Archives: 05/2015

Huckabee’s Support for Higher Taxes and More Spending

Former Arkansas Governor Mike Huckabee launched his presidential campaign last week. Huckabee highlighted his fiscal successes as governor during his announcement. He claims that he cut taxes 94 times while governor, and he promised to bring his tax-cutting experience to Washington, D.C. Huckabee’s statements do not tell the full story. While Huckabee cut some taxes, his time in office also included a rapid increase in Arkansas state spending and multiple tax hikes. 

Huckabee took office in July 1996 after Governor Jim Guy Tucker was convicted for his involvement in the Whitewater scandal. Shortly after taking office,  Huckabee signed a $70 million  package of income tax cuts. It eliminated the marriage penalty, increased the standard deduction, and indexed tax brackets to inflation. The broad-based tax cut was Arkansas’s first in 20 years.  Huckabee followed it with a large cut to the state’s capital gains tax. These tax cuts were popular, and they improved Arkansas’s economic climate.

Huckabee’s fiscal policies then changed direction. Huckabee used the state’s tobacco settlement money to expand Medicaid, and he supported a large bond initiative to increase spending for infrastructure. These and other spending policies came with a hefty price tag.

Opt Out Tests If Child’s a “Mere Creature of the State”

The Common Core War, over the last few months, has been fought on a largely new front: whether students can be forced to take state tests – in the vast majority of cases, Core-aligned tests – or whether parents and students can refuse. It is perhaps an even more fundamental question than whether the federal government may constitutionally coerce standardization and testing generally, and with Common Core, specific standards and tests. The testing battle is to a large extent about whether a child, in seeming opposition to the seminal Supreme Court ruling in Pierce v. Society of Sisters, is indeed a “mere creature of the State.”

The opt-out numbers are hard to pin down, though there is little question that some districts have seen very large percentages while others – probably the large majority nationwide – have seen few. It is also probably reasonable to conclude that the leader of the opt-out crusade has been New York State, where animosity toward the Core has been high since the state first rushed implementation and state officials, in an effort to calm things, actually inflamed them with a condescending approach to public engagement that launched weeks of recriminations. Last year the state saw an estimated 60,000 students opt out, which leapt to nearly 200,000 this year.

The root question, of course, is should students and parents be able to opt out without fear of punishment? And since punishment would be coming from a government institution – yes, that is what a public school is – that means without fear of punishment by the state. If children are, in part, creatures of the state – and Pierce did not say there is no legitimate state role in education – than punishment is legitimate. If, however, the public schools exist to serve fully free citizens, then punishment cannot be meted out for refusing the test; it is up to parents to freely decide whether or not their children are subjected to the tests.

Against Racial Preferences in Contracting

Since before the Declaration of Independence, equality under the law has long been a central feature of American identity—and was encapsulated in the Constitution. The Fourteenth Amendment expanded that constitutional precept to actions by states, not just the federal government.

For example, if a state government wants to use race as a factor in pursuing a certain policy, it must do so in the furtherance of a compelling reason—like preventing prison riots—and it must do so in as narrowly tailored a way as possible. This means, among other things, that race-neutral solutions must be considered and used as much as possible.

So if a state were to, say, set race-based quotas for its construction contracts and claim that no race-neutral alternatives will suffice—without showing why—that would fall far short of the high bar our laws set for race-conscious government action.

Yet that is precisely what Montana has done. Montana’s Disadvantaged Business Enterprise (“DBE”) program implements a federal program aimed at remedying past discrimination against minority and women contractors by granting competitive benefits to those groups. While there may be a valid government interest in remedying past discrimination, in its recent changes to the program, Montana blew through strict constitutional requirements and based its broad use of racial preferences on a single study that involved weak anecdotal evidence—a study that recommended more race-neutral alternatives, not fewer.

Climate Change Concerns Don’t Belong in Dietary Guidelines

On Friday, May 8, the public comment period closed for the new 2015 Dietary Guidelines issued by the U.S. Department of Agriculture (USDA) and the Department of Health and Human Services (HHS). In a nutshell, the new dietary guidelines are to eat a diet richer in plant-based foods and leaner in animal-based products. One of the considerations used by the USDA/HHA in their Scientific Report used to rationalize these new dietary guidelines was that such diets are

“associated with more favorable environmental outcomes (lower greenhouse gas emissions and more favorable land, water, and energy use) than are current U.S. dietary patterns.” [emphasis added]

Throughout the Scientific Report whenever greenhouse gases are mentioned, a negative connotation is attached and food choices are praised if they lead to reduced emissions.

This is misleading on two fronts. First, the dominant greenhouse gas emitted by human activities is carbon dioxide which is a plant fertilizer whose increasing atmospheric concentrations have led to more productive plants, increasing total crop yields by some 10-15 percent to date. The USDA/HHS is at odds with itself in casting a positive light on actions that are geared towards lessening a beneficial outcome for plants, while at the same time espousing a more plant-based diet.

And second, the impact that food choices have on greenhouse gas emissions is vanishingly small—especially when cast in terms of climate change. And yet it is in this context that the discussion of GHGs is included in the Scientific Report. The USDA/HHS elevates the import of GHG emissions as a consideration in dietary choice far and above the level of its actual impact.

