October 31, 2018 10:21AM

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.

October 31, 2018 9:28AM

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.

Gold versus Paper

The most obvious way in which holders of Scottish banknotes may have suffered from the suspension of specie payments would have been by finding that those notes were no longer worth their par value in gold, that is, that the cost, in banknotes and subsidiary coin, of an ounce of fine gold had risen above £3 17s 10.5d.[1]

It is, moreover, tempting to assume that the suspension led to an immediate and substantial decline in banknotes' value, by eliminating what had been a crucial check against banks' temptation to over-issue paper currency, thereby undermining the public's confidence in it.

In the present instance, however, that's not what happened. Instead the public, reassured by the British government's promise that the Bank Restriction was to be a temporary measure only (and despite repeated extensions of the deadline for resumption), retained its confidence in paper currency to a remarkable degree. For its part the Bank of England continued to regulate its note issues as if specie payments hadn't been suspended at all, no doubt in part because its directors also understood that they might be obliged to resume payments within a relatively short time. Scottish and English country banks in turn continued to be no less disciplined by the scarcity of Bank of England paper than they had formerly been by the scarcity of specie.

The upshot of all this, as can be seen in the chart below, is that a substantial portion of the Bank Restriction era banknotes, and Bank of England notes in particular, did not suffer any substantial loss of value relative to gold. Until 1808 the premium approached 10 percent on one occasion only — during the first quarter of 1801. Generally it was insignificant. (Even during the long stretch, between 1803 and late 1808, when the chart shows a constant 3 percent premium, gold's market price was often lower, the 3 percent premium having been one that the Bank of England alone elected to pay at the time as a matter of its own peculiar policy.) "Month after month had passed away," Henry Adams observes,

not only without bringing depreciation, but even rapidly increasing the stream of precious metals which flowed toward England, so that people were little inclined to dwell upon the dangers or temptations of restriction, and probably overestimated its value as a safeguard against panic.[2]

Media Name: BankofEngland_Gold_Chart-002.png

Following the 1801 spike, gold again fell close to par, from which it varied only insignificantly until 1808, thanks in part to the British governments' willingness to limit its demands upon the Bank for wartime accommodation.

For some purposes, of course, and especially for that of paying for foreign goods, banknotes were no substitute for gold. But in that case, provided the particular need for gold could be demonstrated, the Scottish banks were often prepared to accommodate it, albeit quietly. "There is reason," says William Graham,

to believe that cash [specie] payments were not stopped so entirely in Scotland as they were at the Bank of England. All the Scots banks kept stocks of gold, and it is probable that, notwithstanding the theory that the notes of Scotland turned out the gold, there was more gold in the country than was generally supposed, for the more prudent measures of the banks in their exchanges and issues could not fail to attract some of the gold which was displaced by excessive issues in England.[3]

In any case, gold could always be had in London and, to a more limited extent, in some other English markets, if not for its official price of £3. 17s 10.5d then for something not far from it. In that case, the main disadvantage consisted of transport costs amounting, in the case of shipments to Scotland, of between half and three-quarters of one percent of the purchase price,  plus a fixed insurance fee.

The Great Blockade

In the fall of 1808 circumstances changed radically, thanks mainly to the delayed effects of Napoleon's Continental System, which had closed the European market to British exports two years before. For the first time gold commanded a substantial premium that peaked at over 40 percent during the last half of 1813. Under the circumstances — and the British government's contrary official stance notwithstanding — it would be ludicrous to maintain that the public, whether in Scotland or elsewhere where the suspension remained in effect, continued to regard banknotes as equivalent to gold.[4]

Yet it would be a mistake to assume that the harm done to Scottish and other holders of banknotes and deposits was proportional to the extent to which the price of gold rose above its par value. By 1808 the "paper pound" had been an established fact for more than a decade, making it extremely doubtful that many contracts were still being entered into on the assumption that the payments called for would be made in anything save paper money and token coin. The "promise to pay" that every banknote bore was likewise understood to mean nothing more than a promise to replace one specimen or type of paper money with another.

