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August 30, 2019 3:22PM

How a Footnote in the USMCA Undermines Economic Liberty

House Democrats are holding up ratification of the U.S.-Mexico-Canada Agreement (USMCA) until U.S. Trade Representative Robert Lighthizer agrees to make some changes.  While a number of the big concerns about the new NAFTA, such as enforcement, biologic drugs, and the implementation of Mexico’s labor laws have received a lot of attention, there is another issue that has flown under the radar, perhaps in part because it’s buried in a footnote.

Chapter 7 of the USMCA, “Customs Administration and Trade Facilitation,” includes a section on “Express Shipments.”  These are goods of low or negligible value that are shipped by courier or express mail services in large volume. Think about that pair of shoes you just ordered from France. That’s an express shipment.

Because there are so many of these packages coming through customs facilities, and it’s such a burden to process them, most countries have what is called a de minimis threshold, that is a set value below which imported goods are both sales tax and duty free. The United States has the highest de minimis threshold in the world, allowing individuals and businesses to make purchases from abroad up to $800 with no duty or tax collected by customs. As Gary Hufbauer, Euijin Jung, and Lucy Lu explain, high de minimis thresholds are not only good for consumers, who do not have to deal with the complexity and time delays in processing customs duties and sales tax on the things they buy, but also for small businesses, because of the importance of intermediate inputs, as well as cross-border sales for their profits.

As part of the USMCA, Canada and Mexico both raised their de minimis thresholds, which not only helps small businesses in the United States but also consumers in both countries as well.  Canada raised its de minimis threshold to $150 CAD from its original $20 CAD limit, and sales tax cannot be collected until the value of the product reaches at least $40 CAD. Mexico increased its de minimis from $50 USD to $100 USD, with tax free de minimis on $50 USD.

While the U.S. did not alter its de minimis threshold in USMCA, there is a curious footnote in Chapter 7 that should be cause for concern. It reads:

Notwithstanding the amounts set out under this subparagraph, a Party may impose a reciprocal amount that is lower for shipments from another Party if the amount provided for under that other Party’s law is lower than that of the Party.

Now we are all well aware of this administration’s distorted concept of reciprocity, and they seem to be applying it here as well. What this footnote suggests is that the U.S. could potentially lower its de minimis threshold to match what Canada or Mexico have agreed to. To put this in perspective, in 2016, the United States increased its de minimis level to $800 from $200. This footnote would allow the de minimis to drop even below the 2016 limit. This is not only an attack on economic liberty for American citizens, but it would be an enormous step backward on a policy where the United States has been a leader for liberalization.

Back in June, Robert Lighthizer was directly asked about this footnote by multiple members of the House Ways and Means Committee during a hearing on the 2019 trade policy agenda. While a number of excellent questions were raised, I highlight two below. First, Rep. David Schweikert (R-AZ), noting bipartisan support for the current de minimis threshold, stated:

In 2016, Congress raised the U.S. de minimis threshold to $800 in the bipartisan Trade Facilitation and Trade Enforcement Act. This change enjoys wide bipartisan support in Congress and throughout the e-commerce landscape. The current threshold benefits millions of American small businesses, across all sectors, including manufacturers, who rely on low-value inputs for the production of U.S. exports. As a result, American small businesses now enjoy more rapid border clearance, reduced complexities and red tape, and lower logistics costs, while American consumers benefit through faster, less expensive access to a wider range of goods.

Given the benefits of the current de minimis threshold to American small businesses and the U.S. economy as a whole, and that Congress legislated on the U.S. de minimis level only a few years ago, I remain extremely concerned over the Draft Statement of Administrative Action (SAA) on the U.S.- Mexico-Canada Agreement (USMCA) transmitted to Congress on May 30. This draft SAA includes language suggesting that you may seek changes to the U.S. de minimis threshold through the USMCA implementing bill. As you know, last December, Rep. Kind and I led a bipartisan letter urging you not to seek to lower the U.S. de minimis threshold. My position has not changed. I strongly oppose including any language in the USMCA implementing bill that would lower the U.S. de minimis level or that would delegate this authority to the Executive Branch. As you work with Congress to finalize the USMCA implementing legislation, will you commit to not seeking authority to lower the U.S. de minimis threshold?

Rep. Daniel Kildee (D-MI) also emphasized how this change would undermine Congress’s authority to regulate commerce:

In 2016, Congress raised the U.S. de minimis threshold to $800 in the bipartisan Trade Facilitation and Trade Enforcement Act. The current threshold benefits millions of American small businesses, across all sectors, including manufacturers, who rely on low-value inputs for the production of U.S. exports. As a result, American small businesses now enjoy more rapid border clearance, reduced complexities and red tape, and lower logistics costs, while American consumers benefit through faster, less expensive access to a wider range of goods.

