December 1, 2020 4:23PM

Greenhouse Gases and the California Waiver Again

General Motors recently announced that it is terminating its participation in the Trump administration’s lawsuit to deny California the ability to set more stringent Corporate Average Fuel Economy (CAFE) standards. As I have discussed before, CAFE standards, which were originally devised to reduce fuel use during the oil shocks of the 1970s, have been repurposed as climate change (CO2) emissions controls. But the standards are an inefficient method to reduce CO2 emissions.

Last year, the Trump administration froze future CAFE standards at 2020 levels and denied California’s request to set higher fuel economy standards than the federal government. California and 22 other states filed a lawsuit challenging the Trump administration’s denial of the waiver from the more lax federal standard. General Motors, Toyota, and Fiat Chrysler joined the lawsuit on the side of the administration while Ford, Honda, BMW, Volkswagen, and Volvo agreed to follow California’s more stringent standard. General Motors’ decision to stop participation in the lawsuit increases the likelihood that the ultimate result for the country will be California’s standard of 51 mpg rather than the Trump 40 mpg.

This ongoing saga and its portrayal in the media illustrate a deficiency of much environmental journalism. Environmental journalists write about these disputes as if there is a good side and a bad side. The bad side opposes more stringent environmental regulation and the good side supports them.

Why don’t journalists ever ask what the optimal amount of environmental protection would be and how we would achieve it? Their black and white view of environmental regulations ignores the legitimate debate over what level of environmental protection is appropriate and what regulatory tools offer the most cost‐​effective way to accomplish those goals.

For example, economic analysis of the original Obama CAFE standard of 54.5 mpg concluded that it would reduce emissions as much as a carbon tax of $27 a ton (27 cents per gallon) but cost six times as much. Additional analysis of the Obama proposal also has concluded that it is regressive. So why do journalists praise a policy proposal that is the equivalent of a revenue‐​neutral federal carbon tax of $162 a ton ($1.62 per gallon) with a rebate of the revenue to those with above‐​median family income?

December 1, 2020 12:37PM

What to Expect from China’s New Export Control Law

China’s Export Control Law went into effect today. Ostensibly meant to bolster Chinese national security, the choice to enact it at this particular moment was likely spurred by a desire to provide Beijing with the legal ground to retaliate against export restrictions put in place by the Trump administration targeting China. Given such motivations, the new law could have a significant impact on bilateral trade and investment flows.

One of the most immediate results of the law, which features vague language and broad provisions, will be to increase the compliance burden on U.S. companies. But its impact could also prove much more sweeping. As some observers in China have pointed out, the law could enable Beijing to impose new restrictions on rare earth exports, either as retaliation against U.S. export restrictions or negotiating leverage. Beyond its immediate harm to U.S. supply chains, such a move would further roil the bilateral relationship and further fuel calls for decoupling the two economies.

China’s law could also motivate other countries to take similar measures. Japan, for example, recently imposed export controls on three key semiconductor materials to South Korea, citing concerns such materials could be used for military purposes. Unsurprisingly, South Korea views the decision as politically motivated.Although international adjudication could help limit the abuse of export controls, the crippled state of the World Trade Organization’s dispute settlement body means that such measures could prove ripe for abuse. This could disrupt international trade at a moment the global economy can least afford it.

The TikTok Deal

Beyond its abstract and theoretical consequences, the law could quickly and concretely impact the lives of U.S. citizens. Chinese company ByteDance, parent company of the wildly popular social media app TikTok that claims usage by 100 million Americans, was requested by President Trump to divest its U.S. operation by November 12 (later extended to December 4). At the center of this issue is TikTok’s algorithms, which industry analysts say are the “secret sauce” to the company’s success.

TikTok’s algorithms, however, appear to fall into two categories under China’s export control law: (1) personalized information push service technology based on data analysis, and (2) artificial intelligence interactive interface technology. ByteDance already submitted an application for an export license pursuant to China’s export control rules, but it is unclear when Beijing will announce its decision. In the meantime, to avoid running afoul of Chinese laws ByteDance and Oracle negotiated a deal under which Oracle will be ByteDance’s technology partner and assume management of TikTok’s U.S. user data but will not receive the algorithms from ByteDance.

