The Washington Post On Dodd-Frank’s Conflict Minerals Fiasco

Economic sanctions, when they have an effect at all, tend to inflict misery on a targeted region’s civilian populace and often drive it further into dependence on violent overlords. That truism will surprise few libertarians, but apparently it still comes as news to many in Washington, to judge from the reaction to this morning’s front-page Washington Post account of the humanitarian fiasco brought about by the 2010 Dodd-Frank law’s “conflict minerals” provisions. According to reporter Sudarsan Raghavan, these provisions “set off a chain of events that has propelled millions of [African] miners and their families deeper into poverty.” As they have lost access to their regular incomes, some of these miners have even enlisted with the warlord militias that were the law’s targets. 

Congress added the provisions to Dodd-Frank in a fit of moral self-congratulation over making sure Americans had the chance to be ethical and thoughtful consumers of such products as jewelry and cellphones (as well as thousands of other products, as it turned out, from auto parts to the foil in food packaging). Publicly held companies would be required to report on their supply connections to “conflict minerals” such as tin, tungsten, and gold mined in war-torn areas of the Democratic Republic of the Congo. Lawmakers assigned enforcement of the law to the Securities and Exchange Commission – a body with scant discernible expertise in either African geopolitics or metallurgy – and barbed it with stringent penalties for disclosure violations, to which are added possible liability in class-action shareholder lawsuits.

Reactions to this morning’s Post account frequently employ words like “unintended” or “tragic” to describe the effect on miners of the law, which people in the Congo soon came to call “Loi Obama” – “Obama’s law”.  Unintended and tragic? Maybe. But not unforeseen, because the signs that the law would backfire this way have been in plain sight for years now – as in this 2011 account by Prof. Laura Seay (via) of how “electronics companies now have a strong incentive to source minerals elsewhere, leaving Congolese miners unemployed.” Or this 2011 account by David Aronson in the New York Times of the “unintended and devastating consequences” that he “saw firsthand on a trip to eastern Congo.” Or this more recent paper by law professor Marcia Narine.

But although the evidence has been there for years, the will to believe in the law was too strong – a will fueled by anti-corporate campaigners who take it on faith that when brutalities in the underdeveloped world occur within two or three degrees of separation of the activities of multinational businesses, the right answer must be to blame and shame the businesses.

You might call it an expensive lesson for Americans too, if you assume that anything has been learned. A recent Tulane calculation found that the costs in business compliance have already topped $700 million, with billions more ahead should nothing change. Just this September, the U.S. government conceded that it “does not have the ability to distinguish” which refiners and smelters around the globe are tainted by a connection to militia groups. That is to say, the government has demanded of business a degree of certainty that it cannot achieve itself.  Courtesy of UCLA corporate law professor Stephen Bainbridge, here’s a flowchart of what complying might involve for a given business. 

If the new Republican Congress wants to be taken seriously about fixing counterproductive regulation, it should make the repeal of this law an early priority.

Computer-Aided Reporting: Looking Where the Light Is Good

Upshot (New York Times) writer Derek Willis tweeted this morning, “We need to stop doing stories (and maps) with meaningless data.” At the link, a story on Vox charts the poorest members of Congress. It’s based on a Roll Call story published in September.

His main point, I think, is the failure of the data to reliably reflect what it’s supposed to. The disclosures on which these stories rely don’t include the value of homes members own, for example, and information is reported in broad bands, so it’s probably not very accurate and may be wildly inaccurate.

The data is meaningless in another, more important way. Neither story suggests any correlation between wealth (or its absence) and legislators’ behavior or fitness for office. It’s just a look at who has money and who doesn’t—uninformative infotainment. Maybe some readers stack up inferences to draw conclusions about Congress or its members, but this is probably an exercise in confirming one’s biases.

This illustrates a real problem for computer-aided journalism. When the only data available depicts a certain slice of the world, that will skew editorial judgments toward that slice of the world, overweighting its importance in news reporting and commentary.

In my opinion, reporting on public policy suffers just such a skew. There is relatively good data about campaign financing and campaign spending, which makes it easy to report about. The relatively high level of reporting on this area makes it appear more important while the actual behavior of public officials in office—the bills they sponsor, the contents of bills, amendments, votes, and the results for society—goes relatively unreported.

It won’t be the fix for all that ails reporting on public policy, but our Deepbills project makes essential content of legislation available as data. It vastly expands the territory around U.S. federal public policy that computer-aided jounalists can cover. Deepbills data has been picked up various places, but we need more adoption before it will provide all the value it can to a better-informed public.

Update: On Wednesday, the House Government Reform and Oversight Committee will have a hearing on implementation of the DATA Act, which could yet further expand the data available to journalists, and all of us.

