Topic: Cato Publications

“We’re Going to Have to Come Up with Something.”

And that something is a national ID.

The quote is Senator Chuck Schumer’s (D-NY), speaking about immigration reform at Politico’s Playbook Breakfast. The national ID gloss is mine, based on the immutable logic of “internal enforcement.”

Senators Schumer and McCain (R-AZ) say that the “Gang of Eight” senators who are working up an immigration reform package are united on the idea of making it impossible for illegal immigrants to get work in the United States. The only way to do that is to put all working Americans—if you work, that means you—into a national ID system.

“People say, ‘National ID card,’” Senator Schumer says. They do because that is what he’s talking about.

Now, they haven’t gotten all the way through the logic of their plans. Senator Schumer talks about a “non-forgeable [Social Security] card,” but a Social Security card only proves that a certain name is linked to a certain number. If a system is going to prove that a given person is entitled to work in the United States, it must be an identity system. It must compare the identifiers of the person to the identifiers in the system, whether held on a card or in a database, so that it can assess their legal status, including natural-born citizenship.

This is why Senator Schumer also talks about biometrics. The system must biometrically identity everyone who works—you, me, and every working American you know. There is no way to do internal enforcement of immigration law without a biometric national identity system.

It looks as though E-Verify, an incipient national ID system, will be a part of most or all comprehensive immigration reform proposals. Ironically, immigration reform that aligns the law with our country’s economic need for labor would obviate the need for E-Verify and a national ID. 

There are lots of ways to become familiar with the national ID issues that have yet to bubble up in this early stage of the immigration reform debate. My 2006 book, Identity Crisis, is a decent primer on identity and national ID generally. I examined the direct line between internal enforcement of immigration law and a national ID in my 2008 paper: “Electronic Employment Eligibility Verification: Franz Kafka’s Solution to Illegal Immigration.” And my article in last year’s special Cato Journal on immigration reform was called: “Internal Enforcement, E-Verify, and the Road to a National ID.”

Changing the Electoral College Game

Article II of the United States Constitution states: “Each State shall appoint, in such Manner as the Legislature thereof may direct, a Number of Electors, equal to the whole Number of Senators and Representatives to which the State may be entitled in the Congress” to elect the president. The phrase “in such Manner” does not obviously restrict the way electors may be rewarded.

Even before the last election, some people had proposed changing the way states award electoral votes. The National Popular Vote effort, for example, proposed a compact in which states with a majority of the electoral votes agree to award their votes to the winner of the popular vote for president. Now other people, mostly Republicans, propose that states award each of their electoral votes to the winner of each congressional district in a state.

This proposal is highly partisan, but it is not outlandish. Two states, Nebraska and Maine, now award almost all of their electoral votes by congressional district. In each state, two of their electoral votes (the two they get because of equal state representation in the Senate) go the state-wide winner of the popular vote.

However, proponents of the “district proposal” have not suddenly been convinced of the merits of presidential elections in Maine and Nebraska. Rather, they are beguiled by the thought that Mitt Romney would have won in 2012 had electoral votes been awarded by congressional district.

Here we find the first problem with the proposal: it concerns the past not the future. Much like those liberal Democrats who wished to change the filibuster rule because Sen. McConnell (R-KY) frustrated the president’s desires on health care, some Republicans now wish to change electoral rules in response to the 2012 disaster.

It is unlikely that states governed by Democratic majorities in the legislature would adopt this proposal. Let’s assume they would, however, to think about what might happen.

The “district proposal” would increase the value of partisan redistricting since the presidency as well as the House would now depend on the composition of congressional districts.

The “district proposal” might change nothing. If the partisan majority in every state legislature has already maximized its share of congressional seats, nothing changes. I think that would be the case for most states controlled by the GOP.

