Federal Subsidies Micromanage Local Activities

The federal government spends more than $700 billion a year on 1,386 subsidy programs for state and local activities such schools, transit, and housing. In a recent study, I described 18 reasons why these aid programs should be eliminated. 

One reason is that the rules that come with federal subsidies undermine citizen control of their own communities. The Obama administration, for example, tried to manipulate local zoning laws through the Community Development Block Grant (CDBG) program. Those particular rules have been loosened up, but micromanagement is an ongoing threat from all federal aid programs.

A recent local news story from Pennsylvania reflects the CDBG manipulation problem. Note that CDBG is not so much a program for “low-to-moderate income individuals,” but rather a program that hands-out business subsidies, as discussed here and here.

Nonprofits and residents in Hampden Township have been unable to receive some federal grant funding for three years – but that might be changing soon.

The Hampden Township Commissioners chose to opt out of Cumberland County’s Community Development Block Grant program, which provides federal funding for low-to-moderate income individuals, several years ago. At the time, commissioners cited fears that the program might allow federal authorities to change and influence local zoning laws.

Now, thanks to a change in federal law that would make that practice unlawful, township commissioners are considering rejoining the program. They will meet for a special workshop at noon on Friday to discuss the topic.

… Hampden Board of Commissioners President Al Bienstock said the township opted out because previous rules meant the U.S. Department of Housing and Urban Development (HUD) could change local zoning laws based on perceived discrimination.

“The provisions were so onerous in ceding the zoning authority to some unelected bureaucrats in the federal government that, reluctantly, we opted out,” Bienstock said. “Congress included last year in an appropriations bill something that effectively reversed that HUD rule.”

Looking Back: Charles Reich and His Era

Charles Reich, who died Saturday at 91, had a brief run in popular culture as author of “The Greening of America,” the bestseller that endeavored to sell the 1968 outlook to middle-class readers as the coming thing (“Consciousness III”). His reputation was to prove much more durable in the world of law, where as a young professor he penned what was to become the most cited Yale Law Journal article ever: “The New Property,” published in 1964. In it, Reich argued that courts should treat welfare benefits, public employment, and government contracts and licenses as types of property to which current holders were presumptively entitled, at least absent some sort of formalized adversary process. The phrase “new property” invited a comparison to plain-old-property in such forms as real estate, of the rights to which the courts were (with Reich’s approval) becoming less solicitous over this same period, as in 1978’s Penn Central Transportation v. New York City, which authorized the government to take development rights without compensation.

I’ve written over the years about both sides of Reich’s work. In Schools for Misrule (2011) I explored his durably influential 1964 article at some length as an example of academic thinking that indisputably helped to shape real-world jurisprudence. Part of its ingenuity was in couching in seemingly sober and cautious terms an idea whose implications (especially welfare rights) were otherwise controversial, so as to appeal to moderates and also to the sorts of thinkers who would soon be termed libertarian. (The New York Times, in its obituary, says that “The New Property” article “defended an individual’s right to privacy and autonomy against government prerogative,” which sounds either Cato-ish or positively anodyne.) As I put it: 

Many of the social problems Reich discussed were in the air, so to speak, in the early 1960s. In applauding “individualism,” in raising doubts about the “magnification of government power” and the “dependence” it might instill in recipients, Reich might even have been seen as working in a vein similar to that of Milton Friedman, who had just two years earlier (in 1962) been in the public eye with his book Capitalism and Freedom. In one of the most celebrated chapters of that book, Friedman had detailed at length the abuses of occupational licensure and proposed its abolition. And as part of his longtime interest in “negative income tax” proposals, Friedman too criticized some paternalistic and intrusive social-welfare rules that were aimed in part at monitoring and uplifting recipients’ way of life. 

Reich’s idea of making it easier to sue over license denial might come across as a less-drastic alternative to Friedman’s idea of doing away with professional and occupational boards. And you might argue that by advancing the concept of a right to welfare, Reich was echoing Friedman’s critique of welfare bureaucracy. In short, so long as you didn’t examine matters too closely, Reich and Friedman might almost come off as co-thinkers in seeking to constrain the size and power of government….

The Supreme Court’s speedy adoption of the “new property” idea in the years that followed became the stuff of law-school legend. 