Given the benefits of the current de minimis threshold to American small businesses and the U.S. economy as a whole, I was curious to see the Draft Statement of Administrative Action on the U.S. Mexico Canada (USMCA) includes language that you may seek authority for the Executive Branch to set U.S. de minimis thresholds. Congress must maintain its Constitutional authority to set tariffs – including de minimis thresholds.

As you work with Congress to finalize the USMCA implementing legislation, can you commit not to seek the derogation or authority to derogate from the current U.S. de minimis threshold?

Amb. Lighthizer’s comments to all questions on the de minimis threshold remained the same:

As noted in the Administration’s submission to Congress on changes to existing law and the draft Statement of Administrative Action, we identified this as an issue for consultation with the Committee on Ways and Means of the House and the Committee on Finance of the Senate. These consultations are underway. I look forward to continuing those conversations with you and other Members on this important issue.

Congress should continue to press the administration for the removal of this footnote from the USMCA. It may seem like a small part of the broader USMCA debate, but Congress should not be fooled. This is representative of the broader attempts by the executive branch under this administration to expand its power into areas where the Constitution gives Congress express authority. Congress should not give up its authority to regulate foreign commerce, and should actively push to rein in the abuses of the executive in trade policy. By pushing for this on de minimis, we can get one step closer to ensuring that the Trump administration’s trade policy remains as its own small footnote in the history of U.S. trade policy.

August 30, 2019 10:30AM

What’s the Point of the Overtime Pay Regulation?

The Trump administration will reportedly raise the overtime pay salary threshold from $23,660 to $36,000 in the coming weeks. Anyone below the current threshold is eligible to be paid at least one-and-a-half times their regular wage for any hours worked above 40 per week. The proposed change would make approximately 1.3 million extra people eligible for overtime pay.

Economically, such a regulatory change is a great big nothing burger. It will do nothing to affect long-term overall compensation, but will bring mild labor market dysfunction and adjustment costs along the way.

Yes, in the short-run, employers have business practices and contracts with their employees that take time to change. Some workers will therefore benefit from higher total compensation in the immediate aftermath of the rule change, as employers are now legally obliged to pay them extra for overtime. This, no doubt, will be the outcome the Trump team trumpets.

But as time goes by, employers will adjust.

That might come initially through managing their workforce to minimize the likelihood of paying overtime rates - changing shifts patterns, recategorizing workers into exempt categories, outsourcing tasks, or trimming the workforce. Basic economics tells us, though, that what employers ultimately care about are the total costs of employment. In time, the overwhelming response will be employers cutting base pay rates or other perks and benefits (relative to where they would have gone) such that overall employment costs remain unchanged. This is exactly the response that empirical research has found.

So the broadened scope of the rule will do little for workers beyond the short-term. But we’d expect it to modestly reduce the efficiency of the economy in other ways. For example, more employers might decide to spend time tracking their employees’ hours closely, disallow “working from home,” or adjust contracts towards hourly wages that are less appropriate for the nature of their industries.

August 29, 2019 12:00PM

Puerto Rico Financial Oversight Board Was Unconstitutionally Appointed

By 2016, Puerto Rico’s government was in dire financial straits. To avoid bankruptcy, Congress enacted the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), creating a board responsible for restructuring the island territory’s substantial public debts. But there are serious questions regarding the constitutionality of this Financial Oversight and Management Board for Puerto Rico (the “Board”).

Under PROMESA, the president chooses six of the seven members of the Board from “secret lists submitted to [him] by the House and Senate leaders.” But in view of the Board members’ selection process and responsibilities, the U.S. Court of Appeals for the First Circuit held that they are “principal federal officers” who must be nominated by the president and confirmed by the Senate, rather than “inferior officers” whose appointment does not go through the same constitutional rigmarole.

Under the Constitution’s Appointments Clause, the president “shall nominate” principal federal officers, “and by and with the Advice and Consent of the Senate, shall appoint” them. But that is not what happened here. PROMESA’s appointment scheme raises serious separation-of-powers concerns because it positions the legislative branch to assume a role the Constitution exclusively reserves to the executive.

The First Circuit did not see it this way. Although it deemed the Board members “principal federal officers,” it applied an archaic doctrine to uphold their appointments. Under the “de facto officer” doctrine, acts performed by an officer that has assumed official duties without having been properly appointed to an office are valid even though it is later discovered that the officer’s appointment is legally deficient.

But this ancient doctrine is inapplicable to this case. Here, it is not the appointment of individual Board members against a valid appointment process that is in question. By all accounts, the appointment of each Board member did not violate any of PROMESA’s express prescriptions. Instead, it is PROMESA’s appointment process itself that is constitutionally suspect. In such case, the “de facto officer” doctrine has no real bearing, because no officer can be validly appointed in the first place.

