Archives: 04/2019

ITC Report on Economics of USMCA Out; Next Up, Politics

The U.S. International Trade Commission (ITC) released its report on the likely impact on the U.S. economy and specific industry sectors from the U.S.-Canada-Mexico Agreement (USMCA). The main finding is unsurprising: “if fully implemented and enforced, USMCA would have a positive impact on U.S. real GDP and employment.” Since the North American Free Trade Agreement (NAFTA) was already beneficial to Canada, Mexico and the United States, the changes were not expected to be on net negative.

However, the topline figure which “estimates that USMCA would raise real U.S. GDP by $68.2 billion (0.35 percent) and U.S. employment by 176,000 jobs (0.12 percent)” is slightly higher than expected, but still small in terms of its overall impact on the U.S. economy.

Both exports and imports will increase as a result of the deal, though many of the gains remain small or modest, such as in textiles and apparel, chemicals and pharmaceuticals, electronic products, energy products and services. The reason why smaller gains are expected here is because NAFTA already liberalized most trade in these sectors, so any additional reductions would be minor.

There are two notable outcomes worth highlighting. First, the largest gains are expected to come from new rules on international data transfers and e-commerce, which were not part of the original NAFTA. Locking in existing commitments on the free cross-border flow of information is likely to deter future barriers to data transfers, such as data localization. The reduction of policy uncertainty in these areas is a key factor in the higher than projected gains. In addition, the higher de minimis thresholds on e-commerce exports is also net liberalizing, and likely to increase exports to Canada by $332 million and $91 million to Mexico.

The biggest harm, and largest impact of the USMCA, comes from an area that was expected—the restrictive rules of origin (ROO) on the automotive sector. The report states that these new requirements “would strengthen and add complexity to the rules of origin requirements in the automotive sector” and are “estimated to increase U.S. production of automotive parts and employment in the sector, but also lead to a small increase in the prices and a small decrease in the consumption of vehicles in the United States.” Essentially, cars will become more expensive (0.37 percent for pick-up trucks and 1.61 percent for small cars) and total consumption will decline by 140,000 vehicles. These production costs will be the result of, as footnote 7 states, “the shifting sourcing of core parts to the United States, even though the non-preferential tariff rates they would face (for many vehicle types) if they did not comply with the new automotive ROOs would be small.” Basically, the economic analysis assumes that companies will be willing to pay non-preferential tariffs instead of complying with the stricter auto ROO.

Furthermore, footnote 66 of the report states:

“Commissioner Kearns notes that, as described above, the model appears to suggest that the trade restrictiveness of ROO is inversely related to its positive impact on the U.S. economy. Carried to its logical conclusion, this would appear to suggest that the best ROO is a very weak or nonexistent ROO.”

This essentially means that one of the biggest trumpeted gains, the new auto rules, are actually the worst part of the new agreement.

There are a number of other small increases expected, such as in agriculture, particularly due to the fact that Canada increased its tariff rate quotas on dairy products, poultry, meat, eggs, and also wheat and alcoholic beverages. The gains, however, are still modest, projected to increase U.S. agricultural and food exports by 1.1 percent.  

The main takeaway is that since NAFTA removed almost all tariff barriers, the gains from USMCA are modest and largely come from reductions in the remaining non-tariff barriers. While the gains are higher than expected, this is likely due to the change in methodology by ITC to incorporate the impact of the gains from reducing these non-tariff barriers. At the end of the day, the final number is still modest, and is unlikely to sway anyone in Congress from changing their already strongly held opinions on the agreement. If anything, the release of the ITC report clears the way for implementing legislation to come forward and the real battle for the passage of USMCA to begin.

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Latest Opioid “Sting” Again Illustrates The Power of Prohibition to Corrupt

The front page of today’s Wall Street Journal reports on a federal sting operation that led to the arrest of 31 doctors, 7 pharmacists, 8 nurses, and other health care professionals including dentists for distributing more than 32 million prescription opioid pills to patients in five Appalachian region states. 

