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Thousands of members of Congress and congressional staffers are benefiting from an illegal scheme that gives Congress special treatment both by exempting them from the harshest part of ObamaCare and by providing them each up to $12,000 in benefits that federal law prohibits them from receiving. Last week, the Heritage Foundation’s John Malcolm and I furnished additional evidence that the government officials who implemented this scheme violated federal criminal laws. (Malcolm is a former deputy assistant attorney general in the Department of Justice’s Criminal Division.) Few government officials or legal scholars are willing to defend this scheme. Those who are nevertheless have been unwilling to comment on these new revelations or to offer a legal basis for this scheme. At least one seems to suggest that, because the executive branch did it, it must be legal.

In brief, the Obama administration violated numerous federal laws, including criminal laws, to provide thousands of dollars of benefits to members of Congress for the purpose of preventing members from voting to change ObamaCare. Martha Stewart went to jail for less. Congress has proven unwilling to investigate this obvious fraud, precisely because members of Congress from both parties benefit from it. The Trump administration has kept this illegal arrangement going for the same reason the Justice Department has not investigated the crimes committed implementing it: the beneficiaries of this fraud are extremely powerful and united in their determination both to perpetuate it and to hide it from voters.

The scheme is illegal, as Malcolm and I explain, in part because it relies on Congress enrolling in coverage through the District of Columbia’s small-business Exchange (also known as a “SHOP” Exchange), even though both federal and D.C. law prohibits employers with more than 100 workers from participating in SHOP Exchanges. Congress employs thousands upon thousands of people. Congressional officials falsified the applications they submitted to the D.C. SHOP Exchange on behalf of the House and Senate by claiming each employs fewer than 100 people. All by themselves, those false statements are prosecutable under 18 U.S.C. § 1001, with each count exposing the responsible officials to up to five years in prison.

Malcolm and I found that after those false statements became public in late 2014, D.C. dropped the employer-size question from its SHOP Exchange applications. At a minimum, this means D.C. officials were not enforcing the limits federal and D.C. law place on SHOP Exchange participation. It also has the appearance of a cover-up: after congressional officials made potentially prosecutable false statements about Congress’ eligibility for a federal program, D.C. officials stopped asking all applicants about that eligibility criterion. And when those officials continued to make other false statements on their applications, the D.C. government just stopped requiring applications entirely. Finally, we found Congress has since admitted to D.C. that it employs thousands of people and that D.C.’s SHOP Exchange has never turned down any employer for participation based on the employer’s size.

One must admire the brazen evasiveness of the D.C. government’s response to this additional evidence of the illegality of this scheme:

Federal regulations prohibit the DC Health Benefit Exchange Authority, and all other state-based or federally-facilitated marketplaces, from checking employer size requirements when a small business submits a renewal application (45 CFR 155.710(d)). Thus, DC Health Benefit Exchange Authority cannot deny renewals to DC small businesses and their employees through the SHOP marketplace because that small business has grown beyond 50 full-time employees. [Italics added.]

The claim that federal regulations don’t allow D.C. to ask small businesses who renew their SHOP Exchange participation about how many people they employ merely begs the twin questions of whether Congress was ever a qualifying small business with fewer than 100 employees (obvious answer: no) and whether there was ever any justification under either federal or D.C. law for treating Congress as if it were. If D.C. officials are such sticklers about the law, perhaps they could answer that question. Or they could explain why they chose to eliminate the employer-size question for new applicants in 2015, and eliminate those applications altogether in 2016. The fact that D.C. has never turned down any employer based on firm size suggests D.C. officials may not such sticklers for the law after all. Their silence leaves us guessing.

University of Michigan law professor Nicholas Bagley commented on our latest revelations, yet he likewise evades the main issue. Bagley acknowledges congressional officials made false statements to the D.C. government, and that those false statements were part of an effort to draw money from the federal treasury to benefit members of Congress. But he says it’s all nice and legal because the Office of Personnel Management says so, and those false statements are not prosecutable because D.C. officials knew they were false, which means they were not “material” to the decision to allow Congress to participate in D.C.’s SHOP Exchange.

I see at least three problems with Bagley’s approach to this issue.

First, according to the United States Attorneys’ Manual, in which the Department of Justice provides guidance to federal prosecutors around the country, “the test for materiality under 18 U.S.C. § 1001 is not whether the false statement actually influenced a government function.” Instead, the Department of Justice explains, “To establish materiality as an element, it is sufficient that the statement have the capacity or a natural tendency to influence the determination required to be made.” Unless we are willing to argue that statements regarding eligibility criteria for federal programs do not have a natural tendency to influence eligibility determinations for federal programs, then these false statements satisfy the test for materiality under 18 U.S.C. § 1001.

Second, Bagley’s theory ultimately reduces to, “When the president does it, that means that it is not illegal.”

Imagine federal law creates Benefit A for some group. Maybe a subsidy or a tax break. Maybe for seniors or veterans. Imagine federal law denies eligibility for Benefit A to members of Congress. Finally, imagine a corrupt president—say, President Nixon—realizes that providing Benefit A to members of Congress would keep them from reopening a law important to the president, and therefore the president personally directs a federal agency to determine that Congress is “a special case” where those restrictions do not apply. Under Bagley’s theory, if implementing that exemption requires government officials to violate laws against false statements or other federal laws, they would be immune from prosecution. Even if their actions satisfy all the elements of a federal crime that conflict with an agency rule, they would be immune simply because the president said what they are doing is legal.

I suspect Bagley isn’t entirely comfortable with how much power this theory would give the executive branch—especially this one. Bagley’s theory would allow the executive to gift members of Congress by manufacturing exemptions to eligibility benefits throughout the federal code. It would even allow the president to find special exemptions for Congress where—as in this case!—the purpose of the provision the executive is interpreting is to deny Congress special treatment. And it would eliminate perhaps the only feasible remedy to stop such abuses.

To be fair, there is something to Bagley’s argument that the congressional officials who submitted those falsified applications to the D.C. SHOP Exchange were simply “relying on OPM’s decision.” But I was just following orders only gets you so far. If implementing an agency ruling requires you to satisfy the elements of a federal crime, that is an indication there is something wrong with the agency’s decision. If relying on the OPM’s decision requires you to falsify official government documents that require you to attest, under threat of legal penalties, that the information you are providing is truthful, that is also an indication that there is something wrong with your course of action, and ultimately with the OPM’s decision. The agency’s decision does not purify the act. The act indicts the agency’s decision.

Third, and finally, in the four years since Judicial Watch’s Freedom of Information Act request first exposed these false statements, neither the OPM, nor Bagley, nor anyone else who defends Congress’ ObamaCare exemption has articulated a legal theory as to why the explicit employer-size limitations that federal and D.C. law impose on SHOP Exchange participation should not apply to Congress. Nor has anyone articulated a theory as to how OPM, whose authorizing statute allows it to pay only for health plans it has “approved” to participate in the Federal Employees Health Benefits Program, has any legal authority to contribute to the premiums of plans it has not so approved.

Instead, the OPM says we have determined it is legal, and its defenders say it is legal because they say it is.

Former Treasury Secretary Larry Summers claimed at a Wednesday lunch that the “Republican vow to significantly reduce the size of government is a foolish pipe dream” due to “structural economic realities.”

What are these realities, according to Summers?

  1. An aging population will mean upward pressure on entitlement spending on unchanged policy.
  2. The rise in inequality requires government spending to “ameliorate” the consequences.
  3. Prices tend to rise relatively quickly in service sectors such as education and healthcare, necessitating more government spending.
  4. Rising national security threats and increased military spending by geopolitical foes will necessitate more U.S. military spending too.

Where to start?

Summers is right that, on unchanged policies, government spending would balloon due to aging.

The Congressional Budget Office projects spending on Social Security would rise from 4.9 to 6.3 percent over the next 30 years, whilst Medicare spending would nearly double from 3.1 percent of GDP to 6.1 percent. The impact of all that extra spending, even as non-Social Security and healthcare spending is projected to fall from 8.9 percent of GDP to 7.6 percent, is a growing budget deficit and accumulated debt. This would raise net debt interest payments further, such that by 2047 the U.S. budget deficit stood at (a completely unsustainable) 9.8 percent of GDP.

These long-term projections come with all the usual caveats. They use assumptions about the likely path of productivity growth in the economy, population growth, and the extent of labor force participation. Nevertheless, this analysis does highlight the scale of the contingent liabilities embedded in current policy.

Summers is also right about movements in relative prices, at least if historic trends continue. Labor intensive service industries, particularly where government involvement and support is high, seem to have seen price explosions relative to general price indices. Absent a future productivity take-off in medicine and education, it is certainly plausible that government will be under pressure to spend even more in these areas to maintain services.

The main problem that I have with Larry’s argument is not his description of these economic phenomena. It’s that on the implications of these facts and his further points about inequality and defense spending, he conflates economics with politics. He is guilty of a category error, combining elements of positive economics with normative judgments, especially when it comes to necessity to tackle inequality.

If you assume (as others such as Will Wilkinson have argued) that the public will not accept a smaller government because they do not want it, that entitlements cannot be touched and that there is an income elasticity for government spending > 1 (Wagner’s Law), then the trends outlined above are likely to grow government. But this need not be the case from an economic perspective. There are plenty of other policy options available. In other words, Larry’s political judgments help drive what he describes as “economic reality”.

This reminds me of the Brexit debate, when multiple economic agencies, including the UK government’s own Treasury, proclaimed there could only be economic losses from the UK leaving the EU. Looking at their assumptions, one saw these results arose largely by construction. Assuming Britain would sign no new free trade deals and change no regulations, but still suffer reduced trade within Europe, then Brexit inevitably would make Britain poorer.

So what does Larry miss?

First of all, there’s a whole host of areas where the federal government could reduce spending outside of healthcare and Social Security spending. Though quantitatively some of these areas might be small, and others would be politically difficult, qualitatively they would reduce the scope of government substantially. Chris Edwards has outlined a potential $457.8 billion in savings in the recent Cato Handbook for Policymakers.

