Cato Op-Eds

Individual Liberty, Free Markets, and Peace
Subscribe to Cato Op-Eds feed

Yesterday, WBUR in Boston reported on a simple technology that could reduce the number of opioid deaths: fentanyl test strips. The strips can be used by drug users to test for the presence of fentanyl in drugs they buy on the street. A Brown University study found that,

Sixty-two percent of young adult drug users who participated in the study in Rhode Island dipped the thin, pliable strips into the cooker where they heated the powder, or into their urine sometime after injecting. Half reported a positive result — a single dark pink line emerging on the strip — signaling fentanyl.

Most changed their routine as a result in at least one of these ways: 45 percent said they used a smaller amount of the drug; 42 percent slowed down their use; 39 percent used with someone else who could help if they ODed; and 36 percent did a test amount before injecting the full syringe.

While these routine changes aren’t as effective at preventing overdose as not taking the drugs at all, they do reduce the risk of a fentanyl overdose. So why aren’t more of these potentially lifesaving strips in the hands of those who could use them? As WBUR recounts,

But few drug users have access to fentanyl test strips. They are not FDA-approved, so are not for sale in drugstores or other outlets in the U.S. A handful of harm reduction groups fund distribution through private contributions. Other groups say they’d like to order the strips from the Canadian manufacturer but can’t afford the cost: about $1 per strip.

As federal and state officials are scrambling to come up with policy responses to the opioid epidemic it seems they are ignoring one easy measure: get out of the way and let the market provide low-cost harm reduction tools to those who can benefit from them.

Written with research assistance from David Kemp.

If the Democrats take the House, they’ll impeach Justice Kavanaugh, President Trump warned at a mass rally in Iowa last week. “Impeach, for what? For what?” Trump demanded. For perjury, most likely: “If we find lies about assault against women,” says Rep. Luis Gutierrez (D.-Ill.) one of several House Judiciary Committee members calling for renewed investigation, “then we should proceed to impeach.” 

I’m not the newly-minted Justice’s biggest fan. From the start, I thought Kavanaugh was a lousy pick for the Court: weak on the Fourth Amendment and unreasonably fond of extraconstitutional privileges for the president. I’ve also argued, at great length, that we ought to impeach federal officers more frequently than we do. That goes for Supreme Court Justices as well. The Framers thought impeachment could serve as a valuable check on abuses of judicial power: that we’ve managed to impeach just one member of the “high court” in 230 years is pretty anemic. 

All that said, I find the case for impeaching Justice Kavanaugh uncompelling, for the reasons that follow.

It’s true that there’s ample precedent for impeaching federal judges for perjury. Our last five judicial impeachments were based on charges of lying under oath. 

Here’s a brief rundown of each case: in 1986, the House impeached, and the Senate removed, Judge Harry E. Claiborne (D. Nev.) for filing false tax returns under penalty of perjury (Claiborne had been convicted of those offenses earlier that year, becoming the first sitting federal judge to be incarcerated). Three years later, the Senate removed two more judges for lying under oath. One, the inauspiciously surnamed Walter L. Nixon (S.D. Miss.), was serving five years in prison for lying to a federal grand jury about his attempt to influence a drug smuggling prosecution. The other, Alcee L. Hastings (S.D. Fla.), had been prosecuted for soliciting a $150,000 bribe in exchange for reducing the sentences of two mob-connected developers who’d robbed a union pension fund. He beat the rap in court, but lost his post when the Senate voted to remove him for the bribery scheme and perjuring himself at trial. (Hastings bounced back pretty quickly, however, winning election to the U.S. House of Representatives in 1992. He currently represents Florida’s 20th congressional district.)

More recently, we have the grotesque behavior of Judge Samuel Kent (S.D. Tex.), impeached in 2009 for sexually assaulting two court employees and lying about it to federal investigators. (Kent resigned before completion of his Senate trial.) Finally, there’s Judge G. Thomas Porteous (E.D. La.), impeached and removed in 2010 for “a longstanding pattern of corrupt conduct,” including kickbacks from attorneys, perjury in his personal bankruptcy filing, and “knowingly ma[king] material false statements about his past” to the Senate Judiciary Committee “in order to obtain the office of United States District Court Judge.” 

In principle and in practice, then, perjury is an impeachable offense. That obviously includes lying under oath to gain confirmation to higher office. In Monday’s Wall Street Journal, David Rivkin and Lee Casey insist that “Justice Kavanaugh cannot be impeached for conduct before his promotion to the Supreme Court,” including “any claims that he misled the Judiciary Committee.” But that’s nonsense. Misleading the Judiciary Committee about prior conduct was precisely what was at issue in the Porteous impeachment. 

And yet, the cases outlined above differ from Brett Kavanaugh’s in at least one crucial respect: in each of them, Congress had overwhelming evidence of impeachable falsehoods. Claiborne, Nixon, and Kent were already in federal prison when the House voted to impeach. Hastings and Porteous were removed after exhaustive investigations pursuant to the Judicial Conduct and Disability Act convinced their colleagues impeachment referrals were warranted. Indeed, despite Hastings acquittal in his criminal trial, a Judicial Investigating Committee concluded there was “clear and convincing evidence” he lied and falsified documents in order to mislead the jury.

When it comes to the central charge against Kavanaugh, however, clear and convincing evidence is unlikely to emerge. I don’t know if he’s lying about whether he sexually assaulted Christine Blasey Ford in the early ‘80s, and neither do you. It’s hard to imagine that further investigation, however exhaustive, will lead to dispositive proof one way or the other. 

Members of Congress are, of course, free to adopt a less stringent burden of proof—and maybe they should. The Constitution’s impeachment provisions nowhere specify clear and convincing evidence, proof beyond a reasonable doubt, or any particular evidentiary standard. That recent judicial impeachments have mirrored criminal-law standards is a result of the post-1980 statutory regime for disciplining federal judges and the “Overcriminalization of Impeachment” more generally. Since the purpose of impeachment is less to punish bad actors than to expel unfit officers, looser standards are arguably warranted. 

But unless members of Congress are willing to proceed on something closer to reasonable suspicion, any attempt to impeach Justice Kavanaugh would have to focus elsewhere, where the evidence for false statements is stronger. Did he testify falsely “regarding what he knew about emails stolen from the Senate Dems by a Republican operative” in judicial confirmation fights in the early 2000s? Did he attempt to mislead the Senate about his high-school yearbook?

In fact, I strongly suspect Kavanaugh lied about several items on his yearbook page. Was the reference to “Renate Alumnius” really just “intended to show affection” toward a female student at a nearby school? Was “boof[ing]” meant to indicate “flatulence”? I went to high school in the mid-Atlantic in the ‘80s, several years after Kavanaugh graduated, and I remember the term being a corny euphemism for sex. That usage better fits what Kavanaugh actually wrote—“Judge—Have You Boofed Yet?”—unless we credit him with unusual concern about his drinking buddy’s intestinal discomfort. 

But just going through the “boof-sleuthing” exercise in the prior paragraph cost me several IQ points and a soupcon of self-respect. The Framers viewed impeachment as a solemn and serious affair. Hamilton described “the awful discretion which a court of impeachments must necessarily have, to doom to honor or to infamy the most confidential and the most distinguished characters of the community.” A Kavanaugh impeachment inquiry would be awful in a different way: a spectacle proving mainly that high school never ends.  

“Imagine what it would look like,” writes Stephanie Mencimer in Mother Jones:

Hours of testimony from Squi, Timmy, and PJ over whether a Devil’s Triangle is really, as Kavanaugh testified, a drinking game. Expert debates over the definition of “boofing.”…. Michael Avenatti could figure prominently. It’s the kind of stuff that could end up making former House Oversight Committee chairman and Benghazi conspiracy theorist Rep. Jason Chaffetz (R-Utah) look like an elder statesman.

