Saving the WTO’s Appeals Process

The continued intransigence of the Trump Administration in blackballing the appointment of new judges to the highest tribunal of world trade compels the 163 other countries that are members of the World Trade Organization to unite by resolving their international disputes in a way that cannot be stopped by the United States. The other, practical way should be the alternative means of trade dispute resolution currently available under Article 25 of the dispute settlement rules that are part of the WTO treaty – WTO arbitration.

The US refusal to join in the consensus needed to appoint and reappoint members of the WTO Appellate Body has now reduced the appellate tribunal from its full complement of seven judges down to the minimum of three judges required by the WTO treaty to hear an appeal. WTO member countries have an automatic right to appeal the legal rulings of ad hoc WTO panels under the treaty. If there are not three judges to hear an appeal, then the right to appeal will be denied and the WTO will be unable to adopt and enforce panel rulings.

Recently, nearly 90 percent of all panel reports have been appealed. Left with no opportunity to appeal, surely every country that loses before a panel will nevertheless seek to exercise its right to an appeal to guarantee that the verdict against it will not be enforceable. The WTO dispute settlement system will then be paralyzed. Moreover, if the rules cannot be upheld and enforced, why bother to comply with them or try to improve them? The very existence of the WTO will then be put at even graver risk than it faces now due to the illegal actions of Trump and his trade enforcers on other fronts in world trade.

If this stalemate between the US and the rest of the WTO continues, come December 11, 2019, the final terms of two of the three remaining members of the Appellate Body will end, and the tribunal will be reduced to only one member. Unlike the US, the other 163 countries in the WTO profess to see this situation as urgent. They also seem to assume they have until December 10, 2019, to resolve it. But one of the three remaining judges could at any time become ill, encounter a legal conflict, or decide to resign for family or other unrelated reasons. This could happen tomorrow.

The 163 other WTO members have endured nearly two years of largely stoic stonewalling by the United States due mainly to the US distress that the Appellate Body has had the temerity to do its job by upholding treaty rules on the use of dumping and other trade remedies that the US played a leading role in writing but now indignantly opposes under pressure from protectionist interests domestically and from within the Trump Administration.

The time has come for the other WTO members to stand up to Trump’s bullying and isolate the United States by employing the alternative of arbitration that has previously been largely ignored but is clearly permitted under the WTO treaty. Under Article 25, any two WTO members can choose to use arbitration when they have a trade dispute. They can select their own arbitrators. They can decide on their own procedures. They do not need prior approval to do so. They cannot be prevented from doing so by any other country. The judgment they get in arbitration will be as binding and as enforceable as any other judgment in WTO dispute settlement.

“Arbitration” is not defined in Article 25. Thus, countries choosing it as an alternative to the regular dispute settlement proceedings are free to decide simply to duplicate those proceedings. They can photocopy the regular dispute settlement rules and adopt them as their form of arbitration. This would have the practical effect of establishing a parallel dispute settlement system in the WTO that is identical to the current one – but that excludes the United States.

Topics:

States Can’t Make Up New Laws to Punish Old Conduct Just Because They Call Them “Civil”

Article I, Section 10 of the Constitution provides that “[n]o State shall … pass any … Ex Post Facto law.” The Ex Post Facto Clause was incorporated into the Constitution to prohibit states from enacting retrospective legislation, which the Framers believed to be inherently unfair and contrary to the principles of limited, constitutional government. Despite the Framers’ clear aversion to retrospective lawmaking, the Supreme Court has since adopted the view that states are uninhibited from enacting retroactive civil penalties. So long as a retrospective law contains a discernable legislative purpose and a “civil” label, retroactive application will not run afoul of the Ex Post Facto Clause. Consequently, states have imposed increasingly burdensome retroactive penalties on convicted sex offenders under the guise of civil regulatory laws. Even after offenders have paid their debts to society, they continue to face excessive registration requirements and other onerous civil penalties. 

Back in 2004, 19-year-old Anthony Bethea was convicted of six counts of sexual activity arising from non-forcible, consensual intercourse with a 15-year-old girl. He pled guilty and agreed to be sentenced to up to 48 months of imprisonment, complete a sex offender treatment program, and register as a sex offender for 10 years. He successfully completed the treatment program in 2006 and his period of probation in 2007. Beginning in 2006, however, North Carolina drastically transformed its sex offender statute, adding a laundry list of additional burdens on previously convicted sex offenders. Today, Bethea is subject to numerous restrictions that did not exist at the time of his plea agreement, such as limitations on where he can go, where he can live, and what jobs he can hold. Perhaps worst of all, the new restrictions have prevented him from being a father to his children. Due to his continued registration, Bethea has been forced to miss his son’s graduation ceremonies, parent-teacher conferences, and school field trips. Bethea should have been off the registry four years ago, but North Carolina retroactively lengthened his registration period from 10 to 30 years.