Enduring Myths that Obscure the Case for Free Trade

Most economists agree that free trade works better than restricted trade to increase the size of the economic pie. By enlarging markets to span national borders, free trade increases the pool of potential producers, consumers, partners, and investors, which permits greater specialization and economies of scale – both essential ingredients of per capita economic growth.

But, in practice, free trade remains elusive. It is the exception, not the rule. Sure, many tariffs and other border barriers have been reduced in the United States (and elsewhere) over the years, but protectionism persists in various guises. There are “Buy American” rules limiting government procurement spending to local firms and US-made products; heavily protected services industries; seemingly endless incarnations of agriculture subsidies; import quotas on sugar; green-energy and other industrial subsidies; shipbuilding and shipping restrictions; the Export-Import bank; antidumping duties; and, regulatory protectionism masquerading as public health and safety regulations, to list some. Ironically, protectionism is baked into our so-called free trade agreements. It takes the form of rules of origin requirements, local content mandates, intellectual property and investor protections, enforceable labor and environmental standards, and special carve-outs that shield entire products and industries from international competition.

Trade agreements may be the primary vehicle through which U.S. trade barriers are reduced, but they are predicated on the fallacy that protectionism is an asset to be dispensed with only if reciprocated, in roughly equal measure, by negotiators on the other side of the table. If the free trade consensus were meaningful outside of economics circles, trade negotiations would be unnecessary. They would have no purpose. If free trade were the rule, trade policy would have a purely domestic orientation and U.S. barriers would be removed without any need for negotiation because they would be recognized for what they are: taxes on domestic consumers and businesses.

U.S. and Russia Must Find Exit to Ukraine Impasse

MOSCOW—The Kremlin was its forbidding worst when I recently visited a dreary, stormy Moscow. Russia is not the Soviet Union, but hopes for the former to develop into a genuinely liberal society have been stillborn.

However, the fact that President Vladimir Putin is an unpleasant autocrat doesn’t change the necessity of Washington and Moscow working together.

Moscow is not threatening any core U.S. interest. Putin’s Ukrainian aggression does not impair fundamental American national interests. There is no indication that Moscow has any ill plans for Europe.

Unfortunately, Washington contributed to the Ukraine imbroglio by foolishly joining Europe in treating Kiev as a geopolitical competition. This allied blunder doesn’t justify Russia’s response, of course, but it precipitated Moscow’s intervention.

Putin demonstrates that even paranoids have enemies. Allied behavior post-Cold War—expanding NATO up to Russia’s border, dismantling Serbia, treating Georgia as a military ally, holding open the possibility of NATO membership for Kiev, and trying to pull Ukraine into Europe’s economic orbit—has consistently ignored or threatened Moscow’s interests.

The result is an economic and political impasse with a risk of military confrontation. Russia’s control in Ukraine will not change unless Moscow suffers decisive military, economic, or political loss.

However, Ukraine’s military is markedly inferior to that of Russia. The U.S. and Europe won’t go to war with nuclear-armed Russia over Ukraine.

While the Kremlin’s unjustified use of force warrants sanctions as temporary punishment, they are counterproductive as permanent policy. The restrictions have hurt the Russian economy, but so far less than the unrelated drop in oil prices.

The Europeans have even less political leverage over Moscow. Russia has moved closer to China, expanding the former’s options. So far Putin’s policy remains popular at home.

Washington and Brussels have no plausible strategy to reverse Moscow’s approach. Even the Obama administration rejects crackpot schemes for military intervention—such as putting American troops into a war zone and daring Moscow to attack.

Non-lethal aid to Kiev wastes scarce American resources. Military assistance would strengthen the Ukrainian armed forces, but the conflict matters far more to Moscow than to the allies, so the former always will spend and risk more to achieve its ends.

Tightening sanctions is another possibility, though historically they have proved to be better at inflicting economic harm than forcing political change. Russia’s economy is likely to withstand, though at potentially high cost, whatever Europe is willing to impose. At the same time the West, too, will suffer economically.

Worst is the economic condition of Ukraine, the epicenter of conflict. The longer the crisis persists, the greater the financial drain Kiev will be for America and Europe.

Unfortunately, Washington and Brussels have no political path to victory. The problem is not just a “frozen conflict” involving Ukraine and separatists, with Kiev broken and bankrupt. The bigger risk is a frozen conflict—essentially a Cold War lite—between Russia and America/Europe.

Which means everyone needs to look for an exit from the current impasse.

Grubergate, the Mini-Series

Remembering Georgia’s Freedom Fighter

Sometimes a person’s genuine significance can be assessed only after their passing. That seems to be the case of Kakha Bendukidze, Georgian entrepreneur, reformer, and philanthropist, who died unexpectedly early last month. While he was very well-known among libertarians in Eastern Europe and the former USSR, the reactions of some of the world’s leading media outlets suggest that his influence extended far beyond narrow ideological lines, making him one of the most important voices on public policy in the region.