Really, must we? Sure, it might be entertaining to hear Rep. Alcee Hastings (D-Fla.), impeached for lying about participation in a gangland bribery scheme—and lately dogged by his own sex scandal—justify a vote to impeach over “Renate Alumnius.” But the proceeding as a whole would hardly be edifying. 

 A much-discussed recent survey puts two-thirds of Americans into a category the authors dub “the exhausted majority”—voters who are “frustrated and fed up with tribalism.” A Kavanaugh impeachment effort seems tailor-made to exhaust them even further.  

 

Max Gulker of the American Institute for Economic Research has a great short paper out summarizing the problems with a federal jobs guarantee. It echoes many of the issues that I raised about such a program on this blog.

One thing that is often underappreciated is just the sheer scale of the programs proposed. For reasons I outlined, the true numbers could potentially be much higher than the Levy Institute and Center on Budget and Policy Priorities (CBPP) worked proposals. But even taking their numbers as given, the estimated 10.7 million participants according to CBPP and 12.7-17.5 million from Levy would make the federal program by far the world’s largest employer, if thought as a single firm or entity.

Consider the striking chart below.

At the Levy report’s upper-bound estimate, the numbers employed would exceed the world’s nine largest employers combined. Even the CBPP’s lower estimate would only be marginally below the employment level of the world’s five largest employers combined.

When is it appropriate to privatize the work of public prosecutors? And does it make things better or worse when “cause” lawyering is at issue? As Jeff Patch reports at Real Clear Investigations, a project called the State Energy & Environmental Impact Center at New York University supplies seasoned lawyers to the offices of nine state attorney general offices, plus D.C. They serve there in such roles as special assistant attorney general while being paid by the NYU project, which is funded by and closely identified with former New York City Mayor Michael Bloomberg. The catch, which explains why the program is not likely to hold appeal for AGs in some other states: “Under terms of the arrangement, the fellows work solely to advance progressive environmental policy at a time when Democratic state attorneys general have investigated and sued ExxonMobil and other energy companies over alleged damages due to climate change.” 

Private funding of lawyers inside public prosecutors’ offices is not a new idea. Iowa’s AG office, for example, told Patch that it has employed legal talent from an American Bar Association-supported program. In another variation, it is not unusual for prosecutors to accept funding from the insurance industry for efforts to combat insurance fraud. Undergirding the political viability of these schemes is the (perhaps wobbly) premise that the state office is not farming out influence over politically or ideologically sensitive policy matters to outside groups that may have their own agenda.  

The AG offices participating in the program (Illinois, Maryland, Massachusetts, New Mexico, New York, Oregon, Pennsylvania, Virginia, and Washington state, as well as the District of Columbia) might plausibly argue that the projects they’re paying the Bloomberg embeds to work on are mostly ones they’d want to pursue zealously in any case, such as suing the EPA and other federal agencies over alleged lapses. Critics point to the ideologically fraught nature of the work and say the arrangement could violate some states’ ethics rules or generate improper conflicts of interest, as through an obligation to report activities back to the Bloomberg center. 

The spotlight on backstage doings at state AG offices arises from reports by Chris Horner of the Competitive Enterprise Institute based on public records requests that were fought tooth and nail by various AGs. (Besides the CEI report on attorneys general, Horner’s written a companion report on governors.) CEI is anything but a disinterested party in all this, of course, having been hit with a AG subpoena (later beaten back in court) over its supposedly wrongful advocacy on climate issues. That was itself part of a subpoena campaign targeting more than 100 research and advocacy groups, scientists, and private figures on the putatively wrong side of climate debates, which we and others decried at the time as a flagrant attack on rights protected by the First Amendment. 

Where Brexit negotiations are concerned, we have reached (as they say in Britain) “squeaky bum time.” The triggering of Article 50 on March 29th 2017 started a 2-year countdown for the UK and EU to negotiate a withdrawal agreement for a binding international treaty. Yet just 5 months from deadline, the EU’s position on Northern Ireland and a lack of domestic support for Prime Minister Theresa May’s desired long-term trading relationship mean a no deal Brexit in March remains a real possibility (the tweet linked here quotes Britain’s trade minister Liam Fox).

True, much of the withdrawal agreement has been long agreed. A transition period through to 31 December 2020 is planned to essentially keep the UK within the EU’s economic institutions (the single market and customs union), though reports suggest both sides might be willing to extend this for an extra year. Free movement of people would continue for this period, and the UK would pay £39 billion into the EU budget. Importantly, though Article 50 states that a withdrawal agreement must take account of the longer term post-exit relationship, this is not going to be achieved in time: the agreement would merely be accompanied with a joint, loose-languaged political declaration on the future framework.

But it’s here where difficulties have arisen, and most center around the Northern Irish border. Both sides have said from the start that, post-Brexit, they want to keep the border between the Republic of Ireland (an EU state) and Northern Ireland (part of the UK) free of physical infrastructure and associated interventions at politically-sensitive crossings. But making that commitment self-evidently necessitates a trade relationship. Given long-term trade arrangements will not be agreed in the withdrawal agreement, the EU has therefore insisted that the withdrawal deal itself contain backstop provisions to ensure the border remained open should another arrangement or trade deal incorporating not be agreed.

This is what led last December to the UK and EU agreeing in principle to a fudged “backstop” position on Northern Ireland. In vintage legalese, the text stated: “In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all-island economy and the protection of the 1998 Agreement.”

Given the UK government has said repeatedly that the UK would be leaving the EU customs union and single market, this text raised Brexiteer eyebrows. Yes, the UK government agreed this to kick forward future trade relationship talks, and in the hope it would not be ultimately necessary. But talk of full alignment left ambiguity, and the potential for the backstop itself to keep the UK locked into Brussels’ regulatory and customs orbit. However much the UK government insisted that this language did not mean regulatory harmonization, but instead merely achieving shared regulatory goals via detailed sanitary rules, customs procedures, and the Single Energy Market, the backstop left an uncomfortable feeling that the UK had fallen into a trap.

This was not helped when the EU then rejected proposed “technological solutions” and “away from the border checks” that the UK insisted could have avoided the backstop. The unease intensified when, from February, the EU and Ireland began proposing a backstop arrangement where Northern Ireland alone would remain within the EU single market and customs union to ensure a soft border. This was something out of kilter not only with the text but with the wishes of the Northern Irish Democratic Unionist party which props up the Conservative minority government.

This is all significant because Brexiteers fear now that the Northern Irish border has become the tail wagging the dog not just on the backstop, but on the potential future long-term trade relationship between the EU and UK. They fear the UK is being hoodwinked into a Brexit-in-name-only by threats of breaking up the UK through saying that only a soft Brexit can keep the Northern Irish border without physical infrastructure.

The Prime Minister Theresa May’s proposals for a longer-term trade relationship (known as the Chequers Plan) is Exhibit A. Rather than aiming for the best trade arrangements and then seeking to minimize disruption at the Irish border, the plan seems explicitly designed to keep the border as frictionless as possible, at the cost of an extraordinary loss of policy freedom. Chequers proposes a common rulebook between the UK and the EU on goods and agri-goods trade but not services, where fears of Brussels regulating the City of London alone without a UK vote were reason enough alone for exclusion. Non-regression-like clauses on environmental and labor laws would be included.  A complex facilitated customs arrangement would see the UK collect the EU’s tariffs on its behalf.