Second, though aging does put upward pressure on spending, the above figures show that the current entitlement framework is unsustainable without mammoth increases in the tax burden, which would reduce the potential growth rate of the economy. Entitlement reform in itself then is an exercise in “downsizing government” relative to current policy, and only reform here can maintain or reduce the size of government overall. Larry might be right that entitlement reform is politically difficult, but that is not an economic argument.

Third, and finally, though there are other economic explanations for the rising relative prices of education and health services, it seems likely that at least part of the story is precisely the role of administrative bloat and lack of competition brought about by government involvement. If so, then Larry’s argument gets things the wrong way round – the necessity of more government spending will be (in part) a consequence of government interference in the first place.

As my colleague Dan Mitchell has acknowledged, downsizing government is no doubt a difficult endeavor. That’s one reason why Cato has a whole stream of work dedicated to it. But Summers should not pretend that political choices are the same as economic realities.

Anwar Ibrahim, former deputy prime minister and finance minister of Malaysia and later leader of the opposition in the parliament, is currently in jail for the second time on trumped-up charges. His jailer, Malaysian Prime Minister Najib Razak, will be welcomed to the White House by President Trump on Tuesday.

A Wall Street Journal editorial notes:

A visit to the White House is a diplomatic plum that world leaders covet. So why is President Trump bestowing this honor on Malaysian Prime Minister Najib Razak, who jailed an opposition leader and is a suspect in a corruption scandal that spans the globe?

Mr. Najib will visit the White House next week for a presidential photo-op that could help him win the next general election and imperil Malaysia’s democracy. 

From 1981 to 1998 Anwar was a rising star in the UMNO party, which has produced all of Malaysia’s prime ministers since its formation in 1963. In the late 1990s, however, he became a vocal critic of what he described as the widespread culture of nepotism and cronyism within UMNO. This angered Prime Minister Mahathir Mohamad.

They also disagreed on how to respond to the Asian financial crisis, as Wikipedia describes:

[As finance minister, Anwar] also instituted an austerity package that cut government spending by 18%, cut ministerial salaries and deferred major projects. “Mega projects”, despite being a cornerstone of Mahathir’s development strategy, were greatly curtailed.

Although many Malaysian companies faced bankruptcy, Anwar declared: “There is no question of any bailout. The banks will be allowed to protect themselves and the government will not interfere.” Anwar advocated a free-market approach to the crisis, including foreign investment and trade liberalisation. Mahathir blamed currency speculators like George Soros for the crisis, and supported currency controls and tighter regulation of foreign investment.

Anwar was removed from office and then jailed in a trial that was criticized around the world. Amnesty International said that his trial “exposed a pattern of political manipulation of key state institutions including the police, public prosecutor’s office and the judiciary.” After his release from jail in 2004 he became leader of an opposition party and then in 2015 was sent back to jail. 

In 2005 Anwar visited the Cato Institute. In the photo above, I’m giving him a copy of my book Libertarianism: A Primer, which he told me had already read – in prison. What a thing for an author to hear! Understandably, the thought of the president of the United States honoring his jailer is especially painful.

When the English Leveller John Lilburne was tried for sedition and treason in 1649, he declared, “I shall leave this Testimony behind me, that I died for the Laws and Liberties of this nation.” American presidents should honor heroes who can make such claims, not their oppressors.

Discussions about global warming and hurricanes obscure the human tragedies unfolding before our eyes. With climate science being as politicized as it is, we’ve received quite a lot of inquiries as to whether those rushing to blame this on human emissions are onto something, and it’s natural to wonder what’s going on when the news cycle is dominated by storms. The truth of the matter is: we don’t yet have the data to know.

On August 30, National Oceanic and Atmospheric Administration’s Geophysical Fluid Dynamics Laboratory said:

It is premature to conclude that human activities–and particularly greenhouse gas emissions that cause global warming–have already had a detectable impact on Atlantic hurricane or global tropical cyclone activity.

This update cites research showing a “2 to 11%” increase in hurricane intensity by the end of this century. Given the enormous year-to-year variability in storms, the highest figure would take nearly fifty years to emerge from the noise in the data, and the lowest one—probably over a century.

As we said at the outset, this subject is better treated in a comprehensive fashion after the tragedies of today start to heal. For those of you who are thirsting for answers, I strongly recommend following my colleague here at Cato’s Center for the Study of Science, Ryan Maue, on Twitter. Ryan was one of the first to predict the extent of Harvey’s rainfall; you’ve likely seen his images atop the Drudge Report or journalists citing his work. In fact, the New York Times noted him in their article How to Follow Irmaand we agree.

Some use their voices to lift spirits of those impacted by natural disasters & others use opportunity to mock & score political points. https://t.co/pPlVngJvtg

— Ryan Maue (@RyanMaue) September 7, 2017

Later this month the Cato Institute will be releasing an in-depth report analyzing the results of the national Cato 2017 Financial Regulation Survey. The survey, conducted in collaboration with YouGov, asked 2,000 Americans what they think of Wall Street, the regulators who oversee Wall Street, the Federal Reserve, and what Americans think of their banks, credit cards issuers, and lenders, among many other important issues. Today we’re pre-releasing several of the survey findings.

Find topline results here.

Sign up here to receive the forthcoming Cato Institute 2017 Financial Regulation Survey report.

Americans generally agree about what the top two priorities for government financial regulators should be. First, protect consumers from fraud (65%) and second ensure banks and financial institutions fulfill obligations to account holders (56%). Even though respondents were asked to select their top three priorities for regulators, most agree on the first two. After that, Americans diverge on what should be financial regulators’ focus and if they should take on additional social initiatives.

Less than half agree the following should be top priorities for regulators: fostering economic growth (29%), ensuring bank efficiency (22%), preventing banks from making bad decisions (20%), promoting competition (18%), preventing consumers from making bad decisions (14%), banning risky financial products (13%), ensuring banks don’t make too much profit (12%), and promoting innovation (10%).

Given that the 2008 financial crisis focused public attention on excessive risk taken by financial institutions, it’s particularly interesting that only 13% say regulators should make it a priority to ban risky financial products.

Ethics in Payday Lending

The large sample size also offered an opportunity to ask Americans who have used payday and installment loans about their experiences. In the past 12 months about 4% of Americans report having taken out a payday or installment loan. Among these, 63% say their payday or installment lender gave them good information about the fees and risks associated with taking out the loan. However, 35% believe their lender misled them.

Sign up here to receive the forthcoming Cato Institute 2017 Financial Regulation Survey report.

The Cato Institute 2017 Financial Regulation Survey was designed and conducted by the Cato Institute in collaboration with YouGov. YouGov collected responses online May 24-31, 2017 from a national sample of 2,000 Americans 18 years of age and older. The margin of error for the survey is +/- 2.17 percentage points at the 95% level of confidence. The full survey report is forthcoming.

Congress is set to approve a multi-billion dollar aid package for Hurricanes Harvey and Irma. Much of the funding will be for the Federal Emergency Management Agency (FEMA).

The figure below shows real, or inflation-adjusted, spending on FEMA since 1970. (FEMA was created in 1979, but federal budget figures include spending on predecessor agencies). Put aside the mid-2000s spike from Katrina, and you can see that FEMA spending has trended strongly upwards. FEMA spending averaged $1 billion a year in the 1980s, $3 billion a year in the 1990s, and more than $10 billion a year recently.

Background on FEMA’s history, role, and performance here. DownsizingGovernment charting utility here.

Harvey Is What Climate Change Looks Like: It’s time to open our eyes and prepare for the world that’s coming.” That August 28 Politico article by Slate weatherman Eric Holthaus was one of many trying too hard to blame the hurricane and/or flood on climate change.

Such stories are typically infused with smug arrogance. Their authors claim to be wise and well-informed, and anyone who dares to question their “settled science” must need to have their eyes pried open and their mouths shut.

There will doubtless be similar “retroactive forecasting” tales about Irma, so recent story-telling about Harvey may provide a precautionary warning for the unwary.

I am an economist, not a climatologist.* But blaming Harvey on climate change apparently demands much lower standards of logic and evidence than economists would dare describe as serious arguments.

Atlantic’s climate journalist said, “Harvey is unprecedented—just the kind of weird weather that scientists expect to see more of as the planet warms.” But Harvey’s maximum rainfall of 51.88 inches barely exceeded that from Tropical Storm Amelia in 1978 (48”) and Hurricane Easy in 1950 (45”). And what about Tropical Storm Claudette in 1979, which put down 42 inches in 24 hours near Houston (Harvey took three days to do that)? In such cases, attributing today’s weather extreme to “climate change” regardless of what happens (maybe droughts, maybe floods) is what the philosopher Karl Popper called “pseudoscience.” If some theory explains everything, it can’t be tested and it is therefore not science. (Popper’s favorite examples of psuedoscience were communism and psychoanalysis.)

Seemingly plausible efforts to connect Harvey to climate change are precariously based on another unusual event in 2015–16, not long-term climate trends. In the Atlantic, Robinson Meyer wrote that “Harvey benefitted from unusually toasty waters in the Gulf of Mexico. As the storm roared toward Houston last week, sea-surface waters near Texas rose to between 2.7 and 7.2 degrees Fahrenheit above average.” Thank you, 2015–16 El Nino.

Meyer’s source is a single unsourced sentence from “Climate Signals beta” from the Rockefeller Foundation’s “Climate Nexus” project run by Hunter Cutting (“a veteran political director who develops communications strategy”). Perhaps it would be wiser to consult the National Hurricane Center about Gulf temperatures, which shows they are averaging about one degree (F) above the baseline.

