Wasting a Crisis: A Book Forum

Wasting a CrisisThis is a story we all know: the Great Depression was caused by market failure, the predictable fall-out from the excesses of the unrestrained, unregulated, Wild West that was the securities markets at the dawn of the 20th century. After all, before the 1930s, there was no Securities and Exchange Commission. The state securities laws, the so-called “blue sky laws,” were also products of the early 20th century, largely implemented between 1911 and 1931. These laws, as well as the Securities Act of 1933 and the Securities Exchange Act of 1934, tamed the wild speculators that had been defrauding the American public by requiring transparency in the markets and promoting thorough disclosure in securities offerings.

But is that story true? Paul Mahoney, Dean of the University of Virginia School of Law, has dug deeply into this narrative in his recent book, Wasting a Crisis: Why Securities Regulation Fails. The results of his research and analysis reveal a mismatch between the received wisdom about the causes of the Depression and the actual data, and a pattern of crisis-narrative-regulation that has persisted through the recent Great Recession and the implementation of Dodd-Frank.

Dean Mahoney recently shared his thoughts on these and related issues at a book forum at the Cato Institute. Joining us was also banking regulation scholar Heidi Schooner of the Columbus School of Law at the Catholic University of America, leading to an interesting discussion of the externalities of bank failures and the application of banking regulation principles to non-bank entities.

Watch the video of the event:

The Lax Kw’alaams and Why Property Rights Matter

The New York Times recently reported that the Lax Kw’alaams Band, an indigenous tribe in a remote part of British Columbia, has rejected a $1 billion offer for their consent to the construction of a natural gas processing facility that would service a nearby liquefied natural gas terminal. The group, which has about 3,600 members, would have received the equivalent of about $277,000 per person to allow the plant. The leader of the group explained their decision by saying, “Hopefully, the public will recognize that unanimous consensus in communities (and where unanimity is the exception) against a project where those communities are offered in excess of a billion dollars, sends an unequivocal message this is not a money issue: this is environmental and cultural.”

In normal market transactions, resources flow to those who value them the most regardless of who owns them initially. In this case, that would imply the decision to build the facility (whether now or in the future) does not depend on whether the Lax Kw’alaams Band or the gas company owns the land. Ownership simply determines who has to pay whom in order to develop the land or leave it undeveloped. If the gas company owned the land, they would not have to pay the tribe in order to develop the plant, but the tribe could purchase the land (or, at least, an anti-development easement) from the gas company in order to keep it undeveloped. If the tribe owns the land, the gas company would have to pay or the land would stay undeveloped. In both cases, development would occur if the gas company values the land more than the tribe.

That’s the general theory, but in this particular case the facts suggest that initial property rights do matter. In the case of the Lax Kw’alaams, the group places great value on keeping the land from being despoiled by a natural gas plant. A decade or so ago, the Canadian Supreme Court determined that tribes like the Lax Kw’alaams must be consulted and accommodated if projects cross their land. The tribe clearly has strong preferences for a pristine environment, and has made the choice to forgo a windfall to maintain it.

But what would have happened if the property rights belonged to someone else? If the party given the right had weaker environmental preferences, the terminal would likely be built; it’s doubtful the Lax Kw’alaams would win (or perhaps even enter) a bidding war with the gas company over control of the land. Because participants in environmental policy disputes “know” that property rights matter in this way, they fight politically over who has the current property rights rather than allow rights to exist and be traded.

Budget Caps? What Budget Caps?

This special post was written by Travis Evans, research associate in Cato’s Defense and Foreign Policy Studies Department.

House Republicans have found a way to circumvent those bothersome Budget Control Act (BCA) spending caps. On MSNBC’s Morning Joe this morning, Rep. Mac Thornberry (R-TX), chairman of the House Armed Services Committee, brazenly stated that the $611.9 billion defense authorization bill, which was passed by the House today, adheres to the BCA cap on discretionary defense spending. How, you may be asking, is it possible to authorize $89 billion more than the caps and still adhere to them? Simple: funnel the money through a slush fund that is not beholden to the spending caps, in this case the Overseas Contingency Operations (OCO) account.

