Topic: Regulatory Studies

Save Elephants by Selling Ivory

For many people free markets seem cold and calculating.  Maybe it’s the best way to sell, say, automobiles and soap.  But we shouldn’t like the process.  And we certainly shouldn’t base our behavior on markets when basic concepts of right and wrong are at stake.

Of course, markets are no substitute for understanding what the good life is all about.  However, markets offer a powerful tool to reinforce underlying moral values.

One of the great tragedies of the modern age is the slaughter of elephants.  Ivory long has been a widely desired decorative material.

Unfortunately, these days most new ivory comes from poachers.  The killing of elephants has sparked a new form of prohibition, with steadily tighter controls over ivory sales. 

As I note in my new Freeman article:

As a result, elephants have turned into modern day bison—simultaneously owned by no one and more valuable dead than alive.  The result has been devastating for elephant populations in many African states, with upwards of 40,000 elephants being killed annually.

In fact, about the only advocates of the giant creatures are Westerners who see the animals in zoos or on carefully controlled safaris.  In contrast, struggling developing nations must manage wildlife reserves and deter poachers while facing what they see as far more pressing human needs. 

Worse is the situation facing villagers and farmers.  Residents of the industrialized West wax eloquent when talking of faraway elephants, but to locals the creatures are giant rats, threatening and destructive. 

Thus, despite much effort, activists and governments have not been able to stop the massacre of elephants.  Yet faced with the failure of prohibition, the usual suspects only propose more of the same. 

They are pushing countries to destroy existing ivory stockpiles, acquired from elephants which died naturally or were culled, as well as seized from poachers.  Groups also are pressing to ban even the sale of antique ivory, as if outlawing ancient objects could bring back long-dead elephants.  Even more improbable have even been proposals that Western nations deploy military

Without a change of tactics, elephants could disappear from some African countries.  Yet some in the West favor morality lectures rather than practical innovations. 

Moral suasion always is worth a try.  But what happens after preaching fails?

Use markets to reinforce the moral message.  Observed the international conference covering endangered species (CITES):  “provided that their full value (i.e. both intrinsic and extrinsic) is fully realized by the landholders involved, not only will elephants be conserved but so will the accompanying range of biodiversity existing on such land.” 

It’s not a jump into the unknown.  Before 1989 Botswana, Malawi, Namibia, South Africa, and Zimbabwe allowed legal sales.  The same countries generally enjoyed expanding elephant populations, in contrast to the shrinking herds evident elsewhere in Africa.

Even today, after closure of these ivory markets, some governments sell licenses to hunt elephants when the population exceeds the land’s capacity.  Where the money is shared locally, noted analyst Peter Fitzmaurice, “Damaged land and crop losses are not only being tolerated, but villages are doing their best to guard against poachers.”

More needs to be done.  Observed CITES:  “A legal trade in ivory, elephant hide and meat could change current disincentives to elephant conservation into incentives to landholders and countries to conserve them.” 

Some activists appear to believe that it simply is morally wrong to trade in animals, or at least elephants (speciesism lives!).  But markets have been used elsewhere to help save endangered species, such as vicunas, tigers, and crocodiles.

Why not elephants too?

The current system formally treats elephants as sacred, thereby leaving them for dead.  Markets would treat elephants as commercial, thereby keeping them alive. 

If asked, elephants likely would prefer the second policy.  So should we.

Jared Bernstein’s “Tax Reform” Assault on Pensions, IRAs and 401(k)s

The bad habit of defining “tax reform” in terms of fairness or “closing loopholes” sidesteps the most essential task of effective tax policy – namely, to collect taxes in ways that do the least possible damage to incentives for productive effort, investment and entrepreneurship.

The Joint Committee on Taxation list of “tax expenditures” is arbitrary accounting, not economics, and tax expenditures are not necessarily “loopholes.” These estimates do not take taxpayer behavior into account and therefore do not estimate revenues that could be raised by closing the so-called loopholes (e.g., a higher tax on capital gains would shrink asset sales and revenues). Policies that make sense in terms of economic incentives can therefore be portrayed as useless tax subsidies in the purely static accounting of “tax expenditures.”

