March 16, 2018 12:30PM

A Problem With Pigouvian Taxes

My UK Telegraph column today is on the likely impact of the country’s sugary drinks tax. The levy, as ever, is being justified on the basis it will internalize the “social costs” of obesity.

There’s a ton of obvious problems. Sugary drinks make up less than 2.5 percent of overall adult calorie consumption in the UK—a drop in the dietary ocean. For young kids, fruit juice is a bigger source of sugar. Obesity, of course, is not simply determined by sugar intake, or even diet either. And it’s not even clear what the social costs of obesity are (above and beyond the private costs—such as lost productivity and worse health), though the UK’s socialized healthcare system complicates matters here.

That all to one side, beneath the line comes a great comment from Tim Hammond highlighting a general under-appreciated problem of using Pigouvian taxes to deal with externalities:

The basic premise of the tax is wrong – externalities should only be taxed if they cause external costs at all levels. Otherwise they should be taxed only at the levels when they start to be damaging. It is obvious (to all except the zealots) that drinking one can of Coke a year is not remotely harmful, either to me or to the NHS (even with the most dodgy claims). So why tax that?

Unit taxes are a blunt instrument to deal with the actual social costs politicians purport to care about.

Think of another example: alcohol taxes are designed in part to ameliorate the social costs associated with alcohol-related crime or driving under the influence. But it might be that some consumers generate these kinds of externalities every time they drink, while others who merely enjoy a glass of wine with their dinner never do. Yet both would face the alcohol taxes designed to mitigate the social problems.

Of course, it may be that taxes are the only practical way of at least trying to account for the externalities. Assessing people for driving under the influence or whether they smoke around young children might be much more costly, both for the government and the regulated. But one can imagine in many instances more targeted ways of dealing with the externalities, such as revoking licenses of drunk drivers.

Tim’s central point though is right: Pigouvian taxes are not clean ways of dealing with external effects of activities. Markets are not perfect in the traditional “perfect competition model” sense. But nor are they “perfectable” by governments.


March 16, 2018 10:41AM

Trump’s Gunboat Diplomacy Takes Aim at the Global Trading System

Cross-posted from Forbes.com

By any objective measure, the degree and nature of U.S. reliance on imports of steel and aluminum do not threaten national security. President Trump’s claiming so was a smokescreen. The president wanted the domestic authority to impose tariffs, and invoking Section 232 of the Trade Expansion Act of 1962 was a foolproof way to get it.

The statute gives the president the broadest possible discretion to define and mitigate a “national security threat.” Because he can modify the tariffs or exempt countries from its reach practically on a whim, Trump has amassed the leverage he wants to bend U.S. trade partners to his will: Buy more U.S. products and I’ll drop the tariffs! Curtail your exports and I’ll modify the scope! Ramp up your NATO spending and I’ll call off the dogs!

Those who share Trump’s worldview might call this strategy ingenious. It is certainly unconventional, provocative, and possibly unhinged. Whatever you call it, Trump’s gunboat diplomacy is a major departure from the policy continuity of the last 13 U.S. administrations, and it presents a grave threat to the international trading system and the global economy.

Not since Herbert Hoover has a U.S. president been so cavalier about the consequences of protectionism. Never has a president been more dismissive of the importance of trade to our prosperity and security. Never has a president been so impervious to the lessons of history.

On trade, Trump is one-dimensional. He sees deficits as proof that the United States is losing at trade (and losing because the foreigners cheat). A winning policy, he believes, would produce trade surpluses. But, if that’s true for the United States, it’s true for all countries and since all countries can’t run surpluses, trade can’t possibly be an exercise in cooperation and mutually beneficial exchange. To Trump, trade is a survival-of-the-fittest, winner-take-all, Hobbesian struggle.

Animating this zero-sum fallacy is a sense of resentment that permeates the American nationalist narrative. Donald Trump, Robert Lighthizer, John Bolton, Peter Navarro, and others advising the president see the United States as a benevolent giant, having selflessly provided the resources, security, and generosity of spirit to rebuild Western Europe, East Asia and the rest of the free world after the war. Under the U.S. security umbrella, our allies took advantage of our kindness, short-changed the till, flaunted the rules, became economic rivals, and adopted policies that advanced their own interests at the expense of America’s industrial base. Or so goes the story.

