Archives: 06/2011

Capitalist Acts between Consenting Adults

Even Robert Nozick gave up on libertarianism,” says Stephen Metcalf, more or less. “So what’s wrong with you?” (Aside, of course, from the fact that Nozick didn’t give up.)

I probably should hesitate before declaring my allegiance to the evil league of evil. But you’re reading this at the Cato Institute, so it may be too late for that. Metcalf’s piece falls into a large and (sadly) growing category for me, one labeled “People Condemning Libertarians for Strange Things That Never Occurred to Anyone, Let Alone to Us.”

It never occurred to me, for example, that by citing Wilt Chamberlain as someone who became wealthy in a morally blameless way, Robert Nozick was playing the race card. Metcalf writes:

“Wilt Chamberlain” is an African-American whose talents are unique, scarce, perspicuous (points, rebounds, assists), and in high demand. We feel powerfully the man should be paid, and not to do so—to expect a black athlete to perform for (largely) white audiences without adequate compensation—raises the specter of the plantation.

Raises the specter of the plantation? Does it now? Let’s generalize: Your forcing anyone to perform without what they consider adequate compensation should raise that same specter. If someone is going to perform for you, they must do it for a wage that they consider adequate, whether their “performance” is a show of basketball prowess or just working on an assembly line.

If they don’t like the wage, they should be free to seek a better one. If the employers pay a giant wage, and if they do so because they really, really like the work, then that’s also their right.

Those who want to interfere – to tax wages, to restrict entry or exit, or to prohibit whole lines of work – they are the ones who bear the burden of proof. Not the willing buyers and sellers of labor. That’s what Wilt Chamberlain’s example is supposed to show.

Maybe you’re not ready to go whole-hog and declare that taxation is theft. Eh, fine. Still, taxation should make all of us pretty uncomfortable, especially when we look at its philosophical implications. The arguments that justify taxation might actually be unavoidable—truthfully, I wouldn’t know how to run a government without them—but that doesn’t make them any less dangerous.

Of the many errors in a long and error-ridden article, I think the worst has to be the idea that libertarians hold all concentrations of wealth to be good. As long, I infer, as we gather it in sufficiently large heaps. Metcalf writes:

But being a star athlete isn’t the only way to make money. In addition to earning a wage, one can garnish a wage, collect a fee, levy a toll, cash in a dividend, take a kickback, collect a monopoly rent, hit the superfecta, inherit Tara, insider trade, or stumble on Texas tea. For each way of conceiving wealth, there is at least one way of moralizing its distribution. The Wilt Chamberlain example is designed to corner us—quite cynically, in my view—into moralizing all of them as if they were recompense for a unique talent that gives pleasure; and to tax each of them, and regulate each of them, according to the same principle of radical noninterference suggested by a black ballplayer finally getting his due.

This is simply wrong. For a libertarian, it’s only Wilt Chamberlain’s particular type of wealth that is morally blameless, not all the rest. Which kind is his? The kind acquired through voluntary transactions, without coercion or fraud. The kind that comes from Nozick called capitalist acts between consenting adults.

Some wealth is blameless. Some isn’t. And yes, some cases are truly hard to judge: Is Wal-Mart a free-market success story? Wellll…. kind of. But what about all those special tax privileges? What about that eminent domain abuse?

Wilt Chamberlain makes a good example not because he’s a black man struggling sympathetically in a white man’s world. His example is useful because it strips away every possibility of force, fraud, corporate welfare, and government favoritism. When we do that, we can see that it’s still possible to grow wealthy through honest, voluntary methods. That’s a valuable insight, even if you don’t necessarily agree with everything else Robert Nozick ever wrote. (Don’t sweat it; I don’t either.)

Finally, Metcalf strangely neglects Chamberlain’s fans. When we talk about Wilt Chamberlain’s right to collect a paycheck, it’s partly because he’s highly visible. But we should not forget that when we take away that paycheck, we also take away an entertainment choice for millions of ordinary people.

