Archives: 05/2018

Tax Competition in Action

A Wall Street Journal story today captures the power of interstate tax competition:

One of the oldest names on Wall Street is moving to one of the fastest-growing cities in the South, reinforcing a recent shift in finance jobs to cheaper parts of the U.S.

AllianceBernstein Holding LP plans to relocate its headquarters, chief executive and most of its New York staff to Nashville, Tenn., in an attempt to cut costs, according to people familiar with the matter. That largely ends a 51-year presence in the nation’s traditional finance capital.

… In a memo to employees, AllianceBernstein cited lower state, city and property taxes compared with the New York metropolitan area among the reasons for the relocation. Nashville’s affordable cost of living, shorter commutes and ability to draw talent were other factors.

… Wall Street’s migration began after the last financial crisis as banks and money managers looked to trim expenses or take advantage of lower tax rates. Hiring in lower-cost regions can mean millions of dollars in annual savings.

A new tax plan passed last year by Congress also reduced tax breaks that many in the New York region heavily lean on, such as the deductibility of mortgage interest and state and local tax deductions.

Tennessee “is low cost in every respect compared to New York” including housing and transportation, said William Fox, an economist and director of the University of Tennessee’s Boyd Center for Business and Economic Research.

… AllianceBernstein, which manages $550 billion in assets, considered as many as 30 cities as part of its search, according to part of an internal memo seen by the Journal, and analyzed factors such as housing, education, weather and cost of living.

Has Ray Ozzie Solved the “Going Dark” Problem?

Has the thorny problem of providing law enforcement with access to encrypted data without fatally compromising user security finally been solved?  That’s the bold thesis advanced by a piece at Wired that garnered an enormous amount of attention last week by suggesting that renowned computer scientist Ray Ozzie, formerly a top engineer at Microsoft, had developed an “exceptional access” proposal that “satisfies both law enforcement and privacy purists.”  Alas, other experts have been conspicuously less enthusiastic, with good reason.  It’s worth saying a few words about why.

In one sense, the attention garnered by Ozzie’s proposal, which he’s dubbed “CLEAR,” is somewhat odd: There isn’t much here that’s fundamentally new.  A few novel wrinkles notwithstanding, Ozzie’s proposal is a variant on the very old idea of “key escrow,” which involves device manufacturers holding on to either a master key or a database of such keys that can be used to decrypt data at the request of law enforcement.  The proposal is limited to providing “exceptional access” to data “at rest” on a device, such as a smartphone, in the physical custody of law enforcement.  Ozzie’s suggests that when a user creates a passcode to encrypt the data on a device, the passcode itself should be encrypted using the device manufacturer’s public key, which is hardcoded into the cryptographic processor embedded in the device.  Then, when law enforcement wishes to access such a device in their possession, pursuant to a valid court order, they activate a special law-enforcement mode which permanently renders the device inoperable (or “bricks” it) and displays the encrypted user passcode.  This can then be sent to the manufacturer, which, upon validating that they’ve received a legitimate request from a real law enforcement agency with a valid warrant, uses their own private key (corresponding to the public key baked into the phone) to decrypt the original passcode and provide it to the requesting agency.  

In its broad outlines, this isn’t fundamentally much different from proposals that crypto experts have considered and rejected for decades.  So why has CLEAR (and Wireds article on it) generated so much interest?  A substantial part of it simply comes down to who’s offering it: Ozzie has a stellar reputation, and is offering a solution where most security experts have simply been urging governments to abandon the idea of building a police backdoor into cryptosystems.  This feeds into the seemingly widespread conviction among law enforcement types that computer scientists are really just ideologically opposed to such backdoors, and stubbornly refusing to work on developing technical solutions.  Many, moreover, may not really understand why experts tend to say such backdoors can’t be built securely, and therefore believe that Ozzie’s proposal does represent something fundamentally new: The “golden key” that all those other experts pretended couldn’t exist.  But, of course,  cryptographers have long known a system along these lines could be built: That was never the technical problem with law enforcement backdoors. (There’s perhaps some fairness to the complaint that privacy advocates haven’t always been sufficiently clear about this in arguments aimed at a mass audience, which may contribute to the impression that Ozzie’s proposal represents some significant breakthrough.)  Rather, the deep problem—or rather, one of several deep problems—has always been ensuring the security of that master key, or key database. 