Legislating in Panic

The late William A. Niskanen was an astute observer of Washington policymaking for more than 40 years, as assistant director of the federal Office of Management and Budget, director of special studies in the Office of the Secretary of Defense, director of the Program Analysis division at the Institute of Defense Analysis, chief economic adviser to President Ronald Reagan, and then for more than 25 years as chairman of the Cato Institute. Late in his life, as Congress hurriedly considered President Obama’s “stimulus” spending bill, he offered these reflections on the results of legislating in haste. (I would add the Patriot Act, passed immediately after the 9/11 attacks, as another example.) His cautions are worth reading again.

Slow Down the Political Response to a Perceived Crisis

By William A. Niskanen

Repeating his plea for the fiscal stimulus plan on February 5, President Obama said that “The time for talk is over. The time for action is now, because we know that if we do not act, a bad situation will become dramatically worse. Crisis could turn into catastrophe for families and businesses across the country.”

This is the fifth time in my adult life that the president has asked for or asserted unprecedented authority on an expedited basis with little or no congressional review. Each of the prior occasions turned out to be a disaster.

The first of these episodes was in August 1964. Following a reported attack by North Vietnamese torpedo boats on two U.S. destroyers operating on an electronic intelligence mission in the Gulf of Tonkin on August 4, President Johnson ordered a U.S. air strike on where these boats were based. On August 5, President Johnson asked Congress to approve a resolution “expressing the unity and determination of the United States in supporting freedom and protecting peace in southeast Asia,” with express support “for all necessary action to protect our Armed Forces,” although he repeated prior assurances that “the United States seeks no wider war.” On August 10, after less than nine hours of congressional debate, Congress approved a joint resolution which authorized the president “to take all necessary steps, including the use of armed force, to assist any member of the Southeast Asia Collective Defense Treaty requesting assistance in defense of is freedom,” a resolution that passed the House with no dissenting vote and passed the Senate with only two dissenting votes. At the time, Senator Morse warned that “I believe this resolution to be an historic mistake.” As it was. In 1967, a Senate committee learned that the Navy communications center in the Philippines had questioned whether there was any attack on the U.S. destroyers on August 4. After huge fatalities to Vietnamese, Cambodians, and Laotians, and 58,000 U.S. combat fatalities, the war did not end until the North Vietnamese captured Saigon in April 1975. In contrast with the administration’s. “domino theory” rationale for the war, there was no spread of communism to the rest of southeast Asia. The U.S. and the unified Vietnam now have peaceful and productive relations, and the U.S. has acquired another exotic Asian cuisine.

The second of these episodes was on August 15, 1971 when President Nixon announced his New Economic Policy on Sunday night television when Congress was in their summer recess. Provoked by a flight from the dollar that spooked Treasury Secretary John Connally and acting on his own authority without consulting Congress or the international financial authorities, Nixon imposed a comprehensive system of wage and price controls for 90 days, imposed a 10 percent surcharge on all imports, and ended the Bretton Woods system of buying and selling gold at a fixed dollar price. In the name of increasing employment, he also asked Congress to approve a package of budget measures, none of which were approved. The import surcharge was dropped in December 1971. The wage and price controls were gradually changed into “guidelines” by President Ford and President Carter. Continued price controls on gasoline, however, led to queues at service stations until these controls were finally eliminated by one of President Reagan’s first actions in January 1981. What were the effects of Nixon’s New Economic Policy? The consumer price inflation increased from 4.4 percent in 1971 to 13.5 percent in 1980, and real GDP declined in 1974, 1975, and 1980. Congress should clearly have reviewed the major measures that Nixon implemented on his own authority.