If we remove enough choices like these, we won’t merely have made life less cushy for the talented. We’ll also have made it a lot poorer for the rest of us. We could be taking away not just basketball, but breakthroughs in science, technology, and the arts. And why? Because someone found someone else’s voluntary transfer of wealth distasteful. That shouldn’t be much of a reason.

The Treaty Clause Doesn’t Give Congress Unlimited Power

In 1920, the Supreme Court decided an obscure case concerning the implementation of a treaty between the United States and Canada regarding migratory birds. Tucked into Justice Oliver Wendell Holmes’s five-page decision in Missouri v. Holland was a sentence that expressed a truly startling idea: that Congress can transcend its enumerated powers via its power to implement treaties.

That is, although Congress has no enumerated power to pass, say, general criminal laws, if a ratified treaty with France demands that we pass such laws, then Congress’s power expands to allow for such legislation. Thus, foreign nations and the executive branch are given the power to change, almost at will, one of the most hotly debated and carefully crafted sections of the Constitution, the scope of Article I congressional power!

Now an equally obscure case relating to copyrights gives the Court an opportunity to revisit Missouri v. Holland’s starkly erroneous proposition and reaffirm the Framers’ vision of Congress’s powers as “few and defined.” Golan v. Holder concerns a law Congress passed after the president signed and the Senate duly ratified the “Uruguay Round” general trade agreement, which in part amended the 1971 Berne Convention on intellectual property. This new law reinstated copyright protection to works that were previously in the public domain.

A number of orchestra conductors, educators, performers, film archivists, and motion picture distributors who depend on the public domain for their livelihood challenged the law on two grounds: 1) that it violates the “promote progress in Science and the Useful arts” limitation on the congressional power to pass copyright laws (the Copyright Clause), and 2) it violates the First Amendment. Cato and Georgetown law professor Nicholas Quinn Rosenkranz filed a brief that supports this challenge by highlighting the problems with an expansive interpretation of the treaty power.

We argue that, as a matter of constitutional structure, history, and logic, a treaty cannot increase Congress’s legislative powers. Not only is the power to “make treaties” distinct from the power to execute treaties already made, but such an expansive interpretation of the treaty power would allow Congress and the Executive to circumvent the Article V amendment process.  Even more shockingly, it would allow foreign governments to have control over the scope of congressional power. In sum, Missouri v. Holland is a structural and doctrinal anomaly in tension with other precedent and based on a misreading of constitutional history. It should be overruled.

The Supreme Court will hear argument in Golan v. Holder this fall.

Wal-Mart v. Dukes: The Court Gets One Right

In today’s decision in Wal-Mart v. Dukes, the Supreme Court unanimously found that the Ninth Circuit had jumped the gun in certifying what would have been one of the largest class actions in history, a job-bias action against the giant retailer on behalf of female employees. A five-justice majority led by Justice Scalia found that the plaintiffs had clearly not met the requirements needed to have the case certified for class treatment; four dissenters led by Justice Ginsburg would have sent the case back for more consideration.

While some press commentary simplistically treated this case as a “Which Side Are You On” parable of workplace sexism, both the majority and the dissent spend much time grappling with more lawyerly issues specific to class actions as a procedural format, such as the exact role of “common questions,” whose implications will inevitably be felt in litigation far removed from the employment discrimination context. To sweep hundreds of thousands of workers (or consumers or investors) into a class as plaintiffs even if they personally have suffered no harm whatsoever – to use sexism at Arizona stores to generate back pay awards in Vermont, and statistical disparities to prove bias without allowing defendants to introduce evidence that a given worker’s treatment was fair – bends the class action mechanism beyond its proper capacity. Also to the point, it is unfair.

Because both class action law and employment discrimination law are in the end creatures of federal statute, the elected branches will have the last word. Advocates of expansive employment litigation can be expected to introduce legislation in Congress to overturn key elements of today’s decision, a strategy that has worked well for them in the past on issues like back pay, “disparate-impact” law and the scope of coverage of the Americans with Disabilities Act (ADA). While we will soon be hearing a drumbeat to that effect, Congress should resist it, because the majority’s opinion today is to be preferred as a matter of policy, fairness, and liberty.

