Archives: January, 2013

Foreign “Currency Manipulation” Does Not Warrant Washington’s Attention

In a Wall Street Journal oped today, Former Council of Economic Advisors chairman Ed Lazear pokes some big holes in the theory that Chinese currency manipulation explains that country’s big trade surplus, contradicting the central argument of a recent paper from the Peterson Institute. 

I concur with Lazear and offer my own critique of the Peterson paper on Forbes, today.

Creating a Human Freedom Index

Until now, no global index measuring human freedom consistent with a classical liberal approach has existed. Today, as part of the Human Freedom project sponsored by Cato, the Fraser Institute, and the Liberales Institut, we are releasing the first such attempt (.pdf) devised by my colleague Tanja Stumberger and by me. The index is a chapter in Towards a Worldwide Index of Human Freedom (.pdf) (published by Fraser and Liberales).

Using indicators consistent with the concept of negative liberty—the absence of coercive constraint—we have tried to capture the degree to which people are free to enjoy classic liberties in each country: freedom of speech, religion, individual economic choice, and association and assembly. The freedom index is composed of 76 distinct variables including measures of safety and security, freedom of movement, and relationship freedoms such as assembly or legal discrimination against gays.

In this preliminary index New Zealand ranks as the most free country in the world, followed by the Netherlands and then Hong Kong. Australia, Canada, and Ireland follow, with the United States ranking in 7th place.

As we mention in our essay, “The purpose for engaging in this exercise is to more carefully explore what we mean by freedom, and to better understand its relationship to any number of social and economic phenomena. Just as important, this research could improve our appreciation of the way in which various freedoms relate to one another.”

The index thus allows us to look at which freedoms are most under threat in which parts of the world, the relationship between economic freedom and personal freedom at different stages of development, and the relationship between human freedom and democracy, to name a few examples.

We have benefited from the input of numerous scholars around the world who have participated in several seminars as part of this project, many of whom have also contributed chapters to the book published today. Fred McMahon provides a nice survey (.pdf) of the literature on defining freedom that serves as a good introduction to the topic. Our index is being updated and revised along the lines of recommendations we have received since this version was drafted. We also thank Bob Lawson and Josh Hall for providing critiques (published in the book) on the index, the bulk of which we agree with. Further recommendations and criticisms are also most welcome as we continue to refine this work in progress.

A Map of Economic Freedom in India

Economic freedom in India has improved notably since the beginning of the country’s market reforms in the early 1990s, stimulating high growth from a very low income base. Though India’s level of economic freedom is still low—it ranked 111 out of 144 countries in the latest Economic Freedom of the World index—assigning one overall rating to this vast country can be a bit misleading. The map below shows that, rated on a state by state basis, the levels of economic freedom in India in fact vary greatly. The state of Gujarat, for example, has the freest economy in the country and ranks far above West Bengal, one of the least free states.

The data comes from the Economic Freedom of the States of India: 2012 report, co-published today by Cato, the Friedrich Naumann Foundation, and Indicus Analytics in New Delhi.

Economic Freedom in India

This annual report shows a positive relationship between economic freedom and growth. It is a reminder to policymakers at the state level that they need not wait for national leaders to restart the reform agenda; much can be done at the sub-national level to improve freedom. My colleague Swami Aiyar, one of the co-authors of the report, suggests some reforms in his chapter(.pdf) describing Punjab’s decline.

The study discusses reforms in two other areas that would have a significant impact on Indian growth. In his chapter (.pdf), Ashok Gulati, the head of the Indian government’s Commission for Agricultural Costs and Prices, describes the extent to which Indian agriculture is so incredibly screwed up in every step of production and sales, and he suggests sweeping liberalization. Economist Bibek Debroy describes India’s extremely rigid labor laws (.pdf), which help explain India’s large informal economy and why the country has failed to create labor intensive export industries as have developed in other Asian countries.

Larry Downes’ “A Rational Response to the Privacy ‘Crisis’ ”

We don’t expect news reports to exhibit the tightest legal reasoning, of course, but Sunday’s New York Times story on location privacy made a runny omelet of some important legal issues relating to privacy.