The third of these episodes was in early October 2002 when Congress approved the Iraq War Resolution, giving President George W. Bush almost complete discretion on whether, when, and how to go to war with Iraq. The resolution cited numerous conditions to justify a war with Iraq without mentioning whether Iraq was a direct threat to the United States. This resolution was approved by a large bipartisan majority in both the House and the Senate, including the approval by Joe Biden and Hillary Clinton, and five proposed amendments to limit the discretion of President Bush on this issue were also defeated by a large bipartisan majority. The outcome was that the U.S. military forces initiated war against Iraq in March 2003. Early in the war, it became clear that Iraq did not have any weapons of mass destruction and had not supported al-Qaeda, so the argument for the war shifted to more nebulous rationales, such as creating and preserving democracy in the Middle East. The U.S. experience in both Iraq and Afghanistan proved that our military can defeat most existing governments quickly but that we do not have the knowledge or patience to be a successful occupying power in a hostile environment. In any case, the new status of forces agreement with the Iraqi government commits U.S. forces to be withdrawn by the end of 2011, making the Iraq war one of our longest wars with a yet uncertain outcome. This is another case in which Congress did not take sufficient time to review a very important issue, in part because of the rush to go home to run for reelection.

The fourth of these episodes was in October 2008 when Congress approved the Emergency Economic Stabilization Act of 2008, incorporating the Troubled Asset Relief Program (TARP) that gave the Secretary of the Treasury almost complete authority to spend up to $700 billion (!) to purchase “troubled” assets, primarily mortgage-backed securities, and to increase the capital in selected banks. This act is the outgrowth of a three-page proposal by Treasury Secretary Henry Paulson on September 19 that, in turn, was the result of a concern by Paulson and Fed Chairman Ben Bernanke that lending among the major Wall Street banks had almost ceased after the collapse of Lehman Bros. The proposed law was expanded to 110 pages but was defeated in the House on September 29. The Senate expanded the bill to 451 pages, adding about $150 billion of expenditures for unrelated measures, and approved the expanded bill on October 1. The expanded bill was then approved by the House and signed by the president on October 3, making it possible for Congress to go home to run for reelection. The only significant constraint that Congress added to Paulson’s original proposal was to require subsequent congressional approval to release the second $350 billion of the authorized expenditures. As it turns out, Secretary Paulson was not clear what he would do with all this money. He originally expected to use most of this money to purchase mortgage-backed securities from the banks. On October 14, however, the program shifted to buying preferred stock and warrants from the nine largest banks and then from hundreds of smaller banks. As it turns out, this program was an expensive failure. On February 5, 2009, a congressional panel that oversees TARP reported that the Treasury paid $254 billion for preferred stocks and warrants that may only be worth about $176 billion. And to the administration’s irritation, most of the banks used the Treasury money to increase their capital ratio rather than to increase lending. The Obama administration and Congress have yet to determine what to do with the remainder of the appropriation for this program.

The fifth of these episodes, of course, is the current congressional deliberation on the fiscal stimulus plan for over $800 billion (!) of additional spending and tax reductions. Most of the details of this plan were apparently selected by House Speaker Nancy Pelosi, but the guiding principle seems to be White House Chief of Staff Rahm Emanuel’s advice that “You never want a serious crisis to go to waste. And this crisis provides the opportunity for us to do things that you could not do before.” President Obama and the congressional Democrats have used this opportunity to seek approval for policies that they have supported for years, wrapping them in a package and calling it a fiscal stimulus plan. The only coherence in this plan is political, not whether it is an effective or efficient method to stimulate the economy. The House passed this plan with little congressional debate or a single Republican vote on January 29. As I write, a group of moderate Republican Senators is bargaining for larger tax reductions consistent with maintaining a $800 billion limit on the sum of spending and tax measures. Again, as in the four prior episodes, there is every reason not to rush to approve a program of such magnitude. The primary reason for the current financial crisis is that many banks cannot evaluate their own solvency or that of their current or potential counterparties, primarily because of the difficulty of valuing mortgage-backed securities and other complex derivatives, and neither TARP nor the fiscal stimulus plan addresses this problem. Our political system, unfortunately, is strongly biased to try to protect people against the effects of a crisis without addressing the causes of the crisis. To Congress: Slow down. Make sure you understand the causes of the financial crisis and the potential solutions before you burden your children and your grandchildren with another trillion dollars of federal debt. Your present course is best described as fiscal child abuse.