Looking back at any unpredicted weather anomaly, “fact-checking” journalists can always count on Michael Mann and Kevin Trenberth to spin some tale explaining why any bad weather (but never good weather!) must surely be at least aggravated by long-term global climate trends. “It’s a fact: climate change made Hurricane Harvey more deadly,” writes Michael Mann. Gulf sea surface temperatures have increased from about 86 degrees to 87 “over the past few decades,” he says, causing “3–5% more moisture in the atmosphere.” He neglected to point out other compensatory things he surely knows, like that the same climate science predicts a more stable tropical atmosphere, reducing the upward motion necessary for hurricanes.

Even The Washington Post’s esteemed Jason Samenow got onto shaky ground, writing that “rainfall may have been enhanced by 6 percent or so, or a few inches.” It would have been nice if he noted that Harvey’s maximum observed rainfall of 51.88 inches is statistically indistinguishable from the aforementioned Amelia’s 48, forty years ago.

In either case, to blame the Gulf’s temperature and moisture in August 2017 on a sustained global increase in water temperatures requires more than theory or “confidence” (faith). It requires evidence.

As it happens, sea surface temperatures (SSTs) were not rising significantly, if at all, during the years between the two super-strong El Ninos of 1997–98 and 2015–16. On the contrary, a January 2017 survey of four major data sources finds that “since 1998, all datasets show a slowdown of SST increase compared with the 1983–1998 period.” That may sound as if SST had been increasing rapidly before 1998, but that too is unclear: “Prior to 1998, the temperature changes in Global, Pacific, and Southern Oceans show large discrepancies among [four leading estimates], hindering a robust detection of both regional and global OHC [ocean heat content] changes.”

From 1998 to 2012, the evidence on sea surface temperatures becomes even more inconvenient. Two of the four studies show “weak warming” near the surface while the other two show “cooling, coincident with the global surface temperature slowdown [emphasis added].” In other words, the embarrassingly prolonged 1997–2014 pause or “hiatus” in global warming is also apparent in oceanic surface temperatures, not just land and atmospheric temperatures.

Keep in mind what the vaunted “climate change consensus” means. By averaging four estimates, NASA declares “Globally-averaged temperatures in 2016 were 1.78 degrees Fahrenheit (0.99 degrees Celsius) warmer than the mid-20th century mean.” The underlying yearly estimates are deviations from that mid-century meanؙ—“anomalies” rather than actual temperatures.

To convert anomalies into degrees NASA had to use computer models to add anomalies to temperatures in the base period, 1951–80, where the data are hardly perfect. As a result, “For the global mean,” NASA explains, “the most trusted models produce a value of roughly 14°C, i.e. 57.2°F, but it may easily be anywhere between 56 and 58°F and regionally, let alone locally, the situation is even worse.”

It might be rude to notice the range of error between 56 and 58°F globally (“let alone locally”) is larger than NASA’s supposed increase of 1.78 degrees over many decades. Note too that NASA’s ostensibly cooler base period, 1951–80, includes the second and third biggest floods in U.S. history.

My main point here is simple: Weather is highly variable. There’s a great deal of noise in hurricane and flood data, and it is impossible to attribute a single hurricane or a flood to the slight rise in temperature. Yes, warmer ocean temperatures would logically seem to correlate with more or stronger hurricanes, but as shown below, it doesn’t.

*Cato climate scientist Patrick Michaels contributed his $0.02 to this post, and the Accumulated Cyclone Energy chart comes from meteorologist Ryan Maue, also with Cato.)

While candidate Donald Trump promised to protect medical marijuana on the campaign trail, President Trump’s Justice Department wants to be more aggressive against state-legal marijuana under the Controlled Substances Act (CSA). Attorney General Jeff Sessions personally asked Congress for funds to prosecute medical marijuana cases in states where it is legal. The legal sale of recreational marijuana remains limited to a handful of states, but 29 states plus the District of Columbia allow the prescription and distribution of medical marijuana. National polling shows that more than half of Americans favor marijuana legalization, but an even larger majority want the federal government to leave marijuana alone in states where it is legal. This represents a glaring violation of federalism—the notion that states should generally set their own policies free from federal oversight or interference—and the Republican-controlled Congress should have no part of it.

Since 2014, Congress has prevented the Department of Justice from using funds to prosecute state-legal medical marijuana transactions. What was then called the Rohrabacher-Farr Amendment (now known as the Rohrabacher-Blumenauer Amendment) is a rider to the Omnibus Appropriations Bill that defunds prosecutions for state-legal medical marijuana offenses. Congress has the constitutional authority, colloquially known as “the power of the purse,” to prohibit government agencies from using tax dollars for particular activities, such as prosecuting federal marijuana violations in states that have chosen to legalize it.

Because the Senate included the no-prosecution amendment in its version of this year’s budget while the House did not, it will be up to a conference committee to decide whether the amendment stands or falls. If it does fall, hundreds of businesses will be threatened and countless chronic pain sufferers and other patients will face uncertainty in their quality of life. Moreover, studies suggest that some patients deprived of medical cannabis turn to opioids to ease their pain, putting them in greater risk of dependency or addiction in the so-called opioid epidemic. Attorney General Sessions’s attempts to link medical marijuana to the opioid crisis fly in the face of evidence from the National Institute on Drug Abuse that show places with access to medical marijuana experience fewer opioid overdoses than those without access. A RAND study also found that prescriptions of opioids and reported opioid abuse decline where state-legal marijuana dispensaries operate. 

Despite its perceived association with the political left, medical marijuana is not just a blue-state issue. Ten of the 29 states with legal medical marijuana—and 115 electoral votes—went for Donald Trump in the 2016 election. More than 200 million American residents, roughly 62 percent of the population, live in states where medical marijuana is legal. Nationwide, according to a 2017 CBS poll, 71 percent of Americans—including 63 percent of Republicans—oppose federal interference with state-legal marijuana. Perhaps most telling, a 2017 Quinnipiac poll found that 94 percent of American voters approve of adult medical marijuana use if prescribed by a doctor.

Congress doesn’t just decide whether federal tax dollars can be used to enforce particular drugs laws—it also has the power to determine which substances should be under federal control in the first place. All drugs regulated and banned under federal law are “scheduled”—that is, ranked by factors like rates of abuse, potential for chemical dependence, and potential medical uses. Schedule I, which includes heroin, marijuana, and LSD, is the most restrictive and recognizes no legitimate uses, and the scales descend from there to Schedule V, which includes various analgesics and other medicines with lower potential for abuse. As the evidence continues to mount, an increasing number of doctors, patients, and policymakers reject the federal government’s assertion that marijuana has no accepted medical use and must therefore remain a Schedule I drug—particularly when opium and cocaine are classified as less restrictive Schedule II drugs on the premise that they have legitimate medical applications.

Although the negative consequences of marijuana use and abuse may be downplayed in much of the discourse around legalization, the medicinal benefits to individuals have swayed enough doctors, patients, state legislatures, and public opinion that Schedule I designation ceases to make any sense.  At least one Republican Congressman has proposed legislation to de-schedule marijuana entirely.

In fact, Rep. Tom Garrett, a Republican former prosecutor from Virginia, introduced H.R. 1227, the Ending Federal Marijuana Prohibition Act of 2017.  The bill would remove marijuana from the list of federal controlled substances while still prohibiting its sale across state lines. This would enable states to decide for themselves whether to legalize marijuana for medicinal or recreational purposes. Marijuana would then be subject to the state and local laws like those that apply to tobacco and alcohol.

While legal marijuana may not be for every state or locale, it is clearly popular enough that the federal government should end its attempt to prohibit it where it is state legal, particularly for medicinal purposes. Millions of Americans and their doctors have determined that cannabis has medical benefits, and almost two-thirds of the states have recognized that. Congress need not take the lead on this issue, but it should at least recognize the political realities and get out of the way.

Round two of the NAFTA negotiations wrapped up early this week, without any major new developments. Of course, it is still very early in the process, and until the parties propose actual text for particular chapters, it is difficult to assess how bargaining will unfold. However, there are some issues where the positions of Canada, Mexico and the United States are fairly well known. One such issue, which Canada raised in the second round, is the inclusion of provisions on regulatory cooperation. As I’ve written with my colleagues in a recent working paper, a chapter on regulatory cooperation would be beneficial to an upgraded NAFTA.

First, as traditional tariff barriers have decreased over time, many of the remaining trade frictions take the form of so-called non-tariff barriers. Among these are the various regulations and standards that different countries utilize to regulate their product markets. There are a wide range of reasons these rules may differ—protectionism, consumer preferences, or divergence resulting from regulating in silos. The first of these is already addressed at the World Trade Organization (WTO). The second can entail things like consumer attitudes towards genetically modified foods (GMOs). The third is the range of issues that make up the bulk of what would be addressed in any type of regulatory cooperation forum. Examples include differences in the dimming technology for headlights used in vehicles, or the size of soup cans.

In 2011, there were two bilateral initiatives between the U.S. and Canada and between the U.S. and Mexico to address this type of regulatory divergence (outside of the NAFTA framework). The initiative with Mexico, the High-Level Regulatory Cooperation Council, did not achieve much progress, though Mexico has remained a supporter of regulatory cooperation initiatives. However, the U.S.-Canada Regulatory Cooperation Council had some notable successes, though progress has been very slow. For example, Health Canada and the Federal Drug Administration created a common electronic submission process that allows for a single application to both agencies for pharmaceutical and biological products; progress was also made in establishing mutual recognition of foreign animal disease zoning, as well as a joint review process for crop protection products. Given that this initiative has been in place for six years, however, criticism of the limited number of outcomes is not misplaced.

As Inside U.S. Trade reported, this is but one of the many reasons Canada put forward a proposal to include something similar to what it negotiated as part of its trade agreement with the EU, the EU-Canada Comprehensive Economic and Trade Agreement (CETA). The CETA includes a separate chapter on regulatory cooperation (Chapter 21), which sets up a forum that will meet annually to discuss these issues. In general, the CETA seems to institutionalize much of what has already been happening with the U.S.-Canada RCC, though it goes beyond it in a few areas, for instance, by allowing the participation of other trading partners in certain discussions, pending agreement of both parties.

