October 15, 2019 2:00PM

The Economic Consequences of Sen. Sanders’ Stock Confiscation Plan

Bernie Sanders would confiscate 20 percent ownership stakes in 22,000 companies, distributing the stocks to workers through shared employee ownership funds. His “Corporate Accountability Plan,” announced yesterday, should lay to bed any lingering doubts that “democratic socialism” is just about social democracy, or a bigger welfare state. Rather, it amounts to a fundamental attempt to re-order the American economy through federal government edicts.

Under Sanders’ “Democratic Employee Ownership Funds,” all publicly traded companies and those with at least $100 million in annual revenue would have to contribute 20 percent of their stock to “workers” over a decade, creating an “employee-controlled fund” that distributes any dividends to employees. Unlike ordinary stocks, workers couldn’t sell or transfer the stocks in their name. Instead, the fund would be managed by elected worker representatives, with ordinary voting rights. Worker representatives would also make up at least 45 percent of boards in firms with at least $100 million in annual revenue, $100 million balance sheets, and publicly traded companies.

There are some obvious economic problems with this combined plan:

  • If we force businesses to compensate employees via collective stock donations, then employers will look to reduce remuneration costs in other ways, most likely reducing wages to offset the cost of said donations. We’d expect Bernie’s plan then to change the composition of remuneration, but not its overall level.
  • If this is correct, most ordinary risk averse employees would be worse off under this plan. They would have preferred the extra wage income for diversification purposes (i.e. the ability to invest their extra income elsewhere). Because the stock is locked in the fund, a company failure now means they lose their jobs’ wages AND the value of the stocks they notionally “own.”
  • True, some companies and employees clearly do prefer stock compensation, especially in Silicon Valley start-ups. This can make economic sense in firms with limited cash that are trying to attract talented workers in businesses with the potential to grow rapidly. It’s evidence from these types of exceptions that is usually used to “prove” that employee ownership improves incentives and business outcomes.
  • If co-operatives and mutuals really did harness dispersed information and align incentives to engender more business success across the board though, then why don’t socialists actively create such firms and outcompete ordinary stockholder businesses, rather than seeking coercive government mandates to facilitate their idea? Indeed, why don’t more businesses decide to mutualize anyway?
  • The reason, surely, is that this ownership structure would create big problems for many companies. Most obviously it would risk inefficient decision-making by worker board members and create severe difficulties in raising new capital (it’s little surprise that most advocates of this type of plan worldwide also suggest new government “investment banks.") In Yugoslavia, where such market socialism was rolled out extensively, academic research suggests the country became afflicted with the same inefficiencies, stagnation and impaired capital allocation as seen in other socialist economies.
  • This is unsurprising. Elected worker-owner representatives and board members will result in a political system in business decisions. Workers and their ownership and board representatives have their own self-interests (not least being re-elected) and interest groups would quickly form for both (e.g. worker representation for those with stronger interests in shoring up the pension plan, those workers resisting a plant closure etc.) Since workers aren’t generally tied to a business for life, short-termism might become a problem – trying to raise overall remuneration rather than longer-term investment. Or else investment might be biased towards protecting jobs even though any profits might be socially better invested elsewhere.
  • Of course, firms may seek to also avoid the measures by restructuring businesses to avoid public listing, or separate parts of the company to avoid exceeding the $100 million revenue threshold. Other board members may try to resist dividend payouts until a new president and Congress would overturn the measures too, significantly distorting business decisions.

Employee-owned businesses, mutuals, and co-ops are a perfectly normal part of the rich tapestry of a free economy. Mandating this structure and confiscating and redistributing stock to achieve it is another matter entirely.

October 15, 2019 9:42AM

Lars Svensson on NGDP Targeting

Back in July, I shared here some thoughts concerning the Fed's conference in Chicago that month, which was dedicated to a review of its tools, strategies, and communications. Among other things, I said I was disappointed by the short-shrift given to NGDP targeting by Lars Svensson in his paper evaluating alternatives to strict inflation-rate targeting.

That paper's dismissive treatment of NGDP targeting met with some sharp replies from audience members sympathetic to the idea. In response to these, Professor Svensson has since revised it, moving its original, terse discussion of NGDP targeting from an appendix to the main body, and enlarging upon it.

These changes don't alter the paper's conclusion, to wit: that NGDP targeting is inferior to several other possible monetary policy strategies, and particularly to average inflation targeting. But they do make it easier to spot some subtle fallacies upon which that negative verdict rests. By pointing-out these fallacies, I hope I may help to convince both Professor Svensson himself and others to better appreciate NGDP targeting's merits.