The starting point is United States v. Jones, a case the Supreme Court decided last January. The Court held that government agents violated the Fourth Amendment when they attached a GPS tracking device to a vehicle without a warrant and used it to determine the location of a suspect for four weeks. Location information can be revealing.

“Some advocacy groups view location tracking by mobile apps and ad networks as a parallel, warrantless commercial intrusion,” says the story. A location privacy bill forthcoming from Senator Al Franken (D-MN) “suggests that consumers may eventually gain some rights over their own digital footprints.”

Jones was about government agents—their freedom of action specifically disabled by the Fourth Amendment—invading a recognized property right (in one’s car) to gather data. There is little analogy to location tracking by mobile devices, apps, and networks, which are privately provided, voluntarily adopted, and which violate no recognized right. Indeed, their tracking provides various consumer benefits. The Times piece equivocates between the government’s failure to get a legally required search warrant in Jones and uses of data that some may feel “unwarranted,” in the sense of being “uncalled for under the circumstances.”

The first line of Larry Downes’ new Cato Policy Analysis, “A Rational Response to the Privacy ‘Crisis’,” could have been written for the Times’ sloppy analogy:

“What passes today as a ‘debate’ over privacy lacks agreed-upon terms of reference, rational arguments, or concrete goals,” Downes says. The paper examines how the “creepy factor” permeates privacy debates rather than crisp thinking and clear-headed examination.

It’s not that location tracking doesn’t generate legitimate privacy concerns. It does. People don’t know how location information is collected and used. They don’t always know how to stop its collection. And the future consequence of location information collected today is unclear. But the capacity of private actors to harm individuals with location data is limited. Their incentive to do so is even smaller. And avoiding location tracking is simply done (at significant costs to convenience).

As Downes’ piece illustrates, we’ve seen this kind of debate before, and we’ll see it again: A particular innovation spurs privacy concerns and a backlash (whipped by legislators and regulators). A negotiation between consumers and industry, facilitated by the news media, advocates, and a variety of other actors, produces the way forward. As often as not, the way forward is a partial or complete embrace of the technology and its benefits. Plenty of times, the threat never materializes (see pervasive RFID).

Downes explores the legal explanation for what happens when consumers adopt new technologies that use personal information to produce custom content and services—this question of “rights over … digital footprints.” He finds that licensing is the best explanation for what is happening. When consumers use the many online services available to them, they license data that they might otherwise control.

The legal framework Downes puts forward sets the stage for iterative, contract-based development of rules for how data may be used in the information economy. It cuts against top-down dictates like Franken’s proposal to regulate future technologies today, knowing so little of how technology or society will develop.

Ultimately, no legislature can resolve the deep and conflicted cultural issues playing out in the privacy debate. Downes characterizes that debate as revealed tension between Americans’ Davey Crockett side—the privacy-protective frontiersmen—and our collective Puritanism. We are participants in and parts of a very watchful society.

It’s worth a read, Larry Downes’s “A Rational Response to the Privacy ‘Crisis’.”

The Obama Administration’s Illegal Health Care Taxes: an Update

There have been several developments with respect to the Obama administration’s attempt to impose the Patient Protection and Affordable Care Act’s employer-mandate penalties and individual-mandate penalties where it has no authority to do so.

My coauthor Jonathan Adler and I have posted an updated and final draft of our forthcoming Health Matrix article, “Taxation Without Representation: The Illegal IRS Rule to Expand Tax Credits Under the PPACA,” to the Social Sciences Research Network web site. This draft contains additional evidence that Congress did indeed intend to restrict the Act’s tax credits, cost-sharing subsidies, employer mandate penalties, and (to a certain extent) individual mandate penalties to states that establish their own health insurance Exchanges. It also shows how recent arguments advanced by defenders of the rule cannot be reconciled with the statute or the legislative history. If you’re interested in this issue, you’ll want to read this draft, even if you’ve already read previous versions.

In the Winter issue of Regulation magazine, University of Missouri law professor Thomas Lambert shows how this feature of the Act, combined with the Supreme Court’s ruling in NFIB v. Sebelius and other features, make the law so dangerously unstable that repeal remains a distinct possibility. I plan to blog more about this article soon.