The Trans-Pacific Partnership (TPP) is the only other agreement that has something similar, but its chapter on regulatory coherence is distinct from CETA in that it is more heavily focused on issues relating to good regulatory practice and regulatory process, such as providing notice and comment on upcoming regulations, and having a central authority like the Office of Information and Regulatory Affairs (OIRA). The CETA has provisions on good regulatory practice as well, but it is clear that regulatory cooperation is the main focus of that chapter. This distinction may seem subtle, but it’s an important one I’ve noted previously with my colleague here.

Recent reports suggest that the U.S. is not too keen on including something like the CETA chapter in the new NAFTA, possibly because it is concerned about the extra burden or interference with domestic regulators. However, when the U.S. first launched negotiations with the EU under the aegis of the Transatlantic Trade and Investment Partnership (TTIP), the concern was not one of regulatory overreach, but rather a fight over this subtle distinction in regulatory process vs. regulatory outcome, with the U.S. pushing to export its domestic agenda to a global level.

I would bet that the same debate is what is taking shape with the NAFTA negotiations, because it would entail expanding the current ad hoc structure of the U.S.-Canada RCC to a broader regulatory cooperation forum that includes Mexico as well. While some of the regulatory issues are different between these two markets, it does not make sense to maintain two separate regulatory cooperation councils. In fact, having Mexico at the table will only enhance the dialogue on regulatory divergence and allow all three countries to tackle longstanding regulatory barriers.

The CETA chapter on regulatory cooperation, though not perfect, is a step in the right direction for the NAFTA countries to move forward in this area. A regulatory cooperation forum that allows for broad input from civil society and business, a regular dialogue on long-standing issues, and establishes a voluntary process for this exchange would be a welcome upgrade to NAFTA. Canada’s proposal is a recognition of the challenges non-tariff barriers pose to international trade today, and the U.S. should support it. 

The pictures tell the story:

The drafters of a North Carolina redistricting plan drew a finger of land from a state senator’s district to take in a second home he’d recently built outside its bounds.

From what I’ve seen in my work on redistricting issues in Maryland and elsewhere, there’s nothing unusual about this tactic (except maybe how blatantly it was done). Often, as in this case, the finger method does not appear to have been welcome to the lawmaker in question, but serves to limit his options or keep him out of a district where he might run strongly.

In my chapter on this subject on Cato’s recently updated Handbook for Policymakers, I wrote:

The American system tends to leave the power of redistricting in the hands of the same officials whose careers are at stake, and they have routinely misused that power to draw lines with the aim of electing or defeating one or another candidate or party….Redistricting reform makes sense for its own sake and as a safeguard against the entrenchment and insulation of a permanent political class.

It would also keep rival lawmakers from giving each other – not to mention the voters – the finger.

In the aftermath of Hurricane Harvey, commentators have been quick to blame Houston’s lack of traditional zoning for the storm’s damage. Last week, I provided some evidence that lack of zoning is not the cause of Houston’s problems. But commentators have been equally quick to minimize the various benefits that accompany Houston’s limited zoning.

That’s short-sighted. To begin with, Houston’s lack of traditional zoning impedes its ability to act in political or exclusionary ways. Take New Orleans, post-Hurricane Katrina as a comparative study. Following Katrina, parishes in the New Orleans metropolitan statistical area (MSA) imposed moratoriums on construction of multi-family housing, threatened changes to zoning that deterred low-cost housing development, and created a blood-relative ordinance that restricted home rentals to blood relatives of owners “within the first, second or third direct ascending or descending generations.” These zoning regulations kept low-income evacuees out of certain neighborhoods and were highly controversial.

The details might sound remarkable, but the impacts of New Orleans’ post-Katrina zoning follow a standard pattern. Academic research suggests zoning acts as a barrier to the provision of low-cost, rental, and multi-family housing, segregates by socio-economic class and by race, and drives the cost of housing up. In fact, one study found that over half of the difference in levels of segregation between strictly zoned Boston and lenient Houston could be attributed to zoning regulations.

Given the average impacts of zoning, it shouldn’t be a surprise that low-income African Americans, low-income whites, and Hispanics have opposed zoning electorally in Houston and other locations.

It’s probably also not a coincidence that about 250,000 Hurricane Katrina evacuees, many of them African American, temporarily settled in inclusive Houston. Between 25,000 and 40,000 Katrina evacuees stayed permanently. According to reports, this was because of greater economic opportunities and affordable housing. Thanks to limited zoning, Houston could accommodate housing needs more quickly and cheaply than other cities.

Limited zoning will be good for Harvey evacuees, too. For example, limited zoning partly explains why Houston has a high apartment vacancy rate. Last year, Houston’s apartment vacancy rate was 6.8%, compared to 2.7% in Manhattan and 3.9% in the United States overall. This means there are thousands of apartments for Harvey evacuees to fall back on while they repair their homes.

These benefits will become increasingly apparent as Houstonians rebuild. The truth is that limited zoning means more opportunity, more low-cost housing, and less politically-motivated and exclusionary policies. That’s good every day, but especially good in case of an emergency.

When the federal government regulates food quality, consumers lose. Unfortunately, a Washington Post article on a recent increase in class-action lawsuits by consumers against food manufacturers over the use of “natural” labels shows how consumer groups are missing this point. In suing food companies, plaintiffs are arguing that these manufacturers (of cheese, in one particular case) are misleadingly labeling their food as “natural” while using milk from cows that use a growth hormone and eat animal feed made from genetically modified grain.

Though the plaintiffs and food companies disagree over what should be labeled as “natural,” one thing they do agree on is that the U.S. Food & Drug Administration, which has so far stayed silent on the issue, needs to provide guidance on what “natural” actually means. Manufacturers argue that clear rules would help them avoid legal battles, while consumer groups believe that government regulation would reduce what they view as deceptive marketing.

The “natural” label fight is a repeat of last decade’s fight over labeling food “organic.” In that case, the federal government did step in, with the U.S. Department of Agriculture creating the “USDA Organic” label and establishing rules on when the label can be used. However, that hardly ended the controversy over the use of the term “organic.”

As I discussed in a previous post, traditional organic farmers are now fighting with new hydroponic farmers over the latter’s use of the “USDA Organic” label. Hydroponic farming seems consistent with organic farming goals: producing environmentally friendly and healthy foods. However, traditional organic farmers don’t want competition from the upstart hydroponics industry because that competition will likely cut into the price premium that organic foods now fetch. An FDA defined “natural” label would compel the same type of jockeying by producers to hurt rivals.

The “organic” label also illustrates that there is no reason to believe regulations actually provide any assurances about health and environmental benefits. I highlighted in another post that the “USDA Organic” label, far from indicating increased health, safety, and quality, is instead a taxpayer-funded marketing tool with dubious benefit to human health or the environment.

My chapter on health and safety policy in the most recent Cato Handbook for Policymakers explains why manufacturers call for these types of regulations. FDA regulation of “natural” foods would create what’s known as a “pooled market”—one in which anonymous producers provide a good without any branding and consumers are reassured about the good’s quality by government inspection and regulation. To appreciate this, think of the supermarket shelf of “normal” bananas that sits next to the shelf of “organic” bananas; can consumers really tell the difference between the two goods that warrants the difference in price? The “USDA Organic” label is supposed to assure consumers of that difference, but there are good reasons to question the value of that government assurance. 

A separated market—a market with different levels of price and quality conveyed to consumers through marketing and branding—would provide more choices for consumers. For example, in the past several years both Whole Foods and Perdue have used concerns about genetically modified foods and antibiotics as opportunities to market the safety and quality of their foods. Consumers who are motivated to pay more for healthy foods incentivize transparency and increased quality from producers.

And while consumer groups are claiming that manufacturers are misleadingly marketing their foods as “natural,” pooling the market through FDA regulation would protect the producers without effectively addressing the groups’ complaints. A pooled market allows manufacturers to hide behind the false assurances regulations offer, but in a competitive, separated market other food companies will step in to offer truly “natural” foods and reap the benefits.

As the “USDA Organic” label has demonstrated, FDA intervention into “natural” foods would stifle competition and limit manufacturer transparency. Consumers concerned with the health and safety of the food they buy should instead push for the choices and accountability that markets provide.

Written with research assistant David Kemp.

As our more regular readers know well, every now and then I like to take another stab at debunking the  myth that fractional reserve banking has fraudulent roots. Besides occurring in numerous textbooks, that myth is routinely expounded in the writings and lectures of certain contemporary Austrian School economists. Moreover, as we’ll see, it is occasionally given credence in reputedly scholarly publications by scholars who don’t identify themselves with that school.

It is relatively slow in DC, as I write this, with Congress out of session, and therefore as good a time as any to rejoin the old debate, which I do first by drawing attention to a paper: “Banks v Whetston (1596),” by David Fox, a Cambridge law professor and barrister, and the author of a fascinating legal treatise on Property Rights in Money (OUP, 2008).

A Hum-Drum Case

Although he wrote “Banks v Whetson” for a 2015 volume titled Landmark Cases in Property Law, Fox hastens to explain that the case in question may not really qualify as a “landmark” since “very few lawyers have heard of it and it does not have a strong history of citation in later decisions.” Its significance, so far as he’s concerned, lies on the contrary fact that it was perfectly hum-drum. Because of that, the case supplies a particularly clear illustration of the common law’s ca. 1596 understanding of property rights in money — an understanding which prevailed, according to Fox, “throughout the middle ages and into the early modern period.”

The plaintiff in Banks v Whetson, having accused the defendant of robbing him of his money, brought an action in detinue (that is, for the return of specific property) against him. The defendant in turn filed a demurrer, which was argued in the Court of King’s Bench. The case was adjudged without argument for the defendant, on the grounds that the money in question consisted of loose coins rather than ones enclosed in a bag or chest. For that reason, the court observed, it was impossible to distinguish them from other, similar coins. Because the plaintiff could not establish that any particular coins in the defendant’s possession had in fact been taken from him, the court held that his case lacked the technical requirements for a suit in detinue.