Under these circumstances, it was only reasonable for merchants and laborers to determine what they regarded to be the right sums, not of gold but of banknotes themselves, to demand in exchange for their merchandise and labor, while allowing for the risk that paper would fall in value relative to gold. And it was likewise only reasonable for persons who deposited either silver or gold in a bank to determine whether the promised return — here, again, understood as a return likely to be paid in paper money  — was sufficient to make the deposit worthwhile. Finally, it was possible for  many who distrusted the paper standard to protect themselves by trading bank money for gold while it was still at or close to par, albeit by sacrificing the interest return banks promised them. In short, although there's no doubt that many were caught short by the unprecedented post-1808 increase in the price of gold, and still greater increase in prices more generally, the overall losses attributable to that increase were presumably far less than those that would have ensued from an otherwise equivalent but immediate devaluation of a previously convertible currency.

Scotland's Small Change Problem

The appreciation of gold after 1808 was, on the other hand, not the only source of anguish stemming from the banks' decision to suspend specie payments. Besides denying bank liability holders ready access to gold at its official price the suspension denied them access to silver; and although gold rather than silver had been Great Britain's de facto medium of account, it was lack of access to the less precious metal that proved particularly troublesome to many bank customers, and especially to merchants and manufacturers of all kinds. For those merchants and manufacturers needed small-denomination media with which to make change and pay their workers; and because banknotes were generally available only in larger denominations, they couldn't serve the purpose even if they were still worth their nominal value in gold.

The problem was especially acute in England, where the smallest notes issued either by the Bank of England at the onset of the crisis were for £5 — a princely amount when you consider that the average wage worker was lucky to bring in 10 shillings a week, or one-tenth that amount! It was mainly owing to their fear of being deprived of means of payment suitable for their everyday needs, including gold guineas and half-guineas as well as smaller silver coins, that the English public panicked upon learning of the restriction. "It is no exaggeration to say," writes William Graham, "that had the Bank of England at this time issued one pound notes…the storm would have been prevented." The panic, he adds, "was purely a scarcity of a suitably small circulating medium in which the public could have confidence, and not a commercial crisis in any sense."[5]

It was only after panic had set in, in March 1797, that the Bank first issued £1 notes, thereby helping to relieve the small-change problem and, ultimately, to bring more specie out of hiding and into its coffers. Eventually English and Welsh country banks, which had also been prevented from issuing notes of £5 or more, were also granted permission to issue £1 and £2 notes, thereby providing further relief. Coin remained necessary, however, for amounts below £1, causing numerous other expedients, including private tokens, to be resorted to in lieu of official silver coins.[6]

In Scotland the situation was better in so far as banks there were already allowed to issue £1 notes when the crisis broke out. Consequently the panic was largely limited from the start to a scramble for smaller-denomination silver coins. In Memoirs of a Banking-House, Sir William Forbes, who was then head of Forbes, Hunter and Co. (forerunner of the Union Bank of Scotland) offers a vivid account of the situation he and other Edinburgh bankers confronted then. The bankers having plastered the city with handbills and notices announcing their decision to suspend, the counting house of Forbes, Hunter and Co. at once found itself

crowded to the door with … fishwomen, carmen, street-porters, and butchers' men, all bawling out at once for change, and jostling one another in their endeavors who should get nearest to the table, behind which were the cashier and ourselves endeavoring to pacify them as well as we could. … [W]e felt the hardship on the holders who were deprived of the means of purchasing with ready money the necessaries of life, as there were no notes of less value than twenty shillings, and it was with the utmost difficulty they could get change anywhere else; for the instant it was known that payment in specie were suspended, not a person would part with a single shilling that they could keep, and the consequence was that both gold and silver specie was hoarded up and instantly disappeared. …Saturday was the day on which we had the severest outcry to encounter; for on that day we had always been accustomed to the largest demand for silver to pay wages.[7]

"The banks," William Graham writes, "were besought to issue smaller notes than for one pound," but were prevented from doing so by the Bank Notes Act of 1765. Instead "recourse was had to tallies, tokens, and sometimes even to tearing a twenty-shilling note into quarters, for which the bankers afterwards freely paid the proportional sum."[8]

But in March Parliament, having relieved the situation in England and Wales somewhat by allowing banks there to issue £1 notes, in turn brought relief to Scotland by suspending the provision of the 1765 Act outlawing Scottish bank notes for less than that amount. Before long, substantial quantities of banknotes worth as little as 5 shillings had fully met Scotland's demand for small change, bringing the Scottish panic to an end, and eventually causing large amounts of silver coin that had disappeared into hoards returning to circulation, if not to Scottish bankers' coffers. According to Sir William Forbes,