This variant of American exceptionalism demands tribute in the form of our allies’ unquestioning support for U.S. positions on matters of foreign and economic policy, and reparations in the form of excusing U.S. policy transgressions and acquiescing in other U.S. claims to entitlement or special consideration. That the United States isn’t treated exceptionally by the World Trade Organization’s Dispute Settlement Body—which is to say with extra helpings of deference or even turning a blind eye to U.S. infractions—as recognition for America’s selfless leadership in establishing the rules and institutions of the trading system helps explain Trump’s reckless trade policy tack today.

Trump’s trade policy is all about asserting U.S. sovereignty over the presumed constraints of international law and using the leverage that comes from threatening to impede access to the world’s largest market to compel foreign governments to take certain actions. Trump reckons that countries running surpluses with the United States have more to lose from a trade war, hence his assertion that trade wars are “good” and “winnable.” While it may be true that the United States would be less weakened than other countries by a trade war (as the U.S. is much less dependent on trade than almost every other country—imports plus exports account for 27% of U.S. GDP as compared to a world average of 53%), the damage to the U.S. economy would be considerable nonetheless. But the very notion of feeling confident to threaten a trade war because U.S. “casualties” would be lighter than say China’s or Europe’s is anathema to any proper understanding of how trade and the global economy really work. Trade is not a zero-sum game, but a win-win, lose-lose proposition. Hurting our trade partners unequivocally hurts ourselves. Trump’s predecessors understood this.

U.S. importers and trading partners are all well aware of the flimsiness of Trump’s national security argument for steel and aluminum tariffs, and domestic legal actions and WTO challenges are likely to materialize. But that will take time and, in light of the so-called National Security Exception (Article XXI of the General Agreement on Tariffs and Trade) that would seem to permit governments to raise tariffs to protect national security, a successful outcome is very uncertain.

Meanwhile, foreign retaliation is no panacea. Smart governments get no pleasure from raising trade barriers because smart governments know that those barriers impose the greatest burdens on their own countries’ businesses and consumers. Even though the EU has published a retaliation list, which targets U.S. exports from states of important members of Congress, European restaurants, hotels, and households don’t want to bear the burden of paying more for their bourbon and cheese. Moreover, imposing direct retaliation instead of pursuing resolution through the WTO dispute settlement system could very well find those who retaliate in violation of the rules before the United States is ever held to account.

If there is going to be retaliation, expect it to come via copycat invocation of some bogus national security rationale. That would at least provide a similar level of insulation from WTO rebuke that probably shields the U.S. steel and aluminum actions. One could imagine the EU going after Google, Amazon, and the other U.S. internet giants, which have been in Brussels’ cross-hairs for years. Restrictions on the kinds of information that can cross borders, data localization requirements, and other onerous rules to “protect national security,” which also happen to burden the U.S. business models, could be imposed.

Likewise, Beijing already considers China’s reliance on western technology to be a national security threat. In fact, China already has a National Security Law and a Cybersecurity Law, both of which extend unspecified and unpredictable authorities to the Chinese government to inspect U.S. information and communications technology products, and to compel U.S. companies to “share” their technology. Those practices are among the subjects of the Trump administration’s highly provocative Section 301 investigation. If China was previously on the defensive about those allegations, any inclination toward changing those policies it may have had has probably waned as a result of the U.S. precedent to invoke national security to rationalize protectionism. Now, Beijing has another option.

Of course, the significance of these national security tariffs to the future of the trading system will pale in comparison to any U.S. measures imposed unilaterally pursuant to the Section 301 investigation of China. As a WTO member, the United States cannot be judge, jury, and executioner. The United States can bring its evidence of Chinese violations to the WTO and ask for a ruling as to whether China is, in fact, in violation. If China is found to be in violation and it fails to bring its policies or practices into conformity with the WTO agreements it is violating, then the United States can pursue retaliation.

But Trump is said to be seeking a list of retaliation targets totaling somewhere between $30 and $60 billion worth of Chinese imports and is reportedly intent on pulling the trigger. Such a blatant violation of WTO rules perpetrated by the United States would signal the world that Trump is not interested in the rule of international trade law, but in asserting U.S. sovereignty at all costs. And the costs will be huge, as other governments follow suit and the once predictable global trading system descends into a wild west of anything goes lawlessness.

March 16, 2018 9:01AM

One Week Left To Get Exemptions from the Steel/​Aluminum Tariffs

With all the media coverage of President Trump's steel/aluminum tariffs, it would be easy to assume they are in effect already, but they don't actually start until next Friday, March 23. This is from the Presidential proclamation relating to steel:

Except as otherwise provided in this proclamation, or in notices published pursuant to clause 3 of this proclamation, all steel articles imports specified in the Annex shall be subject to an additional 25 percent ad valorem rate of duty with respect to goods entered, or withdrawn from warehouse for consumption, on or after 12:01 a.m. eastern daylight time on March 23, 2018.