Later experience showed, I believe, that the two scholars were by no means on the same track: making it easier to sue over license revocation isn’t much like recognizing freedom to engage in an occupation, and restricting welfare agencies from cutting off benefits they believe to have been fraudulently obtained isn’t very much like what a negative income tax (or universal basic income) tries to do. Reich’s remedies did not really operate to curtail big government, while they did advance the power and role within it of lawyers and those comfortable with legal process. In that way too, Reich outran his peers at capturing the spirit of his era.  


Costs Skyrocket for NASA Launch System

The federal government is enormously inefficient. Agencies have little incentive to control costs or improve quality, and Congress does little serious oversight. Indeed, members face incentives to spend lavishly on items such as Pentagon weapon systems because higher costs mean more spending in their districts. 

The Pentagon and many other agencies incur large cost overruns on projects. NASA’s projects, for example, often skyrocket in cost and touchdown on completion far behind schedule. NASA originally estimated that assembly of the International Space Station would be complete by 2002 at a cost $17 billion, but assembly was not complete until 2011 at a cost of $74 billion.

A Washington Post article today by Christian Davenport discusses the latest NASA boondoggle:

The rocket NASA plans to use to get astronauts to the moon by 2024 has for years suffered significant cost overruns and schedule delays. But those problems are even worse than originally thought, according to a federal watchdog report expected to be released Wednesday.

The report, a copy of which was obtained by The Washington Post, said NASA had masked the true price tag of the program by shifting some costs to future missions without accounting for them. It accused the space agency of “a lack of transparency … especially for its human spaceflight program” and said NASA misrepresentations made it hard to determine the true cost of the program.

It said the cost of the rocket, known as the Space Launch System [SLS], had grown by nearly 30 percent or nearly $2 billion and that the first launch of the rocket, initially expected in late 2017, might not happen until June 2021.

Still, NASA has continued to pay tens of millions of dollars in “award fees” to Boeing, the SLS’s primary contractor, for scoring high on performance evaluations.

… But the key to that mission is the SLS, a rocket with a cost that is not fully known since “NASA’s current approach for reporting cost growth misrepresents the cost performance of the program,” according to the GAO.

Last year, NASA’s Inspector General blamed Boeing for a 2.5-year delay for the program.

In its latest report, the GAO said that NASA diverted nearly $800 million of program costs to future missions, which it said “obscures cost growth” for the program. It also noted that NASA cost estimate runs only through the first launch of the rocket, meaning there is a lack of transparency into what the total cost of the program is.

The GAO report also took aim at the program to develop the Orion spacecraft that would fly atop the SLS. The prime contractor for that program is Lockheed Martin, which also has been receiving regular award fees from NASA, despite being over budget.

America’s moon landing 50 years ago was a brilliant achievement. But taxpayers should not have to foot the bill for another manned lunar visit because robots are more efficient at exploration these days and private enterprise is the future for people in space.

For more on cost overruns, see here.

Iowa Channels Colonel Jessup in Prosecuting Truth-Telling

“You can’t handle the truth!” So says Jack Nicholson’s cantankerous Colonel Nathan R. Jessup in A Few Good Men upon the prosecutor’s needling inquisition into the death of a young Marine. So also say the paternalistic officials of Davenport, Iowa to tenants who seek to learn whether their eviction was motivated by what they would consider to be a good or bad reason. The Supreme Court has long held that “hurtful” speech—even outright hate speech—shares the same level of First Amendment protection as a friendly greeting. Two years ago in Matal v. Tam, the Court summarized the law thus: “Speech may not be banned on the ground that it expresses ideas that offend.”

Well, Iowa courts seem to disagree with the U.S. Supreme Court. Theresa Seeberger of Davenport leased a single-family residence to Michelle Schreur and her 15-year-old daughter. After a history of late payments and other bad feelings, Seeberger finally decided to evict the two when the daughter got pregnant. When Schreur asked for the reason for the eviction, Seeberger listed some general grievances and then said that “[n]ow you’re going to bring another person into the mix.” While there are no local laws against evicting tenants for this reason, Davenport prohibits landlords from informing evictees of potentially discriminatory reasoning (family status being a protected category for this purpose).