The Pressing Need for Meaningful Prosecutorial Accountability

From 2004 to January 2013, Massachusetts state chemist Sonja Farak used drugs that she stole from or manufactured in an Amherst crime lab, causing thousands of people to be wrongfully convicted of drug crimes based on unreliable evidence. To make matters worse, prosecutors from the Massachusetts Attorney General’s Office (“AGO”), have engaged in persistent misconduct to cover up and minimize the scope of the scandal. Former Assistant AGs Kris Foster and Anne Kaczmarek committed “fraud on the court” by withholding exculpatory evidence, and misleading the superior court into finding — incorrectly — that Farak’s drug use began only in 2012, rather than all the way back in 2004. Moreover, the AGO itself consistently failed to investigate the scope of this misconduct, failed to correct false statements made to the courts, and failed to notify the defendants affected by the scandal.

To address and rectify this massive degree of prosecutorial misconduct, the ACLU and a group of public defenders filed a petition with the Massachusetts Supreme Judicial Court (“SJC”), asking the SJC to dismiss the convictions of all defendants whose samples were processed by Farak’s lab, and also to issue standing orders designed to prevent similar misconduct in the future, and grant issue monetary sanctions against the AGO. The Cato Institute, along with the NYU Center on the Administration of Criminal Law, has filed an amicus brief in support of this petition.

Prosecutorial misconduct — especially the unlawful withholding of exculpatory evidence from the defense — is rampant across the country, yet prosecutors themselves are hardly ever held accountable. Internal discipline does little to nothing, criminal prosecutions are incredibly rare, and — thanks to the Supreme Court’s invention of the doctrine of absolute immunity — prosecutors can never be held civilly liable, even for the most egregious, willful misconduct. This is all the more troubling because prosecutors wield enormous power in our criminal justice system, especially given the immense leverage they can bring to bear on defendants to coerce them into accepting pleas. In light of this background, it is crucial for the SJC to issue broad relief — in particular, to issue standing orders that compel pre-plea compliance with the disclosure obligations of Brady v. Maryland, and that provide for meaningful discipline and sanctions if prosecutors fail to meet these obligations.

Did the Kennedy Tax Cuts Cause Rising Inflation?

Wall Street Journal columnist Greg Ip, among others, has repeatedly warned that “this year’s tax cut may overheat an economy already near full employment.”   

This equivocal prediction relies on a theory that inflation is caused by combining low unemployment and large structural (cyclically-adjusted) budget deficits. Inflation is assumed to be a national rather than global phenomenon, and its cause is assumed to be fiscal rather than monetary. 

To support this fiscal theory that tax cuts are inflationary, the evidence Greg Ip and others have always turned to is this brief sample from U.S. history, 1965 to 1967:

“In 1966, inflation, which had run below 2% for nearly a decade, suddenly accelerated to over 3%. Some of the circumstances echo the present: unemployment had slid to 4%, taxes had been cut and federal spending for the Vietnam War and Lyndon Johnson’s ‘Great Society’ programs was surging.”

This legendary “guns and butter” explanation suggests inflation “suddenly accelerated” in 1966 largely because “taxes had been cut” thus supposedly pushing budget deficits much higher than prudent at a time of 4% unemployment. The Fed’s reluctance to even keep the fed funds rate barely above the known year-to-year inflation trend is barely mentioned. Treasury dollar exchange rate policy, including slipping ties of coins to silver and of the dollar to gold, is ignored. 

In February 1964, the Kennedy/LBJ tax cut reduced all marginal tax rates by about 30% over two years, with the top rate falling from 91% to 70% by1965 and the lowest rate from 20% to 14%.  Corporate tax rates were also reduced, particularly for small firms.

Contrary to Mr. Ip, the 1964-65 “tax cuts” can’t possibly explain why inflation “suddenly accelerated” in 1966, because tax revenues in 1966-67 were rising rather than falling, and budget deficits were tiny.

As a percentage of GDP, federal revenues rose from 16.4% in 1965 to 16.7% in 1966 and 17.8% of GDP in 1967 (higher than any year from 1956 to 1963). But percentages of GDP understate the real gain, because real GDP was rising so fast.  

Measured in constant 2009 dollars to adjust for inflation (from Table1.3 of the Budget’s Historical Tables), real federal revenues had long been virtually stagnant before the Kennedy tax cuts, rising only 7.5% between 1952 and 1963 –from $657.7 billion in 1952 to $707.1 billion in 1963.  

After tax rates came down, by contrast, real revenues rose by 29% in just four years.  Real revenues rose to $735.6 billion in 1964, $752.5 billion in 1965, $819.8 billion in 1966, $911.9 billion in 1967.  After a brutal 10% surtax was added in June 1968, real revenues initially fell to $904.6 billion (17% of GDP), though revenues briefly surged in the first half of 1969.