As Fox explains, the decision in Banks v Whetston  rested on a by-then long-established  distinction between detinue on the one hand and “the varieties of debt action which lay to enforce claims for delivery of generic fungibles” on the other. So far as the common law courts were concerned, the distinction was just as applicable to money as to other fungible goods. Money, Fox explains,

could either be a specific item of property (as when it was bailed for safekeeping in a sealed bag or locked chest) or it could be owed as a fungible amount under a debt expressed in pounds, shillings and pence. In principle, there was no objection to a plaintiff suing in detinue to recover money bailed in specie, provided that the object of his claim could be identified clearly enough… The thing detailed by the defendant had to be identified as the same thing which the plaintiff delivered to him.

However,

If the plaintiff’s case was instead to enforce a generic obligation for the payment of money, then his action was in debt… In contrast to detinue, debt lay to recover a certen summe of money. The distinction…signaled two commercially different kinds of transaction: one involving the enforcement of the plaintiff’s property (where the property in question happened to be coins) and the other for the enforcement of a simple monetary obligation to pay a generic amount denominated in monetary units.

Paper, Plastic, or a Loan?

The legal distinction between detinue and debt had, as its practical counterpart, what Fox calls “the bagging rule.” If someone wished to retain title to a sum of money, despite surrendering possession of it, and to therefore be able to sue in detinue for its recovery, that person had to place  the money in question in a bag or chest, and preferably in a sealed bag or a locked chest. “The bagging of money removed the evidential uncertainty about identifying coins as the property of one person or another, and in a detinue action it allowed the money to be restored in hoc individuo.

More importantly for our purposes, the bagging rule also supplied a simple means for distinguishing between different kinds of financial transactions — one which, whatever its shortcomings, was

readily understood by the commercial parties and by juries who were charged with determining the capacity in which a person received or held sums of money.  The simple question “Was the money in  bag or not?” cut through the conceptual artificialities of determining what might have been the intent of the parties, of the sort encountered in modern-day law.

So long as money was surrendered in a closed bag or chest, it was understood that its possessor “held it in right of another so that he was not free to spend it as his own”:

To seal coins in a bag…constituted an assertion by the person whose seal was on the bag that the property in the money was in him or in some third person to whom the money had to be remitted. Either way, it showed, negatively, that the person holding the bag might not have the full property in it.  He was quite possibly a bailee who might be liable in detinue… (my emphasis).

The common law courts denied, on the other hand, “that one person could maintain an enforceable title to any [loose] money that had passed — voluntarily or involuntarily  — into the possession of another person” (my emphasis again). “In this respect,” Fox observes, “the common law’s treatment of property in money was no different from its treatment of fungible commodities.”

By the time that Banks v Whetston was decided, in 1596, the “bagging principle” was old-hat. Yet another half-century or so was to pass before England’s goldsmiths would pioneer there the practice of fractional-reserve banking. In other words, the first goldsmith-banker to lend or otherwise make use of coins “deposited” at his bank had every right to do so, according to principles of common law that had by then been firmly established for over a century, so long as the coins were tendered loose rather than in sealed bags or other containers. The presumption that the banker had good title to any loose coins he received existed regardless of the other terms of the specific deposit agreement, excepting only such terms expressly indicating that the coins were to be held in trust. A depositor’s right to recover any part of a deposited sum, whether after a specific term or on demand, or a banker’s promise to pay a particular sum, whether to a specific person or to the bearer of a circulating banknote, was proof of the banker’s indebtedness, and nothing more.

Keepers of the Faith

In light of the simplicity of the bagging rule, and the fact that that rule appears to have been perfectly well-established when the practice of fractional reserve banking was but a twinkle in some goldsmith’s eye, one might expect spinners of the yarn that fractional reserve banking was (and perhaps still is) a form of theft — and the related whopper that banknotes and deposit credits were originally (and, by some accounts, still are) “titles” to cash — to respond to doubting Thomases by changing the subject, rather than by boldly declaring their accounts to be fully consistent with the fine points of early modern English common law. Were it only so! Alas, among certain devotees of Murray Rothbard-style Austrian economics, the fractional-reserve-is-fraud fairy tale amounts to a dogma to be upheld, by hook or by crook, in the face of every sort of contradictory evidence.

Two especially relentless defenders of the Rothbardian faith are Philipp Bagus and David Howden, who, with some other coauthors, have maintained a steady output of papers claiming, among other things, that according to legal principles prevailing at the time, in both Roman and common law, early fractional reserve bankers did indeed routinely lend money that didn’t belong to them.

Having once before confronted Bagus and Howden, with both barrels blazing (see here and my reply here), only to have them deny receiving so much as a scratch [1], I doubt that anything said here will faze them, let alone strike a mortal blow. Still I consider it worthwhile, for the sake of those standing on the sidelines, to show how these economists deal with fundamental points of early modern English common law that David Fox and numerous other historians of law and banking, from Henry Dunning Macleod to James Steven Rogers, have painstakingly elucidated.

Consider “Oil and Water Do Not Mix, or: Aliud Est Credere, Aliud Deponere,” a 2015 Journal of Business Ethics paper Bagus and Howden wrote with Amadeus Gabriel, a genuinely Austrian Austrian economist. Like several of Bagus and Howden’s other papers, this cryptically-titled number (the Latin comes from a passage in the Digest of Justinian) rests its case against fractional reserve banking not on a direct appeal to the common law but on the distinction found in more ancient Roman law between “regular” and “irregular” deposits contracts:

In a regular deposit contract, specific things are deposited such as a Rembrandt painting. Such contracts are called bailments in common law. In an irregular deposit contract, fungible goods such as bushels of wheat, gallons of oil or money are deposited. … Most money deposits are irregular.

So far so good. But the authors go on to declare that:

Over time governments failed to enforce the traditional legal principles of monetary irregular deposits. … A special privilege is given to bankers (but not to private persons) to violate these obligations in the case of monetary irregular deposits… . The practice of fractional-reserve banking was legalized ex-post.

The  violations to which Bagus, Howden, and Gabriel refer consist of banks’ having lent some of the cash deposited with them, instead of keeping it on hand, as the terms of a depositum irregulare supposedly obliged them to do.

This would be dandy reasoning, so far as Continental developments are concerned, were it indeed the case that, according to Roman law, an “irregular” money deposit was in fact a bailment in the strict sense of that term, with the depositor retaining a valid title to the deposited sum, rather than a loan. But that simply wasn’t so. Instead, according to just about every authority on the topic, with the singular exception of Jesus Huerta de Soto, upon whom Bagus, Howden, and Gabriel rely, a banker who received an “irregular deposit” became the owner of the deposited money!

Concerning Huerta de Soto’s understanding of what an irregular deposit contract entails, as conveyed in the first chapter of his magnum opus, Money, Bank Credit, and Economic Cycles,  “Lord Keynes” (the pseudonymous blogger at Social Democracy for the 21st Century[2]) concludes, on the basis of a painstaking review of relevant sources, that it

is utterly unorthodox. He cites certain Spanish legal sources and Spanish legal scholars for his definition, but it is clearly eccentric and aberrant, certainly with respect to Roman law and Anglo-American law.

Nor, he adds, did classical Roman jurists themselves ever insist, as Huerta de Soto does, that a banker receiving an irregular deposit was obliged to keep the full amount of the deposit at hand. It was therefore perfectly possible, as a matter of Roman law, for a banker to lend coins received as irregular deposits without breaking the law.

With regard to English experience, the Bagus-Howden-Gabriel view is, believe it or not, even less sound, for as Benjamin Geva explains in The Payment Order of Antiquity and the Middle Ages: A Legal History (p. 433), the English common law went one better than the Roman law “in bypassing altogether the category of the irregular deposit, and thus facilitating an easy route to the characterization of the bank deposit as a loan.” As we’ve seen, that characterization was automatically applied to all “deposits” of loose coin.

Concerning Bagus and Howden’s remarkable ability to ignore or misread the plain testimony of countless authorities, I hope I may be forgiven for instancing as a case in point their reading of my own 2010 article, “Those Dishonest Goldsmiths,” as given in a footnote to another paper of theirs,  published in the Journal of Business Ethics. According to that note, my paper

provides evidence that Goldsmiths…offered contracts that were neither demand deposits nor loans. These contracts were akin to aleatory contracts, whereby a financial institution promises its best to return an invested sum on demand. …While Selgin provides evidence that the Goldsmiths offered such contracts, he maintains that Goldsmiths did not pioneer fractional reserve banking. Selgin’s empirical evidence that Goldsmiths offered a third contract distinct from the two we posit that are legally permissible is not irreconcilable with our own view. Indeed, Selgin’s work would only be problematic if 1) it could be shown that people who agreed to these contracts wanted to maintain the full availability of their money, or 2) if these historical instances were used to argue for the legitimacy of the fractional reserves demand deposit.

I do not exaggerate in saying that every part of this purported précis of my article comes as a great surprise to me. In fact, I’ve never questioned the standard view that, in England at least, goldsmiths pioneered fractional reserve banking. And the whole point of “Those Dishonest Goldsmiths” was to defend the goldsmiths against the charge of misappropriating their customers’ deposits and, to that extent at least, “to argue for the legitimacy of fractional reserve banking”!

As for my supplying evidence that goldsmith bankers took part in “aleatory contracts,” that claim presumably refers to a single footnote in my paper, concerning a specific transaction with a goldsmith recorded in Pepys diary, in which the banker appeared to have acted as a sort of broker, rather than as a strict intermediary. It never occurred to me that, by referring to that one transaction, and suggesting that such transactions weren’t uncommon (in part because they helped bankers and their clients to skirt usury laws), I risked being portrayed as denying that goldsmith-bankers ever engaged in  plain-vanilla fractional-reserve banking!