In our Comment to the USDA/HHS, we attempted to set them straight on these issues.

Our full Comment is available here, but for those looking for a synopsis, here is the abstract:

There are really only two reasons to discuss greenhouse gas emissions (primarily carbon dioxide) in the context of dietary guidelines in the U.S., and yet the USDA and HHS did neither in their Scientific Report of the 2015 Dietary Guidelines Advisory Committee (DGAC).

The first reason would be to discuss how the rising atmospheric concentration of CO2—a result primarily of the burning of fossil fuels to produce energy—is a growing benefit to plant life. This is an appropriate discussion in a dietary context as atmospheric CO2 is a fertilizer that promotes healthier, more productive plants, including crops used directly as food for humans or indirectly as animal feed. It has been estimated that from the atmospheric CO2 enrichment to date, total crop production as increased by 10-15 percent. This is a positive and beneficial outcome and one that most certainly should be included in any discussion of the role of greenhouse gases emissions in diet and nutrition—but is inexplicably lacking from such discussion in the DGAC report.

The second reason to discuss greenhouse gas emissions in a diet and nutrition report would be to dispel the notion that through your choice of food you can “do something” about climate change.  In this context, it would be appropriate to provide a quantitative example of how the dietary changes recommended by the DGAC would potentially impact projections of the future course of the climate. Again, the DGAC failed to do this.  We help fill this oversight with straightforward calculation of averted global warming that assumes all Americans cut meat out of their diet and become vegetarians—an action that, according to the studies cited by the DGAC, would have the maximum possible impact on reducing greenhouse gas emissions and thus mitigating future climate change.  Even assuming such an unlikely occurrence, the amount of global warming that would be averted works out to 0.01°C (one hundredth of a degree) by the end of the 21st century.  Such an inconsequential outcome has no tangible implications.  This should be expressed by the DGAC and mention of making dietary changes in the name of climate change must be summarily deleted.

We recommend that if the DGAC insists on including a discussion of greenhouse gas emissions (and thus climate change) in it 2015 Dietary Guidelines, that the current discussion be supplemented, or preferably replaced, with a more accurate and applicable one—one that indicates that carbon dioxide has widespread and near-universal positive benefits on the supply of food we eat, and that attempting to limit future climate change through dietary choice is misguided and unproductive.  These changes must be made prior to the issuance of the final guidelines. 

We can only guess on what sort of impact our Comment will have, but we can at least say we tried.

When Billionaires Play Politics (As Is Their Right), Pundits Can Criticize Them

Free speech can get awfully expensive when billionaires are involved. Just ask the International Crisis Group, a charity that seeks to prevent war and related atrocities by monitoring conditions in the world’s most dangerous regions.

In 2003, ICG published a report on the political and social climate of Serbia following the assassination of Zoran Đinđić, the country’s first democratically elected prime minister after the fall of Slobodan Milošević. One of the issues noted there was the concern of “average Serbs” that powerful businesses were still benefiting from corrupt regulatory arrangements that dated back to the Milošević regime.

One of several oligarchs mentioned was Milan Jankovic, who also goes by the name Philip Zepter. With an estimated net worth of $5 billion, Jankovic is widely believed to be the richest Serb (and one of the 300 wealthiest men in the world). His holdings include Zepter International, which sells billions of dollars of cookware each year and has more than 130,000 employees.

One might think that a man responsible for running a vast business empire would have better things to do than suing a charity, but you’d be wrong. For the last decade, Jankovic has hounded ICG, relentlessly pressing a defamation suit, first in Europe and now in the United States. After 10 years of litigation, the case finally comes down to a single question: Is Milan Jankovic a public figure?

The Supreme Court has long held that the First Amendment’s protection of speech (and political criticism) requires libel plaintiffs who are public figures—like politicians and celebrities—to show that potentially defamatory statements were not only false but also published with “actual malice.” Under this standard, the defendant must have actually known that the statements were false; a negligent misstatement or the innocent repetition of another’s falsehood isn’t enough.

In an amicus brief filed in the U.S. Court of Appeals for the D.C. Circuit, Cato, along with a diverse group of organizations including the Brookings Institution, Council on Foreign Relations, and PEN American Center, argues that while Jankovic is not a politician or other government official, he should still be treated as a public figure for the purpose of this case.

Under the “limited public figure” doctrine, the Supreme Court holds that private citizens become public figures when they “thrust themselves to the forefront of particular public controversies in order to influence the resolution of the issues involved.” As we argue, Jankovic is in his own words one of Serbia’s most powerful and influential citizens, whose vast wealth and political connections gives him a near-unparalleled ability to shape the outcome of public debates. What’s more, Jankovic has played an active role in Serbian politics. He describes himself as one of the men responsible for overthrowing Milošević, and he once hired American lobbyists to represent the Serbian government in Washington. He’s even rumored to have used his own money to fund the government during a budget crisis!

In short, Jankovic is the very definition of a public figure—and criticism of public figures, whether they be elected officials like Frank Underwood or shadowy powerbrokers like Raymond Tusk, must be privileged. Unless the weakest are free to criticize the most powerful, democracy is nothing but a house of cards.

