review three years of social media history and one year of internet search history of any person seeking to purchase a firearm.

True, “free speech and gun rights complaints are likely to come up” – no kidding! – but Adams says it’s a way to identify persons who “not suitable to hold and possess a firearm.” 

The two are hoping to identify any hate speech on social media profiles, which are often revealed only after someone is arrested in a mass shooting.

The only way to make this proposal better – by which I mean worse – would be to arrange for New York to quarter troops on the homes of applicants with especially bad social media postings. That way the sponsors could achieve a straight flush of Bill of Rights violations.

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