Archives: 01/2018

New Study on Electricity Infrastructure

Private-sector utilities provide the bulk of electricity generation, transmission, and distribution in the United States. But the federal government also owns a share of the nation’s electricity infrastructure.

The government owns the Tennessee Valley Authority (TVA) and four Power Marketing Administrations (PMAs). The PMAs mainly transmit power generated by hydroelectric dams owned by the Army Corps of Engineers and the Bureau of Reclamation. Federal entities account for 7 percent of U.S. power generation, and they own 14 percent of the nation’s transmission lines.

In its 2018 federal budget, the Trump administration proposed privatizing the PMAs. Today, Cato is releasing a study discussing the PMAs and the advantages of privatization. A previous study looked at privatizing the TVA.

The federal government entered the electricity business in the mid-20th century when faith in government ownership was high. But over time it has become clear that government-run businesses lag private businesses in efficiency, innovation, and environmental performance. As such, there has been a global trend toward privatization, and many nations have sold their electricity assets. 

The Trump budget said, “ownership of transmission assets is best carried out by the private sector where there are appropriate market and regulatory incentives.” And it said the proposal to “eliminate or reduce the PMA’s role in electricity transmission and increase the private sector’s role would encourage a more efficient allocation of economic resources and mitigate risk to taxpayers.”

Trump is on the right track with the PMAs. Rather than increasing infrastructure subsidies, the administration should work to improve the efficiency of existing infrastructure, and that includes clearing out the federal attic and holding a garage sale.

About three-quarters of Americans receive electric power from for-profit private utilities. There are no sound policy reasons for the other one-quarter to be supplied by government facilities and subsidized nonprofit firms. Privatizing federal generation and transmission facilities would raise government revenues from the sell-off and from the payment of income and property taxes by the privatized entities over time.

President Ronald Reagan proposed privatizing the PMAs because it would “result in a more efficient power system for electricity customers.” President Bill Clinton also proposed privatizing the PMAs. It makes sense for President Trump to dust off the Reagan and Clinton plans, and move ahead with reforms.

Privatize the PMAs here.

Privatize the TVA here.

Clearing the rest of the federal attic here

Trump’s Infrastructure Plan

A six-page summary of the Trump infrastructure plan seems to have leaked out yesterday.

To me, it looks like a plan that President Obama would propose with more federal spending and top-down rules. Bob Poole at Reason sees it differently.

The Trump administration is expected to request $200 billion over 10 years for its infrastructure plan. The document leaked yesterday suggests where those subsidies would go:

  • “Infrastructure Incentives Initiative” would be 50 percent of the spending. The states would compete for this aid, which would be for a wide range of projects including highways, airports, and water facilities. The federal money would cover 20 percent of project costs.
  • “Rural Infrastructure Program” would be 25 percent of the spending. This aid would be handed out to the states by formula, and used for projects in defined rural areas.
  • “Transformative Projects Program” would be 10 percent of the spending. The Department of Commerce would hand out this aid to the states for projects that are risky and “ground-breaking.” The rules are complex.
  • The remaining 15 percent of spending would go to various loan programs and financing funds.

The proposals generally move in the wrong direction. New federal subsidies are not needed. Any state wanting to improve its infrastructure can do so with its own funding. States have huge revenue-raising power through income, sales, property, and gas taxes. They can issue debt for infrastructure, and charge user fees. They can also privatize infrastructure—such as airports and seaports—and end subsidies.

Federal infrastructure subsidies are often counterproductive. As I discuss here, they distort state decision making, replicate mistakes across the country, come with costly regulations, and add bureaucracy.

The Trump six-pager hints at the new bureaucracy. For the “incentive” grants, states would have to achieve “milestones” and deliver “evidence” on project efficiency, the use of technology, the economic and social returns, and other data. The “transformative” grants would create bureaucratic structures such as “partnership agreements” and an “interagency selection committee.” To get the rural subsidies, states would need to “publish a comprehensive rural infrastructure investment plan (RIIP).”

