Archives: 06/2013

Doing Business Under Fire

Since its inception, World Bank’s Doing Business project has attracted a lot of criticism from groups that do not share its broadly pro-market policy ramifications. It is dispiriting to see the review panel of the project, appointed by the Bank’s president, Jim Yong Kim, cave to the attacks and regurgitate the ideologically motivated myths spread by the project’s most vocal critics.

The report by the review panel, which was released on Monday, and which will inform the decision about the future of the project, recommends stripping the publication of important parts of its content and weakening its role as a focal point for governments that are striving to improve business environments in their countries. That is a grave mistake.

1. Scrapping the rankings

The report recommends that the aggregate rankings of countries should be dropped:

The act of ranking countries may appear devoid of value judgment, but it is, in reality an arbitrary method of summarising vast amounts of complex information as a single number. (p. 20)

It is true that aggregation is always contestable and that there is no objective way of weighing the ten Doing Business indicators to create the final index. But that is true of any aggregate measurement exercise in the social sciences. As long as the weights used in creating the ranking are transparent and the underlying data are known, no information is lost in producing the ordinal rankings of countries.

If one is concerned about the arbitrariness of the weights attributed to the different indicators (they are weighed equally), it would have been easy to enhance the functionality of the Doing Business website to allow readers to pick their own weights.

But make no mistake, this is not an arcane dispute about methodology. One of the criticisms leveled against Doing Business was that its use of aggregate rankings encouraged governments to use them as focal points for their policymaking. Is that bad?

The aggressive reformers that recorded quick improvements in their Doing Business rankings—like Mauritius or Rwanda—have not only seen significant economic growth, but have also witnessed dramatic improvements in different measures of governance and a fall in corruption. The critics of the project and the panel fail to provide any evidence of cases where an unscrupulous pursuit of higher Doing Business rankings has led to a deterioration of either economic or social outcomes.

2. Scrapping the tax rate indicator

Another common criticism of the Doing Business report relates to its indicator of Paying Taxes which includes a measure of the total tax rate facing companies, adding different local, regional and nation-level taxes. According to the critics, the Paying Taxes indicator encourages governments to cut taxes, harms revenue collection and prevents governments from productive spending.

In response, in 2012 the Bank has introduced a threshold of 25.7 percent, below which tax cuts do not affect countries’ performance on this indicator. This time around, the review panel favors removing the indicator altogether because

a tax rate indicator is not a relevant measure of the ease of doing business in a country (although it does provide an imperfect indicator of the amount of tax paid by businesses). (p. 38)

That is preposterous. Tax rates do matter for locational decisions. Furthermore, it is recognized that corporate taxes are distortionary, and have potentially large economic costs. If one cares about economic efficiency, one should be happy about encouraging governments to rely more on other tax instruments.

But whatever one’s take on the issue is, it is obvious that marginal and average tax rates imposed on firms’ activities do constitute an obstacle to doing business, regardless of whether their final burden falls on consumers, employees, or firms themselves. The reasonable attitude would be to recognize the cost that business taxation represents and, if needed, balance it against other policy considerations. But to deliberately choose to disregard it is a recipe for disastrous policies.

The Border Security Obsession

Immigration is mainly an economic phenomenon, but the politics surrounding reform are mired in border security talking points. The soon-to-be-voted-on Hoeven-Corker amendment to the immigration reform bill will double the size of border patrol and place an absurd array of technology and fencing on the southern border. The Hoeven-Corker amendment is a political necessity, but a policy absurdity.

Securing the border is largely a rhetorical excuse to oppose reforming the immigration system. Senator Jeff Sessions (R-AL) said of the Hoeven-Corker amendment that, “I do not think this amendment is going to touch many of the objections that I spoke about.” The Hoeven-Corker amendment militarizes the border to an embarrassing degree–replacing the Statue of Liberty’s promise of liberty to all with a wall facing southward.   