A private employer has petitioned a federal court in Oklahoma to be added as a plaintiff in that state’s lawsuit against the IRS rule.

The December 2012 Harvard Law Review notes that the IRS rule “may provide a useful opportunity for a reviewing court to clarify the major questions exception to Chevron. In several cases since 2000, the Supreme Court has refused to defer to an agency interpretation on politically or economically significant questions.” The rule certainly seems to be economically significant. Given that 32 states accounting for two-thirds of the U.S. population have refused to establish Exchanges, the rule would result in more than a half-trillion dollars in unauthorized tax credits, subsidies, and penalties against employers and individuals. 

On December 6, the Congressional Budget Office issued a letter that devastates the Obama administration’s defense of the IRS rule. Most media outlets misinterpreted the letter’s significance. I clarified the matter in this oped for Reuters.

On December 13, the chairmen of the House committees on Ways & Means and Oversight & Government Reform, who have held hearings on the IRS rule, sent a letter to Treasury Secretary Timothy Geithner requesting unredacted versions of documents relating to the development of the rule. The House Oversight committee has previously threatened to subpoena the documents if the agency is not forthcoming.

Hagel’s a Good Fight

Chuck Hagel isn’t the consistent dove his opponents say he is, and he’s no civil libertarian. But his nomination as secretary of defense is still a fight worth having.

Hagel shouldn’t have much trouble in the Senate armed services committee. Among the panel’s Democrats, Chairman Carl Levin of Michigan is a Hagel booster, as is Rhode Island senator Jack Reed. Claire McCaskill (D-MO) seems supportive. Thus far the others have not commented or are noncommittal. On the other side, Roger Wicker (R-MS) has announced his opposition (via twitter), and John McCain (R-AZ), Lindsay Graham (R-SC), Ted Cruz (R-TX), and Kelly Ayotte (R-NH) seem likely to vote no. But the incoming ranking member, Jim Inhofe (R-OK), was positively inclined a month ago. Saxby Chambliss (R-GA) and Jeff Sessions (R-AL) appear open to persuasion. With broad Democratic support likely, it will take only a couple Republicans to get the majority Hagel needs to reach the full Senate.

But there may be only a few Republican yes votes in the Senate. Senators John Coryn (R-OK), Tom Coburn (R-OK), and Dan Coats (R-IN) will vote no. Senator Marco Rubio (R-FL) threatens a hold. Senator Mitch McConnell (R-KY) is lukewarm. A few others, including both Nebraska senators, are noncommittal. The rest are silent, so far. Most Democrats should vote yes. Senators Dianne Feinstein (D-CA), Dick Durbin (D-IL) and Heidi Heitkamp (D-ND) seem supportive. Senators Chuck Schumer (D-NY) and Barbara Boxer (D-CA) offer vague non-endorsements. At this point, who knows what will happen in a floor vote, but with 55 Democrats, 60 needed for confirmation, and an engaged White House, Hagel’s odds seem better than even.

As Chris Preble notes, one virtue of Hagel becoming secretary is that he is willing to cut the massive defense budget and is more skeptical than most Washington bigwigs about war. He has a tendency to offer sensible observations that count as apostasy in U.S. foreign policy circles. Examples include his claim that the U.S. trade embargo toward Cuba is senseless (a view shared by most people outside Miami, which brought Rubio’s hold threat), the notion that diplomatic engagement with odious regimes is generally worthwhile, doubts about the utility of coercive sanctions on Iran (which academics that study the matter mostly share), and, of course, his willingness to admit the existence of an Israeli lobby (granted, he shouldn’t have said “jewish”) and a distinction between U.S. and Israeli interests.

As Hagel’s more reasonable critics note, having never served on a defense committee, his qualifications are not ideal. Serving in Vietnam does not teach you much about how to run the Pentagon. But Hagel’s military experience does seem to have encouraged his skepticism about the wisdom of generals and admirals—a useful tendency for a Secretary of Defense, especially one that may have to overcome the brass’s resistance to ending a war and implementing a drawdown. Deputies like Ashton Carter can help with management.