In 2014, 10 years after he registered, Bethea petitioned the North Carolina courts to be removed from the registry. He argued that retroactively applying the statutory provisions enacted after Bethea’s conviction violated the Ex Post Facto Clause. Although the court found that Bethea was in no way a threat to public safety, his petition was denied. On appeal, the North Carolina Court of Appeals held that the state’s sex offender statute was civil, rather than punitive, and thus did not constitute a violation of the Ex Post Facto Clause. The North Carolina Supreme Court denied review and Bethea has asked the U.S. Supreme Court to take his case.

Cato has filed an amicus brief supporting that petition, arguing that the Court must return to an original understanding of the Ex Post Facto Clause guided by its twin historical aims: to prevent vindictive legislation targeted at unpopular groups and provide sufficient notice of the consequences in place. Without a principled foundation in original meaning and historic purpose, the Court’s multi-factor ex post facto analysis has come to rest on shaky ground, supplying unimpeded deference to legislative intent. The Court’s continued unwillingness to invalidate statutes for their retroactive punitive effect has given states a perverse incentive to enact increasingly burdensome civil penalties that alter the legal consequences of previously committed conduct without constitutional accountability.

The Supreme Court should take up Bethea v. North Carolina and eaffirm that the Constitution’s prohibition against ex post facto lawmaking forbids states from skirting constitutional scrutiny by simply labelling increasingly burdensome retrospective penalties as “civil” regulatory laws.

Would Government Paid Leave Benefits Grow Over Time?

Some advocates and policymakers think government should be involved in providing a limited or modest paid leave benefit, just 12 weeks or less. Their support seems implicitly contingent on the expectation that a paid leave entitlement wouldn’t grow, or wouldn’t grow much. But is there any evidence of that?

If the trajectories of OECD paid leave entitlements are any indication of the path a new U.S. entitlement would take then the answer is no. All OECD countries except one increased the length of their paid leave benefits substantially over time (see chart).

For example, the average length of paid maternity, parental, and home care leave entitlements in the Eurozone increased from 17 weeks in 1970 to 57 weeks in 2016. That means that the average duration of paid leave entitlements more than tripled over the period. OECD countries at-large follow the same trend.

In fact, the only country that reduced the length of its paid leave entitlement is Hungary. Hungary began with one of the most lengthy paid leave entitlements of any country; 162 weeks in 1970. In subsequent years Hungary reduced the length of that benefit by 2 weeks, to 160 weeks, which isn’t much. 

 

international paid leave entitlements 

Data source: OECD Family Database

In short, international programs demonstrate that paid leave benefits grow substantially over time, similar to other government entitlement programs. Supporters of government paid leave should be aware that current proposals aren’t likely to stay limited to 12 weeks or less in the longterm.

For more information on paid leave, see the new Cato report Parental Leave: Is There a Case for Government Action? or livestream today’s Capitol Hill event.

Trump’s Criticisms Shouldn’t be the Most Important Headlines about the Fed

On Tuesday, the president renewed his earlier criticisms of the Federal Reserve’s interest rates hike—saying he was not happy with the fast pace of the Fed’s “normalization” plan.  This pattern has been reported as “breaking” with tradition and questioning the “independence” of the Fed.  Then yesterday afternoon, after a plunge in financial markets, Trump sharpened his critique saying “the Fed has gone crazy.”

While it is—at least among recent presidents—unusual for the president to opine on monetary policy, this has been a most unusual presidency from the start.  And while Trump’s criticisms of the Fed are good for generating headlines, they risk drawing attention away from more important matters at the central bank. To that end, I want to share two points to help put the president’s remarks in proper contexts—followed by two additional points to reorient the Fed discussion around what’s actually important.

One worry people have about Trump’s comments is that they call into question the Fed’s “independence.” But it is critical to remember that central bank independence is a somewhat amorphous term—with different speakers relying on different definitions. It is, however, a useful concept when independence refers to the Fed conducting monetary policy without regard to political considerations.  That is to say, the Fed is an independent institution insofar as it sets policy in reaction to changing macroeconomic conditions—not in reaction to changes in the legislative agenda or electoral prospects. What is not, or should not, be meant by central bank independence is that the Fed is fully divorced from all other public institutions.  Chair Powell often, and rightly, stresses that the Fed pursues goals given to it by Congress; in that respect, the Fed is certainly not independent from accountability to the public.

To the extent anyone is worrying that the Powell Fed will change policy based on Trump’s remarks, such concerns are unfounded.  