The Iowa appellate court upheld fines (in the tens of thousands of dollars) that the Davenport Civil Rights Commission imposed on Seeberger, reasoning that her statement to Schreur was “commercial speech” and that the law prevents “landlords from subjecting prospective tenants to the stigmas associated with knowingly being discriminated against.” The Iowa Supreme Court allowed that ruling to stand.

But the government can’t use its desire for politeness as a weapon to “protect” residents from an offensive or derogatory opinion, especially in areas as important as eviction. Prodded by certain voices in the academy, a growing segment of the American public believes that the First Amendment does not in fact protect “hate” speech (whatever that means). This despite a long line of Supreme Court opinions that protect, among other things, callous protests near a fallen soldier’s funeral, the hurtful exclusion of gay organizations from a St. Patrick’s Day parade, and neo-Nazi marches designed to intimidate Holocaust survivors. We doubt there is anything different about the “commercial” context that should allow for the restriction of speech far less offensive than some of the things said in the non-commercial marketplace of ideas.

Laws that stop us from telling the truth strike at the heart of the First Amendment and foreshadow a brave new world in which a paternalistic and inevitably puritanical state determines to prohibit that which offends, upsets, disgusts, hurts, demeans, insults, stigmatizes, or, dare we say, “triggers.” Cato has thus joined with the Hamilton Lincoln Law Institute to file an amicus brief in support of Seeberger’s petition for review by the U.S. Supreme Court, seeking reversal of a state court ruling that undermines core tenets of First Amendment jurisprudence.

Far from protecting the Schreurs of the world from the “stigmas associated with knowingly being discriminated against,” statutory prohibitions against informing tenants of discriminatory motivations behind their eviction can only do more harm than the truth—depriving people of an honest answer to a very basic question: Why are you terminating my lease?

The Supreme Court will decide whether to take up Seeberger v. Davenport Civil Rights Commission in September upon returning from its summer recess.

Opportunity Zones: Big Win for Landowners

The Republican Tax Cuts and Jobs Act of 2017 created 8,700 “opportunity zones” across the country, which receive special capital gains tax breaks. O Zones have divided our cities and towns into winner and loser zones, while encouraging political corruption.

O Zones are supposed to alleviate poverty, but the main beneficiaries are likely to be certain landowners within the politically chosen zones. When governments alter the profitability of parcels of land through taxes and regulations, changes in expected future returns are capitalized into current land prices. Markets are forward looking.

News articles have highlighted the windfalls that O Zones have bestowed on some lucky landowners, as I noted here and here. Now a statistical study has confirmed the basic economic logic. A study by Alan Sage, Mike Langen, and Alex Van de Minne found that O Zone designation has:

resulted in a 14% price increase for “redevelopment” properties and a 20% price increase for vacant development sites … Our findings suggest that the OZ program has thus far primarily passed through the statutory tax benefits to existing land owners, with limited evidence of additional value creation.

The authors investigated whether there is evidence of increased productivity within O-Zones and spillover benefits to other properties. They find no such effect:

If the tax benefit would spur the local economy, one would expect price increases for all properties [in the zones], not just the ones getting the actual tax benefit. Instead, we find that only properties that benefit from the tax break—redevelopment properties and vacant land—see their prices increase. The tax break is essentially factored into the land price.

The study concludes,

Our findings cast doubt on the capacity of the OZ program to achieve its ostensible goal of creating value in low-income communities … Whereas an increase in land productivity could produce benefits for residents of OZs, a pass-through of tax benefit will likely benefit only existing owners of commercial real estate in target neighborhoods.

The problems with O Zones are discussed further hereherehereherehere, and here.

Article III Court Should Hear Challenge to SEC’s Unconstitutional Enforcement Proceedings

How many constitutional infractions must one endure at the hands of the government before getting the chance to be heard in an Article III court? According to the Securities and Exchange Commission, the answer is at least two.

In April 2016, the SEC commenced an enforcement proceeding against Michelle Cochran for alleged violations of federal accounting regulations. The proceeding took place before an administrative law judge who was reported at the time to have said to defendants that “they should be aware he had never ruled against the agency’s enforcement division.” True to his word, the SEC judge issued an initial decision ruling in the SEC’s favor. Ms. Cochran was fined $22,500 and banned from practicing as an accountant for at least five years.