Federal prosecutors described doctors handing out pre-signed blank prescriptions in exchange for cash. In some instances, doctors provided prescriptions in return for sexual favors. One Alabama doctor allegedly recruited prostitutes to become patients and let them use drugs at his house. Dentists performed unnecessary teeth extractions on cooperative patients so they can have a legal excuse to prescribe them the opioid pills they desired. Some doctors knowingly sold prescriptions to nonmedical drug users and then billed Medicare and Medicaid for the evaluations and tests they performed as a cover.

Brian Benczkowski of the Department of Justice told reporters, “When medical professionals behave like drug dealers, the Department of Justice is going to treat them like drug dealers.” 

Mr. Benczkowski is right to consider these professionals “drug dealers.” This is just the latest and most graphic example of how prohibition fuels the so-called opioid crisis. In 2017 the DOJ arrested 412 doctors, pharmacists, and others for engaging in similar schemes in Florida. 

As I have written here, drug prohibition creates lucrative black market opportunities for people willing to sell drugs illegally. Prescription pain pills sell for a much higher price on the black market than they do legally at the pharmacy. The lure of easy money tempts corrupt doctors, dentists, nurse practitioners, and pharmacists to leverage their degrees to nefarious ends, especially because they can use the third party payment system to “double-dip:” they get paid by drug dealer middlemen for churning out and filling prescriptions which then get sold on the black market, and at the same time get reimbursed for their “services” by Medicare, Medicaid, and insurance companies.

Prohibition brings out the worst in people. It provides the corrupt and the corruptible with irresistible money-making opportunities. 

Meanwhile, desperate chronic pain patients, already the civilian casualties in the government’s war on opioids, are justified in their concern that politicians will react to the latest news with further crackdowns on opioid prescribing while more doctors will abruptly taper their chronic pain patients or abandon treating pain altogether out of fear they might risk being the next target of law enforcement wrath.

If lawmakers, policymakers, and the press want to know where to place the blame for the ugly facts revealed by this latest sting operation the answer is obvious: blame prohibition.

 

 

The Ruins of Old Tech Monopolies

Look on my works, ye Mighty, and despair!

Mar 2000: Palm Pilot IPOs at $53 billion

Sep 2006: “Everyone’s always asking me when Apple will come out with a cellphone. My answer is, ‘Probably never.’” – David Pogue (NYT)…

Jun 2007: iPhone released

Nov 2007: “Nokia: One Billion Customers—Can Anyone Catch the Cell Phone King?” (Forbes)

Geoffrey Manne and Alec Stapp at Truth on the Market have written a brief history of impregnable tech monopolies that were pregnable after all, in fields from personal computers to video distribution to social media. Sen. Elizabeth Warren and others are now arguing that the government should break up and closely regulate tech giants Google, Amazon, Facebook, and Apple “claiming they have too much power and represent a danger to our democracy.” Manne and Stapp offer examples of sector after sector in which what was seen as structural, inescapable tech monopoly turned out to be not so unassailable. Here’s music distribution: 

Dec 2003: “The subscription model of buying music is bankrupt. I think you could make available the Second Coming in a subscription model, and it might not be successful.” – Steve Jobs (Rolling Stone)

Apr 2006: Spotify founded

Jul 2009: “Apple’s iPhone and iPod Monopolies Must Go” (PC World)

Jun 2015: Apple Music announced

 They conclude by quoting two observations by Benedict Evans, a venture capitalist at Andreessen Horowitz, first on “why competition in tech is especially difficult to predict”:

IBM, Microsoft and Nokia were not beaten by companies doing what they did, but better. They were beaten by companies that moved the playing field and made their core competitive assets irrelevant. The same will apply to Facebook (and Google, Amazon and Apple).

And why “we will not be stuck with the current crop of tech giants forever”:

With each cycle in tech, companies find ways to build a moat and make a monopoly. Then people look at the moat and think it’s invulnerable. They’re generally right. IBM still dominates mainframes and Microsoft still dominates PC operating systems and productivity software. But… It’s not that someone works out how to cross the moat. It’s that the castle becomes irrelevant. IBM didn’t lose mainframes and Microsoft didn’t lose PC operating systems. Instead, those stopped being ways to dominate tech. PCs made IBM just another big tech company. Mobile and the web made Microsoft just another big tech company. This will happen to Google or Amazon as well. Unless you think tech progress is over and there’ll be no more cycles … It is deeply counter-intuitive to say ‘something we cannot predict is certain to happen’. But this is nonetheless what’s happened to overturn pretty much every tech monopoly so far.

