March 31, 2016 4:12PM

Equality Run Amok — Women’s Soccer Version

The New York Times reports today that five key members of the US women’s national soccer team have filed a complaint with the Equal Employment Opportunity Commission charging U.S. Soccer, the private federation that oversees soccer in the United States, with wage discrimination. It seems that, on average (see the article for details), the federation pays women players considerably less than players on the men’s team, and that may be a problem under current law.

If Thomas Jefferson only knew what would follow from writing “All men are created equal.” What he meant, of course, was only that we all have equal rights to “life, liberty, and the pursuit of happiness,” and we’re free to pursue happiness however we think best. Most of us do that through voluntary association with others, which can result in all kinds of inequalities, yet violate the rights of no one. After all, whose rights are violated if Mia Hamm negotiates a salary with the team that is higher than a lesser player negotiates?

“Equality” hasn’t been pressed that far yet, but its life is still unfolding. In higher education, for example, we have Title IX to the 1964 Civil Rights Act, as amended over the years, which prohibits discrimination on the basis of sex. And that has led in stages to everything from the abolition of countless college men’s athletic programs, due to a paucity of female participants in equivalent programs, and more recently to sexual harassment charges against even female professors who write articles that some students find offensive, to college kangaroo-court trials of students charged with sexual assault, and much more.

Here at issue is the Equal Pay Act of 1963, part of the Fair Labor Standards Act of 1938, as amended and as administered and enforced by the EEOC. As one might imagine, the very idea of enforcing equal pay for “equal” work is fraught with peril, as the reams of exceptions in the Act only hint at. (Don’t take my word for that; read the Act.) Not surprisingly, the Act has become a full employment scheme for lawyers and a hammer for special-interest politicians.

When the EEOC is called on to see that women in the WNBA are paid the same as Lebron James, Kevin Durant, and other NBA stars, maybe we’ll see this “fairness” fiasco seriously called into question. But don’t bet on it.

March 31, 2016 2:43PM

Drug War Defeats Taxpayers

The federal government spends about $30 billion a year on the war on drugs. Much of the spending is wasteful and counterproductive. This week, for example, an auditor’s report revealed how the drug bureaucracy flushed $86 million down the drain on an anti-drug aircraft that was never used.

The Washington Post described this Drug Enforcement Administration (DEA) and Department of Defense (DOD) boondoggle:

The plan was for DOD to modify a DEA plane to be used in counter-narcotics operations in a combat zone. … The Justice Department’s Office of the Inspector General (IG) determined “collectively, the DEA and DOD spent more than $86 million to purchase and modify a DEA aircraft with advanced surveillance equipment to conduct operations in the combat environment of Afghanistan, in what became known as the Global Discovery Program. We found that more than 7 years after the aircraft was purchased for the program, it remains inoperable, resting on jacks in Delaware, and has never flown in Afghanistan.”

The IG found that the “program has cost almost four times its original anticipated amount of $22 million.” Sadly, this sort of failure is par for the course when it comes to federal capital investments.  

Thank goodness for the IGs who uncover such waste, but what will come of these findings? Will anyone be fired? Will policymakers begin to rethink the drug war? Not yet it seems. When the Washington Post asked the DEA and DOD about the report, “the Pentagon did not reply and the DEA response was short boilerplate.”

For more on the government’s drug war, see Jeff Miron’s work here.

March 31, 2016 10:39AM

Federal Versus State Marijuana Law

Marijuana is now legal under the laws of four states and the District of Columbia, but not under federal law. And this creates huge headaches for marijuana businesses: 

Two years after Colorado fully legalized the sale of marijuana, most banks here still don’t offer services to the businesses involved.

Financial institutions are caught between state law that has legalized marijuana and federal law that bans it. Banks’ federal regulators don’t fully recognize such businesses and impose onerous reporting requirements on banks that deal with them.

Without bank accounts, the state’s burgeoning pot sector—2,500 licensed businesses with revenue of $1 billion a year, paying $130 million in taxes—can’t accept credit or debit cards from customers, Colorado officials say.

Marijuana-related businesses instead use cash to pay their employees, purchase equipment or pay taxes to the state. Reports abound of business owners refurbishing retired armored bank trucks to transport money and hiring heavily armed security guards.

The best solution is repeal of federal prohibition. This is not on the policy table yet, but if more states legalize marijuana in November (at least five states are likely to vote on the issue), the pressure on federal policy might just hit the boiling point.

March 31, 2016 10:23AM

A Plant Pathogen that Can’t Take the Heat

Plant pathogens have long been a thorn in the side of the agricultural industry, reducing crop production between 10-16 percent annually and costing an estimated $220 billion in economic losses (Chakraborty and Newton, 2011). What is more, there are concerns that such damages may increase in the future if temperatures rise as predicted by global climate models in response to CO2-induced global warming. Noting these concerns, Sabburg et al. (2015) write that “to assess potential disease risks and improve our knowledge of pathogen strengths, flexibility, weakness and vulnerability under climate change, a better understanding of how pathogen fitness will be influenced is paramount.”