However, this effort to comply with China’s new export restrictions may result in the Trump administration’s rejection of the deal, with Treasury Secretary Steven Mnuchin insisting that “All of the code will have to be in the United States. Oracle will be responsible for rebuilding the code, sanitizing the code.” If the divestiture effort fails, millions of U.S. TikTok users could lose access to the application.

The Ambiguous Export Control Law

China traditionally has implemented export controls through regulations, and its effort to craft a comprehensive Export Control Law did not begin until 2017. A final text was approved in October. Despite the years‐​long process, some key parts of the law are still vague, which creates some uncertainties and challenges for the business community as it navigates these new rules.

This lack of clarity begins with the law’s key stated objective. Although the text declares the law’s goal as the protection of “national security and interests,” it does not provide further elaboration and the exact scope is unknown. Relatedly, the law authorizes agencies to take reciprocal measures if “any country or region abuses export control measures to endanger the national security and interests” of China. Again, under what circumstance this provision will be invoked is unclear.

In addition, the law provides for the establishment of a list of controlled items, which has not been published. This list is likely to include items already found on existing lists subject to China’s export control regime. However, the law also has a catch‐​all provision, which allows export restrictions to be placed on items not currently on the controlled lists. This provision allows the authority to subject ad hoc items to export controls without going through an additional regulatory process first, adding another layer of uncertainty for the trade community.

The extra‐​territorial jurisdiction of the law is similarly murky. The current law restricts re‐​exports of Chinese goods and technology, but it does not define “re‐​exports.” An earlier draft stipulates that foreign products that contain a certain percentage of China‐​origin controlled items will also be subject to the law. However, this language has been taken out in the final text. As a result, the law’s extra‐​territorial impact will not be known until Beijing enforces it.

How the Chinese Export Control Law will be carried out remains to be seen. At a first glance, it gives China another powerful legal tool in the trade war with the United States. As bilateral relations further deteriorate, we may see the law become a prominent feature of the trade landscape.

December 1, 2020 10:28AM

U.S. Commercial Shipbuilding Output Is Abysmal. It’s About to Get Worse.

Perhaps the Jones Act’s most damaging provision is its requirement that vessels engaged in domestic commerce be constructed in U.S. shipyards. By forcing Americans to buy ships that cost four to five times as much as those built abroad, the restriction exerts downward pressure on the size of the U.S. fleet. Compounding matters, the requirement has proved ruinous to the U.S. commercial shipbuilding industry, which has become almost wholly dependent on a captive domestic market whose size continues to dwindle.

To appreciate the market’s decline, consider that in 1996 the chairman of the Shipbuilders Council of America lamented in testimony before Congress that U.S. shipyards—effectively shut out of the international market given their sky‐​high prices—were “fighting over a lousy five or six Jones Act ships that might be built every year.” Last year, meanwhile, a Congressional Research Service report noted that annual production of such vessels had slipped to a mere two or three. And now a new government study suggests that production is likely to decline even further.

Last month the Government Accountability Office (GAO) released a report examining the effects of Congress’s December 2015 decision to repeal the ban on exports of U.S. oil. Among its findings was a decreased demand for U.S.-built Jones Act tanker ships. Freed from the export ban, U.S. producers have increasingly opted to sell their crude on the international market rather than to U.S. refiners—a domestic shipment requiring expensive transport on Jones Act vessels. Those refiners, meanwhile, replaced the domestic oil they had previously purchased with imported crude able to take advantage of much cheaper international shipping.

As the GAO report notes, crude exports from the Gulf Coast increased by over 200 percent from 2016 to 2017, Jones Act shipments from the Gulf Coast to the East Coast declined by 57 percent in 2016, and oil imports bound for the East Coast that same year increased by 35 percent. This increased use of cheap international shipping and reduced demand for Jones Act vessels has significant implications for U.S. shipbuilding:

Four of the seven shipping industry stakeholders we interviewed said that the decline in demand for the use of Jones Act tankers and barges to transport crude oil has primarily affected the shipbuilding sector…One industry representative we interviewed explained that approximately 80 percent of the Jones Act fleet was built between 2007 and 2016, and since such vessels have a lifespan of approximately 30 years, it is unlikely that there will be a need to build new tankers in this decade given the decrease in demand.