Using the OCO account to supplement discretionary defense spending is so common nowadays that Chairman Thornberry explains the Republicans’ actions as if we should applaud him and his colleagues for saving the defense budget.

The caps are a concern, but we found a way to add to the Overseas Contingency account, so that we in the House budget and the defense bill on the floor right now meet exactly the amount the president has ask for.

You see what he did there? He is able to say that the Republicans are honoring the caps (the ones they agreed to in 2011) while giving the president the defense spending he requested. Clever. But maybe too clever. Congressional Democrats don’t seem to be persuaded. Even the president is opposed to the bill (albeit because of some particulars of the bill, not the topline spending amount).

House Minority Leader Nancy Pelosi (D-CA) called the bill “disingenuous” and “dangerous,” stating that the “Republicans are trying to use war funding as a virtual slush fund for one part of the budget while letting the ax fall on everything else.” While I’m not in the habit of agreeing with Rep. Pelosi, she is right in this case.

Will Congress Reform Air Traffic Control?

Five years ago, Bob Poole and I argued that the nation’s air traffic control (ATC) system should be transformed into a private, nonprofit organization supported by customer charges, not taxpayer subsidies. I have argued that Canada’s privatized system is a good model for U.S. reforms.

Well, how about that: the Wall Street Journal reports that Congress and various aviation interest groups are coming around to the Cato way of thinking on the matter: 

A push to radically reshape the outmoded U.S. air-traffic control system is gaining support, as airlines and some labor unions join to back change and a top lawmaker drafts legislation that could effectively privatize services.

Rep. Bill Shuster, a Pennsylvania Republican and the chairman of the House Transportation and Infrastructure Committee, and his staff are drafting legislation to strip the nation’s 15,000 civilian controllers and more than 230 air-traffic facilities from the Federal Aviation Administration, possibly putting them under the control of a nonprofit corporation, people familiar with the plan say.

… Rep. Shuster’s spokesman said this month that the goal is “serious reform” and the committee “has looked extensively at other air-traffic models around the world.”

… A number of influential organizations are joining the chorus for change. Paul Rinaldi, president of the controllers union, hasn’t signed onto the idea of privatization but has become less resistant to the general concept. He has complained about the unpredictability of congressional appropriations by saying “we are going to lose our competitive edge if we don’t knock it off.”

NYT Infrastructure Story Crumbles

In the New York Times on Wednesday, David Leonhardt presented a chart under the headline “Amtrak Crash and America’s Declining Construction Spending.”

The chart shows federal, state, and local government construction spending as a share of GDP. Leonhardt discusses America’s “crumbling infrastructure,” particularly rails, bridges, highways, and airports. He highlights the spending decline as a share of gross domestic product over the past five years.

Leonhardt also cites Joe Weisenthal of Business Insider, who presented a similar chart after the collapse of a bridge near Seattle two years ago. Weisenthal’s brief piece was called “The Collapse Of Public Infrastructure Spending In One Chart.”

There is a big problem here: the falling spending that Leonhardt and Weisenthal point to has very little to do with transportation. The data come from the Census, which the two writers extracted from this Fed database. The data can be broken out into a dozen subcomponents for the period 2002–2015. If the writers had done that, they would have come to different conclusions.

The three largest subcomponents of government construction are highways and streets, education, and (non-road) transportation, which includes airports, seaports, and transit. Using the Fed database, I charted the three components in millions of dollars; that chart is below the jump. (I’ll look at spending as a percentage of GDP in a moment.)

Time for Hillary to Speak Up on Trade

The Washington Post ran an editorial on Wednesday indicting Hillary Clinton for her silence on the trade agenda. Yesterday morning, the Post published an op-ed by Robert Kagan of Brookings titled “Clinton’s Cowardice on Trade.” Both pieces offer some valid observations, but the matter deserves more scrutiny still.