For example, a recent New York Times article by former vice presidential adviser Jared Bernstein complains that tax deferral for retirement savings is unfair because, “most savings subsidies go to households that would surely save anyway, while almost nothing goes to the households that need help to save.” 

These “subsidies” for high-bracket taxpayers mainly consist of deferring rather than avoiding taxes, which only partly offsets the way savings are double-taxed. Even if higher-income households would actually save the same without 401(k) accounts (which contradicts research), they would still end up with much smaller retirement savings. Dividends and capital gains would then be repeatedly taxed, year after year, rather than being continually reinvested within a tax-deferred pension, IRA or 401(k) account. 

Estimated “subsidies” from tax deferral are deceptive: Instead of having recent dividends and capital gains taxed at a 15-20 percent rate in recent years, distributions from tax-deferred accounts will later be taxed at rates up to 39.6 percent. It’s a subsidy only if you don’t live much past 70.

Bernstein presents a graph showing the top 20 percent getting a 66 percent share of these “subsidies” for pensions and defined-contribution plans while the middle fifth gets only nine percent and the poorest 20 percent just two percent. What these figures actually demonstrate is that (1) people who work full-time for many years have more income to save than those who don’t, and that (2) people who pay no income tax cannot benefit from any policy that reduces taxable income, even temporarily.

There are five times as many workers in the top 20 percent than there are in the bottom 20 percent. To exclude young singles and old retirees, Gerald Mayer examined the work experience of households headed by someone between the working ages of 22 and 62. Average work hours among the poorest 20 percent still amounted to just 1,415 hours a year in 2010, while those in the middle fifth worked 2,771 hours, and the top 20 percent worked 4060 hours.

If Bernstein’s “subsidies” were properly expressed as shares of income, rather than as shares of foregone tax revenue, the differences nearly vanish. The Congressional Budget Office (the undisclosed source of his estimates) shows tax benefits for retirement savings worth only about twice as much to the top 20 percent (2 percent of net income) as to the middle 20 percent (0.9 percent of income). Retirement savings incentives appear to be worth only 0.4 percent of income to the poorest 20 percent, since they rarely owe taxes, yet annual benefits are a poor guide to lifetime benefits. Those in low income groups while they are young commonly move up to higher tax brackets by the time they start saving for retirement.

The alleged unfairness of lower-income households not getting the same dollar tax break as couples earning more than $115,100 (the top 20 percent) could be alleviated by reducing marginal tax rates on two-earner families. But Bernstein instead suggests “closing loopholes that make it easy for wealthy individuals to exceed contribution limits to tax-preferred accounts (as was found to be the case with Mitt Romney), reducing contribution limits for high-income filers, or simple limiting the value of tax breaks for the wealthiest of filers (e.g. allowing them to deduct such contributions at 28 percent instead of 39.6 percent.” None of these schemes would add a dime to the savings of low or middle-income households, of course, and they wouldn’t work.

It is not legal – and therefore not “easy”– to exceed strict contribution limits for high-income taxpayers, and Mitt Romney certainly did not do so.  What Romney did was to roll over qualified retirement plans into an IRA and then earn high compounded returns on very successful investments.  Similarly, albeit on a much smaller scale, I rolled-over a lump-sum pension into an IRA in 1990 when I changed jobs, and that IRA is now 12-times larger thanks to compound interest and bold investments.  Since I never contributed another dollar after 1990, tougher or lower contribution limits would have been entirely irrelevant.  

Bernstein’s final proposal is from the Obama budget – “allowing taxpayers to deduct contributions at 28 percent instead of 38.6 percent.” But that too is irrelevant. Any alleged “loopholes” for retirement savings have nothing to do with itemized deductions for top-bracket taxpayers, who are not allowed to deduct contributions to an IRA.  Failure to include employer contributions as taxable income is not an itemized deduction to begin with, nor is the exclusion from adjusted gross income for contributions to a Keogh retirement plan for the self-employed.  

