Archives: August, 2012

What Did the Founders Think About International Law?

Last term, the Supreme Court postponed its decision in Kiobel v. Royal Dutch Petroleum, a case that initially asked whether the Alien Tort Statute—one of our oldest laws (1789), giving federal courts jurisdiction over lawsuits brought by aliens for actions “in violation of the law of nations”—applies to non-natural persons (that is, corporations). Instead, the Court called for further briefing and re-argument on a more basic question: Does the ATS allow U.S. courts to even hear lawsuits for violations of international law on foreign soil?

Cato’s previous brief in this case argued that the ATS must be interpreted in a manner consistent with Congress’s original jurisdictional grant—that is, in accordance with international law as of 1789, which allowed only natural persons to be sued—because courts cannot expand their own jurisdiction.

But the inquiry need not end there, because the Founders understood “the law of nations” to provide a methodology for defining the extraterritorial scope of ATS jurisdiction as well, as we explain in our supplemental Kiobel brief. We argue that the Founders’ understanding of jurisdiction rested on the nexus between territory and sovereignty and that the law of nations as of 1789 recognized a territorial nexus between the state asserting jurisdiction and the claim asserted.

We further argue that the petitioners’—12 Nigerians who sued an oil company and its subsidiaries for various human rights violations committed by Nigerian soldiers in Nigeria—heavy reliance on an analogy to piracy to support their expansive view of extraterritorial jurisdiction is unconvincing because “piracy,” properly understood, occurs on the high seas, in a stateless zone, and involves crimes committed by stateless actors. That the law of nations permits jurisdiction under those unique circumstances does not mean that a U.S. court may assert jurisdiction over conduct occurring entirely within the territory of a foreign sovereign.

Moreover, we note that the Supreme Court has already ruled in Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund (1999) that courts should not resort to “evolving” standards of international law to define the ATS’s extraterritorial scope. Petitioners have no answer for why the Court should not follow Grupo Mexicano or the clear principles of international law as of 1789.

In any event, the supplemental briefs filed by the petitioners, supporting amici, and the United States (which previously supported the petitioners but now argues partially against them) demonstrate the need for a clear, principled methodology regarding all aspects of ATS claims. The law of nations, as understood by the Founders in 1789, provides just such methodological guidance.

The Supreme Court will hear re-argument in Kiobel v. Royal Dutch Petroleum on Oct. 1, the first day of the new term.

More Truth about Sequestration

Pentagon officials and other proponents of big military spending have three basic complaints about sequestration. That’s the process created by last summer’s Budget Control Act that would cut planned federal spending by about $1.1 trillion over the next nine years through budget caps and a $110 billion in across-the-board cuts in January 2013, with half the cuts coming from defense.

The first complaint is that the cuts would harm national security. The second is that the defense cuts would cause great job loss and economic damage. The third complaint concerns sequestration’s breadth. Because the hit coming in January would apply in equal proportion to every “program, project, and activity” in the defense budget, Pentagon officials claim it prevents prioritizing among programs and planning to limit its pain. That’s what Secretary of Defense Leon Panetta, always ready with a violent metaphor, calls the “goofy meat-axe approach.”

The video Cato posted yesterday concerns the first complaint, noting that the cut is not that large in historical terms and that we could safely spend far less if we defended fewer countries (a point Chris Preble, Justin Logan and I have often made elsewhere). In a paper Cato released today, Ben Zycher attacks the economic case against military spending cuts, including sequestration, showing that they generally increase economic productivity and employment in the long term.

In a piece published today by CNN.com’s Global Public Square, I concentrate on the third complaint. I point out several ways that current law gives the Pentagon to control where sequestration applies. The most important is a provision in the 1985 Gramm-Rudman-Hollings Act, which the BCA amends. It seems to allow the president to transfer funds at will beneath the defense cap, provided Congress passes an expedited joint resolution approving the shift. So the president, with Congress’s permission, can convert the 2013 sequester into a cap and prioritize among programs beneath it.

