Archives: 08/2017

The Current Budget Crisis Illustrates James Buchanan’s Concerns About Politics

Nobel laureate James Buchanan has been in the news lately, especially because of a book that seeks to link his 7000 pages of economic writing to both Dixiecrat segregationists and Charles Koch’s secret plan “to radically alter our government in ways that will be devastating to millions of people.” The thesis of Democracy in Chains by Nancy MacLean is that public choice economics is a radical plan to “shackle the people’s power,” “to put democracy in chains.” Oddly, she claims (without evidence), he set out on this project because he resented the Supreme Court’s decision in Brown v. Board of Education – which of course used “undemocratic” means to overturn the democratic decisions of legislatures in various states.

Buchanan certainly was concerned with how to achieve justice, efficiency, and “prevention of discrimination against minorities” in the context of majority rule. Throughout his work he explored how to design constitutional rules to bring about optimal outcomes, including a balanced budget requirement, supermajorities, and constitutional protection of individual rights. He worried that both majorities and legislatures would be short-sighted, economically ignorant or inefficient, and indifferent to the imposition of burdens on others.

And today a Washington Post column by Dana Milbank illustrates one of the big problems that Buchanan sought to solve: the temptation of legislatures to spend money with little regard for what two of his students called “deficits, debt, and debasement.” Looking outward from Hurricane Harvey to the upcoming congressional session, Milbank wrings his hands:

Harvey makes landfall in Washington as soon as next week, when President Trump is expected to ask for what could be tens of billions of dollars in storm relief. And paying for storm recovery — probably with few offsetting spending cuts — will be but the first blow to fiscal discipline in what looks to be a particularly active, and calamitous, spending season.

It’s not just disaster relief. The Pentagon is hoping for tens of billions of additional dollars. And Republicans may pivot from “tax reform” to mere tax cuts. It’s easier just to spend money and cut taxes than to reform the flood insurance program, make the tax system more efficient, and focus military spending on actual defense needs, much less to think about the national debt and the next generation.

Will Harvey Reform Flood Insurance?

In July, my Cato colleague Ari Blask and I wrote a study critiquing the National Flood Insurance Program.

We made what—to us—seem like obvious critiques of a broken program: it doesn’t charge an actuarially fair price for many homeowners who live in flood plains, and those who get the best deal seem to be the wealthy. It also fails to use updated maps that detail the current geography and risks to homeowners, and generally doesn’t charge enough to cover the costs of major catastrophes. The result of this is that we have too much development in the flood-prone areas of the country.

After the report came out I appeared on a few radio and TV shows and received a few emails about our research, and the main complaint I received—in fact, virtually the only feedback I got—was from people who said they were in a 100-year floodplain but had never seen any flood. They were angry that their bank made them buy this insurance to get a mortgage, and didn’t think it was fair.

On Thursday, I was a guest on another radio show to talk about the after-effects of Hurricane Harvey, and the second caller complained about… having been forced to purchase flood insurance despite his belief that his house couldn’t flood. The next caller chimed in with the same complaint.

Apparently not too many people see Harvey as being a precautionary tale. But that’s only natural: human beings aren’t great at perceiving risk. Surveys show that people worry much more about dying from a terrorist attack or a plane crash when slipping in the shower or getting hit by lightning are far more deadly, for instance.

However, insurance companies tend to be pretty good at discerning risk—they go bankrupt if they’re bad at it. Life insurers hire teams of people to try to understand longevity risk, for instance, and property and casualty insurers do the same to understand the risk to homes.

Should We Subsidize Schooling?

Public schooling monopolists such as the President of the American Federation of Teachers, Randi Weingarten, argue that private school choice programs undermine our democratic society. One of the frequently made fundamental arguments is that, if given the opportunity to do so, self-interested individual families would choose a “less-than-socially optimal” level of schooling since education may be a merit good.

In other words, if my children receive an education, the rest of society benefits from the transaction without having to pay for it directly. After all, other members of society will benefit if my children grow up to be well-informed voters and law-abiding citizens. The conclusion made by some economists is that the government ought to be able to force the rest of society – the free-riders – to subsidize schooling so that the collective could reach some “socially optimal” level of education.

However, such a conclusion assumes that having a more educated populace is the only externality associated with traditional schooling. In order to better understand the overall effect, I have created a list of possible positive and negative externalities associated with government schooling.