Another virtue of Hagel’s nomination is that it may show that the interests that police speech on these issues are not as powerful as they seem. As nearly everyone reading this knows, the most vocal opponents of Hagel’s nomination are the familiar band of neoconservatives ever-eager for war, the editorialists that reliably agree with them, and some pro-Israel (really Likunik) lobbying groups. Also opposed to Hagel are some gay-rights advocates angered by his voting record on that issue, including his 1998 comment calling an ambassadorial nominee “openly, aggressively gay,” for which he recently apologized.

If Hagel loses in the Senate, many will say that the Israeli lobby and their neoconservative friends did it. His loss, you might say, will enhance their perceived power and quiet those tempted to challenge the ideology they enforce. But since Obama floated his name and brought attacks, not nominating him would have had the same result. So why not now have a fight?

There may be some political benefit even in losing. Neoconservative attacks on Hagel come largely on matters where the public takes Hagel’s side—the military budget, bombing Iran, the occupation of Iraq, the wisdom of intervention in Syria. If Senators like McCain, Graham, and Kelly Ayotte (of the lately anti-war New Hampshire) attack Hagel on these grounds, they may harm themselves and their cause. Floor debate might allow a senator to ask Dan Coats how being anti-war means disrespecting the military. Even on Israel, there may be virtue in exposing a wider public to the irony of the Israeli lobby intimating people by attacking someone for saying the Israeli lobby intimidates people.

If Hagel wins, it will demonstrate that his opponents aren’t all they are cracked up to be. Neoconservatives obviously lose regularly; various wars they said our security depends on never occurred, and those that did were generally smaller than they’d like. The Israel lobby, on the other hand, seems more successful. But they regularly win because there is rarely anyone strong pushing back—no Palestinian lobby, for example. Americans are so safe from Middle-Eastern trouble that, most of the time, few costs—blood, treasure, votes—come from doing whatever those most interested want. When their ambitions bring conflict with something powerful, like a lobby of similar heft, strongly anti-war sentiment, or a determined president just reelected, the other side can win.

I argued that Susan Rice was a bad choice for secretary of state because she is unfailingly pro-war, and that her ascension would show, again, that being pro-war is generally politically safer than being against it. In terms of perception, Hagel is now nearly the opposite. If he became secretary it would indicate that it’s not verboten for ambitious politicos to be realists that question the virtue of violent meddling in the Middle East and supportive of substantial military cuts. A few less people might bite their tongue for fear that someday the likes of Abe Foxman, Bill Kristol, and their PR flaks will call them anti-semites and keep them from getting an important job. One appointment may not unleash the perestroika needed to undermine the hawkish consensus that prevails on these issues, but it would help.

SCOTUS to Weigh in on Class Action Abuse

I and others have written before on Standard Fire Ins. v. Knowles, the pending Supreme Court case on class action abuse (in which the Cato Institute has filed an amicus brief, courtesy Ilya Shapiro and the firm of Baker Hostetler) and now Roger Parloff has an excellent write-up in Fortune. Relevant excerpt:

…behind [Standard Fire’s] technical question lurks a lurid, tragicomic, outlandish back story. That story concerns the goings-on inside the circuit court of Miller County, Ark., where a handful of local law firms have made almost $400 million in fees over the past seven years, all from class-action settlements that have been procured without a judge’s ever having ruled that these cases are even worthy of class treatment, let alone meritorious.

Precisely how much cash the lawyers’ clients – the class members themselves – have received from the lawyers’ so amply-compensated efforts on their behalf is, on the other hand, a mystery to this day. Those numbers are regarded as “confidential” and “proprietary” by the plaintiffs attorneys, and have been found to be “irrelevant” by the Miller County court, which has repeatedly refused to order that information disclosed to defendants who have sought it….

Belief in the reality and harmfulness of magnet jurisdictions is not viewed by the Supreme Court as a liberal or conservative issue. It’s seen as a matter of whether or not you were born yesterday. None of these justices were born yesterday. That’s why I think the vote in today’s case might be 9-0 for Standard Fire.

Parloff’s article is full of illuminating detail about how, given scope for sufficiently creative forum-shopping, a single rural county can wring enormous sums out of defendant businesses nationwide. Read it here.