In particular – to take just one of the policy issues in employment law brought to center stage by today’s case – plaintiffs seek to establish that Wal-Mart’s policy of decentralized manager discretion over pay and promotions is itself an unlawful practice because (they argue) it allows too wide a scope for (unconscious or otherwise) bias on the part of store managers, notwithstanding the company’s adoption of overall policies banning sex bias. The majority led by Scalia marveled that Wal-Mart’s corporate non-policy – that is, its decision not to micromanage its local executives on personnel choices – would wind up being legally interpreted as amounting to an affirmative centralized decision to discriminate. But it’s not – and we should be glad lawyers at every big company aren’t yet insisting that every local HR decision be sent to a distant headquarters for fear of liability.

Here We Go Again: ObamaCare’s Preventive-Care Subsidies Aren’t ‘Free’

In press release, a new video, and an elusive new report, the Obama administration is boasting about the “free” preventive services that ObamaCare provides to Medicare enrollees.

Here we go again.

First, these preventive-care subsidies are not “free.” They are costing taxpayers dearly by adding to America’s $14 trillion national debt.  There is no such thing as a free lunch.  And there is nothing “free” about ObamaCare.

Second, ObamaCare supporters have claimed that more preventive care would reduce health care spending, but research shows that it will not.

Third, I hope someone is keeping track of all the taxpayer dollars this administration has wasted trying to convince the American people that they’re wrong to dislike ObamaCare.

Finally, if the $250 checks that ObamaCare sent to millions of Medicare enrollees didn’t make this law popular among seniors, I doubt these indirect subsidies will.

Misunderstanding Nozick, Again

Someone called Stephen Metcalf writes at Slate of his horror at finding in “an otherwise quite groovy loft” in New York’s SoHo “not one but two copies of something called The Libertarian Reader.” Given that he manages to lump not just Paul Ryan and South Park but Sarah Palin into the libertarian basket, you can appreciate his dismay.

Metcalf puts Robert Nozick at the center of his argument, understandably enough. My colleague Tom Palmer says that academic critics almost always cite one chapter of one book, Nozick’s Anarchy, State, and Utopia, and declare that they have grappled with libertarian ideas. Still, it’s a good book and worth grappling with, and it did have an impact, as Metcalf notes:

I like to think that when Nozick published Anarchy, the levee broke, the polite Fabian consensus collapsed, and hence, in rapid succession: Hayek won the Nobel Prize in economics in 1974, followed by Milton Friedman in ‘75 [1976], the same year Thatcher became Leader of the Opposition, followed by the California and Massachusetts tax revolts, culminating in the election of Reagan, and … well, where it stops, nobody knows.

I’ll leave it to my more learned colleagues to analyze how successfully Metcalf actually deals with Nozick’s arguments. I just want to note one thing here. Like many other critics of libertarianism, Metcalf triumphantly announces:

How could a thinker as brilliant as Nozick stay a party to this? The answer is: He didn’t. “The libertarian position I once propounded,” Nozick wrote in an essay published in the late ’80s, “now seems to me seriously inadequate.”

Yes, yes, yes. It gets repeated a lot: “Even Nozick renounced libertarianism.” If it were true, it’s not clear what it would mean. Libertarianism is true, or not, whether or not Paul Krugman or Russell Kirk believes it, and whether or not Robert Nozick believes it. The idea stands or falls on its own. But as it happens, Nozick did “stay a party” to the libertarian idea. Shortly before his death in 2002, young writer Julian Sanchez (now a Cato colleague) interviewed him and had this exchange:

JS: In The Examined Life, you reported that you had come to see the libertarian position that you’d advanced in Anarchy, State and Utopia as “seriously inadequate.” But there are several places in Invariances where you seem to suggest that you consider the view advanced there, broadly speaking, at least, a libertarian one. Would you now, again, self-apply the L-word?