It was remarkable…after the first surprise and alarm was over, how quietly the country submitted, as they still [1803] do, to transact all business by means of bank-notes, for which the issuers give no specie as formerly.  The wonder was the greater, because the act of the Privy Council first, and afterwards the act of parliament, applied merely, as I have already said, to the Bank of England, while all other banks, both in England and Scotland, were left to carry on their business without any protection from parliament, and without any means of obtaining specie beyond what the natural course of business brought into their hands from the circulating in the country. That source, however, has hitherto proved amply sufficient for all needful purposes (my emphasis).[9]


With the facts concerning the causes and consequences of the Scottish suspension before us, we're now prepared to consider the extent to which that suspension ought to be regarded as a black mark against the Scottish free banking system, if not against freedom in banking more generally. I'll address that topic in my third and final post in this series.


[1] Although Great Britain did not officially switch from bimetallism to a gold standard until 1819, a de facto gold standard is generally understood to have prevailed there since the opening decades of the 18th century when, by assigning gold guineas an official value of 21s Isaac Newton caused gold to be legally overvalued at the Royal Mint relative to silver.

[2] Henry Adams, "The Bank of England Restriction. 1797-1821," North American Review, Vol. 105, No. 217 (Oct., 1867), pp. 402-3. Reprinted in Charles Francis Adams Jr. and Henry Adams, Chapters of Erie, and Other Essays (Boston: James R. Osgood and Company, 1871), pp. 224-68.

[3] William Graham, The One Pound Note in the Rise and Progress of Banking in Scotland (Edinburgh: James Thin, 1886) p. 123.

[4] Yet Nicolas Vansittart denied it nonetheless, by moving a resolution in Parliament in 1811 to the effect that the public then considered banknotes to be equivalent to gold. By so doing he made a laughing stock of himself. Still that didn't stop Parliament from passing the resolution.

[5] Graham, op. cit., p. 115.

[6] For the story of the private tokens issued during this period see my Good Money: Birmingham Button-Makers, The Royal Mint, and the Beginnings of Modern Coinage, 1775-1821 (Ann Arbor and Oakland: University of Michigan Press and the Independent Institute, 2008).

[7] Sir William Forbes, Memoirs of a Banking-House (London: William and Robert Chambers, 1860), p. 81.

[8] Graham, op. cit., p. 116.

[9] Forbes, op. cit., p.85.

[Cross-posted from Alt-M.org]

October 30, 2018 4:59PM

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 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.

October 30, 2018 3:06PM

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.

October 30, 2018 1:01PM

Policing High‐​Crime Areas: A Matter of Trust

By Jonathan Blanks and Matthew Larosiere

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.

Aggressive and invasive police stops can lead to recovering firearms and other contraband from individuals, but there is no statistical evidence that ties those tactics to decreases in crime rates or violence. Indeed, as described in recent testimony in Little Rock, Arkansas, evidence shows that a heightened visible police presence can have positive effects on crime rates and violence in affected areas without the use of invasive stops.

Another problem with MPD policy is whom in particular the GRU is stopping. The jump-out cars are not used equally throughout the District. Indeed, friend of Cato and now-retired judge Janice Rogers Brown had some harsh words about the GRU in a 2015 case before her in the U.S. Court of Appeals for the D.C. Circuit:

As a thought experiment, try to imagine this scene in Georgetown. Would residents of that neighborhood maintain there was no pressure to comply, if the District's police officers patrolled Prospect Street in tactical gear, questioning each person they encountered about whether they were carrying an illegal firearm? Nothing about the Gun Recovery Unit's modus operandi is designed to convey a message that compliance is not required. While viewing such an encounter as consensual is roughly equivalent to finding the latest Sasquatch sighting credible, I submit to the prevailing orthodoxy, but I continue to reject its counterintuitive premise. (Brown, J. concurring, U.S. v. Gross 784 F.3d 784, 790 (2015))

Although she never mentions race once in her opinion, Judge Brown all but dared the MPD to try this method of policing in Georgetown—a posh, predominantly white residential and shopping district—instead of Southeast D.C., where GRU operates and the residents are predominantly poorer and black. She likens the idea that Georgetowners would think such treatment would be fair to the likelihood of seeing Bigfoot, but because the politicians and the courts have tolerated these heavy-handed tactics mostly used in poor black areas, they remain legal.