Tankers account for nearly 60 percent—57 of 97—oceangoing ships in the Jones Act fleet. If the appetite for such vessels has been sated for the foreseeable future—and there is every indication it has, with no tankers delivered since 2017 and none currently under construction—that places a severe dent in demand for new Jones Act ships. Among non‐​tanker Jones Act ships, there are currently three such vessels scheduled for delivery through 2021. But after that, the order book for Jones Act ships is empty. Even when orders eventually are placed, it will take several years for the ships to be delivered (two of the three Jones Act ships still awaiting delivery were ordered in August 2017, for example, while the third was ordered in August 2016).

In other words, it is a virtual certainty that there will be entire years in this decade in which zero Jones Act ships are delivered. And for those years ships are delivered, their numbers are sure to prove anemic given the lack of need for new tankers.

The shipbuilding industry may have once complained about a “lousy” five or six Jones Act ships constructed per year, but such times will likely be regarded—if they aren’t already—as the good old days. The Jones Act’s requirement forcing the domestic construction of ships serves as a considerable deterrent to the purchase of new vessels while utterly failing to foster a vigorous commercial shipbuilding industry. This is costly protectionism in service of nothing.

December 1, 2020 10:22AM

E Pluribus, Unum? Federal Reserve Provision of Retail Accounts

This is the third and final essay in my series on proposals to help reduce the number of unbanked households in America. In my prior essays, I examined the history of the postal savings system between 1910 and 1966, and I evaluated present-day calls to allow the U.S. Postal Service to offer bank accounts—and possibly small-dollar credit—to its customers. But no review of contemporary financial inclusion policy would be complete without considering the case for direct provision of retail deposit accounts by the Federal Reserve, extending to households and nonfinancial businesses what is currently only available to member banks of the Federal Reserve System.[1]

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November 30, 2020 7:47PM

Supreme Court Rules that Constitution Matters, Even in a Pandemic

Late on the night before Thanksgiving, the Supreme Court granted an injunction against New York State’s restriction on religious services, with 10- or 25- person occupancy limits depending on whether the gathering is in a “red” or “orange” zone, respectively, according to viral prevalence. Although the justices split 5–4, with Chief Justice John Roberts voting to deny the injunction on a technicality, it seemed like a no‐​brainer: houses of worship were treated differently than many similarly situated secular facilities, so the state executive order couldn’t stand as a basic First Amendment matter (and also equal protection, though the Court didn’t discuss that framework).

I called it a “Thanksgiving miracle,” with the Court finally pushing back on expansive and arbitrary COVID‐​era restrictions rather than blindly deferring to government officials. Then I went on to enjoy the long holiday weekend—Thanksgiving is my favorite holiday—with minimal time on social media or reading anything work‐​related.

So it was with sadness if not surprise that I discovered that the last few days have seen an explosion of anger and disbelief from progressives, academics and Twitter trolls alike. The criticisms seem to boil down to two major lines of attack: (1) the Court is privileging religion over everything else; and (2) the Court isn’t taking the pandemic seriously, or is substituting its own ill‐​considered scientific views for those of expert health officials. And overarching both of these points is the construct through which many on the left now view the High Court: that a conservative majority is simply imposing its ideology, regardless of what law or precedent might dictate.

Those arguments betray a misunderstanding of Roman Catholic Diocese of Brooklyn v. Cuomo—not surprising given how fact‐​specific most pandemic‐​related cases are—and read more into it than what it actually says. They also probably extrapolate from Justice Neil Gorsuch’s provocative concurring opinion, with which I ultimately agree but which isn’t necessary to decide the case (which is why it’s a concurrence). Let me explain.

Of the 33‐​page document the Court released on All Turkeys’ Eve, barely more than six pages constitute the actual per curiam (“by the court”) opinion. It’s a very streamlined analysis—as one might expect in response to an application for injunctive relief pending appeal (not a fully briefed and argued case on the merits)—that makes the following simple points:

