By 2016, Puerto Rico’s government was in dire financial straits. To avoid bankruptcy, Congress enacted the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), creating a board responsible for restructuring the island territory’s substantial public debts. But there are serious questions regarding the constitutionality of this Financial Oversight and Management Board for Puerto Rico (the “Board”).
Under PROMESA, the president chooses six of the seven members of the Board from “secret lists submitted to [him] by the House and Senate leaders.” But in view of the Board members’ selection process and responsibilities, the U.S. Court of Appeals for the First Circuit held that they are “principal federal officers” who must be nominated by the president and confirmed by the Senate, rather than “inferior officers” whose appointment does not go through the same constitutional rigmarole.
Under the Constitution’s Appointments Clause, the president “shall nominate” principal federal officers, “and by and with the Advice and Consent of the Senate, shall appoint” them. But that is not what happened here. PROMESA’s appointment scheme raises serious separation-of-powers concerns because it positions the legislative branch to assume a role the Constitution exclusively reserves to the executive.
The First Circuit did not see it this way. Although it deemed the Board members “principal federal officers,” it applied an archaic doctrine to uphold their appointments. Under the “de facto officer” doctrine, acts performed by an officer that has assumed official duties without having been properly appointed to an office are valid even though it is later discovered that the officer’s appointment is legally deficient.
But this ancient doctrine is inapplicable to this case. Here, it is not the appointment of individual Board members against a valid appointment process that is in question. By all accounts, the appointment of each Board member did not violate any of PROMESA’s express prescriptions. Instead, it is PROMESA’s appointment process itself that is constitutionally suspect. In such case, the “de facto officer” doctrine has no real bearing, because no officer can be validly appointed in the first place.
Supreme Court precedent confirms, again and again, that the Board members are indeed “principal federal officers” who must be nominated by the president, and only then Senate-confirmed for appointment. That’s because they (1) occupy a “continuing” position established by federal law, and (2) “exercise significant authority pursuant to the laws of the United States.” While (1) is obvious, perhaps (2) is less so. And so it bears emphasizing that the Board, under PROMESA, has ultimate authority over the fiscal future of a U.S. territory of more than three million inhabitants. If that authority is not “significant,” we don’t know what is.
Cato has thus filed an amicus brief supporting several of Puerto Rico’s creditors before the Supreme Court, in their argument to overturn the decisions of the Board and invalidate its statutory authority. If PROMESA is allowed to stand, and the Board’s decisions are upheld, this will signal to the executive and legislative branches—both complicit in this perilous scheme—that anything goes, that they are free to strike at the heart of our constitutional structure without any pushback from the one branch left to preserve the ever-fragile separation of powers.
The Supreme Court will hear argument in Financial Oversight & Management Board for Puerto Rico v. Aurelius Investment, LLC on October 15.
Thanks to President's Trump's picks for prospective Fed Board nominees, the subject of gold price targeting (or a gold "price rule") is getting attention once again.
The idea, which got a lot of attention back in the 1980s, after Arthur Laffer and other supply-siders, including Alan Reynolds, first began promoting it, is that the Fed could mimic a gold standard, keeping inflation in check and otherwise making the dollar "sound," by employing open-market operations to stabilize the price of gold. The topic has come up again because three of Trump's prospective nominees have at one time or another suggested that the U.S. should revive the gold standard, and two of them, Herman Cain and Stephen Moore, are full-fledged supply-siders. Although Cain and Moore are no longer in the running, Judy Shelton, the third gold standard fan, is still in the race (along with Chris Waller of the St. Louis Fed), and she also has strong supply-side leanings.
These facts prompted Representative Jennifer Wexton (D-Va.) to ask Jerome Powell, following his July 10th testimony, whether the U.S. should "go back to the gold standard." In response Powell, whether because he had a Laffer-style gold price-rule in mind or for some other reason, interpreted the question as one asking whether the Fed should "stabilize the dollar price of gold." That, he said, wouldn't be a good idea:
There have been plenty of times in fairly recent history where the price of gold has sent signals that would be quite negative for either [maximum employment or stable prices]. …If you assigned us [to] stabilize the dollar price of gold, monetary policy could do that, but the other things would fluctuate, and we wouldn’t care. We wouldn’t care if unemployment went up or down. That wouldn’t be our job anymore.
Powell's statement raises three questions. One is whether it's proper to equate reviving the gold standard with having the Fed target the price of gold, as Powell did. The second is whether Judy Shelton has herself endorsed a gold price rule. The third is whether such a rule would be as disastrous as Powell claims.