Positive Externalities:

  • A more educated citizenry – the rest of society benefits when they have educated people to interact with. Also, democracy might function more effectively with highly educated and informed voters.
  • Obedience – public schools were originally designed to create more obedient citizens. If a person is more obedient to the state, they may be less likely to break the law. As a result, third parties benefit from not having their property damaged or stolen.

Negative Externalities:

  • A less educated citizenry – third parties are harmed if the compulsory levels of schooling do not maximize children’s education levels. After all, schooling is but one channel to achieve an education, and government schools do not have an incentive to provide children with optimal educational experiences.
  • Obedience – if citizens are trained to be obedient, they may be less likely to invent technologies that benefit the rest of society. In addition, obedient employees may be less productive if their job requires them to think on their feet.
  • Legitimized coercion through voting – the voting booth allows advantaged groups to exercise coercion over less fortunate members of society. Politically powerful groups can mobilize and extract resources from third parties, producing, at best, a zero-sum game.
  • Opportunity costs of the political process – citizens must use excessive amounts of time and effort in order to become politically knowledgeable about various educational policies. These scarce resources could be more efficiently allocated towards generating an income or spending time strengthening bonds within the family.
  • Inefficiency – government schools do not have an incentive to spend taxpayer resources efficiently. Consequently, we have observed public school spending increase substantially without discernible effects on observed student outcomes.

The Economic and Budgetary Cost of Repealing DACA at the State Level

Earlier this year my colleague Logan Albright and I estimated the economic and fiscal costs that a full and immediate repeal of DACA would impose on the federal government and the economy as a whole. DACA stands for the Deferred Action for Childhood Arrivals, an Executive Order issued by President Obama that allowed the foreign-born children of illegal immigrants who migrated with their family to remain in the U.S. if they remain in school and subsequently obtain gainful employment.

We found that the aggregate economic cost would be over $200 billion and the cost to the government would be $60 billion, numbers we suggest are conservative. Most of this high cost is driven by the fact that the “dreamers” tend to do well in school and as a result do well in the job market after they complete their education.

To shed some further light on this issue we recently updated our analysis to break down these costs by the individual states.

We began our original analysis by comparing DACA recipients to those immigrants who hold H-1B visas. These are high-skilled, well-educated immigrants who are demographically analogous to DACA students, all of whom must necessarily enroll in higher education programs in order to be eligible.

The average DACA recipient is 22 years old, employed, and a student. 17 percent of them are on track to complete an advanced degree. The college attrition rate of DACA recipients is miniscule compared to domestic students, an indication of the exceptional caliber of the DACA students and their degree of motivation, no doubt partly driven by the fact that dropping out of school for them can result in deportation.

H-1B holders are generally between 25 and 34, have an employment rate of nearly 100%, and have usually completed a college education. We posit that they are akin to what DACA recipients will look like in a few years’ time.

Very Few Immigration Vetting Failures of Terrorists Since 9/11

This post was updated to include all convictions or attacks through October 31, 2017.

President Trump’s executive order attempted to temporarily ban all refugees and all travelers or immigrants from six African and Middle Eastern countries due to a concern over widespread vetting failures. The purpose of the temporary ban was to give the administration time to “improve the screening and vetting protocols and procedures.” The order grounded this concern in one fact:

Recent history shows that some of those who have entered the United States through our immigration system have proved to be threats to our national security. Since 2001, hundreds of persons born abroad have been convicted of terrorism-related crimes in the United States.

These statements contain five clear implications: 1) that these “hundreds of persons born abroad” committed acts of terrorism in the United States; 2) that they came to the United States “through our immigration system,” 3) that they entered since 2001, 4) that better “screening and vetting protocols” could have prevented their entry, and 5) these offenders pose a significant threat to Americans. Each one of these implications is false. Here are the facts:

1)      Not “hundreds of persons” committing terrorism in the United States: Only 55 percent of people convicted of “terrorism-related” offenses according to the federal government are, in fact, convicted of involvement in terrorism.

2)      Not “hundreds” through our immigration system: Less than 200 foreigners convicted of or killed during terrorism offenses since 9/11 entered “through our immigration system.”