But before the SEC could finalize its order against Ms. Cochran, the Supreme Court held in Lucia v. SEC that administrative law judges are “inferior officers” subject to the Constitution’s Appointments Clause. Because SEC judges had not been appointed by the “President alone…Courts of Law, or…Heads of Departments”—as required for all “inferior officers” by Article II—the Supreme Court invalidated all ongoing administrative enforcement proceedings before the SEC, including the one against Ms. Cochran.

After Lucia, the SEC attempted to cure this constitutional defect by “ratifying” its administrative law judges’ prior appointments, thereby comporting with constitutional procedures. The problem is that the SEC’s Appointments Clause “solution” entails a violation of the Constitution’s Removal Clause. As a matter of constitutional law, the agency jumped from the frying pan into the fire.

In Free Enterprise Fund v. PCAOB, the Supreme Court held that “officers” of the United States may not be insulated from presidential control by more than one layer of tenure protection. Yet the SEC’s judges enjoy employment protections, and they are removable by SEC commissioners, who also enjoy employment protections. That is, the SEC’s administrative law judges are “officers” with at least two layers of tenure protections, and, therefore, run afoul of the Supreme Court’s reading of the Removal Clause in Free Enterprise Fund.

In its Lucia brief, the SEC acknowledged this constitutional quandary. Notwithstanding this concession, and although the SEC has the discretion to bring its enforcement proceedings in an original action before a federal district court, the agency reassigned Ms. Cochran’s case to a new administrative law judge. As a result, the SEC knowingly subjected Ms. Cochran to a second unconstitutional enforcement proceeding, which remains ongoing.

Enough is enough. In January, with the help of the New Civil Liberties Alliance, Ms. Cochran filed suit against the SEC in a federal district court in Texas. She argued that she should not have to undergo a second unconstitutional enforcement proceeding. To be clear, she’s not asking the court to void the SEC’s charges against her or otherwise diminish the SEC’s enforcement power. Ultimately, Ms. Cochran seeks only for a federal court—and not an unconstitutional administrative law judge—to try the SEC’s case against her. Simply put, she wants her day in a court that passes constitutional muster.

On March 25, 2019, the district court dismissed her case for lack of subject-matter jurisdiction, concluding that Congress intended to preclude district court jurisdiction over Ms. Cochran’s constitutional claims and channel those claims through the administrative process. Ms. Cochran has appealed the district court’s order to the U.S. Court of Appeals for the Fifth Circuit.

Cato, joined by the Cause of Action Institute and Competitive Enterprise Institute, yesterday filed a brief in support of Ms. Cochran. We argue that the district court misconstrued (and thereby trivialized) Ms. Cochran’s serious ongoing constitutional injury. In addition, we argue that parties like Ms. Cochran may never get any opportunity to seek or obtain redress for their constitutional injury, and even if they do it will be too late to undo or remedy the injury. Because this case alleges a colorable constitutional claim of ongoing ultra vires government action, and because Congress cannot have intended to strip district courts of jurisdiction over such a claim, the Fifth Circuit should allow Ms. Cochran’s case to proceed in the district court.

For more background on this case, see Cato’s briefs in Lucia v. SEC and Free Enterprise Fund v. PCAOB.

1973: The Year John Kenneth Galbraith Made Socialism Mainstream

I started writing about economic issues in 1971, first in Reason then National Review. One of my most serious early articles –­and certainly the most unread–­ was a 2800-word critique of John Kenneth Galbraith in The Intercollegiate Review, posing as a book review with the mildly disrespectful title “Irrelevant Anachronism.”  

Ken Galbraith and I met years later, when he was invited to comment about my presentation at a 1987 debate at Harvard [recorded by C-Span] about “The Disappearing Middle Class” on a panel with Lester Thurow, Barry Bluestone and Frank Levy.  

In Paul Krugman’s ill-tempered 1994 book, Peddling Prosperity [which I reviewed as “Peddling Pomposity”], he called Galbraith “the first celebrity economist,” adding that “he has never been taken seriously by his academic colleagues, who regard him as more of a media personality.”

