Cato Op-Eds

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

In numerous states and cities, taxi interests – notably unions representing taxi drivers – have come up with creative legislation to hobble the rise of ridesharing apps like Lyft and Uber. In Nevada, the taxi union recently proposed a package of measures to slam the apps good and hard, of which perhaps the most startling was this: drivers getting a rideshare booking would be required by law to wait to ensure that their fare was not picked up in less than ten minutes.  

What a great idea – all must be brought down to the level of the least able! Echoing Vonnegut’s funny-dystopian short story Harrison Bergeron, the speediest would have to sit out in artificial penalty time to ensure that they did not arrive before the poky. “In a brief interview, [union president T. Ruthie] Jones said the union only wanted a level playing field,” reports the Nevada Independent.

And it gets even better. When legislators got a look at the union’s wish list of requests, whoever was in charge of drafting apparently decided that a 10 minute wait time didn’t go far enough. So Senate Bill 485, introduced on Monday, instead upped the handicap delay to 15 minutes. Per the Nevada Independent, “Taxi companies — long an influential Nevada industry — gave to 50 legislators throughout the 2016 campaign cycle for a total of $476,200.” 

But the bill’s introduction stirred immediate and searching news coverage Tuesday. An Uber representative termed the 15 minute obligatory wait time “really absurd, frankly, on its face,” and said the service would pull out of the state if it were enacted. (That was the idea, right?) And by yesterday, Sen. Kelvin Atkinson (D-North Las Vegas), who chairs the committee on Commerce, Labor and Energy, said the bill was “bad policy,” dead and wouldn’t get a hearing. One of his opposite numbers had already commented critically:

Republican Assembly Leader Paul Anderson said in an earlier interview that the proposed restrictions were “atrocious” and said the measure was a blatant attempt to kneecap the industry.

“All it does is stifle an industry that is significantly providing a better service,” he said in a Tuesday interview.

My favorite comment came on Twitter: “I dunno, maybe the lawmakers should be forced to wait a while before they can drop this proposal…”

Imagine how many proposals of this sort would quietly slip through were it not for the vigilant, independent, and free press we are used to having in America.

The NAFTA renegotiation Donald Trump promised during his campaign may finally be getting started.  The specialty trade publication Inside US Trade (subscribers only) has a draft of the administration’s notice to Congress “that the President intends to initiate negotiations related to the North American Free Trade Agreement (NAFTA) and its architecture,” in which the administration sets out “specific objectives for negotiation.”  

At first glance, the administration’s plan looks like more than just a tweak to NAFTA, but will not come close to blowing up the system (as it sometimes sounded like during the campaign).  Things may change before the final notice is sent out, but for now a lot of what’s in there seems like an attempt to upgrade NAFTA to reflect provisions that have been developed in U.S. trade agreements over the last 15 years, including in the TPP.  In a sense, this NAFTA renegotiation is an attempt to make NAFTA more like the TPP.  Some examples are:  

  • adding rules on digital trade and cross-border data flows
  • adding enforceable provisions on labor, the environment, and state-owned enterprises
  • revising the provisions on investor-state dispute settlement
  • strengthening intellectual property rights

To the extent that the NAFTA renegotiation just incorporates TPP provisions, it is not too worrying.  That’s not to say that we in Cato’s trade policy center like all of the TPP provisions, but it would indicate that the Trump administration is not looking to do anything too radical on trade.

On the other hand, there are some proposals that could take NAFTA in a more protectionist direction.  Some examples of that are proposals to:

  • Eliminate a special procedure to have an international panel review U.S. anti-dumping/countervailing duties
  • Address the perceived unfairness of foreign border adjustment taxes (“level the playing field on tax treatment”)
  • Make sure NAFTA allows Buy America provisions (“establish rules that require government procurement to be conducted in a manner that is consistent with U.S. law and the Administration’s policy on domestic procurement preferences”)
  • Tighten up rules of origin, that is, restrict who can benefit from low NAFTA tariffs
  • Add new procedures that allow special tariffs when there are increased imports (“a safeguard mechanism to allow a temporary revocation of tariff preferences, if increased imports from NAFTA countries are a substantial cause of serious injury or threat of serious injury to the domestic industry”)

Keep in mind that this is just the draft, so the objectives stated here may change a bit.  Also, note that this is simply what the U.S. will ask for, and not necessarily what it will get after sitting down with Canada and Mexico.

All in all, it is somewhat of a relief to see that the proposed changes do not completely undermine NAFTA.  However, there will be some aspects of these proposals that we will be pushing back on, once the specifics of the proposals become more clear.

When it comes to foreign policy, the Trump administration has been engulfed in scandal and intrigue from day one. From the resignation of Michael Flynn, to a botched Yemen raid, to a U.S. bombing campaign in Mosul, Iraq that killed up to 200 civilians, to unrelenting controversy over Russian meddling in our election, it’s difficult to even keep up.

With all these distractions, it is easy to forget that there are important issues that demand thoughtful attention. High among these is the Iran nuclear deal. Not only must the Iran deal compete for attention with other controversies swirling around the White House, it has to withstand antagonism from hawks who refuse to acknowledge its success.

At the annual American Israel Public Affairs Committee conference this week, Senate Majority Leader Mitch McConnell criticized the Joint Comprehensive Plan of Action (JCPOA) for “bestow[ing] a windfall of billions for the Iranian regime to distribute to its proxies.” At the same conference, House Speaker Paul Ryan described the deal as “an unmitigated disaster” that is “dangerous for the United States and for the world.”

Actually, most of the tangible benefits in sanctions relief have gone to improving the economy for every day Iranians. And far from being a “dangerous” and “unmitigated disaster,” the deal has been successful in rolling back Iran’s nuclear program and in easing regional tensions.

The rhetorical abuse visited upon the JCPOA doesn’t bode well for the survival of the deal. And even the relative moderates in the Trump administration – people like Secretary of Defense James Mattis and Secretary of State Rex Tillerson, frequently described as the “grown-ups,” in contrast with the opposing bloc of “ideologues” – seem more hawkish than pragmatic on Iran.

In other words, the Trump White House exists in an echo chamber of negativity toward the JCPOA. The deal’s survival depends on deliberate administration support and a measured understanding of its benefits.

Sanction relief is an important part of this. The Trump administration needs to work hard to ensure that Iran sees the full benefits of sanctions relief in exchange for Iran rolling back its nuclear program, as it has done.

Unfortunately, both the Senate and the House are working to impose additional sanctions on Iran. The legislation would target people involved in Iran’s ballistic missile program and foreign entities who do business with them, while also applying terrorism sanctions to the Iranian Revolutionary Guards Corps (IRGC).

But concerns about Iran’s missile program and support for terrorism are distinct from the JCPOA. The nuclear deal was narrowly conceived as a non-proliferation agreement. Iran’s recent ballistic missile tests, which have drawn so much fire from critics of the deal, did not violate the agreement.

More to the point, Iran’s missiles aren’t a serious security threat. Iran is militarily weak compared to all of its neighboring rivals and is easily deterred from attacking its adversaries with these missiles.

As for applying terrorism sanctions to the Revolutionary Guards, this amounts to a pointless redundancy that will not yield positive results, but may make things much worse. The IRGC is “already one of the most sanctioned entities in the world” and these additional measures will have negligible impact on its activities. New sanctions could even undermine anti-ISIS operations, as the IRGC and Iranian Shiite militias are battling ISIS in Iraq and Syria. Indeed, American military and intelligence officials have warned such sanctions “could endanger U.S. troops in Iraq and the overall fight against the Islamic State, and would be an unprecedented use of a law that was not designed to sanction government institutions.”

Imposing new sanctions on Iran that are unrelated to the JCPOA and have almost zero chance of producing the desired results is needlessly antagonistic. In fact, Iran’s cheeky response this week to new U.S. sanctions was to impose “its own sanctions regime on U.S. military companies involved in supporting Israeli settlements.” This tit-for-tat dynamic risks eroding trust between Iran, the United States, and the other signatories to the deal (the U.K., France, Russia, China, and Germany), creating a disincentive for Iran to comply with the deal’s restrictions.

Most worryingly, this may even be the intention of those who oppose the deal. They recognize that pulling out of the JCPOA unilaterally would be too costly for America diplomatically, but if they can provoke violations on Iran’s part, they can destroy the deal and avoid blame.

Both the White House and Congress need to understand that the future of the Iran nuclear deal is a matter of choice. The United States can choose to uphold the deal and ensure promised sanctions relief for Iran. Or it can choose to undermine the agreement by inflating the threat from Iran and provoking tension over peripheral issues. The first choice holds back nuclear proliferation in the Middle East. The second risks disastrous conflict between the United States and Iran. 

For an economist, it’s rare that events occur enabling us to directly test our economic theories and assess them against outcomes. Britain’s Brexit vote last year was one such moment. As the formal Article 50 process for EU withdrawal begins today, it’s worth re-examining the consensus view on what a “Leave” vote would mean. Those warning of impending doom today are many of the same people who predicted a decision to exit would bring immediate economic slowdown.

The Economists for Brexit group of which I was a founding member was busy refuting anti-Brexit reports pre-referendum. Britain’s Treasury led the way, claiming GDP would be 6.2 per cent smaller after 15 years if Britain exited the EU and single market (replaced with an EU-UK bilateral trade deal, as Prime Minister Theresa May now desires). Importantly, they forecast the mere act of voting to leave would trigger an immediate 4-quarter recession with 500,000 people losing jobs, higher inflation and lower house prices. There would be a “profound economic shock.” The IMF warned that a path towards leaving the single market would mean a recession in 2017. The OECD predicted a “major negative shock.” An Economists for Remain letter signed by 12 Nobel Laureates likewise said “a recession causing job losses will become significantly more likely.”

