Free Trade in Canadian Beer (and More?)

Last year, I mentioned a Canadian court case that could help promote free trade within Canada. Well, a lower court has now ruled for free trade, finding that the Canadian constitution does, in fact, guarantee free trade among the provinces. Here are the basic facts, from the Toronto Globe and Mail:

In 2013, Gérard Comeau was caught in what is likely the lamest sting operation in Canadian police history. Mr. Comeau drove into Quebec, bought 14 cases of beer and three bottles of liquor, and headed home. The Mounties were waiting in ambush. They pulled him over, along with 17 other drivers, and fined him $292.50 under a clause in the New Brunswick Liquor Control Act that obliges New Brunswick residents to buy all their booze, with minor exceptions set out in regulations, from the provincial Liquor Corporation.

And here’s how the court ruled:

Mr. Comeau went to court and challenged the law on the basis of Section 121 of the Constitution: “All articles of the growth, produce or manufacture of any of the provinces shall, from and after the Union, be admitted free into each of the other provinces.”

The judge said Friday that the wording of Section 121 is clear, and that the provincial law violates its intention. The Fathers of Confederation wanted Canada to be one economic union, a mari usque ad mare. That’s why they wrote the clause.

If you are into these sort of things, I highly recommend reading the judge’s decision, which looks deeply into the historical background of the Canadian constitutional provision at issue.

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Two Cheers for the Leverage Ratio

In a previous blog posting, I suggested that there is no case for capital adequacy regulation in an unregulated banking system.  In this ‘first-best’ environment, a bank’s capital policy would be just another aspect of its business model, comparable to its lending or reserving policies, say.  Banks’ capital adequacy standards would then be determined by competition and banks with inadequate capital would be driven out of business.

Nonetheless, it does not follow that there is no case for capital adequacy regulation in a ‘second-best’ world in which pre-existing state interventions — such as deposit insurance, the lender of last resort and Too-Big-to-Fail — create incentives for banks to take excessive risks.  By excessive risks, I refer to the risks that banks take but would not take if they had to bear the downsides of those risks themselves.

My point is that in this ‘second-best’ world there is a ‘second-best’ case for capital adequacy regulation to offset the incentives toward excessive risk-taking created by deposit insurance and so forth.  This posting examines what form such capital adequacy regulation might take.

The Evidence Is In: School Choice Works

There are a great many reasons to support educational choice: maximizing freedom, respecting pluralism, reducing social conflict, empowering the poor, and so on. One reason is simply this: it works.

This week, researchers Patrick J. Wolf, M. Danish Shakeel, and Kaitlin P. Anderson of the University of Arkansas released the results of their painstaking meta-analysis of the international, gold-standard research on school choice programs, which concluded that, on average, such programs have a statistically significant positive impact on student performance on reading and math tests. Moreover, the magnitude of the positive impact increased the longer students participated in the program.

As Wolf observed in a blog post explaining the findings, the “clarity of the results… contrasts with the fog of dispute that often surrounds discussions of the effectiveness of private school choice.”

That’s So Meta

One of the main advantages of a meta-analysis is that it can overcome the limitations of individual studies (e.g., small samples sizes) by pooling the results of numerous studies. This meta-analysis is especially important because it includes all random-assignment studies on school choice programs (the gold standard for social science research), while excluding studies that employed less rigorous methods. The analysis included 19 studies on 11 school choice programs (including government-funded voucher programs as well as privately funded scholarship programs) in Colombia, India, and the United States. Each study compared the performance of students who had applied for and randomly won a voucher to a “control group” of students who had applied for a voucher but randomly did not receive one. As Wolf explained, previous meta-analyses and research reviews omitted some gold-standard studies and/or included less rigorous research:

The most commonly cited school choice review, by economists Cecilia Rouse and Lisa Barrow, declares that it will focus on the evidence from existing experimental studies but then leaves out four such studies (three of which reported positive choice effects) and includes one study that was non-experimental (and found no significant effect of choice).  A more recent summary, by Epple, Romano, and Urquiola, selectively included only 48% of the empirical private school choice studies available in the research literature.  Greg Forster’s Win-Win report from 2013 is a welcome exception and gets the award for the school choice review closest to covering all of the studies that fit his inclusion criteria – 93.3%.