In an attempt to obtain that knowledge, the team of four Australian researchers set out to investigate the impact of rising temperatures on Fusarium pseudograminearum, the “predominant pathogen causing crown rot of wheat in Australia” that is responsible for inducing an average of AU$79 million in crop losses each year. More specifically, they examined “whether the pathogenic fitness, defined as a measure of survival and reproductive success of F. pseudograminearum causing crown rot in wheat, is influenced by temperature under experimental conditions.”

The experiment was conducted in controlled-environment glasshouses at the Queensland Crop Development Facility in Queensland, Australia, where eleven lines of wheat were grown under four day/night temperature treatments (15/15°C, 20/15°, 25/15° and 28/15°C for 14-hour days and 10-hour nights). The first three treatments were representative of “the range of average maximum temperatures of the various wheat-growing regions across Australia,” whereas the fourth (28/15°C) treatment was intended to simulate a future warming scenario. The minimum temperatures of all treatments were kept at 15°C because “night-time temperatures over the last 50 years in the large majority of wheat-growing regions across Australia have not shown an increasing temperature trend in all seasons.” With respect to the eleven wheat lines, they were selected based on known susceptibilities and resistances to crown rot. Fourteen days after sowing a portion of each line was infected with F. pseudograminearum and then grown to maturity.

So what did the researchers find?

With respect to disease severity, Sabburg et al. report it was highest under the lowest temperature treatment and declined with increasing temperature (Figure 1a), and this general reduction was noted in all of the eleven wheat lines. Similarly, pathogen biomass was also reduced as treatment temperature increased (Figure 1b). According to the researchers, “on average, warming reduced pathogen biomass in stem base (PB-S) by 52% at either 25/15°C or 28/15°C compared with the biomass at 15/15°C.” And it also decreased the amount of relative pathogen biomass from the stem base to flag leaf node. (The flag leaf is to top leaf on the plant.)

A third fitness measure of F. pseudograminearum -- deoxynivalenol (also known as “vomitoxin,” for an obvious reason) content (DON) -- was also reduced in the stem base and flag leaf node tissue as temperature treatment increased. And the significance of this finding was noted by the authors as “an encouraging result if we consider temperature rises in the future,” because “DON can make food sources including wheat grains unsafe for human or animal consumption.” That’s putting it mildly!

Figure 1. Effect of temperature on (Panel A) disease severity as expressed by the length of stem base browning (cm) and (Panel B) relative pathogen biomass in stem base (PB-S) and flag leaf node tissue (PB-F) as measured by Fusarium DNA relative to wheat DNA. All measurements in wheat plants were made at maturity following stem base inoculation by Fusarium pseudograminearum. Adapted from Sabburg et al. (2015).

Figure 1. Effect of temperature on (Panel A) disease severity as expressed by the length of stem base browning (cm) and (Panel B) relative pathogen biomass in stem base (PB-S) and flag leaf node tissue (PB-F) as measured by Fusarium DNA relative to wheat DNA. All measurements in wheat plants were made at maturity following stem base inoculation by Fusarium pseudograminearum. Adapted from Sabburg et al. (2015).

In light of the above results, Sabburg et al. conclude that “this study has clearly established that temperature influences the overall fitness of F. pseudograminearum,” and that “based on our findings, warmer temperatures associated with climate change may reduce overall pathogenic fitness of F. pseudograminearum.” And given the annual production and monetary damages inflicted by this pathogen on wheat, this is news worth both reporting and celebrating!



Chakraborty, S. and Newton, A.C. 2011. Climate change, plant diseases and food security: an overview. Plant Pathology 60: 2-14.

Sabburg, R., Obanor, F., Aitken, E. and Chakraborty, S. 2015. Changing fitness of a necrotrophic plant pathogen under increasing temperature. Global Change Biology 21: 3126-3137.


March 31, 2016 10:16AM

Can Competition ‘Make America Great Again’?

Many worry about international trade and the increased competition to which it leads, while overlooking trade’s incredible benefits. In a refreshing Wall Street Journal article, the founder and CEO of FedEx, Fred Smith, reflects on how trade and deregulation have improved American living standards over the course of his lifetime. He recalls how many luxuries enjoyed by few during his youth plummeted in price and became accessible to more people than ever before. 

