Archives: 10/2018

Nonviolent Felons Shouldn’t Lose Their Second Amendment Rights

In 1989, Larry Hatfield fudged his employment records to get some extra money from the Railroad Retirement Board. He was caught and pled guilty to the federal crime of making a false statement, and was sentenced to a fine and (at the government’s recommendation) no prison time. Since then, Hatfield has lived his life without incident, incurring nary as much as a parking ticket. He doesn’t fight, do drugs, or cause problems. Hatfield has lived as a completely law-abiding citizen for decades.

Hatfield’s neighborhood, however, has changed for the worst, so he wants to own a firearm to defend himself in his home. But the intersection of an odd federal law—18 U.S.C. § 922(g)(1)—and the ever-expanding idea of what a “felony” is has seen his right to keep and bear arms stripped away. That old conviction for lying to the Retirement Board now restricts his right to armed self-defense. While his conduct in 1989 was not upstanding, permanently stripping Hatfield of his core Second Amendment right seems an excessive punishment—one that puts the government in the interesting position of having argued that Hatfield is both so non-dangerous so as to have been recommended zero days in prison, but so dangerous that he can never be trusted with a gun.

Hatfield sued in federal court and won. The district judge agreed that permanently banning all felons—whether violent or not—from owning firearms was unconstitutional. The government has appealed that ruling to the Chicago-based U.S. Court of Appeals for the Seventh Circuit. Because the Second Amendment applies, on its face, to all Americans, Cato has filed a brief supporting Hatfield. Across-the-board felon disarmament is not only unconstitutional as applied to Hatfield—a non-violent felon who served no prison time—but with respect to all non-violent felons.

There is no longstanding precedent supporting the government’s position. In fact, Congress enacted a provision restoring gun rights to felons that don’t pose a threat to public safety, indicating a tacit acceptance that “felon” as a category is excessively broad in relation to the government’s stated purpose of protecting the public. Section 922’s operation as a categorical elimination of rights for a broad class of people is both beyond what was historically acceptable and without a meaningful tie to public safety.

The excessive breadth of modern felonies—including things as irrelevant to public safety as improper packaging of lobsters—unconstitutionally removes many individuals’ rights to self-defense. These laws also hurt minorities and the poor, the people most likely to become victims of crime and receive the least police assistance.

In Hatfield v. Sessions, the Seventh Circuit should uphold the lower court’s ruling and find the permanent removal of Hatfield’s right to defend himself unconstitutional.

Untangling At Last: Policymakers Take Aim at Ending Arms Sales to Saudi Arabia

Saudi Arabia has a big problem on its hands this week. Despite funneling significant resources into lobbying efforts and U.S. congressional campaigns, the kingdom has found itself in a pickle that it cannot seem to easily extricate itself from: the disappearance of Jamal Khashoggi. 

For years, Saudi Arabia’s war in Yemen has drawn significant criticism for its strategy and tactics. The Saudi naval blockade has the kingdom’s smaller neighbor grappling with a devastating famine and a dearth of medical supplies and humanitarian aid. The Saudi air campaign has also proven deeply problematic—either from poor aim or amoral choices of target. 

International critiques seemed to reach a crescendo last month after the Saudis mistakenly bombed a school bus full of children, killing 26 and injuring 19 Yemeni kids. European nations issued statements that they would halt weapons shipments to the kingdom for the foreseeable future because of the incident, but many of those nations (including Spain and Germany) did an abrupt U-turn later in the month and proceeded with the sales. 

Some American policymakers have also tried to halt weapon sales to the nation over the past two years. There have been two outright votes on the matter led by bipartisan, bicameral coalitions, but both measures were narrowly defeated.

Saudi Arabia’s role in Khashoggi’s disappearance has created a pivotal moment for the effort led by some in Congress to untangle the United States from Saudi crimes. Make no mistake, this change is not out of the blue—it’s reaching critical mass. The champions of previous amendments, including Sen. Rand Paul, Sen. Bernie Sanders, Sen. Chris Murphy, and Sen. Mike Lee, now have powerful policymaker allies that had been previously opposed to their efforts.  