This post is devoted to answering, or trying to answer, these questions.
A Gold Target Isn't a Gold Standard
Answering the first question is relatively easy. Despite what Jay Powell suggested, reviving the gold standard and having the Fed target the price of gold aren't the same thing. So far as most fans of the gold standard are concerned, in a genuine gold standard paper money consists of readily redeemable claims to gold; and it's that redeemability—and not any central bank "targeting"—that keeps that paper on a par with the gold it represents.
At a still more fundamental level, a true gold standard is one in which paper money consists of legally-binding IOUs, exchangeable for definite amounts of gold, not as a matter of policy, but as a matter of contract. Making the equivalence of paper money and gold a matter of binding contracts, enforceable in ordinary law courts, rather than one of pledges made as a matter of public policy, makes that equivalence especially credible. The sovereign immunity enjoyed by most modern central banks, in contrast, renders them unfit to operate genuine gold standards even when their notes are officially redeemable in gold, because they can always change their policy, dishonoring a prior redemption pledge, with impunity. (Every older central bank has, in fact, done just that at some point in its history.)
So although a central bank may target the price of gold, or adhere to a gold "price rule," by doing so, it creates a "pseudo" rather than a "real" gold standard. Having a real gold standard, in contrast, doesn't call for having a central bank at all, as many past examples make clear. Indeed, so far as many fans of the classical gold standard (including this one) are concerned, central banks have mainly served to muck things up.
Finally, it's by no means clear that the macroeconomic consequences of a gold price rule would be the same as those of a genuine gold standard, in part precisely because such a rule can be more easily set aside, and therefore would lack the credibility, of a genuine gold standard. I'll return to this point later in this essay.
Some Gold Standard Proponents Still Favor a Gold Price Rule…
Despite its possible shortcomings, gold price targeting has continued to have advocates since the 1980s. Jack Kemp pleaded its case again in a 2001 Wall Street Journal op-ed; and Steve Forbes has been carrying the gold price rule torch ever since. Referring to the Federal Reserve Transparency Act, he wrote,
Unlike in days of old we don't need piles of the yellow metal for a new [gold] standard to operate. Under Poe's plan—an approach I have long favored—the dollar would be fixed to gold at a specific price. For argument's sake let's say the peg is $1,300. If the price of gold were to go above that, the Federal Reserve would sell bonds from its portfolio, thereby removing dollars from the economy to maintain the $1,300 level. Conversely, if the gold price were to drop below $1,300, the Fed would "print" new money by buying bonds, thereby injecting cash into the banking system.
Nathan Lewis is another gold standard fan who considers a stable gold value for the dollar the essence of a gold standard, no matter how that stability is achieved.
Former prospective Fed nominees Herman Cain and Stephen Moore both spoke and wrote of the benefits of having the Fed target the price of gold. Although he was better known for his notorious 9-9-9 plan, Cain also had a plan for establishing a "21st Century Gold Standard." According to Charles Kadlec, that plan would have assigned the Fed
a single target—the value of the dollar in terms of gold—and the tools to achieve that target. Open market operations would be used for the sole purpose of increasing or decreasing the supply of dollars in order to maintain the dollar/gold exchange rate. Other than setting the Discount Rate to fulfill its role as lender of last resort, targeting or manipulating interest rates would be prohibited.
Although Steve Moore would rather have had the Fed target a broad index of commodity prices, according to a report in The New York Times, he agrees with Steve Forbes that having the Fed target the price of gold would be “a lot better than what we have now.”
… but Judy Shelton Isn't One of Them
Powell was very careful, in answering representative Wexton's question, to make clear that his remarks shouldn't be taken as referring to the views of Judy Shelton or any other prospective Fed board nominee. That's just as well, because although she certainly favors a gold standard of some sort, so far as I can determine Shelton has never spoken or written in favor of gold price targeting.
It's true that in her 1994 book, Money Meltdown (pp. 298-301), Shelton discusses the idea of having the Fed target gold's price (which many thought it was then doing under Greenspan's leadership), showing much sympathy for it. But she ultimately concludes, for several reasons, that the policy would be a poor alternative to a gold standard founded upon actual convertibility of paper dollars into gold.
Taking the same subject up again more recently, in her pamphlet Fixing the Dollar, Shelton comes to the same conclusion, to wit: that despite the greater challenges involved, "the advantages of forging an inviolable link between the value of US money and gold through fixed convertibility seem to make it well worth tackling the difficulties."