The budget deficit in 1966 was a trivial 0.5% of GDP –down from 0.8% in 1963 (before the tax cuts), and still just 1% of GDP in 1967.  To properly judge the alleged “fiscal stimulus” theory, however, we need to adjust deficits for the state of the economy by removing “automatic stabilizers” that enlarge deficits in recessions: Revenues naturally fall with falling payrolls and profits, while unemployment and other means-tested benefits rise.

Show Me the (Education) Money, Part III!

With “Red for Ed” walkouts continuing in Arizona, and ongoing discussion about how well public K-12 schooling has been funded nationwide, here’s part three of our impromptu series on spending. As promised last week, this post presents the total spending charts for the five states that have been most in the news over funding: Arizona, Colorado, Kentucky, Oklahoma, and West Virginia. Please see the previous posts for discussions of national spending levels and data sources. The data here are total, inflation-adjusted, per-pupil expenditures on public elementary and secondary schools.

Arizona

Things are looking down in AZ, though with a similar pattern to the nation overall: Spending generally rising before the Great Recession—total expenditures peaked in 07-08 at $11,141—then dropping afterwards. Unlike much of the nation, however, for the entire period total spending in Arizona fell, from $9,837 per pupil to $8,697. And it has a somewhat pronounced spending valley before the recession.

Where were the cuts? While all of the various types of support services saw increases for the overall period—and some saw increases even after the recession—instructional spending, which most people would probably consider the nucleus of what schools do, fell 6 percent for the full period, or $281 per student. The biggest loser was capital outlays, which dropped 58 percent for the period, or by nearly $1,300.

Colorado

Again we see the pattern of overall spending peaking in 07-08, then falling. We also see a loss from the beginning of the period to the end. But Colorado’s decline is much smaller than in AZ; only $86, or a less-than 1 percent dip.

For the overall period, only two sub-categories of spending saw cuts: capital outlays, which dropped 34 percent, and other support services, which fell about 22 percent. Instructional spending rose by roughly 2 percent and even after the recession fell only 14 percent.

The Medicaid Mess

DownsizingGovernment.org has released a new study on Medicaid. The piece discusses basic problems with the program, examines the rapid rise in spending, and proposes reforms to reduce costs and improve quality.

Medicaid is a joint federal-state program that funds medical services and long-term care for people with moderate incomes. It is one of the largest and fastest-growing items in the federal budget, at almost $400 billion a year.

State governments administer Medicaid, but most of the funding comes from the federal government. The current funding structure encourages expansion and provides little incentive to control costs. At the same time, the top-down regulatory structure of Medicaid distorts health care markets. The 2010 Affordable Care Act increased Medicaid spending and did not fix the program’s structural flaws.

Policymakers should reverse course and restructure Medicaid to reduce costs. The program should be turned into a block grant, with the federal government providing a fixed amount of aid to each state. That was the successful approach taken for welfare reform in 1996. Fixed grants would encourage states to restrain spending, combat fraud and abuse, and pursue cost-effective health care solutions.

Federal deficits are rising, and health care spending is a major reason why. Reforming Medicaid with a block grant structure would allow federal policymakers to control spending while encouraging health care innovation in the states.

The DownsizingGovernment.org study is here.

Michael Cannon’s study here is also a good introduction to this costly program.

Maintaining Peace Is the End, Denuclearization Is the Means

Demonstrating the capacity to surprise, North Korea’s Kim Jong-un acted like a modern statesman when he ventured into the Republic of Korea for his summit with South Korean President Moon Jae-in. That doesn’t mean Kim and his heavily armed nation are not potentially dangerous. But after watching Kim in action, as Margaret Thatcher said of Mikhail Gorbachev, “we can do business together.”

Reasons for caution are many. After all, Kim’s father had summits with two successive South Korean presidents, but by earlier this year people were talking about the possibility of nuclear war between the U.S. and North Korea. However, despite the danger of excessive expectations, the diplomatic option first advanced by Kim has shifted the peninsula away from military conflict, at least in the short-term.

Which is a major benefit. As I point out in a new study for Cato, war simply is not an option. It wouldn’t be “over there,” as Sen. Lindsey Graham (R-SC) infamously assured us. Americans would be directly involved, even if the North was not capable of striking the U.S. homeland. In any case, if war resulted, the likely death and destruction on the peninsula, with South Korea a major part of the battlefield, and likely beyond, including Japan, would be far too great to justify the risk.