Archives: 11/2015

Trade Is Not a Trade-Off: The Stronger Case for Free Trade

Too many advocates of trade liberalization don’t really understand the case for free trade. Consider this sympathetic interview by Steve Inskeep of NPR with U.S. Trade Representative Michael Froman, the chief negotiator of the Trans-Pacific Partnership:

INSKEEP: Froman argues the TPP, the Trans-Pacific Partnership, will give U.S. industries more access to foreign markets. Granted, there’s a trade-off. Other nations get more access to the U.S. for their products. Froman contends that, at least, happens slowly as tariffs or import taxes drop.

FROMAN: The tariff on imported trucks from Japan, as an example, won’t go away for 30 years. On apparel and textiles, we worked very closely with the textile manufacturers in the U.S. to come up with an outcome that they could be comfortable with, so that we’ll let in clothes coming that are made Vietnam or made in Malaysia, but they’ve got to use U.S. fabric.

Inskeep refers to the lowering of U.S. tariffs as “a trade-off,” and Froman accepts that characterization. Both operate from the premise that Americans want other countries to reduce their barriers to our exports, and that the “trade-off” for that benefit is that we must reduce our own trade barriers.

That’s backwards. The benefit of trade is that we get access to goods and services that we might not get otherwise, or we get to pay lower prices for the goods we want. More broadly, we want free – or at least freer – trade in order to remove the impediments that prevent people from finding the best ways to satisfy their wants. Free trade allows us to benefit from the division of labor, specialization, comparative advantage, and economies of scale.

Supreme Court Must Defend Interstate Commerce

The Commerce Clause, while invoked since the New Deal as a warrant for progressive federal policy, actually provides protections for businesses against state regulations that burden interstate commerce. In Brown-Forman Distillers Corp. v. New York State Liquor Authority (1986), for example, the Supreme Court struck down New York’s Alcoholic Beverage Control Law on the ground that it regulated the price of alcohol outside the state.

Or take this hypothetical example: Colorado gets its electricity from a grid that services 11 states, Canada, and Mexico. Electricity used anywhere within this grid can come from any source that services it and, once loaded onto the grid, this electricity is identical, regardless of how it was produced or the fuel used to generate it. Yet Colorado renewable-energy regulations require that all energy that enters the state be created in compliance with certain parochial standards, which excludes the type of power generated by a particular power company in California. What Colorado has effectively enacted is an extraterritorial law, regulating economic activity outside the state and thus violating the Commerce Clause (more technically, the Dormant Commerce Clause, in the sense that Congress hasn’t explicitly legislated to prohibit the Colorado regulation).

This situation is not hypothetical, however, but the actual case of Energy & Environment Legal Institute v. Epel, wherein the U.S. Court of Appeals for the Tenth Circuit held that Colorado’s regime evaded Commerce Clause scrutiny because it did not consist of pure price controls. No matter that the regulations has a clear anticompetitive and protectionist effect on the interstate energy market—favoring in-state (complying) producers over out-of-state ones—the court sanctioned any state’s adoption of extraterritorial regulation so long as the state is savvy enough to crafts its rules as something other than a price-control mechanism.

Accordingly, Cato has joined the Pacific Legal Foundation, National Federation of Independent Business, and Reason Foundation on an amicus brief supporting a request that the Supreme Court take the case and restore a (relatively) free and competitive interstate energy market. This brief comes at an important crossroads for state-federal economic regulation, particularly relating to environmental norms. Indeed, California’s attempt to regulate out-of-state emissions was raised before the Court in Rocky Mountain Farmers Union v. Corey (2015)—turnabout is fair play?—and North Dakota is suing Minnesota for attempting to regulate its neighbors’ emissions.

The ban on extraterritorial regulation vis-à-vis the Commerce Clause is essential to preserving the competitive-federalism regime enshrined in the Constitution and the Supreme Court’s precedents. If states were able to impose their regulatory schemes on out-of-state companies in interstate industries, the 50 “laboratories of democracy” would not be able to function as such.

Under a regime of federal rivalry, competition for voters, taxpayers, and industries forces states to be accountable to those they govern and innovative in their search for solutions to vexing problems. If a state finds a cheaper, more efficient way to solve a policy conundrum, people and businesses will flock to it. But if states can impose the costs of their regulatory regimes on their neighbors, they could blunt this competitive effect.

The Supreme Court should take up Epel and flesh out federal constitutional protections for interstate commerce.

More on the Immigration Ruling as We Head to the Supreme Court

Nearly a week has passed since the Fifth Circuit affirmed the injunction against President Obama’s executive action on immigration, known as DAPA (Deferred Action for Parents of Americans). After digesting the 70-page majority opinion and 54-page dissent (plus the 11-page DAPA memo that’s an appendix), I can say that there aren’t any real surprises but we should keep in mind the following points as this case moves forward to the Supreme Court, which I elaborate on forForbes:

  1. Standing is very important.
  2. “Justiciability” is similarly crucial.
  3. The appellate court didn’t simply affirm the district court’s finding that the executive action violated the Administrative Procedure Act, but also added a further justification, that DAPA exceeds the executive’s statutory authority.