These options (and several others mentioned in Frank Oliveri’s excellent subscriber-only piece in CQ Weekly) undermine the claim that the Pentagon cannot plan for sequestration. The reason you hardly hear about them is that both the Obama administration and Republicans leaders are gambling that the threat of sequestration will serve their priorities (tax increases and entitlement cuts, respectively), so everyone in power wants it to sound as scary as possible.

To be clear, I do not think sequestration is good policy unless what I just mentioned occurred—the 2013 cut essentially becomes a spending cap. Even if that joint resolution process does not occur, the same end could be accomplished by amending the BCA.

The Lacey Act: Protectionism through Criminalization

This week Gibson Guitars reached a settlement agreement with the Department of Justice to end a highly publicized criminal case involving wood imported in violation of the law of Madagascar.  Gibson was accused of violating the Lacey Act, an old federal law that since 2008 has made importation, sale, or possession of certain forest products a criminal offense.  The case gained notoriety after FBI agents conducted fully-armed surprise raids of Gibson’s Tennessee facilities and confiscated up to a million dollars worth of wood and guitars.  The move was condemned by politicians and activists concerned about over-criminalization and heavy handed enforcement by the federal government, and efforts have begun to reform the law’s most draconian provisions.

You can often learn a lot about a law by identifying its key supporters.  It’s worth noting, therefore, that proponents of the current restrictions in the Lacey Act include not just the predictable cadre of environmental organizations but also the American lumber industry and labor unions.  Why this peculiar alliance among traditional enemies?  As it turns out, the cost of compliance with reporting requirements and the risk of being slammed with huge fines and a criminal indictment for paperwork errors produce strong incentives to avoid buying foreign lumber altogether.  American consumers of lumber, which include productive, job-creating businesses like Gibson Guitars, cannot reasonably control whether a foreign supplier got all the right licenses and followed all local laws.  Ultimately, the Lacey Act enables domestic suppliers to avoid price-squeezing import competition in a way that harms law-abiding foreign suppliers, American consumers, and all sectors of the U.S. economy that make or use wood products.

The willingness to use government to achieve one’s ends can certainly produce strange bedfellows.  Protectionists these days like to paint their foreign competitors as devious cheaters whose unscrupulous ways give them an “unfair” advantage that the U.S. government should fix with trade barriers.  The effectiveness of this strategy prompted the tree-killing industry to team up with tree-hugging environmentalists to label their foreign competitors (and their own potential customers) as perpetrators or supporters of illegal logging and deforestation.  Environmentalists should remember, however, how that same finger-pointing rhetoric was used to justify the imposition of punitive duties on Chinese solar cell and wind tower manufacturers, and that free trade is the best path to advancing affordable clean energy in the United States and the world.

Perhaps one day environmentalists will embrace free-market solutions to both clean energy and forest maintenance, and all businesses will respond to import competition by improving quality and efficiency.  Until then, free traders will need to be eternally vigilant and willing to challenge protectionism in all its forms.  Reforming the Lacey Act is a good way to start.

Are Military Spending Cuts Good for the Economy?

Yesterday, Cato released a new video pointing out that the military spending cuts specified under the Budget Control Act’s sequestration provision are not large relative to total spending, and would still have the U.S. government spending nearly $5.2 trillion on the Pentagon’s base budget over the next ten years. Under sequestration, the average annual total, $472 billion in constant, 2012 dollars, is well above the level spent during the 1990s (average $422 billion), and comparable even to what we spent during much of the Cold War. The video (building on my and Ben Friedman’s earlier writing, especially here) spells out the strategic rationale for even deeper cuts.

In a new paper released today, economist Benjamin Zycher outlines some of the economic rationales for such cuts. He shows that cuts on the order of $100 billion per year over ten years can be reasonably expected to reduce economic costs by $135 billion – provided that the funds are redirected to the private sector and not simply plowed into other government spending. Zycher concedes that the demand for U.S. military spending has declined, and its value (measured in what we actually spend) should also decline. At a minimum, he concludes, “These potential savings in real resources are sufficiently large to justify a detailed analysis of U.S. national security needs and the outlays required to defend them.”