Supreme Court precedent confirms, again and again, that the Board members are indeed “principal federal officers” who must be nominated by the president, and only then Senate-confirmed for appointment. That’s because they (1) occupy a “continuing” position established by federal law, and (2) “exercise significant authority pursuant to the laws of the United States.” While (1) is obvious, perhaps (2) is less so. And so it bears emphasizing that the Board, under PROMESA, has ultimate authority over the fiscal future of a U.S. territory of more than three million inhabitants. If that authority is not “significant,” we don’t know what is.

Cato has thus filed an amicus brief supporting several of Puerto Rico’s creditors before the Supreme Court, in their argument to overturn the decisions of the Board and invalidate its statutory authority. If PROMESA is allowed to stand, and the Board’s decisions are upheld, this will signal to the executive and legislative branches—both complicit in this perilous scheme—that anything goes, that they are free to strike at the heart of our constitutional structure without any pushback from the one branch left to preserve the ever-fragile separation of powers.

The Supreme Court will hear argument in Financial Oversight & Management Board for Puerto Rico v. Aurelius Investment, LLC on October 15.

August 29, 2019 10:06AM

On Targeting the Price of Gold

Thanks to President's Trump's picks for prospective Fed Board nominees, the subject of gold price targeting (or a gold "price rule") is getting attention once again.

The idea, which got a lot of attention back in the 1980s, after Arthur Laffer  and other supply-siders, including Alan Reynolds, first began promoting it, is that the Fed could mimic a gold standard, keeping inflation in check and otherwise making the dollar "sound," by employing open-market operations to stabilize the price of gold. The topic has come up again because three of Trump's prospective nominees have at one time or another suggested that the U.S. should revive the gold standard, and two of them, Herman Cain and Stephen Moore, are full-fledged supply-siders. Although Cain and Moore are no longer in the running, Judy Shelton, the third gold standard fan, is still in the race (along with Chris Waller of the St. Louis Fed), and she also has strong supply-side leanings.

These facts prompted Representative Jennifer Wexton (D-Va.) to ask Jerome  Powell, following his July 10th testimony, whether the U.S. should "go back to the gold standard." In response Powell, whether because he had a Laffer-style gold price-rule in mind or for some other reason, interpreted the question as one asking whether the Fed should "stabilize the dollar price of gold." That, he said, wouldn't be a good idea:

There have been plenty of times in fairly recent history where the price of gold has sent signals that would be quite negative for either [maximum employment or stable prices]. …If you assigned us [to] stabilize the dollar price of gold, monetary policy could do that, but the other things would fluctuate, and we wouldn’t care. We wouldn’t care if unemployment went up or down. That wouldn’t be our job anymore.

Powell's statement raises three questions. One is whether it's proper to equate reviving the gold standard with having the Fed target the price of gold, as Powell did. The second is whether Judy Shelton has herself endorsed a gold price rule. The third is whether such a rule would be as disastrous as Powell claims.

This post is devoted to answering, or trying to answer, these questions.

A Gold Target Isn't a Gold Standard

Answering the first question is relatively easy. Despite what Jay Powell suggested, reviving the gold standard and having the Fed target the price of gold aren't the same thing. So far as most fans of the gold standard are concerned, in a genuine gold standard paper money consists of readily redeemable claims to gold; and it's that redeemability—and not any central bank "targeting"—that keeps that paper on a par with the gold it represents.

At a still more fundamental level, a true gold standard is one in which paper money consists of legally-binding IOUs, exchangeable for definite amounts of gold, not as a matter of policy, but as a matter of contract. Making the equivalence of paper money and gold a matter of binding contracts, enforceable in ordinary law courts, rather than one of pledges made as a matter of public policy, makes that equivalence especially credible. The sovereign immunity enjoyed by most modern central banks, in contrast, renders them unfit to operate genuine gold standards even when their notes are officially redeemable in gold, because they can always change their policy, dishonoring a prior redemption pledge, with impunity. (Every older central bank has, in fact, done just that at some point in its history.)

So although a central bank may target the price of gold, or adhere to a gold "price rule," by doing so, it creates a "pseudo" rather than a "real" gold standard. Having a real gold standard, in contrast, doesn't call for having a central bank at all, as many past examples make clear.  Indeed, so far as many fans of the classical gold standard (including this one) are concerned, central banks have mainly served to muck things up.

Finally, it's by no means clear that the macroeconomic consequences of a gold price rule would be the same as those of a genuine gold standard, in part precisely because such a rule can be more easily set aside, and therefore would lack the credibility, of a genuine gold standard. I'll return to this point later in this essay.

Some Gold Standard Proponents Still Favor a Gold Price Rule…

Despite its possible shortcomings, gold price targeting has continued to have advocates since the 1980s. Jack Kemp pleaded its case again in a 2001 Wall Street Journal op-ed; and Steve Forbes has been carrying the gold price rule torch ever since. Referring to the Federal Reserve Transparency Act, he wrote,

Unlike in days of old we don't need piles of the yellow metal for a new [gold] standard to operate. Under Poe's plan—an approach I have long favored—the dollar would be fixed to gold at a specific price. For argument's sake let's say the peg is $1,300. If the price of gold were to go above that, the Federal Reserve would sell bonds from its portfolio, thereby removing dollars from the economy to maintain the $1,300 level. Conversely, if the gold price were to drop below $1,300, the Fed would "print" new money by buying bonds, thereby injecting cash into the banking system.