An Asian Outbreak

Were the fractional reserves = fraud fairy tale encountered only in undergraduate textbooks, manifestly idiotic web pages, and papers written by a coterie of ultra-Rothbardian economists for publication in their own house organs (or in journals edited by persons who are neither economists nor historians nor legal scholars), its persistence might be no more a  cause for concern than the 450-odd samples of variola vera residing, under heavy guard, at the Centers for Disease Control in Atlanta.

I have, unfortunately, come across at least one serious case of fractiophobia  far removed from the bacterial incubators of Madrid and Auburn, Alabama — as far as Seoul, Korea, to be precise. In “How Modern Banking Originated: the London Goldsmith-Bankers’ Institutionalization of Trust,”Jongchul Kim, a political scientist at Sogang University,[3] claims that modern banking rests upon a “double ownership scheme” pioneered by London’s goldsmiths. In that scheme

two groups — the holders of the bankers’ notes and depositors — were the exclusive owners of one and the same cash that was kept safely in the bankers’ vaults; and one amount of cash created two balances of the same amount, one for the holders and the other for depositors. This double ownership remains a central feature of the present banking system.

In fact, Kim’s claim of double ownership is doubly wrong: neither noteholders nor depositors of loose coin owned — that is, possessed a good title to — the cash to which their claims entitled them. Instead, as both the common-law bagging rule and its Continental counterpart, the concept of a depositum irregulare, made perfectly clear, whatever actual cash the banker retained that had originally come to him in the form of loose coin belonged to the banker alone.

Although Kim devotes many pages, in several different (if similar) articles, to embellishing and repeating his “trust scheme” argument, by doing so he merely succeeds in making it all the more evident that he has completely misunderstood the English common law of property in money. Moreover he has managed to do so despite drawing on the works of scholars like James Rogers Stevens and Benjamin Geva (though not David Fox), the plain language of which cannot possibly have misled him.

So, what happened? The answer is that, when it comes to the specific question of the ownership of coins handed over to a banker, Kim leans, not on such highly reputable legal historians, but on — hold on to your hat! — Murray Rothbard & Company, whose distortions he appears to have swallowed hook, line, and sinker!

Kim’s debt to the Rothbardians is particularly clear in his assertions to the effect that goldsmith banking was “self-contradictory”:

Goldsmith-bankers’ deposit-taking was self-contradictory because it was simultaneously a loan contract and not a loan contract. Because deposits were repaid on demand, the ownership of deposits practically remained in the hands of depositors. But bankers lent deposits at their own discretion and in their own names, and they attained and retained the ownership of the loans.

But there’s no contradiction. Notwithstanding what Rothbard and some of his devotees have written, as soon as depositors handed their loose coins over to a banker, that banker became the owner of the coins, while the depositors ceased to own them, either legally or “practically.” What the depositors now “owned” was, no longer a certain set of coins, but a contractual right to demand an equivalent sum, whether after a particular term or on demand. Likewise the banker, upon lending coins received on deposit, though he certainly owns the loan itself — meaning the right to a future payment of principle and interest — ceases to own the lent coins. In short, the coins themselves never have but a single “exclusive” owner.

When Kim appears to muster more qualified authorities in support of his “double ownership” thesis, he does so by quoting from them selectively and misleadingly.  Consider the following passage:

As legal theorist Benjamin Geva rightly argues, “Fungibility of money…explains the depository’s right to mix the deposited money instead of keeping it separate.  It does not necessarily explain the depository’s right to use the money.” A depository is still required to keep an equivalent amount of money deposited.

A reader of this passage might be excused for supposing that Geva himself held the opinion contained in its last sentence. In fact, that opinion belongs to Kim alone. Geva (whose concern is in any case with Roman rather than common law) merely wished to make the logical point that, as he puts it in a subsequent paragraph, “authority to mix does not entail automatically the authority to use” (my emphasis).

This is Serious

If supposedly scholarly elaborations of the myth that fractional reserve banking is inherently fraudulent make claims that are ludicrously at odds with the facts, while more popular presentations of the myth are downright laughable, that doesn’t make the myth itself either funny or harmless. On the contrary: by encouraging people who might otherwise be inclined to oppose heavy-handed government regulation of private industries to favor, on ethical grounds, the outright prohibition of many ordinary banking transactions, the myth that fractional reserve banking is inherently fraudulent strengthens the hand of officials and others who want to hamstring bankers for quite different, but equally unsound, reasons, not excluding a general dislike of free enterprise.

Yet (as I and others have argued often on this site an elsewhere), conventional fractional-reserve banking is capable of yielding enormous benefits to society. What’s more, it has proven most capable of doing so when and where it has been allowed to flourish with the least government interference, including interference aimed at making certain bankers the beneficiaries of government favors. An unbiased and open-minded review of the historical record will make clear to anyone who undertakes it, that it is not those nations that have heaped regulation upon regulation on most of their banks, while favoring one or several with privilege after privilege, that have enjoyed the greatest financial stability. It is those that have mainly relied upon open competition between banks free of special privileges that have witnessed the greatest financial stability. As for those that have attempted, or have succeeded, in banning ordinary banking altogether, if they can be said to have enjoyed financial stability, it is only because they have stagnated.

__________________

[1] In this respect Bagus and Howden remind me of my twin brother Peter.  When we used to play army together, I often managed, thanks to my well-honed tactical and stalking skills (and, let’s face it, all around physical and mental superiority), to sneak up on him with my toy Tommy gun and let him have it at point-blank range, only to hear him repeatedly shout, “You missed me!” However, when Peter acted that way, I could always settle matters, without risking legal repercussions, by beating him up.

[2]I should not be surprised if some members of the anti-anti-Rothbard vigilante squad treat my reference to “Lord Keynes’ ” remarks as further proof (Exhibit “A” being my occasional references to “aggregate demand”) that I’m a dyed-in-the-wool Keynesian, and as such someone all right-thinking free market types ought to ignore. For the record: I am not now, nor have I ever been, especially fond of Keynes’ General Theory.

[3]I have since discovered that Mr. Kim did his postdoctoral research at the Department of Economic History and Institutions at Universidad Carlos III in Madrid.

[Cross-posted from Alt-M.org]

While same-sex couples ought to be able to get marriage licenses—if the state is involved in marriage at all—a commitment to equality under the law can’t justify the restriction of private parties’ constitutionally protected rights like freedom of speech or association. Masterpiece Cakeshop, a bakery in Lakewood, Colorado, declined to bake a cake for the wedding of Charlie Craig and David Mullins. Jack Phillips, the shop’s owner, considers himself to be both an artist and a committed Christian whose faith permeates his art. Consistent with that faith, he will not create cakes marking events or ideas that violate his beliefs, such as cakes celebrating Halloween, incorporating hateful or vulgar messages, or celebrating any marriage that he believes is contrary to biblical teaching. While he refused to make the wedding cake, he did offer to make the couple any other cake they might like. Craig and Mullins responded by filing a charge of sexual orientation discrimination with the Colorado Civil Rights Commission, which found that Jack violated the Colorado Anti-Discrimination Act and rejected his First Amendment defenses, saying that baking and decorating custom wedding cakes does not constitute artistic expression. The Colorado Court of Appeals affirmed and the U.S. Supreme Court agreed to hear the case. Cato has filed an amicus brief supporting Masterpiece Cakeshop and urging the Court to vindicate Americans’ right not to speak.

Although making cakes may not initially appear to be speech to some, it is a form of artistic expression and therefore constitutionally protected. There are numerous culinary schools throughout the world that teach students how to express themselves through their work; couples routinely spend hundreds or even thousands of dollars for the perfect cake designed specifically for them. Indeed, the Supreme Court has long recognized that the First Amendment protects artistic as well as verbal expression, and that protection should likewise extend to this sort of baking—even if it’s not ideological and even if done to make money. The Court declared nearly 75 years ago that “[i]f there is any fixed star in our constitutional constellation, it is that no official, high or petty, can prescribe what shall be orthodox in politics, nationalism, religion, or other matters of opinion, or force citizens to confess by word or act their faith therein.” W.Va. Board of Education v. Barnette (1943). And the Court ruled in Wooley v. Maynard—the 1977 “Live Free or Die” license-plate case out of New Hampshire—that forcing people to speak is just as unconstitutional as preventing or censoring speech. The First Amendment “includes both the right to speak freely and the right to refrain from speaking at all” and the Supreme Court has never held that the compelled-speech doctrine is only applicable when an individual is forced to serve as a courier for the message of another (as in Wooley). Instead, the justices have said repeatedly that what the First Amendment protects is a “freedom of the individual mind,” which the government violates whenever it tells a person what she must or must not say. Forcing a baker to create a unique piece of art violates that freedom of mind.

Moreover, unlike true cases of public accommodation—the travelers’ inns at common law or the state-segregated restaurants in the Jim Crow South—there are abundant opportunities to choose other bakeries in the same area. Finally, granting First Amendment protection to bakers would not mean that public-accommodation laws could provide no protection to same-sex couples. The Free Speech Clause protects expression, which should include the custom design, baking, and decorating of wedding cakes, as well as photography and floristry, but not businesses like caterers, hotels, and limousine companies, who aren’t creating artistic expression. Those sorts of businesses may have other rights and legal defenses available, constitutional or statutory, but that’s a different matter.

The Supreme Court will hear argument in Masterpiece Cakeshop v. Colorado Civil Rights Commission sometime this fall.

In an address at the American Enterprise Institute today, Nikki Haley, the U.S. ambassador to the United Nations, laid out an assertive and fundamentally misleading case against continuing U.S. participation in the Iranian nuclear deal.

Though Haley was careful to note that she was not calling for the United States to actively withdraw from the Joint Comprehensive Plan of Action (JCPOA), she offered a selection of ‘alternative facts’ and carefully phrased arguments clearly aimed at justifying President Trump’s desire to do just that.  