Finally, as if to settle any doubts, in an interview this June Shelton declared,
I'm sure I've never said that the Fed should have a price rule to ratchet up or down interest rates in accordance with the daily price of gold. But I'm sure that if anything I would have said a price rule I don't think is a good idea. I've never suggested that. I'm not badmouthing the gold standard. I'm saying look to see what you like about prior systems that have worked and see if we could develop a future system that would incorporate the virtues of things that worked in the past.
Consequently the drawbacks of gold price targeting, whatever they may be, can't fairly be laid at Judy Shelton's door, whether by implication or explicitly. For while a gold price targeting regime may resemble a convertibility-based gold standard in one respect, it also differs greatly from it in others. Its flaws aren't the flaws of the Bretton Woods system, just as the flaws of the Bretton Woods system aren't those of the classical gold standard. Perhaps they are all faulty. Still, each deserves a separate hearing.
Is Powell Right? Some Econometric Results
So we come to the third question. It calls for giving proposals for targeting the price of gold a proper hearing. Although such proposals can be assessed in all sorts of ways, one popular approach involves asking what would have happened had the Fed actually targeted the price of gold in the past.
Economists usually use statistical techniques to try to answer this sort of question. So naturally I turned to my former UGA colleague Bill Lastrapes, the Gordo Cooper of econometricians (that is, the best econometrician I ever saw), who worked on a similar project with me years ago. That project investigated claims to the effect that Greenspan's Fed had actually been practicing gold price targeting. Although we concluded that those claims contained rather more than a kernel of truth, we made no attempt to say whether the policy was or wasn't a good idea.
Now, there are all sorts of ways to go about such a counterfactual exercise, each with its drawbacks. One way is to rely on a simple reduced-form regression of the price of gold on the fed funds rate— the Fed's immediate target—and then infer from it, first, where the fed funds target would have had to be set at any given time to maintain a fixed value of gold and, second, how inflation and output would have responded to that rate setting. Using this approach (or the first part of it) to assess Herman Cain's gold price rule proposal, Menzie Chinn concluded that, had that policy been put into effect in January 2000, between then and March 2019 the Fed would have had to increase its fed funds target by 14.89 percentage points, whereas in fact it reduced it by 3.04 percentage points, to a level that President Trump, and many others besides, still consider too high.
While Chinn's approach is certainly suggestive, it suffers in treating the fed funds rate itself as an "exogenous" variable, and thereby failing to allow for the simultaneous determination of gold price and interest rates. More generally, Chinn ignores general equilibrium effects. To take those effects into account, Bill and I (OK, Bill) used a simple, structural "VAR" (for Vector Auto-Regression) model. The model has four equations for as many variable: real GDP, the inflation rate, the fed funds rate, and the price of gold. In the "factual" regression we take to the data, we assume that the Fed sets the funds rate in response to changes in both GDP and P, but not in response to changes in the price of gold. In contrast, in the "counterfactual" regression, we let the Fed adjust the funds rate so as to either rigidly fix the nominal price of gold or stabilize it around a constant mean. In both cases we rely on various other identifying restrictions to distinguish the Fed's rule from the effect of non-Fed instigated interest rate changes on gold prices.
All that still leaves open plenty of options, so we considered several, based on data starting either in 1973 or in 1979. The results in every case, like those from Chinn's simple regression, support Powell's position. Indeed, they suggest that a gold price rule would be an even worse idea than Chinn's findings suggest.
To drive that point home, I'll report here results from only one of the many regressions Bill and I considered: the one that yielded results most favorable to a gold price rule. (The complete study isn't yet ready for distribution.) That regression refers to the post-1979 sample period only. Going back to 1973 makes gold price targeting look worse. It also assumes, again in gold price targeting's favor, that instead of trying to the price of gold absolutely constant, the Fed allows it to vary somewhat above and below its targeted value.
Looking first at the findings for the price of gold itself, the figure below compares gold's actual price during the sample period to its counterfactual price, where the last reflects our assumption that a gold-targeting Fed tolerates some fluctuations in that price.
Evidently, even keeping gold's price within these broadened limits requires substantial changes in the Fed's monetary policy settings. Just how substantial can be seen in the next chart, showing actual and counterfactual values for the federal funds rate, where the counterfactual values are those needed to generate the relatively stable price of gold shown in the previous image. For the period since 2005, which includes the financial crisis and recession, the average counterfactual funds rate exceeds 10%; and on some occasions that rate exceeds 20%.