In the process of giving “tax reform” a bad name, Jared Bernstein uses a sham fairness argument to justify arbitrary and unworkable anti-affluence policies that are irrelevant to any ill-defined problems. 

 

 

 

 

 

 

The Federal Reserve’s “Foreign Banking Organization” Rule Is Unnecessary

Last November, Arthur Long and I released a policy study on the likely impact of the Federal Reserve’s 2012 “Foreign Banking Organization” proposal.

We argued – along with many others – that the proposal amounted to little more than a costly corporate reshuffling exercise. Of even greater concern, we suggested that the proposal threatened the ability of global banks to allocate capital and liquidity in an efficient manner, would increase financial instability, and dampen economic growth.

Yesterday, the Federal Reserve released a final rule that is essentially the same as the original proposal. The final rule is more lenient only in the sense that it increases the timeframe for compliance, simplifies the leverage requirements a little, and impacts fewer organizations. To that end, the fundamental criticisms still apply, as does the confusion around why such a proposal is necessary.

Governor Tarullo – a leading proponent of the rule – has argued that the Federal Reserve extended financial “support” to foreign banks at unprecedented levels during the crisis and therefore should be given greater oversight of these banks’ activities. That sounds reasonable. But upon closer review, the support he refers to was limited to liquidity provided through the Fed’s discount window. Foreign banks were not eligible to receive TARP or other forms of bailout assistance.

Fed officials have gone to great lengths to argue that providing liquidity through the discount window (which may be provided only to otherwise solvent institutions on a fully collateralized basis) is a legitimate central bank function and is NOT financial assistance constituting a bailout.

I agree (although on this point, I note that I depart quite radically from some of my contemporaries). However, this argument does undermine the central pillar supporting the Fed’s new rule. In addition, if protecting U.S. taxpayers is the fundamental aim, why implement a rule that will close-off the channels of liquidity and support that the U.S. subsidiary could receive from the foreign parent? 

The Fed’s rule may well spark retaliatory actions from foreign regulators, who are even more annoyed about it than the banks they oversee. The losers will be both local and foreign banks and, most importantly, consumers of credit. Governor Tarullo himself noted during yesterday’s open meeting that the rule “may not strike the right balance indefinitely.” The Fed had an opportunity to lead from the front. That it failed to do so is unfortunate. 

Obama Administration Turns Antique Collectors And Dealers Into Criminals

The Obama administration is preparing to treat virtually every antique collector, dealer, and auctioneer in America as a criminal.  In the name of saving elephants, the administration is effectively banning the sale of all ivory objects, even if acquired legally decades ago.  Doing so will weaken conservation efforts and enrich those engaged in the illegal ivory trade.

Under the Convention on the International Trade in Endangered Species of Wild Fauna and Flora (CITES) only ivory from before 1989 can be sold.  Unfortunately, ivory prohibition has not stopped the slaughter of elephants. 

The greatest demand for new ivory comes from Asia.  Most ivory in America arrived legally, many years ago. 

Until now the rules were simple and sensible.  Ivory imported legally can be sold.  Moreover, the burden of proof fell on the government to convict you of violating the law.  That’s the way America normally handles both criminal and civil offenses.

However, in mid-February the administration issued what amounted to a ban on ivory sales.  As I point out in my new Forbes online column:

In practice, virtually every collector, dealer, auctioneer, and other person in America is banned from selling ivory items, even if acquired legally, owned for decades, and worth hundreds or thousands of dollars.  Every flea market, junk shop, estate sale, antique store, auction showroom, and antique show is at risk of raids, confiscations, and prosecutions.

First, no imports are allowed, not even of antiques, which before could be brought to America with a CITES certificate. 

Second, all exports are banned, except antiques (defined as over a century old) in what the Fish and Wildlife Service says are “exceptional circumstances.”  At best the administration is raising the administrative and cost burdens of exporting to countries which already limit ivory imports to items with appropriate CITES documentation.  Or the new rule may restrict the sale of items previously allowed, thereby hindering Americans in disposing of their legal collections. 

