Archives: 10/2018

The Trump Administration’s Latest Trade Move

The latest attack on international institutions by the Trump administration distinguishes itself by being quite obscure: It’s about postage. It also may have more of a basis than most of the administration’s complaints about trade. 

The administration is concerned about the Universal Postal Union (UPU), a specialized agency of the UN. The UPU was established by the Berne Treaty of 1874 and became a UN agency in 1948. The administration has taken issue with the “terminal dues” rates issued by the UPU, under which, the administration argues, the United States has been subsidizing the shipping costs of foreign suppliers in certain countries, including China, when they send goods to the United States. The basic story is as follows (some good background is here).

When companies or individuals ship goods abroad, they use their domestic postal service to send the item. When that item arrives in the foreign country, the postal service of the shipping country makes a payment to the postal service of the destination country in the form of “terminal dues.” These “terminal dues” are set by the UPU and are designed to cover the destination country’s portion of the transportation costs – basically an agreed upon reimbursement rate to transport the item to the recipient.

The Trump administration’s concerns relate to the “terminal dues” rates set through the UPU for less wealthy countries, such as China. These countries’ rates are set very low, and do not necessarily cover the actual costs of shipping (and are sometimes significantly less than the rate American companies pay to ship within the United States). What this means in practice is that American taxpayers are sometimes subsidizing the transport costs of American companies’ foreign competition. It appears, then, that there is some legitimacy to the administration’s concerns about unfairness. 

Of course, as is often the case with the Trump administration, its approach to the problem is confrontational and perhaps risks inflaming tensions. The administration has, yet again, decided to use a threat of withdrawal from a treaty as a negotiating tactic, taking steps to withdraw from the UPU. Perhaps the withdrawal threat will force quick action to change the fee structure at the UPU, although there are some risks. Pulling out of the treaty would give the United States the flexibility to set our own transport rates, but it would also mean that we lose the power to stop others from charging us higher rates in return, while doing away with a mechanism that was designed to reduce, and streamline, transaction costs. In essence, the administration’s approach could lead to a postal “trade war.”

Are there alternative approaches? A Bloomberg editorial board piece sets out what they think may be a workable solution: having the administration look for a compromise on a postal rate during the broader trade negotiations with China. Of course, there would have to be some negotiations going on for this to work.

If it weren’t for all of the other aggressive trade actions taken by the Trump administration, this issue might be more easily addressed. Because it is part of a larger package of contentious moves, it might get lost in the mix of all the real and perceived trade slights the administration is complaining about. In calmer times, this might be a simpler problem to fix.

Thanks to Logan Kolas for research assistance with this post.

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Scottish Banks and the Bank Restriction, 1797-1821, Part 2

In my opening post about Scottish banks’ suspension of specie payments, I explained that, although the suspension was technically illegal, it failed to provoke any lawsuits in part because it was no less in the interest of many Scottish citizens, and Scottish bank creditors especially, than it was in that of Scottish bankers themselves. Rather than sue their banks, large numbers of prominent Scotsmen resolved publicly to make and receive payments in notes issued either by the Bank of England or by the Scottish banks themselves.

But while many Scots may have been willing, at least grudgingly, to accept bank notes rather than specie in payments, it doesn’t follow that none were harmed by the suspension. In today’s post I’ll consider just what the costs were, and who bore them. I’ll then turn in my third and final post to considering whether these costs should be regarded as a black mark against the Scottish bankers, and as a reason for denying that the Scottish free banking episode serves as a good example of the advantages of unregulated banking.

The Migrant Caravan Probably Doesn’t Contain Many Criminals

One concern about the caravan of Central American migrants making its way to the U.S. border is that it may contain criminals. Although we don’t know the identities or criminal histories of the actual people in the caravan, we can get an indication by looking at estimates of the incarceration rates of immigrants in the United States who come from the Central American countries where the caravan originated.

Hondurans are likely the largest contingent in the caravan. The Honduran incarceration rate in the United States was 1,130 per 100,000 Hondurans in 2016 (Figure 1). The incarceration rate of native-born Americans is about 25 percent higher than for those born in Honduras at 1,498 per 100,000 natives. In 2016, the incarceration rate for immigrants from all of Mexico and Central America is about 35 percent below that of native-born Americans. 