Haley’s arguments carefully skirted around the actual facts. The key problem for the Trump administration’s desire to withdraw from the JCPOA is simple: Iran is actually adhering to the terms of the deal. Rather than attacking the deal head on, therefore, Haley instead argued that the United States should consider factors outside the legal scope of the deal when deciding its future.

Indeed, though she cited many different reasons to take a harder line against Iran - including a litany of Iran’s past bad behaviors, the regime’s actions in Syria and elsewhere, and its missile testing – none of these are actually covered by the nuclear deal. Haley even suggested that Iran could have hundreds of covert nuclear sites which cannot be inspected under the deal, but offered no evidence for her assertion.

Her portrayal of the nuclear agreement was also misleading. As she described it: “the deal he [President Obama] struck wasn’t supposed to just be about nuclear weapons. It was meant to be an opening with Iran; a welcoming back into the community of nations.” In Haley’s account, these broad goals justify the use of a broader lens in deciding whether to stick with the deal or not. 

There’s just one problem: the Obama administration was always clear to stress that the JCPOA was first and foremost a nonproliferation agreement, focused on preventing an Iranian bomb, not on fixing every problem in the U.S.-Iranian relationship. Though she never stated it so bluntly, Haley’s remarks amount to an argument that these broader issues are worth jettisoning even a successful nonproliferation agreement that is preventing an Iranian nuclear weapon. 

Perhaps the most misleading statement in the Ambassador’s remarks was her assertion that Trump’s choice to decertify the deal would not actually amount to U.S. withdrawal from the JCPOA, but would merely allow congress to debate the issue. Yet it would also result in a congressional vote on re-imposing nuclear related sanctions on Iran, potentially withdrawing the United States from the deal and splitting us from European allies.

Unusually for this administration, Nikki Haley’s arguments today were well-crafted, clearly delivered and plausible-sounding. But listeners should not be fooled: they nonetheless embraced the Trump administration’s universe of ‘alternative facts.’

U.S. withdrawal from the JCPOA could easily set Iran back on the path to a nuclear weapon, and re-open the debate over military action which occurred prior to the finalization of the nuclear deal. By ignoring the risks and eliding basic facts, Haley’s arguments are likely only to undermine U.S. foreign policy.

 

DACA is a good policy but bad law. Those who were brought to the United States illegally as children and have since led productive lives deserve to stay and earn citizenship. Alas, our immigration laws prevent this and the executive branch didn’t acquire extra powers to remedy this when Congress shamefully failed to pass the DREAM Act on multiple occasions.

President Trump was justified in stopping a program that lacked constitutional authority, but he is now equally obligated to press Congress to fix the laws that created the resulting mess. As my colleagues Alex Nowrasteh and David Bier have pointed out, the moral and economic case for continuing the legal status of the so-called DREAMers and legalizing other unlawful immigrants is overwhelming. Congress has six months in which to legislate such a solution, whether as a stand-alone bill or as part of a larger immigration compromise. If it fails, Congress will have earned opprobrium for the 800,000 lives that are now in turmoil.

This episode illustrates how President Obama’s penchant for government by executive action leads to continued reversals in his key programs. Any legal challenges to DACA rescission have no leg to stand on precisely because he and his lawyers argued that the program, like its DAPA successor, created no new legal rights or statuses. There was no administrative process to create DACA—there could not have been because of the absence of legal foundation—and so no process beyond the new Trump administration guidance is needed to end it.

The ball is now properly in Congress’s court.

 

President Trump will reportedly end the Deferred Action for Childhood Arrivals (DACA) program, which allows young unauthorized immigrants to live and work legally in the United States. According to ABC News, he will shut off all new applications today and allow those who currently participate in the program to continue to renew their applications for two years for the next six months until March 5, 2018. After that, the administration will accept no more renewals.

As I have explained previously, most DACA recipients receive 2-year “deferred action” forms that prevent their removal during that period as well as 2-year employment authorization documents that allow employers to hire them legally. President Trump will reportedly not attempt to reclaim these authorizations immediately on March 5. He will instead allow them to expire “naturally” at the end of their validity periods.

U.S. Citizenship and Immigration Services only releases data on DACA approvals and renewals on a quarterly basis, so it’s not possible to give precise month-to-month figures, but we can obtain a rough picture of how the program will wind down. As Figure 1 shows, the six-month delay will allow 24 percent of all DACA recipients, or 190,822, to renew their permits before March 5. This is a big deal for the 108,000 beneficiaries who received 3-year renewals under the attempted DACA expansion in late 2014 and early 2015. All of their permits would have expired without the delay, leaving them worse off than if they had received a two-year renewal, which they could have extended in late 2016 or early 2017.

Figure 1: DACA Renewals and Projected Expirations Starting September 5, 2017

Source: USCIS Data Set: Form I-821D Deferred Action for Childhood Arrivals. April 2017 to September 2017 figures are not published yet and are projections based on the number of two-year renewals in those months in 2015.

Roughly three quarters, however, will not benefit at all from the six-month delay. Some 595,000 permits will expire the same as if the program ended today. After March 5, there will be roughly 32,686 expirations per month, 7,543 per week or 1,078 per day. Figure 1 breaks the numbers down on a six-month basis. Roughly 60 percent of DACA recipients (318,015) will retain permits until at least 2019. About 11 percent will retain their permits until 2020.

Figure 2: DACA Projected Expirations Starting September 5, 2017

Source: See Figure 1.

The administration is adamant that DACA beneficiaries will not become priorities for removal after their permits expire. Without employment authorization, they will be forced into the black market for jobs, and according to the administration’s new expansive priorities, anyone who works under a false name or borrowed identity is priority for removal. Already ICE has an indiscriminate policy of taking “enforcement action” against any unauthorized immigrant it “encounters,” which would include Dreamers it finds during raids targeting their parents. In order to prevent this from happening Congress must find a legislative solution.

An argument will soon erupt over the fate of the Affordable Care Act’s mandate that requires health insurance to cover oral contraceptives at no direct out of pocket cost to the patient. This mandate was never explicitly listed in the ACA as one of the “essential health benefits.” Its inclusion was made at the discretion of the HHS Secretary. According to press reports, the Trump Administration is about to relax the requirement.

The arguments made in favor of loosening the mandate mostly revolve around the employers’ right to freedom of conscience. Meanwhile, some advocacy groups fear this will mean many women won’t be able to obtain affordable oral contraceptives. As I recently wrote in Morning Consult, it can help temper the concerns of all parties to the argument if the Food and Drug Administration (FDA) followed the recommendation that the American Congress of Obstetricians and Gynecologists (ACOG) has been making for decades, and reclassify oral contraceptives from prescription to over the counter (OTC). Birth control pills are already available over the counter in 102 countries.

But health insurance plans usually only cover prescription drugs. Making birth control pills available OTC means that women can purchase them directly, like they purchase aspirin, ibuprofen, antihistamines and antacids.

In my Morning Consult piece, I point out that the average cash price of prescription birth control pills runs from $20 to $50 per month but can range as low as $9 per month. Various community health centers across the US, as well as Planned Parenthood, offer free oral contraceptives for those unable to afford them. If birth control pills are made available over the counter prices are likely to drop. That’s because oral contraceptives will be liberated from the third-party spending trap.

As is the case with doctor, hospital, and lab bills, the presence of a third-party payer results in higher prices for prescription drugs than would otherwise be the case if a pharmacy was dealing directly with the patient, not the third-party middleman. That’s because the third party severs the link between the consumer and the producer of goods and services that allows market forces to work. Doctors, hospitals, labs, and pharmacies negotiate with a deeper-pocketed third party, not the consumer, to arrive at a price.

For example, in a March 2017 Consumer Reports  interview, University of Minnesota Professor of Pharmacoeconomics Stephen Schondelmeyer stated:   “…Retail chains such as CVS and Rite Aid aren’t concerned about consumers who pay out of pocket…What does concern them is how much third parties, such as insurance companies, will pay, usually either a negotiated reimbursement fee or the list price —whichever is lower. So retailers intentionally set the list price very high so that there’s no chance it could undercut what they get paid by insurers.”

And here is Douglas Jennings, PharmD, writing in the June 2016 Pharmacy Times: “Cash prices started to dip below co-pays a decade ago, when several stores started offering dozens of generic drugs for as little as $4 per prescription. But, as co-pays increase and high-deductible insurance plans become more common, patients may be overpaying for their prescriptions when using insurance.”

When the FDA reclassifies a prescription drug to over the counter it extracts it from the third-party spending trap. As consumers play their part, market forces often bring prices down and new competitors frequently enter the market. Moving to OTC also adds further savings—like the saving of time taken away from work or other activities to sit in a doctor’s waiting room for a prescription; and the saving of money from not having to pay for the office visit. It also means an improvement in privacy and comfort, as many women prefer to purchase this kind of product discreetly and avoid unwanted discussion or counseling, even if offered by a health care provider. Privacy appears to be a major issue for women purchasing emergency oral contraception, which has been available over the counter since 2006. There is even convincing evidence that reclassifying prescription birth control pills to over the counter increases their continuous use by women.

Some health care practitioners are leery of making oral contraceptives OTC, citing safety concerns. ACOG’s Committee on Gynecologic Practice believes any safety concerns are not great enough to deter reclassification of oral contraceptives to OTC. I further explore that matter here.

Reclassifying birth control pills to over the counter can save women money in the long run. It also adds convenience, choice, and privacy. Medical science supports the move. The only remaining obstacles are political. 

In 2013, Defense Distributed uploaded computer aided design (CAD) files and made them freely available to the public. With the proper equipment and knowledge, someone could use the CAD files to create a 3D-printed gun. The government quickly ordered the files removed (under threat of severe penalties) because it determined that the files ran afoul of the International Traffic in Arms Regulations (ITAR), which prevent people from communicating to foreign persons “technical data” about constructing certain arms. In other words, ITAR is one of the laws that makes it illegal to tell the foreign persons how to make things like an Apache helicopter. Not all arms are listed, and ITAR doesn’t restrict technical data that is merely “general scientific, mathematical, or engineering principles commonly taught in school.”