But it should never have taken the disappearance of a Washington Post journalist to reach critical mass. Saudi Arabia has a staggering history of involvement in human rights concerns in Yemen that should have provided enough momentum to stop and question the current scope of defense exports flowing into the country. The evidence that, at the very least, selling weapons to the country was a risky endeavor has been clear for years.

Everything You Need to Know About Net or Gross Saving Rates

Writing in Project Syndicate, Stephen Roach, former chief economist for Morgan Stanley, declares the U.S. economy’s foundations fundamentally unsound:

“America’s net national savings rate – the sum of saving by businesses, households and the government sector – stood at just 2.1% of [gross] national income in the third quarter of 2017.  That is only one third of the 6.3% of the average that prevailed in the final three decades of the twentieth century… America… is saving next to nothing.  Alas, the story doesn’t end there. To finance consumption and growth, the U.S. borrows surplus saving from abroad to compensate for the domestic shortfall.  All that borrowing implies a large balance of payments deficit with the rest of the world which spawns an equally large trade deficit.”   

This alleged “savings crisis” has popped up periodically since the 1980s when there’s a Republican in White House, such as 2006 when I wrote about it.

Roach believes it “important to think about saving in ‘net’ terms, which excludes the depreciation of obsolete or worn-out capacity in order to assess how much the economy is putting aside to fund the expansion of productive capacity.”  

Dividing net savings by gross national income subtracts a semi-arbitrary estimate of depreciation from the numerator but not from the denominator. Dividing net by gross shrinks the resulting savings/income ratio. For Roach to suggest that more net savings could in any sense pay for more “consumption and growth” is misleading at best.  Don’t expect a discount on a new car because you hope to pay with net savings, after subtracting estimated depreciation.

The amount of money needed for new plants and equipment is gross, not net. And it is the dollar gap between gross investment and gross saving that needs to be financed by attracting foreign investment.  Mr. Roach calls foreign investment in U.S. equity (stocks) or real property “borrowing,” but that’s not how we describe the same investments if made by a U.S. resident.

Gross and Net Saving and Investment Rates

The blue line in the first graph shows gross savings as a percentage of gross national income (GNI). The red line shows gross private domestic investment as a percentage of GDP, which is quite similar to GNI (GDP excludes income of foreigners spent in the U.S. and remitted income of Americans living abroad).  

The dotted green line is net savings divided by gross income – the extraneous ratio that worries Mr. Roach.  The green line appears to fall much more than the blue line simply because estimated depreciation rose from 12.3% of national income in 1969 to 15.9% in 2017 – as the capital stock shifted from structures to rapidly-depreciating high-tech. Because rising depreciation estimates are subtracted from saving yet added to income, the downward tilt of the green line is exaggerated by the oddity of dividing net savings by gross income. 

A declining net savings rate since the mid-1960s did not thwart fixed investment, though recessions always do.  Real net domestic fixed investment nearly tripled from $379.9 billion in 1983 (in 2009 dollars) to over $1 trillion by 2005-2006, and has again been heading up since the 2008-09 recession.

In the second graph, the ups and downs in the net savings rate (green line) do not track or explain the movements in net exports (exports minus imports). The U.S. runs a capital surplus and current account deficit when the economy is growing briskly.  Trade deficits shrink just before, during and right after recessions.  

Net Saving does not explain net exports

When previous “net savings” anxieties appeared, they were used as a rationale for raising taxes.  In accounting, unlike economics, it sounds simple to raise national savings by reducing the government’s negative savings (budget deficits).  If we carelessly assume that higher taxes have no bad effects on the economy or private savings, budget deficits would then fall with higher taxes and national saving (the sum of public and private saving) would rise.  In this simplistic bookkeeping, more taxes are defined as being identical to more savings.     

