Archives: 11/2011

Firing Failed Employees Would ‘Harm’ Agency Says SEC Chief Schapiro

Over a year ago I asked a fairly simple question, why can’t we fire failed regulators?  After all, lots of seemingly smart people had oversight of our financial markets, and regardless of whatever spin you might hear, our financial markets are, and have been, highly regulated.  Sadly, “highly” is not the same as “well”.

Perhaps no failure was as avoidable as that of the Bernie Madoff scheme.  After all outside parties basically put the case together and brought it to the Securities and Exchange Commission (SEC).  Yet the SEC did nothing until it was far too late.  Eventually the SEC’s human resources department and an outside law firm advised the agency on how to handle these regulatory failures.  Their recommendation:  fire the manager responsible.  SEC Chair Mary Schapiro’s response?  No, as such “would harm the agency’s work.”  I’d think having incompetent employees would harm the agency’s work.  But then we have yet to hear what happened to the many SEC employees that spent the crisis watching porn instead of doing their job.

This is just another example, in a long list, of why relying on the relatively weak incentives of government regulatory oversight is inferior to relying on the strong incentives contained in market participants having their own wealth on the line.  But then for such incentives to be effective, we need to end bailouts and have real market discipline.  Sadly we are currently stuck in the worst of both worlds:  incompetent and unaccountable regulators coupled with a neutering of market discipline by these very same regulators.

Juan Manuel Santos calls for a discussion on the legalization of cocaine

A couple of weeks  ago I wrote about Colombian President Juan Manuel Santos’ explicit—though lukewarm—support for the legalization of marijuana and other soft drugs. This weekend, in an interview with The Observer, Santos was blunter in saying that, “I would talk about legalising marijuana and more than just marijuana… I might consider legalising cocaine if there is a world consensus because this drug has affected us most here in Colombia.”

Once again, Santos emphasized the need for a global debate on prohibition and new approaches to drug policy. As The Guardian points out:

 “It is difficult to overestimate the symbolic importance of a Colombian president entering the debate with such force, given the central role drugs have played in his country’s recent bloody history. Santos is all too aware of the symbolism and of the role he is playing.”

Tomorrow Cato will host a major conference on how to end the global war on drugs. The event will be live streamed from our website at www.cato.org/live beginning at 9:05am ET.

Alan Blinder’s Accidental Case for the Flat Tax

Alan Blinder has a distinguished resume. He’s a professor at Princeton and he served as Vice Chairman of the Federal Reserve.

So I was interested to see he authored an attack on the flat tax – and I was happy after I read his column. Why? Well, because his arguments are rather weak. So anemic that it makes me think there’s actually a chance to get rid of America’s corrupt internal revenue code.

There are two glaring flaws in his argument. First, he demonstrates a complete lack of familiarity with the flat tax and seemingly assumes that tax reform simply means imposing one rate on the current system.

Here’s some of what he wrote in a Wall Street Journal column.

Many useful steps could be taken to simplify the personal income tax. But, contrary to much misleading rhetoric, flattening the rate structure isn’t one of them. The truth is that 100% of the complexity inheres in the definition of taxable income, which takes up millions of words in the tax laws. None inheres in the progressive rate structure. If you don’t believe that, consider the fact that the corporate income tax is virtually flat once a corporation passes a paltry $75,000 in taxable income. Is it simple? Back to the personal tax. Figuring out your taxable income can be quite an effort. But once that is done, most taxpayers just look up their tax bill on an IRS-provided table. Those with incomes above $100,000 must perform a simple calculation that involves multiplying two numbers together and adding a third. A flat tax with an exemption would require precisely the same sort of calculation. The net reduction in complexity? Zero.

I can understand how an average person might think the flat tax is nothing more than applying a single tax rate to the current system, but any public finance economist must know that the plan devised by Professors Hall and Rabushka completely rips up the current tax system and implements a new system based on one tax rate with no double taxation and no loopholes.

Heck, the Hall/Rabushka book is online and free of charge. But Blinder obviously could not be bothered to understand the proposal before launching his attack.

What about his second mistake? This one’s a doozy. He actually assumes that taxable income is fixed, which is a remarkable error for anyone who supposedly understands economics.

…flattening the rate structure won’t make the tax code any simpler. It would, however, make the tax system far less progressive. Do the math. …Someone with $20 million in taxable income pays nearly $7 million in taxes under the current rate structure, with its 35% top rate. Replace that with a 23% flat tax, and the bill drops to just under $4.6 million.

In other words, he assumes that people won’t change their behavior even though incentives to engage in productive behavior are significantly altered.

In a previous post, I showed how rich people dramatically increased the amount of income they were willing to earn and report after Reagan lowered the top tax rate from 70 percent to 28 percent.

To Blinder, this real-world evidence doesn’t matter – even though the rich paid much more tax to the IRS after Reagan slashed tax rates.

For more information, here’s my flat tax video.

And here’s the video on the global flat tax revolution. Interestingly, there are now about five more flat tax jurisdictions since this video was made – though Iceland abandoned its flat tax, so there are some steps in the wrong direction.

Makes you wonder. If the flat tax is such a bad idea, why are so many nations doing so well using this simple and fair approach?

But be careful, as this cartoon demonstrates, simplicity can mean bad things if the wrong people are in charge.

