To Become an American, Prove You Haven’t Smoked Pot

One requirement for immigrants to naturalize and receive U.S. citizenship is that they affirmatively demonstrate “good moral character.” America’s nanny staters have decided that consuming marijuana in any form is, well, immoral. The Trump administration decided this week to clarify further that it is still immoral to use, share, sell, or manufacture marijuana that is legal at the state level. The updated guidance states:

An applicant cannot establish good moral character (GMC) if he or she has violated any controlled substance-related federal or state law or regulation of the United States or law or regulation of any foreign country during the statutory period… . Classification of marijuana as a Schedule I controlled substance under federal law means that certain conduct involving marijuana, which is in violation of the CSA, continues to constitute a conditional bar to GMC for naturalization eligibility, even where such activity is not a criminal offense under state law.

For example, possession of marijuana for recreational or medical purposes or employment in the marijuana industry may constitute conduct that violates federal controlled substance laws. Depending on the specific facts of the case, these activities, whether established by a conviction or an admission by the applicant, may preclude a finding of GMC for the applicant during the statutory period.

The new guidance goes even further:

Note that even if an applicant does not have a conviction or make a valid admission to a marijuana-related offense, he or she may be unable to meet the burden of proof to show that he or she has not committed such an offense.

In other words, even if an immigrant attempting to become an American has never been convicted of using marijuana and won’t admit doing so, they could still be denied U.S. citizenship. It is important, you understand, that immigrants learn about American traditions. Obviously, those traditions do not include smoking marijuana—despite one of the highest use rates in the world—while they do include Kafka-esque bureaucracy.

Don’t Assume That Gay Couples Face Mortgage Discrimination

A study by Iowa State researchers that has gotten some media attention at places like NBC News finds that mortgage lending to same-sex applicant pairs is associated with higher rates of loan rejection and slightly higher interest rates. The study is already being cited in support of the Equality Act, a bill that, among many other provisions expanding the scope of federal law, would extend the federal Fair Housing Act to cover sexual orientation. 
There are reasons, however, to approach the findings with caution. To begin with, lenders currently have an economic incentive to underwrite loans correctly and compete for all profitable business. Beyond that, studies that find positive (even if thin) evidence of discrimination tend to get reported and amplified heavily, while those with null results get ignored.
The first point to get on the table here is that same-sex couples are decidedly *not* distributed randomly across all sorts of neighborhoods. In particular, in common observation, male couples have long tended to be overrepresented in neighborhoods that are undergoing various stages of renovation, often associated with upward movement of real estate values. Some of these neighborhoods are run-down or even crime-ridden when the same-sex couples start moving in. Some have finished the process of “arriving” and have become pricey and desirable (although the gay couples might choose to move on at or before that point). 
There are at least two possible mechanisms by which these neighborhoods could have higher mortgage denial rates for reasons unrelated to any animus on the part of lenders: they might include more marginal/troubled neighborhoods in the early stages of comeback (which will have higher default rates for multiple reasons). Separately, renovators have different needs in the mortgage market than those who buy new (or buy fully renovated).  Loans in comeback neighborhoods might be exposed to the complications of renovation by being, for example, hybrid construction loans, multi-family, residential-plus-commercial, or lacking in conventional amenities such as off-street parking. 
One transaction I know about from firsthand experience, for example, was nonconforming in several of these ways: it was a construction loan premised on the idea that a large chunk of cash was going to fix up the old house, it was a two-unit, and one of the units was commercial. Such a loan is often hard to place in the conventional mortgage market, which is geared toward standard servicing and packaging for resale into predictable secondary markets, as favored by mass lenders and mortgage servicers. The alternative, as in the case I know about firsthand, can mean turning to an individualized deal on slightly less favorable (but still fair and competitive) terms.  
Sure enough, if you turn to the write-up at Iowa State, you find that it reaches quite a significant conclusion that goes unmentioned in the more popular NBC report:  
“What they found was somewhat surprising. In neighborhoods with more same-sex couples, both same-sex and different-sex borrowers seem to experience more unfavorable lending outcomes overall. The researchers say the findings should raise enough concern to warrant further investigation.”
In other words, the study itself leaves gay couples’ higher turn-down rate looking like something of an artifact: the observable result was linked instead to the neighborhoods where they take out mortgages. Incidentally, the researchers were able to control for some variables such as types of mortgage, which did allow them to take into account some of the differences that could be observed and quantified. But just as surely, especially working with data sets gathered for other purposes, they could not control for all the ways one neighborhood (or for that matter one individual loan) differs from another. 
These are not findings on which one would want to premise any new legislation restricting liberty of contract. 

Leaving High-Tax Connecticut for Low-Tax Florida

The exodus of the wealthy from high-tax Connecticut continues, according to the Wall Street Journal:

After four years on the market, and three price cuts, a stately Colonial-style home on Greenwich, Conn.’s tony Round Hill Road is being sold in a way that was once unthinkable in one of the country’s most affluent communities: It is getting auctioned off. Once asking $3.795 million, the four-bedroom property will be sold May 18 with Paramount Realty USA for a reserve price of just $1.8 million.

Seller Isaac Hakim, a real-estate investor, said it is time to move on …. Many wealthy New Yorkers are opting to live in the city, rather than in the suburbs. Some of the wealthiest, like Mr. Hakim, have decamped to Florida in search of more favorable tax rates.

… Owners who paid top dollar for their homes in the Fairfield County town in the mid- to late-2000s are routinely selling for less than they paid. Dramatic price cuts are the order of the day.

… Starwood CEO Barry Sternlicht, a former Greenwich resident, declared it to be the worst housing market in the country. “You can’t give away a house in Greenwich,” he said while speaking at an investment conference. Mr. Sternlicht’s company has since relocated from Greenwich to Miami Beach, Fla.

Data from both the Census Bureau and Internal Revenue Service have long shown that Americans are, on net, moving from higher-tax states such as Connecticut to lower-tax states such as Florida. The 2017 Tax Cuts and Jobs Act (TCJA), which capped state and local tax deductions, has likely strengthened these existing migration patterns.

These patterns are shown in the chart below. Each blue dot is a state. The vertical axis shows the mid-2017 to mid-2018 Census net interstate migration figure as a percentage of state population. The horizontal axis shows state and local household taxes as a percentage of personal income. The red line shows the fitted relationship between the two variables.

On the right, most of the high-tax states have net out-migration. On the left, nearly all the net in-migration states have household tax loads of less than 8.5 percent of personal income.

The TCJA should be a wakeup call for out-migration states such as Connecticut. Such states need to reduce their taxes and trim their government costs. News articles reveal that the wealthy are taking a hit on selling their Connecticut homes. But the whole state takes a hit when highly productive people and their businesses decamp for tax-friendlier locations.

I profile some of the other wealthy expatriates from Connecticut here.

A new study published by NBER summarizes the latest international evidence on tax-induced mobility.

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

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

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

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

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

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

Furthermore, footnote 66 of the report states:

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

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

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

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


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

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

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

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

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

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

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

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

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



The Ruins of Old Tech Monopolies

Look on my works, ye Mighty, and despair!

Mar 2000: Palm Pilot IPOs at $53 billion

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

Jun 2007: iPhone released

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

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

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

Apr 2006: Spotify founded

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

Jun 2015: Apple Music announced

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

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

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

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

A Gold Standard Does Not Require Interest-Rate Targeting

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

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

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