Zycher’s findings should help to set the record straight on some of the more outrageous statements pertaining to sequestration, particularly the claims of massive job losses and economic devastation. The study that has attracted the most attention, by George Mason University Professor Stephen Fuller, alleged that a reduction of just $45 billion in procurement spending would result in a decline of about $86.5 billion in GDP in 2013, and the loss of over one million full-time equivalent jobs (1,006,315, to be precise). Fuller updated his findings last month and now concludes that the automatic cuts under sequestration, both defense and non-defense, will reduce the nation’s GDP by $215 billion, and cost 2.14 million jobs.

There are at least two major problems with Fuller’s research (and others like it), one methodological, the other conceptual. Zycher scrutinizes them both.

The primary methodological flaw is Fuller’s grossly inflated assumptions about the multiplier effects of defense spending, in particular, and government spending generally. The supposed economic effects above imply a multiplier of 1.92, whereas the recent peer-reviewed economics literature shows multipliers of between 0.6 and 0.8. Zycher observes: a multiplier effect of less than 1.0 “suggests strongly that increases in defense spending (and government spending more generally) have effects on GDP that are offset by reductions in other economic activity.”

The conceptual problem of proclaiming that defense spending is good for the economy, and cuts are bad, flows logically from the different assumptions about the multiplier. Fuller and others focus narrowly on the particular industries either affected by cuts. But these cuts should free up resources elsewhere. To be sure, there are likely to be temporary dislocations for some workers and businesses. These will be difficult for the individuals and firms affected, but the economy as a whole will benefit as skills and resources are redirected to more productive activities.

These conclusions shouldn’t really surprise, and they should be common-sense for Republicans who are generally skeptical of Keynesian arguments for using government spending to stimulate the economy. After all, every dollar spent by the government – federal, state or local – is extracted from the private sector. Advocates for higher taxes and more government spending claim that individuals in Congress, state capitols and city halls are wise enough to know where these resources should be spent. Conservatives and libertarians point out that this attempt to pick winners and losers will fail more often than it succeeds, and the net result is a less productive economy. The principle applies equally when the money is spent by government agency A (e.g. the Department of Agriculture) vs. government agency B (e.g. the Department of Defense).

In fact, it costs more than a dollar to send a dollar to the government because of the excess burden of taxation, a process documented by a number of economists, including Harvard’s Martin Feldstein. The tax system imposes costs on the economy by discouraging economic activity, including both work and investment, that would otherwise occur in the absence of those taxes. Feldstein finds that higher marginal tax rates generate an excess burden on the economy of $0.76 for every additional dollar of revenue. Because “the taxes needed to fund existing spending impose an excess burden smaller than the taxes needed to fund increased spending,” Zycher conservatively estimates an excess burden of 35 percent for current military expenditures. Accordingly, he concludes, “a reduction in annual defense outlays of $100 billion can be predicted with high confidence to increase the size of the private sector by at least $135 billion per year.”

The Iron Grip of Polarization

Like a lot of people these days, the actress Kathleen Turner is very concerned about polarization in Washington. She has a special reason to be concerned: She’s coming to Washington’s Arena Stage to do a one-woman show, “Red Hot Patriot: The Kick-Ass Wit of Molly Ivins,’ based on the life and writings of the sharp-tongued liberal columnist. She tells the Washington Examiner:

“One of these challenges may be getting a wide enough breadth of people to come, you know, because people are so closed-minded now, that if they think it doesn’t represent their point of view, they’re not interested,” she said. “I’m afraid it will be like – if you’re a Republican, don’t go to the show – it’s a real shame both artistically and as a reflection of our nation’s mentality.”