Figure 1: Incarceration Rate by Nationality of Birth Per 100,000, Ages 18-54, 2016

Figure 1 controls for the size of the population to create a meaningful comparison of incarceration rates between the national-origin groups. For instance, the incarceration rate for American natives is 1,498 per 100,000 American natives and the Mexican incarceration rate is 996 per 100,000 Mexican-born residents in the United States. The incarceration rate for all immigrants from Mexico and Central America was 970 per 100,000 immigrants from that part of the world.    

The data for the estimates in this blog come from the 2016 American Community Survey (ACS). These are estimates from the group quarters population for those aged 18-54. Figure 1 is an estimate because not all inmates in group quarters are in correctional facilities. Most inmates in the public-use microdata version of the ACS are in correctional facilities, but the data also include those in mental health and elderly care institutions and in institutions for people with disabilities. As a result, we narrowed the age range to 18-54 to exclude most of those in mental health and retirement facilities. 

Commenting on the likely criminality of members in the migrant caravan based on the incarceration rates of their co-nationals in the United States is not fully satisfying. People in the migrant caravan could be more crime-prone than their fellow countrymen in the United States, for instance. However, the incarceration rates of their fellow countrymen in the United States at least provide some evidence to cut through the political statements made without any evidence.    

Most of the members of the caravan will likely seek asylum in the United States while the others will try to enter unlawfully. The government will vet the asylum-seekers to identify serious criminals and national security threats. However, it is impossible to vet those who enter as illegal immigrants – which is one of the better arguments for allowing them to enter legally as they would then be subject to vetting.

Special thanks to Michelangelo Landgrave from crunching many of the numbers for this post.

C-SPAN: Health Care and Campaign 2018

This weekend, I appeared on C-SPAN’s Washington Journal alongside Families USA’s Frederick Isasi to discuss “the role of health care  in the 2018 mid-term elections.” Specific topics were covered include Cato’s latest health care book, Overcharged: Why Americans Pay Too Much For Health Care; the recent vote by Senate Democrats that would have thrown patients with preexisting conditions out of their health plans and left them with no coverage; how ObamaCare’s preexisting-conditions provisions are unpopular and reduce quality; how markets make access more secure for the sick than employer-sponsored plans; the benefits and costs of short-term plans; the Veterans Health Administration; the single-payer two-step; and how ObamaCare supporters want to take away your freedom to choose your health benefits. 
 

Prepare yourself for the greatest 55 minutes and 30 seconds of your life.

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Policing High-Crime Areas: A Matter of Trust

Last week, NPR.org published a story entitled “D.C.’s Aggressive Confiscation of Illegal Guns Leaves Residents Feeling Targeted.” The report explains how the D.C. Metropolitan Police Department (MPD) is particularly adept among major cities at getting illegal guns off the streets, but a recent uptick in gun violence has ramped up efforts of their Gun Recovery Unit (GRU). The aggressive tactics of the GRU—using what locals call “jump-out cars” to stop and search individuals for weapons—contribute to the longstanding animosity between some community residents and the police.

While it is true that, per capita, D.C. leads other cities in gun confiscation, the high number of recovered weapons only tells part of the story. That is, what MPD did and the numbers of stops they made to recover that many weapons are part of a larger problem of harassment and distrust in the community. The MPD is quick to point to D.C.’s 44 percent increase in homicides since last year as the justification for their policy, but it’s uncertain as to whether “jump-out” tactics will help at all.

Judge Thapar Can Handle the Truth about the Fourth Amendment and Due Process

Before President Trump nominated now-Justice Brett Kavanaugh to fill Justice Anthony Kennedy’s Supreme Court seat, I wrote a piece about Judge Amul Thapar, a top contender for the seat who may yet find his way onto the Court. Thapar is on the Cincinnati-based U.S. Court of Appeals for the Sixth Circuit and is a judge who has displayed a deep understanding of our founding principles. He’s also a clear writer with a fondness for movie references. Two of his recent opinions illustrate his commitment to individual liberty and due process through a nuanced, contextualized view of the Constitution.