These numbers are roughly in agreement with Chinn's findings. But we can also see some consequences of gold price targeting not evident from Chinn's simple regression, including the fact that it would make the fed funds rate highly volatile. During the year 2000, for example, the rate would have had to vary by about 12 percentage points. Other years would have seen still larger movements. Had the Fed instead tried to keep the price of gold absolutely constant, the fed funds rate would have bounced around even more. The greater volatility makes intuitive sense, because under a gold price target, the Fed must respond to fluctuations not only in the absolute but in the relative price of gold. (John Cochrane made a similar point in his WSJ editorial a few weeks ago, which he has since republished on his blog.)
Moving next to inflation, although gold price targeting would have meant more rapid disinflation at the start of the Volcker era, for most of the Great Moderation it would have made relatively little difference, resulting in slightly less inflation in some periods, and slightly more in others. Only starting in the mid-2000s does the policy begin to matter again, by yielding (until 2015 or so) persistently lower inflation. But that lower inflation includes severe deflation during much of 2009, which hardly makes the counterfactual inviting, especially when one takes account of corresponding effects on output.
The final image shows those effects, and more. Counterfactual real GDP runs persistently below actual real GDP from 2000 onward, with a particularly severe dip—that is, relative to the already severe actual dip—during 2008-9, and a substantially lower level from late 2009 onward. Under gold price targeting, in short, the Great Recession would have been more like a second Great Depression. Indeed, since the original Great Depression actually consisted of two separate downturns, it might have qualified as America's Greatest Depression yet!
… and Some Caveats
While econometric findings similar to those I've reported no doubt informed Powell's answer to Representative Wexler, such findings need to be taken with a grain of salt. For while they yield more information than Chinn's simple regression, they may still be unreliable. In particular, they may still run afoul of the famous "Lucas Critique."
That critique, as originally summed up by Robert Lucas himself, holds that, because "the structure of an econometric model consists of optimal decision rules of economic agents, and … optimal decision rules vary systematically with changes in the structure of series relevant to the decision maker … any change in policy will systematically alter the structure of econometric models." As Thomas Sargent later explained, this means, among other things, that the uses to which VARs can safely be put "is more limited than the range of uses that would be possessed by a truly structural simultaneous equations model." Such VARs, Sargent continues, are particularly ill-suited for evaluating "the effect of … changes in the feedback rule governing a monetary or fiscal policy variable [because] when one equation […] describing a policy authority’s feedback rule changes, in general, all of the remaining equations will also change."
Of particular concern to both Lucas and Sargent are instances in which agents’ expectations of the policy process are likely to change when policymakers change their own behavior. As Christopher Sims puts it, "evaluating changes in policy rule as if they could be made permanently, while leaving expectations formation dynamics unchanged, is a mistake."
That concern is clearly relevant in the present instance. Consider our VAR model's gold price equation, the coefficients of which are functions of the supply of and demand for gold. Our counterfactual assumes that those coefficients stay the same whether or not the Fed targets the price of gold. But that assumption is suspect. Gold is, after all, demanded in part as an inflation hedge. Consequently, by credibly switching to a gold price rule, the Fed might reduce that demand by dampening fears of inflation. Put another way, the shocks in our gold price equation could be smoothed under gold price targeting. Because it doesn't allow for this, our counterfactual exercise may overstate the shortcomings of a gold price rule, especially by exaggerating the fed funds rate changes needed to implement it.*
Were our sample period one during which changing fears of inflation were not an important source of innovations to the demand for gold, our counterfactual estimates would be less vulnerable to the Lucas Critique. With this understanding in mind, Bill repeated our counterfactual analysis for the "Great Moderation" (1984-2008) sub-period, during which inflation fears are generally understood to have been quieted. Although the counterfactual fed funds rate for this period, shown below, is somewhat less volatile, it still swings dramatically, while the other counterfactual series show results similar to those from the longer sample period.
These findings suggest that, though our results are subject to the Lucas Critique, they may not be all that misleading. Thus we might echo Sims' claim, made with regard to counterfactual work of his own, that the possibilities raised by Lucas are "reasons to be somewhat cautious about these results, not a reason for ignoring them."