  1. “[T]he regulations cannot be viewed as neutral because they single out houses of worship for especially harsh treatment.” That’s because, in the red zone that limits worshippers to barely a minyan, “essential” businesses like acupuncture facilities and chemical manufacturers are not limited at all. And in the orange zone, limiting congregants to 25, even “non‐​essential” businesses can decide their own limit.
  2. Since the rules aren’t religiously neutral, they’re subject to “strict scrutiny,” meaning they have to be narrowly tailored to achieve a compelling public interest. Contrary to some commentary I’ve seen, the Court fully accepts that “[s]temming the spread of COVID–19 is unquestionably a compelling interest.” But the problem is that New York’s rules are an outlier, “far more restrictive than any COVID–related regulations that have previously come before the Court, much tighter than those adopted by many other jurisdictions hard‐​hit by the pandemic, and far more severe than has been shown to be required to prevent the spread of the virus at the applicants’ services.” Not only is there no evidence that either the Diocese of fellow applicant Agudath Israel have contributed to the spread of COVID–19 — the record shows they’ve taken safety precautions beyond anything required before this latest lockdown — but “there are many other less restrictive rules that could be adopted to minimize the risk to those attending religious services,” such as percentage‐​capacity limits.
  3. There is irreparable harm to religious believers from being unable to attend in‐​person services; it’s uncontroversial that even a temporary loss of First Amendment freedoms is a serious problem.
  4. There is no harm to the harm to the public interest from granting the injunction because “the State has not claimed that attendance at the applicants’ services has resulted in the spread of the disease. And the State has not shown that public health would be imperiled if less restrictive measures were imposed.”

In short, the justices in the majority, while accepting that they “are not public health experts” and fully respecting “the judgment of those with special expertise and responsibility in this area,” still had to hold public actions to the constitutional fire—and in this case found them wanting. “[E]ven in a pandemic, the Constitution cannot be put away and forgotten.”

Chief Justice Roberts, for his part, did not take issue with any of the above analysis, noting that “capacity limits of 10 and 25 people, depending on the applicable zone, do seem unduly restrictive. And it may well be that such restrictions violate the Free Exercise Clause.” But the reason he would’ve denied the injunction is that, after the Diocese and Agudath Israel asked the Supreme Court for relief, the governor revised his zones such that none of the houses of worship involved in this case were subject to those restrictions. “It is not necessary,” Roberts concluded in his typical minimalist manner, “for us to rule on that serious and difficult question at this time.”

The majority responds to that prudential argument by saying that “injunctive relief is still called for because the applicants remain under a constant threat that the area in question will be reclassified as red or orange.” In other words, the case isn’t moot. Indeed, Governor Andrew Cuomo “regularly changes the classification of particular areas without prior notice”—eight times in the previous five weeks. There’s a very strong likelihood that the issue could arise again, so it’s important to decide the issue (at least pending appeal) now.

Some have pointed to the following passage from Justice Gorsuch’s concurrence as evidence of at least his glib disregard for the seriousness of the situation: “So, at least according to the Governor, it may be unsafe to go to church, but it is always fine to pick up another bottle of wine, shop for a new bike, or spend the afternoon exploring your distal points and meridians. Who knew public health would so perfectly align with secular convenience?”

But Gorsuch isn’t saying that the state’s police power can never be used to close churches, or that he knows better than public health officials what a reasonable or necessary restriction is to slow viral spread. He’s just saying that the rules have to apply equally to all—and that courts have been too deferential to executive officers who “have asserted the right to privilege restaurants, marijuana dispensaries, and casinos over churches, mosques, and temples.”

It’s the arbitrariness of the essential/​nonessential distinction that’s the problem, not the closings. As he concludes, “while the pandemic poses many grave challenges, there is no world in which the Constitution tolerates color‐​coded executive edicts that reopen liquor stores and bike shops but shutter churches, synagogues, and mosques.”

For his part, Justice Brett Kavanaugh goes out of his way to say that “the COVID–19 pandemic remains extraordinarily serious and deadly” and that he doesn’t “doubt the State’s authority to impose tailored restrictions—even very strict restrictions—on attendance at religious services and secular gatherings alike.” But here the restrictions aren’t tailored to the circumstances, particularly in light of the constitutional rights involved. Even if New York’s rules require movie theaters and certain other spaces to remain completely closed, “under this Court’s precedents, it does not suffice for a State to point out that, as compared to houses of worship, some secular businesses are subject to similarly severe or even more severe restrictions.”

There’s a further important back‐​and‐​forth among the justices about the meaning of Chief Justice Roberts’s concurrence in South Bay Pentecostal Church v. Newsom, deferring to California’s governor on religious‐​service restrictions in the early months of the pandemic. Courts have cited that squib of an opinion 114 times to support various lockdowns but, as Josh Blackman put it, “the 115th citation sank it.” I’d say more on that — the chief justice himself wrote in Diocese of Brooklyn that courts have been reading his South Bay words too expansively, but this post has already gone on too long.