Do we really need more subsidies for rural America? On top of all the farm subsidies and rural subsidies the government already hands out?

There are measures in the Trump plan that would facilitate use of public-private partnerships. But to me the six-page memo mainly indicates an old-fashioned, top-down, subsidy approach. Globally, infrastructure is going private, but America remains stuck in the past.

Policymakers are rightly concerned that America have better infrastructure to compete in the global economy. But we are not going to get it with a system based on subsidies and government ownership. Federal policymakers should cut subsidies, privatize the infrastructure it owns, and eliminate barriers to state and local privatization.

After Kabul Hotel Attack, Pakistan Should Make Clear Where It Stands

On Saturday, January 20, six men disguised in army uniforms launched an attack within Kabul’s InterContinental Hotel, holding it under siege for over 12 hours and killing 22 people, including Americans. Harrowing accounts of survivors are emerging, with many saying that the attackers were looking for foreigners specifically and killing them on the spot. Some survivors jumped out of windows while most were rescued by Afghan security forces, who acted swiftly.

The Taliban claimed responsibility for the attack, though Javid Faisal, the deputy spokesman for Afghanistan’s executive office blamed the Haqqani Network, a militant group that fights Afghan and U.S. security forces in Afghanistan and has close ties with Pakistan. In fact, the Trump administration has called on Pakistan to end its support of militants and eradicate domestic safe havens as a myriad of D.C.-based analysts dissect Pakistan’s leverage over the Taliban and Haqqanis

While the United States and India both denounced the attack and praised the Afghan National Defense and Security Forces for their bravery, Pakistan’s condemnation seemed to be conditional. Mohammad Faisal, a spokesman for Pakistan’s Ministry of Foreign Affairs, tweeted “We reject the knee jerk allegations by some Afghan circles to point the finger at Pakistan” and instead, urged for a credible investigation into the attack.   

The attack highlights three important—and troubling—aspects of U.S. involvement in Afghanistan and its deteriorating relationship with Pakistan.

First, violence in Kabul has not only been on the rise these last few years, but has also become predictable. For example, just a few days before the attack, the U.S. State Department had issued a warning about the increased likelihood of hotels in Kabul being targeted by extremist groups, and urged all to remain alert at all times, keep a low profile, and ensure that cells phones were fully charged. In 2017, in their quarterly report to Congress, the Special Inspector General for Afghanistan Reconstruction reported that civilian casualties and targeted attacks on Afghan military, police, and Special Forces have been the highest since 2009. This latest attacks shows that the trend may continue in 2018 regardless of an increased U.S. presence in Afghanistan.

Second, even though the Taliban took responsibility for this attack, there are two more powerful insurgent groups that could have easily orchestrated an attack: the Haqqani Network and the ISIS–Khorasan (ISIS–K) group. The Haqqani Network, along with the Taliban, have been an ongoing source of tension between the United States and Pakistan, while ISIS–K’s expansion along the Afghanistan–Pakistan border poses a new set of counterinsurgency challenges for all three states: the U.S., Afghanistan, and Pakistan.

The third, and most significant, aspect of the Kabul Hotel attack is that it highlights the urgent need for a reassessment—or rather reopening—of realistic and pragmatic diplomatic avenues. The Taliban and Haqqani Network both have been growing stronger: while they may not be able to militarily defeat U.S. and NATO forces, they have proven time and time again that they can’t be defeated. As of September 2017, the Taliban controls over 40% of Afghanistan’s territory—the most since the onset of the Global War on Terror.

Pakistan is currently pursuing a strategy that consists of a combination of persuasion (i.e. trying to convince the United States that all safe havens have been eliminated), tough talk (i.e., threats to stop intelligence-sharing and suspend NATO supply routes), and restraint (i.e., measured response to Trump tweet). At the forefront of this strategy is Pakistan’s ambassador to the United States, Aizaz Chaudhry, who has spoken at Carnegie, Georgetown University, and George Washington University, explaining Pakistan’s position and its relationship with the United states. This week, at CSIS, he said that Pakistan’s relationship with United States must be “preserved and strengthened” with a focus on resettling Afghan refugees currently residing in Pakistan back to Afghanistan—even by force.  