There are big problems with assuming a $100 million tax-financed cut in the deficit equals a $100 million increase in national savings.  One is that politicians’ favorite targets for new taxes are savers and savings – retained corporate profits, dividends, interest, capital gains and high incomes in general.  If successful firms and families pay more in taxes, they’ll have less to save.

Universal Savings Accounts Can Fix 401(k) Leakage

More than 50 million Americans hold trillions of dollars in 401(k) accounts. The retirement accounts have been a big success. By eliminating the double-taxation of savings under the income tax, 401(k)s encourage individuals to build larger nest eggs.

However, many people needing near-term cash end up withdrawing funds from their accounts or borrowing against their balances. Retirement experts are concerned about such “leakage.” But the real problem is that the system imposes paperwork burdens and penalties on people for accessing their own money.

The solution is to create a savings vehicle that would allow withdrawals without a mess of rules, penalties, and paperwork. The solution is Universal Savings Accounts (USAs), as discussed in this Cato study.

USAs would be the first tier of savings for individuals, with the funds available for any near-term expenses that may arise. For individuals that didn’t end up needing the funds in the near-term, account balances would grow tax-free and help cover future retirement needs.

Because USAs would allow withdrawals free of hassles and penalties, they would encourage more savings. The simplicity and liquidity of USAs would make the accounts popular across all age and income groups, which is the experience with similar accounts in Britain and Canada.

The Wall Street Journal yesterday highlighted the 401(k) leakage issue:

Annual defaults on loans taken against investors’ 401(k)s threaten to reduce the wealth in U.S. retirement accounts by about $210 billion when the lost savings are compounded over employees’ careers, according to an analysis by Deloitte Consulting LLP.

The projected future loss amounts to about 2.7% of the $7.8 trillion currently in 401(k)-style retirement accounts.

The numbers highlight the problem of tapping 401(k) savings before retirement, known in the industry as leakage. Most leakage occurs because about 30% to 40% of people leaving jobs elect to cash out their accounts and pay taxes or penalties rather than leave the money or transfer it to another 401(k) or an individual retirement account.

But employees also take out loans, which about 90% of 401(k) plans offer. Workers can generally choose to borrow up to half of their 401(k) balance or $50,000, whichever is less.

About one-fifth of 401(k) participants with access to 401(k) loans take them, according to the Investment Company Institute, a mutual-fund industry trade group. While most 401(k) borrowers repay themselves with interest, about 10% default, or fail to repay their accounts, triggering taxes and often penalties, according to research by authors including Olivia Mitchell, an economist at the University of Pennsylvania’s Wharton School.

Failing to restore the funds typically occurs when employees with outstanding 401(k) loans leave companies before fully repaying their balances.

Money lost to 401(k) leakage, including loan defaults and cashouts, reduces the wealth in U.S. retirement accounts by an estimated 25% when the lost annual savings are compounded over 30 years, according to an analysis by economists at Boston College’s Center for Retirement Research.

Even those who successfully repay 401(k) loans can end up with less at retirement than they would have had. One reason is that many borrowers reduce their 401(k) contributions while repaying their loans.

While 401(k) loan defaults currently amount to about $7.3 billion a year, the impact is far greater given that many borrowers in default withdraw additional money to cover the taxes and early-withdrawal penalties they owe on their outstanding balances, says Gursharan Jhuty, senior manager at Deloitte Consulting.

… Few employers are willing to eliminate 401(k) loans, in part because academic studies have shown that they encourage 401(k) plan participation.

The fact that leakage is so high reveals a household need for flexibility that is not being met with current accounts. Universal Savings Accounts would fill the need by allowing withdrawals at any time for any reason. 

Ryan Bourne and I discussed the advantages of USAs in this study last year, and policymakers followed through with legislation this year. Republicans included USA accounts in their recent Tax Reform 2.0 package that passed the House.