Lasers: The End of Privacy?

Gizmodo points to some outré technology on the Department of Homeland Security’s drawing board.

Within the next year or two, the U.S. Department of Homeland Security will instantly know everything about your body, clothes, and luggage with a new laser-based molecular scanner fired from 164 feet (50 meters) away. From traces of drugs or gun powder on your clothes to what you had for breakfast to the adrenaline level in your body—agents will be able to get any information they want without even touching you.

I don’t know about each of the technologies in this article, but the one I do know of—Raman spectroscopy—works by exciting a molecule with a laser. When the molecule returns to its normal state, it gives off a distinct photon that can be treated as a signature of the molecule. Thus, munitions and drug detection becomes “easy.”

Here’s why “easy” is in scare-quotes: At anything other than a very small distance, you have to shine a very high-intensity laser and have very sensitive detection equipment to gather the signature. The laser would fry people’s skin and burn their retinas, and the sensor would probably not work in the noisy, dusty areas where they might use these devices. There may be some new technology that defeats these challenges of physics, of course, but I hope not.

The article says there has “so far been no discussion about the personal rights and privacy issues involved.” Not true!

On page nine of Cato’s brief to the Supreme Court in Florida v. Jardines, we noted this developmental technology as an example of something that could perform quite invasive analysis without being a “search” under the Jacobsen/Caballes corollary to the “reasonable expectation of privacy” test from Katz v. United States.

The doctrine that arose from Katz was that a Fourth Amendment search occurs when one’s reasonable expectations of privacy are upended by government action. When government action only detects only illegal drugs, such as when a drug-detecting dog sniffed Caballes’s car, this is something in which a person can have no reasonable expectation of privacy, so no search has occurred. Get it?

Technologies like remote Raman spectroscopy illustrate the absurd result Katz doctrine produced in Jacobsen and Caballes. Katz and the Jacobsen/Caballes corollary are junk.

Cato’s Jardines brief points out the better way to administer the Fourth Amendment: When government agents use uncommon technology to perceive otherwise imperceptible things, that is searching. If the searching is appurtenant to our persons, houses, papers, and effects, it must be reasonable. In the vast majority of cases, that means getting a warrant.

Lasers won’t be the end of privacy if I can help it.

Advertising, Credit Reporting, and ‘Anti-Objectification’

You need a set of priors that I lack to stay interested in the forthcoming Suffolk University Law Review article, “Selling Consumers, Not Lists: The New World of Digital Decision-Making and the Role of the Fair Credit Reporting Act.” I think the thing animating authors Ed Mierzwinski and Jeff Chester is what I call “anti-objectification,” a desire at the outskirts of the privacy concept. It is bad, anti-objectifiers appear to believe, when a person is treated as a mere object of commerce, observed and communicated with on that basis alone.

Without anti-objectification, I can’t find much of anything wrong in their description of the emerging world of digital data collection and marketing. There is an impressive and complex array of techniques coming online to discover what people want, learn when they want it, and communicate with them in ways that will spur them to act on their desires.

Given the wrongs they perceive in these developments—which, again, I must guess at—Mierzwinski and Chester make a broad pitch to have online marketing drawn under the blanket of Fair Credit Reporting Act regulation. Not only the Federal Trade Commission, but the new, unconstrained Consumer Financial Protection Board, should look at bringing online advertising within the FCRA, they say.

Given the paucity of (apparent) harms to be rectified, one struggles to examine how broadening regulation of the information economy would improve things. But I don’t know why the Fair Credit Reporting Act would be a model anyway. In forty years, the FCRA has not cured the ills that Senator Proxmire (D-WI) recited when he introduced the law—to judge by the words of self-styled consumer advocates, at least. New challenges have emerged, and the FCRA has turned credit bureaus to the government’s use in financial surveillance. The FCRA preempted state common law—you can’t sustain a defamation action against a credit bureau, no matter how wrong its reporting is—replacing it with opaque and unwieldy bureaucratic procedures for those who believe their credit bureau records are inaccurate.