The "except as otherwise provided" qualifier is important here. There is still time to narrow the scope of the tariffs significantly, both through specific product exclusions and broader country exemptions. Canadian and Mexican steel has already been exempted. And President Trump had a tweet suggesting Australia would be exempt: "Working very quickly on a security agreement so we don’t have to impose steel or aluminum tariffs on our ally, the great nation of Australia!" But what about other U.S. trading partners? The EU, Brazil, South Korea, and Japan, among others, are all going to be making their case to the U.S. Trade Representative, who is running these negotiations.

The criteria for exemptions for these countries is as follows: "Any country with which we have a security relationship is welcome to discuss with the United States alternative ways to address the threatened impairment of the national security caused by imports from that country." That's obviously pretty vague. What exactly is the U.S. looking for in these negotiations? Maybe it is looking for increased military spending by our allies. Maybe it is looking for support for the U.S. position on addressing global steel overcapacity and other trade issues. Maybe it is looking to convince these countries to "voluntarily" reduce their steel and aluminum exports to the U.S., which is an arrangement used in the 1980s, when current U.S. Trade Representative Robert Lighthizer last worked for USTR. But today's trade world is very different from the 1980s, and it's not clear that any of our trading partners are going to be willing to cave in to U.S. pressure.

Perhaps the best outcome we can expect here is some face-saving deals, in which other countries agree to do things they were already going to do, the U.S. grants the exemptions, and everyone can declare victory. All of this is far from ideal, but having gotten ourselves into this, it may be the best way out. Otherwise, if these tariffs are actually imposed on all of these countries, there will be significant harm to the domestic economy and the very real prospect of retaliation (by the EU in particular, but possibly others as well). 

The next week will be a mad dash of diplomacy to try to salvage something out of this mess.

March 15, 2018 4:42PM

Ronald D. Rotunda, R.I.P.

I am saddened to report that Professor Ronald D. Rotunda died unexpectedly yesterday of pneumonia after a brief hospital stay. He was 73. A distinguished professor of law, Ron, as he was known to his friends, was a visiting senior fellow in constitutional studies at Cato during the 2000 calendar year. He remained a Cato senior fellow in constitutional studies until 2008 and served on the editorial board of the Cato Supreme Court Review from its inception in 2001 until 2008. After leaving Cato in 2000 he joined the faculty of the George Mason University School of Law. In 2008 he joined the faculty of Chapman University’s Dale E. Fowler School of Law where he was the Doy and Dee Henley Chair and Distinguished Professor of Jurisprudence at the time of his death.

A graduate of Harvard College and the Harvard Law School, Ron was for much of his career the Albert E. Jenner, Jr. Professor of Law at the University of Illinois College of Law. I first met him in the early 1990s when the college’s Federalist Society chapter invited me to speak there. Ron was the chapter’s faculty advisor. He picked me up from the airport in his vintage Rolls Royce. Ever the showman, he was famous for his colorful collection of bow ties, matching his colorful character. But beneath the show was a serious scholar of immense erudition. He is perhaps best known for his five-volume Treatise on Constitutional Law: Substance and Procedure, co-authored with John E. Nowak, but his scholarship covered many legal fields. His popular writings have appeared in the Wall Street Journal, the Washington Post, and beyond, and many of those works have been translated into several languages. His c.v., detailing his many appointments and honors, runs some 55 pages.

During his brief year with us at Cato, Ron was a valued member of our small Center for Constitutional Studies team and a mentor for all. We were in the early stages then of developing our now highly-regarded amicus brief program. I recall in particular a brief we filed with the Supreme Court on January 1, 2001, in Solid Waste Agency of Northern Cook County v. U.S. Army Corps of Engineers, where we offered the Court a reading of the Commerce Clause that the Framers would have recognized. While moving in that direction, the Court did not go that far, but we were pleased at least that we had shown the flag and that we emerged on the winning side. Well before that, however, Ron had contributed a chapter to the book that Ed Crane and I edited in 1994, The Politics and Law of Term Limits. And Ron contributed another chapter to my edited collection, The Rule of Law in the Wake of Clinton, which Cato published in 2000. At our website, you will find more of Ron’s contributions to Cato’s work. We will miss him. May he rest in peace.