Yet the UK economy has proven robust. Immediate financial market turbulence following the unexpected vote quickly subsided. Far from contracting at the Treasury’s forecast 0.4 per cent annualized rate, the economy is currently growing at 2.8 per cent per year. The employment rate for 16 to 64 year olds is at its highest ever level, 74.6 percent, with unemployment at just 4.7 percent. House prices are currently increasing at 6.2 per cent per year. Annual broad money growth was 6.6 percent in January – suggesting robust nominal GDP growth through 2017. Even after Theresa May pledged to leave the single market and customs union, forecasters were revising growth estimates upwards for 2017.

The economic consensus did forecast correctly the pound’s fall on a trade-weighted index (around 13 percent decline), as did the Economists for Brexit analysis. This will raise the UK inflation rate. But even the recent uptick in inflation to 2.3 percent is in part driven by increasing commodity prices affecting U.S. and German inflation rates too. The flipside has been strong export order books, highlighted by the Confederation of British Industry’s buoyant survey last week. What happens to the pound in the longer term of course depends on the economic fundamentals, but what is clear is that so far the doom-mongers have been wrong on the macroeconomic impact overall.

Some disingenuously claim they called it wrong because Article 50 was not triggered straight away, or because the Bank of England took action after the vote. But this makes little economic sense given the forward-looking nature of consumers and investors, and the lags with which monetary policy operates.

No, the faulty forecast really came about because forecasters made a host of negative political assumptions in their modelling. They implied that many of the positive pro-market policies that have taken place since the 1970s alongside EU membership would be reversed. They assumed Britain would choose to maintain EU-level tariffs on the rest of the world and fail to agree any new trade deals. They assumed an independent Britain would change no EU regulations. They assumed that Britain’s gross contribution to the EU budget, and other powers in everything from agriculture to clinical trials, would be no better used domestically.

On every major issue, they looked solely at the potential downsides of Brexit and not the opportunities. Britain in the EU was considered the peak of economic dynamism. Thinking they’d be worse off after Brexit, the British Treasury and others believed consumers and investors would tighten their belts now. The faulty forecast of an “immediate recession” stemmed directly from the assumptions the Treasury made. 

Most consumers and investors have so far shrugged off the vote though, suggesting the public believe Brexit will have little long-term economic impact. Theresa May has made strong commitments to pursue free trade (despite the lazy comparisons between Brexit and Trump) and the British Chancellor has floated the idea of moving to a Singapore-like economic model if no deal with the EU is reached. If the UK were to pursue free trade unilaterally, my Economists for Brexit colleague Professor Patrick Minford estimates GDP gains of as much as 4 percent in the long-term. Incidentally, his near-term forecast, deriving from this assumption, was much closer to outturns than the pessimistic consensus.

Even the EU Commission itself seems to think that the single market adds just 2.1 percent to EU-wide GDP overall, and you’d think that this figure would be lower for the UK given the market in services is less complete and Britain’s instincts on regulation tend to be on the liberal end. Factor in the ability to review damaging regulations on clinical trials, agricultural and financial services, and there is room for optimism for a post-EU Britain.

As Article 50 is triggered, it is time for economists to remember that there are many more options stemming from policy freeoms than many of them considered during the campaign. Brexit is a supply-side shock to the economy. Whether it is a positive or negative one depends on how Britain uses the trade, regulatory and spending powers it repatriates from the EU in the long-term. All agree that a country more open to trade and investment will, other things given, be more prosperous. The fact that some economists are so sure Brexit will be damaging reflects their own priors rather than economics.  

Yesterday morning the Supreme Court heard oral arguments in Lee v. United States, which concerns the right to counsel and the right to trial by jury.  Here is an excerpt from a piece I had published in The Hill:

Jae Lee came to the United States from South Korea in 1982. At the time, he was just a boy in the care of his parents. Now 48 years old, Lee has lived in the U.S. as a lawful permanent resident for decades. He went to school in New York, but eventually moved to Memphis and got into the restaurant business. According to federal prosecutors, Lee also became a small time drug dealer and, after his arrest, he was facing serious criminal charges.

Like many persons who are accused of a crime, the prosecution offered Lee some leniency in prison time if he would agree to surrender his constitutional right to trial by jury. Naturally, Lee wanted to know all of the legal consequences of accepting the government’s plea offer — so he asked his attorney whether he would be subject to deportation to South Korea. Lee’s attorney assured him that deportation would not be a problem and advised him to accept the plea bargain.

On that recommendation, Lee pled guilty.

As it turned out, Lee received bad legal advice. His conviction meant he was now subject to deportation under federal law. After serving several years in prison, he would eventually be deported to South Korea and essentially banished from the U.S.

On appeal, Lee argues that he only pled guilty because of the recommendation from his lawyer. He wants to take his case before a jury.

Federal prosecutors say there’s no need for a trial because the evidence against Lee is strong.  That’s a curious argument to make.  Our constitutional right to trial by jury doesn’t depend on the government’s assessment of its own case.  And, really, what kind of government would burden us with trillions of dollars of debt and then turn around and, in effect, say “Yes, this person was given incorrect legal advice, and yes, the Bill of Rights says we’re supposed to respect the accused’s right to trial by jury, but this is a situation in which we have to be mindful of the costs related to trials.  Let’s deny a trial to Mr. Lee because it would just be a waste of time and money. He should be grateful for the way his case was handled, for his prison food, and that we’re sending him to South Korea instead of North Korea.”

Here’s a link to the Cato amicus brief in the case.  And if you’d rather listen than read, here’s a link to a Cato podcast interview with Caleb Brown.

Craig Keefe was expelled from his state-funded nursing college in Minnesota because something he said was deemed unprofessional. He didn’t break any laws with what he said—there were no threats or anything like that—and wasn’t even on campus at the time. He just made a handful of rude comments on his personal Facebook page, unrelated to any curricular project.

Nevertheless, the school had adopted the American Nurses Association’s code of professional ethics, which forbids behavior “unbecoming of the profession” or that “transgresses personal boundaries,” into its student handbook, so the federal district court rejected Keefe’s challenge to his expulsion. The U.S. Court of Appeals for the Eighth Circuit affirmed that ruling, effectively holding that that any punishment of speech under the nursing code is effectively free from First Amendment review.

So now Mr. Keefe, represented by Cato adjunct scholar Robert Corn-Revere, is asking the Supreme Court to take his case. Cato, joined by the Electronic Frontier Foundation, National Coalition Against Censorship, and Student Press Law Center, and with the help of Prof. Eugene Volokh and the UCLA First Amendment Clinic, has filed a brief supporting that request.

First Amendment protection is critical at universities, where complicated and controversial ideas are supposed to be formulated and debated. If uncorrected, the Eighth Circuit opinion permitting Keefe’s expulsion will set a dangerous precedent: Colleges will be able to punish students for expressing their views, based simply on administrators’ judgments that certain speech is inconsistent with their subjective understanding of professionalism.

Many professional-ethics codes—including the one at issue here—embody specific ideological commitments that might not be shared by large numbers of students, while also containing vague requirements that members uphold those values in their daily lives. The Eighth Circuit has opened the door for professional schools, including law and business schools, to enforce ideological litmus tests under the guise of ensuring adherence to professional ethics. Indeed, we have already seen—in cases the lower court cites to defend its position—students being targeted for their beliefs (for example, Keeton v. Anderson-Wiley (11th Cir. 2011), where a student was disciplined for statements disapproving of homosexuality).

Allowing viewpoint discrimination by way of professional codes of conduct opens up a gigantic loophole in the First Amendment’s freedom of speech, and in constitutional protections for conscience rights more broadly.

The Supreme Court will decide before it breaks for the summer at the end of June whether to take Keefe v. Adams.

It is difficult to forecast what President Trump’s fiscal legacy will be. He’s sought credit for a recent reduction in public debt, but pledged not to touch the entitlement programs which are its key long-term driver, while also cutting taxes. His team has talked of the need for high-quality infrastructure investment to boost productivity, but leaked memos suggest priority projects must be “shovel ready” and “direct job creators” – different short-term aims.

Anybody hopeful that the fiscal conservative lines of this muddled agenda might win out might want to think again. It looks as if Trump has “stimulus” rather than a supply-side agenda in mind. Here’s an interview excerpt from The NYT:

Trump seemed much less animated by the subject of budget cuts than the subject of spending increases. “We’re also going to prime the pump,” he said. “You know what I mean by ‘prime the pump’? In order to get this” — the economy — “going, and going big league, and having the jobs coming in and the taxes that will be cut very substantially and the regulations that’ll be going, we’re going to have to prime the pump to some extent. In other words: Spend money to make a lot more money in the future. And that’ll happen.”

Let us presume for the sake of argument that Trump is a Keynesian who believes that government spending can be used to re-inflate the economy from downturns. Let us also assume that this kind of agenda works as Keynesian theory predicts. We can still ponder: why does the U.S. economy need a fiscal stimulus now? Theory (even Keynesian) and evidence suggests it does not.

1. Theory would suggest fiscal stimulus is not effective when there is little “spare capacity.” Whatever Trump thinks about the veracity of the statistics, the US economy is close to “full employment.” The civilian unemployment rate currently stands at 4.7 percent, only slightly above the Congressional Budget Office’s estimate for the “natural rate of unemployment.” The job openings rate is now running above that seen pre-crisis, quit rates are about the same as they were prior to the crash. The U5 unemployment rate (which adds marginally attached workers to the official rate) and the U6 unemployment rate (which adds those who are part-time for economic reasons) are at levels seen in the middle of the 2000s and construction unemployment is lower than in 2007. In such an environment, any attempted macroeconomic stimulus through infrastructure investment would be highly likely to crowd out private sector activity.