The FCRA already reduces consumer welfare by keeping new entrants out of the credit reporting business. When companies edge toward providing data that might be used for credit decisions, employment screening, housing, and the like, they quickly learn to eschew that market so they can avoid the FCRA’s obligations and regulator inquests. The result? Our economy is making less intelligent decisions about credit, employment, and housing. Efficiences that would lower costs to consumers across the board are not being found.

I drew lessons from the failure of the Fair Credit Reporting Act to fix things in my paper “Reputation under Regulation: The Fair Credit Reporting Act at 40 and Lessons for the Internet Privacy Debate.”

Meet the Press, Check the Facts

This Sunday (2 December 2012), David Gregory hosted a lively session of NBC’s Meet the Press. The focus of Sunday’s program was the so-called Fiscal Cliff. Gregory rounded up many of the usual Washington suspects, including Treasury Secretary Timothy Geithner, and drilled them on their talking points.

Several times, in the course of Gregory’s questioning, he referred to President Bill Clinton’s tough 1993 budget deal. Throughout the broadcast, Gregory kept stressing the fact that the 1993 deal included defense cuts. For Gregory, those cuts were the flavor of the day.

This isn’t surprising. Indeed, most members of Washington’s chattering classes parrot the line that the economy boomed during the Clinton years because Clinton was the beneficiary of the so-called peace dividend, which allowed him to cut defense expenditures.

In fact, if we look carefully at the federal budget numbers, while Clinton did cut defense expenditures, as a percent of GDP, the majority of the Clinton squeeze came from non-defense expenditures. Indeed, as can be seen in the accompanying table, the non-defense squeeze accounted for 2.2 percentage points of President Clinton’s 3.9 total percentage point reduction in the relative size of the federal government.

Clinton squeezed the budget and squeezed hard, from all major angles. This was a case in which a president’s actions actually matched his rhetoric. Recall that, in his 1996 State of the Union address, he declared that “the era of big government is over.”

Clinton’s 1993 deal marked the beginning of the most dramatic decline in the federal government’s share of the U.S. economy since Harry Truman left office. The Clinton administration reduced government expenditures, as a percent of GDP, by 3.9 percentage points. Since 1952, no other president has even come close. At the end of his second term, President Clinton’s big squeeze left the size of government, as a percent of GDP, at 18.2 percent—the lowest level since 1966.

The table contains the facts. President Clinton knew how to squeeze both defense and non-defense federal expenditures. Indeed, he squeezed non-defense a bit harder than defense. Since 1952, the only other president who has been able to reduce the relative share of non-defense expenditures was Ronald Reagan. Forget the “peace dividend”—it’s all about the Clinton “squeeze dividend.”

The UK’s Capital Obsession

Last Thursday, Mervyn King, the outgoing governor of the Bank of England, called for yet another round of recapitalization of the major UK banks. For some time, I have warned that higher bank capital requirements, when imposed in the middle of an economic slump, are wrong-headed because they put a squeeze on the money supply and stifle economic growth. So far, bank recapitalization efforts, such as Basel III, have resulted in financial repression – a credit crunch. It is little wonder we are having trouble waking up from the current economic nightmare.

So why would Mr. King want to saddle the UK banking system  with another round of capital-requirement increases, particularly when the UK economy is teetering on the edge of a triple-dip recession? Is King simply unaware of the devastating unintended consequences this would create?

In reality, there is more to this story than meets the eye. To understand the motivation behind the UK’s capital obsession, we must begin with infamous Northern Rock affair. On August 9, 2007, the European money markets froze up after BNP Paribas announced that it was suspending withdrawals on two of its funds that were heavily invested in the US subprime credit market. Northern Rock, a profitable and solvent bank, relied on these wholesale money markets for liquidity. Unable to secure the short-term funding it needed, Northern Rock turned to the Bank of England for a relatively modest emergency infusion of liquidity (3 billion GBP).