We shall see which way control of Congress goes, but helping Americans at all income levels increase their financial security with USAs should be a bipartisan goal.

Saving the WTO’s Appeals Process

The continued intransigence of the Trump Administration in blackballing the appointment of new judges to the highest tribunal of world trade compels the 163 other countries that are members of the World Trade Organization to unite by resolving their international disputes in a way that cannot be stopped by the United States. The other, practical way should be the alternative means of trade dispute resolution currently available under Article 25 of the dispute settlement rules that are part of the WTO treaty – WTO arbitration.

The US refusal to join in the consensus needed to appoint and reappoint members of the WTO Appellate Body has now reduced the appellate tribunal from its full complement of seven judges down to the minimum of three judges required by the WTO treaty to hear an appeal. WTO member countries have an automatic right to appeal the legal rulings of ad hoc WTO panels under the treaty. If there are not three judges to hear an appeal, then the right to appeal will be denied and the WTO will be unable to adopt and enforce panel rulings.

Recently, nearly 90 percent of all panel reports have been appealed. Left with no opportunity to appeal, surely every country that loses before a panel will nevertheless seek to exercise its right to an appeal to guarantee that the verdict against it will not be enforceable. The WTO dispute settlement system will then be paralyzed. Moreover, if the rules cannot be upheld and enforced, why bother to comply with them or try to improve them? The very existence of the WTO will then be put at even graver risk than it faces now due to the illegal actions of Trump and his trade enforcers on other fronts in world trade.

If this stalemate between the US and the rest of the WTO continues, come December 11, 2019, the final terms of two of the three remaining members of the Appellate Body will end, and the tribunal will be reduced to only one member. Unlike the US, the other 163 countries in the WTO profess to see this situation as urgent. They also seem to assume they have until December 10, 2019, to resolve it. But one of the three remaining judges could at any time become ill, encounter a legal conflict, or decide to resign for family or other unrelated reasons. This could happen tomorrow.

The 163 other WTO members have endured nearly two years of largely stoic stonewalling by the United States due mainly to the US distress that the Appellate Body has had the temerity to do its job by upholding treaty rules on the use of dumping and other trade remedies that the US played a leading role in writing but now indignantly opposes under pressure from protectionist interests domestically and from within the Trump Administration.

The time has come for the other WTO members to stand up to Trump’s bullying and isolate the United States by employing the alternative of arbitration that has previously been largely ignored but is clearly permitted under the WTO treaty. Under Article 25, any two WTO members can choose to use arbitration when they have a trade dispute. They can select their own arbitrators. They can decide on their own procedures. They do not need prior approval to do so. They cannot be prevented from doing so by any other country. The judgment they get in arbitration will be as binding and as enforceable as any other judgment in WTO dispute settlement.

“Arbitration” is not defined in Article 25. Thus, countries choosing it as an alternative to the regular dispute settlement proceedings are free to decide simply to duplicate those proceedings. They can photocopy the regular dispute settlement rules and adopt them as their form of arbitration. This would have the practical effect of establishing a parallel dispute settlement system in the WTO that is identical to the current one – but that excludes the United States.

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States Can’t Make Up New Laws to Punish Old Conduct Just Because They Call Them “Civil”

Article I, Section 10 of the Constitution provides that “[n]o State shall … pass any … Ex Post Facto law.” The Ex Post Facto Clause was incorporated into the Constitution to prohibit states from enacting retrospective legislation, which the Framers believed to be inherently unfair and contrary to the principles of limited, constitutional government. Despite the Framers’ clear aversion to retrospective lawmaking, the Supreme Court has since adopted the view that states are uninhibited from enacting retroactive civil penalties. So long as a retrospective law contains a discernable legislative purpose and a “civil” label, retroactive application will not run afoul of the Ex Post Facto Clause. Consequently, states have imposed increasingly burdensome retroactive penalties on convicted sex offenders under the guise of civil regulatory laws. Even after offenders have paid their debts to society, they continue to face excessive registration requirements and other onerous civil penalties. 