Fortunately, liberals from Hollywood don’t have that sort of us-against-them mentality:

But while Ivins became famous for mocking former President George W. Bush, nicknaming him “Shrub” and “Dubya,” Turner told us that her approach to dealing with the Bush years was a bit more subtle.

“I had to do some real dodging there once in a while, but I pretty much managed it,” she said, explaining that she “purposely” never met Bush. “I used to be on the Kennedy Center artistic, you know, selection board and those events are always held at the White House, and so then I had to bow out for a few years, didn’t I?”

It’s a real shame when Republicans are closed-minded.

Will A Housing Recovery Reignite Hispanic Immigration?

Hispanic immigration is slowing down and being replaced by immigration from Asia.  In 2009, for the first time, more Asians immigrated to the U.S. than Hispanics.  Besides their origins, the two groups are very different.  For instance, Asians are more than 3 times as likely to immigrate with employment based (EB) green cards that favor skills.  In contrast, Hispanic immigrants are more likely to rely on family reunification and unauthorized entry due to historical ties, proximity, and the dearth of visas for lower skilled workers.

The two groups also react differently to labor market opportunities.

Unauthorized immigrants, more than three-quarters of whom are Hispanic, react more quickly to U.S. labor market opportunities than legal immigrants.  Unauthorized immigrants can move without getting permission from a bureaucracy – they just have to spend resources evading U.S. immigration authorities and then labor in the informal economy.  In contrast, the legal immigration process can take decades, is expensive and cumbersome, inflexible, and does not adjust to domestic labor market conditions.

Unauthorized immigrants are drawn to American jobs.  The graph below compares the number of annual apprehensions of unauthorized immigrants along the southwest border (an estimation of market demand) and the U.S. unemployment rate.  As economic theory predicts, a higher U.S. unemployment rate results in fewer unauthorized entry attempts and a precipitous decline in apprehensions.

Source: Customs and Border Protection and Bureau of Labor Statistics

Increased American demand for goods produced by unauthorized immigrants incentivizes their entry.  During the housing boom from about 2002 to 2006 the number of housing starts drew in an enormous number of unauthorized immigrants (see the next graph, below).  The demand for housing factors inputs was largely filled by Hispanics and unauthorized immigrants.

For example, in 2007 Hispanics were 19 percent of all construction and maintenance workers nationwide.  Male Hispanics were 31 percent of that gender’s construction and maintenance workers.  In Arizona in 2006, 28 percent of all construction workers were immigrant non-citizens – a group that includes unauthorized immigrants.  The popping of the housing bubble beginning in 2006 collapsed housing starts and shrunk quantity demanded for construction workers leading to less demand for unauthorized workers, fewer unauthorized entries, and fewer apprehensions along the southern border.

Source: Customs and Border Protection and U.S. Census Bureau, Historical Data of New Residential Construction

All of this begs the question, if the housing market recovers will Hispanic immigration recover with it?  We might find out very shortly.  In the last 8 months, housing prices across 20 metropolitan areas have stabilized and begun to rise ever so slightly.  Construction payroll, weekly hours, and earnings are up for every month of this year over last year.  Housing construction is also picking up, with 24 percent more housing starts in June, 2012 than June, 2011.  Estimates of unauthorized apprehensions and entries are not yet available for 2012, but a rebounding housing market could kick-start Hispanic immigration and the heated debate over immigration reform.

My Testimony on the Illegal IRS Rule Increasing Taxes & Spending under ObamaCare

Here is the video of my recent opening statement before a House Oversight Committee hearing on the IRS rule that Jonathan Adler and I write about in our forthcoming Health Matrix article, “Taxation without Representation: the Illegal IRS Rule to Expand Tax Credits under the PPACA.”

Please forgive the audio.

In addition, Pete Suderman writes that Adler and I “have jointly authored a long and quite convincing rebuttal to defenders of the IRS rule over at the journal Health Affairs. If they are right, it could be a fatal blow to the law.”