The main point is that, as I wrote in my essay “State Police Powers and the Constitution”— part of Cato’s Pandemics and Policy series—“State and local officials have broad power to govern for public health and safety, but there are limits—for example, on the powers themselves and who exercises them.” Moreover, measures that are reasonable in the rapid response to the start of an emergent health crisis with a lack of epidemiological data will often prove unreasonable once we have a better understanding of the challenges.

Blunderbuss shutdown orders have overstayed their constitutional welcome and it’s great to see the Supreme Court’s starting to guard the guardians. To quote my favorite line from Justice Gorsuch’s Diocese of Brooklyn opinion, “Even if the Constitution has taken a holiday during this pandemic, it cannot become a sabbatical.”

Postscript: On Sunday, France’s highest court ordered the government to review a law limiting church attendance to 30, saying the restriction wasn’t proportionate to the risk of COVID-19 transmission.

November 30, 2020 10:11AM

The Trade Policy Views of Biden’s CEA Picks

By Simon Lester and Alfredo Carrillo Obregon

It is commonly said that "personnel is policy," which can make it worthwhile to look in depth at the views of key people appointed by a president.

The Council of Economic Advisers (CEA) is an agency within the Executive Office of the President that advises the President on economic policy. This post looks at the trade policy views of the three people Biden has just announced for the CEA: Cecilia Rouse (Chair), Heather Boushey and Jared Bernstein. (Of the three, Bernstein has had by far the most to say on trade policy.)

Based on the quotes we offer below, none of them seem to have Trump's deeply ingrained protectionist views (e.g. none declare themselves to be "a tariff man", or woman as the case may be), but they all have varying degrees of skepticism about trade liberalization and trade agreements.

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November 27, 2020 9:42PM

The Libertarian, Progressive, and Conservative Constitutions

Earlier this year, the National Constitution Center commissioned a constitution drafting project, with teams of constitutional scholars tasked with creating a new U.S. Constitution, or updating the existing one, according to libertarian, progressive, and conservative visions, respectively. In addition to the actual draft constitutions, we each submitted explanatory essays that summarized our approaches and noted key innovations. Here's a summary of what we did, followed by some concluding thoughts about this experience. (Full disclosure: The project was suggested and underwritten by Cato board member Jeff Yass.)

I led Team Liberty (as we called ourselves), joined by Tim Sandefur of the Goldwater Institute (and a Cato adjunct scholar) and Christina Mulligan of Brooklyn Law School. This was probably an easier project for us than for our counterparts because the current Constitution is fundamentally a libertarian or, more precisely, classical liberal document. So much so that, at the outset, we joked that all we needed to do was to add “and we mean it” at the end of every clause. As we put in our introduction, however

many parts of our fundamentally libertarian constitution, particularly those that limit federal power, have been more often ignored, or cleverly evaded, than honored, especially by court decisions that have perverted the actual meaning of the document’s text. Our task was therefore largely to clarify and sharpen those provisions—most notably the Commerce Clause, which has been transformed by legal interpretation into a charter of expansive federal power far beyond what the framers envisioned.

Of course, there have been some developments in the 230 years since the original Constitution and Bill of Rights took effect and the 150 years since the post-Civil War amendments were ratified, that have demonstrated certain deficiencies from a libertarian perspective. Out-of-control spending necessitates a balanced budget requirement (except in emergencies). Today’s imperial presidency militates for a reweighing of checks and balances. We also couldn’t help but add in a few “and we mean it” provisions just to be safe, as well as certain liberty-enhancing reforms suggested by such scholars as Randy Barnett and Milton Friedman.

We also circumscribed executive power (as did the other groups in certain ways), including by allowing for impeachment of federal officials for "behavior that renders them unfit for office." We made sure that Congress couldn't coerce the states -- the states are allowed to choose block grants instead of federal funding with regulatory strings -- while a supermajority of the states can reverse a federal law or regulation. And we strengthened or made more explicit what we now consider to be protections under the First, Second, Fourth, Fifth, and Sixth Amendments, as well as -- my favorite -- protecting the right to the “fruits of one’s labors” and adding a catch-all “right to live a peaceful life of one’s choosing.” You can read our constitution here.

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