“Foreign travel was exotic, expensive and rare among the population as a whole” during the 1960s, Smith reminds us. Industry deregulation and international Open Skies agreements changed that. “Long-distance telephone calls were expensive, international calls prohibitively so,” and cell phones did not even exist yet. “From furniture to TVs and appliances, and especially automobiles, American brands dominated consumer spending” across the United States, and were often out of reach to the less affluent. Then trade worked its magic: 

[Trade] has rewarded Western consumers with low-cost products that have substantially improved standards of living. [Today] Americans and Europeans don’t need to be affluent to afford cell phones, digital TVs, furniture and appliances.

The moral of Smith’s story is clear: competition, which trade and deregulation facilitate, has an extraordinary tendency to enhance efficiency and bring down prices.

As we have documented, the falling cost of living improves the lives of ordinary people irrespective of how fast incomes rise. The few areas where costs have gone up instead of down—education, housing, and healthcare—have been subject to severe market distortions. Subjecting education, housing, and healthcare to more competition could have salutary results. Falling cosmetic procedure prices, for example, provide insight into how deregulated healthcare might affect healthcare costs. 

Smith’s article also recounts how increased competition has helped to move technology forward. Technology, in turn, has furthered expansion of trade—a virtuous cycle: 

During the 1970s and 1980s, while container ships and planes became increasingly efficient with each successive model, newly developed fiber-optic cables (patented in 1966) began running underseas, connecting the world at the speed of light, lowering voice and data-communication costs by orders of magnitude. Financial markets became globally integrated and transactions multiplied at an astounding rate.

In addition to improving lives in the United States, trade has also helped lift billions of people out of extreme poverty around the world, notably in East Asia

While the vast majority of Americans are made better off by trade, that is of small comfort to those working in industries that are having trouble competing with the rest of the world. Their disappointment contributes to the popularity of anti-trade political figures like Donald Trump and Bernie Sanders. 

It is important to acknowledge the “destructive” part of “creative destruction”—and trade contributes to creative destruction—but also to put trade in a proper perspective. The positives markedly outweigh the negatives. As Fred Smith concludes: 

More than three billion people are now connected to the Internet. Billions more have aspirations for a better life and are likely to come online as global consumers. The odds are good, therefore, that today’s remarkable transport systems and technologies will continue to improve and facilitate an even larger global economy as individual trade is becoming almost “frictionless.”

History shows that trade made easy, affordable and fast—political obstacles notwithstanding—always begets more trade, more jobs, more prosperity. From clipper ships to the computer age, despite economic cycles, conflict and shifting demographics, humans have demonstrated an innate desire to travel and trade. Given this, the future is unlikely to diverge from the arc of the past.

March 31, 2016 10:11AM

Big Win for MetLife and Other SIFIs

MetLife notched an important win this week, securing a ruling from a federal court that it is not a systemically important financial institution (SIFI) under Dodd-Frank. Like much of the Dodd-Frank Act, the SIFI designation has been controversial since its introduction in 2010. The designation is intended to help the Financial Stability Oversight Council (FSOC, another Dodd-Frank creation) to monitor companies whose demise could destabilize the country’s financial system. Putting aside the question of whether a group of regulators in Washington could see and stop a crisis more quickly than those in the trenches at the nation’s financial giants, the designation triggers a host of regulatory requirements that many companies would prefer to avoid. 

One of the most controversial aspects of the SIFI designation is its black box nature. There is no publicly available SIFI check-list. The rationale for following a more principles- than rules-based approach may be that the definition needs to remain flexible. Companies may be motivated to avoid the letter of such a rules-based approach without avoiding the spirit, leaving FSOC without the ability to monitor a company that, despite not triggering the SIFI designation, still poses a risk to the financial system. But this has left companies in a bind. The SIFI designation has real and substantial ramifications for any company that triggers it, but companies have been unable both to avoid designation and to challenge designation once applied.  It’s hard to argue that you don’t fit a certain definition if you don’t know what the definition is.

Of course, not all companies want to avoid SIFI status. Although some have argued that FSOC and other aspects of Dodd-Frank will prevent future bailouts, it seems naïve to think that the government could designate a company as a risk to the entire financial system and then sit idly by as it burns.  SIFI designation is a wink and a nod, all but assuring government support if the designated company founders in rocky times.

In its case against the government, MetLife argued that its designation as a SIFI was “arbitrary and capricious.” This is the famously deferential standard by which actions by federal agencies are judged. Rarely will a court overstep an agency’s decision to find that it violated this very low bar. And yet this is exactly what Judge Rosemary Collyer found. Although the government may appeal the decision, it will likely spur other SIFIs to challenge their designation as well.

More importantly, however, Judge Collyer’s decision may provide the check-list that companies have been seeking. Judge Collyer issued her opinion under seal, meaning that its details are not currently public. She has asked the parties to weigh in on whether any portions of it should remain hidden, signaling her interest in making the opinion public in the near future. Once the opinion, and Judge Collyer’s legal analysis, is made known, I foresee many lawyers scrambling to set their clients on MetLife’s path.