How will this $5-billion-a-year security buildup be financed? The Congressional Budget Office (CBO) estimates enormous fiscal gains from immigration reform–reducing deficits from between $700 billion and $1.2 trillion over the next 20 years. Spending large portions of those anticipated savings on more security will convince some Republicans to vote for the entire immigration bill, but it won’t solve the unlawful immigration problem going forward. Fixing the legal immigration system will. 

Allowing more legal low-skilled guest workers will channel would-be unlawful immigrants into the legal market. Immigrants won’t cross illegally if they can come in legally through a checkpoint. Shrinking the size of the unlawful immigrant population by channeling most of them into the legal system will help Border Patrol weed out the criminals, national security threats, and sick people from the vast majority of willing peaceful workers. History shows us the way. 

In the early 1950s unlawful immigration was a problem, but Border Patrol did not just punish the immigrants, it funneled them into the legal market. During that time there was a guest worker visa program called Bracero. After arresting unlawful immigrants, Border Patrol drove them down to the Southern border and immediately let them enroll in the Bracero program, allowing them to return to their jobs after taking a few steps over the border and coming back into the U.S. with lawful permission. 

Soon, would-be unlawful immigrants learned they could just enter legally–and they did. Unlawful immigration dropped by more than 90 percent in the following years. If there was a legal immigration option today, expanded to sectors of the economy besides just agriculture, immigrants would overwhelmingly make the same choice.

Today, the immigration enforcement infrastructure already exists to funnel would-be unlawful immigrants into the legal market. The only thing lacking is a functional guest worker visa program. The current immigration reform bill’s guest worker visa program is a complicated mess that is barely better than the current system.  

Allowing additional legal guest workers will accomplish more than spending $5 billion a year on border security.  It will channel peaceful people in the legal immigration system while leaving Border Patrol to deal with the real criminal and national security threats that remain.  Militarizing the border without improving the guest worker visa system risks a repeat of the 1986 Reagan amnesty.

The good portions of this immigration reform bill still outweigh the bad but we cannot afford too many more Hoeven-Corker amendments.

Silver Linings in United States v. Kebodeaux

Although the decision in the affirmative action case, Fisher v. University of Texas, is getting the most press, another of today’s opinions, United States v. Kebodeaux, is also of interest.

In 1999, Anthony Kebodeaux was sentenced to three years in prison for statutory rape. He served his time and was freed. Years later, when Kebodeaux moved intrastate from San Antonio, Texas to El Paso, Texas, he failed to update his change of address within the three-day period as required by the federal Sex Offender Registration and Notification Act (SORNA) of 2006.

Because Kebodeaux was freed from federal custody, the Fifth Circuit ruled that his “unconditional” release meant that Congress had lost jurisdiction over him and that they could not regain it without some action (such as interstate travel) that brought him back into federal jurisdiction. We filed a brief arguing that to allow Congress to assert jurisdiction over someone because he was once in federal jurisdiction would be improper because it would give Congress nearly limitless power. After all, all of us have been in federal jurisdiction at some point. This would be the “Hotel California” theory of jurisdiction: you can check out, but you can never leave.

Who’s Misinforming, Exactly?

At this point I don’t want to write another word about Common Core supporters’ cheap rhetorical tactics. Unfortunately, a new op-ed by Chester Finn and Michael Petrilli of the Thomas B. Fordham Foundation demands it. And this after AEI’s Rick Hess took Core defenders to task for their excesses, then kindly offered some helpful advice on how to at least have an honest conversation. Why didn’t the Fordham folks listen to Rick? Coulda saved me a lot of trouble.