2. Theory suggests fiscal stimulus will be offset by monetary policy. Given the Fed has begun to raise its target rate, Keynesian theory would suggest monetary policy would offset any expansionary fiscal policy. Paul Krugman spelled this argument out clearly when he wrote “spending can be withdrawn later on without hurting employment, because once you’re out of the liquidity trap the Fed can offset the contractionary effects of a fiscal tightening by holding off on the monetary tightening it would otherwise have pursued.

3. Evidence suggests that any effect of government spending is very small when countries are highly indebted. US federal public debt stands at 105 percent of GDP. The long-term outlook for the public finances is dire on unchanged policies, driven by rising entitlement spending given demographic trends and rising health care costs. The federal deficit is already projected to be 2.9 per cent in 2017, but if current policies remain largely unchanged, the Congressional Budget Office projects estimates the annual deficit would rise to 5 per cent of GDP over the next decade (even with tax revenues above their average over the past five decades). In such an environment, consumers are more likely to foresee future tax increases when the federal government borrows more, and hence rein in activity today.

4. The assumptions necessary for short-term spending improving the debt-to-GDP outlook are incredible. Trump talks about spending money now to make a lot more in the future, but Larry Summers and Brad Delong outlined back in 2012 the conditions under which short-term borrowing could hypothetically improve the longer-term debt-to GDP path. As I wrote at the time, “the paper does an important public service, however. It lays out in detail the scale of the assumptions required.” They presume fiscal multipliers are large, monetary policy does not work, and that absent short-term borrowing workers and capital will become much less productive. All of these conditions are even less likely now than they were in 2012. As the FT’s Chris Giles said: “you have to have a rather weird faith in the notion that raising capital spending a bit today provides a much more powerful boost than the hit that inevitably comes next year when that temporary support is removed.”

In sum, theory and evidence suggests more government borrowing at the current time is unnecessary and would have little effect on GDP but would worsen the debt-to-GDP ratio. Sure, there might be a case for some infrastructure investment for other reasons (maintenance, alleviating damaging congestion, enabling new transport modes etc.), which I will explore in future posts, but that is a very different rationale from the pump priming put forward by the President.

A friend recently emailed me this after arriving at the Barcelona airport from Dublin:

I approve of their immigration system. I had this conversation with the agent:

Americano?

Si

You are not Trump?

Ha no.

Welcome

Gracias

Says it all.

In the political hullabaloo over efforts to shift costs of health care to someone else, the argument for keeping Obamacare’s compulsory insurance and ever-expanding Medicaid enrollment relies naïvely on notoriously comical Congressional Budget Office (CBO) 10-year “projections.” 

CBO claims the initial House Republican plan would eventually cause 3 million to “lose” health insurance simply because they would no longer be fined up to 2.5% of income for not buying a policy designed by and for politicians. This not a loss, but a gain – in freedom of choice.

CBO claims the GOP plan would “lose” another 14 million by not expanding Medicaid enrollment as rapidly as Obamacare hopes to. The federal government pays about 57% of the cost of Medicaid for poor people, but 90-93% (until 2022) to the 31 states that provide Medicaid to those earning up to 138% of the poverty line. That has added 17 million to the Medicaid rolls, and enriched big health insurers and Kaiser Permanente.

Since expanded Medicaid added only 17 million, how could the Republican plan’s modest frugality possibly subtract 14 million?  Only because CBO assumes that if nothing changes then more and more states will leap on this stalled bandwagon, thus shoving millions more on Medicaid.  This seems politically unlikely (few Republican governors have done so), but also unhealthy. All those new patients on Medicaid may have to drive very far to find an MD who accepts Medicaid. Having a third-rate health insurance card is not “health care.” It’s a card.  

Some of the biggest public policy blunders of recent years resulted from taking CBO’s crystal ball far too seriously.  Higher 1991 tax rates on high incomes and luxuries worsened the recession and lost revenue, for example, yet seemed courageous by the low standards of faulty CBO bookkeeping. 

An even better example of CBO dominating policy decisions was the foolishly phased-in and poorly-targeted 2001 Bush tax cuts.

In January 2001, CBO predicted that budget surpluses would add up to $5.6 trillion by 2011. That absurd CBO forecast made their (overestimated) $1.35 trillion 10-year revenue loss from look puny – merely nibbling away at 24% of projected surpluses.  Little wonder the 2001 law was a grab-bag of feel-good giveaways (10% tax rate, refundable credits, etc.) thanks in large part to the CBO’s blurred vision of endless surpluses.

Why does this have anything to do with health insurance policy?  Because CBO projections for the Affordable Care Act (ACA) have also been embarrassingly wrong. In March 2010 CBO estimated only 21 million would be uninsured by 2016, but the actual number turned out to be 27 million.  CBO expected 21 million policies on the Exchanges by 2016, but the actual number turned out to be 12 million.  

By using CBO projections as the baseline, as is being done with the GOP plan, it could be said that Obamacare “lost coverage” for 6 million people in 6 years –compared with 2010 CBO projections.

In short, the CBO has always grossly overestimated the success of Obamacare. And they still do.  They appear to underestimate how much larger federal subsidies to Medicaid and the Exchanges “crowd out” other insurance – luring people out of unsubsidized insurance into subsidized insurance, or into seemingly “free” expanded Medicaid in 31 states. 

The CBO’s rosy scenario about the future success of Obamacare exchanges, and about future growth of expanded Medicaid coverage, results in a grossly exaggerated estimate of the number of policies to be “lost” by reducing compulsion, mandates and taxpayer subsidies.  Good policy requires more good judgment, not more bad estimates.

Remarks made by Secretary of State Rex Tillerson in Beijing caused a collective gnashing of teeth among the foreign policy establishment this week. At least twice, Tillerson said that the U.S.-China relationship was built on “non-conflict, non-confrontation, mutual respect, and win-win solutions.” These exact words have often been used by China’s president Xi Jinping to describe a “new model of major country relations” between the United States and China.

China watchers based in D.C. rushed to criticize Tillerson’s statements for mirroring Xi’s language. Writing for Politico, Ely Ratner of the Council on Foreign Relations said, “terms like ‘mutual respect’ and ‘nonconfrontation’ are code in Beijing for U.S. accommodation of a Chinese sphere of influence in Asia.” A headline in the Washington Post said that Tillerson handed a “diplomatic victory” to China. The article featured quotes from experts such as Bonnie Glaser from the Center for Strategic and International Studies who said, “By agreeing to [mutual respect], the U.S. is in effect saying that it accepts that China has no room to compromise on these issues.” In Foreign Policy, former State Department and National Security Council official Laura Rosenberger argued that U.S. allies in East Asia “may question [U.S.] commitments given Tillerson’s wording in Beijing.”

The consensus seems to be that Tillerson’s statements are bad for the United States and good for China. But this overinflates the importance of Tillerson’s words. The reaction to then president-elect Donald Trump’s statements about the One-China policy offers a useful point of comparison to Tillerson’s statements. Hand wringing over Trump’s statements were justified, but the response to Tillerson’s statements are overblown.

In a December 2016 interview with Fox News Sunday, Donald Trump suggested that the United States would no longer be bound by its longstanding One-China policy “unless we make a deal with China having to do with other things, including trade.” Trump’s statements prompted a strong, mostly negative response from American experts, and rightly so.

The reaction to Trump’s One-China policy remarks was justified because of the circumstances at the time. The interview came shortly after news broke about a precedent-breaking phone call between Trump and the president of Taiwan, which also caused considerable angst among China watchers. The phone call and One-China policy remarks raised serious questions about the future of U.S.-China relations because there was no policy record to judge these actions against.

Supporters of Trump’s behavior argued that his status as president-elect muted the impact of his actions, and since taking office he has taken steps to reassure China that a significant change in American policy toward Taiwan is not likely. However, at the time the actions were taken it was prudent for China watchers to account for worst-case scenarios given the lack of policy to compare the actions against. Even though worst-case predictions turned out to be false, the shadow of uncertainty that loomed over the incoming Trump administration meant that such dire assessments could not be ruled out.

Tillerson’s recent statements in Beijing can be judged against Trump administration policies. When such policies are taken into account, the “diplomatic victory” won by Beijing quickly loses its significance. The first elements of the Terminal High Altitude Area Defense (THAAD) missile defense system, which Beijing stringently opposes, arrived in South Korea shortly before Tillerson’s trip to the region. A few days before Tillerson’s statements, an aircraft carrier strike group operating under the command of the U.S. Navy’s Third Fleet arrived in South Korea to conduct military exercises alongside the South Korean navy. According to U.S. Pacific Command, this marks the first time that a carrier strike group under Third Fleet command has operated alongside allies in the Western Pacific since World War II.

The Trump administration is also threatening to put greater economic pressure on China, despite its early decision to withdraw from the Trans Pacific Partnership, which many China watchers saw as a boon for Beijing. A recent report by Reuters claims the administration is considering “sweeping sanctions aimed at cutting North Korea off from the global financial system,” which could apply to Chinese banks and firms that do business with North Korea. Robert Lighthizer, Trump’s nominee for U.S. Trade Representative, said he would put more pressure on China in response to its economic practices that hurt the U.S. economy in his confirmation hearing.

The foreign policy establishment is overreacting to Tillerson’s statements in Beijing. There are plenty of U.S. policies, military movements, and economic rhetoric that point to a reality that is divorced from Tillerson’s rhetoric. Words do matter for Beijing, and it may take succor from Tillerson’s words, but this is unlikely to ease their concerns over THAAD deployment, deepening U.S.-South Korean ties, and gathering storm clouds of American trade policy. 

F. A. Hayek died 25 years ago today. His secretary called Cato Institute president Edward H. Crane, who confirmed the sad news to the New York Times.