Internet Belatedly Notices How Much Spying Government Can Do Without a Warrant

I’m seeing a lot of technology news sites reporting,  in tones of shock and horror, on a recent court ruling holding that people generally waive their Fourth Amendment “expectation of privacy” in data collected on them by Internet sites, at least when the sites give some kind of notice (however buried in legalese) that they do collect that data.  That means, in this instance, that the government can obtain detailed connection records from Twitter about users associated with Wikileaks without a full-blown Fourth Amendment warrant based on probable cause: A subpoena or a court order based on a far weaker claim of “relevance” to an investigation will suffice.

But this isn’t some shocking new precedent. It’s been the status quo since 1986, when our increasingly outdated electronic privacy laws were written, and arguably for longer than that.

There are plenty of problems with this most recent decision, to be sure. For one, as security researcher Chris Soghoian notes, the court based its opinion on the current Twitter privacy policy, even though the policy in effect at the time the targets of the investigation signed up for the site was significantly more protective. In a way, though, this seems unnecessary: Under the misguided Supreme Court decisions that established our modern “third party doctrine,” contractual promises of privacy don’t matter.

In other words, users are held to “assume the risk” that any third party might turn their information over to the government, effectively waiving their Fourth Amendment rights over that data, even if the third party explicitly promises not to do this. The one reason the privacy policy might be relevant here is that the “third party doctrine” covers information knowingly conveyed to third parties, and while it’s obvious that you “convey” a dialed phone number to the phone company when you make a call (for instance), it might not be as obvious that Web sites you visit are logging your Internet Protocol address.

Still, there’s nothing fundamentally new here: The government routinely obtains “transactional” information or “metadata” (as opposed to the contents of communication) without bothering with a search warrant. Google received nearly 6,000 government requests for user data in January–June of this year (not counting national security requests, which the company is gagged from reporting), and most experts believe the volume of requests to Internet Service Providers like Comcast or Verizon is vastly higher.

But unlike wiretaps—which totaled just over 3,000 for all criminal investigations in 2010—there’s no requirement that courts track and report aggregate numbers for such requests. That means a hugely more common form of government monitoring is effectively invisible. The only unusual thing about the demand for information from Twitter in the Wikileaks investigation is that the public has become aware of it.

A good first step toward a more sane policy—one that ought to be a no-brainer whatever one’s position on the desirable level of online privacy—would be to require statistics on these user data requests to be compiled, just as they already are for wiretaps. Perhaps Americans will be comfortable with the current levels of government spying on Internet activities, and perhaps they’ll demand change. Either way, though, citizens in a democracy surely have a right to be informed about the scope and scale of government spying on their digital activities—and the reactions to this court ruling make it obvious they aren’t.

From Washington to Nigeria

Adedayo Thomas, Outreach Manager for Atlas Network’s AfricaLiberty.org, loads thousands of donated books from the Cato Institute, the Institute for Humane Studies, Reason and the Institute for Economic Affairs bound for a container shipment from Washington to Nigeria. These books will find their way to remote universities throughout Africa.

Photo by Kristina CranePhoto by Kristina Crane


Ex-Im Bank Pits U.S. Industry Against Industry

I know it’s unseemly to brag, but I just couldn’t help but feel vindicated when I read this article in the Wall Street Journal today about recent complaints by the Air Transport Association to the Export-Import Bank of the United States regarding their loan guarantees to foreign airliners.

On page 15 of my recent Trade Policy Analysis, “Time to X Out the Ex-Im Bank”, I warn: “…the billions of dollars the bank authorizes each year in financing to foreign airlines to buy American aircraft could be seen as a way of helping foreign airlines compete against American ones.”

Behold, buried on page B4:

In a letter to Ex-Im Bank Chairman Fred Hochberg earlier this month, the Air Transport Association, a trade group for America’s biggest carriers, called on the federal agency to slash subsidies to all overseas buyers of Boeing jets.

“The bank’s support for foreign airlines injures U.S. carriers,” said ATA outside counsel Michael K. Kellogg…

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Obamacare Is Bigger than Roe v. Wade

This morning, as expected, the Supreme Court agreed to take up Obamacare.  What was unexpected – and unprecedented in modern times – is that it set aside five-and-a-half hours for the argument.  Here are the issues the Court will decide:

  1. Whether Congress has the power to enact the individual mandate. - 2 hours
  2. Whether the challenge to the individual mandate is barred by the Anti-Injunction Act. - 1 hour
  3. Whether and to what extent the individual mandate, if unconstitutional, is severable from the rest of the Act. - 90 minutes
  4. Whether the new conditions on all federal Medicaid funding (expanding eligibility, greater coverage, etc.) constitute an unconstitutional coercion of the states. - 1 hour

In addition to the length of argument, which we can expect to be heard over multiple days in March or April, perhaps the biggest surprise is the Court’s decision to review that fourth issue.  There is no circuit split here – in large part because 26 states are already in this one suit – and no judge has yet voted to uphold what also be described as a claim that the federal government is “commandeering” the states to do its bidding.  The Court probably took the case precisely because so many states have brought it; that former solicitor general Paul Clement is their lawyer also doesn’t hurt.  As a practical matter, this could be a bigger deal than the individual mandate because, while Congress had never before tried an economic mandate, it certainly does attach plenty of strings to the grants it gives states – and the spending power is thought to be even broader than the power to regulate commerce.

In any event, the Supreme Court has now set the stage for the most significant case since Roe v. Wade.  Indeed, this litigation implicates the future of the Republic as Roe never did.  On both the individual-mandate and Medicaid-coercion issues, the Court will decide whether the Constitution’s structure – federalism and enumeration of powers – is judicially enforceable or whether Congress is the sole judge of its own authority.  In other words, do we have a government of laws or men?