Today, Krugman is a leading celebrity economist and media personality. But he never approached the pop chart supremacy and political clout that Galbraith once had. Galbraith was, for example, the uncontested bandleader behind the deafening drumbeat for Nixon’s price controls in August 15, 1971.

My September 24, 1971 cover story for National Review, “The Case Against Wage and Price Controls” began by dismembering the arguments behind Galbraith’s briefly victorious argument that, “The seemingly obvious remedy for the wage-price spiral is to regulate prices and wages by public authority” [from The New Industrial State, 1967].

Once the central government can tell workers what their labor is worth and tell businessmen how to price their products, that is about as far as we can possibly get from a free market, and Nixon’s New Economic Policy was perhaps as close as the U.S. ever came to full-blown socialism (aside from rationing in major wars). The only thing worse would be allowing the government make virtually all decisions about what producers can produce and consumers can consume ­–­ otherwise known as “socialism.” 

In his 1973 book, Economics and the Public Purpose, Galbraith found a “socialist imperative” for virtually every product or service of much importance. As in the case of his campaign for wage and price controls, this clarion call for socialism fit in with the temper of the times and did not generate the concern or skepticism the word sometimes arouses today.

When Americans today wonder what “socialism” means, they could do worse than recall how the quite mainstream commentator John Kenneth Galbraith defined it in 1973. Newsweek provided a concise summary on October 1, 1973 with Arthur Cooper’s glowing review of Galbraith’s book, Economics and the Public Purpose (also the topic of my review about its quaint irrelevance). 

In the tradition of New Deal regulatory protagonists Berle and Means (whose inspiration he acknowledged in many books), Galbraith wrote of a “bureaucratic symbiosis” between the federal government and the “planning system” of giant corporations and their “technostructure” of lawyers, scientists, engineers and lobbyists. 

Cooper explained: 

Galbraith is certain that the people are being exploited by a [corporate-dominated] planning system whose interests run increasingly counter to their best interests… [and is] blunt about what is required to rectify the situation- “a new socialism.” This socialism demands various actions:

•          Set up “full organization under public ownership of the weak parts of the market system- housing, medical care and transportation.”

•          Encourage small-business men and firms in the market system to form trade associations, with governmental regulation of prices and extend coverage of the minimum wage as well as a major increase in the amount.

•          Abandon the unrealistic goal of full employment and institute instead a guaranteed or alternative income for those who cannot find satisfactory work.

•          Convert “fully mature corporations” into fully public [government-owned] corporations. This would mean public purchase of stock for fixed- interest-bearing securities so that capital gains would accrue to the public treasury. Such public corporations as Renault and the Tennessee Valley Authority are run this way now.

•          Also convert large specialized weapons firms doing more than half their business with the government into full public corporations. “The large weapons firms are already socialized except in name”-e.g., Lockheed and General Dynamics.

•          Impose a public authority to coordinate different areas of the planning system. Thus, the promotion of electrical use by appliance firms will not run absurdly ahead of the utilities’ ability to supply electricity.

•          Establish “a special presumption” in favor of public support of the arts.

Admittedly not a “revolutionary,” Galbraith allows that all this will come about only through political processes- once politics itself is emancipated from the grip of the planning system. Since he believes the Republican Party is “the instrument of the planning system,” Galbraith’s hopes repose in the McGovern wing of the Democratic Party. Will Galbraith’s ideas, which may be “radical” but certainly sound sensible, work? Maybe time will tell. But John Galbraith sounds like an idea whose time has come.

Mr. Cooper’s 1973 hope that the time had come for socialism proved a decidedly premature forecast, thanks in part to (1) George McGovern’s unprecedented presidential defeat and (2) the stagflationary disaster resulting from Nixon’s 1971-74 policy of mixing a deliberately debased dollar with Galbraithian wage and price controls.

Belief in socialism requires innocently trusting politicians and bureaucrats to make all your decisions for you, typically by promising to give you goodies that some other chump is expected to pay for. This inevitably involves greatly limiting individual choices: the fewer choices are left, the more “socialist” the system has become. “Single payer,” for example, means a single choice. Take it or leave it. Second or third choices become illegal.

If a single choice from the bossy political duopoly was better than many in the marketplace, we might as well replace all U.S. restaurants with a chain of federal cafeterias, and allow production and sales of only one people’s car in only one color.