But Sims' thinking mustn't be stretched too far. However useful our counterfactual exercise may be for assessing the likely consequences of gold price targeting, it's far less capable of telling us what consequences might result from a return to a more genuine gold standard, including a Bretton-Woods type arrangement of the sort Judy Shelton has sometimes recommended. For that more radical regime change would almost certainly involve still more far-reaching changes in the coefficients of our models' equations, making any results it might yield especially dubious. That doesn't mean, of course, that reviving Bretton Woods, or establishing any other sort of "genuine" gold standard, would be a good idea. It's just that whether it is or isn't isn't something one can hope to decide, even very tentatively, just by running a few regressions.
*If, on the other hand, the Fed's gold price rule is less than fully credible, our findings might still be misleading, because that less-than-credible rule could itself give rise to a speculative demand for gold based on fears that the rule with change. In that case, the Fed's (unconvincing) switch to a gold price rule could end up making the fed funds rate more rather than less volatile than if it didn't pretend to target gold at all.
[Cross-posted from Alt-M.org]
The Overseas Base Realignment and Closure Coalition, "a group of military base experts from across the political spectrum," is calling on Congress to mandate a reporting requirement on overseas bases. In a letter to the Senate and House Armed Services Committees, the group of experts says the information that the Department of Defense currently provides on the cost and location of overseas bases is very "limited" and the "data is frequently incomplete." This lack of transparency, they write, has allowed the Pentagon to erroneously claim America's empire of overseas military bases - some 800 installations in 70 or 80 countries around the world - only costs taxpayers $20 billion per year, even while more inclusive independent estimates go as high as $150 billion per year. Below is an excerpt of the letter:
Research has long shown that overseas bases are particularly difficult to close once established. Often, bases abroad remain open due to bureaucratic inertia alone. Military officials and others frequently assume that if an overseas base exists, it must be beneficial; Congress rarely forces the military to analyze or demonstrate the national security benefits of bases abroad.
The Navy’s “Fat Leonard” corruption scandal, which resulted in tens of millions of dollars in overcharges and widespread corruption among high-ranking naval officers, is one of many examples of the lack of proper civilian oversight overseas. The military’s growing presence in Africa is another: When four soldiers died in combat in Niger in 2017, most members of Congress were shocked to learn that there were approximately 1,000 military personnel in that country. Although the Pentagon has long claimed it has only one base in Africa—in Djibouti— research shows that there are now around 40 installations of varying sizes (one military official acknowledged 46 installations in 2017). You are likely among a relatively small group in Congress who know that U.S. troops have been involved in combat in at least 22 countries since 2001, with frequently disastrous results.
Current oversight mechanisms are inadequate for the Congress and the public to exercise proper civilian control over the military’s installations and activities overseas. The Pentagon’s annual “Base Structure Report” provides some information about the number and size of base sites overseas, however, it fails to report on dozens of well-known installations in countries worldwide and frequently provides incomplete or inaccurate data. Many suspect the Pentagon does not know the true number of installations abroad.
A proposed provision in the 2020 National Defense Authorization Act (NDAA) called “Report on Financial Costs of Overseas United States Military Posture and Operations,” could, "if implemented rigorously," the letter writers say, "increase transparency and enable better oversight over Pentagon spending, contribute to critical efforts to eliminate wasteful military expenditures, and enhance military readiness and national security."
For background on this issue, see my Cato Policy Analysis from 2017 entitled, "Withdrawing from Overseas Bases: Why a Forward-Deployed Military Posture Is Unnecessary, Outdated, and Dangerous."
Here are the signatories of this letter:
Christine Ahn, Women Cross DMZ
Andrew J. Bacevich, Quincy Institute for Responsible Statecraft
Medea Benjamin, Codirector, Codepink
Phyllis Bennis, Director, New Internationalism Project, Institute for Policy Studies
Leah Bolger, CDR, US Navy (ret), President World BEYOND War
Noam Chomsky, Laureate Professor of Linguistics, Agnese Nelms Haury Chair, University of Arizona/Professor Emeritus Massachusetts Institute of Technology
Cynthia Enloe, Research Professor, Clark University
Foreign Policy Alliance, Inc.
