Archives: 06/2017

Statement on U.S. Withdrawal from the Paris Climate Treaty

In response to the U.S. withdrawing from the Paris climate treaty, I’ve issued the following statement:

The Paris climate treaty is climatically insignificant. EPA’s own models show it would only lower global warming by an inconsequential two-tenths of a degree Celsius by 2100. The cost to the U.S.—in the form of required payments of $100 billion per year from the developed to the developing world—is too great for the inconsequential results. These very real expenses will consume money that could be used by the private sector to fund innovative new technologies that are economically sound and can power our society with little pollution.

Because of our private investments in technological innovation, America leads the world in reducing carbon dioxide emissions from power plants. We did that without Paris, and we will continue our exemplary leadership without it.

While Paris will be with us for the near future as the process of withdrawing transpires, this is a step in the right direction. If you’d like to read more on the science behind Paris, take a look at this recent piece I wrote for The Hill, called “The Scientific Argument against the Paris Climate Agreement.”

The Angel and Jennifer Mendez Case

The Supreme Court issued a ruling this week in the case of County of Los Angeles v. Mendez.  The case involved a police shooting and the ruling involves some technical legal analysis regarding the proper application of prior Supreme Court precedents.  In this post I want to take a step back from the technical legal discussion and highlight the facts of the case, which are quite sad.

In October 2010, Angel Mendez and his then pregnant girlfriend, Jennifer Garcia, were dirt poor.  They lived in a one room shack, made of plywood, in the backyard of a home owned by Paula Hughes in Lancaster, California.  On the awful day in question, the couple were not bothering anyone.  They were actually napping in their tiny shack when their world was suddenly shattered.

Without any announcement at all, a police officer entered the shack.  Startled, Angel got up and grabbed a BB gun that he kept in the shack to kill rodents and other pests.  The deputy then yelled “Gun!” to alert his fellow officers of potential danger.  In a moment, several police officers entered and opened fire, discharging a total of 15 rounds.  Both Angel Mendez and Jennifer Garcia were shot “multiple times and suffered severe injuries.”  Mr. Mendez’s right leg had to be amputated below the knee.

Two people minding their own business and in just a few moments, the police are shooting at them.  The police did not accuse them of violating any law. They were totally innocent.

IOER and Banks’ Demand for Reserves, Yet Again

In our recent American Banker opinion piece, Heritage’s Norbert Michel and I argue that, if the Fed is really serious about shrinking its balance sheet, it had better quit paying interest on banks’ excess reserves (IOER) as well. How come? Because the current, relatively high IOER rate  is contributing to a strong overall demand for excess reserves, while a shrunken Fed balance sheet will mean a reduced supply of reserves. Reducing the supply of reserves while doing nothing to reduce banks’ demand for them is a recipe for demand-driven deflation, which is a monetary policy no-no.

Predictably (because it has happened every time I write on this topic) our article generated several comments to the effect that we didn’t know what we were talking about, because banks couldn’t possibly prefer the meager 100 basis points they can earn by holding reserves (or something less than that, if they are obliged to pay FDIC premiums) to the far greater amount they can earn by making loans.

The remarkable thing about these criticisms is that they all appear to deny that banks (or some banks, in any event) are in fact sitting on large amounts of excess reserves, and that they are, to that extent, settling for a return on those reserves of 100 basis points or less, instead of swapping reserves for other assets.

To Be Liable for Fraud, You Have to Have Actually Defrauded Someone

Stream Energy is a retail gas and electrical energy provider whose business model allows prospective salesmen to purchase the right to sell its products and to recruit new salesmen. In 2014, some former salesmen brought a class-action lawsuit against Stream for fraud, alleging that the company’s business model constituted an illegal pyramid scheme.

But unusually for a fraud claim, the plaintiffs argued that they didn’t need to identify any specific misrepresentations made by Stream that might have convinced particular class members to become salesmen. Instead, the plaintiffs claimed that simply offering membership in an illegally structured business would be fraud in and of itself, even if people joined with full knowledge of all risks and benefits.

A federal district court in Texas certified the class, so Stream appealed that decision to the U.S. Court of Appeals for the Fifth Circuit. A three-judge panel reversed the district court, holding that a class could not be certified because each plaintiff must individually prove that he was subject to a misrepresentation. But the entire Fifth Circuit then reheard the appeal and ruled for the plaintiffs. The court didn’t rule on whether Stream was in fact engaged in an illegal pyramid scheme, but did affirm the class certification, accepting the plaintiff’s theory that a single proof of illegal structuring would prove a fraud against every one of Stream’s salespeople.

Stream has asked the Supreme Court to review this last question, and Cato has filed an amicus brief supporting that petition. In our brief, we explain why it is dangerous to hold that someone can be liable for fraud without ever having made a misrepresentation. Reasonable judicial limitations on liability are essential to protecting the personal autonomy of all parties in a case.

In the fraud context, the key inquiry has always been whether the alleged fraudster made a specific misrepresentation on which someone actually relied to her detriment. To be liable for someone else’s losses, not only must a particular misrepresentation have been made, but it must have been the direct or “proximate” cause of those losses. By abandoning this proximate-cause rule and holding that misrepresentation isn’t necessary for potential fraud liability, the Fifth Circuit removed an important check on liability.

If individual reliance on a misrepresentation need not be proven, savvy investors may search out multi-level marketing programs, knowingly put their money in such risky ventures, and then sue for fraud if their investment doesn’t yield a profit. This significantly increases the likelihood of improper class-action lawsuits—potentially subjecting undeserving defendants to crushing liability.

Instead of that uncertainty, businesses should instead be secure in the simple legal rule that has worked for centuries: if you don’t want to be liable for fraud, don’t lie about what you’re selling.

The Supreme Court should take the case of SGE Management v. Torres and ultimately reverse the Fifth Circuit.