This deal has proven anathema to most Conservative Brexiteers, binding as it does the UK to EU goods regulation without voting power over it and stripping away the bargaining chip of goods regulation in making liberalising trade deals with third parties. They see Chequers as an unnecessary loss of sovereignty, and want Theresa May to “Chuck Chequers” and instead negotiate with the aim of a whole of UK FTA and practical solutions at the border.

Incidentally, the EU doesn’t like Chequers either. They rightly see it as cherry-picking parts of the single market, are suspicious of a foreign government collecting its duties and would prefer even tighter integration of lots of regulations (including commitments for full harmonization on labor and environmental laws), such that the UK cannot secure a competitive advantage. Political commentators in the know say Chequers is dead as far as the EU is concerned.

In the EU’s eyes, the preferred long-term options have always been a Canada-style free trade agreement, or maintained UK membership of the single market and a customs union (in essence, a political Brexit but not an economic Brexit). Most Brexiteers very much prefer the former, which comes with more regulatory and trade policy freedoms.

This brings us to the crux of the current political crisis. May’s government have thus far lined up with the EU (and against Brexiteer insistence otherwise) in stating that it’s impossible to solve the border problem satisfactorily through an ordinary UK-EU free trade deal and other practical solutions. They imply that with a Canada-style FTA, Northern Ireland alone would have to remain tied to EU economic institutions to avoid a hard border, effectively creating an economic border down the Irish Sea. Conveniently, May claims that only something like her Chequers plan can avoid this.

But with Chequers seemingly without much support at home or in the EU, the future relationship talks have effectively stalled. With so much uncertainty about it, the backstop agreement has taken center-stage, because de facto that could become the default relationship. And here Brexiteer fears have heightened. Since May insists no UK government would countenance Northern Ireland having different customs arrangements from Britain, she has proposed the whole of the UK remaining in a customs union-like arrangement as a backstop.

Earlier this year she suggested this would last for an extra year beyond transition (to December 2021) and Brexiteers are still keen on this kind of time limit. But the EU says that a backstop cannot be time-limited, because otherwise it’s not a backstop. Brexiteers winced this week when the PM’s position seemingly “evolved” in the EU’s direction, with her suggesting remaining in a customs arrangement as a backstop on a “temporary” but indefinite basis. These fears heightened with news that the EU believed there was not enough time to discuss a UK-wide backstop proposal, and insisting that the withdrawal agreement incorporate a “backstop to a backstop,” with a Northern Ireland-only customs arrangement should a full UK-wide agreement fail to be agreed.

For many Brexiteers, the major economic benefit of Brexit is the ability to conduct independent trade policy, cutting deals and setting tariffs. An indefinite customs arrangement threatens this. Given the EU would seemingly prefer the whole of the UK to remain within its economic institutions, a non-time-limited customs backstop provides little incentive for the EU to agree to a future comprehensive free trade deal the Brexiteers desire.

Combined with Chequers then, Brexiteers fear a huge sell out is on the cards. The UK government’s official position has always been that the country will leave the EU single market and customs union. But now both Chequers and the backstop risk are seen to keep the UK within these arrangements to varying degrees.

The result is a political crisis. The PM this week updated the house on the negotiations but could not provide assurances any customs arrangement backstop would be time-limited. She has since floated and then rowed back on extending the transition period, something that would see UK taxpayers pay for at least another year of EU funding, without settling the backstop issue.

As a result, everyone is unhappy. There is talk of Brexiteers dethroning May as a last gasp attempt to push for the Canada FTA-type deal the EU has offered. The DUP are threatening to derail the government’s domestic legislative agenda should the PM allow Northern Ireland to be treated differently. The hardline Remainers, meanwhile, are pressing for a second referendum on any withdrawal agreement May brings back.

With the clock ticking, and stakes rising, the prospect of no deal is therefore heightening. The EU has engineered a situation where in the long-term it insists either the UK must sign up to a backstop where Northern Ireland must be effectively economically annexed, or the UK must remain locked in the EU’s regulatory and customs embrace itself.

The Brexiteers (to my mind rightly) consider this unacceptable. Ignoring whether a change of Prime Minister or strategy is perceived as bad faith negotiating by the UK, it does not seem an extreme position to say that the EU should not have the right to dictate the economic breakup of a sovereign country, nor determine its domestic economic regulations. But at such a late stage and in such a febrile political environment, who knows where this multi-actor game of chicken ends?

Management practices in firms differ widely between countries according to research summarized by economists Nicholas Bloom and John Van Reenen.  The differences between well-managed firms and those that are poorly managed are significant and could help explain differences in Total Factor Productivity (TFP) between countries.  In the field of economic history, economists Louis Putterman and David N. Weil (henceforth P&W) found that the length of time that a population of a country has lived with a centralized state and with settled agriculture (henceforth, Deep Roots) are powerful predictors of their GDP per capita today.  Perhaps there is a relationship between firm management practices by country and that country’s Deep Roots?

P&W tested their Deep Root’s hypothesis by creating a matrix of contemporary populations of each country based on their population’s ancestral origin in the year 1500.  They use a variable called state history that measures how long a country has lived under a supra-tribal government, the geographic scope of that government, and whether that government was controlled by locals or by a foreign power.  Their second variable is agricultural history and it measures the number of millennia that have passed since a country transitioned from hunting and gathering to agriculture.  P&W then combined the matrices of ancestry with the Deep Roots variables to show how long each national origin group was governed by a centralized state and how long they had settled agriculture.  The Deep Roots score varies dramatically between peoples and locations.  P&W’s findings stand in contrast to those that explain economic development and GDP per capita as the ultimate result of geography, institutions, or other conventional explanations.

Ryan Murphy and Alex Nowrasteh tested whether the Deep Roots variables can explain differing GDP per capita by U.S. state in a paper published in the Journal of Bioeconomics (working paper available here).  They found that P&W’s core result of a statistically significant and positive relationship between Deep Roots variables and GDP per capita does not hold at the subnational level in the United States.  This argument is related to immigration because new immigrants bring different state history and agricultural history scores with them, eventually affecting the Deep Roots of their new country.  Whether that matters for economic growth is up for debate.  

Since Deep Roots are correlated with GDP per capita globally and some economists think that they can explain economic development, firm management practices should probably also be correlated with Deep Roots.  To test this, we ran simple linear OLS regressions testing the relationship between firm management practices and a country’s state and agricultural history.  Our standard errors are robust to heteroskedasticity.  We controlled for the same variables that P&W did as well as the economic freedom score.  We downloaded the firm management practices dataset for 34 countries here

We found precisely nothing interesting related to the Deep Roots (Table 1).  Neither state history nor agricultural history is correlated with better management practices.  However, economic freedom and absolute latitude are positively correlated with state history and agricultural history.  On the positive side, our R-squared is 0.72, so the variables that we included can explain 72 percent of the variation.   

There are a lot of reasons why this could be.  We only had management score data for 34 countries, collinearity was rampant, cross sections are limited, or other explanations that we haven’t considered.  Regardless, there is no evidence here that there is a link between Deep Roots and firm management practices.  

 

Table 1

Firm Management Practices, State History, and Agricultural History

Millions of Americans move between states each year. These migration flows are influenced by numerous factors including job opportunities, climate, and housing costs. Interstate migration is also influenced by state and local taxes, as discussed in this recent study.

Internal Revenue Service data show that 2.8 percent of households moved to another state in 2016. The map below shows the net patterns of movement. People are leaving the red and purple states for the blue states.

The ratio of domestic gross in-migration to gross out-migration is shown for each state. In 2016, New York gained 142,722 households and lost 218,937 for a ratio of 0.65. Florida gained 307,022 households and lost 211,950 for a ratio of 1.45.