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October 14, 2019 3:51PM

Trump’s Needlessly Dangerous Saudi Arabia Deployment

The Trump administration has approved the deployment to Saudi Arabia of Air Force F-15s, new air defense systems, and other military hardware, along with U.S. troops to operate and maintain those weapons systems. These new measures the Pentagon announced on October 11 will bring the total U.S. troop deployment to the kingdom to 3,000 since a mid-September attack on Saudi oil facilities. Speaking to reporters after the announcement, Secretary of Defense Mark Esper said that it is now “clear that Iranians are responsible” for the attacks and warned that Washington has additional units “on alert” that can provide increased security to both the U.S. forces and Saudi Arabia “if necessary.”

U.S. leaders have taken an unsavory step deepening Washington’s support of an odious, duplicitous Saudi regime that brutalizes its own people and has committed an appalling array of war crimes in Yemen. It also puts the United States in the middle of an escalating political and military confrontation between Saudi Arabia and Iran. The direct confrontation between Riyadh and Tehran is merely one component of a larger struggle for regional dominance pitting major Sunni powers against a loose alliance of Shia factions led by Iran. Yemen, Syria, Iraq, and Bahrain are other arenas in which that power struggle continues to be waged.

The administration’s decision to elevate the U.S. military role in Saudi Arabia is all the more bizarre and indefensible in light of President Trump’s repeated condemnations of the Iraq War and other U.S. Middle East entanglements. In defending his recent decision to withdraw U.S. forces from northern Syria, the president stated bluntly that “it is time for us to get out of these ridiculous Endless Wars, many of them tribal, and bring our soldiers home.” Trump is correct, but he needs to follow his own advice throughout the region, not just in Syria.

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October 14, 2019 11:02AM

“Illegal Alien” Is One of Many Correct Legal Terms for “Illegal Immigrant”

Rhetoric plays an unfortunately large role in public policy debates. Generally, those who are particularly supportive of deporting illegal immigrants tend to call them “illegal aliens” while those who prefer legalization tend to use the term “undocumented immigrants.” As I’ve written before, these euphemisms are tiresome and don't matter much so I use the term “illegal immigrants” because most people understand that.

However, one argument by immigration restrictionists in favor of using the term “illegal alien” is that it is the technical legal term. Hans von Spakovsky of the Heritage Foundation makes this point. Representative Julian Castro (D-TX) introduced the Correcting Hurtful and Alienating Names in Government Expression (CHANGE) Act recently to amend U.S. immigration law to, among other things, replace the term “illegal alien” with “undocumented foreign national.” I don’t expect that bill to become law.

Regardless, most people seem to assume that “illegal alien” is the correct legal term. Recently, Judge Andrew Hanen addressed this rhetorical issue in his decision of Texas v. U.S. when he wrote:

The Court uses the phrases "illegal immigrant" and "illegal alien" interchangeably. The word ‘immigrant’ is not used in the manner in which it is defined in Title 8 of the United States Code unless it is so designated. The Court also understands that there is a certain segment of the population that finds the phrase "illegal alien" offensive. The Court uses this term because it is the term used by the Supreme Court in its latest pronouncement pertaining to this area of the law. See Arizona v. United States, 132 S. Ct. 2492, 2497 (2012).

However, U.S. immigration law, Congress, and government agencies use many different terms in place of “illegal aliens.” The most famous example is the Illegal Immigration Reform and Immigrant Responsibility Act of 1996. Also, the Department of Homeland Security frequently used the term “unauthorized immigrant.” I searched immigration law (CTRL-F) for every term I could think of to describe illegal immigrants. My searches included every combination of the first words illegal, unauthorized, undocumented, irregular, and infiltrator with the second word of immigrant, alien, migrant, person, entrant, or person. The term “foreign national” was not preceded by an adjective so I did not search for it.

Table 1 shows the different terms used to describe the concept of an illegal immigrant in Title 8 of the U.S. Code, the portion of the law that contains laws on citizenship, nationality, and immigration. Those combinations of words were mentioned 84 times. The term “illegal alien” was mentioned most of all – 33 times for 39 percent of total mentions. The second most common term was “unauthorized alien,” which appeared 21 times or about a quarter of the time. Interestingly enough, “undocumented alien” was the third most common with 18 uses. My preferred term of “illegal immigrant” was used only six times but the term “illegal immigration” was used 93 times, which I didn’t include in the table because it’s not a term that describes individuals.

It is clear that U.S. law doesn’t have an agreed-upon single legal term for "illegal immigrants." The debate over rhetoric isn’t important and I prefer to use the term “illegal immigrant” because I think that is most commonly used and understood by Americans outside of law and policy. If only language were entirely about the ease of communication!