Indeed, as Jessie Liu, U.S. Attorney for the District of Columbia, told NPR, "I think that both the police department and our office are doing a great deal to train on what the legal requirements are.” But legality and propriety are often not one in the same. As one resident testified at a public hearing on the GRU tactics, the police “look at everyone in the community like [they are] villains.” While it is true that Georgetown and Southeast D.C. have different problems, each area’s residents are entitled to the same respect and treatment by police officers.

Perhaps most crucially, curbing illegal gun possession requires understanding why these individuals are carrying guns in the first place: fear. Putting aside the imprudence of carrying an illegal gun while fearful and lacking proper training, even tough-on-guns police executives admit that the fear of being killed is a major driver of these illegal gun possession cases. In 2017, nearly 45 percent of homicide victims were black men, and data shows homicides generally cluster in low-income areas of medium-to-large cities. A young black man in Southeast D.C. may have good reason to fear for his safety and security, and when the police have deemed themselves untrustworthy through their policies and actions, carrying an illegal gun may appear to be a reasonable—though reckless, flawed, and desperate—option.

By targeting people for searches based in part on where they live—and the same people resent the police and justifiably fear for their lives—it’s hard to see how MPD expects to either reduce crime and foster cooperation by using the GRU and its tactics. The rift between these communities and the police poses a problem when police are trying to solve crimes of tragic violence. Local activist Jay Brown told NPR, after the shooting death of a 10-year-old girl this summer, that the relationship between the community and police is so bad that, “We can’t even trust the police. [I]f anybody does know anything about what happened…they’re not going to talk to the police [because] it’s just like talking to another gang.”

And, thus, the vicious cycle continues.

Of course, both police and communities want to lower the murder rate—no one wants the killing to stop more than the people who live in the areas suffering the highest violence—but those desires don’t excuse each and every means the police contrive to find illegal guns. Antagonistic interactions between police and the public have real costs, and the stated intent of quelling gun violence does not make those costs disappear. If the police violate the trust of the community by shaking down and mistreating community members—even if it’s technically legal to do so—they risk the community’s cooperation when people get hurt. This lack of cooperation can enable the most violent offenders to go free, defeating the goal the police are trying to achieve.

The police need the public’s trust to be effective at deterring and solving crimes. It doesn’t make sense for them to direct the GRU to violate that trust and then expect the community to respond well. That’s not how trust works.

October 29, 2018 3:38PM

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. 

If Morgan puts Judge Thapar’s intellectual chops on display, then Doe v. Michigan showcases the effectiveness of his vibrant writing style. Here, a fraternity boy (“John Doe”) and sorority girl (“Jane Roe”) at the University of Michigan drank and had sex at a party. Roe filed a report, claiming she was too drunk to consent. Doe said the sex was consensual and he didn’t know she was intoxicated. He introduced witnesses, all of whom were his male fraternity brothers, and she brought her own, all female, most of whom were her sorority sisters. The two sets of witnesses presented two conflicting stories. The school was at an impasse, ultimately deciding in favor of Roe. Doe filed a claim against the school, citing due process violations.

The Sixth Circuit has established that in a public university disciplinary hearing where credibility is at issue, the accused must have an opportunity to cross-examine witnesses. Judge Thapar thus writes for the court that, since the case turned on Roe and her witnesses’ credibility, Doe had a right to cross-examine. Cross-examination, he argued, allows us to determine the truth when the accuser’s story sounds as plausible as the accused’s version of events. The accused has the chance to reveal inconsistencies in a witness’s story, and the trier of fact can evaluate someone’s demeanor. In a footnote, Thapar cited A Few Good Men and My Cousin Vinny as examples of why, even in pop culture, cross-examination is so highly regarded; it can be incredibly effective to “both undermine and establish the credibility of witnesses.”

The clarity of Judge Thapar’s opinions demonstrate his effectiveness as an originalist. Not only does he rely on the liberty-protecting context surrounding constitutional text to determine its proper meaning, but he applies it to the facts with style. He merits his place on a future Supreme Court short list.

Cato legal associate Patrick Moran contributed to this blogpost.

October 29, 2018 12:06PM

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.