Archives: 10/2013

Free Trade on the Internet

This is from a recent speech by Senator Ron Wyden (D-OR):

Today, the Internet represents the shipping lane of 21st Century goods and services. It is reshaping global commerce just like social media is reshaping societies. But right now the trade rules don’t neatly apply to the digital economy, despite the growing number of protectionist barriers popping up. The most recent WTO rules were written before the Internet.

It’s time for the digital economy to be within the Winners Circle by keeping data flows open and ensuring that foreign markets aren’t more legally hazardous than the U.S.

This is an important point. With regard to international trade in goods, the impact of the Internet has been significant, but only within certain limits. With the exception of goods for which electronic versions have been developed, you still need to make the goods at a factory and ship them around the world.  

With services, by contrast, the Internet revolution has been greater. A number of services that used to be difficult to trade internationally at all are now tradable with the click of a mouse. To use an example I’ve written about recently, online higher education services are taking off. Someday soon it may be just as convenient for a Washingtonian to get a degree from Melbourne University in Australia as it is to do so from Georgetown.

One problem, though, as Senator Wyden points out, is that many of our international trade rules were written in the pre-Internet era. This became apparent during the WTO dispute over online gambling. The rules could barely fit with this new industry.

Wise Words on Fiscal Sovereignty and Corporate Taxation (sort of) from Bill Clinton

I’ve always had a soft spot in my heart for Bill Clinton. In part, that’s because economic freedom increased and the burden of government spending was reduced during his time in office.

Partisans can argue whether Clinton actually deserves the credit for these good results, but I’m just happy we got better policy. Heck, Clinton was a lot more akin to Reagan that Obama, as this Michael Ramirez cartoon suggests.

Moreover, Clinton also has been the source of some very good political humor, some of which you can enjoy here, here, here, here, and here.

Most recently, he even made some constructive comments about corporate taxation and fiscal sovereignty.

Here are the relevant excerpts from a report in the Irish Examiner.

It is up to the US government to reform the country’s corporate tax system because the international trend is moving to the Irish model of low corporate rate with the burden on consumption taxes, said the former US president Bill Clinton. Moreover, …he said. “Ireland has the right to set whatever taxes you want.” …The international average is now 23% but the US tax rate has not changed. “…We need to reform our corporate tax rate, not to the same level as Ireland but it needs to come down.”

Kudos to Clinton for saying America’s corporate tax rate “needs to come down,” though you could say that’s the understatement of the year. The United States has the highest corporate tax rate among the 30-plus nations in the industrialized world. And we rank even worse—94th out of 100 countries according to a couple of German economists—when you look at details of how corporate income is calculated.

Higher Education at the High Court

At 1:00 p.m. this afternoon, in Schuette v. Coalition to Defend Affirmative Action, the Supreme Court will begin hearing oral argument on a simple question: may states ban racial discrimination in their public colleges and universities? Given that the U.S. Constitution, for 145 years, has said that “No state shall deny to any person within its jurisdiction the equal protection of the laws,” one would think that an easy question to answer. But such is our convoluted equal-protection law today that last November the entire Sixth Circuit Court of Appeals decided, 8-7, that 58 percent of Michigan’s voters violated the Constitution when in 2006 they passed Proposition 2, amending the state’s constitution by prohibiting, among other things, discrimination by race in public higher education.

To understand why Prop. 2 was thought necessary in the first place, given the 14th Amendment’s equal protection guarantee, we have to consider the Supreme Court’s 2003 decision in Grutter v. Bollinger. There the Court held, 5-4, that public universities may take race into consideration in their admissions decisions in order to promote “diversity” – at least as long as they consider race among other factors and don’t do so too explicitly. In that case the University of Michigan’s law school passed the test. In a companion case, Gratz v. Bollinger, the college failed because its discrimination was too blatant. Wanting no part of that social engineering scheme, Michigan’s voters passed Prop. 2.

