201710

October 19, 2017 3:41PM

Competing Analyses of the Republican Tax Reform Framework

The media’s favorite analysis of the Big Six tax reform framework comes from the Urban-Brookings Tax Policy Center (TPC), which purports to estimate that the plan would increase individual income taxes by $471 billion over a decade (by slashing exemptions and deductions), while cutting business taxes by $2.6 trillion.  Predictably, this generated a tidal wave of outraged editorials and TV ads claiming the plan would do nothing for economic growth and benefit only “big corporations and the top 1%” (which is redundant, because individual taxes aren’t cut and the TPC wrongly attributes nearly all corporate tax cuts to the top 1%).

The Wall Street Journal has offered a powerful corrective to the TPC’s concealed analysis in “Where Critics of Tax Reform Go Wrong”, by Larry Kotlikoff of Boston University. It draws on his working paper with Seth Benzell of MIT and Guillermo Lagarda of the Inter-American Development Bank, which found “The [corporate] tax reform produces enough additional revenues to permit a reduction in personal income tax rates.”

The Tax Policy Center opines there will be “little macroeconomic feedback effect on revenues,” Kotlikoff explains, because they rely on an antique closed-economy model in which (1) investment can only be financed from some domestic “pool” of savings, and (2) higher taxes are equivalent to more savings because they supposedly reduce government deficits without reducing private savings. If government borrows more, this supposedly raises interest rates and “crowds out” private investment.

In reality, U.S. interest rates do not rise and fall with budget deficits, partly because arbitrage ensures the global bond yields move in tandem. Japan ran large chronic budget deficits for decades with super-low interest rates.  

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October 19, 2017 2:46PM

The Myth of Public‐​Sector Unions’ “Free Rider” Problem

Last month, the Supreme Court’s agreed to review Janus v. American Federation of State, County, and Municipal Employees, Council 31 (Cato filed a brief in support of the plaintiffs). The case is a First Amendment challenge to the “agency fees” that must be paid to a public-sector union by non-members. As a matter of existing First Amendment law, no employee may be compelled to join a union or contribute money to fund a union’s direct political activities, such as political ads. In roughly 22 states (the 28 “right-to-work” states outlaw agency fees), unions may compel non-members to pay agency fees that (ostensibly) only reflect the cost of the union’s representational activities, such as bargaining over wages and working conditions. The agency fee is the product of the Supreme Court’s decision in Abood v. Detroit Board of Education (1977), in which the Court prohibited public-sector unions from compelling non-members to support political speech, but allowed for the compelled support of the union’s other “non-political” activities. 

 

The plaintiff in Janus—like the 2015 Friedrichs case that stalemated after Justice Scalia’s death (in which Cato also filed a brief)—claims that, for public employees, the distinction in Abood between “political” and “non-political” is illusory because the terms and conditions of public employment are inherently a matter of public concern. A teachers union negotiates with a school system over salaries and benefits packages, merit pay versus seniority, the standards for teacher evaluation, and the controversial “tenure” provisions that in some states make it nearly impossible to fire even serial abusers. Each of these represents a core, political issue in education policy, and a teacher who believes that, say, merit-based pay systems would improve the quality of teaching in the school system (where perhaps her own children may attend) can currently be forced to fund negotiations against it.

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October 17, 2017 6:19PM

Will Everyone Please Cool it on the Protectionism?!

As negotiations on the North American Free Trade Agreement (NAFTA) continue, many proposals seem to run counter to the goal of modernizing the deal, and some industry groups are taking the opportunity to advance their protectionist agenda. A recent op-ed by Mike Schultz, Vice President of R-CALF USA and COOL Chairman, and Martin Rosas, President of United and Food and Commercial Workers (UFCW) Local 2 in Kansas City, argued for the reinstatement of U.S. legislation that required meat products to bear a label that identifies the country of origin of the product, so-called COOL (country of origin labeling) rules. Supporters of this type of labeling scheme argue that it helps inform consumers of the products they are buying, and that consumers are willing to pay more for this information. In addition, supporters tend to claim that NAFTA hurt the U.S. beef industry.  All of these arguments are incorrect.

First, the COOL scheme that was established by the United States in 2008 was a complex set of requirements that set out when particular muscle-cuts of meat would require a label that identifies where the product was “born, raised, and slaughtered.” On its face, this may seem benign, but the way the legislation was crafted discourages U.S. meat producers from sourcing foreign meat because of the costs of tracing every step of the production process, including segregating herds by nationality.

Tracing of a piece of meat’s “nationality” is complicated by the fact that there is a lot of back and forth trade in the beef industry between Canada, Mexico and the United States. And there are additional barriers to tracing, like the fact that Alaska and Hawaii transship their cattle through Canada to get to the U.S. market to avoid the high costs of shipping imposed by the Jones Act.

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October 17, 2017 4:59PM

LAPD Drones Threaten Privacy

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Today, the Los Angeles Police Department (LAPD) civilian police commission voted to approve proposed guidelines for a one-year unmanned aerial vehicles (UAVs) pilot program. According to the LAPD's guidelines, UAVs will not be equipped with lethal or nonlethal weapons and will only be deployed in a narrow set of circumstances. The guideline also requires officers to obtain a warrant before using a UAV "when required under the Fourth Amendment or other provision of the law." This looks all well and good, except that the Fourth Amendment and California law provide little protection when it comes to aerial surveillance.

The Fourth Amendment protects "persons, houses, papers, and effects" from "unreasonable searches and seizures." Many Americans could be forgiven for thinking that this constitutional provision would act as a shield against warrantless aerial surveillance. Sadly, this is not the case. California law is similarly of little help. California is not one of the states that require law enforcement to obtain a warrant before using a UAV, with Gov. Jerry Brown in 2014 vetoing a bill that would have imposed such a requirement.  