RN: Yes. But I never stopped self-applying. What I was really saying in The Examined Life was that I was no longer as hardcore a libertarian as I had been before. But the rumors of my deviation (or apostasy!) from libertarianism were much exaggerated. I think this book makes clear the extent to which I still am within the general framework of libertarianism, especially the ethics chapter and its section on the “Core Principle of Ethics.”

So Nozick did not “disavow” libertarianism. Indeed, Tom Palmer adds a point that

David Schmidtz told at a forum about Schmidtz’s book from Cambridge University Press, Robert Nozick, held October 21, 2002 at the Cato Institute. According to David, Nozick told him that his alleged “apostasy” was mainly about rejecting the idea that to have a right is necessarily to have the right to alienate it, a thesis that he had reconsidered, on the basis of which reconsideration he concluded that some rights had to be inalienable. That represents, not a movement away from libertarianism, but a shift toward the mainstream of libertarian thought.

Metcalf’s criticisms of libertarianism will have to stand on their own, as will libertarianism itself. He doesn’t have Nozick on his side. As for Metcalf’s final complaint that advocates of a more expansive state have been “hectored into silence” by the vast libertarian power structure, well, I am, if not hectored, at least stunned into silence.

P.S. Matt Welch notes that if Metcalf doesn’t have Nozick on his side, at least he has Ann Coulter.

In Global Warming Case, Supreme Court Reaches Correct Result But Leaves Room for Mischievous Litigation

In the important global warming case decided today, American Electric Power Co. v. Connecticut, the Supreme Court unanimously reached the correct result but one that still leaves room for plenty of mischievous litigation.  While it’s clearly true that, as the Court said, the Clean Air Act and the EPA exist to deal with the claims the plaintiffs made here—that the defendants’ carbon dioxide emissions are pollutants that cause global warming—the Court left open the possibility of claims on state common-law grounds such as nuisance.  And it unfortunately said nothing about whether any such disputes, whether challenging EPA action or suing under state law, are properly “cases and controversies” ripe for judicial resolution.

The judiciary was not meant to be the sole method for resolving grievances with the government, even if everything looks like a nail to lawyers who only have a hammer.  This case is the perfect example of a “political question” best left to the political branches: The science and politics of global warming is so complex and nuanced that there simply isn’t a judicial role to be had.

As Cato’s amicus brief argued, the chain of causation between the defendants’ carbon emissions and the alleged harm caused by global warming is so attenuated that it resembles the famed “butterfly effect.” Just as butterflies should not be sued for causing tsunamis, a handful of utility companies in the Northeastern United States should not be sued for the complex (and disputed) harms of global warming. Even if plaintiffs (here or in a future case) can demonstrate causation, it is unconstitutional for courts to make nuanced policy decisions that should be left to the legislature.  Just as it’s improper for a legislature to pass a statute punishing a particular person (bill of attainder), it’s beyond courts’ constitutional authority to determine wide-ranging policies in which numerous considerations must be weighed in anything but an adversarial litigation process.

If a court were to adjudicate claims like those at issue in American Electric Power and issue an order dictating emissions standards, two things will happen: 1) the elected branches will be encouraged to abdicate to the courts their responsibilities for addressing complex and controversial policy issues, and 2) an already difficult situation would become nearly intractable as regulatory agencies and legislative actors butt heads with court orders issued across the country in quickly multiplying global warming cases. These inevitable outcomes are precisely why the standing and political question doctrines exist.

Dissatisfaction with the decisions and pace of government does not give someone the right to sue over anything. Or, as Chief Justice Marshall once said, “If the judicial power extended to every question under the laws of the United States … [t]he division of power [among the branches of government] could exist no longer, and the other departments would be swallowed up by the judiciary.”

FATCA Law Is a Nightmare for Cross-Border Economic Activity

One of the tax increases buried in Obamacare was an onerous and intrusive “1099″ scheme that would have required businesses to collect tax identification numbers for just about any vendor and then send paperwork to the IRS whenever they did more than $600 of business.