This lending of last resort might have worked, had a leak inside the Bank of England not tipped off the BBC to the story on Thursday, September 13, 2007. The next morning, a bank run ensued, and by Monday morning, Prime Minister Gordon Brown had stepped in to guarantee all of Northern Rock’s deposits.

The damage, however, was already done. The bank run had transformed Northern Rock from a solvent (if illiquid) bank to a bankrupt entity. By the end of 2007, over 25 billion GBP of British taxpayers’ money had been injected into Northern Rock. The company’s stock had crashed, and a number of investors began to announce takeover offers for the failing bank. But, this was not to be – the UK Treasury announced early on that it would have the final say on any proposed sale of Northern Rock. Chancellor of the Exchequer Allistair Darling then proceeded to bungle the sale, and by February 7, 2008, all but one bidder had pulled out. Ten days later, Darling announced that Northern Rock would be nationalized.

Looking to save face in the aftermath of the scandal, Gordon Brown – along with King, Darling and their fellow members of the political chattering classes in the UK – turned their crosshairs on the banks, touting “recapitalization” as the only way to make banks “safer” and prevent future bailouts.

In the prologue to Brown’s book, Beyond the Crash, he glorifies the moment when he underlined twice “Recapitalize NOW.” Indeed, Mr. Brown writes, “I wrote it on a piece of paper, in the thick black felt-tip pens I’ve used since a childhood sporting accident affected my eyesight. I underlined it twice.”

I suspect that moment occurred right around the time his successor-to-be, David Cameron, began taking aim at Brown over the Northern Rock affair.

Clearly, Mr. Brown did not take kindly to being “forced” to use taxpayer money to prop up the British banking system. But, rather than directing his ire at Mervyn King and the leak at the Bank of England that set off the Northern Rock bank run, Brown opted for the more politically expedient move – the tried and true practice of bank-bashing.

It turns out that Mr. Brown attracted many like-minded souls, including the central bankers who endorsed Basel III, which mandates higher capital-asset ratios for banks. In response to Basel III (and Basel III, plus), banks have shrunk their loan books and dramatically increased their cash and government securities positions (both of these “risk free” assets are not covered by the capital requirements imposed by Basel III and related capital mandates).

In England, this government-imposed deleveraging has been particularly disastrous. As the accompanying chart shows, the UK’s money supply has taken a pounding since 2007, with the money supply currently registering a deficiency of 13%.


How could this be? After all, hasn’t the Bank of England employed a loose monetary policy scheme under King’s leadership? Well, state money – the component of the money supply produced by the Bank of England – has grown by 22.3% since the Bank of England began its quantitative easing program (QE) in March 2009, yet the total money supply, broadly measured, has been shrinking since January 2011.

The source of England’s money-supply woes is the all-important bank money component of the total money supply. Bank money, which is produced by the private banking system, makes up the vast majority – a whopping 97% – of the UK’s total money supply. It is bank money that would take a further hit if King’s proposed round of bank recapitalization were to be enacted.

As the accompanying chart shows, the rates of growth for bank money and the total money supply have plummeted since the British Financial Services Authority announced its plan to raise capital adequacy ratios for UK Banks.


In fact, despite a steady, sizable expansion in state money, the total money supply in the UK is now shrinking, driven by a government-imposed contraction in bank money. So, contrary to popular opinion, monetary policy in the UK has been ultra-tight, thanks to the UK’s capital obsession.

Despite wrong-headed claims to the contrary by King, raising capital requirements on Britain’s banks will not turn around the country’s struggling economy – any more than it will un-bungle the Northern Rock affair. Indeed, this latest round of bank-bashing only serves to distract from what really matters – money.