Anyway, four things particularly stick out in Fordham’s piece, published in the Milwaukee Journal Sentinel, though many others are dubious:

    1. The piece starts off by, essentially, smearing all opponents of the Core as carpet-bagging liars. The very first line reads: “For some time now, outside groups have been vigorously spreading misinformation about the Common Core state standards.” The goal here is, presumably, to declare opponents devious right off the bat, and compound that by asserting that they are all icky non-Wisconsinites. Never mind that Finn and Petrilli, to my knowledge, aren’t from the Badger State, and have definitely lived in the Washington, DC, area for years.
    2. A major complaint of Core supporters is that critics blame things like data-mining and curricular control on the Core which aren’t, technically, in it. They are intimately connected through Race to the Top and No Child Left Behind waivers, which intentionally place the Core in broader pushes for evaluation, data collection, etc., but no, they aren’t actually in the Core. It is apparently fine, though, to proclaim that the Core by itself “demands accountability, high standards and testing,” as Finn and Petrilli do. The difference, of course, is that Finn and Petrilli favor the Common Core, and the Common Core is great!
    3. Finn and Petrilli offer a tiny, non-concession concession to people who have decried the massive federal coercion that drove Core adoption, noting that “many conservatives are justifiably angry about the inappropriate role the Obama administration has played in promoting and taking credit for these standards.” But the thing is, Obama didn’t just promote and take credit for the Common Core. He implemented concrete federal policies that essentially told states that if they didn’t adopt Common Core they couldn’t get part of a $4.35 billion pot of money, and it would be harder to get out of the absurd demands of No Child Left Behind. If Finn and Petrilli want to be forthright, they need to actually write the words “Race to the Top” and “waivers,” and explain exactly what they did. But they don’t even mention them!
    4. Finally, it is simply wrong to suggest that the Obama administration went all lone wolf on Core supporters. Why? Because, as I have discussed repeatedly, the report Benchmarking for Success, from the groups that created Common Core, came out in 2008 – before there was an Obama administration – and called on the federal government to “incentivize” adoption of common standards. In other words, they wanted the Feds to twist arms all along!

I hate it when Common Core supporters – from Wisconsin, DC, or anywhere else – misinform the public. Especially when their first move is to drop the deceiver card on their opponents.

New Hampshire Court’s School Choice Decision Was Flawed and Unprecedented

Last week, a New Hampshire trial court declared that the state’s nascent scholarship tax credit (STC) program could not fund students attending religious schools. The Granite State’s STC program grants tax credits to corporations worth 85 percent of their contributions to nonprofit scholarship organizations that aid low- and middle-income students attending the schools of their choice.

Writing on the Washington Post’s Answer Sheet blog, Professor Kevin Welner of the University of Colorado at Boulder mocked supporters of the program who criticized the decision. Welner argues that school choice advocates should have expected this decision, declaring that it was “unsurprising” that the court should find the program (partially) unconstitutional. But what Welner calls unsurprising is actually unprecedented.

Only toward the bottom of his post does Welner reveal that the only high courts to address the issue thus far—the U.S. Supreme Court and the Arizona supreme court—have ruled STC programs constitutional in their entirety. Indeed, though all but two of the remaining ten states with STC programs have similar “Blaine Amendment” provisions in their state constitutions, opponents haven’t even bothered to challenge their constitutionality. Additionally, other state courts have ruled on the question of whether tax credits constitute “public money” in a manner consistent with the previous STC cases, demonstrating that the courts’ rulings were not the aberrations that Welner imagines them to be.

If school choice supporters had a reason not to be surprised, it was because the ACLU and Americans United for Separation of Church and State shrewdly went judge shopping. That’s why they brought their lawsuit in Strafford County instead of Merrimack County, where the state capital is located. Their strategy seemed to pay off, as the judge’s decision relies heavily on the dissenting opinions in the U.S. Supreme Court and Arizona supreme court decisions, and misapplies the limited precedent from New Hampshire. Nevertheless, the final decision rests with the New Hampshire supreme court. As I detail below, logic and precedent suggest that they should overturn the lower court’s decision.