There are many manuals and documents out there that tell people how to make dangerous things. The Anarchist Cookbook is perhaps the most famous. Many people are surprised that the government lets The Anarchist Cookbook exist, but it is not the government that lets it exist—they’d probably rather it didn’t—it’s the First Amendment. The First Amendment protects communication about making dangerous things, from bombs to napalm, and it certainly protects communication on how to fix guns or even construct them from scratch. If the government is going to restrict such information it must do so narrowly and with good reason, while understanding that there is a difference between instructions for a plutonium trigger for a hydrogen bomb and CAD files for a plastic, one-shot pistol. And if the government goes too far, people should be allowed to challenge it.

ITAR’s regulation of communicating technical data is clearly a content-based prior restraint of speech—it restrains speech before it is published based on the content of the communication—which is one of the most egregious ways to violate the First Amendment. While it is certainly proper for the government to prohibit telling the North Koreans how to make a nuclear bomb, Defense Distributed believes that the government went too far in extending ITAR to cover CAD files for small, 3D-printed guns. Moreover, by uploading the files to the internet—which, yes, foreign persons can access—Defense Distributed believed it wasn’t communicating them to foreigners in the manner contemplated by the statute. In such situations, when a plaintiff believes a law has reached too far and is impinging on their freedom of speech, it is usually proper to seek a preliminary injunction that keeps the government from shutting the speech down until a court has determined the merits of the ultimate issue. But the district court improperly denied the request based on an incorrect approach to preliminary injunction analysis and a wholly inappropriate assessment of the relevant interests at stake. The Fifth Circuit upheld the lower court’s decision and denied a request for rehearing en banc, which is when all the judges on a circuit hear a case rather than the usual three-judge panel. Defense Distributed has now filed a petition for a writ of certiorari asking the Supreme Court to take up their case and protect their First Amendment rights. Cato has filed a supporting brief urging the Court to accept and summarily reverse the decision below. We argue that such disposition is required when a facially content-based prior restraint escapes review just because the government says “national security.”

In essence, the lower courts refused to look at one of the most important considerations in the preliminary injunction analysis—likelihood of success on the merits—because the government intoned the words “national security,” to which the judges said “okay, that clearly outweighs any interests Defense Distributed has.” Defense Distributed certainly has an interest—the rights protected by the First Amendment of the U.S. Constitution—and it was frankly ridiculous that the lower courts so casually let the government’s interests trump the First Amendment.

In a First Amendment case, in order to determine whether an injunction is in the public interest, the merits of a plaintiff’s claim must be evaluated before proceeding to weigh the equities. This is not like an injunction to prevent your neighbor from spilling pollutants on your lawn. In such a case the court would weigh the various interests involved in deciding whether to issue an injunction, but no one’s constitutional rights would be part of the consideration. Constitutional rights get special weight if it is likely they’re being violated. That’s why they’re in the Constitution. Nevertheless, the lower courts said that Defense Distributed failed to show how granting an injunction to enjoin an unlawful restriction of speech was in the public interest. But enforcing the Constitution is always in the public interest, and the government cannot be harmed if its own unconstitutional activity is enjoined. If it seems likely the government is violating the First Amendment, then that strongly indicates that the plaintiff’s equities outweigh the government’s because the First Amendment is being violated.

By concluding that the district court had not abused its discretion by failing to consider the merits of a First Amendment plaintiff’s claims, the Fifth Circuit fundamentally altered the preliminary injunction standard, laid out by the Supreme Court, which should be applied to the most egregious abridgments of speech. Dissenting from denial of rehearing en banc, Judge Elrod put it succinctly: “The panel opinion’s flawed preliminary injunction analysis permits perhaps the most egregious deprivation of First Amendment rights possible: a content-based prior restraint.”

While some people are frightened by the prospect of 3D-printed guns—including, perhaps, some of the judges in the lower courts here—that is no reason to allow the government to shut down speech about such guns without ensuring that the restrictions comport with the strictures of the First Amendment. Even if you don’t like guns, this case should concern you because the government should not be allowed to say “national security” in order to shut down speech it doesn’t like—“first they came for the guns, and I didn’t speak up because I didn’t own guns; then they came for the…” The implications for free speech rights could be catastrophic Defense Distributed fails to prevail in this case.

 

During the Hurricane Harvey disaster, many reporters and commentators seemed to assume that federal agencies had to take the lead in rescuing the city. And even before water levels had receded in Houston, federal politicians were promising billions of dollars in aid.

However, the large-scale federal intervention in natural disasters we saw during and after Katrina, Sandy, and Harvey is a relatively recent phenomenon. Prior to recent decades, the private sector handled much of the nation’s disaster response and rebuilding. The U.S. military and National Guard have long played important roles during natural disasters, but private charitable groups and businesses have been central to disaster response and rebuilding throughout U.S. history.

In this essay, I discuss the responses to various natural disasters in the past. The 1906 San Francisco earthquake and fire and the 1913 Great Easter Flood illustrate the impressive outpouring of private-sector support during past calamities.

1906 San Francisco Earthquake and Fire

San Francisco was struck by a massive earthquake and fire in 1906 that destroyed 80 percent of the city and killed about 3,000 people. At least 225,000 people out of about 400,000 in the city were left homeless, and 28,000 buildings were wrecked.

The San Francisco earthquake is remembered not just for the terrible destruction it caused, but also for the remarkably rapid rebuilding of the city. More than 200,000 residents initially left the city, but the population recovered to pre-quake levels within just three years, and residents quickly rebuilt about 20,000 buildings.

The private sector response to the disaster was extremely impressive. Voluntary aid poured in from around the country. John D. Rockefeller, Andrew Carnegie, and W.W. Astor, for example, each donated $100,000. Charitable groups, including the Salvation Army and the Red Cross, played a large role in relief efforts. The health care and home-products company Johnson and Johnson quickly loaded rail cars full of donated medical supplies and sent them to San Francisco.

The insurance industry was crucial to the rebuilding. About 90 percent of San Francisco residents had fire insurance from more than 100 different companies. The companies ended up paying out a massive $225 million in claims, which was equal to what the entire U.S. insurance industry had earned in profits in the prior four decades. Insurance payouts totaled about 90 percent of what was owed, as only a relatively small number of companies failed.

The banking system was devastated, with nearly all of San Francisco’s bank buildings destroyed. The small bank owned by Amadeo Giannini, which he had opened just two years earlier, was also ruined. But Giannini was able to rescue his gold and securities, and the next day he opened for business on a wharf on San Francisco Bay. His rapid response and willingness to provide loans to all types of people after the disaster helped him gain the respect of the city. His bank would eventually grow to be one of the largest in the nation, the Bank of America.

Another impressive story is that of the Southern Pacific Railroad, which immediately swung into action and provided free evacuation for more than 200,000 city residents to anywhere in the country. Within five days of the earthquake, the company had filled 5,783 rail cars with passengers leaving the city. Southern Pacific president Edward Harriman made disaster response the highest priority of his rail network. Only one day after the earthquake, the first of his rail cars full of emergency supplies left Omaha for San Francisco. Harriman personally donated $200,000 to relief efforts.

What about the government response to the San Francisco conflagration? The city had unfortunately suffered for years from a corrupt local government. The good news was that in the immediate aftermath of the earthquake, leading citizens formed essentially a new city government called the “Committee of 50,” which was credited with a very organized and effective disaster response. For its part, Congress appropriated just $2.5 million for relief to San Francisco, or about $50 million in today’s dollars.

The main federal organization that responded was the U.S. Army, which moved quickly to take control of the city and provide water, food, tents, and other relief items. Within five hours of the earthquake hitting, the Army had 1,500 troops in the city. Some of the actions of the Army were controversial, but the swift response by the commander of the nearby Presidio base is an example of how local resources and local decisionmaking are crucial in the aftermath of disasters.

1913 Great Easter Flood

The Great Easter Flood in 1913 ravaged a huge area in one of the most widespread and damaging disasters ever to strike the United States. High winds and massive flooding caused destruction and more than 1,000 deaths across 14 states from Vermont to Alabama. The U.S. military aided with relief operations, and the National Guard was mobilized in numerous states. Americans responded with huge contributions to the Red Cross and other charitable organizations aiding victims.

Ohio was the hardest hit state, and Dayton probably the hardest hit city. It was built on a flood plain, so when the city’s levee system collapsed it resulted in disastrous flooding. Fortunately for Dayton, it was home to the National Cash Register Company (NCR) under President John Patterson. Seeing the flood disaster that was about to happen, Patterson seized the initiative and NCR become the central funder and organizer of relief in the city.

NCR built 300 boats to rescue flood victims, organized search teams, and provided meals and shelter for thousands of people. On its peak day, NCR’s kitchens provided meals for 83,000 flood victims. NCR headquarters also became the base of operations for the Red Cross and Ohio National Guard.

John Patterson was an interesting leader. He instituted innovative and enlightened management practices, such as providing a wide range of recreation and medical amenities for workers. But he was also an aggressive businessman, and he and other NCR executives were found guilty of violating federal antitrust laws just weeks before the flood, although this was reversed on appeal. NCR’s leaders apparently saw a chance to redeem themselves in the eyes of the community, and their remarkable efforts to save their city during the flood gained them national praise.

Historian Trudy Bell has written in detail about the 1913 disaster. One of her findings is that there were widespread refusals of aid by affected individuals and communities, apparently because of cultural norms at the time regarding personal pride and the belief in standing on one’s own feet. Some people and communities even gave back unused amounts of aid that they had received after the disaster. These days, sadly, the situation is the reverse: there is usually a large amount of fraud in relief programs in the wake of disasters.

For more on the proper federal role in natural disasters, see www.downsizinggovernment.org/dhs/fema.

 

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