Nathan Lewis is another gold standard fan who considers a stable gold value for the dollar the essence of a gold standard, no matter how that stability is achieved.

Former prospective Fed nominees Herman Cain and Stephen Moore both spoke and wrote of the benefits of having the Fed target the price of gold. Although he was better known for his notorious 9-9-9 plan, Cain also had a plan for establishing a "21st Century Gold Standard." According to Charles Kadlec, that plan would have assigned the Fed

a single target—the value of the dollar in terms of gold—and the tools to achieve that target. Open market operations would be used for the sole purpose of increasing or decreasing the supply of dollars in order to maintain the dollar/gold exchange rate. Other than setting the Discount Rate to fulfill its role as lender of last resort, targeting or manipulating interest rates would be prohibited.

Although Steve Moore would rather have had the Fed target a broad index of commodity prices, according to a report in The New York Times, he agrees with Steve Forbes that having the Fed target the price of gold would be “a lot better than what we have now.”

… but Judy Shelton Isn't One of Them

Powell was very careful, in answering representative Wexton's question, to make clear that his remarks shouldn't be taken as referring to the views of Judy Shelton or any other prospective Fed board nominee. That's just as well, because although she certainly favors a gold standard of some sort, so far as I can determine Shelton has never spoken or written in favor of gold price targeting.

It's true that in her 1994 book, Money Meltdown (pp. 298-301), Shelton discusses the idea of having the Fed target gold's price (which many thought it was then doing under Greenspan's leadership), showing much sympathy for it. But she ultimately concludes, for several reasons, that the policy would be a poor alternative to a gold standard founded upon actual convertibility of paper dollars into gold.

Taking the same subject up again more recently, in her pamphlet Fixing the Dollar, Shelton comes to the same conclusion, to wit: that despite the greater challenges involved, "the advantages of forging an inviolable link between the value of US money and gold through fixed convertibility seem to make it well worth tackling the difficulties."

Finally, as if to settle any doubts,  in an interview this June Shelton declared,

I'm sure I've never said that the Fed should have a price rule to ratchet up or down interest rates in accordance with the daily price of gold. But I'm sure that if anything I would have said a price rule I don't think is a good idea. I've never suggested that. I'm not badmouthing the gold standard. I'm saying look to see what you like about prior systems that have worked and see if we could develop a future system that would incorporate the virtues of things that worked in the past.

Consequently the drawbacks of gold price targeting, whatever they may be, can't fairly be laid at Judy Shelton's door, whether by implication or explicitly. For while a gold price targeting regime may resemble a convertibility-based gold standard in one respect, it also differs greatly from it in others. Its flaws aren't the flaws of the Bretton Woods system, just as the flaws of the Bretton Woods system aren't those of the classical gold standard. Perhaps they are all faulty. Still, each deserves a separate hearing.

Is Powell Right? Some Econometric Results

So we come to the third question. It calls for giving proposals for targeting the price of gold a  proper hearing.  Although such proposals can be assessed in all sorts of ways, one popular approach involves asking what would have happened had the Fed actually targeted the price of gold in the past.

Economists usually use statistical techniques to try to answer this sort of question. So naturally I turned to my former UGA colleague Bill Lastrapes, the Gordo Cooper of econometricians (that is, the best econometrician I ever saw), who worked on a similar project with me years ago. That project investigated claims to the effect that Greenspan's Fed had actually been practicing gold price targeting. Although we concluded that those claims contained rather more than a kernel of truth, we made no attempt to say whether the policy was or wasn't a good idea.

Now, there are all sorts of ways to go about such a counterfactual exercise, each with its drawbacks. One way is to rely on a simple reduced-form regression of the price of gold on the fed funds rate— the Fed's immediate target—and then infer from it, first, where the fed funds target would have had to be set at any given time to maintain a fixed value of gold and, second, how inflation and output would have responded to that rate setting. Using this approach (or the first part of it) to assess Herman Cain's gold price rule proposal, Menzie Chinn concluded that, had that policy been put into effect in January 2000, between then and March 2019 the Fed would have had to increase its fed funds target by 14.89 percentage points, whereas in fact it reduced it by 3.04 percentage points, to a level that President Trump, and many others besides, still consider too high.