Survey Says: School Choice Improves Student Performance

The meta-analysis found that, on average, participating in a school choice program improves student test scores by about 0.27 standard deviations in reading and 0.15 standard deviations in math. In laymen’s terms, these are “highly statistically significant, educationally meaningful achievement gains of several months of additional learning from school choice.”

Berniecare Would Increase Federal Expenditure by $32 Trillion Over Next Decade, Twice as Much as Campaign Claimed

Fresh off his resounding victory in the West Virginia primary, Senator Bernie Sanders has intimated that he has no intent of dropping out of the race any time soon, even though he trails his rival Hillary Clinton significantly in pledged delegates. One of the cornerstones of the Sanders campaign has been his health care plan, which would replace the entirety of the current health care system with a more generous version of Medicare. His campaign has claimed the plan would cost a little more than $13.8 trillion over the next decade, and he has proposed to fund these new expenditures with a clutch of tax increases, many of them levied on higher-income households. At the time, analysts at Cato and elsewhere expressed skepticism that the cost estimates touted by the campaign accurately accounted for all the increases in federal health expenditures the plan would require, and incorporated costs savings estimates that were overly optimistic. Now, a new study from the left-leaning Urban Institute corroborates many of these concerns, finding that Berniecare would cost twice as much as the $13.8 trillion price tag touted by the Sanders campaign.

The authors from the Urban Institute estimate that Berniecare would increase federal expenditures by $32 trillion, 233 percent, over the next decade. The $15 trillion in additional taxes proposed by Sanders would fail to even cover half of the health care proposal’s price tag, leaving a funding gap of $16.6 trillion. In the first year, federal spending would increase by $2.34 trillion. To give some context, total national health expenditures in the United States were $3 trillion in 2014.

Sanders was initially able to restrict most of the tax increases needed to higher-income households through income-based premiums, significantly increasing taxes on capital gains and dividends, and hiking marginal tax rates on high earners. Sanders cannot squeeze blood from the same stone twice, and there’s likely not much more he could do to propose higher taxes on these households, which means if he were to actually have to find ways to finance Berniecare, he’d have to turn to large tax increases on the middle class.

There are different reasons Berniecare would increase federal health spending so significantly. The most straightforward is that it would replace all other forms of health care, from employer sponsored insurance to state and local programs, with one federal program. The second factor is that the actual program would be significantly more generous than Medicare (and the European health systems Sanders so often praises), while also removing even cursory cost-sharing requirements. In addition, this proposal would add new benefits, like a comprehensive long-term services and support (LTSS) component that the Urban Institute estimates would cost $308 billion in its first year and $4.14 trillion over the next decade. These estimates focus on annual cash flows over a relatively short time period, so the study doesn’t delve into the longer-term sustainability issues that might develop from this new component, although they do note that “after this 10-year window, we would anticipate that costs would grow faster than in previous years as baby boomers reach age 80 and older, when rates of severe disability and LTSS use are much higher. Revenues would correspondingly need to grow rapidly over the ensuing 20 years.”

Even at twice the initial price tag claimed by the Sanders campaign, these cost estimates from the Urban Institute might actually underestimate the total costs. As they point out, the authors do not incorporate estimates for the higher utilization of health care services that would almost certainly occur when people move from the current system to the generous, first-dollar coverage in the more generous version of Medicare they would have under this proposal. They also chose not to incorporate higher provider payment rates for acute care services that might be necessary, and include “assumptions about reductions in drug prices [that] are particularly aggressive and may fall well short of political feasibility.”

Berniecare would increase federal government spending by $32 trillion over the next decade, more than twice as much as the revenue from the trillions in taxes Sanders has proposed. And this might not be underselling the actual price tag, and only considers the cash flow issues in the short-term. There could be even greater sustainability problems over a longer time horizon. One thing is for certain the plan would require even more trillions in additional tax hikes.

The Necessary and Valuable Economic Role of Tax Havens

Economists certainly don’t speak with one voice, but there’s a general consensus on two principles of public finance that will lead to a more competitive and prosperous economy.

To be sure, some economists will say that high tax rates and more double taxation are nonetheless okay because they believe there is an “equity vs. efficiency” tradeoff and they are willing to sacrifice some prosperity in hopes of achieving more equality.