Judicial Deference and Affirmative Action

Perhaps the most important point to come out of the Supreme Court’s 7-1 affirmative action decision today is its instruction to lower courts that they may not defer to state college and university representations when deciding whether those institutions have unconstitutionally granted racial preferences in their admissions decisions.

“Strict scrutiny,” the Court said, “does not permit a court to accept a school’s assertion that its admissions process uses race in a permissible way without a court giving close analysis to the evidence of how the process works in practice.” This is a victory for more serious judicial engagement, as Cato urged in the amicus brief we filed in the case.

Justice Anthony Kennedy, writing for the Court, held in Fisher v. Texas that because the Fifth Circuit was more deferential than the Court’s Bakke and Grutter precedents permitted, the grant below of summary judgment for the University of Texas was incorrect. Thus, the Court vacated the decision below and sent the case back for further consideration, based on the more exacting standards of strict scrutiny.

As background for today’s decision, in 1997, in a successful effort to achieve racial and ethnic “diversity” in its student body, Texas instituted a race-neutral “Top Ten Percent Plan” under which any student in the top ten percent of his or her high school graduating class is automatically admitted to all state-funded universities. To fill the remaining slots, the university considered several factors, including race.

In 2008, Abigail Fisher, who is white and was the plaintiff in today’s case, just missed the cut-off for admission to the University of Texas at Austin. She was then denied admission under the alternative admissions program, even though her academic credentials exceeded those of many admitted minority applicants. In our amicus brief supporting her suit, we argued that government may treat people differently because of their race only for the most compelling reasons.

Notwithstanding the text of the Fourteenth Amendment’s Equal Protection Clause, the modern Court has read that restriction as allowing state colleges and universities to consider race as one among several factors to be considered in individualized reviews of each applicant. Ten years ago, in a 5-4 decision in the Grutter case, the Court upheld the University of Michigan Law School’s race-conscious affirmative action admissions process, even though it might favor “underrepresented minority groups,” because the program sought to achieve “class diversity” in a “multi-factored way.” But in a companion case  the Court found the university’s undergraduate admissions program unconstitutional because it was more explicit in its use of race to achieve diversity.

That uneasy compromise led many critics to charge that a university could use racial preferences as long as it was clever enough to be vague about what it was doing. That possibility still remains, because the Court did not rule preferences out categorically. Rather, racial classifications are constitutional if “essential”: quoting its opinion in Grutter, the Court today wrote “a university’s ‘educational judgment that such diversity is essential to its educational mission is one to which we defer’” – “an academic judgment to which some, but not complete, judicial deference is proper.” But,

The University must prove that the means chosen by the University to attain diversity are narrowly tailored to that goal. On this point, the University receives no deference. … The reviewing court must ultimately be satisfied that no workable race-neutral alternatives would produce the educational benefits of diversity.

Justices Scalia and Thomas wrote separately. Because Fisher did not ask that Grutter be overruled, they did not urge that here. But they made it clear that in their view the Constitution proscribes government discrimination on the basis of race. Justice Ginsburg dissented from today’s ruling.

On balance, then, this was a qualified win for a color-blind Constitution. It remains to be seen, however, how courts below apply the Supreme Court’s ruling, even in this case, which may yet return to the High Court. The Court’s repeated return to the issue of judicial deference, and the importance of judicial engagement, is perhaps what this decision will most stand for over time. And the implications of that reach far beyond affirmative action.

Vance, Nassar, Mutual: The High Court’s Ballad of Impossible Tasks

In the “impossible tasks” genre of folk song, the best-known in English probably being Scarborough Fair, the sweetheart is given a set of impossible tasks to perform – make a shirt with no stitch, gather an acre of land between the sea and the beach, and so forth. Law, unlike the realm of fable, shouldn’t set impossible tasks, which is why we should be glad the Supreme Court’s five-Justice “conservative” majority prevailed today in three cases – the employment-law cases Vance v. Ball State and University of Texas Southwestern v. Nassar and the pharmaceutical-preemption case Mutual v. Bartlett.