On the policy front, the president seemed to suggest the Fed should wait on raising interest rates until “inflation [comes] back.” What threshold Trump has in mind when he says “back” is anyone’s guess, but inflation has been increasing. While this morning’s CPI release had month-over-month inflation below expectations, the Fed’s preferred inflation metric has moved up to their 2% target in recent months. And the ten-year forecast, put out by the Cleveland Fed, shows long-run inflation expectations have also increased of late and are now slightly above the Fed’s 2% inflation target.

These inflation data have been moving up as the Fed has been increasing their policy rates, suggesting that monetary policy has not become overly restrictive. Scott Sumner, in a post reacting to yesterday’s stock market developments, points out that while monetary policy was too tight it has recently moved towards a more neutral and appropriate stance. Remember, looking at just interest rates is insufficient to judge the actual stance of monetary policy. Therefore, at least for now, the Fed is likely to continue the normalization plan it has been talking about for years.

Of course, the Fed should not stick to this plan irrespective of any and all changes in the macroeconomy; indeed, I have been critical of their defense of rates increases in the past. But daily stock market volatility and the president’s response to it are not developments that should immediately change the Fed’s longer-term strategy. 

For the astute people monitoring the Fed, the president’s comments ought to be largely ignored.  It is far more important to pay attention to two conversations occurring within the Fed. 

One conversation is about changing the Fed’s 2% inflation target. Several Fed officials have already endorsed their preferred strategies. Eric Rosengren, President of the Boston Fed, believes an inflation range, perhaps 1.5-3%, is best, while New York Fed President John Williams and Atlanta Fed President Raphael Bostic, want to adopt a new target altogether: a price level target. Ex-Fed officials have also joined the conversation, with former Fed Chair Ben Bernanke proposing a hybrid system that would move from an inflation target to a price level target when the policy interest rate got close to zero.  There are very good reasons for the Fed to begin reconsidering its monetary policy target, but for this conversation to be truly beneficial the Fed should include an NGDP level target on the list of alternatives. 

The second conversation, and one of more immediate concern, is about the Fed’s operating framework for executing monetary policy. The current framework—which pays banks an above market interest rate on their deposits held at the Federal Reserve in order to keep the effective federal funds rate within the Fed’s target range—was created during the financial crisis.  The Fed is still learning about this new framework for setting interest rate policy and has already needed to tweak the framework once. Chair Powell has signaled that the FOMC will be exploring it further throughout the fall.  For those interested in learning more about the potential issues embedded in the Fed’s new operating framework and why it is in need of reform, I would point you toward my colleague George Selgin’s summary of his forthcoming book Floored!.

There are important challenges facing the Fed and its conduct of monetary policy, and they deserve more attention than do the president’s rants.

Congress Can’t Create an Independent and Unaccountable New Branch of Government

The Founding Fathers crafted a system of government in which legislative, executive, and judicial authority were each entrusted to different entities. Their purpose in choosing this design was to prevent the consolidation of power in any one individual or group of individuals. The Framers anticipated—and attempted to guard against—a bureaucracy that could serve multiple governmental functions and remain unaccountable to the citizenry. In Federalist No. 47, James Madison recognized that when legislative, executive, and judicial power rest in one entity, individual liberty suffers. Likewise, Justice Anthony Kennedy declared in his concurrence in the 1998 case of Clinton v. New York, which struck down the presidential line-item veto, “Liberty is always at stake when one or more of the branches seek to transgress the separation of powers.” 

In passing the Dodd-Frank Wall Street Reform and Consumer Protection Act, however, Congress circumvented constitutional design and violated the separation of powers doctrine. Among its multifarious failings, Dodd-Frank created the Consumer Financial Protection Bureau (CFPB), controlled by a single director who has the unilateral power to enact, enforce, and adjudicate regulations. The director is not accountable to any internal structure, is exempt from congressional oversight, and cannot be removed by the president for policy reasons. Since its inception, the CFPB has issued 19 federal consumer protection rules, affecting everything from student loans to banking practices, all without checks, balances, or accountability to voters. Essentially, Congress assigned a vast amount of authority to a bureau that answers to no one.

When a challenge to Congress’s unconstitutional delegation went before the U.S. Court of Appeals for the D.C. Circuit, the court refused to consider the impact that the CFPB’s actions have on individual liberty. However, the Supreme Court, in Commodity Futures Trading Commission v. Schor (1986), reminded us that the separation of powers protects “primarily personal, rather than structural, interests.” In other words, substantive freedom, rather than simply procedural rights, is most at risk when checks and balances fail. And so the CFPB, going far beyond simply contravening checks and balances, regulates areas such as home finance and credit cards. These sectors are essential to individual economic activity, so the D.C. Circuit was wrong to hold that the CFPB’s infringements upon these liberties were irrelevant.