Hayek’s life spanned the 20th century, from 1899 to 1992. In his youth he thought he saw liberalism dying in nationalism and war. Thanks partly to his own efforts, in his old age he was heartened by the revival of free-market liberalism. John Cassidy wrote in the New Yorker that “on the biggest issue of all, the vitality of capitalism, he was vindicated to such an extent that it is hardly an exaggeration to refer to the twentieth century as the Hayek century.”

Back in 2010 the New York Times said that the Tea Party “has reached back to dusty bookshelves for long-dormant ideas. It has resurrected once-obscure texts by dead writers [such as] Friedrich Hayek’s “Road to Serfdom” (1944).” I responded at the time,

So that’s, you know, “long-dormant ideas” like those of F. A. Hayek, the winner of the Nobel Prize in Economics, who met with President Reagan at the White House, whose book The Constitution of Liberty was declared by Margaret Thatcher “This is what we believe,” who was described by Milton Friedman as “the most important social thinker of the 20th century” and by White House economic adviser Lawrence H. Summers as the author of “the single most important thing to learn from an economics course today,” who is the hero of The Commanding Heights, the book and PBS series by Daniel Yergin and Joseph Stanislaw, and whose book The Road to Serfdom has never gone out of print and has sold 100,000 copies this year.

On the occasion of Hayek’s 100th birthday, Tom G. Palmer summed up some of his intellectual contributions:

Hayek may have made his greatest contribution to the fight against socialism and totalitarianism with his best-selling 1944 book, The Road to Serfdom. In it, Hayek warned that state control of the economy was incompatible with personal and political freedom and that statism set in motion a process whereby “the worst get on top.”

But not only did Hayek show that socialism is incompatible with liberty, he showed that it is incompatible with rationality, with prosperity, with civilization itself. In the absence of private property, there is no market. In the absence of a market, there are no prices. And in the absence of prices, there is no means of determining the best way to solve problems of social coordination, no way to know which of two courses of action is the least costly, no way of acting rationally. Hayek elaborated the insights of the Austrian economist Ludwig von Mises, whose 1922 book Socialism offered a brilliant refutation of the dreams of socialist planners. In his later work, Hayek showed how prices established in free markets work to bring about social coordination. His essay “The Use of Knowledge in Society,” published in the American Economic Review in 1945 and reprinted hundreds of times since, is essential to understanding how markets work.

But Hayek was more than an economist. As I’ve written before, he also published impressive works on political theory and psychology. He’s like Marx, only right. Tom Palmer noted:

Building on his insights into how order emerges “spontaneously” from free markets, Hayek turned his attention after the war to the moral and political foundations of free societies. The Austrian-born British subject dedicated his instant classic The Constitution of Liberty “To the unknown civilization that is growing in America.” Hayek had great hopes for America, precisely because he appreciated the profound role played in American popular culture by a commitment to liberty and limited government. While most intellectuals praised state control and planning, Hayek understood that a free society has to be open to the unanticipated, the unplanned, the unknown. As he noted in The Constitution of Liberty, “Freedom granted only when it is known beforehand that its effects will be beneficial is not freedom.” The freedom that matters is not the “freedom” of the rulers or of the majority to regulate and control social development, but the freedom of the individual person to live his own life as he chooses. The freedom of the individual to break old molds, to create new things, and to test new paths is the mark of a progressive society: “If we proceed on the assumption that only the exercises of freedom that the majority will practice are important, we would be certain to create a stagnant society with all the characteristics of unfreedom.”

Reagan and Thatcher may have admired Hayek, but he always insisted that he was a liberal, not a conservative. He titled the postscript to The Constitution of Liberty “Why I Am Not a Conservative.” He pointed out that the conservative “has no political principles which enable him to work with people whose moral values differ from his own for a political order in which both can obey their convictions. It is the recognition of such principles that permits the coexistence of different sets of values that makes it possible to build a peaceful society with a minimum of force. The acceptance of such principles means that we agree to tolerate much that we dislike.” He wanted to be part of “the party of life, the party that favors free growth and spontaneous evolution.” And I recall an interview in a French magazine in the 1980s, which I can’t find online, in which he was asked if he was part of the “new right,” and he quipped, “Je suis agnostique et divorcé.”

Hayek lived long enough to see the rise and fall of fascism, national socialism, and Soviet communism. In the years since Hayek’s death economic freedom around the world has been increasing, and liberal values such as human rights, the rule of law, equal freedom under law, and free access to information have spread to new areas. But today liberalism is under challenge from such disparate yet symbiotic ideologies as resurgent leftism, right-wing authoritarian populism, and radical political Islamism. I am optimistic because I think that once people get a taste of freedom and prosperity, they want to keep it. The challenge for Hayekian liberals is to help people understand that freedom and prosperity depend on liberal values, the values explored and defended in his many books and articles.

White House National Trade Council Director Peter Navarro’s views have been roundly criticized by economists and policy professionals from across the political and ideological spectra. There seems to be an emerging consensus that the more Navarro speaks and writes, the more he marginalizes his influence within the administration. It is with that cause and (positive) effect in mind that I continue pulling on this thread.

A couple of weeks ago, Navarro wrote an oped in the Wall Street Journal, offering some really unconventional perspectives about trade policy and revealing a profoundly unique understanding of economics. I replied (in long form) on the Cato blog and (in shorter form) with a letter to the editor of the WSJ.

This afternoon, the WSJ published a response from Navarro to me and the authors of the two other letters published in response to Navarro’s original oped. And in response to Navarro’s response, Cafe Hayek’s/Mercatus’s/GMU’s Don Boudreax wrote this letter to the WSJ editor:

22 March 2017

Editor, Wall Street Journal

1211 6th Ave.

New York, NY 10036

Dear Editor:

The headline is promising: “Peter Navarro Responds to His Trade Critics” (March 22). So I eagerly anticipated reading Navarro’s substantive defense, against knowledgeable critics, of his reasons for fearing trade deficits. Alas, disappointment. Navarro offers not a single relevant argument.

Typical is his contemptuous treatment of Dan Ikenson. To establish that Mr. Ikenson has an “Alice-in-Wonderland worldview,” Navarro merely lists some of Mr. Ikenson’s policy positions without offering as much as a syllable to inform us why these positions are untenable.

The closest Navarro comes to making a relevant argument is when he writes, responding to Desmond Lachman, that “if India agrees to lower its tariffs on Harley Davidson motorcycles, Indian consumers will buy more Harleys and save less while Harley will sell more Harleys and invest more.” Well, no one has ever denied that Indians would buy, and Harley would sell, more Harleys if India reduces its tariff on these bikes. But it doesn’t follow that Indians would necessarily, as a result, save less. (Does Navarro always save less when his cost of living falls?) And while more resources would indeed likely be invested in Harley’s operations, these resources would have to come from foreigners if Americans don’t increase their savings. Contrary, therefore, to the conclusion that Navarro wants us to draw from what he pretentiously (if inaccurately) calls “obvious general equilibrium effects,” a cut in India’s tariffs on Harleys is not remotely guaranteed to lead to a decrease the U.S. trade deficit.

Sincerely,

Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030 

Stay tuned!

A Washington Post story today about one of President Trump’s budget cuts reflects what can be called victim journalism. The story focuses on the proposed ending of federal funding for the Appalachian Regional Commission (ARC). The reporter presents an interesting narrative about some ARC beneficiaries, but does not provide the balance needed to judge the overall value of the program.

The story presents individuals in Appalachia as victims, and federal money as the only savior. It does not focus on personal responsibility, local government policies, or federal program failures. The reporter does not mention any studies examining the ARC’s overall effectiveness, or whether auditors have done a benefit-cost analysis to see whether the program’s benefits outweigh the costs.

However, the main problem with the Post story is a lack of appreciation for the federal structure of American government. Statements like this bewilder me: “The federal funding [for ARC] often goes toward repairing essential services rural towns cannot afford on their own, such as fixing broken sewer systems…”

Sewer systems are indeed an essential local service. As such, they should receive a high priority in state and local budgets. If sewers in Appalachia are not being fixed, then state and local governments are failing at a core responsibility. Reporters should ask why that is.

The ARC sprinkles about $150 million a year across 13 states, from New York to Mississippi. Combined state and local spending in those states (excluding federally funded spending) is more than $800 billion a year. So the supposedly crucial ARC spending represents less than 0.02 percent of the region’s own government spending. If the ARC were eliminated, those governments could easily fill the small void with their own money.

Addendum

Let’s drill down on Kentucky, which was the focus of the Post story and is in the center of the ARC region. If all the ARC money were spent just in Kentucky, it would still be only 0.5 percent of the roughly $30 billion in state/local spending in that state.

The Post story claims “so much of the Appalachian commission’s budget — $146 million in 2016 — goes toward infrastructure projects…” Assuming that is true, why doesn’t Kentucky have room in its own budget for infrastructure such as sewers? Looking at Census data for state and local governments in Kentucky suggests why. Total capital spending on sewers and solid waste was $234 million in 2014, but spending on “public welfare” was $8 billion and spending on government worker salaries was $10 billion.

Yesterday, the Los Angeles Times noted that reports of sexual assault and domestic violence are down in Latino-dominated areas of Los Angeles. NPR also published a story yesterday about four cases of domestic violence dropped by four Latina women in Denver, Colorado. The underlying factor blamed in both stories is federal enforcement of immigration laws at local courthouses.

I wrote about the fallout of this abhorrent practice last month in the Washington Post.

Seizing a person who is seeking refuge from violence subverts the protective function of police officers. If individuals fear as much from law enforcement as they do the criminals living among and victimizing them, they will not come forward to report crimes or cooperate with criminal investigations.