States losing population to other states have ratios of less than 1.0 and states gaining population have ratios of more than 1.0. People are generally moving out of the Northeast and Midwest to the South and West, but they are also leaving California, on net.

Here are some of the regional patterns:

  • The Northeast. New Hampshire enjoys net in-migration. It is a low-tax state with no individual income tax. Higher-tax Connecticut, Massachusetts, Rhode Island, and Vermont suffer net out-migration.
  • The Midwest. South Dakota enjoys modest net in-migration, while its higher-tax neighbors Iowa, Minnesota, and Nebraska suffer net out-migration. South Dakota is a low-tax state with no income tax. Neighbor Wyoming has net out-migration overall but has substantial net in-migration among high-earning households. Wyoming has no income tax.
  • The Southeast. Kentucky has suffered net out-migration for years, while its neighbor Tennessee has enjoyed net in-migration. Kentucky is a relatively high-tax state, while Tennessee is a low-tax state with no individual income tax.
  • The West. The largest destinations for out-migration from high-tax California are Texas, Washington, and Nevada—all low-tax states with no income taxes.

In this study, I divide the states between the 25 highest tax and 25 lowest tax, with taxes measured as state and local individual income, sales, and property taxes as a percent of personal income. In 2016, 286,431 households (with almost 600,000 people) moved, on net, from the 25 highest-tax states to the 25 lowest-tax states. Of the 25 highest-tax states, 24 of them had net out-migration in 2016. (Maine was the exception).

The 2017 federal tax reform law will likely intensify the patterns shown in the map of people moving from high-tax states to low-tax states. The law doubled standard deductions and capped state and local tax deductions. Those changes will reduce the number of households deducting state and local taxes from 42 million in 2017 to about 17 million in 2018. Those households will feel a larger bite from state and local taxes and become more sensitive to tax differences between the states.

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. Trump appears to call for defense spending cut,” Aaron Mehta. This week’s Cabinet meeting went a bit differently than most. The President, apparently due to worry about the country’s rising debts and deficits, issued a call for every federal department to cut it’s spending by five percent in Fiscal Year 2019 (FY19). Reporters understandably rushed to ask President Trump if this initiative would include defense spending; while he doesn’t seem to want the full five percent, Trump commented that the budget next year would be “around $700 billion” (a 2.3 percent cut). 
  2. Air Force B-21 Raider Long Range Strike Bomber,” Jeremiah Gertler. The Congressional Research survey released an update on the still-classified B-21 program. While many details remain unavailable to the public, this report discusses  the status of the program and includes useful information on projected research and development funding. 
  3. Air and Missile Defense at a Crossroads,” Mark Gunzinger and Carl Rehburg. The Center for Strategic and Budgetary Alternative released a new report today on adapting missile defense for protecting overseas bases, and recommendations to move the portfolio in that direction. 
  4. Senior defense committee Democrat wants to stop U.S. weapon sales to Saudi Arabia,” Tony Bertuca. Senator Jack Reed, the ranking Democrat on the Senate Armed Services Committee (SASC), said publicly that all sales of offensive weapons to Saudi Arabia should be blocked until a thorough investigation into the death of journalist Jamal Khashoggi can be undertaken. 

The U.S. Treasury reports that the federal budget deficit was $779 billion in fiscal 2018. The deficit is caused by spending in excess of tax revenues and is financed by borrowing from foreign and domestic creditors.

Federal spending in 2018 was $4,108 billion and tax revenues were $3,329 billion, so Congress financed 19 percent of its spending with borrowing. Did taxpayers—who will ultimately bear the burden—really consent to that extra debt-financed spending? It is like Dad leaving the kids some cash to buy pizza, and then coming home to find that they also used his credit card to rack up charges on the Internet.

Unless the politicians grow up and start making reforms, the deficit will likely grow from $1 trillion in 2019 to more than $2 trillion a year a decade from now.

Annual deficits are piling onto accumulated federal debt held by the public of $16 trillion. That is $127,000 for every household in the nation. Compared to the size of the economy, today’s federal debt is, by far, the highest in our peacetime history.

Why is soaring government debt so worrying?

  1. Spending Induced. Most federal spending is for subsidy and benefit programs, not for activities that increase productivity. Subsidy and benefit programs distort the economy and generally reduce overall output and incomes. Those distortions occur whether spending is financed by debt or current taxes. But the availability of debt financing induces policymakers to increase overall spending, which at the margin goes toward lower-valued activities.
  2. Tax Damage Compounded. When taxes are extracted to pay for government spending, it induces people to change their working and investing activities, which distorts the economy and reduces growth. When spending is financed by borrowing, the tax damage is pushed to the future and compounded with interest costs.
  3. Investment Reduced. Government borrowing may “crowd out” private investment, and thus reduce future output and incomes. Economist James Buchanan said, “By financing current public outlay by debt, we are, in effect, chopping up the apple trees for firewood, thereby reducing the yield of the orchard forever.” The crowd out will be reduced if private saving rises to offset government deficits. But the CBO says, “the rise in private saving is generally a good deal smaller than the increase in federal borrowing.” Government debt may also deter investment through expectations—businesses will hesitate to invest if rising debt creates fears of tax increases down the road.
  4. Borrowing from Abroad. A decline in private investment due to government borrowing may be avoided if capital is attracted from abroad. Indeed, huge federal borrowing has been facilitated by global capital markets, and today more than 40 percent of federal debt is held by foreigners. Borrowing from abroad may prevent a fall in domestic investment but does not prevent the shifting of costs to future taxpayers. As government debt rises, more of our future earnings will be taxed to pay interest and principal on the government’s debt to foreigners.
  5. Macroeconomic Instability. CBO warns that a “large and continuously growing federal debt would … increase the likelihood of a fiscal crisis in the United States.” Experience shows that high levels of government debt tend to reduce growth and increase financial fragility. In their study of financial crises through history, Carmen Reinhart and Ken Rogoff concluded, “again and again, countries, banks, individuals, and firms take on excessive debt in good times without enough awareness of the risks that will follow when the inevitable recession hits.” Government debt, they found, “is certainly the most problematic, for it can accumulate massively and for long periods without being put in check by markets.”

Sadly, with regard to the federal budget, policymakers seem to be in la-la land, a “euphoric dreamlike mental state detached from the harsher realities of life.” They dream about spending on their favorite programs and act as if there won’t be harsh consequences to their profligacy. But there will be. Future living standards are being eroded as huge costs are being pushed forward, and the rising debt will eventually spark a damaging financial and economic crisis.

The focus of the Trump administration’s trade policy to date has been on renegotiating existing trade deals (with a mix of minor liberalization and modest new protectionism), putting tariffs on a wide range of imports using flimsy justifications, and engaging in a high-profile trade war with China. By contrast, it has put very little effort into pushing for significant new trade liberalization.

That may be about to change. The U.S. Trade Representative’s Office has just sent letters to Congress formally notifying the administration’s intent to enter into trade negotiations with the EU, Japan, and the UK. Cato scholars have called for exactly these negotiations (see herehere, and here, and much more detail here).

There is a lot of work ahead, as these negotiations won’t be easy. They would have been easier if the administration had not imposed “national security” tariffs on imports of steel and aluminum from these very same trading partners. Nevertheless, almost two years into the Trump administration, there is finally a glimmer of hope that there could be some trade liberalization coming.

Over the weekend, Washington Post investigative journalist and Cato alumnus Radley Balko published a devastating report on a drug unit in Little Rock, Arkansas. The squad has been conducting a high number of no-knock raids on drug suspects on evidence supplied by a less-than-reputable criminal informant. As Balko notes, that the police quite literally signed off on some of the informant’s apparent lies is one of myriad problems he uncovered in his investigation.