In the aftermath of this recent attack in Kabul, Pakistan’s leverage on the Taliban and the Haqqani Network is irrelevant—and useless—for U.S. interests in the region. Instead, this attack should serve as an opening for the United States, Pakistan, and Afghanistan to come to the table to ensure that this does not mark a renewal of violence in Kabul and beyond. For Pakistan, this attack puts it at a crossroads: Pakistan can either continue to lend its support to the Taliban and Haqqanis despite experiencing a decrease in leverage or it can shift its domestic counterinsurgency to target both groups. The latter will require Pakistan to be more transparent and the United States to be more open to dialogue. 

Medicaid Will Always Trample Someone’s Values

Last week, the federal Centers for Medicare & Medicaid Services (CMS) issued a “guidance letter” that makes it easier for states to exclude abortion providers (chiefly Planned Parenthood) from Medicaid. According to the National Right to Life Committee 19 states have passed laws excluding abortion providers from Medicaid, and such laws are currently in effect in 11 states (Arizona, Arkansas, Iowa, Kansas, Kentucky, Michigan, Oklahoma, South Carolina, Tennessee, Texas, and Wisconsin). The letter does so by rescinding an Obama-era letter that, according to the new letter, “raises legal issues under the Administrative Procedure Act.”

If you support the existence of the Medicaid program, you have no right to complain about states trying to block abortion providers from the program or the Trump administration making it easier for states to do so.

Health care is where people express their deepest-held values, when it comes to both their own care and what they are willing to purchase for others. Medicaid, like all government health care programs, forces everyone to pay for health care in the manner Washington, DC deems appropriate, on pain of prison, whether they like it or not. It therefore turns such personal questions into political ones. It guarantees one side or another’s values will always get trampled. When Democrats run Medicaid, they use it to trample Republican values. They will allow abortion providers to participate in the program, even though many Republicans consider it morally repugnant that the government should force them to subsidize an organization that practices what they consider legalized murder. When Republicans run Medicaid, they use it to trample Democratic values. They will exclude abortion providers, even though Democrats find any kind of discrimination against abortion providers unconscionable. Those who complain about this change are really just complaining that they don’t get to impose their will on other people. 

Congress should instead let Republicans and Democrats keep their money and decide for themselves what health care they will purchase for the disadvantaged.

A Colorado Minimum Wage Waiver?

Classical liberal economists oppose minimum wage laws because they restrict mutually beneficial labor market trades.  

This is the basic economic case for complete freedom of contract. Wage floors mean potential employees who would otherwise be willing to sell their labor at a lower price are unable to. Employers are banned from employing more people or giving workers longer hours at a lower wage too.

It is in this spirit that Colorado State Rep. Dave Williams has proposed an amendment to the state’s minimum wage law. Williams’ legislation  would allow an opt-out in cases where applicants for jobs or employees and employers mutually agreed to a wage below the state minimum. Paying less than the minimum wage would essentially be legal again in cases where the employee or applicant had agreed to waive their minimum wage “right” (though the employer would still be bound by the federal minimum).

This has potential benefits similar to lowering or abolishing the state minimum wage. On the margin, it would help workers with low productivity levels looking for entry-level jobs. It would also reduce the risk of hiring for employers in cases where potential employees had little work experience. While there would of course be a not insignificant risk that employees might later claim the agreement was not truly “voluntary,” such a waiver would overall shift Colorado labor market law closer to the freedom of contract that libertarians prize.

For that reason, it will of course be opposed by most minimum wage proponents. Traditionally, minimum wage advocates have recognized that such laws outlaw exchanges. But they believe this is a good thing, asserting that market-based wage setting is unfair or exploitative, or appealing to older theories such as monopsony, which says that employers in certain industries have significant market power and are able to hold wages below productivity levels absent regulation. In such a scenario, minimum wages can even raise employment levels.