What, then, was the Sixth Circuit’s reasoning (which generated five dissenting opinions from all seven dissenting judges)? Prop. 2, the majority said, disproportionately burdens minorities by requiring them not simply to appeal to admissions officers for special consideration – as those seeking, say, legacy preferences might – but to overturn a state constitutional amendment. Citing “political structure” precedents, which Cato’s brief before the High Court shows to be irrelevant in this case, the court below held that Prop. 2 “placed special burdens on the ability of minority groups to achieve beneficial legislation.” As my colleague Ilya Shapiro contends below, that argument is not likely to wash with the Supreme Court, not least because California’s Prop. 209, which prohibits racial preferences in that state’s public higher education, has been upheld by several courts, including the notoriously liberal Ninth Circuit Court of Appeals.

Government Racism on Trial: Schuette and EEOC v. Kaplan

Today the Supreme Court hears argument in the Schuette case, regarding the constitutionality of Michigan voters’ decision to ban racial discrimination and preferences in public university admissions (the equivalent bans for public employment and contracting haven’t been legally challenged). In no conceivable world can the Equal Protection Clause – the constitutional provision that bans racial discrimination – prohibit a state law that bans racial discrimination. The Supreme Court should and almost certainly reverse the lower court’s ridiculous judgment to the contrary, and will likely do so with a great degree of unanimity on the “political structure” aspect of the case.

Coinciding with that oral argument, Cato is getting involved in a lower-court case called EEOC v. Kaplan Higher Education Corp. Here’s the situation: Following several incidents of employee theft, Kaplan University did what any reasonable employer might do in similar circumstances: it instituted heightened screening procedures for new hires. This process included credit checks to filter out potential employees at greater risk of committing theft. These checks made no mention of any applicant’s race and Kaplan didn’t collect any race information from applicants, thus making the hiring process both race-neutral and race-ignorant. Nevertheless, the Equal Employment Opportunity Commission, which itself uses credit checks in hiring decisions, sued Kaplan under Title VII of the Civil Rights Act, claiming that the use of credit checks has an unlawfully disparate impact on African American applicants.

Because Kaplan doesn’t keep racial data for applicants, the EEOC had to come up with its own data to prove its case. The agency thus created a team of “race raters,” a group of seemingly random people who sorted Kaplan’s job applicants into racial categories based only on the applicant’s name and DMV photo. (You can’t make this stuff up!) Because of the unscientific and unreliable nature of this data, the EEOC was soundly rebuffed in the federal district court in Ohio where it brought its case.

Now before the U.S. Court of Appeals for the Sixth Circuit, the EEOC is continuing its awkward crusade against employers’ use of credit checks. Cato, joining the Pacific Legal Foundation, the Center for Equal Opportunity, the Competitive Enterprise Institute, and Project 21, has filed a brief supporting Kaplan and arguing that the EEOC’s use of “race raters” and its incautious application of disparate-impact theory violate the Fifth Amendment’s equal protection guarantee.

Classifying people into racial categories based on their name and physical features is a demeaning violation of the Constitution’s mandate that individuals be treated as individuals and not reduced to mere members of a racial class. We also argue that the EEOC’s irresponsible use of disparate-impact theory to attack reasonable business practices contradicts the spirit of equal protection by forcing employers to consider race for all of their business-related decisions in order to avoid bureaucratic entanglement.

When combined with the ongoing Fisher v. UT-Austin saga, we see that while Jim Crow is dead, various government actors continue to offer massive resistance to the ideal of a colorblind society.

The Unpersuasive Case for the NSA Call Dragnet’s Effectiveness

Sen. Dianne Feinstein (D-CA) has an op-ed in the Wall Street Journal ($) defending the NSA’s bulk call records database as a “vital” counterterrorism tool.  While this wouldn’t make the program legal even if true, it also seems clear that the secret Foreign Intelligence Surveillance Court (FISC) has relied, rather uncritically, on the government’s assertions of “necessity” to draw the strained conclusion that every American’s phone records are “relevant” to FBI counterterrorism investigations. It’s thus worth pointing out how extraordinarily weak the case for the program’s utility really is.  Feinstein begins by recycling the claim that if only the NSA program had existed in 2001, the 9/11 hijackers could have been identified and halted before carrying out their catastrophic attack:

Intelligence officials knew about an al Qaeda safe house in Yemen with ties to [hijacker Khalid] al-Mihdhar as well as the safe house’s telephone number, but they had no way of knowing if anyone inside the U.S. was in contact with that phone number in Yemen. Only after 9/11 did we learn that al-Mihdhar, while living in San Diego, had called the safe house.