There are many shocking aspects to Balko’s story, but in the end, much of what he found in Little Rock reflects a broader problem of police reliance on informants to fight the drug war. Today, I published a piece in Democracy Journal explaining the many ways informants corrupt our justice system and policing itself. An excerpt:

The rules for using confidential (also called “criminal”) informants [CIs] in criminal investigations vary from jurisdiction to jurisdiction, but generally speaking, employing CIs introduces three systemic flaws into the criminal justice system. First, the use of confidential informants definitionally requires secrecy and opacity, which shields CIs and officers alike from sufficient oversight and accountability. Second, the informant system relies on bad inputs—namely, drug-addicted individuals and other people immersed in criminal activity to act as agents of the government—and thus effectively becomes a subsidy for criminal behavior. Third, the use of confidential informants creates some bad incentives for law enforcement actors and the CIs themselves, which skew toward case production and away from public safety and security. Taken together, and in the context of our everyday justice system, these flaws produce an array of bad individual and public policy outcomes while providing only superficial benefits for law enforcement.

Coincidentally, I recently testified before the Arkansas Advisory Committee to the U.S. Commission on Civil Rights in Little Rock. The committee invited me to talk about how police practices contribute to the pronounced racial disparities in mass incarceration. Among other things, my testimony included a criticism of Little Rock police using invasive, neighborhood-based pretextual traffic stops to quell an uptick in violence. Such methods fuel community resentment of the police and have not been shown to reduce crime in the process.

You can read Balko’s piece in full here. My commentary on informants can be found here. And the written version of my testimony in Little Rock can be found here.

Earlier this week, Leslie Stahl and 60 Minutes got into the subject of global warming with President Trump.  

Her question, “Do you still think climate change is a hoax” followed background on recent hurricanes Michael, Florence, Maria, and Harvey.

The President’s response was “I think something’s happening. Something’s changing and it’ll change back again. I don’t think it’s a hoax, I think there’s probably a difference. But I don’t know that it’s manmade.” 

This is a huge walk-back from his old rhetoric, which was enough to make scientists like me cringe. 

And in the context of hurricanes, his comment is also is consistent with what the National Oceanic and Atmospheric Administration’s Geophysical Fluid Dynamics Laboratory (GFDL) said in its September 20 statement titled “Global Warming and Hurricanes”: “In the Atlantic, it is premature to conclude that human activities–and particularly greenhouse gas emissions that cause global warming–have already had a detectable impact on hurricane activity.”

It is noteworthy that GFDL’s statement was in an update, and that “Global Warming and Hurricanes” has said the same about Atlantic hurricanes for years, long predating the Trump Administration.

Stahl then went on to Greenland.  Here’s the relevant transcript:

Lesley Stahl: I wish you could go to Greenland, watch these huge chunks of ice just falling into the ocean, raising the sea levels.

President Donald Trump: And you don’t know whether that would have happened with or without man. You don’t know.

Another reasonable response. For reasons having nothing to do with humans, ice-covered areas in Greenland endured 6,000 years of warming centering around 118,000 years ago that, in terms of integrated heating, was larger than anything humans can do to it. Yet it only lost about 30% of its ice. There were certainly more “huge chunks of ice just falling into the ocean raising sea levels” back then, with no human influence on climate.

It’s also true that the current high-latitude north polar warming is largely (but not completely) consistent with global warming theory.

Finally, they got into a “he said, he said” discussion about climate scientists’ various viewpoints.  Here’s how it ended:

Lesley Stahl: Yeah, but what about the scientists who say it’s worse than ever?

President Donald Trump: You’d have to show me the scientists because they have a very big political agenda, Lesley.

Lesley Stahl: I can’t bring them in.

President Donald Trump: Look, scientists also have a political agenda.

No, 60 Minutes cannot be expected to bring in hundreds of scientists on either side of this debate to investigate whether or not they have a political agenda.  But Al Gore may have been on to something in his comments on the recent UN report claiming temperature increases of a mere 0.6°C will be catastrophic.  He said it was “torqued up a little bit, appropriately – how [else] do they get the attention of policy-makers around the world”[?].

Hmmm. Seems like a political agenda.

This month the Washington, D.C. Council voted unanimously in favor of preliminary approval of a bill that has the potential to substantially restrict Airbnb and other short-term rentals in the District. The bill, which must pass a final vote before being officially approved, creates new licensing requirements and imposes new limits on who can rent out their spare rooms or homes and for how long. Most significantly, the legislation would only permit hosts to offer short-term rentals at their primary residence and to rent out their property for a maximum of 90 days a year while not present at their home.

The bill attempts to walk a fine line between fulfilling the promises of Airbnb and similar short-term rental companies and addressing the concerns of a coalition of community activists, hotel lobbyists, and hotel-worker unions. On the one hand, Airbnb—like Uber and some other “disruptors”—allows the middle-class to turn previously underutilized consumer durables and assets into sources of extra income. On the other hand, the groups calling for increased restrictions complain that Airbnb reduces the housing supply for long-term tenants and thus raises housing prices, has allowed commercial hotel operators to skirt regulations and taxes, and disrupts communities and neighborhoods with an influx of noisy strangers.

The benefits of Airbnb to some homeowners are clear, but the complaints of the bill’s proponents aren’t entirely baseless. Community activists argue that Airbnb exacerbates housing affordability issues. As I recounted in my working paper review in the winter 2017-2018 issue of Regulation, economists Kyle Barron, Edward Kung, and Davide Proserpio examined the impact of short-term rentals on housing prices and rent and found that, though the effect is not zero, it is small: a 1 percent increase in Airbnb listings causes a 0.018 percent increase in rents and a 0.026 percent increase in house prices.

Hotels contend that Airbnb, despite cultivating an image of middle-class owners earning extra income from renting out a spare bedroom, has allowed commercial operators to circumvent taxes and health and safety regulations. They back up this claim by citing that the vast majority of Airbnb revenue comes from entire home rentals and argue that regulations are needed to level the playing field. Browse through some of the postings on Airbnb and it is clear that these commercial operators aren’t fictitious (see this host, for example, whose description overtly describes themselves as a “full-service relocation management agency” and, with 79 available units in D.C., is the largest host in the city).

But a close look at the same hotel-lobby funded research used to justify the regulations shows that commercial operators are not as widespread as they portray: over 90 percent of entire home rentals in D.C. are offered by hosts with only one listing. That number also discounts middle-class D.C. residents who may rent out a starter home on Airbnb along with their new home, and thus technically offer two units for short-term rentals but can hardly be considered commercial operators.

Finally, some District residents complain about Airbnb and the strangers it brings into their neighborhoods and apartment buildings. These residents’ concerns about congestion, noise, and safety are probably overstated, but not unfounded. (In one egregious case, for example, one homeowner in the affluent Dupont Circle neighborhood of D.C. was renting his house out for large parties, including a concert with rapper Ja Rule.)

These issues are what is at the core of the short-term rental bill and zoning rules more generally: managing urban externalities. Unlike in rural areas, where neighbors can more easily ignore each other, in an urban environment what people do and how they live affects their neighbors because of proximity and density. Parking, noise, and land-use ordinances and regulations are attempts to create public expectations about behavior such that like-minded people become proximate to each other.

The expectations that are created are both on and off the books. While the norms in Dupont Circle create a quiet and peaceful neighborhood—and a premium for that peace and quiet—someone moving into fraternity row at George Washington University should expect a different decibel level and neighborhood flavor. As long as everyone is aware of these norms before they move in, and as long as everyone follows the norms while they live there, there are no issues.