While Chinn's approach is certainly suggestive, it suffers in treating the fed funds rate itself as an "exogenous" variable, and thereby failing to allow for the simultaneous determination of gold price and interest rates. More generally, Chinn ignores general equilibrium effects. To take those effects into account, Bill and I (OK, Bill) used a simple, structural "VAR" (for Vector Auto-Regression) model. The model has four equations for as many variable: real GDP, the inflation rate, the fed funds rate, and the price of gold. In the "factual" regression we take to the data, we assume that the Fed sets the funds rate in response to changes in both GDP and P, but not in response to changes in the price of gold. In contrast, in the "counterfactual" regression, we let the Fed adjust the funds rate so as to either rigidly fix the nominal price of gold or stabilize it around a constant mean. In both cases we rely on various other identifying restrictions to distinguish the Fed's rule from the effect of non-Fed instigated interest rate changes on gold prices.

All that still leaves open plenty of options, so we considered several, based on data starting either in 1973 or in 1979. The results in every case, like those from Chinn's simple regression, support Powell's position. Indeed, they suggest that a gold price rule would be an even worse idea than Chinn's findings suggest.

To drive that point home, I'll report here results from only one of the many regressions Bill and I considered: the one that yielded results most favorable to a gold price rule. (The complete study isn't yet ready for distribution.) That regression refers to the post-1979 sample period only. Going back to 1973 makes gold price targeting look worse. It also assumes, again in gold price targeting's favor, that instead of trying to the price of gold absolutely constant, the Fed allows it to vary somewhat above and below its targeted value.

Looking first at the findings for the price of gold itself, the figure below compares gold's actual price during the sample period to its counterfactual price, where the last reflects our assumption that a gold-targeting Fed tolerates some fluctuations in that price.

Media Name: GoldTargetGoldPrice.jpg



Evidently, even keeping gold's price within these broadened limits requires substantial changes in the Fed's monetary policy settings. Just how substantial can be seen in the next chart, showing actual and counterfactual values for the federal funds rate, where the counterfactual values are those needed to generate the relatively stable price of gold shown in the previous image. For the period since 2005, which includes the financial crisis and recession, the average counterfactual funds rate exceeds 10%; and on some occasions that rate exceeds 20%.

These numbers are roughly in agreement with Chinn's findings. But we can also see some consequences of gold price targeting not evident from Chinn's simple regression, including the fact that it would make the fed funds rate highly volatile. During the year 2000, for example, the rate would have had to vary by about 12 percentage points. Other years would have seen still larger movements. Had the Fed instead tried to keep the price of gold absolutely constant, the fed funds rate would have bounced around even more. The greater volatility makes intuitive sense, because under a gold price target, the Fed must respond to fluctuations not only in the absolute but in the relative price of gold. (John Cochrane made a similar point in his WSJ editorial a few weeks ago, which he has since republished on his blog.)

Media Name: GoldTargetFedFunds.jpg



Moving next to inflation, although gold price targeting would have meant more rapid disinflation at the start of the Volcker era, for most of the Great Moderation it would have made relatively little difference, resulting in slightly less inflation in some periods, and slightly more in others. Only starting in the mid-2000s does the policy begin to matter again, by yielding (until 2015 or so) persistently lower inflation. But that lower inflation includes severe deflation during much of 2009, which hardly makes the counterfactual inviting, especially when one takes account of corresponding effects on output.

Media Name: GoldTargetingInflation.jpg



The final image shows those effects, and more. Counterfactual real GDP runs persistently below actual real GDP from 2000 onward, with a particularly severe dip—that is, relative to the already severe actual dip—during 2008-9, and a substantially lower level from late 2009 onward. Under gold price targeting, in short, the Great Recession would have been more like a second Great Depression. Indeed, since the original Great Depression actually consisted of two separate downturns, it might have qualified as America's Greatest Depression yet!

Media Name: GoldtargetLogGDP.jpg

… and Some Caveats

While econometric findings similar to those I've reported no doubt informed Powell's answer to Representative Wexler, such findings need to be taken with a grain of salt. For while they yield more information than Chinn's simple regression, they may still be unreliable. In particular, they may still run afoul of the famous "Lucas Critique."

That critique, as originally summed up by Robert Lucas himself, holds that, because "the structure of an econometric model consists of optimal decision rules of economic agents, and … optimal decision rules vary systematically with changes in the structure of series relevant to the decision maker … any change in policy will systematically alter the structure of econometric models." As Thomas Sargent later explained, this means, among other things, that the uses to which VARs can safely be put "is more limited than the range of uses that would be possessed by a truly structural simultaneous equations model." Such VARs, Sargent continues, are particularly ill-suited for evaluating "the effect of … changes in the feedback rule governing a monetary or fiscal policy variable [because] when one equation […] describing a policy authority’s feedback rule changes, in general, all of the remaining equations will also change."

Of particular concern to both Lucas and Sargent are instances in which agents’ expectations of the policy process are likely to change when policymakers change their own behavior.  As Christopher Sims puts it, "evaluating changes in policy rule as if they could be made permanently, while leaving expectations formation dynamics unchanged, is a mistake."