The Farm Bill Came Surprisingly Close to Fixing Some Protectionist Regulations

There’s plenty of criticism flying around about the new farm bill. It spends unprecedented amounts of money to prop up one of the most successful industries in the country. It uses Soviet-style central planning to maintain food prices and make rich farmers richer. Its commodity programs distort trade in violation of global trade rules. 

But this year’s the farm bill had the potential to mitigate some these sins by repealing a number of high-profile protectionist regulations. Despite a few close calls, however, the final version of the bill kept these programs in place, exposing the United States to possible retaliation.

COOL

One of those programs is the mandatory country-of-origin labeling (COOL) law. This requirement was first imposed by the 2002 farm bill. Ostensibly designed to increase consumer awareness, the true impact of the program is to push foreign-born cattle out of the market. The law requires meat packers to keep track of, and process separately, cattle that was born and/or raised for some time in Canada. The added expense benefits a portion of U.S. cattle ranchers at the expense of meat industry as a whole.

The negative impact on the Canadian and Mexican cattle industries was enough to prompt a complaint at the WTO. After the United States lost that case, the administration amended the regulation. But the new regulation, rather than bringing the United States into compliance, actually makes the law even more protectionist. Canada has made clear its intention to impose barriers on a wide range of U.S. products in retaliation.

Repealing this disastrous regulation through the farm bill was discussed during numerous stages of the legislative process, but no language on COOL was ever added to the bill.

Catfish

Another program that could have been fixed by the farm bill was a bizarrely redundant and purely unnecessary catfish inspection regime. The new system would cost an estimated $14 million per year to administer and (by the USDA’s own admission) do nothing to improve the safety of catfish. However, the new institutional requirements imposed on catfish farmers to comply with the new regime would all but eliminate Vietnamese competitors from the market. The U.S. catfish industry and their allies in Congress are all for it.

Even though both house of Congress had at one point or another passed bills that repealed the new catfish regime, the final bill that came out of conference kept the redundant system in place.

The inspection issue has complicated negotiation of the Trans-Pacific Partnership, of which Vietnam will be a member, and could become the basis of a complaint at the World Trade Organization. 

In the words of Sen. Mike Lee, the farm bill is “a monument to Washington dysfunction, and an insult to taxpayers, consumers, and citizens.”  It is also the most popular vehicle for imposing protectionist regulations that serve a small set of businesses at the expense of the national economy. 

There was hope that this bill could roll back some of the damage done in the past, at least for a handful of odious regulations. That hope was sorely misplaced.

IRS Officials Created a New Entitlement Program, Because They Felt Like It

Over at DarwinsFool.com, I summarize a lengthy report issued by two congressional committees on how the Treasury Department, the Internal Revenue Service, and the Department of Health and Human Services conspired to create a new entitlement program that is authorized nowhere in federal law. Here’s an excerpt in which I summarize the summary:

Here is what seven key Treasury and IRS officials told investigators.

In early 2011, Treasury and IRS officials realized they had a problem. They unanimously believed Congress had intended to authorize certain taxes and subsidies in all states, whether or not a state opted to establish a health insurance “exchange” under the Patient Protection and Affordable Care Act. At the same time, agency officials recognized: (1) the PPACA plainly does not allow those taxes and subsidies in non-establishing states; (2) the law’s legislative history offers no support for their theory that Congress intended to allow them in non-establishing states; and (3) Congress had not given the agencies authority to treat non-establishing states the same as establishing states.

Nevertheless, agency officials agreed, again with apparent unanimity, to impose those taxes and dispense those subsidies in states with federal Exchanges, the undisputed plain meaning of the PPACA notwithstanding. Treasury, IRS, and HHS officials simply rewrote the law to create a new, unauthorized entitlement program whose cost “may exceed $500 billion dollars over 10 years.” (My own estimate puts the 10-year cost closer to $700 billion.)

The full post includes details some pretty stunning examples of how agency officials were derelict in their duty to execute faithfully the laws Congress enacts.