While immigration enforcement is often done under the banner of “public safety,” victims of crimes will be less likely to come forward if doing so risks breaking up their families by deportation. This puts more people in harm’s way and enables abusers and predators free rein among people too fearful to ask for the help that they need.

Moreover, despite the “law and order” rhetoric touted by the Trump Campaign and now Administration, these efforts make police officers’ jobs more difficult.

One Los Angeles Police Dept. detective told the Los Angeles Times, “It is my job to investigate crimes… . And if I can’t do that, I can’t get justice for people, because all of a sudden, I’m losing my witnesses or my victims because they’re afraid that talking to me is going to lead to them getting deported.” When he recently approached a group of Latino workers to investigate a crime, they stood up and walked away. Even though Los Angeles has repeatedly asserted its self-appointed status as a “sanctuary city” for immigrants, one of the workers uttered “Trump is coming,” as he left.

All the pro-police rhetoric in the world cannot make-up for the real-world problems that misguided immigration enforcement can cause. Emboldening violent criminals by making large swaths of the population too scared to come forward not only makes police work more difficult, it can make it more dangerous.

Supporting the police means respecting their jobs and enforcement priorities, not just reciting tough-on-crime pablum. If the Administration really cares about police officers, it should start listening to what they have to say. Immigration agents can find other ways to enforce the law than to pick on the most vulnerable at their time of need.

Yesterday the Supreme Court ruled in the case of National Labor Relations Board v. SW General that an “acting” officer cannot simultaneously stand as a nominee to hold that office permanently, regardless of how the acting officer was appointed. The ruling is a double victory, both for the separation of powers between the president and Senate and for textualism.

Though technical, the statutory interpretation issue in this case was not overly complicated. The Federal Vacancies Reform Act (FVRA) lays out three methods by which someone can become an acting officer in three separate clauses, subsections (a)(1), (a)(2), and (a)(3). It also has a “disqualifying clause,” declaring that (with some exceptions not relevant here) “a person may not serve as an acting officer” if he has also been nominated for a permanent position as that same officer.

There would be no dispute that the disqualifying clause applies to all acting officers, except for one wrinkle: the disqualifying clause begins with the preamble “Notwithstanding subsection (a)(1).” Based only on this preamble, the government argued that the disqualifying clause applies only to those who became acting officers under subsection (a)(1). This would mean that anyone who became an acting officer under subsections (a)(2) or (a)(3) (including the man at the center of this case, former NLRB acting general counsel Lafe Solomon) could never be disqualified by the clause.

The decisive moment in the case may have come during oral argument, when Justice Kagan delivered a simple textual analogy to drive home the implausibility of the government’s argument:

I’m at a restaurant and I’m talking to my waiter, and I place three orders. I say, number one: I’ll have the house salad. Number two: I’ll have the steak. Number three: I’ll have the fruit cup. And then I tell the waiter: notwithstanding order number three, I can’t eat anything with strawberries.

As those in the courtroom recognized, this hypothetical maps onto the disputed text of the FVRA: the three orders are the three subsections, and “I can’t eat anything with strawberries” is the disqualifying clause. Then comes the punchline:

So on your theory, the waiter could bring me a house salad with strawberries in it. And that seems to me a quite odd interpretation of what’s a pretty clear instruction: No strawberries.

In the opinion by Chief Justice Roberts (which Kagan joined), fruit salad is sadly nowhere to be found. But in its place is a nearly identical analogy, which shows just how powerful Kagan’s argument was in shaping the Court’s textual analysis:

Suppose a radio station announces: “We play your favorite hits from the ’60s, ’70s, and ’80s. Notwithstanding the fact that we play hits from the ’60s, we do not play music by British bands.”

You would not tune in expecting to hear the 1970s British band “The Clash” any more than the 1960s “Beatles.” The station, after all, has announced that “we do not play music by British bands.” The “notwithstanding” clause just establishes that this applies even to music from the ’60s, when British bands were prominently featured on the charts.

In other words, the Court placed the textual emphasis squarely where it belonged, on the all-encompassing phrase “a person may not serve as an acting officer.”

In Cato’s amicus brief supporting SW General, we argued that even if the text were ambiguous, the Court should err on the side of protecting the Senate’s role of advice and consent. But we’re perfectly happy that the Court did not have to reach our argument, because it correctly determined that the text wasn’t ambiguous in the first place. Even better, the Court put evidence like “legislative history, purpose, and post-enactment practice” in its rightful subordinate place, writing that “[t]he text is clear, so we need not consider this extra-textual evidence.” As the Court observed, “What Congress ultimately agrees on is the text that it enacts, not the preferences expressed by certain legislators.” The late Justice Scalia could not have put it better himself.

The practical effect of yesterday’s decision will be to help protect the Senate’s role as a check on the executive branch. Acting officers exercise all the power of permanent officers, despite not having undergone the Senate confirmation process. The FVRA recognized the danger of allowing the president to install his preferred long-term nominee as an acting officer, which would effectively give that nominee a “head start” before the Senate can weigh in. After yesterday’s decision, that maneuver will no longer be possible, by this or any future president. 

(Editor’s note: This is the second installment of a three-part article.)

Intervention or Private Initiative?

As I argued in my previous post addressing Fung et al.’s article on Canada’s private banknote currency, the imperfections of that currency appear, on close inspection, far less substantial than Fung et al. suggest. Moreover, what blemishes there were didn’t imply any market failure, or a need for more government regulation, for the simple reason that “imperfect” doesn’t mean “inefficient.” On the contrary: the facts suggest that heavy-handed government interventions aimed at correcting the supposed imperfections more rapidly than bankers’ own efforts might would probably have done Canadians more harm than good.

By making those points, I don’t mean to deny that the various reforms Fung et al. describe, culminating in the Bank Act of 1890, led to some genuine improvements. Yet even if they did, the reforms still don’t imply any market failure, for the simple reason that those reforms appear, for the most part, to have been ones that Canada’s private bankers themselves recommended and implemented, often in anticipation of legislation that enshrined them.

The specific reforms to which Fung et al. refer are:

  • The provision of the 1870 Bank Act imposing double liability on banks’ shareholders[1];
  • That of the 1880 Act giving note holders a first lien on banks’ assets; and
  • Those of the 1890 Act requiring banks to establish note-redemption agencies in “all of Canada’s major commercial centers,” together with a Bank Circulation Fund for the redemption of notes of failed banks, and also to provide for the payment of interest to holders of failed banks’ notes as compensation for any settlement delay.

It’s the importance Fung et al. assign to these reforms, in perfecting Canada’s commercial banknote currency, as well as their belief that the reforms were compulsory, that informs their conclusion that “some intervention by government” will be called for if digital currencies are to be made safe and uniform.

But to what extent were those 19th century reforms truly compulsory, in the sense meaning that they had to be imposed upon Canada’s bankers by government authorities?

Canadian Banking Charters and Welcome Reforms

To answer the question, one must consider that during the period in question each of Canada’s commercial banks was chartered by means of a separate Act of Parliament. Furthermore their charters up to the time of Confederation had all been modeled on those of the first Bank of the United States and its very similar successor, and were as such correspondingly outmoded. As George Hague, a prominent Canadian banker and the first President of the Canadian Bankers’ Association, explained in an 1897 address to Ottawa’s Board of Trade, although many of the provisions Alexander Hamilton set down in drafting the first Federal bank’s charter “indicated considerable financial knowledge, others exhibited a remarkable want of acquaintance with the function and scope of Joint Stock Banking. They indicated rather a ‘feeling after’ what was desirable, than an acquaintance with what had been found to be sound and practicable.”

In other words, Canada’s early bankers were saddled with charters containing various “curious and crude provisions…all indicating a great want of acquaintance with Banking as it was carried on in the countries where it had attained the highest development and was best understood, viz., England and Scotland.”

But while the bankers might have urgently wished to revise some of the rules under which they operated, they couldn’t do so on their own, for modifications to the provisions of their charters could only be effected through legislation, whether the bankers themselves welcomed the modifications or not.

In fact, Canadian bankers did welcome most of the reforms contained in the various Bank Acts, for the simple reason that they were themselves the principal authors of those reforms! According to Roeliff Breckenridge’s The Canadian Banking System, 1817-1890 (p. 357), an authoritative work to which Fung et al. frequently refer, it was the bankers’ own suggestions and efforts, inspired by their “desire to remove…the causes of public dissatisfaction,” that paved the way to change.[2]

As for Parliament itself, according to George Foster, the MP who introduced the 1890 Act, by then at least it seemed determined “not to interfere violently with what  we may call the natural growth of the banking system in this country” (ibid., p. 358). Instead, by heeding the bankers’ advice, it endeavored (to return to Breckenridge’s own words) “by some slight strengthening, some little alteration, to keep and enhance the certain benefits of what they [Canadians] already possessed.”

Bank Act of 1870: Liability

The significance of bankers’ own desire for reform is admittedly not so evident in the case of the double liability provision of the Bank Act of 1870. But that’s only because, despite what Fung et al. suggest, that measure wasn’t all that significant. For some years before the 1870 Act was passed, most of Canada’s bank shareholders were already subject to double liability in the event that a bank whose shares they owned failed. The sole exceptions were holders of shares in the Bank of British North America, whose liability was limited, and those of the Banque du Peuple, whose liability was unlimited. Since the Bank of British North America was actually exempted from the 1871 double liability provision, that measure did not actually subject existing Canadian bank shareholders to any increased liability at all!

Bank Act of 1880: Note Holders First Lien

The 1880 provision making banknotes a first lien on banks’ assets was, on the other hand, a genuine innovation. But it was also one for which Canada’s bankers were themselves responsible. As Breckenridge explains (p. 291-2), it was they who approached the then Minister of Finance, Sir Samuel Tilly, presenting him with various reform proposals, including their “plan to make the notes issued by a bank the first charge upon its assets in case of insolvency,” which they believed would assure “the ultimate payment of all bank notes in full” despite occasional bank failures.