That concern is clearly relevant in the present instance. Consider our VAR model's gold price equation, the coefficients of which are functions of the supply of and demand for gold. Our counterfactual assumes that those coefficients stay the same whether or not the Fed targets the price of gold. But that assumption is suspect. Gold is, after all, demanded in part as an inflation hedge. Consequently, by credibly switching to a gold price rule, the Fed might reduce that demand by dampening fears of inflation. Put another way, the shocks in our gold price equation could be smoothed under gold price targeting. Because it doesn't allow for this, our counterfactual exercise may overstate the shortcomings of a gold price rule, especially by exaggerating the fed funds rate changes needed to implement it.*

Were our sample period one during which changing fears of inflation were not an important source of innovations to the demand for gold, our counterfactual estimates would be less vulnerable to the Lucas Critique. With this understanding in mind, Bill repeated our counterfactual analysis for the "Great Moderation" (1984-2008) sub-period, during which inflation fears are generally understood to have been quieted. Although the counterfactual fed funds rate for this period, shown below, is somewhat less volatile, it still swings dramatically, while the other counterfactual series show results similar to those from the longer sample period.

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These findings suggest that, though our results are subject to the Lucas Critique, they may not be all that misleading. Thus we might echo Sims' claim, made with regard to counterfactual work of his own, that the possibilities raised by Lucas are "reasons to be somewhat cautious about these results, not a reason for ignoring them."

But Sims' thinking mustn't be stretched too far. However useful our counterfactual exercise may be for assessing the likely consequences of gold price targeting, it's far less capable of telling us what consequences might result from a return to a more genuine gold standard, including a Bretton-Woods type arrangement of the sort Judy Shelton has sometimes recommended. For that more radical regime change would almost certainly involve still more far-reaching changes in the coefficients of our models' equations, making any results it might yield especially dubious. That doesn't mean, of course, that reviving Bretton Woods, or establishing any other sort of "genuine" gold standard, would be a good idea. It's just that whether it is or isn't isn't something one can hope to decide, even very tentatively, just by running a few regressions.

__________________

*If, on the other hand, the Fed's gold price rule is less than fully credible, our findings might still be misleading, because that less-than-credible rule could itself give rise to a speculative demand for gold based on fears that the rule with change. In that case, the Fed's (unconvincing) switch to a gold price rule could end up making the fed funds rate more rather than less volatile than if it didn't pretend to target gold at all.

[Cross-posted from Alt-M.org]

August 28, 2019 2:16PM

Requiring the Pentagon to be Transparent about US Overseas Bases

The Overseas Base Realignment and Closure Coalition, "a group of military base experts from across the political spectrum," is calling on Congress to mandate a reporting requirement on overseas bases. In a letter to the Senate and House Armed Services Committees, the group of experts says the information that the Department of Defense currently provides on the cost and location of overseas bases is very "limited" and the "data is frequently incomplete." This lack of transparency, they write, has allowed the Pentagon to erroneously claim America's empire of overseas military bases - some 800 installations in 70 or 80 countries around the world - only costs taxpayers $20 billion per year, even while more inclusive independent estimates go as high as $150 billion per year. Below is an excerpt of the letter:

Research has long shown that overseas bases are particularly difficult to close once established. Often, bases abroad remain open due to bureaucratic inertia alone. Military officials and others frequently assume that if an overseas base exists, it must be beneficial; Congress rarely forces the military to analyze or demonstrate the national security benefits of bases abroad.

The Navy’s “Fat Leonard” corruption scandal, which resulted in tens of millions of dollars in overcharges and widespread corruption among high-ranking naval officers, is one of many examples of the lack of proper civilian oversight overseas. The military’s growing presence in Africa is another: When four soldiers died in combat in Niger in 2017, most members of Congress were shocked to learn that there were approximately 1,000 military personnel in that country. Although the Pentagon has long claimed it has only one base in Africa—in Djibouti— research shows that there are now around 40 installations of varying sizes (one military official acknowledged 46 installations in 2017). You are likely among a relatively small group in Congress who know that U.S. troops have been involved in combat in at least 22 countries since 2001, with frequently disastrous results.

Current oversight mechanisms are inadequate for the Congress and the public to exercise proper civilian control over the military’s installations and activities overseas. The Pentagon’s annual “Base Structure Report” provides some information about the number and size of base sites overseas, however, it fails to report on dozens of well-known installations in countries worldwide and frequently provides incomplete or inaccurate data. Many suspect the Pentagon does not know the true number of installations abroad.

A proposed provision in the 2020 National Defense Authorization Act (NDAA) called “Report on Financial Costs of Overseas United States Military Posture and Operations,” could, "if implemented rigorously," the letter writers say, "increase transparency and enable better oversight over Pentagon spending, contribute to critical efforts to eliminate wasteful military expenditures, and enhance military readiness and national security."

For background on this issue, see my Cato Policy Analysis from 2017 entitled, "Withdrawing from Overseas Bases: Why a Forward-Deployed Military Posture Is Unnecessary, Outdated, and Dangerous."