March 15, 2018 2:06PM

You Ought to Have a Look: Lukewarming the News

Scientific American, which is quite reliably alarmed by the prospects of climate change, showed signs of moderation this week in an article highlighting the work of the ecomodernists. The ecomodernists acknowledge that man-made climate change is occurring, but believe humans are already (and will continue) decoupling their well-being from environmental destruction—meaning every day that passes, human flourishing requires less pollution and resources. Though not libertarians, they are spot-on in regards to climate change being a minor overlay in a world increasingly insulated from the vagaries of nature due to market forces. The piece, titled Should We Chill Out about Global Warming?, is answered with an unqualified YES! from those of us at the Center for the Study of Science.

One of their ecomodernist peers, journalist Will Boisvert, recently pondered in a piece, “How bad will climate change be?” He has a voluminous response that’s worth a read, which he quickly summarizes as “Not very.” He went on to note what many of us have been saying for years—as long as there has been capital for innovation and civil order, we’ve been adapting to climate change, and will continue to do so. Boisvert neatly skewers horseman after horseman of the apocalypse—drought, hunger and heat, and notes our increasingly clean and efficient energy technology.

In a similar vein, Nature Communications published an article by Yousuke Sato (and coauthors) from Nagoya University, showing the controversial “indirect cooling effect” of particulates that often go in the air along with carbon dioxide is much smaller than what’s in the climate models. The models are generally tuned with these aerosols to match the climate history of the 20th century, where a large warming occurs before much carbon dioxide is emitted, followed by a slight cooling for several decades as emissions ramped up. Because the aerosol cooling is large, the warming they counter must be huge—which is why in recent decades the models predict so much more warming in the lower atmosphere than is being observed.

The largest projections of future warming are driven by an emissions scenario we recently debunked, known as RCP 8.5. We noted that researchers at the University of British Columbia recently found there is simply not enough coal (recoverable or otherwise) to make these outcomes physically possible. In the Wall Street Journal, the Manhattan Institute’s Oren Cass takes a similar look at the failure of worst-case scenarios to account for human ingenuity and adaptation—calling them “laughably bad economics.” It’s based on a detailed report you can download here.

With these recent developments in science, economics, and popular perception of climate outcomes, we’re hoping the Trump Administration will take the reins of the Fourth National Climate Assessment—which was largely written in the last administration—and steer it back onto a realistic course. It’s getting ready for publication, and we submitted extensive suggestions on how to make it more accurately represent the best and newest science.

March 14, 2018 7:17PM

Won’t You Save Me First Amendment Grief, San Francisco?

San Francisco bans signage advertising “off-premises” activity, but not “on-premises” advertising. That is, if you own a liquor store, you can advertise the beers you have for sale, but not the upcoming beer festival you’re sponsoring across town.

But advertising is a form of speech protected by the First Amendment, and if the government wants to places limits on that speech, it must adhere to the constitutional limits on its own power. A company called Contest Promotions has challenged this law. The U.S. Court of Appeals for the Ninth Circuit ruled in the city’s favor, so now the company asks the Supreme Court to take its case.

At the core of the First Amendment is a principle of non-discrimination. That is, the government can place certain limits on speech in public places, but it may not preference some speakers over others based on the speech’s content or viewpoint. The content-based distinction San Francisco makes is precisely the sort of discrimination the constitution doesn’t abide. Unfortunately, the Supreme Court has made something of a muddle in this area. In Central Hudson v. Public Service Commission (1980), it set forth a special test for what is “commercial” speech, such as advertising, which it deemed less protected than other speech. It did this presumably to be able to better police fraud—which isn’t protected regardless—but that led to an unworkable standard and a litigation mess that lower courts have been unable to clean up.

Cato has now joined the Pacific Legal Foundation to file a brief in support of Contest Promotions, urging the Court to take up the case and reconsider its blunder in Central Hudson. The Court should dispense with a bifurcated First Amendment and treat commercial speech as on par with all other forms of expression. Moreover, it should clarify the boundaries of what does and doesn’t pass muster as a content-based restriction. Such distinctions require the most rigorous review (what lawyers call “strict scrutiny”), and the government should not be able to dodge the constitutional limits on their power by appealing to vague distinctions like “commercial” versus “noncommercial” speech.

The Supreme Court should put Contest Promotions v. San Francisco front an center on its docket in big, neon letters, and put an end to the jurisprudential murkiness in this area once and for all.