Bank Act of 1890: Note Redemption

The 1890 reform, finally, was also the bankers’ idea. According to Breckenridge, in December 1888 one of them sent a circular letter to all the others, noting the complaints about banknotes not always being current, and outlining plans for keeping them at par “however far they might be from the place of issue.” The circular also proposed the establishment of “a safety fund, contributed from all the banks, whereby to ensure prompt and full redemption to the holders of notes of a suspended bank.”

What’s more, most of the banks completed arrangements to carry out the circulars’ first proposal within a year of its receipt, that is, before the new Bank Act was passed, making pairwise agreements to redeem each other’s notes in their separate neighborhoods. According to Breckenridge, “this simple device quite prevented the discount for geographical reasons” (p. 321). The actual legislation, in other words, amounted to little more than an official endorsement of voluntary arrangements already in place when it passed.[3]

It was, presumably, with these facts in mind that L. Carroll Root (p. 323) bemoaned “the tendency  of United States financiers and statesmen to place extraordinary stress upon providing for elaborate redemption facilities,” while noting that Canada’s experience proved “that legislation in this regard was delightfully immaterial.” U.S. experience, on the other hand, “demonstrated how completely a thoroughly good system which has developed without the aid of law has been petrified by attempting to assist it.”

Government-Inspired Reforms

And what about those banking and currency reforms, whether merely proposed, or proposed and actually implemented, that really were the brainchildren of Canadian government officials? How sound were they, and how much good did they do when actually implemented?

The general answers are, not sound at all, and no good at all.  Although the schemes’ proponents always claimed that they were aimed at improving the established  system’s stability and uniformity, in truth their real purpose, like that of most government-inspired monetary reforms in those days, if not since, was to fill the government’s coffers —  and never mind the other consequences! Also like most reform proposals then and long after, they tended to be influenced more by mere U.S. and British precedents, and occasionally without regard to those precedents’ actual results, than by any consideration of the plans’ merits in comparison to those of existing Canadian  arrangements.

If you doubt these claims, I hope that a quick review of the main government-inspired schemes will change your mind. These were:

  • Lord Sydenham’s 1841 proposal to establish a monopoly bank of issue for the Province of Canada;
  • The Provincial Government’s (so-called) Free Banking Act of 1850; and
  • The 1866 plan by which Provincial (later Dominion) notes were introduced.

Most of the governments’ other initiatives were but variations on these three schemes.

Lord Sydenham’s 1841 Monopoly Proposal

The reform originally proposed by Lord Sydenham, the first Governor-General of the Province of Canada (a merger of the earlier colonies of Upper and Lower Canada) was nothing less than an attempt to anticipate in Canada a stricter version of the system that Peel’s Act established in England several years later. Like the latter arrangement, it was based on Lord Overstone’s Currency School doctrines, with their insistence upon maintaining a rigid connection between the quantity of banknotes outstanding and their issuers’ specie reserves. The specific plan was to establish a Provincial Bank of Issue with a fixed fiduciary note issue, beyond which it could issue notes only in exchange for bullion, and soon thereafter to discontinue other banks’ powers of note issue.

Anyone conversant with English financial history knows that Peel’s Act proved a failure there, the government having had to suspend it on three occasions within less than a quarter-century. But in England the measure could at least be said to have been intended to address the established arrangement’s undeniable shortcomings, made dramatically evident in the severe Panic of 1825 and the somewhat less severe one of 1836. (By the way, Scotland, with its free banking system that Canada’s bankers wisely strove to imitate — whenever the Canadian government let them — was quite unscathed by either panic.)

The Province of Canada, however, could offer no such justification for pursuing a similar reform. As Breckenridge (p. 111) points out, with a (I think quite justified) hint of indignation,

so far as the experience of either Upper or Lower Canada taught anything, it was that their bank note currency was satisfactory, worked well and was safe.  … What [Canadians] wanted, what in fact they had, was a bank note currency that would fluctuate in correspondence with the number and amount of transactions wherein it was used. Compared to this, the rigidity and inelasticity of a government issue were distinctly objectionable.

If Lord Sydenham’s plan was hardly likely to give Canadians a currency superior to what they already had, what it was likely to do was help fill the Provisional government’s depleted coffers. Talk of protecting note holders was, in fact, a sham; the government’s real intent all along had been to create, in the shape of the proposed Provincial Bank, a ready market for Provincial  government debt, which was to make up three-quarters of the assets backing the proposed bank’s notes (ibid., pp. 110-11).

The (So-Called) Free Banking Act of 1850

Turning to the reform of 1850, Warren Weber, one of the authors of the work I’m criticizing, but also a foremost authority on the shortcomings of the so-called “free banking” systems established by 17 U.S. state governments between 1837 and 1860, would presumably be among the first to recognize the seeds of folly lurking in any plan to superimpose a like system upon Canada’s otherwise commendably safe and stable, if not quite perfect, monetary arrangements. As Daniel Sanchez explains in a recent review of the U.S. experiments, although a few worked reasonably well, others witnessed numerous bank failures, and still others were complete fiascos.

Yet importing the doubtful American arrangement, right down to its misleading name, is just what the Hon. William Hamilton Merritt did in  proposing the Free Banking Act of 1850 to the Provincial Government’s Legislative Assembly. Once again, the proposed measure overlooked both the special circumstance — in this case, the corruption involved in the so-called “spoils system” for chartering banks — that had brought the U.S. free banking systems into being, and the very real shortcomings of those systems. Even in New York’s case — one of the better ones, upon which Canada’s legislation was most closely modeled — twenty-nine banks had failed within the system’s first five years, forcing those holding their notes to settle for only 75¢ on each of their supposedly fully secured dollars (Breckenridge p. 137)!

Despite these facts, the government succeeded on this occasion in getting its proposal adopted. Fortunately, few banks were ever chartered under the Free Banking Act’s provisions, and those that were found competing with their less-regulated rivals a hard slog. Eventually, in the colorful words of Horace White (p. 361), the chartered banks “crowded the free banks to the wall.” Although it lingered on for some years as a dead letter, Canada’s Free Banking Act was finally repealed in 1866.

What drove Canadian government authorities to push such an ill-conceived and ill-fated measure through in the first place? Not, surely, a desire to “regulate private banking and the circulation of the notes of private bankers,” much less “to protect the public from injury from private banks,” as the law’s preamble declared: the Free Banking Act didn’t do, and couldn’t possibly have done, any of these things. The measure’s true purpose was, as usual, “to relieve, in part at least, the financial difficulties of the government, by widening the market for its securities” (Breckenridge, p. 137), which it did by asking banks formed under it to “deposit with the Receiver General provincial securities for not less than £25,000 ($100,000), par value, in pledge for their notes” (ibid., pp. 138-9).

The Provincial Note Act of 1866

The Provincial Note Act of 1866, finally, was another Provincial Government revenue gambit, this time motivated by the fact that $5 million in its floating debts were coming due, plus the fact that A.T. Galt, its acting Minister of Finance, lacked “the courage to borrow, at the market rate of interest, the necessary funds” to pay them (Breckenridge p. 178). Galt therefore argued that the government “should resume a portion of the rights which it had deputed to others, and meet the liabilities of the country with the currency which belonged to it” (ibid.) His specific proposal consisted of an act authorizing the Provincial government itself to issue up to $8 million in notes payable on demand in specie, and to reward banks for agreeing to retire their own notes and employ provincial notes instead.

Concerning Mr. Galt’s claim that the right to issue currency “belonged” to the government, Beckenridge effectively rebuts it (pp. 196-7), observing instead that  “The right to issue promissory notes, payable on demand, for circulation of money was not originally a government or crown prerogative, either in Great Britain or its colonies,” and that this same right “existed and was exercised both in Lower and Upper Canada before banks ever became a subject of [Canadian] legislation.”  Breckenridge goes on to say that

Once it is recognized that the business of issuing notes for circulation, promising payment, and payable on demand, is essentially similar to any other business in instruments or forms of credit — once it is seen that, historically and practically, note issue is no more a prerogative of government than life insurance, receiving deposits at call, or drawing foreign exchange, the way is barred to many a fallacy and delusion. The cry that “the profits of the circulation should belong to the government,” then appears no less ridiculous than the plaint, “the profits of the flour mills, the shoe factories, the building societies, should belong to the government” (ibid., p. 199).

To which I can only add, Hear, hear!

Well justified or not, Galt’s project won the day. And what were its effects? Even from the government’s own perspective, they were disappointing. The Bank of Montreal alone agreed to retire its own notes in exchange for the new Provincial ones — and did so only because that was its best hope of collecting on the $2,250,000 the government owed it at the time. As other banks refused to go along with the plan, the average amount of Provincial notes outstanding during the scheme’s first year was just a little more than $3 million, which was hardly enough, if indeed it was enough, to cover the governments’ costs of implementing it.

If the Provincial Notes Act let down the government, it proved positively destructive to the Canadian banking system. Although the Bank of Montreal itself gained by the fact that the government was no longer in  arrears with it, the Act also had the detrimental effect of placing the interests of that powerful institution “in antagonism to those of the other banks” (ibid., p. 183).

In particular, because the Montreal bank profited from any increase in the demand for Provincial notes, and those notes alone enjoyed legal tender status, it now stood to gain from any general loss of confidence in the banking system (ibid., p. 185). Consequently it became, not merely disinclined to offer its assistance to any of its rivals in need, but inclined to resort to stratagems, such as that of refusing to accept (as it had routinely done in the past) drafts on Montreal in lieu of legal tender in settlement of interbank dues (ibid., p. 182), calculated to embarrass them. It was (again, according to Breckenridge) owing to these and other such subtle effects of the Provincial Notes Act that Canada suffered one of its only (minor) banking panics, in 1868, among other “remoter” consequences (ibid., p. 194). For all these reasons Breckenridge finds himself concurring  Sir Richard J. Cartwright’s verdict, delivered in the Dominion House of Commons in December 1867. “A statute more offensive, or more deliberately mischievous, or more calculated to prejudice Upper Canada,” Cartwright said, “was impossible to conceive (ibid.).”