Here are the signatories of this letter:

Christine Ahn, Women Cross DMZ

Andrew J. Bacevich, Quincy Institute for Responsible Statecraft

Medea Benjamin, Codirector, Codepink        

Phyllis Bennis, Director, New Internationalism Project, Institute for Policy Studies

Leah Bolger, CDR, US Navy (ret), President World BEYOND War           

Noam Chomsky, Laureate Professor of Linguistics, Agnese Nelms Haury Chair, University of Arizona/Professor Emeritus Massachusetts Institute of Technology

Cynthia Enloe, Research Professor, Clark University

Foreign Policy Alliance, Inc.

Joseph Gerson, President, Campaign for Peace, Disarmament and Common Security        

David C. Hendrickson, Colorado College

Matthew Hoh, Senior Fellow, Center for International Policy         

Guahan Coalition for Peace and Justice

Kyle Kajihiro, Hawaiʻi Peace and Justice

Gwyn Kirk, Women for Genuine Security

MG Dennis Laich, US Army, Retired

John Lindsay-Poland, Stop US Arms to Mexico Project Coordinator, Global Exchange; author, Emperors in the Jungle: The Hidden History of the U.S. in Panama

Catherine Lutz, Thomas J. Watson, Jr. Family Professor of Anthropology and International Studies, Watson Institute for International and Public Affairs and Department of Anthropology, Brown University

Khury Petersen-Smith, Institute for Policy Studies

Del Spurlock, Former General Counsel and Assistant Secretary of the US Army for Manpower and Reserve Affairs

David Swanson, Executive Director, World BEYOND War

David Vine, Professor, Department of Anthropology, American University

Stephen Wertheim, Quincy Institute for Responsible Statecraft and Saltzman Institute of War and Peace Studies, Columbia University

Colonel Ann Wright, US Army retired and former US diplomat 

August 28, 2019 11:37AM

Arizona Levies Unconstitutional Tax to Pay for New Sports Facilities

Arizona needed to raise money to update its sports facilities, but polling indicated that a new tax for this purpose was politically unpalatable. The state legislature had an idea: it would tax the tourism industry through hotel and rental car surcharges. The initial draft of the tax exempted Arizonans from the surcharge, but a smart legislative counsel observed that this just might be unconstitutional because it treated in-staters differently than out-of-staters. Instead, when Arizona levied a new tax on rental vehicles, it exempted long-term rentals, replacement rentals, bus rentals, and a whole slew of other vehicle rentals that are used primarily by locals, leaving the tax in effect on the short-term rentals favored by visitors. This tax would be voted into place by individual counties.

On the day Maricopa County (Phoenix) voted to enact the surcharge, pamphlets circulated claiming, “it will cost Arizona residents next to nothing. As much as 95% of the new . . . taxes will be borne by visitors.” These predictions have borne true; businesses reported that 72-87 percent of surcharge tax revenue has come from out-of-staters.

Saban Rent-A-Car, a Maricopa County business, paid the surcharges and sued for a refund in Arizona Tax Court. It made arguments based on the Commerce Clause of the U.S. Constitution—that the law interfered with interstate commerce—as well as state constitutional claims. The Tax court rejected both grounds. Arizona’s intermediate appellate court affirmed the tax court decision on Commerce Clause grounds. A divided Arizona Supreme Court also affirmed. Saban now seeks review in the U.S. Supreme Court.

This case raises two issues. First: the power of the states to regulate within their borders. The history of the Commerce Clause shows that it was written specifically to address discriminatory state legislation targeting out-of-state commerce. A necessary corollary to Congress’s power to regulate interstate commerce is the Dormant Commerce Clause, which prohibits states and their political sub-units from discriminating against out-of-state commerce. Over the years, the Supreme Court has invalidated taxes on trains carrying freight out of state, laws allowing additional harbor fees on ships carrying out-of-state goods, and taxes on out-of-staters shipping liquor into a state.

The second issue, to quote a Revolutionary War slogan, is “no taxation without representation!” Arizona has passed a tax that disparately impacts visitors from out-of-state who are not represented in the Arizona legislature. This ordinarily is not a problem. When a tax applies equally to all, visitors’ objections will be readily voiced by residents, who are equally effected. But when the tax is designed to fall on visitors, their lack of representation becomes a problem because their interests are opposed to the citizens of the state. For out-of-staters, this amounts to taxation without representation.

Cato has thus filed an amicus brief supporting Saban Rent-A-Car’s petition. The Arizona rental-car surcharge violates the Commerce Clause and impermissibly taxes out-of-staters without adequate representation of their interests in the state legislature.

The Supreme Court will decide whether to take up Saban Rent-A-Car v. Arizona Department of Revenue when it returns from its summer recess.

Thanks to Cato legal associate Michael Collins for his assistance with this post.

August 27, 2019 4:14PM

Trump’s Emergency Economic Powers: “Case Closed”?