3)      Not “hundreds” entering since 9/11: Only 35 foreigners convicted of or killed during terrorism offenses since 9/11 entered “through our immigration system” since 2001.

4)      Not “hundreds” slipping through “screening” since 9/11: Only 17 likely radicalized prior to entry.

5)      Not a significant threat: No refugee nor any national of the banned countries has successfully carried out a deadly terrorist attack in over four decades. 

In the aftermath of the world’s worst terrorist attack on September 11, 2001, the U.S. government rapidly responded with much stricter vetting for foreign visitors, immigrants, and refugees. It created new terrorist watch lists, required biometric verification of identities, instituted mandatory visa interviews, hired thousands of new consular officers, improved inter-agency intelligence sharing, and much else. America’s pre-9/11 visa vetting system has almost nothing in common with today’s system. For this reason, it is appropriate to begin the analysis of immigration vetting failures with 9/11.

A Half-Century Increase in Global Terrestrial Net Primary Production Driven Primarily by Rising Atmospheric CO2

Net primary production (NPP) represents the net carbon that is fixed (sequestered) by a given plant community or ecosystem. It is the combined product of climatic, geochemical, ecological, and human effects. In recent years, many have expressed concerns that global terrestrial NPP should be falling due to the many real (and imagined) assaults on Earth’s vegetation that have occurred over the past several decades—including wildfires, disease, pest outbreaks, and deforestation, as well as overly-hyped changes in temperature and precipitation.

The second “National Assessment” of the effects of climate change on the United States warns that rising temperatures will necessarily result in the reduced productivity of major crops, such as corn and soybeans, and that crops and livestock will be “increasingly challenged.” Looking to the future, the National Assessment suggests that the situation will only get worse, unless drastic steps are taken to reduce the ongoing rise in the air’s CO2 content (e.g., scaling back on the use of fossil fuels that, when burned, produce water and CO2).

But is this really the case? If growing crops are increasingly affected, damage should also be showing up in the global ecosystem. Is the productivity of the biosphere in decline?

In a word, no! Observational data indicate that just the opposite is occurring (see, for example, the many studies reviewed previously on this topic here). Rather than withering away, biospheric productivity is increasing, thanks in large measure to the growth-enhancing, water-saving, and stress-ameliorating benefits of atmospheric CO2 enrichment.

When Is a Whistleblower Not a Whistleblower

Imagine you are an employee and you suspect another employee, or your employer, has violated federal securities laws. You might want to report these violations to your employer (internal reporting), or you might want to tell the federal government (external reporting). But if you report the violation, you run the risk of being retaliated against by your employer.

When Congress passed the Dodd-Frank Act in 2010, it included an “anti-retaliation” provision to protect those employees who externally report securities violations to the Securities and Exchange Commission (SEC). Indeed, the statutory text clearly defines a reporting employee—a “whistleblower”—as an “individual who provides … information relating to a violation of the securities laws to the Securities and Exchange Commission.” The statute is unambiguous: if a person reports a violation of the covered laws to the SEC, Dodd-Frank provides them a remedy to protect themselves from retaliating employers.

In 2014, Paul Somers sued his former employer Digital Realty in the United States District Court for the Northern District of California. Somers claimed that he was fired for complaining to senior management that his supervisor had violated the Sarbanes-Oxley Act of 2002 (one of the securities laws covered by Dodd-Frank). It is undisputed that Somers did not report any violation of the securities laws to the SEC, but he nevertheless asserted in his complaint that Digital Realty retaliated against him in violation of Dodd-Frank’s anti-retaliation provision. Digital Realty moved to dismiss the case because, as noted, it’s clear that Dodd-Frank only protects people who report violations to the SEC. The district court disagreed, however, holding that the definition of “whistleblower” was ambiguous and that Chevron deference was owed to a 2011 SEC rulemaking which had redefined the term “whistleblower” to include not only those who report violations to the SEC, but also those that internally report violations to their employer. Digital Realty appealed to the U.S. Circuit Court of Appeals for the Ninth Circuit, but lost there as well. The Ninth Circuit not only agreed with the district court that the statute was ambiguous, and that Chevron deference should apply to the SEC’s rulemaking, but also—incredibly—upheld Somers claim on the grounds that a better reading of the statute’s text protected internal reporting. Digital Realty petitioned the Supreme Court to hear the case and the Court granted their request.

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