Expert opinion was no less damning concerning the later, 1869 government proposal to have Dominion notes, not only replace former Provincial notes, but completely supplant commercial bank notes. When this proposal was mooted, gold was still commanding a 30 percent premium relative to U.S. Notes (aka greenbacks), notwithstanding Lee’s surrender at Appomattox several years earlier. With that circumstance in mind, the editor of the Canadian Journal of Commerce observed that

with the well defined experience of the past to guide us, besides having the example of the Unites States as a warning, it does seem almost a work of supererogation to argue the question of a government paper currency. To advocate it, except under very peculiar circumstances, implies either palpable ignorance of the plainest historical facts and the most widely admitted conclusions on the science of banking, or a strange, infatuous, and obstinate clinging to a mere theory, long after the world has thrown it aside as absurd. … [Government paper currency] is only justifiable when it is the last resort of an embarrassed Treasury, and when the national honor and existence are at stake, and even then experience shows that whenever it is adopted a long heritage of debt and high expenditures is entailed upon the country which sanctions or suffers it.

No wonder that Fung et al. don’t find much evidence that Dominion notes “improved the performance of the Canadian monetary system.” Unfortunately, they never consider the possibility that banknotes were in crucial respects superior to government paper money, as was indeed the case. I’ll have more to say about that in the next, and final, post in this series.

But why resurrect all these ancient complaints about the Canadian government’s interference with its (mostly) private monetary system? Because, if Fung et al. succeed in encouraging either the Canadian government or the Bank of Canada itself to regulate private digital currencies so as to “improve” them, Canadians citizens had better brace themselves for another round of harmful (though perhaps fiscally convenient) currency reforms.

(To be continued.)

_______________________________

[1] Although, in their “Non-Technical Summary” and elsewhere, Fung et al. credit the Bank Act of 1871, rather than that of 1870, with imposing double liability on Canadian bank shareholders, that is not correct. In fact the 1871 Act involved only minor technical amendments to existing legislation. Instead, as Breckenridge notes (pp. 261-2), it was chiefly “devoted to the re-enactment and consolidation of legislation with respect to banks already in force.”

[2] In observing that Canada’s bankers themselves bore primary responsibility for the various beneficial reforms that Fung et al. attribute to “government intervention,” I don’t by any means intend to suggest that any reform that some or all bankers themselves desire is bound to prove generally beneficial! In the United States, certainly, powerful bankers have been behind some of the very worst banking reforms, including the decision, following the Panic of 1907, to set-aside a Canadian-style currency and banking reform in favor of the establishment of a central bank.

[3] The bankers rejected, on the other hand, an alternative proposal that would have compelled them to copy the 1864 U.S. National Bank Act provision, discussed previously, by which every national bank had to receive at par the notes of all other national banks, on the perfectly valid grounds that “the duty of redemption ought to fall, not upon its competitors, but upon the bank which gains from the circulation” (Johnson p. 323). This is one of many examples — some others are discussed below — of how the Canadian government’s own reform proposals tended to consist of thoughtless imitations of U.S. (or British) arrangements that were themselves, more often than not, severely flawed.

Besides reciprocal arrangements between pairs of banks, the establishment (again, voluntary) of bank clearinghouses also contributed to the efficiency of Canada’s note redemption arrangements. Here Halifax and Montreal led the way by establishing clearinghouses in 1887 and 1889, respectively. Other clearinghouses were established, with the help of the newly-formed (and once again voluntary) Canadian Bankers’ Association, in Toronto and Hamilton in 1891, in Winnipeg in 1893, and in St. John, New Brunswick, in 1896 (see Cannon, Clearing-Houses, p. 299). Yet it was not until after that Association was incorporated by Canada’s Parliament in 1900 that it was authorized, by the Bank Act of 1900, to “establish in any place in Canada a clearing house for banks, and make rules and regulations for the operations of such clearing house [sic].” Here again, legislation merely sanctioned what private initiative had already accomplished.

[Cross-posted from Alt-M.org]

President Donald Trump’s budget issued last week would cut $54 billion from nondefense spending. Budget director Mick Mulvaney did a nice job assembling an array of sensible cuts, as I discuss in this CNN op-ed and this blog.

Recipients of handouts and pro-spending activists are not happy with the proposals. But many of Mulvaney’s proposed cuts are for local activities, such as housing and schools. If programs are important, then local governments can fund them with their own taxes, which would be a more efficient, transparent, and democratic fiscal approach.

Some GOP members of Congress are not happy about the cuts either. Republicans generally consider themselves to be fiscal conservatives. But for some members, their oft-expressed concerns about deficits might be just philosophical musings, not a guide to their actual policy positions:

  • Senator Rob Portman (R-OH) responded to Trump’s cuts by coming to the defense of federal funding for Lake Erie restoration, which he called “critical.” Yet the senator’s official website complains about the federal “spending spree, piling up new deficits onto our massive debt … Washington’s fiscal irresponsibility passes the problem to future generations.”
  • Representative Michael Conway (R-TX) opposes farm subsidy cuts, saying “Agriculture has done more than its fair share” in restraining deficits. (That’s not true—farm aid has risen in recent years). Yet on his website, Conway says, “Our nation is in a budgetary crisis … As a CPA and fiscal conservative, I am committed to working with my colleagues to cut spending and put our fiscal house in order. Congress does not have a blank check; it is vitally important that we balance the federal budget.”
  • Senator Lisa Murkowski (R-AK) complained about the Trump budget as well. She “attacked plans to cut or eliminate programs that help the poor pay heating bills, provide aid for localities to deal with wastewater and subsidize air travel in rural areas like her home state of Alaska.” Yet her website says, “Senator Murkowski believes one of the most essential functions of Congress is to pass a balanced budget that sets a responsible spending plan for federal government services. For too long, the U.S. government has been spending more than it takes in and borrowing large sums of money to make up the difference. To set the nation on a more stable financial path, it is critical for Congress to set sustainable funding levels for the federal government, reduce overall spending levels.”
  • House appropriator Hal Rogers (R-KY) complained about Trump’s proposed cuts to foreign affairs activities. Yet his website says that he will “remain steadfast in fighting against government waste and any bills that increase the government’s reach on your dime.” As it turns out, foreign affairs has greatly increased its reach on our dime, and so Trump’s proposed cuts make a lot of sense.

President Trump recently signed an Executive Order requiring agencies to eliminate two regulations for each new one imposed. He should ask members of Congress to be similarly responsible on spending. For each proposed spending cut they disapprove, they should identify and pursue two similar-sized cuts elsewhere in the budget.   

In our recent brief on immigrant crime, we focused on the 18 to 54 age range when looking at the incarcerated and non-incarcerated populations. This was necessary because the American Community Survey data for weighted responses does not distinguish between the type of group quarters – which are prisons, universities and colleges, mental health facilities, nursing homes, and others.

By narrowing our focus to those in the 18 to 54 age range we were able to cut out about 1.4 million folks in elderly care facilities but only excluded about 206,000 prisoners or about 9.2 percent of the total. Excluding those under the age of 18 also removed most respondents in mental health facilities but only decreased the adult criminal population by 0.2 percent.

Figure 1 did not make it into our final brief but it shows a big difference in the distribution of ages between the three groups we examined. The median age of illegal immigrants and natives is 35 – almost exactly in the middle of the 18 to 54 age range. Interestingly, there is a dip in the age distribution for natives in their late thirties and early forties while the age distribution of illegal immigrants is shaped like a bell. In contrast, the median for legal immigrants was 41 which is on the older side of the distribution.

Figure 1
Age (18-54) Distribution of Illegal Immigrants, Legal Immigrants, and Natives

Source: ACS and authors’ calculations.

Criminals are disproportionately young so it would be reasonable to expect natives to be more crime-prone before the age of 27 and illegal immigrants to have a higher crime rate than legal immigrants. That could explain part of the difference in crime rates between natives and illegal immigrants. The surprising result is that illegal immigrants are so much less crime prone when immigration-only offenders are excluded even though they are younger than legal immigrants and have a median age that is the same as natives.  The young age and low education of illegal immigrants are consistent with more criminality in other populations.

The most surprising finding from our brief is that illegal immigrant women are less than half as likely to be incarcerated as women who are legal immigrants or natives (Figure 2). Illegal immigrants are slightly less likely to be women in this age range, only 48.5 percent compared to 51 percent for legal immigrants and 50 percent for natives, but that doesn’t explain the difference in rates. It could be related to low female illegal immigrant labor force participation rates (LFPR) or caused by the same mechanism that induces those lower LFPRs.

Figure 2
Characteristics of Prisoners by Sex and Nativity, Ages 18-54

 

Natives

Legal Immigrants

lllegal Immigrants

All

Female

11.47%

10.73%

4.58%

11.06%

Male

88.53%

89.27%

95.42%

88.94%

 Source: ACS and authors’ calculations.

 

 

In a unanimous decision yesterday, the U.S. Court of Appeals for the Eleventh Circuit vindicated Ocheesee Creamery’s free speech rights when it reversed a district court’s decision that prevented the creamery from telling its customers the truth about the products it sells.