  • Send one of your sales people to New York for a couple of nights? They would have to get the tax ID for the hotel and submit a form to the IRS.
  • Buy a printer for the office? The printer company would need to provide a tax ID and the purchaser would have to submit a form to the IRS.
  • o Have a retirement dinner for somebody in the accounting department? Get the restaurant’s tax ID and submit another form to the IRS.

This system was seen as a nightmare, even leading to rather amusing cartoons mocking the law and showing how it would expand an already abusive IRS. And in a rare fit of common sense, the 1099 requirement was repealed earlier this year.

That’s the good news. The bad news is that an international version of Obamacare’s 1099 scheme also was enacted early last year. But since the burden is largely falling on foreigners, there’s no groundswell among voters to repeal the law – even though it will impose far more damage on the American economy.

Known as the FATCA (the acronym for the Foreign Account Tax Compliance Act), this law was included as a revenue-raising provision to pay for one of Obama’s failed stimulus bills.

But while the bill didn’t create jobs, it has created a giant nightmare for all sorts of people and firms – including foreign financial institutions that may now decide that it’s no longer worth the trouble to invest in America.

Consider these excerpts from a shocking story in the Financial Times.

…one of Asia’s largest financial groups is quietly mulling a potentially explosive question: could it organise some of its subsidiaries so that they could stop handling all US Treasury bonds? Their motive has nothing to do with the outlook for the dollar. …Instead, what is worrying this particular Asian financial group is tax. In January 2013, the US will implement a new law called the Foreign Account Tax Compliance Act. …the new rules leave some financial officials fuming in places such as Australia, Canada, Germany, Hong Kong and Singapore. …implementing these measures is likely to be costly; in jurisdictions such as Singapore or Hong Kong, the IRS rules appear to contravene local privacy laws. …Terry Campbell, head of Canada’s banking association, points out, the rules are essentially akin to “conscripting financial institutions around the world to be arms of US tax authorities”. …the IRS is threatening to impose a withholding tax of up to 30 per cent on sales of US assets by groups that it deems to be “non-compliant” – and the assets could include US shares or US Treasury bonds. Hence the fact that some non-US asset managers and banking groups are debating whether they could simply ignore Fatca by creating subsidiaries that never touch US assets at all. “This is complete madness for the US – America needs global investors to buy its bonds,” fumes one bank manager. “But not holding US assets might turn out to be the easiest thing for us to do.” …“Right now my board is probably as concerned about political risk in America as Indonesia, from a business perspective – perhaps more so,” says the head of one large global bank. It is a complaint that American politicians ignore at their peril.

Many people, when hearing about foreign banks resisting demands by the IRS, might automatically assume the issue involves jurisdictions with strong human rights laws with regards to financial privacy, such as Switzerland or the Cayman Islands.

There are plenty of those stories, to be sure, but American tax law has become so bad that the IRS is causing headaches and anger even in nations with high taxes and weak protection of client data.

Here’s an excerpt from an article from the Financial Post in Canada.

Toronto-Dominion Bank is putting up a fight against a new U.S. regulation that would compel foreign banks to sort through billions of dollars of deposits to find U.S. citizens who might be hiding money. According to Bloomberg News, TD has complained that the proposed IRS rule is unreasonable because it would require the bank to make US$100-million investment in new software and staff. Other lenders resisting the effort include Allianz SE of Germany, Aegon NV of the Netherlands and Commonwealth Bank of Australia, Bloomberg said. Now the Canadian Bankers association has joined the fray. In an emailed statement the CBA called the requirement “highly complex” and “very difficult and costly for Canadian banks to comply with.” …According to the New York-based Institute of International Bankers, major global banks would end up spending US$250 million or more to comply with the regulation in terms of new technology employee training.

The vast majority of Americans are very fortunate that they don’t have any personal interactions with the IRS’s onerous international tax rules. But that doesn’t mean they shouldn’t care. The tax treatment of cross-border economic activity can have enormous implications for America’s prosperity, as I’ve already explained in my discussions of a reckless IRS regulation that could drive more than $100 billion of capital out of American banks.