The problems arise when people want to be different. Hosting a Ja Rule concert in Dupont violates both zoning laws and, more importantly, the established norms of the neighborhood. As it stands, someone who wants to be different can either break the rules and hope they are ignored, or lobby for change at city hall and hope for preferential treatment. But I propose a third option: buy the right to be different.

People who live next door to the concert, or even just a typical Airbnb, may not like the noise and strangers, but what if they got paid? Currently, a discontented neighbor’s only option to address their complaints is to ask the city government, through the police or enforcement of zoning laws, to use force. Instead, create a platform for rights exchange, which, as long as a price can be agreed upon, would give homeowners the right to rent their house on Airbnb providing they appropriately reimburse their neighbors for any disruption or inconvenience. 

What this platform would look like is unknown, and many questions, such as how it would handle holdouts, need to be addressed, but this sort of rights exchange is not unheard of. In the D.C. area, for example, rising home prices and demand for housing over the past 30 years created the need for denser housing developments. In Northern Virginia, which was once dominated by single-family homes, for 15 years between the late 1980s and early 2000s developers bought up neighborhoods for redevelopment, often paying homeowners more than double the listed price of their houses. Even more strikingly, a polluting coal power plant bought an entire town in Ohio for $20 million.

In both cases, the opportunity for exchange allowed the land to be used most efficiently while compensating those who had initial property rights. Though short-term rentals are on a smaller scale, the principles remain the same. Whether someone wants to rent their house on Airbnb or host a Ja Rule concert they should have the right to do so as long as they properly reimburse their neighbors for the externalities they create.

Written with research assistance from David Kemp.

School choice critics often resort to fearmongering. For example, a Superintendent of Public Instruction in North Carolina contended that citizens “could be in dangerous territory” with the expansion of private school vouchers. After all, she argued, “there is nothing in the [voucher] legislation that would prevent someone from establishing a school of terror.”

The only problem is that the facts don’t support these scare tactics.

My just-published study examines whether fluctuations in the private share of schooling affect national stability within 177 countries around the globe over 16 years. The analysis does not detect contemporaneous effects of private schooling on any of the five measures national stability. However, I find evidence indicating that increases in private schooling improve measures of perceived control of corruption and rule of law – provided by the World Bank – when students become adults.

As shown in Table 1 below (and in the original study), a one-percentage point increase in the private share of schooling enrollment is associated with around a 0.01-point increase in both the perceived control of corruption and the perceived control of the rule of law even after controlling for changes in factors such as GDP, population, and government expenditures.

Table Notes: p-values are indicated in parentheses. * p < 0.05, ** p < 0.01, *** p < 0.001. All coefficients are average marginal effects. All models use year and country fixed effects with time-variant controls added and a 7-year lag of the private share of schooling enrollment. Column 5 does not show any results for Coup d’état because the dependent variable did not vary. When the instrumental variable employed by DeAngelis and Shakeel (2018) and DeAngelis (2017)—short-run fluctuations in the demand for schooling—is used, the lag coefficient for Rule of Law remains statistically significant; however, the lag coefficient for Corrupt Control becomes statistically insignificant with a p-value of 0.11.

 

This study doesn’t provide any evidence to suggest that private schooling is dangerous to societies around the world. If anything, it appears that private schooling improves the character and citizenship skills necessary for social order. And this study isn’t alone. None of the eleven rigorous studies on the topic find that private school choice reduces social order in the U.S. The majority of these studies actually find positive effects on civic outcomes. But why?

Private schools must cater to the needs of families if they don’t want to shut down. And, of course, families want their children to become good citizens. But government schools remain open whether they teach kids character skills or not. Perhaps supporters of the status quo should consult the evidence – and basic economic theory – before resorting to scaremongering.

The federal government imposes a mandate to blend corn ethanol and other biofuels into the nation’s gasoline. This “renewable fuel standard” or RFS produces a range of negative effects, as discussed in this study at DownsizingGovernment.

The “10% Ethanol” sticker you see at the gas station indicates that the government is subverting your free choice and raising your driving costs to benefit corn farmers. The government has decided that corn farmers are more important than you are.

President Trump has supported the ethanol mandate, and he recently acted to increase the harm by allowing greater use of a 15 percent ethanol blend.

A Washington Post editorial today describes why that move is misguided:

For more than a decade, the United States has pursued the foolhardy energy policy known as the Renewable Fuel Standard, or RFS. Thanks to legislation passed by a Democratic Congress and signed into law by a Republican president, George W. Bush, in 2007, the RFS illustrates the sad-but-true principle of Washington life that bipartisanship is no guarantee of wisdom. In a nutshell, the RFS required the nation’s petroleum refiners to blend ever-increasing quantities of biofuels, chiefly ethanol, into gasoline, purportedly to promote energy independence and fight climate change.

Never mind that the United States has meanwhile become a major oil exporter, due to a production boom. Never mind that the environmental harms of ethanol arguably outweigh its benefits, because it takes massive amounts of energy to distill ethanol from corn — and massive amounts of fragile farmland to grow that crop. Never mind that diverting resources into corn production for ethanol raises the price of food. Never mind all that, because 39 percent of Iowa’s corn crop goes to create nearly 30 percent of all U.S. ethanol. And Iowa is a swing state with six crucial electoral votes and a first-in-the-nation presidential caucus; whatever Iowa wants, Iowa gets, from politicians of both parties.

Hence President Trump’s announcement, on the midterm-election campaign trail in Iowa, that he would, in effect, double down on this decreasingly justifiable policy. Mr. Trump declared that the Environmental Protection Agency will draft regulations allowing the year-round sale of motor fuel containing 15 percent ethanol, as opposed to the 10 percent limitation in effect for several months a year because of air-pollution concerns related to summertime atmospheric conditions. This would incentivize gas station owners to install pumps capable of delivering the fuel, thus boosting ethanol sales.

The point is to rescue Iowa corn farmers from adverse market conditions, which include lower prices because of retaliation from trading partners against Mr. Trump’s tariffs. The more fundamental problem is that, at its inception, the RFS assumed that ever-rising U.S. gas consumption would permit refiners to absorb huge amounts of ethanol. In fact, the year after Congress adopted the bipartisan RFS legislation, the U.S. economy went into a recession, causing a collapse in the number of miles Americans drove and the amount of fuel consumed per capita. Only last year did consumption return to pre-recession levels.

Refiners face high and rising costs when they are forced either to mix more ethanol into their motor fuels or to buy offsetting credits known, obscurely, as Renewable identification numbers (RIN). Plagued by volatility and manipulation, the market for RIN has turned into a major headache for smaller refiners, which often seek waivers of the ethanol blending requirement. The entire system adds enormous bureaucracy and complexity to the fuel market, with little or no benefit to consumers. E15, as the 15 percent ethanol blend is known, might cost less per gallon, but because of its lower energy content, motorists would probably get poorer mileage and have to fill up more often.

The petroleum industry has promised a lawsuit to stop Mr. Trump’s plan. While we hesitate to take sides between agribusiness and Big Oil, in this instance public policy clearly favors the latter.

Sears Roebuck & Co. became the most fabled retailer in American history as the pioneer of catalogue merchandising, an innovation that revolutionized small-town life. Its then-visionary management followed up with stand-alone stores that long served as landmarks in their communities, developing brands and business lines notable in their own right such as Craftsman, Kenmore, Discover Card, and Allstate Insurance, most of which are now independent. 

In the first half of the 20th century a whole generation of antitrust and competition laws attempted to restrain the rise of chain stores, with their perceived advantages in negotiating with suppliers. “One of the dumbest laws,” as Cato senior fellow Doug Bandow has called it, was the Robinson-Patman Act, amending the Clayton Antitrust Act in 1936, which (employing vague, opaque language) criminalized many arrangements in which chain stores like Sears obtained quantity discounts from manufacturers. Per one reference work, Robinson-Patman was meant to respond to “the growth of chain stores such as A&P and Sears, Roebuck,” in service of the interests of independent retailers and wholesalers. “The United States Wholesale Grocers Association drafted the original bill,” notes another source. 