To the LAPD's credit, routine surveillance is not included in its list of approved UAV operations. However, the LAPD has a history of using new surveillance gadgets, and it's reasonable to be wary of UAVs being regularly used for surveillance as they become an everyday feature of police departments' toolboxes.

Although the Supreme Court has yet to take up the issue of UAV surveillance, it did address aerial surveillance in a few cases in the 1980s. In Dow Chemical Co v. United States (1986) the Supreme Court ruled that the Environmental Protection Agency did not need an administrative warrant when it hired a commercial photographer using a mapping camera to inspect a 2,000 acre Dow Chemical plant from an aircraft.

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October 17, 2017 11:20AM

International Relations at China’s 19th Party Congress

Later this week the Communist Party of China (CPC) will hold the 19th Party Congress, a major political event that happens just once every five years. Domestic issues will take center stage at the Party Congress, and China watchers will watch closely for news on the composition of a new Politburo Standing Committee, the likely inclusion of Xi Jinping Thought into the CPC’s constitution, and the future of economic development.

International relations will take a back seat to internal issues during the 19th Party Congress, but it will not disappear from the agenda entirely. Three important issue areas to follow are the progress of China’s military reforms, Taiwan, and North Korea. All three could come up during the congress, and all have important implications for U.S. strategy in East Asia and the U.S.-China relationship.

 

Military Reforms

Xi Jinping kicked off a massive reform of the Chinese military in late 2015 by cutting 300,000 personnel from the People’s Liberation Army (PLA) and changing its command and control system. Additional notable reforms over the past two years include changing from military regions to theater commands, the creation of a Strategic Support Force for space, cyber, and electronic warfare, and the growing prominence of the PLA Air Force and PLA Navy relative to the army. The overarching goal of Xi’s military reforms is to turn the PLA into a lean, mean fighting machine capable of winning wars on the modern battlefield.  

Some general information about military reform should be mentioned in the work report produced at the beginning of the 19th Party Congress, but before the report is released congress-watchers should pay attention to promotions and demotions within the PLA and Central Military Commission (CMC). In the weeks and months leading up to the Party Congress, Xi removed several high-ranking PLA generals from their posts and replaced them with new commanders. Changes to the CMC could include a reduction in the number of individuals on the commission and new members that are loyal to Xi and want to improve the PLA’s joint warfare capabilities.

The PLA reforms have two important and competing implications for the United States. On the one hand, once the reforms are completed and internalized the PLA should be a much more effective fighting force, which in turn raises the costs of U.S. military commitments in East Asia. On the other hand, these reforms are a massive and difficult undertaking that will take many years to fully implement. American policymakers should not inflate the threat posed by China in the short term, but it would be unwise to ignore the long-term political implications of a more capable PLA.

 

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October 17, 2017 10:59AM

Pruitt: No More Regulation By Settlement at the EPA

Welcome news from the Environmental Protection Agency: Administrator Scott Pruitt is curbing often‐​collusive deals (“sue and settle”) by which the agency, sued by outside groups, agrees to adopt new policies or enact new regulations. (It also usually agrees to pay the outside groups handsomely in legal fees.) As The Hill puts it, the new policy (full EPA release here) focuses especially on transparency:

“We will no longer go behind closed doors and use consent decrees and settlement agreements to resolve lawsuits filed against the agency by special interest groups where doing so would circumvent the regulatory process set forth by Congress,” Pruitt said, adding that he is also cracking down on attorneys’ fees paid to litigants.


Under Pruitt’s new directive, the agency will post all lawsuits online, reach out to affected states and industries and seek their input on any potential settlements.


The EPA is pledging to avoid settlements that would make for a rushed regulatory process, or that obligate the agency to take actions that the federal courts do not have the authority to force.

Cato adjunct scholar Andrew Grossman discussed the issue in 2015 Senate and 2017 House testimony, noting that “The EPA alone entered into more than sixty such settlements between 2009 and 2012, committing it to publish more than one hundred new regulations, at a cost to the economy of tens of billions of dollars.” He observed that judicially enforceable consent decrees create “artificial urgency” for bulldozing through new regulations quickly, give favored outside organizations an added channel of influence not available to many of those directly regulated, and tie the hands of later administrations. And as I pointed out in this space a few years back, the issue is by no means confined to the EPA or environmental regulation, but serves as a way to expand government agency power while seeming to constrain it in education, social services, and many other areas.


But the next administration’s EPA chief could reverse Pruitt’s directive with the stroke of a pen. That’s one reason the U.S. Department of Justice — which has been doing its own welcome housecleaning of settlement practices lately — should continue to monitor and regularize litigation practices of this sort, and why Congress should proceed to consider legislation to curb sweetheart pacts on a more lasting basis. 

October 17, 2017 9:24AM

Monetary Freedom: Lessons from the Western Han Dynasty

During the Western Han Dynasty (206 B.C. – A.D. 9), the question of monetary freedom was vigorously debated. There were as yet no banks or paper money in China — money consisted solely of coin.  Private mints competed with government mints, either in the shadow market or legally. In 81 B.C., the issue of whether the state or the market would be the best guardian of sound money came to a head in the famous “Discourses on Salt and Iron,” which were compiled by Huan Kuan in his book Yantie lun. The relevant chapter for our study is chapter 4, “Cuobi” (“Discordant Currencies”).

In this article, I provide some background for the debate between the Confucian scholars who favored private (competitive) coinage and the statesmen, particularly Sang Hongyang, who defended the government’s monopoly on coinage. I then consider the arguments of those engaged in the 81 B.C. debate over the role of government in coinage and the lessons learned.

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