For more detailed examinations of the Fifth Circuit ruling, see Josh Blackman’s diligent series of posts on standingjusticiability, the procedural claim, the substantive claim,  the dissenting opinion generally and on standing and justiciability.

So where do we go from here? Read my Forbes piece.

Is Bitcoin Only Valuable to Crooks and Tax Cheats?

It isn’t every day that University of Chicago economists Eugene Fama and Richard Thaler see eye to eye. Fama, who won the Nobel Prize in 2013, is one of the best known proponents of the efficient market hypothesis. Thaler, in contrast, champions behavioral economics. Indeed, Thaler spends a great deal of time criticizing the efficient market hypothesis in his recent book, Misbehaving.

Both economists, however, seem to be on the same side when it comes to bitcoin. Commenting on Fama’s recent interview with the Bitcoin Uncensored podcast, Thaler tweets: “Must say I agree with Fama here. Only value of bitcoin seems to be to crooks& [sic] tax cheats. Negative social value.”

Richard Thaler Tweet

Fama and Thaler are not alone. Many regulators worry that, absent sufficient government oversight, cryptocurrencies like bitcoin will be used to conduct illegal transactions and transfers on a massive scale. For example, Sen. Joe Manchin has claimed that the “clear ends of Bitcoin [are] for either transacting in illegal goods and services or speculative gambling.” Likewise, Sen. Charles Schumer has described bitcoin as “an online form of money laundering.” Some have even warned that bitcoin might be used to fund terrorism. Like Fama and Thaler, many people outside the bitcoin community seem to believe bitcoin is basically for criminals.

But they’re wrong. To date, the black market transactions that trouble Fama, Thaler, and others have been quite limited. Consider Silk Road, the premier bitcoin-for-drugs website in operation from February 2011 to October 2013. The best available evidence suggests there were roughly $1.2 million worth of transactions made on Silk Road each month. More recent estimates put the figure at roughly $4.7 million per month. That modest figure hardly made Silk Road the Amazon of drugs, as Gawker once claimed. Amazon averaged roughly $6,204.2 million per month in 2013. That’s more than 370 times the highest monthly transactions volume estimated for Silk Road. Silk Road was not even the Etsy ($112.32 million per month) of drugs.

One might counter that the volume of transactions on Silk Road was low because so few people were using bitcoin at the time. But the volume of transactions on the Silk Road was also small relative to the total volume of transactions conducted in bitcoin. The monthly transactions volume for the entire bitcoin system averaged just under $16 billion from February 2011 to October 2013. That means that Silk Road transactions were responsible for a measly 0.03 percent of all transactions conducted in bitcoin. In other words, it was not just that few people were using bitcoin, but that of those who did few were buying and selling illegal substances on Silk Road.

What about terrorism? The U.S. Treasury Department itself has found no evidence of bitcoin’s widespread use in funding terrorism. That really shouldn’t come as a surprise. Terrorist groups have much more convenient ways to secure funding outside of legitimate banking channels. Moreover, to the extent that terrorists are located in developing regions, they would encounter the same hurdles to adopting bitcoin that others in developing countries face.

If they aren’t buying cocaine or funding terrorists, what are users doing with all that bitcoin? Answer: a lot of things. They are purchasing flights, Xbox games, and, well, anything sold on They are paying college tuition. They are ordering satellite television. They are purchasing premium memberships on dating sites and then using Yelp! to find a romantic coffee shop or trendy bar that—you guessed it—accepts bitcoin. They are sending remittances to family members around the world at a fraction of the usual cost. They are donating to support art, open source projects, and foundations. A better question would be: what aren’t they doing with bitcoin?

Contrary to popular opinion, bitcoin is not basically for criminals. It is barely for criminals. In that respect, it resembles ordinary cash—that is, Federal Reserve notes. As a matter of fact, the case is probably stronger for eliminating cash than bitcoin. Harvard economist Ken Rogoff has claimed more than half of all cash in circulation is used to hide transactions from tax or law enforcement authorities. More formal estimates by Edgar Feige suggest roughly 48 percent of cash held by the public is employed in the domestic underground economy. For those interested in transacting outside the law, cash—not bitcoin—is king.

In short, most bitcoin users seem to be a lot like you and me, if perhaps a bit more tech savvy. They want to purchase legal goods and services and remit funds as cheaply and conveniently as possible. To the extent that bitcoin is more effective than traditional payment mechanisms for making some transactions, it lowers transaction costs, encouraging production and exchange.