The D.C. Circuit will hear argument in Jankovic v. International Crisis Group later this spring or summer.

Lessons from the Ayr Bank Failure

One consequence of the financial crisis of 2008-09 has been renewed interest in the merits of contingent convertible debt as a mechanism for equity bail-ins at moments of acute financial distress. Should it fail, a financial institution’s contingent bonds are automatically converted into equity shares. History suggests that convertible debt can help to preserve financial stability by limiting the spillover effects of individual financial institution failures.

A particularly revealing historical illustration of this advantage of contingent debt comes from the Scottish free banking era. From 1716 to 1845, the Scottish financial system functioned with no official central bank or lender of last resort, no public (or private) monopoly on currency issuance, no legal reserve or capital requirements, and no formal limits on bank size, at a time when Scotland’s was a classic emerging economy with large speculative capital flows, a fixed exchange rate, and substantial external debt. Despite this, Scotland’s banking sector survived many major shocks, including two severe balance of payments crises arising from political disturbances during the Seven Years’ War.

The stability of the Scottish banking system depended in part on the use it made of voluntary contingent liability arrangements. Until the practice was prohibited in 1765, some Scottish banks included an “optional clause” on their larger-denomination notes. The clause allowed the banks’ directors to convert the notes into short-term, interest-bearing bonds. Although the clause was seldom invoked, it was successfully employed as a means for preventing large-scale exchange rate speculators from draining the Scottish banks’ specie reserves and remitting them to London during war-related balance of payments crises–that is, as a private and voluntary alternative to government-imposed capital controls.

Contingent debt also helped to make Scottish bank failures less costly and disruptive. If an unlimited liability Scottish bank failed, its shorter-term creditors were again sometimes converted into bondholders, while its shareholders were liable for its debts to the full extent of their personal wealth. Although the Scottish system lacked a lender of last resort, the unlimited liability of shareholders in bankrupt Scottish banks served as a substitute, with sequestration of shareholders’ personal estates serving to “bail them in” beyond their subscribed capital. The issuance of tradeable bonds to short-term creditors, secured by mortgages to shareholders’ estates, served in turn to limit bank counter-parties’ exposure to losses, keeping credit flowing despite adverse shocks.

A particularly fascinating illustration of how such devices worked came with the spectacular collapse in June 1772 of the large Scottish banking firm of Douglas, Heron & Co., better known as the Ayr (or Air) Bank, after the parish where its head office was located. The Ayr collapsed when the failure of a London bond dealer in Scottish bonds caused its creditors to panic. The creditors doubted that the bank could could meet liabilities that, thanks to its reckless lending, had ballooned to almost £1.3 million. The disruption of Scottish credit ended quickly, however, when the Ayr’s partners resorted to a £500,000 bond issue, secured by £3,000,000 in mortgages upon their often vast personal estates—including several dukedoms. By this means the Ayr Bank managed to satisfy creditors, at 5% interest, as the Ayr’s assets, together with those of its partners, were gradually liquidated. In modern parlance, the Ayr Bank had been transformed into a “bad bank,” whose sole function was to gradually work off its assets and repay creditors while the immense landed wealth of its proprietors’ personal estates provided a financial backstop. Creditors were thus temporarily satisfied with fully secured, negotiable bonds, which were eventually redeemed in full, with interest.

We are unlikely today to witness a return to unlimited liability for financial institution shareholders. The extensive and effective use of contingent liability contracts during the Scottish free banking episode nevertheless offers important evidence concerning private market devices for limiting the disruptive consequences of financial-market crises. When compared to the contemporary practice of public socialization of loss through financial bail-outs, such private market alternatives appear to deserve serious consideration. Most importantly, perhaps, by encouraging closer monitoring of financial institutions by contingently liable creditors and equity holders, these private alternatives appear, in the Scottish case at least, not only to have made crises less severe, but also to have made them far less common.

This post is based on Tyler Goodspeed’s doctoral dissertation, a revised version of which is under consideration at Harvard University Press under the title Legislating Instability: Adam Smith, Free Banking, and the Financial Crisis of 1772.

Universal Savings Accounts (USAs)

My op-ed today at The Federalist discusses exciting developments in Canada and Britain regarding personal savings. Both nations have implemented universal savings vehicles of the type I proposed with Ernest Christian back in 2002. The vehicles have been a roaring success in Canada and Britain, and both countries have recently expanded them.

In Canada, the government’s new budget increased the annual contribution limit on Tax-Free Savings Accounts (TFSAs) from $5,500 to $10,000. In Britain, the annual contribution limit on Individual Savings Accounts (ISAs) was recently increased to 15,240 pounds (about $23,000). TFSAs and ISAs are impressive reforms—they are pro-growth, pro-family, and pro-freedom.

America should create a version of these accounts, which Christian and I dubbed Universal Savings Accounts (USAs). As with Roth IRAs, individuals would contribute to USAs with after-tax income, and then earnings and withdrawals would be tax-free. With USAs, withdrawals could be made at any time for any reason.