I disagree, mostly because there’s compelling evidence that this approach ultimately leads to less income for the poor, but this is a fair and honest debate. Both sides agree that lower rates and less double taxation will produce more growth (though they’ll disagree on how much growth) and both sides agree that a low-tax/faster-growth economy will produce more inequality (though they’ll disagree on whether the goal is to reduce inequality or reduce poverty).

Since I’m on the low-tax/faster-growth side of the debate, this is one of the reasons why I’m a big fan of tax competition and tax havens.

Laboratory of Democracy? No—Adminstrative Arm of DHS

In several states around the country, legislators are working to pass legislation that would move their states toward compliance with the REAL ID Act, the U.S. national ID law. Oklahoma state senator David Holt (R), for example, has touted his plan as giving Oklahomans the “liberty” to choose which of two ID types they’ll get. Either one feeds their data into a nationwide system of databases.

If you want a sense of what these legislators are getting their states into, take a look at the eight-page notice the Department of Homeland Security published in the Federal Register today. It’s an entirely ordinary bureaucratic document, which walks through the processes states have to go through to certify themselves as compliant. Its few pages represent hundreds of hours of paperwork that state employees will have to put in complying with federal mandates.

Among them is the requirement that the top official of the DMV and the state Attorney General confirm that their state jumps through all the hoops in federal law. Maybe Oklahoma’s Attorney General, Scott Pruitt (R), thinks his office’s time is well spent on pushing paper for the federal government, but it’s more likely that he wants to be enforcing Oklahoma laws that protect Oklahomans.

REAL ID-compliant states have to recertify to the DHS every three years that they meet DHS’s standards. DHS can and will change these standards, of course. DHS officials get to inspect state facilities and interview state employees and contractors. DHS can issue corrective demands and require the states to follow them before recertification.

It’s all unremarkable—if you’re sanguine about taxpayer dollars burned on bureaucracy, and if you think that states are just administrative arms of the federal government. But if you think of states as constitutionally independent sovereigns, you recognize that this document is out of whack. States do not exist to play second fiddle in bureaucrat-on-bureaucrat bureaucracy.

Whether or not we have a national ID matters. The constitutional design of government matters, including, one hopes, to people in Oklahoma and other states across that land. State officials who are conscious of these things should reject this paperwork and these mandates. If the federal government wants a national ID, the federal government should implement it itself.

Arctic Sea Ice Loss Not Leading to Colder Winters

Global Science Report is a feature from the Center for the Study of Science, where we highlight one or two important new items in the scientific literature or the popular media. For broader and more technical perspectives, consult our monthly “Current Wisdom.”

Although it’s a favorite headline as people shiver during the coldest parts of the winter, global warming is almost assuredly not behind your suffering (the “warming” part of global warming should have clued you in on this).

But, some folks steadfastly prefer the point of view that all bad weather is caused by climate change.

Consider White House Office of Science and Technology Policy (OSTP) head John Holdren. During the depth of the January 2014 cold outbreak (and the height of the misery) that made “polar vortex” a household name, OSTP released a video featuring Holdren telling us that “the kind of extreme cold being experienced by much of the United States as we speak, is a pattern that we can expect to see with increasing frequency as global warming continues.” 

At the time we said “not so fast,” pointing out that there were as many (if not more) findings in the scientific literature that suggested that either a) no relationship exists between global warming and the weather patterns giving rise to mid-latitude cold outbreaks, or b) the opposite is the case (global warming should lead to fewer and milder cold air outbreaks).

The Competitive Enterprise Institute even went as far as to request a formal correction from the White House. The White House responded by saying that the video represented only Holdren’s “personal opinion” and thus no correction was necessary. CEI filed a FOIA request, and after some hemming and hawing, the White House OSTP finally, after a half-hearted search, produced some documents. Unhappy with this outcome, CEI challenged the effort and just this past Monday, a federal court, questioning whether the OSTP acted in “good faith,” granted CEI’s request for discovery.

In the meantime, the scientific literature on this issue continues to accumulate. When a study finds a link between human-caused global warming and winter misery, it makes headlines somewhere. When it doesn’t, that somewhere is usually reduced to here.