Is it just me or do others see it as presumptuous, disrespectful, and even contemptuous that the person who expects to head the Democratic Party ticket next year feels entitled to her silence on the single most divisive issue confronting that party? Trade policy is causing a schism between Democrats, and Clinton chooses to showcase her leadership bona fides by … refraining from taking a position? And what does that say about the judgment of her steadfast supporters, whose return silence countenances an evasion akin to deceit? On the other hand, Clinton’s supporters are accustomed to accommodating a more expansive definition of honesty, so perhaps they’re oblivious.

If I were an engaged Democrat, I’d demand to know, now, where Hillary Clinton stands on trade. And if I were a presidential candidate with a reputation for favoring expedience over principle and whose most compelling claim to the White House is that I really, really want to be president, I would want to demonstrate my worthiness by taking a firm position, explaining to my party why I believe that position is the right one, pointing out (as President Obama has) that many of the Left’s objections to trade are based on fallacies, and sticking to it, even if it alienates some factions. Making some people unhappy is a necessity of leadership.

Like President Obama, Hillary Clinton has a history of flip-flopping on trade, so people are understandably confused. As First Lady, she advocated on behalf of her husband’s efforts to forge NAFTA. As a U.S. senator, she was a solid protectionist, voting against trade barriers only 31 percent of the time and against trade-distorting subsidies only 13 percent of the time. As a candidate for president, she expressed skepticism and, at times, indignation about trade agreements and joined with the political left in vilifying NAFTA. As secretary of state, she not only embraced the Trans-Pacific Partnership (TPP), but was instrumental in making it the centerpiece of the administration’s “pivot to Asia.” Today, in the midst of a debate that will make or break the TPP and shape next year’s Democratic Party platform and more, Clinton is mum.

The Trade Promotion Authority legislation struggling to gain support from congressional Democrats would extend the terms of TPA through the entirety of the next president’s first term and into the second (it would expire in July 2021). It is a tool that would be welcomed by any president who sees trade agreements as channels for economic growth and diplomacy. Clinton’s silence implies indifference to the outcome of the TPA debate in Congress and, thus, indifference to trade liberalization as a policy tool. Clinton is well aware that the most important aspect of U.S. foreign policy to most countries is our trade and commercial policy.

So, unless the former top U.S. diplomat, as president, would turn her back on the TPP she once embraced, and pull the rug out from under the Transatlantic Trade and Investment Partnership—outcomes that would deprive the economy of valuable growth opportunities, offend 39 foreign governments, and reinforce perceptions of U.S. decline—she should affirmatively endorse TPA now.

Clinton’s endorsement would signal leadership and provide cover for scores of Democrats in Congress who are wary of the party’s dash to the far left. It would provide refuge for members who want to be on the economically responsible side of the schism. It would create an environment where it is safe to say the anti-trade, progressive emperor is stark naked. 

Do Racial Disparities Explain Flat Student Performance?

The latest results of the Nation’s Report Card for history, geography, and civics are out, and as usual they are depressing. The exam, formally known as the National Assessment of Educational Progress, is administered to a representative sample of U.S. students to give a snapshot of student performance in a variety of subjects nationwide. Education Week reports:

The nation’s eighth graders have made no academic progress in U.S. history, geography or civics since 2010, according to the latest test results from the National Assessment of Educational Progress (NAEP).

Fewer than one-third of students scored proficient or better on any of the tests and only 3 percent or fewer scored at the advanced level in any of the three subjects.

No significant changes since 2010

However, Chad Aldeman of Bellwether Education Partners argues that saying students “have made no academic progress” is “the wrong way to look at it” because of something called Simpson’s Paradox (which has nothing to do with the voice of Principal Skinner and Mr. Burns turing down a $14 million contract):