March 31, 2016 9:12AM

Dodd‐​Frank and Capital, Revisited

My previous post, inquiring as to the actual impact of the Dodd-Frank Act on bank capital, elicited some comments, mainly in the form of tweets, from Dodd-Frank’s defenders.  Here are some of the issues raised, along with my response.

A tweet from former Schumer staffer and current law professor David Min suggests that, while my analysis referred to depositories, the real issue is consolidated bank holding companies.  I don’t think the distinction matters much, because the capital requirements in Section 2(o)(1) of the Bank Holding Company Act, mirror those in Section 38 of the Federal Deposit Insurance Act, which I had discussed.  In any case the fact remains that bank regulators had more than sufficient authority before Dodd-Frank to set almost any capital standards they wanted, whether for bank holding companies or their depository subsidiaries.

That said, the question remains whether  bank holding companies’ capital levels  have in fact gone up since Dodd-Frank.  Let’s see.  In 2010, the year  Dodd-Frank was passed, the largest bank holding companies, on a consolidated basis, had a tier 1 leverage ratio of 9.05%.  By 2015 the ratio had risen to 9.69% — a mere 64 basis points.  Again, color me unimpressed.  Other leverage measures for holding companies show slightly different numbers, but the magnitudes are all similar.

In another tweet, Mike Konczal suggests that the 64 basis-point increase, although slight, is nevertheless the result of Dodd-Frank.  But that conclusion may well be doubted.  As I’ve observed, regulators might have insisted on a similar, if not greater, increase before Dodd-Frank.  In fact, I believe the  increase is most likely do to  the Basel process, rather than to domestic regulatory pressures.

Konzcal, in contrast, suggests that the increase may be due to Dodd-Frank’s capital “surcharge” on very large banks.  Were that the case, one would expect the largest holding companies to have witnessed the greatest increases in capital, with  smaller banks not subject to the surcharge experiencing smaller gains, or none at all.  As mentioned above, the leverage ratio for the largest bank holding companies increased by 64 basis points since Dodd-Frank.  But holding companies just below this in size ($3B – $10B), which are not subject to the Dodd-Frank surcharge, also witnessed an increase of 64 basis points.  If we go further down the list, and look at the community banks between $500MM – $1B, the increase in the capital ratio is actually higher, at 127 basis points.  This runs counter to Konzcal’s suggestion.  Now other things may be going on here, so my evidence doesn’t necessarily amount to a refutation.  But it does at least cast doubt upon the claim that Dodd-Frank capital surcharges were an important cause of the overall (modest) increase in post-2010 bank capital ratios.

Although my post specifically concerned bank capital, both Min and Konzcal also say that the real issue concerns non-banks (a view nicely consistent with candidate Clinton’s position).  They suggest that, even if I’m correct about the impact of Dodd-Frank on bank capital, Dodd-Frank has nonetheless made a big difference by allowing bank regulators to extend both capital and liquidity requirements to designated large non-banks.

So, let’s consider that possibility.  So far, only four non-banks have been designated under Title I of Dodd-Frank.  Three of these non-banks are predominately insurance companies.  That’s important for a number of reasons.  For starters, the Dodd-Frank liquidity requirements explicitly exclude nonbank financial companies that “have substantial insurance activities.”  It follows that three of the four non-banks cannot possibly have had their capital holdings raised as a result of Dodd-Frank’s requirements.  Also, despite what Konzcal’s tweets seems to suggest, insurance companies were not “unregulated” prior to Dodd-Frank.  State insurance regulators monitor insurance companies’ liquidity, impose liquidity requirements, and enforce capital standards, as they’ve being doing to some extent since at least 1837.

In fact it makes little sense to imagine, as Min appears to do, that imposing bank-like regulation on non-banks will raise their capital levels, since non-banks have always been far less leveraged than banks.  Even Goldman already met the standards of Dodd-Frank before that law was passed.  Yes, Title I of Dodd-Frank subjects insurance companies, hedge-funds, and some other non-banks to additional regulatory oversight;  but it doesn’t follow that it will cause them to hold more capital, for they already hold more than that law requires — as should not be surprising given that they also do not enjoy the level of government guarantees enjoyed by the banks.  In fact, the only non-banks that are more leveraged than banks, and notoriously so, are Fannie Mae and Freddie Mac.  Yet neither Dodd-Frank nor any other recent legislation attempts to impose meaningful capital requirements on either.

Two much-balleyhooed arguments for Dodd-Frank are that it has given regulators needed tools they lacked beforehand, and that it has made the financial system safer by subjecting certain non-banks to bank-like regulation.  Both arguments are false, and dangerously so.  If we truly wish to avoid future financial crises, we had better assess Dodd-Frank’s consequences honestly, instead of confusing what many claimed it would accomplish with what it has accomplished in fact.

[Cross-posted from Alt-M.org]