A Gold Standard Does Not Require Interest-Rate Targeting

Stephen Moore and Herman Cain, the two recent nominees to the Federal Reserve Board of Governors, have in the past suggested returning to a gold standard (although Moore now says he favors merely consulting a broad range of commodity prices as leading indicators). In response, a number of recent op-eds criticized the idea of reinstating a gold standard. The critics unfortunately show little theoretical understanding of the mechanisms by which a gold standard works, and consult no evidence about how the classical gold standard worked in practice.

I don’t seek to defend the nominees, who I think are poor choices on other grounds that have been enumerated by Will Luther. And I don’t seek here to answer many common criticisms of the gold standard, since I have tried to do that here and here. I want to focus on one novel criticism. It stems from imagining that a gold standard regime works like our present regime in the sense that the central bank uses a short-term interest-rate target to steer the economy toward its long-run goal. The only difference is that the central bank pursues a constant dollar price of gold rather than another nominal goal like a gradually rising price-level or nominal-income path.

Thus a Washington Post reporter, Matt O’Brien, declares that a gold standard is “a disaster” and “might be the worst guide to setting policy.” That he sees the gold standard as a “guide to setting policy” already signals a misconception. O’Brien comes to the “disaster” conclusion by starting from the false premise that the wild price volatility of today’s demonetized gold tells us how volatile the price of gold would be under an international gold standard absent domestic central bank action. To offset that potential price volatility, he supposes, the central bank would have to undertake wild and often inappropriate swings in its interest rate policy. If you look at the track record of the classical gold standard, however, you don’t find such wild central bank policies. In the United States, you don’t even find a central bank.

Fentanyl as a WMD? The War on Opioids Reaches a New Level of Misinformation

“This is like declaring ‘ecstasy’ as a WMD,” an anonymous source from the Department of Defense counter-WMD community commented incredulously. This source was quoted by a Task and Purpose reporter investigating a Department of Homeland Security internal memo discussing designating the synthetic opioid fentanyl as a weapon of mass destruction. This is just the latest example of how misinformation and hysteria inform federal and state policy regarding the overdose crisis. 

Policy makers maintain their state of denial about the role of prohibition in the overdose crisis. Denial fosters vulnerability to misinformation and “alternative facts” to prop up falsely held views. Denial that the war on drugs is responsible for most of the death and destruction surrounding illicit drug use makes policymakers susceptible to claims about fentanyl that are not based in reality.

Misinformation about fentanyl leads to avoidable stress and overreaction among first responders. But misinformation about the causes of the opioid overdose crisis causes much more harm. 

Lawmakers and policy makers continue to believe the overdose crisis was caused by doctors too liberally prescribing pain pills. This ignores the government’s own data that shows there is no correlation between the number of pills prescribed and the incidence of nonmedical use or pain reliever use disorder. It ignores evidence that nonmedical drug use was on a steady exponential increase well before the doctors began prescribing more liberally, and is showing no signs of letting up. As I have written before, the main driver of the overdose crisis has always been prohibition. Policies that fail to recognize this and focus on reducing prescriptions only serve to drive nonmedical users to more dangerous drugs and make patients suffer in the process.

The WMD hypothesis probably derives from a lone instance in 2002 when fentanyl was pumped into a Moscow theater by Russian police to end a hostage crisis, resulting in nearly 200 deaths. The means by which it was aerosolized have never been made public. Much remains secret. American authorities believe a second disabling substance might have been mixed in with the fentanyl. And Russian doctors complained that delays in entering the building and the failure to have naloxone available contributed to the deaths. 

However, a 2017 position statement from the American College of Medical Toxicology states, “At the highest airborne concentration encountered by workers, an unprotected individual would require nearly 200 minutes of exposure to reach a dose of 100 mcg of fentanyl… evaporation of standing product into a gaseous phase is not a practical concern.” 