Almost all minimum wage studies these days are empirical in nature, testing whether minimum wages or increases have the classical or monopsonistic effect. Though the degree of the effect differs, the overwhelming majority find negative employment or job growth consequences from minimum wage increases. From an employment perspective then, any reform in the direction of Williams’ should be welcome.

But another benefit of a debate around this law could be educational. It is difficult to make the case for complete abolition of minimum wage laws, in part because opponents lament that some workers would see pay cuts. No doubt there would be some companies that sought to move to a model with lower pay, with attempts to get employees to sign forms waiving the wage. This is the “seen” effect. But what is not seen is that there are people out there willing to work in Colorado between the federal and state minimum wages, who are currently unable to do so.

Williams’ legislation highlights that minimum wage laws are coercive, ceasing to give us control over our own labor. Indeed, under Williams’ legislation, employers would have to post notices to inform applicants and employees that they have the right to negotiate wages. Well, above the federal minimum at least!

There is therefore a principle and a consequence at stake. The principle is freedom to contract your labor. The consequence is that minimum wage laws tend to cause “unemployment”. While complete abolition of minimum wages would be preferable, Williams’ legislation helps highlight the principle and ameliorate the consequence. 

Is Bank Deregulation Dangerous?

Among last week’s news items that had colleagues asking me, “What’s your answer to this?,” was a piece by Quartz’s John Detrixhe, telling its readers that, according to “300 years of financial history,” rolling back bank regulations is a good way to trigger a financial meltdown.

Though you may be surprised to hear me say it, there’s some truth to Mr. Detrixhe’s thesis. While government intervention in banking typically does more harm than good, it’s also true that, unless it’s done carefully, deregulation can itself lead to trouble. As I put it some years ago in a Cato Journal article (reprinted recently in Money: Free and Unfree), “Dismantling bad bank regulations is like cutting wires in a time bomb: the job is risky and has to be done in carefully ordered steps, but it beats letting the thing go on ticking.”

Back in the 1980s, for example, when U.S. bank regulators phased-out depression-era regulation-Q type restrictions on the interest rates depository institutions could pay to their depositors, they unwittingly freed a moral hazard genie that those regulations had kept bottled-up for several decades.

When Corruption Is a Job Perk

I recall quite vividly the day I first witnessed the potency of the “get out of jail free” cards issued by Police Benevolent Associations. I was a teenager in the New Jersey suburbs headed to a concert with a car full of friends, and our driver was so caught up in conversation about what a great show it was going to be that, despite our feeble warning shouts, he barrelled through a solid red light going about 40 miles per hour—a red light with a police car stopped on the opposite side of the intersection. Predictably, the police car immediately flipped on its siren and tore after us. The passengers resigned ourselves to missing the start of the show. At the very least we were going to be stuck waiting through a sobriety test. The driver was surprisingly calm. He explained that he had both a card and a silver shield in the rear window identifying him as a family member of a law enforcement officer. To our astonishment, the stop was the shortest I’ve ever sat through before or since. The officer made some small talk with the driver, asked (without checking) whether his record was clean, then apologized for the delay before sending us on our way. As our friend explained on the way to the show, an ordinary paper card—the sort given to friends of police or folks who’ve made a donation to a PBA—would have been torn up after such an encounter, providing immunity for only a single minor infraction, while the family versions were permanent.

Since I don’t own a car, I hadn’t thought about these in years, until a story in the New York Post—about officers livid that the union was cutting their allotment of cards to distribute—provoked a flurry of discussion on social media. Readers who’d never heard of the practice before reacted with shock that this form of petty corruption could be so normalized that there would actually be official cards, openly distributed by police departments or their unions, for the explicit purpose of placing friends, family, and donors above the law—even if only for relatively minor infractions. The idea that family of police might get more lenient treatment was not particularly surprising, but many seemed taken aback that the practice could be so shamelessly institutionalized on such a large scale. Is there, after all, any conceivable non-corrupt reason for issuing wallet-sized cards identifying the bearer as a relative of police?