None of which succeeded in holding back the logic of marketplace competition: under the Reagan administration’s leadership of the U.S. Department of Justice’s Antitrust Division, Robinson-Patman fell into disuse and the discount revolution gathered force. This morning, following a long decline, Sears filed for bankruptcy. (A&P, once demonized as a business juggernaut destined to swallow up grocery retailing, went out of business in 2015 after closing its remaining stores).  

In a column worth reading through, Joe Nocera at Bloomberg draws a lesson for policymakers about capitalism’s ferment of creative destruction. “The next time you hear somebody say that the dominance of Walmart or Amazon or Facebook can never end, think about Sears. It can — and it probably will.” 

In 1989, Larry Hatfield fudged his employment records to get some extra money from the Railroad Retirement Board. He was caught and pled guilty to the federal crime of making a false statement, and was sentenced to a fine and (at the government’s recommendation) no prison time. Since then, Hatfield has lived his life without incident, incurring nary as much as a parking ticket. He doesn’t fight, do drugs, or cause problems. Hatfield has lived as a completely law-abiding citizen for decades.

Hatfield’s neighborhood, however, has changed for the worst, so he wants to own a firearm to defend himself in his home. But the intersection of an odd federal law—18 U.S.C. § 922(g)(1)—and the ever-expanding idea of what a “felony” is has seen his right to keep and bear arms stripped away. That old conviction for lying to the Retirement Board now restricts his right to armed self-defense. While his conduct in 1989 was not upstanding, permanently stripping Hatfield of his core Second Amendment right seems an excessive punishment—one that puts the government in the interesting position of having argued that Hatfield is both so non-dangerous so as to have been recommended zero days in prison, but so dangerous that he can never be trusted with a gun.

Hatfield sued in federal court and won. The district judge agreed that permanently banning all felons—whether violent or not—from owning firearms was unconstitutional. The government has appealed that ruling to the Chicago-based U.S. Court of Appeals for the Seventh Circuit. Because the Second Amendment applies, on its face, to all Americans, Cato has filed a brief supporting Hatfield. Across-the-board felon disarmament is not only unconstitutional as applied to Hatfield—a non-violent felon who served no prison time—but with respect to all non-violent felons.

There is no longstanding precedent supporting the government’s position. In fact, Congress enacted a provision restoring gun rights to felons that don’t pose a threat to public safety, indicating a tacit acceptance that “felon” as a category is excessively broad in relation to the government’s stated purpose of protecting the public. Section 922’s operation as a categorical elimination of rights for a broad class of people is both beyond what was historically acceptable and without a meaningful tie to public safety.

The excessive breadth of modern felonies—including things as irrelevant to public safety as improper packaging of lobsters—unconstitutionally removes many individuals’ rights to self-defense. These laws also hurt minorities and the poor, the people most likely to become victims of crime and receive the least police assistance.

In Hatfield v. Sessions, the Seventh Circuit should uphold the lower court’s ruling and find the permanent removal of Hatfield’s right to defend himself unconstitutional.

Saudi Arabia has a big problem on its hands this week. Despite funneling significant resources into lobbying efforts and U.S. congressional campaigns, the kingdom has found itself in a pickle that it cannot seem to easily extricate itself from: the disappearance of Jamal Khashoggi. 

For years, Saudi Arabia’s war in Yemen has drawn significant criticism for their strategy and tactics. The naval blockade has their smaller neighbor grappling with a devastating famine and a dearth of medical supplies and humanitarian aid. The Saudi’s air campaign has also proven deeply problematic—either from their poor aim or amoral choice of target. 

International critiques seemed to reach a crescendo last month after the Saudi’s mistakenly bombed a school bus full of children—killing 26 and injuring 19 Yemeni kids. European nations issued statements that they would halt weapons shipments to the kingdom for the foreseeable future due to the incident, but many of those nations (including Spain and Germany) did an abrupt U-turn later in the month and proceeded with the sales. 

Some American policymakers have also tried to halt weapons sales to the nation over the past two years. There have been two outright votes on the matter led by bipartisan, bicameral coalitions—both votes narrowly defeated. Saudi Arabia’s role in Jamal Khashoggi’s disappearance has created a pivotal moment for the effort led by some in Congress to untangle the United States from Saudi crimes. 

Make no mistake—this change is not out of the blue—it’s reaching critical mass. The champions of previous amendments, including Sen. Rand Paul, Sen. Bernie Sanders, Sen. Chris Murphy, and Sen. Mike Lee, now have powerful policymaker allies that had been previously opposed to their efforts.  

But it should never have taken the disappearance of a Washington Post journalist to reach critical mass. Saudi Arabia has a staggering history of involvement in human rights concerns in Yemen that should have been enough momentum to stop and question the current scope of defense exports flowing into the country. The evidence that, at the very least, selling weapons to the country was a risky endeavor has been clear for years.

On the Risk Assessment Index, a comprehensive measure meant to objectively measure the risks of negative consequences flowing from American arms sales to particular countries, Saudi Arabia scored a 12 on the scale of 5 (lowest risk) to 15 (highest risk). The overall measure was created from making one unique composite score for each nation from the Fragile State Index, Freedom House Index, U.S. State Department’s Political Terror Scale, Global Terrorism Index, and the UCDP/PRIO Armed Conflict Database. 

While President Trump may tout the economic benefits of weapons exports, Congress has a responsibility to also consider the foreign policy implications of continuing their support. As I wrote recently in the Wall Street Journal,

 

The U.S. makes arms-sales decisions under legislative restrictions Mr. Benard doesn’t address. The 1976 Arms Export Control Act creates a directive to ensure that American-made weapons don’t spark arms races, support terrorism, or enable human-rights violations abroad. These aren’t “worries” or “aversions.” It’s the law.

 

The signs have been clear for a while. The smartest move for policymakers would be to at least halt deliveries to the kingdom until Khashoggi’s disappearance can be thoroughly investigated, and to use that time to seriously evaluate the trade-offs that come from selling weapons to Saudi Arabia. 

Writing in Project Syndicate, Stephen Roach, former chief economist for Morgan Stanley, declares the U.S. economy’s foundations fundamentally unsound:

“America’s net national savings rate – the sum of saving by businesses, households and the government sector – stood at just 2.1% of [gross] national income in the third quarter of 2017.  That is only one third of the 6.3% of the average that prevailed in the final three decades of the twentieth century… America… is saving next to nothing.  Alas, the story doesn’t end there. To finance consumption and growth, the U.S. borrows surplus saving from abroad to compensate for the domestic shortfall.  All that borrowing implies a large balance of payments deficit with the rest of the world which spawns an equally large trade deficit.”   

This alleged “savings crisis” has popped up periodically since the 1980s when there’s a Republican in White House, such as 2006 when I wrote about it.

Roach believes it “important to think about saving in ‘net’ terms, which excludes the depreciation of obsolete or worn-out capacity in order to assess how much the economy is putting aside to fund the expansion of productive capacity.”  

Dividing net savings by gross national income subtracts a semi-arbitrary estimate of depreciation from the numerator but not from the denominator. Dividing net by gross shrinks the resulting savings/income ratio. For Roach to suggest that more net savings could in any sense pay for more “consumption and growth” is misleading at best.  Don’t expect a discount on a new car because you hope to pay with net savings, after subtracting estimated depreciation.