Kakha was a close intellectual ally of Cato and did more than his fair share to promote free-market ideas in countries of the former USSR. In the early 2000s, he pressed for the adoption of a flat tax in Russia. Earlier than others, he understood Vladimir Putin’s true motives, sold his Russian businesses and moved to his native Georgia. It was there that he spearheaded, as Minister for Economy, the ambitious program of fighting corruption and liberalizing the economy, which led to extraordinarily high growth rates for Georgia’s economy. In 2007 alone, the economy expanded by 12.3 percent. After leaving public office, Kakha helped establish the Free University of Tbilisi, a private university offering Western-style undergraduate and graduate education, and the Knowledge Fund, a charity providing funding for teaching and research, including scholarships for Georgian students from poorer backgrounds.

Impressive as this account is, few would have guessed that his passing would prompt a wave of tributes and appreciations coming from sometimes unexpected places. On Foreign Policy’s Democracy Lab, Anna Nemtsova called Kakha one of Georgia’s “most progressive reformers and corruption fighters.” The New York Times published a lengthy obituary, which highlighted Kakha’s involvement with the new leadership of Ukraine. The Independent, in turn, called Kakha a “businessman and statesman who fell foul of Vladimir Putin but rescued Georgia’s post-Soviet economy.”

Finally, the New Yorker magazine offers a carefully written appreciation, offering a lot of details on Kakha’s life and activities in Ukraine prior to his untimely death, as well as the directness with which he communicated his ideas:

Even though he was unsure whether Ukrainians would accept the changes that he wanted to carry out, he agreed to work with [Ukrainian President] Poroshenko, friends say, because he saw Ukraine as the frontline of the battle for liberal reforms in the former Soviet states. With the same tough love that he had inflicted on Georgians, Bendukidze urged Ukrainians to stop blaming others for their problems. “You have broken every world record in idiocy,” he told an audience at the Kyiv School of Economics, in July. “You keep electing populists, people who promise you more. This means you are electing the worst.” He advocated cutting government spending, reducing retirement benefits for public servants, and radically deregulating the economy. Ukraine, he said, in one of his last interviews, had too many ministries and agencies. “Who needs them when the government’s sole function these days is to take money from the International Monetary Fund and pass it on in payment for Russian gas?” he asked.

Under Proposed Rules, Government Could Choose Insurance Plans for Millions of People

The administration is considering a rule change that would allow the government to automatically change some people’s exchange plans to a cheaper alternative.

HHS recently proposed regulations that would let exchanges offer alternative default options for enrollees. Under current law, most enrollees who did not revisit the exchange website are automatically re-enrolled in their plans (a few states do not allow automatic renewal). The new proposed rules would let exchange enrollees choose whether their default option would be to automatically renew the same plan or to let the government switch them into a cheaper similar plan if theirs becomes more expensive. Under the proposed rules, state exchanges would be given the option to offer these alternatives in 2016, with the federally run exchange offering it in 2017.

For people that chose this option, the government would be effectively choosing their insurance plan, a far cry from the “if you like your plan you can keep it” pledge.

In one sense, it is not surprising that HHS is at least exploring this option. Automatic renewal presents a host of potential problems.

Due to the way the law designed the exchange subsidies, many of these people will end up paying significantly more if they automatically renew. An analysis by the New York Times found that people in the most popular plans would face an average premium increase of 9.5 percent. This could end up affecting millions of people, as a recent Gallup poll found that 68 percent of respondents said they planned to renew their current plan.

To some extent, the proposed rules could help alleviate the initial problem of unforeseen premium increases, but it creates other issues at the same time.  Enrollees might not understand the downsides of letting the government automatically switch them to a cheaper plan. People who chose this option fearing premium increases could find that they have lost their doctor, or a prescription they need is no longer covered by their plan. For even the most sophisticated exchange customers, there is a measure of uncertainty.  When they choose a default option, enrollees won’t know how much their premiums will increase next year or how the provider networks of cheaper alternatives compare.  Each customer’s priorities will be different, as will the variables affecting their decision. Obamacare has inadvertently created a very complex situation for the government to try to navigate.

The problems associated with automatic renewal are serious and could affect millions of people, but they might not have a clear solution. In one sense, the proposed default option could help people avoid unforeseen premium increases. This could be the most important factor for many enrollees, but comes at the risk of losing access to provider networks they might like. At the same time, the proposed rules would significantly increase government authority and decision-making power. No longer would the individual mandate, the controversial requirement to obtain health insurance, be enough. For many people, the government would actually choose and enroll them in a specific health insurance plan. The new rules would extend government reach into health care even farther. This is the same government that oversaw the disastrous rollout of the exchange website and inflated enrollment numbers. Given its performance so far, we should be wary of giving the government an even bigger role.