On the campaign trail a few years back, Hillary Clinton declaimed: “We need a president who is ready on Day 1 to be commander in chief of our economy.” We got a good laugh out of that here at Cato—what a megalomaniacal misconception of the job! When President Trump embraced the role last Friday, it somehow seemed less amusing. “Our great American companies are hereby ordered to immediately start looking for an alternative to China,” he brayed, sending the markets into a Twitter-driven tailspin

Media Name: hereby_ordered.png

Where does Trump derive the authority for that “order”? On Saturday, he followed up with a statutory citation for the haters: “try looking at the Emergency Economic Powers Act of 1977. Case closed!” 

True, President Trump makes a lot of crazy threats he never carries out: from revoking birthright citizenship, to closing the border, to using the same 1977 Act to hammer Mexico with across-the-board tariffs, as Trump threatened to do in May. There’s a pattern here: the president sounds his barbaric yawp over the roofs of the world, but before long, backs it down to an ineffectual grumble. In this case, the cycle took all of two days: “I have the right to, if I want,” Trump insisted Sunday, but “I have no plan right now. Actually, we’re getting along very well with China.” OK, then: never mind! 

But we’d be fools to shrug this episode off as another unsettling, but ultimately meaningless Trumpian brainspasm, like nuking hurricanes or buying Greenland. For decades now, Congress has defined national emergencies downwards, investing the executive branch with dangerous new powers the president can trigger by saying the magic words. Trump has only begun to explore the possibilities, and there may be more competent would-be authoritarians waiting in the wings.

The statute Trump specified, the International Emergency Economic Powers Act of 1977 (IEEPA), gives the president an imposing array of unilateral powers to deploy against “any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States” if he “declares a national emergency with respect to such threat.” Granted, Trump’s definition of “emergency” may differ from yours, mine, and the dictionary’s. “For many years, this has been going on,” he explained Sunday, “in many ways, that’s an emergency.” But if history is any guide, federal judges will be extremely reluctant to second-guess “the wisdom of the President's judgment concerning the nature and extent of [the] threat.”

So, “case closed”? Could Trump order U.S. companies to pack up and come home? Not quite; but he could make it extremely difficult for them to do business in and with China. The IEEPA gives the president staggeringly broad powers to block transactions and freeze assets in which any foreign government or foreign national has an interest. And Trump’s not wrong to think he might get away with using the law as a trade-war bludgeon. A Congressional Research Service report published two months before Trump first started threatening to use IEEPA to hike tariffs, opined that such a use was unlikely, but probably permissible.  

The National Emergencies Act of 1976, the framework statute that was supposed to rein in presidential emergency powers, won’t be much help either. It originally allowed Congress to terminate presidential emergencies by majority vote, but thanks to a 1983 Supreme Court decision, the law now requires termination via joint resolution, subject to the president’s veto. Under the current emergency-powers regime, then, the president gets to do what he wants unless a congressional supermajority can be assembled to stop him. 

The good news is that Trump’s norm-busting on emergency powers has spurred a bipartisan reform effort in Congress. On July 24, the Senate Homeland Security and Governmental Affairs Committee moved an important emergency-powers reform bill forward by an 11-2 majority. That bill, Senator Mike Lee’s (R-Utah) ARTICLE ONE Act, would amend the National Emergencies Act to void new emergency declarations within 30 days unless Congress affirmatively approves them. Once approved, new emergency declarations require annual reapproval by Congress. The A-1 Act thus changes the current default setting—the president proposes, and the president disposes—to one in which any emergency edicts he issues rapidly expire without legislative sanction.    

The A-1 Act also addresses IEEPA abuse: thanks to an amendment offered by Senator Tom Carper (D-DE) and approved by voice vote, it would restrict the president’s ability to use the 1977 law to hike tariffs. The IEEPA, it clarifies, “does not include the authority to impose duties or tariff-rate quotas or… other quotas on articles entering the United States.”  

That’s an important change, but it comes with a pretty significant exception: even under the Carper amendment, the president can use the IEEPA for blanket bans of “all articles, or all of a certain type of article, imported from a country from entering the United States.” Nor would authorities claimed under the IEEPA sunset 30 days after the declared emergency. The A-1 Act exempts IEEPA emergencies from the new framework; they remain renewable at-will by the president unless affirmatively repealed by Congress over the president’s veto. 

All but three of the 34 currently active national “emergencies” rest on the 1977 law. The case for an IEEPA carve-out is that the bulk of those 31 are fairly uncontroversial, and requiring yearly congressional reapprovals would be cumbersome. That case was far more compelling before President Trump started threatening to weaponize IEEPA against major trading partners and the American consumer. 

Even so, the ARTICLE ONE Act would constitute a major improvement over the current emergency powers regime, and a possible foundation for future reforms. The courts are unlikely by themselves to impose the necessary restraints. It’s Congress that got us into this mess, and it’s going to be up to Congress to get us out.