October 14, 2019 9:21AM

Supreme Court Should Decide the “Expressive Wedding Vendor” Issue Once and for All

Arlene’s Flowers, run by Barronelle Stutzman in the southeastern Washington town of Richland, designs and sells floral arrangements for many occasions in Richland, Washington. Mrs. Stutzman, for religious reasons, believes that marriage is a spiritual union between a man and a woman and doesn’t create floral arrangements same-sex weddings. This case began when long-time clients Robert Ingersoll and Curt Freed asked Mrs. Stutzman to create the floral arrangements for their wedding. She respectfully declined and referred them to several nearby florists.

To be clear, Mrs. Stutzman serves everyone regardless of sexual orientation or any other category. For nearly a decade, Messrs. Ingersoll and Freed used Mrs. Stutzman for their anniversary and Valentine’s Day needs, for example. Nevertheless, Mrs. Stutzman’s conscience won’t allow her to provide flowers to celebrate a same-sex marriage, even for long-time friends and customers.

Mr. Freed’s Facebook posts expressing disappointment at the situation gained media attention, which caused the couple to receive enough free floral arrangement offers to have 20 weddings. Additionally, the Washington attorney general personally reached out to the couple. Both the couple and the state ended up suing Mrs. Stutzman for violating Washington’s antidiscrimination law.

The trial court ruled against Arlene’s Flowers and the state supreme court affirmed, holding that floral design did not constitute First Amendment-protected artistic expression. The U.S. Supreme Court remanded the case for reconsideration in the light of its 2018 ruling in a similar context (except a baker instead of a florist) in Masterpiece Cakeshop v. Colorado Civil Rights Commission that state officials displayed anti-religious animus and thus could not enforce their law. In the absence of similar anti-religious red flags, it’s probably not surprising that the state supreme court reinstated its previous opinion almost verbatim.

Yet Supreme Court precedent against compelled speech is strong. In West Virginia State Board of Education v. Barnette (1943), the Court ruled that school children could not be forced salute the flag and recite the pledge of allegiance. And in Wooley v. Maynard (1977), the Court found that New Hampshire could not require drivers to display the state motto (“live free or die”) on their license plates. (That case is why, if your jurisdiction has a default slogan—for example, “taxation without representation” in D.C.—it has to offer you an alternative if you ask.)

In a pair of 2018 cases, NIFLA v. Becerra, and Janus v. AFSCME, the Court found that states could not force a pro-life clinic to read a script advising patients on how to get an abortion, and that non-union members of a collective bargaining unit could not be forced to pay for union speech with which they disagree, respectively.

The Court had the opportunity to tackle the issue of whether states may force wedding vendors to create cakes for same-sex weddings in Masterpiece. But the Court didn’t reach the issue of whether the First Amendment—speech or religion clauses—protects a refusal to provide a product or service for a particular occasion, if so how to draw the line between professions that are and aren’t sufficiently expressive to gain that protection, or any other major controversy that continues to roil lower courts. Justice Clarence Thomas wrote a concurrence offering some guidance, but post-Masterpiece state and circuit courts have diverged.

As it has in previous stages of this litigation, Cato has filed an amicus brief supporting Arlene’s Flowers—again joined by Reason Foundation and Individual Rights Foundation—urging the Supreme Court to take up the case and settle these issues and ambiguities after all. Cato is the only organization in the country to have filed briefs in support of both Jim Obergefell (lead plaintiff in the Supreme Court’s same-sex marriage case) and Jack Phillips (owner of Masterpiece Cakeshop). It shouldn’t be so hard to see the difference between government action and individual conscience, to have official equality while letting a thousand flowers bloom.

October 13, 2019 3:20PM

Warren’s Dangerous Lie

Elizabeth Warren’s presidential campaign has a new Facebook ad claiming Mark Zuckerberg, the CEO of Facebook, has endorsed Donald Trump for re-election. That claim is false, and Warren admits as much in the ad. Warren is not trying to mislead people about Zuckerberg. She is trying to control what can be said on Facebook. That is much more dangerous than any lie appearing in a campaign ad.

Recently the Trump campaign ran an ad on Facebook saying former vice president Joe Biden had sought to fire a Ukrainian prosecutor investigating a company whose board included Biden’s son. Many on the left like Warren think this claim is a bald-faced lie. Trump’s supporters probably think it’s obvious something is rotten in the state of Ukraine. Many others, not all fans of the President, find the charges plausible. The Hill newspaper gingerly calls the Biden claims “unsubstantiated allegations.”

