Archives: 03/2014

Another Defective IMF study on Inequality and Redistribution

IMF Warns on the Dangers of Inequality,” screams the headline of a story by Ian Talley in the Wall Street Journal. The IMF – which Talley dubs “the world’s top economic institution”– is said to be “warning that rising income inequality is weighing on global economic growth and fueling political instability.” 

This has been a familiar chorus from the White House/IMF songbook since late 2011, when President Obama’s Special Assistant David Lipton became Deputy Managing Director of the IMF.  It echoes a December 2012 New York Times piece, “Income Inequality May Take Toll on Growth,” and a January 14, Financial Times feature, “IMF warns on threat of income inequality.”  This isn’t news.

Talley writes, “The IMF … says advanced and developing economies need to raise more revenues through taxes, focusing on progressive taxation that moves more of the burden for social security, health care and other state benefits to the high-income earners.” That isn’t news either.  The IMF has an ugly history of advising countries to raise tax rates, with disastrous results.  The inequality crusade is just a new pretext for old mistakes.

SCOTUS Deferred to Executive Agencies. What Happened Next Will Infuriate You!

In the 1996 case Auer v. Robbins, the Supreme Court ruled that where there is any ambiguity or disagreement over what a federal regulation means, courts should defer to the interpretation favored by the agency that issued the regulation. The practical consequence of this decision has been that government agencies have had the power not just to create and enforce their own rules but also to definitively interpret them. Given the mind-boggling number of federal regulations that exist—and the exceptional breadth of behavior that they govern—the importance of this “Auer deference” can’t be overstated.

While handing the powers of all three branches of government to the bureaucracy is problematic in and of itself, a recent decision by the U.S. Court of Appeals for the Ninth Circuit further extended the deference courts show to agency rulemakers by declaring that an agency’s interpretation of its own rule is authoritative even if the agency has altered its interpretation dramatically since the regulation came into effect. Under that logic, an agency could spend decades saying that its regulation governing footwear only applied to shoes—and then, without warning or consultation, unilaterally decide to extend the rule to sandals and slippers (despite explicitly saying for years that they were not covered by the regulation).

Such a power to rewrite regulations through after-the-fact “reinterpretation” is incredibly tempting, freeing agencies to change the rules of the game without further legislation or congressional oversight, or even the formalized rulemaking process required by the Administrative Procedure Act.

Peri & Sons, a family-run farm in Nevada (one of America’s largest onion producers), is caught in just such an Kafkaesque morass. In its case, the Ninth Circuit ruled that even though the Department of Labor for over five years interpreted regulations issued under the Fair Labor Standards Act to mean that employers aren’t required to pay employees for the costs of moving for a job (including passport and visa applications), DOL is free to change its interpretation to now require employers to cover those costs.

Cato, along with the Center for Constitutional Jurisprudence and the National Federation of Independent Business, filed a brief urging the Supreme Court to hear this case. We argue not just against the Ninth Circuit’s extension of Auer to cases where the agency has reversed its position, but also that Auer itself was incorrectly decided. Granting agencies post-hoc control over their regulations’ textual meaning is an abdication by the courts of their constitutional duty to zealously guard against executive encroachment on the judiciary’s role as interpreters of the law. And we’re not alone in questioning the wisdom of Auer; as recently as 2011, Justice Scalia criticized the ruling as being “contrary to [the] fundamental principles of separation of powers.”

The Supreme Court will be deciding this spring whether to hear Peri & Sons Farms v. Rivera.We urge the Court to take the case and restore a modicum of the Constitution’s separation and balance of powers.

This Month’s Cato Unbound: The State, the Clan, and Individual Liberty

The great classical liberal sociologist Henry Sumner Maine theorized that societies progressed from status to contract: In a status-based society, one is born into a place in a hierarchy. That place may change, but typically it doesn’t change very much, and your place governs your rights and obligations. Societies of status are stable, rigid, and often deeply illiberal. They tend to be dominated by kinship groups, or clans, and those can be quite collectivist and hostile to individual liberty.

Contract-based societies are very different: In a contract-based society, individuals tend to be legally equal at birth. Family ties are affective and not quite so legally binding. Obligations tend to be voluntarily undertaken rather than assumed at birth. Societies of contract are flexible, may change rapidly, and will often act to protect individual liberty.