The State National Bank of Big Spring, based in west Texas, filed a petition asking the Supreme Court to review the D.C. Circuit’s erroneous decision. Cato has joined the Southeastern Legal Foundation and National Federation of Independent Business on a brief supporting this petition. We argue that the separation of powers, as our Founding Fathers correctly recognized, is a bulwark of our individual liberties. If we allow Congress to delegate authority in a blatantly unconstitutional fashion, our republican system of government will be eroded by powerful bureaucracies with unchecked authority.

The Supreme Court will decide whether to take up State National Bank of Big Spring v. Mnuchin later this fall.

Cato Scholars on Stop and Frisk

On Monday, President Trump told a gathering of police chiefs that cities faced with serious crime problems should return to the policing practice known as stop-and-frisk. “Stop-and-frisk works and it was meant for problems like Chicago.” This is an old theme for Trump, one he shares with former New York City Mayor Michael Bloomberg, whose rumored 2020 presidential candidacy raises the possibility of a contest between two stop-and-frisk enthusiasts. In Terry v. Ohio (1968) the Supreme Court found the tactic constitutional, but judges since then have sometimes ruled, as in a high-profile case against New York City, that the tactic was being employed in unconstitutional ways. (Despite predictions from some quarters that crime would soar in New York City following that ruling, no such thing happened.)

Cato has had a lot to say about stop-and-frisk over the years. A sampling:

  • “How did we the people of New York City allow this long-term disgrace to continue?” – the late Nat Hentoff, 2010.
  • “A ‘stop’ is an involuntary citizen-police encounter… [Stop-and-frisk] can be a degrading and humiliating event to endure.” - Tim Lynch, 2012.
  • “Statistics do not answer whether it is okay for an ostensibly free society to gratuitously stop-and-frisk its citizens.” – Trevor Burrus, 2013
  • Even after the curtailment of the New York City program, “for too many Americans, the basic liberty to move freely in society has been debased and degraded by police fighting the drug war” - Jonathan Blanks, 2018.

For another dimension, see Cato’s 2016 survey report by Emily Ekins on public attitudes toward Policing in America [attitudes toward authority / views on effectivenesswho should be searched?]  

 

Objecting to Compelled Speech Is More than Sour Grapes

Neither the government nor a private party may compel you to speak; nor may a private party masquerading as a government entity compel you to speak, even when it’s supposedly for your own good. In Delano Farms v. California Table Grape Commission, Cato, joined by the Reason Foundation, Institute for Justice, and DKT Liberty Project, is continuing to support a farm business’s challenge to a California state-established commission that compels grape growers to contribute money for government-endorsed advertisements. We had previously filed in the California Supreme Court, which was a losing battle, and are now asking the U.S. Supreme Court to take the case.

Now, governments are allowed to disseminate their own messages and can use tax revenue to do it under what’s called, simply enough, the “government-speech doctrine.” They can also tax industries specifically and earmark those funds to promote those particular industries; the Supreme Court has upheld several industry-advertising programs, including national campaigns for beef. In many of these targeted tax-and-advertise programs, the government requires taxes or “fees” from anyone doing business in the industry. One justification for these fees is that all producers benefit from such a “group advertisement.” If some were able to get the marketing benefit without paying, the system would suffer from “free riders.” For such a program to actually constitute government speech and thus avoid First Amendment problems, however, it is the government itself that must be speaking.

The California Table Grapes Commission has claimed that it is part of the government and that its speech is thus “government speech.” But the commission isn’t the government; it’s a commercial entity or trade group that uses compelled subsidies to fund speech. The commission’s generic advertisements for California grapes don’t really benefit the entire industry. Instead, they benefit some members of the industry by making it seem that all products are equally good. Furthermore the commission can’t be considered part of the government because it, unlike the actual government, can be disbanded based on a vote of the table grape producers.

Put another way, no person employed by the California government has ever written, produced, or even reviewed the speech the commission compels. In all other cases where the government programs were held constitutional, the government took direct control of the message and maintained oversight of a regulatory entity. None of that is true here. The commission here is a private entity, with the power to exact fees from members who have no choice but to pay for whatever message it ends up promoting.

In our brief, we argue that the Supreme Court should take this case and treat forced subsidies for generic advertising the same way it treats other such subsidies: as violations of the First Amendment freedoms of speech and association. The California courts relied on a decision recently overturned in the Supreme Court’s Janus holding this past June, in which compelled association and speech in union representation was deemed a violation of the First Amendment. The Court should continue with this line of reasoning here: no one should be compelled to support a non-government message.