Facebook does refer some content to external fact-checkers. For example, this morning my Facebook feed had a story that House Speaker Pelosi was diverting Social Security funds to pay for the impeachment inquiry of President Trump. The post was followed by a link to a fact check organization that reported the story was false. Notice that Facebook did not suppress the story. In classic First Amendment style, they provided “more speech” and let the users of the platform make up their own minds.

Facebook has also recently decided to exempt speech from politicians from fact-checking for good reason. What politicians say (including falsehoods) provokes criticisms and “more speech.” Trump’s charges about Biden have been widely attacked and defended for some time. The Trump Facebook ad itself and the company’s policies have been widely reported and debated. Those who wish to make up their mind have much to read, hear, and ponder.

Why is that exemption good? Consider the alternative. Nick Clegg, a Facebook Vice President, has rightly noted, “Would it be acceptable to society at large to have a private company in effect become a self-appointed referee for everything that politicians say?...In open democracies, voters rightly believe that, as a general rule, they should be able to judge what politicians say themselves.” Facebook thus gives priority to freedom of speech on its platform.

But the problem goes deeper than simply denying voters the right of judgment. Elizabeth Warren is demanding that Facebook suppress speech she finds false. But that is not a desirable standard in our politically polarized times. Strident partisans believe everything the other side says is a lie. If Facebook were to adopt the Warren standard for acceptable speech, much valuable speech would be suppressed. And some of it would come from Elizabeth Warren. As a private company, Facebook does not have to obey the First Amendment. But following Warren here would greatly diminish democracy.

Ms. Warren is appealing to Democratic primary voters for whom Facebook is “too big” and the President is an inveterate liar. But we should consider the bigger picture. Ms. Warren may become president, an office with much discretionary power. Beyond her antitrust crusade, President Warren and her allies in Congress would have many ways to harm Facebook. Her current demands to control speech and advertising on Facebook pose a real risk to that company.

But all this involves more than a company’s fate. No one has First Amendment rights against Facebook. If Warren wins this fight, elected officials in the future can suppress the Facebook speech of their critics with impunity. Do Elizabeth Warren’s supporters really want to live in that world if President Trump is re-elected? Do any of us want to live in that world?

Many people complain about Facebook’s size and market dominance. In this case, the company’s importance enables Facebook to push back against Warren’s implicit threats. Politicians do indeed lie and wish to censor speech. Zuckerberg is unwilling to help them censor and trusts Americans to evaluate the lies. Make no mistake. If the angels favor free speech – and I think they do – Mark Zuckerberg is on their side.

October 11, 2019 4:25PM

Add PreP and PEP to The List of Drugs the FDA Should Make OTC

This week California Governor Gavin Newsom signed into law a bill that allows people at risk for contracting HIV to obtain both pre-exposure prophylaxis (PreP) and post-exposure prophylaxis (PEP) directly from a pharmacist, avoiding the inconvenience and expense of having to visit the doctor for a prescription. Drugs that provide HIV prophylaxis are classified as prescription-only by the Food and Drug Administration. States get to determine the scope of practice of their licensed health care practitioners. Expanding the scope of practice of pharmacists to allow them to prescribe a prescription-only drug has been increasingly used by state legislatures to work around the federal prescription requirements in order to improve access (and decrease cost) to medications their residents want and need.

The legislation improving the availability and access to HIV prophylaxis is an excellent public health measure that was endorsed by the California Medical Association and received bipartisan support.

California also has a well-developed syringe services program, operating in the state since the 1980s, aimed at getting clean needles to, and reducing needle sharing among, intravenous drug users.

Both needle exchange programs and expanding access to HIV prophylaxis are two excellent public health measures that, in combination, should go a long way towards the goal of eliminating new cases of HIV, and can be enacted on the state level without requiring federal consent.

California’s move represents the latest example of states using work-arounds to reduce the costs and obstacles of getting prescription-only drugs to consumers. Ten states have allowed pharmacists to prescribe oral contraceptives, which the American College of Obstetrics and Gynecology has urged be made over-the-counter for years. And all 50 states and the District of Columbia have used work-arounds so that opioid users can get the overdose antidote naloxone directly from the pharmacist.

While these efforts by states are laudable, a better approach would be for the FDA to reclassify these drugs as over-the-counter. Past experience tells us that prices drop when a drug moves to OTC. But, more important from a public health standpoint, when drugs become available OTC they can be sold at outlets other than pharmacies—in hundreds of thousands of retail outlets—even in vending machines. This will help get these drugs to the many consumers who may not have a pharmacy close by, or are deterred from asking for a prescription from a pharmacist due to stigmas attached to the drugs they are requesting.

For this to happen, the FDA needs to be more aggressive and proactive in reclassifying drugs as over-the-counter.