In other words, Thaler is wrong: bitcoin has a positive social value.

[Cross-posted from]

NCLB Compromise Looking Pretty Bad

Is pre-kindergarten part of elementary and secondary education? By definition, no. But according to preliminary reports about what is in a compromise to reauthorize the No Child Left Behind Act – really, the latest iteration of the Elementary and Secondary Education Act (ESEA) – a preschool “competitive grant” program will be added to the law. And that’s just one of several troubling items that will reportedly be in the final legislation.

One hallmark of good lawmaking are laws that are easily understood by the people, and larding on lots of items not germane to the topic of a law is one way to move away from that democratic ideal. Adding pre-k to the ESEA lards on, though as I’ll discuss in a moment, apparently the preschool addition isn’t all that will heavily complicate the legislation.

The bigger problem with expanding federal funding and reach on preschool is that the evidence is preschool has few if any lasting benefits, at least that have been rigorously documented for any large, modern efforts. Infamously, that includes Head Start and Early Head Start, which the federal government’s own studies have found to be largely impotent, and in the case of Early Head Start, potentially detrimental to some groups. The compromise would apparently also keep the 21st Century Community Learning Centers program, which federal research has also shown to be impotent or even counterproductive, but at least it is k-12.

New Study on Higher Education Aid

The U.S. Department of Education spends tens of billions of dollars a year on subsidies for higher education. Federal Pell grants are more than $30 billion a year, federal student loans are about $100 billion a year, and grants to colleges and universities are $2.5 billion a year.

College aid is growing rapidly, which is imposing a rising burden on taxpayers. And the subsidies create numerous harmful effects, as Neal McCluskey and I discuss in our new study posted at Downsizing Government.

A key concern is that government money comes with government control. There is increasing pressure to top-down plan America’s higher education system from Washington. As we’ve seen with health care, K-12 schools, disaster aid, transportation, school lunches, and many other activities, federal subsidies invariable end up being the vehicle for central planning.  

This is a big threat to the future of higher education, as our study explains. When the subsidies start flowing, the do-gooders in Washington just can’t keep their hands off. Regulatory manipulation is just too tempting for the politicians and bureaucrats, who hide their big-government impulses behind conservative-sounding phrases such as “standards” and “accountability.”

Even with its problems, the American postsecondary education system is the best in the world. Driven by consumer choice and competition between independent institutions, it has an unmatched vibrancy. However, increasing federal control and subsidization from Washington is creating a serious threat.

Efforts by the current and prior administrations to micromanage accreditation and other aspects of higher education threaten to undermine the system’s diversity and flexibility. The waste and bureaucracy of top-down federal control is exemplified by the regulatory juggernaut of education’s Title IX, the gender discrimination rules.

As we conclude in our study, the best way to avert rising central planning is to cut, and ultimately end, federal subsidies for higher education.

Police Officer Reinstated Despite Regularly Having Body Camera Off

Jeremy Dear, an Albuquerque police officer, has been reinstated despite the fact that his body camera was not on when he shot and killed 19-year-old Mary Hawkes, a suspected car thief who allegedly pointed a gun at Dear during a foot chase in April last year. Dear’s reinstatement is a reminder that officers who do not have their body cameras on when they are supposed to should face harsh disciplinary consequences.

In June 2013 Dear, who was the subject of numerous complaints, was ordered to have his body camera on for every interaction with the public. According to reporting from the Albuquerque Journal, Personnel Board documents show that Dear didn’t have this body camera on for about half of the calls he responded to. Dear’s failure to record his encounters with citizens prompted Albuquerque police chief Chief Gorden Eden to fire him last December.

At the time of the Hawkes shooting Dear was equipped with TASER’s Axon Flex camera. Below are illustrations from the instruction manual for the camera, showing how the camera is attached to the collar and connected to the controller.

Dear claims that his camera was accidentally unplugged from the controller when he killed Hawkes. Dear’s camera was sent to TASER for analysis. TASER’s report on Dear’s camera states that it was shut down and activated a number of times on the day of the Hawkes shooting and that the camera would not have shut down because of low battery power.

TASER’s report also stated that the connector cable on Dear’s camera was damaged at both ends and that the cable retention clip on the controller was missing, thereby making the removal of the cable from the controller “easy with minimal force.”

The report went on the say that “Stress was placed on the cable by twisting and pulling it but without disconnecting it from the system. This stress did not result in a powering down of the system.”

TASER’s report doesn’t contradict Dear’s claim that his camera’s cord was unintentionally detached from the controller. But it is worth remembering that his camera did activate and power down normally numerous times on the day of the shooting.

Dear’s case raises questions about what the repercussions should be for officers who fail to have their cameras activated when they should. I and the ACLU’s Jay Stanley think that in such circumstances there ought to be “Direct disciplinary action against the individual officer.”