March 14, 2018 3:12PM

Facebook and the Future of Free Speech

Britain First is a far-right ultranationalist group” hostile to Muslim immigrants in the United Kingdom. They are active online with significant consequences for their leaders if not for British elections. The leaders of Britain First, Paul Golding and Jayda Fransen, were incarcerated recently for distributing leaflets and posting online videos that reflected their extreme antipathy to Muslims. Fransen received a 36 week sentence, Golding 18 weeks. Britain First was banned from Twitter in late 2017. Now Facebook has taken down both the official Facebook page of the group and those of its two leaders.

Like many European nations, Great Britain has much more narrow protections for freedom of speech than the United States. The United States does not recognize a “hate speech” exception to the First Amendment. Great Britain criminalizes and sanctions such speech. This case is much more interesting, however, than this familiar distinction. The Britain First takedown offers a glimpse of the future of speech everywhere.

The leaders of Facebook did not just wake up on the wrong side of the bed and decide to take down Britain First’s page. Its official statement about the ban says from the start: “we are very careful not to remove posts or Pages just because some people don’t like them.” In this case, the page violated Facebook’s Community Standards against speech “designed to stir up hatred against groups in our society.” The statement does not say which posts led to the ban but The Guardian reports they “included one comparing Muslim immigrants to animals, another labelling the group’s leaders ‘Islamophobic and proud,’ and videos created to incite hateful comments against Muslims.” I understand also that Facebook gave due notice to the group of their infractions. That seems plausible. Almost three months have passed since Twitter banned Britain First. Perhaps Facebook eventually concluded Britain First had no intention of complying with their rules.

You might think Facebook has violated the freedom of speech. But that’s not the case. The First Amendment states that Congress (and by extension, government at all levels) “...shall make no law abridging the freedom of speech.” If the United States government had banned an America First! website, the First Amendment would be relevant. But Facebook is not the government even though they must govern a platform for free speech. But that platform is owned by Facebook. They can govern it as they wish. Most likely they will govern it to maximize shareholder value.

Imagine public officials applied the First Amendment to Facebook. They would be required to offer their service to groups like Britain First regardless of its effects on other customers or returns to shareholders. In this hypothetical case, wouldn’t “free speech” lead to a taking of private property under the Fifth Amendment? Most, if not all, libertarians would agree that Facebook is well within its rights in this matter.

Some conservatives and Republicans are complaining that Facebook and Google enjoy monopolies that have given them control over online speech. They believe that these companies are imposing the views of their employees and excluding critics of the left from their platforms. Some conservatives say the tech companies should be taken over and governed as public utilities. They are calling for something like a Fairness Doctrine for online speech. That’s a bad idea, but the question remains whether Britain First has alternatives to Facebook.

They do. You need only search for Britain First and Gab to find the links. Indeed, Facebook appears to have a new Britain First official page.

divFacebook faces some challenges here. They have values and rules that reflect both the commitments of their leaders and their business model. However, if their interpretation of acceptable speech becomes as narrow as the definitions now dominant at some universities, political (and perhaps business) troubles will follow. No one should welcome such troubles for such a successful enterprise. But such troubles can best be avoided by being “very careful not to remove posts or Pages just because some people don’t like them” and taking steps to maximize the perceived legitimacy of their moderation decisions.

Everything I have said to this point assumes Facebook decided to ban Britain First for business or other reasons. But British Members of Parliament severely criticized Facebook late in 2017 for hosting extreme speech. Perhaps British officials successfully bullied Facebook into taking down the Britain First page. If so, we are getting a glimpse at an ugly future in which government cracks down on speech through private intermediaries thereby (in the United States) bypassing the protections offered by the First Amendment. This danger is the thorn in the rose of Internet speech.

In this case, I am skeptical that Facebook has given in to government threats. As noted, the takedown came three months after the official criticism. By waiting this long to act, Facebook appears to have withstood criticism from both the British government and private citizens.

Facebook’s actions suggest how to keep government out of political speech. Set and publicize clear standards for your platform and then enforce them fairly. When they are applied, state your reasoning publicly, so high profile cases can illustrate the precise contours of more general standards. To that I might add: engage your most persuasive critics thereafter and seek precedential coherence for your common law of content moderation.

Of course, none of this will matter unless the leadership of Facebook (and other tech companies) are willing to stand up to government bullies who seek a way around the First Amendment. Nothing is going to be more important in the days to come than making sure the governance of online speech is truly private.