The urban myth that even minimal skin contact with fentanyl or an analog can cause a drug overdose has been difficult to eradicate. Because it not easily absorbed through the skin it took years of research before pharmaceutical companies finally devised a means to deliver fentanyl trans-dermally using a skin patch, now one of the most common ways it is prescribed in the outpatient setting. In its position paper, the ACMT also affirms that even extreme skin exposure to fentanyl “cannot rapidly deliver a high dose” of fentanyl.

Yet reports abound of first responders being rushed to emergency rooms after manifesting overdose symptoms upon exposure to fentanyl, only to be cleared and released upon evaluation. This may be attributable to the nocebo effectan exquisite example of the power of suggestion that has a neurochemical explanation. Guidelines on preventing occupational exposure from the Centers for Disease Control and Prevention and first responder alertsfrom the Drug Enforcement Administration that state, “Exposure to an amount equivalent to a few grains of sand can kill you,” only serve to enhance the nocebo effect and feed the hysteria.

The DEA states almost all of the fentanyl it seizes is “illicit fentanyl“—fentanyl and fentanyl analog powders made in clandestine labs in Asia and now in Mexico. It is often purchased on the “dark web” and shipped to the US in the mail. Fentanyl’s appearance in the underground drug trade is an excellent example of the “iron law of prohibition:” when alcohol or drugs are prohibited they will tend to get produced in more concentrated forms, because they take up less space and weight in transporting and reap more money when subdivided for sale. 

Licit fentanyl is an excellent drug, not usually produced in powdered form, and is used in many different clinical settings, not the least of which is in the operating room as an anesthetic adjunct. 

Illicit fentanyl is mainly used to enhance the strength of heroin and as an additive to cocaine (for “speedballing”). Drug dealers also use pill presses to press fentanyl into counterfeit prescription pain pills and sell them to unsuspecting drug users. 

The Drug Enforcement Administration recently moved several illicitly produced analogs of fentanyl to Schedule 1 (no known medical use), thus banning them.

This will do nothing to stop the fentanyl trade. The DEA already claims that almost all of the fentanyl seized is illicit fentanyl. Making it schedule 1 will not cause these labs to shut down or the cartels to stop their already lucrative trade. Dozens of fentanyl analogs have been developed and more are on the way. They are as easy to make in the lab as making meth from Sudafed or P2P. 

As they develop scenarios and contingency plans for weaponized fentanyl, policymakers refuse to see that the actual weapon of mass destruction is America’s endless war on drugs.

 

 

Montana Can’t Use a 150-Year-Old Anti-Catholic Law to Discriminate Against Religious Schools

Blaine Amendments—adopted by many states starting in the late 1800s as an anti-Catholic measure—prevent states from using public funding for religious education. Thirty-seven states currently have the amendments, and some courts have interpreted them excluding religious options from state school-choice programs—that is, preventing access to otherwise publicly available benefits purely on the basis of religion. In other words, Blaine Amendments let some states practice religious discrimination.

Montana created a program where people who donated to private-school funding organizations received tax credits. The program both encouraged school choice and allowed people to spend their own money how they saw fit. However, the Montana Department of Revenue used the state’s Blaine Amendment to exclude those donors whose money found its way to religious private schools, and, at the same time, it allowed non-religious private-school donors to benefit. During the ensuing legal challenge, the Montana Supreme Court not only ruled against the religious families that challenged the discrimination, it struck down the entire program, meaning both religious and non-religious donors wouldn’t receive tax credits.

Our friends at the Institute for Justice have petitioned the United States Supreme Court to hear the case, and Cato has filed a brief in support. Both Cato’s Center for Educational Freedom and the Robert A. Levy Center for Constitutional Studies have an interest in this case, so we teamed up to cover both the constitutional and policy angles of the issue. We argue that the Court should correct the Montana Supreme Court’s flawed reading of the First Amendment’s religion clauses and reaffirm that states cannot erode the Free Exercise Clause in the guise of strengthening the Establishment Clause. The Religion Clauses work together to help protect the freedom of conscience, not to prohibit school-choice programs that help both religious and non-religious schools.