Ocheesee Creamery is a small, all-natural dairy farm located in rural Florida that prides itself on selling organic products to its customers. This mission requires that they not add ingredients to the food they sell. One such product the creamery offered was “skim milk”—which is simply milk that has had the cream removed. For a number of years, Ocheesee sold its milk and accurately labeled it as pure pasteurized skim milk—nothing more, nothing less.

In 2012, however, the Florida Department of Agriculture and Consumer Services (FDACS) told the small business that it had to inject its all-natural milk with artificial vitamins or quit telling its customers that what they were offering was skim milk, and instead call it “imitation milk product.” FDACS regulations define skim milk as milk that is not just milk, but as milk injected with vitamins A and D. Now, you might ask yourself how injecting artificial ingredients into all-natural product transforms it into something that is considered “imitation”. Yet that’s precisely what the FDACS requires under its regulations.

This left Ocheesee with a Hobson’s choice: it could mislead its customers by labeling its milk as “imitation”; it could pump the milk full of artificial ingredients and thus violate its mission to sell all-natural products; or it could quit selling skim milk and lose substantial profits. Faced with this dilemma, the creamery offered to put a disclaimer on its labels that would tell customers that its milk doesn’t include added vitamins. But this wasn’t good enough, so, aided by the Institute for Justice, the creamery sued the Florida bureaucrats in federal court.

Ocheesee lost its opening battle when a district court granted the government’s motion to dismiss the case, but the Eleventh Circuit reversed the decision. The court found that the First Amendment protects the creamery’s labeling of its skim milk because the labeling did not relate to an illegal activity and it is not false or inherently misleading speech. The court pointed to Webster’s Dictionary, which defines “skim milk” as “milk from which the cream has been taken”—which is exactly what the creamery was offering its customers. The court elaborated that while “[i]t is undoubtedly true that a state can propose a definition for a given term … it does not follow that once a state has done so, any use of the term inconsistent with the state’s preferred definition is inherently misleading.” Because if the government were allowed to do so, “[a]ll a state would need to do in order to regulate speech would be to redefine the pertinent language in accordance with its regulatory goals… . Such reasoning is self-evidently circular.”

Moreover, the court noted there were other ways Florida could have sought to regulate the creamery’s labeling to protect its regulatory goals. It pointed to a proposal—which Ocheesee had already offered years before—to simply require the creamery’s label include an “additional disclosure” that some vitamins in the milk are removed during the skimming process.

The circuit court’s decision should be applauded as a win for free speech and economic liberty, and shows that states may not take the cream out of the First Amendment or give us “skim milk” constitutional protections.

Responding to conservative protests that the American Health Care Act would immortalize ObamaCare rather than repeal it, the House Republican leadership has announced several amendments. (See my initial analysis of the bill here, and my analysis of the Congressional Budget Office score).

The amendments do not even come close to fixing the problems with this fatally flawed bill. Indeed, by expanding the AHCA’s tax-credit entitlement, it will make the bill resemble ObamaCare even more.

ObamaCare’s Medicaid Expansion                                 

Original AHCA provisions:

As introduced, the AHCA includes language that supposedly repeals ObamaCare’s expansion of Medicaid to able-bodied, childless adults. In fact, it would expand the Medicaid expansion and make it permanent.

The original bill would have allowed the 19 non-participating states to implement the expansion until 2020, allowed participating states to expand enrollment until 2020, and would have kept paying states the enhanced, 90 percent federal “match” for each expansion enrollee until that enrollee disenrolled. Expansion advocates in those 19 states hailed the bill for removing obstacles to those states implementing the expansion.

The bill thus would have repealed the Medicaid expansion in name only. By 2020, there would have been so many more Medicaid expansion states and enrollees, that Congress would rescind the repeal and keep the expansion in perpetuity.

Amendment:

The amendment would prevent the 19 states that have not implemented the expansion from doing so. This is a welcome change—but it is not nearly sufficient.

Even with this change, there would more Medicaid-expansion enrollees after “repeal” than before. The 31 expansion states could keep adding new enrollees to the expansion until 2020, and keep receiving the enhanced, 90 percent federal “match” for those enrollees after 2020. The AHCA would still reward state officials who did the wrong thing (expanding Medicaid) and punish state officials who did the right thing (refused to implement the expansion). The bill would still create increased pressure on Congress to rescind this “repeal” before 2020.

The amendment would allow states to impose work requirements for able-bodied Medicaid enrollees. Again, this is a welcome change, but not nearly sufficient.

Work requirements could reduce dependence on Medicaid, reduce Medicaid spending, and reduce pressure for Congress to preserve the expansion. Yet work requirements are only (politically) feasible for able-bodied adults. And the states where work requirements are most needed—the 31 states that have implemented the Medicaid expansion—are the least likely to impose a work requirement. Why would they? States that use work requirements to help Medicaid-expansion enrollees achieve financial independence would see only 10 percent of the savings. The other 90 percent goes to Washington. The amendment’s optional work requirements are a fig-leaf proposal that does little if anything to improve the AHCA.

Medicaid “Reforms”

Original AHCA provisions:

Under current law, the federal government provides unlimited matching grants to states for their Medicaid programs. For every dollar a state spends on its “old” Medicaid program, the federal government gives the state from $1 to $3. For every dollar a state spends on ObamaCare’s Medicaid expansion, the federal government generally will give the state $9. These provisions create incentives for states to expand Medicaid to able-bodied adults and to cut care for more vulnerable residents—children, expectant mothers, the aged, blind, and disabled.

As introduced, the AHCA would change how the federal government funds the “old” Medicaid program in a way that likewise encourages states to expand the program to able-bodied adults and to cut care for the disabled and other vulnerable residents.

The AHCA would convert the current unlimited matching-grant system to a system where states can receive unlimited grants so long as they keep expanding eligibility and enrolling more people in Medicaid.

States would continue to receive matching federal dollars for every dollar they spend until federal grants reach a variable “cap.” Beyond that cap, states get no more money from the feds. But the cap rises if states expand enrollment.

As a result, when states approach or exceed the cap, they will have two choices. They can expand enrollment (which allows the state to continue receiving federal matching dollars) or they can cut benefits and provider payments. The AHCA thus mimics the Medicaid expansion’s incentives to expand enrollment among able-bodied adults (who cost the state relatively little) and to cut care to vulnerable populations. Under the ACHA, cutting spending for vulnerable patients by $1 saves the state $1, as opposed to an average $0.43 under the current system.

The AHCA would give states the option of a block grant—a fixed federal payment, rather than matching grants. But making block grants an option assures higher federal spending, since each state will take whichever option maximizes the federal contribution to their programs.

Amendments:

The amendments would increase the rate of growth of the “cap” with respect to elderly and disabled enrollees. This change would increase federal spending on those groups, but do nothing to change the perverse incentives noted above.

Tax Provisions

Original AHCA provisions:

As introduced, the AHCA preserves much of ObamaCare’s entitlement spending by reshaping its subsidies for private health insurance. ObamaCare offers “refundable” tax credits for health insurance that are based on income. The “refundable” part means that these tax credits are mostly government outlays, not tax reduction. ObamaCare’s “tax credits” are 94 percent government spending.

The AHCA would convert those tax credits to smaller credits based on age. Crudely put, the AHCA would shift the benefits from ObamaCare’s tax credits from low-income people in the individual market to higher-income people in the individual market. At the same time, the AHCA would allow insurers to reduce premiums for younger enrollees and increase premiums for older enrollees. The combination of these changes means many older and lower-income enrollees will have to pay more out of pocket for less coverage.

The AHCA would have allowed tax-credit recipients who purchased coverage that cost less than the amount of the credit to deposit the balance in a tax-free health savings account (HSA).

ObamaCare increased the threshold above which taxpayers can deduct their medical expenses from 7.5 percent to 10 percent of income. This was literally a tax on the poor and the sick. As introduced, the AHCA would have reduced the threshold back to 7.5 percent.

Amendments:

The amendments provide additional funding for refundable tax credits, but punt to the Senate the task of devising a way to spend the extra money on low-income, near-elderly taxpayers. They would eliminate the “spillover” option of depositing the balance of one’s tax credit into an HSA. And they would further reduce the threshold above which taxpayers may deduct medical expenses to 5.8 percent of income.

These changes are cosmetic. They do not alter the fact that the CBO projects the AHCA will cause average premiums to rise by 20 percent. And they do not address the root problem of excessive health care prices.

Expanding the tax credits simply throws even more federal dollars after unaffordable care. Subsidizing third-party payment, as tax credits do, makes health care less affordable, not more. Eliminating the “spillover” option further subsidizes third-party payment by guaranteeing tax-credit recipients will buy coverage than they consider desirable. Reducing the threshold for medical deductions might move in the direction of tax neutrality between direct payment and third-party payment, but only negligibly.

In each case, Congress would do more to make medical care affordable by using those resources to expand tax-free health savings accounts (HSAs).

Conclusion

Indeed, all the changes made by these amendments are cosmetic. When the House GOP leadership unveiled the American Health Care Act, I wrote that it “merely applies a new coat of paint to a building that Republicans themselves have already condemned.” All these amendments do is paint the shutters a different color. Even with these amendments, the AHCA would be worse than doing nothing.

Some conservatives will like that the amendments would eliminate ObamaCare’s taxes (except the Cadillac tax) one year earlier than the original bill. Yet because the AHCA gets the policy wrong, it sets the stage for higher federal spending, which will create pressure for higher taxes in the future. If conservatives want the AHCA’s tax cuts to stick, they need to revamp the health care provisions drastically. 

To make those tax cuts stick, Republicans need to improve health care. To improve health care, Republicans need to bring premiums down immediately by fulfilling President Trump’s promise to repeal ObamaCare in full; give states a fixed federal contribution to their Medicaid programs plus full flexibility to target Medicaid funds to the truly needy; and bring health care prices down for all patients by expanding HSAs.

Pages