The amount of money needed for new plants and equipment is gross, not net. And it is the dollar gap between gross investment and gross saving that needs to be financed by attracting foreign investment.  Mr. Roach calls foreign investment in U.S. equity (stocks) or real property “borrowing,” but that’s not how we describe the same investments if made by a U.S. resident.

The blue line in the first graph shows gross savings as a percentage of gross national income (GNI). The red line shows gross private domestic investment as a percentage of GDP, which is quite similar to GNI (GDP excludes income of foreigners spent in the U.S. and remitted income of Americans living abroad).  

The dotted green line is net savings divided by gross income – the extraneous ratio that worries Mr. Roach.  The green line appears to fall much more than the blue line simply because estimated depreciation rose from 12.3% of national income in 1969 to 15.9% in 2017 – as the capital stock shifted from structures to rapidly-depreciating high-tech. Because rising depreciation estimates are subtracted from saving yet added to income, the downward tilt of the green line is exaggerated by the oddity of dividing net savings by gross income. 

A declining net savings rate since the mid-1960s did not thwart fixed investment, though recessions always do.  Real net domestic fixed investment nearly tripled from $379.9 billion in 1983 (in 2009 dollars) to over $1 trillion by 2005-2006, and has again been heading up since the 2008-09 recession.

In the second graph, the ups and downs in the net savings rate (green line) do not track or explain the movements in net exports (exports minus imports). The U.S. runs a capital surplus and current account deficit when the economy is growing briskly.  Trade deficits shrink just before, during and right after recessions.  

When previous “net savings” anxieties appeared, they were used as a rationale for raising taxes.  In accounting, unlike economics, it sounds simple to raise national savings by reducing the government’s negative savings (budget deficits).  If we carelessly assume that higher taxes have no bad effects on the economy or private savings, budget deficits would then fall with higher taxes and national saving (the sum of public and private saving) would rise.  In this simplistic bookkeeping, more taxes are defined as being identical to more savings.     

There are big problems with assuming a $100 million tax-financed cut in the deficit equals a $100 million increase in national savings.  One is that politicians’ favorite targets for new taxes are savers and savings – retained corporate profits, dividends, interest, capital gains and high incomes in general.  If successful firms and families pay more in taxes, they’ll have less to save.

But the biggest problem with assuming smaller budget deficits add to national savings is that it is rarely true.  Smaller deficits (particularly surpluses) are frequently offset by lower private savings.  

The last graph compares recent changes in government savings (red line) with changes in private saving (blue) in billions of 2009 dollars.  When the red line falls sharply (2000-2002 and 2006-2009), that indicates a rising budget deficit.  Each time the red line fell, however, the blue line rose nearly as much – leaving total national saving little changed. Conversely, when the deficit was greatly reduced from 2011 to 2014, private savings was greatly reduced too, with little net effect on total public and private saving.

This inverse relationship between public and private savings is not unique to the United States, nor to the last 30 years.  In “A Reconstruction of Macroeconomics” (1992), I displayed graphs for the U.K., Sweden, Norway, and Japan to show the household savings rates fell dramatically (sometimes into negative territory) when these countries moved from budget deficits to surpluses for a few years in the 1978-92 period.  This is consistent with Ricardian Equivalence (taxpayers regard more national debt as their own, so they save to pay more future taxes), but perhaps also consistent with simpler cyclical explanations (people save more in recessions to rebuild lost wealth, and do the opposite in boom times).

We do not live in a closed economy, where new investment might have to be financed from flows of new domestic saving rather than from stocks of appreciated assets.  Global capital finds investment opportunities around the world, and foreign firms and investors find many of the best opportunities in the USA. More capital is better than less, and a dollar is a dollar.

Since the purpose of saving is to add to wealth, the best measure of saving is the addition to wealth.  In the first quarter of 2018, household net worth was a record 685% of disposable income according to the Federal Reserve – up from 548% six years earlier.   When the value of accumulated wealth rises that much, annual additions to the stockpile (saving) become far less urgent or significant.

Dire warnings of a looming savings crisis have been reported many, many times before, always in ways that are agitated, confused, mistaken and irrelevant.

The net savings rate does not explain or predict investment, trade deficits, interest rates, or anything else worthy of concern.  

More than 50 million Americans hold trillions of dollars in 401(k) accounts. The retirement accounts have been a big success. By eliminating the double-taxation of savings under the income tax, 401(k)s encourage individuals to build larger nest eggs.

However, many people needing near-term cash end up withdrawing funds from their accounts or borrowing against their balances. Retirement experts are concerned about such “leakage.” But the real problem is that the system imposes paperwork burdens and penalties on people for accessing their own money.

The solution is to create a savings vehicle that would allow withdrawals without a mess of rules, penalties, and paperwork. The solution is Universal Savings Accounts (USAs), as discussed in this Cato study.

USAs would be the first tier of savings for individuals, with the funds available for any near-term expenses that may arise. For individuals that didn’t end up needing the funds in the near-term, account balances would grow tax-free and help cover future retirement needs.

Because USAs would allow withdrawals free of hassles and penalties, they would encourage more savings. The simplicity and liquidity of USAs would make the accounts popular across all age and income groups, which is the experience with similar accounts in Britain and Canada.

The Wall Street Journal yesterday highlighted the 401(k) leakage issue:

Annual defaults on loans taken against investors’ 401(k)s threaten to reduce the wealth in U.S. retirement accounts by about $210 billion when the lost savings are compounded over employees’ careers, according to an analysis by Deloitte Consulting LLP.

The projected future loss amounts to about 2.7% of the $7.8 trillion currently in 401(k)-style retirement accounts.

The numbers highlight the problem of tapping 401(k) savings before retirement, known in the industry as leakage. Most leakage occurs because about 30% to 40% of people leaving jobs elect to cash out their accounts and pay taxes or penalties rather than leave the money or transfer it to another 401(k) or an individual retirement account.

But employees also take out loans, which about 90% of 401(k) plans offer. Workers can generally choose to borrow up to half of their 401(k) balance or $50,000, whichever is less.

About one-fifth of 401(k) participants with access to 401(k) loans take them, according to the Investment Company Institute, a mutual-fund industry trade group. While most 401(k) borrowers repay themselves with interest, about 10% default, or fail to repay their accounts, triggering taxes and often penalties, according to research by authors including Olivia Mitchell, an economist at the University of Pennsylvania’s Wharton School.

Failing to restore the funds typically occurs when employees with outstanding 401(k) loans leave companies before fully repaying their balances.

Money lost to 401(k) leakage, including loan defaults and cashouts, reduces the wealth in U.S. retirement accounts by an estimated 25% when the lost annual savings are compounded over 30 years, according to an analysis by economists at Boston College’s Center for Retirement Research.

Even those who successfully repay 401(k) loans can end up with less at retirement than they would have had. One reason is that many borrowers reduce their 401(k) contributions while repaying their loans.

While 401(k) loan defaults currently amount to about $7.3 billion a year, the impact is far greater given that many borrowers in default withdraw additional money to cover the taxes and early-withdrawal penalties they owe on their outstanding balances, says Gursharan Jhuty, senior manager at Deloitte Consulting.

… Few employers are willing to eliminate 401(k) loans, in part because academic studies have shown that they encourage 401(k) plan participation.

The fact that leakage is so high reveals a household need for flexibility that is not being met with current accounts. Universal Savings Accounts would fill the need by allowing withdrawals at any time for any reason. 

Ryan Bourne and I discussed the advantages of USAs in this study last year, and policymakers followed through with legislation this year. Republicans included USA accounts in their recent Tax Reform 2.0 package that passed the House.

We shall see which way control of Congress goes, but helping Americans at all income levels increase their financial security with USAs should be a bipartisan goal.

Pages