Back in 2004, 19-year-old Anthony Bethea was convicted of six counts of sexual activity arising from non-forcible, consensual intercourse with a 15-year-old girl. He pled guilty and agreed to be sentenced to up to 48 months of imprisonment, complete a sex offender treatment program, and register as a sex offender for 10 years. He successfully completed the treatment program in 2006 and his period of probation in 2007. Beginning in 2006, however, North Carolina drastically transformed its sex offender statute, adding a laundry list of additional burdens on previously convicted sex offenders. Today, Bethea is subject to numerous restrictions that did not exist at the time of his plea agreement, such as limitations on where he can go, where he can live, and what jobs he can hold. Perhaps worst of all, the new restrictions have prevented him from being a father to his children. Due to his continued registration, Bethea has been forced to miss his son’s graduation ceremonies, parent-teacher conferences, and school field trips. Bethea should have been off the registry four years ago, but North Carolina retroactively lengthened his registration period from 10 to 30 years.

In 2014, 10 years after he registered, Bethea petitioned the North Carolina courts to be removed from the registry. He argued that retroactively applying the statutory provisions enacted after Bethea’s conviction violated the Ex Post Facto Clause. Although the court found that Bethea was in no way a threat to public safety, his petition was denied. On appeal, the North Carolina Court of Appeals held that the state’s sex offender statute was civil, rather than punitive, and thus did not constitute a violation of the Ex Post Facto Clause. The North Carolina Supreme Court denied review and Bethea has asked the U.S. Supreme Court to take his case.

Cato has filed an amicus brief supporting that petition, arguing that the Court must return to an original understanding of the Ex Post Facto Clause guided by its twin historical aims: to prevent vindictive legislation targeted at unpopular groups and provide sufficient notice of the consequences in place. Without a principled foundation in original meaning and historic purpose, the Court’s multi-factor ex post facto analysis has come to rest on shaky ground, supplying unimpeded deference to legislative intent. The Court’s continued unwillingness to invalidate statutes for their retroactive punitive effect has given states a perverse incentive to enact increasingly burdensome civil penalties that alter the legal consequences of previously committed conduct without constitutional accountability.

The Supreme Court should take up Bethea v. North Carolina and eaffirm that the Constitution’s prohibition against ex post facto lawmaking forbids states from skirting constitutional scrutiny by simply labelling increasingly burdensome retrospective penalties as “civil” regulatory laws.

Would Government Paid Leave Benefits Grow Over Time?

Some advocates and policymakers think government should be involved in providing a limited or modest paid leave benefit, just 12 weeks or less. Their support seems implicitly contingent on the expectation that a paid leave entitlement wouldn’t grow, or wouldn’t grow much. But is there any evidence of that?

If the trajectories of OECD paid leave entitlements are any indication of the path a new U.S. entitlement would take then the answer is no. All OECD countries except one increased the length of their paid leave benefits substantially over time (see chart).

For example, the average length of paid maternity, parental, and home care leave entitlements in the Eurozone increased from 17 weeks in 1970 to 57 weeks in 2016. That means that the average duration of paid leave entitlements more than tripled over the period. OECD countries at-large follow the same trend.

In fact, the only country that reduced the length of its paid leave entitlement is Hungary. Hungary began with one of the most lengthy paid leave entitlements of any country; 162 weeks in 1970. In subsequent years Hungary reduced the length of that benefit by 2 weeks, to 160 weeks, which isn’t much. 

 

international paid leave entitlements 

Data source: OECD Family Database

In short, international programs demonstrate that paid leave benefits grow substantially over time, similar to other government entitlement programs. Supporters of government paid leave should be aware that current proposals aren’t likely to stay limited to 12 weeks or less in the longterm.

For more information on paid leave, see the new Cato report Parental Leave: Is There a Case for Government Action? or livestream today’s Capitol Hill event.