At Cato Unbound, this month’s lead essayist, legal historian Mark S. Weiner, argues that the state performs a sometimes unappreciated role in keeping away the status-based society: without a state that’s strong enough to break the power of the clans, then the clans will return, and individual liberty will suffer.

But how real is the danger? Do we really have the strong state to thank for our liberty? Economist Arnold Kling argues that other institutions, including the nuclear family and consensual transfers of property, make clannishness unappealing. The American Conservative’s editor, Daniel McCarthy, suggests that even liberal government is at times a very collectivist, and thus clannish, activity. Legal historian John Fabian Witt will weigh in on Monday, and we welcome your comments as well.

New York Times Op-ed on Infrastructure

My op-ed in today’s New York Times has prompted numerous critical comments on the NYT website. Let me address some of them.

Some readers questioned the linked source for my statement that infrastructure spending in the United States is about the same level as in other high-income countries. This fact does need some explanation, but I didn’t have room to include it in the op-ed. The data I cited were emailed to me by the author of the linked OECD report. It is national accounts data on gross fixed investment. I charted the data here in Figure 2.

Some readers wondered about my definition of “infrastructure.” That word is often used loosely. The definition that makes sense to me is the broad one of gross fixed investment, which includes such items as government highways and private pipelines and factories. The data are available from BEA Table 1.5.5, where you can see that private investment—even aside from residential—dwarfs government investment.

One reader expressed a common view that in traveling abroad you often find nicer airports than in this country. I think that’s correct, and often those foreign airports are private or partly private, while ours are government-owned.

Numerous readers pointed to shortcomings of particular private companies, and some of those complaints are surely correct. Private companies often screw up, but my experience is that governments screw up more because of deep, structural incentive problems. Furthermore, private markets have the powerful built-in mechanism of competition to fix problems over time, whereas government shortcomings often go unaddressed. Where there is a lack of competition in private markets, policymakers should focus on opening entry to increase it.

North Korea: Dealing with a Human Rights Scourge and Security Threat

The Democratic People’s Republic of Korea long has been recognized as one of the globe’s most difficult challenges.  For two decades concern over Pyongyang’s nuclear program has dominated international attention toward the Korean peninsula. 

What to do about The North Korea Problem has troubled three successive U.S. administrations.  The result is a tentative nuclear state seemingly ruled by an immature third-generation dictator willing to terrorize even his own family. 

Particularly unlucky are the residents of North Korea.  There never has been any question about the extraordinary nature of DPRK tyranny.  But the United Nations just released its own gruesome analysis. 

The finding is simple: “systematic, widespread and gross human rights violations have been and are being committed” by the DPRK.  “In many instances, the violations found entailed crimes against humanity based on State policies.” 

As I point out in my latest article in National Interest:

Yet the challenge facing the U.S. and other nations regarding human rights in the North is a lot like the security problem:  what to do?  The Kim dynasty has demonstrated no interest in disarming.  Nor has it ever hinted at the slightest interest in treating the North Korean people better.  Arguing that human rights should be an international priority doesn’t change matters.

Trying to convince the isolated and militaristic regime that a more pacific policy is in its interest so far hasn’t worked.  Trying to convince the same leadership that it also should dismantle the political system that it dominates is even less likely to succeed. 

However, the human rights report might be more effectively directed at another nation, the People’s Republic of China.  The PRC is North Korea’s chief enabler.  (For a time South Korea shared that title, with its bountiful subsidies as part of the Sunshine Policy.)  

The reasons are understandable if not necessarily laudable.  Washington’s push for Beijing to press the DPRK more seriously, repeated during Secretary of State John Kerry’s recent China visit, founders on the PRC’s perception of its interests. 

The North is unpredictable, except for always being ever unreasonable and difficult.  Nevertheless, Beijing fears destabilizing the peninsula more than it fears North Korea nuclearizing the peninsula.

To change China’s position requires addressing that government’s concerns, particularly regarding the impact of a united Korea allied with America at a time when the U.S. appears committed to a policy of soft containment.  The DPRK’s growing reputation as a human rights outlaw might help.