The First Amendment’s Establishment and Free Exercise Clauses prohibit laws “respecting an establishment of religion, or prohibiting the free exercise thereof.” As Cato explained in a recent brief, the two clauses work together to protect individual freedom of conscience. However, states like Montana often use the Establishment Clause to justify the existence of Blaine Amendments. They argue that Blaine Amendments are necessary to prevent “an establishment of religion” by strengthening the wall of separation between church and state. But in the modern world, where government is so involved in giving public benefits like tax credits, it is impossible to maintain a complete wall of separation without discriminating against religion (as Blaine Amendments do), which is not what the Framers intended. Instead, the government must remain neutral toward religion and not disfavor religious people or organizations. In this sense, the Establishment Clause is a shield protecting the people from state religion, not a sword enabling government to discriminate against religious faith.

At the same time, school-choice programs help prevent the forced ideological conformity that is inevitable in public schools. Tax-credit programs like Montana’s allow parents to select schools that share their values, reducing the need to impose those values on others. In so doing, they improve our nation’s social and political cohesion and reduce conflict. Cato’s Public Schooling Battle Map tracks how public schools create conflict by forcing uniformity onto ideological diversity. Blaine Amendments merely fan the flames of the ideological conflicts that currently engulf public education.

Despite all these considerations, the Montana Supreme Court declined to properly consider the First Amendment implications of the state’s Blaine Amendment. Instead, it gave the Montana Department of Revenue a slap on the wrist for exceeding its procedural authority and destroyed the entire tax credit program rather than contend with the unconstitutional discrimination inherent in Montana’s Blaine Amendment. As school choice becomes more popular around the country, the question of religious discrimination and Blaine Amendments will become more salient. The Montana decision was just the latest in a series of federal and state courts decisions that are divided on the issue. That divide will continue without guidance from the Supreme Court. The Court should take this case to clarify that the Constitution requires religious neutrality, not discrimination.

A Positive Policy Agenda for CFPB Director Kathy Kraninger

The Consumer Financial Protection Bureau has been controversial since its creation. As an executive agency enjoying Federal Reserve funding independent of the Congressional appropriations process—and run by a single director removable only for cause—the Bureau is unusual and possibly unconstitutional. In its first years of existence, the CFPB gained a reputation for its exceptional activism and anti-industry agenda. Curiously, many of its enforcement and rulemaking activities focused on areas that were explicitly outside of its regulatory remit—such as auto lending, federal student loans, and credit providers historically regulated at the state level, such as payday lenders.

When Mick Mulvaney replaced Richard Cordray as CFPB Director, he vowed to stop “pushing the envelope” in its approach to regulation. Progressive fans of the Bureau took this as a sign that Mulvaney would terminate the CFPB’s enforcement activities altogether, an expectation that subsequent developments belie. Still, the financial industry, wary of the Bureau’s exceptional powers, breathed a sigh of relief that the Cordray-era modus operandi of attempting to change industry practices, even legal ones, through threats of lengthy and expensive enforcement actions might be over.

Now Mulvaney’s replacement Kathy Kraninger has the unenviable task of crafting a policy agenda for the CFPB that raises consumer welfare and promotes choice, competition, and innovation in the provision of credit. To assure regulatory certainty, her agenda should fall within the Bureau’s regulatory mandate and be compatible with the rule of law. Kraninger will undertake her task in the face of both Democrat hostility and Republican skepticism that the Bureau should even exist. Added to that, designing effective policy changes will also require Kraninger to keep current CFPB staff motivated and to recruit new economists and lawyers who share her vision.

Despite the challenges, Kraninger’s tenure has started auspiciously. The CFPB’s new Office of Innovation is launching a regulatory “sandbox”—an approach that has delivered moderately successful results in Britain and Singapore—and a revised no-action letter policy. Both may make it easier for lenders to try out new ways of providing financial services. Furthermore, the Bureau intends to create an Office of Cost-Benefit Analysis, which could improve the rulemaking process in addition to serving as a gesture of goodwill toward the consumer credit industry—which the CFPB has long seemed to view as all cost and no benefit.

As Director Kraninger settles into her new role, here are five concrete, positive steps she can take to increase the credit options available to consumers.