But that’s just the tip of the iceberg. FATCA is far more onerous and extensive, so the damage will be much greater. Not surprisingly, the law utterly fails to satisfy any sort of cost-benefit analysis.

From the perspective of politicians, the “benefit” is more tax revenue. So how does FATCA score on this basis? During the 2008 campaign, Obama claimed this policy would generate $100 billion of additional revenue every year. When it came time to score the legislation, however, the Joint Committee on Taxation predicted that the law will generate only $870 million per year. That’s a big drop-off, even by the shoddy standards of Washington.

Yet for this tiny amount of revenue, the law imposes a giant regulatory burden on all individuals, companies, and institutions that meet two criteria: 1) They have some form of cross-border economic activity, and 2) They have a business or citizenship relationship with the United States.

Americans living overseas are one of the groups that will be severely penalized. Simply stated, foreign financial institutions are treating U.S. citizens like lepers because they don’t want to deal with the IRS and be deputy enforcers of terrible American law. Here are comments from some of Americans living in other nations (all of whom wish to remain anonymous because they fear being targeted by a thuggish IRS).

  • From an American with a spouse working in Germany – “…when he went to create an account, he discovered that the bond fund could not be sold to US citizens.”o  From a non-profit group operating in Europe – “…we received notification from [bank redacted] that they were terminating our account.”
  • From an American working in Switzerland – “I’m in the process of having my…accounts with [bank redacted] forced closed, except for the mortgage. I’ve been unable to open an account with any other Swiss bank.”o  From an American living in Belgium – “…my portfolio of investments held at their bank was blocked. …He advised me that as of that date, I could no longer trade, but could only hold, sell or transfer my portfolio. I was banned from trading in either US stocks or all others.”
  • From a retired teacher in Germany – “I was denied the policy because I am an American citizen. My agent very clearly said that he could sell the policy that I wanted to any other nationality, except me-because I was American!”
  • From an American working in Saudi Arabia – “As a resident of Saudi Arabia, I have twice been rejected as a customer, purely on the basis of my US citizenship. In both instances, I was told that increased administrative and compliance burdens imposed by US authorities have led the banks in question to refuse to open securities accounts for American citizens.”
  • From an American in Japan – “All of these banks and institutions are cutting me off from participation in any but the most simple of basic bank account. Why? Because they do not want to take the time and instill the systems and carry the cost of reporting the income of each of their US citizen clients to the US government.”
  • From an American married to a European – “I have been unable to gain legal advice in Switzerland regarding US Wills and Guardianships because [bank redacted] lawyers are ‘not permitted to speak to Americans about legal, tax or banking matters in specific terms.’”
  • From an American married to a European – “The company who has been holding my modest UK share portfolio wrote to me in September 2010 saying they were closing my account. They were removing all US persons from their client base due to the increased reporting and audit costs placed on them by the Fatca legislation.”
  • From an American in Europe with a foreign spouse – “They sent me a letter saying: Our records show that you are an American citizen. Because of various strict new American rules regarding securities accounts held by American shareholders, we are closing such accounts including yours.”
  • From an American assigned overseas by his company – “I was extremely surprised and outraged by the fact that not one bank (including foreign branches of US banks!) would allow me to open a simple savings account to pay my rent and bills. All of the banks cited my US citizenship and the difficulties they experience with the US government.”
  • From an American in Spain – “I have been forced to close a U.S. bank account due to being an overseas citizen and cannot open new bank or brokerage accounts in the U.S. I am also being denied the opening of new brokerage accounts in Spain.”

Last but not least, another set of victims are foreigners who legally reside in the United States. That makes them tax residents according to American tax law, which means that they also are lepers from the perspective of foreign financial institutions.

Let’s close this lengthy post by including this letter from a Danish bank to a Danish citizen living in the United States. Once again, identifying information is redacted because the person did not want to suffer IRS persecution (it should disturb all of us, by the way, that there is such universal fear of IRS thuggery).