Beijing obviously is sensitive to the issue, given its own human rights failings.  Nevertheless, there is no comparison between the two nations.  China also has much at stake in the global order, including its reputation, which will be tarnished if it continues to be widely seen as the only reason the Kim regime survives.

Simply bashing Pyongyang won’t be enough.  Washington needs to develop a positive package for a reform North Korean leadership: peace treaty, trade, aid, and integration.  The U.S. also should involve South Korea and Japan.

This approach should directed as much at the PRC as North Korea.  Even Chinese officials frustrated with the DPRK tend to blame the U.S. for creating the hostile threat environment which led the North to develop nuclear weapons.

The PRC still might decide the price of cooperating with America is too high.  But the allies have no better alternative approach.  The DPRK has spent recent years alternating whispers of sweet nothings with screams of blood-curdling threats, tossing in occasional missile and nuclear tests for good measure.  Nothing suggests that the younger Kim has abandoned brinkmanship as Pyongyang’s preferred policy and decided to negotiate away his nation’s most important weapon.

Some day monarchical communism will disappear from the Korean peninsula.  It will do so sooner if China uses its considerable influence—and threatens to withdraw its even more important aid—to press Pyongyang to reform.  The UN’s scathing report on DPRK human rights practices might help win Beijing’s cooperation.

Raise Minimum Wage, Kill Jobs

During his State of the Union address, President Obama announced that he intended to raise minimum wages to $10.10/hour for certain workers. Based on data from EU countries, it is clear that minimum wage laws kill jobs. I concluded that hiking the minimum wage will kill jobs in the U.S., too. Executives surveyed in the Duke University/CFO Magazine Global Business Outlook Survey agree.

Chief Financial Officers from around the world were interviewed and the majority of them concurred: a minimum wage increase from $7.25/hour to $10.10/hour would kill a significant number of jobs.

Here’s what the CFOs had to say:

Will Republicans Make a Principled Stand Against Ex-Im Reauthorization in 2014?

Jobs are good. Exports create jobs. We create exports. Renew our charter.

Such is the essence of the marketing pitch of the U.S. Export-Import Bank, whose officials have begun ramping up their lobbying efforts ahead of a 2014 vote concerning reauthorization of the Bank’s charter, which expires in September.  Last go around, in 2012, Ex-Im ran into some unexpected turbulence when free-market think tanks, government watchdog groups, and limited government Republicans in Congress raised some compelling – but ultimately ignored – objections to reauthorization.

The ostensible purpose of the Ex-Im Bank is to assist in financing the export of U.S. goods and services to international markets. Even if that were a legitimate role of government, the public must keep a watchful eye on how much and to whom loans are made – especially given the current administration’s tendency to bet big on particular industries and specific firms, and in light of its commitment to seeing U.S. exports reach $3.14 trillion in 2014.

From the U.S. Export-Import Bank’s 2013 Annual Report:

The Ex-Im Bank’s mission is to support American jobs by facilitating the export of U.S. goods and services. The Bank provides competitive export financing and ensures a level playing field for U.S. exporters competing for sales in the global marketplace. Ex-Im Bank does not compete with private-sector lenders but provides export financing that fill gaps in trade financing. The Bank assumes credit and country risks that the private sector is unable or unwilling to accept. It also helps to level the playing field for U.S. exporters by matching the financing that other governments provide to their exporters. The Bank’s charter requires that the transactions it authorizes demonstrate reasonable assurance of repayment.

The defensive tone of this mission statement anticipates Ex-Im critics’ objections, but it certainly doesn’t answer them. The objectives of filling gaps in trade financing passed over by the private sector and expecting a reasonable assurance of repayment are mutually exclusive – unless the threshold for “reasonable assurance” is more risk-permissive than the private-sector’s most risk-permissive financing entities.  Therefore, Ex-Im is either putting taxpayer resources at risk or it is competing directly with private-sector lenders for customers in need of finance. And if the latter, then as it seeks to create the proverbial “level playing field” for the U.S. companies whose customers it finances, Ex-Im is un-leveling the playing field for the finance industry, as well as for the U.S. firms in industries that compete globally with these U.S-taxpayer financed foreign companies.