In congressional testimony in June, FBI Director Bob Mueller said that if intelligence officials had had the NSA’s searchable database of U.S. telephone-call records before 9/11, they would have been able to connect the number to al-Mihdhar and produce actionable intelligence on participants of the developing plot. NSA Director Keith Alexander testified before Congress in October that if the call-records program had existed before 9/11, there is a “very high” likelihood that we would have detected the impending attack that killed 3,000 Americans.

The most obvious problem with this argument is that the court order we’ve seen for phone records explicitly demands two distinct categories of records, for calls “(i) between the United States and abroad, or (ii) wholly within the United States, including local telephone calls.” The first category might have helped identify calls to or from a known safehouse in Yemen, but the latter, much larger category rather obviously would not.  This is simply an attempt to exploit the tragedy of 9/11 to deflect criticism of massive domestic surveillance that would not have been any use in preventing that attack.

Crumbling Bridges

A Wall Street Journal story today begins “America’s road to recovery may face a costly detour due to a fraying transportation network. One in nine of the country’s 607,380 bridges are structurally deficient …”

Newspapers have been full of such infrastructure stories in recent years. Pro-spending lobby groups such as ASCE have certainly pumped-up public concerns. America’s highways are becoming more congested, and we should have a discussion about how to finance needed expansions in capacity.

But the popular “crumbling bridges” theme is a bit of a scam. Federal Highway Administration (FHWA) data does show that one in nine bridges are structurally deficient. However, the WSJ doesn’t tell its readers that the share of bridges that are deficient has been steadily declining for two decades, as the chart below reveals.


In 2012, 66,749 of the nation’s 607,380 bridges were structurally deficient, which is 11 percent, or one in nine, as the WSJ reports. But that’s down from 124,072 out of 572,629 bridges, or 22 percent in 1992, according to FHWA.

The general thrust of the WSJ story is correct that having an efficient transportation system aids economic growth. But falling down bridges isn’t the central problem, and hiking gas taxes and boosting federal spending isn’t the solution. Instead, we can spur growth and improve the efficiency of America’s infrastructure by moving as much of it as we can to the private sector.

Budget Battles Highlight Importance of Federalism

Despite the fears expressed in news stories, federal worker furloughs do not seem to have caused major economic disruptions. While the National Parks were closed, most government workers that provide useful services to citizens are at the state and local level, not the federal level.

Thus one advantage of our system of federalism is that budget battles at the national level do not shut down most government services that citizens actually use, such as police, fire, and the schools. Indeed, the ongoing political dysfunction at the federal level should be a warning to avoid any further centralization of American government in Washington.

At most, about 800,000 federal workers were furloughed, but that figure is small compared to the 16 million workers in state and local governments. The federal government spends far more than all state/local governments combined, but it has less than one-quarter of the number of workers. When you exclude the uniformed military, there are just one-eighth the number of federal workers as state/local workers. 

Outside of the military, the federal government is mainly just a giant cash transfer machine, vacuuming up taxpayer earnings and redistributing them to individuals, businesses, nonprofit groups, and state/local governments through more than 2,000 subsidy programs.

There are two charts below. The first chart shows that state/local government employment has soared since 1950. The second chart shows that federal civilian employment has been comparatively flat.

State/local bureaucracies have grown partly in order to handle the flood of cash and paperwork from the rising number of federal aid-to-state programs. The partial federal shutdown has threatened to turn off the cash spigot to some of these programs, but my view is that the more federal aid programs that we can terminate, the more that we will unhook local activities from future budget chaos in D.C. 

(Data notes: Federal “civilian” employment includes nonuniformed Pentagon workers, but it excludes postal workers. The data are from NIPA Table 6.5. and measured in full-time equivalents).