Morgan v. Fairfield County concerned a “knock and talk,” where county policy involved forming a police perimeter around a suspect’s house while one officer attempts to talk to the residents. One of the perimeter officers behind the house saw marijuana plants on a balcony, pursuant to which the police eventually secured a search warrant. The majority found that the county’s “knock and talk” policy directed the officers to conduct a warrantless search – that forming the perimeter involved invading the “curtilage” of someone’s house – and so the county could be held liable for a Fourth Amendment violation (though the officers had qualified immunity because they were just following standard policy).

Judge Thapar dissented in relevant part, arguing that while the officers did have qualified immunity if all they were doing was preserving officer safety or preventing the destruction of evidence, the county’s policy itself did not direct the officers to conduct a search. Accordingly, there was no constitutional violation unless the police actively searched while they formed their perimeter. Looking at the history of the Fourth Amendment, Thapar defined a search as a “purposeful investigative act.” He argues that the Supreme Court muddies Fourth Amendment protections by describing them as relating to a reasonable expectation of privacy, rather than to the reasonableness of a search. That gives too much wiggle room to police and courts alike, as judges struggle to define subjective expectations of privacy. Thapar maintains that the question should instead be whether officers engaged in a purposeful investigative act – and indeed would have remanded the case for a determination of that issue. This would simplify the analysis and allow courts to apply the original meaning of the Fourth Amendment to the facts before them. 

Trump’s Proposal for Drug Reimportation Lite

The Wall Street Journal takes the Trump administration to task this morning, and rightly so, over a proposed rule from Health and Human Services to impose price controls on what Medicare Part B pays for certain drugs. The rule would set the prices HHS pays at 126% of what other developed countries pay, down from 180% today.

Why do Americans pay so much more for drugs than foreigners? That’s the question that’s driving this proposal. The simple answer is that compared to foreign countries with their price controls under single-payer health systems, the U.S. still has a relatively free drug market. But the issues underlying that answer are anything but simple. In recent years they’ve swirled around proposals to end U.S. restrictions on “reimporting” cheaper drugs from Canada and Europe, which would amount to reimporting foreign price controls, critics rightly argue, and hence to reducing incentives to invest in years of expensive research and development. I’ve addressed those issues in detail in a 2004 Cato Policy Analysis and in the Wall Street Journal here and here. This new proposal is more of the same, in different garb.

In a nutshell, the miracle drugs that have so revolutionized modern medicine don’t come cheaply. On average it takes a billion dollars and 15 years of research and development to meet FDA safety and efficacy requirements, which most new drugs fail. But once a drug succeeds, the second pill costs pennies to produce, which is why patents are so crucial, failing which no one would invest in such risky ventures. When companies look at the world, however, they see socialized systems imposing price controls—except in America. So they charge market prices here (half the world market) and take what they can get abroad. What that means, of course, is that Americans pay the lion’s share of R&D costs while foreigners get drugs “on the cheap,” and therein lies the political problem here and the call for reimporting “cheaper” drugs from abroad.

It’s more complicated still, however. Given different levels of demand abroad, companies segment markets and price differentially. But that means they have to guard against not only reimportation but “parallel markets”—local vendors in low-price markets reselling to high-price markets at a discount—or all the drugs will end up in low-price markets, only to be resold to high-price markets, undercutting companies’ profit-making venues. They can try to preserve their market segmentation with no-resale contracts and supply limits. But those contracts are illegal in Europe from a mistaken belief that they’re anti-free trade, which is why there’s a thriving parallel market there. And since proposals in Congress to lift the ban on reimportation here have included bans on no-resale contracts and supply limits abroad, companies have understandably fought them.

This new HHS proposal is not as far-reaching as the earlier reimportation proposals, but the implications for future drug R&D investment are the same. As the Journal writes, “any investor who wants to bankroll the cure for Alzheimer’s is already staring at a very small chance of success—and the Trump HHS proposal adds another potential limit on return,” likely driving investment “into less difficult drug categories” or into other ventures altogether. Government funded drug R&D might not then be far behind. That would further politicize the development of drugs, much like European formulary limits do by rendering unavailable many of the modern miracle drugs we Americans enjoy.

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