Joseph Gerson, President, Campaign for Peace, Disarmament and Common Security
David C. Hendrickson, Colorado College
Matthew Hoh, Senior Fellow, Center for International Policy
Guahan Coalition for Peace and Justice
Kyle Kajihiro, Hawaiʻi Peace and Justice
Gwyn Kirk, Women for Genuine Security
MG Dennis Laich, US Army, Retired
John Lindsay-Poland, Stop US Arms to Mexico Project Coordinator, Global Exchange; author, Emperors in the Jungle: The Hidden History of the U.S. in Panama
Catherine Lutz, Thomas J. Watson, Jr. Family Professor of Anthropology and International Studies, Watson Institute for International and Public Affairs and Department of Anthropology, Brown University
Khury Petersen-Smith, Institute for Policy Studies
Del Spurlock, Former General Counsel and Assistant Secretary of the US Army for Manpower and Reserve Affairs
David Swanson, Executive Director, World BEYOND War
David Vine, Professor, Department of Anthropology, American University
Stephen Wertheim, Quincy Institute for Responsible Statecraft and Saltzman Institute of War and Peace Studies, Columbia University
Colonel Ann Wright, US Army retired and former US diplomat
Arizona needed to raise money to update its sports facilities, but polling indicated that a new tax for this purpose was politically unpalatable. The state legislature had an idea: it would tax the tourism industry through hotel and rental car surcharges. The initial draft of the tax exempted Arizonans from the surcharge, but a smart legislative counsel observed that this just might be unconstitutional because it treated in-staters differently than out-of-staters. Instead, when Arizona levied a new tax on rental vehicles, it exempted long-term rentals, replacement rentals, bus rentals, and a whole slew of other vehicle rentals that are used primarily by locals, leaving the tax in effect on the short-term rentals favored by visitors. This tax would be voted into place by individual counties.
On the day Maricopa County (Phoenix) voted to enact the surcharge, pamphlets circulated claiming, “it will cost Arizona residents next to nothing. As much as 95% of the new . . . taxes will be borne by visitors.” These predictions have borne true; businesses reported that 72-87 percent of surcharge tax revenue has come from out-of-staters.
Saban Rent-A-Car, a Maricopa County business, paid the surcharges and sued for a refund in Arizona Tax Court. It made arguments based on the Commerce Clause of the U.S. Constitution—that the law interfered with interstate commerce—as well as state constitutional claims. The Tax court rejected both grounds. Arizona’s intermediate appellate court affirmed the tax court decision on Commerce Clause grounds. A divided Arizona Supreme Court also affirmed. Saban now seeks review in the U.S. Supreme Court.
This case raises two issues. First: the power of the states to regulate within their borders. The history of the Commerce Clause shows that it was written specifically to address discriminatory state legislation targeting out-of-state commerce. A necessary corollary to Congress’s power to regulate interstate commerce is the Dormant Commerce Clause, which prohibits states and their political sub-units from discriminating against out-of-state commerce. Over the years, the Supreme Court has invalidated taxes on trains carrying freight out of state, laws allowing additional harbor fees on ships carrying out-of-state goods, and taxes on out-of-staters shipping liquor into a state.
The second issue, to quote a Revolutionary War slogan, is “no taxation without representation!” Arizona has passed a tax that disparately impacts visitors from out-of-state who are not represented in the Arizona legislature. This ordinarily is not a problem. When a tax applies equally to all, visitors’ objections will be readily voiced by residents, who are equally effected. But when the tax is designed to fall on visitors, their lack of representation becomes a problem because their interests are opposed to the citizens of the state. For out-of-staters, this amounts to taxation without representation.
Cato has thus filed an amicus brief supporting Saban Rent-A-Car’s petition. The Arizona rental-car surcharge violates the Commerce Clause and impermissibly taxes out-of-staters without adequate representation of their interests in the state legislature.
The Supreme Court will decide whether to take up Saban Rent-A-Car v. Arizona Department of Revenue when it returns from its summer recess.
Thanks to Cato legal associate Michael Collins for his assistance with this post.
On the campaign trail a few years back, Hillary Clinton declaimed: “We need a president who is ready on Day 1 to be commander in chief of our economy.” We got a good laugh out of that here at Cato—what a megalomaniacal misconception of the job! When President Trump embraced the role last Friday, it somehow seemed less amusing. “Our great American companies are hereby ordered to immediately start looking for an alternative to China,” he brayed, sending the markets into a Twitter-driven tailspin.
Where does Trump derive the authority for that “order”? On Saturday, he followed up with a statutory citation for the haters: “try looking at the Emergency Economic Powers Act of 1977. Case closed!”
True, President Trump makes a lot of crazy threats he never carries out: from revoking birthright citizenship, to closing the border, to using the same 1977 Act to hammer Mexico with across-the-board tariffs, as Trump threatened to do in May. There’s a pattern here: the president sounds his barbaric yawp over the roofs of the world, but before long, backs it down to an ineffectual grumble. In this case, the cycle took all of two days: “I have the right to, if I want,” Trump insisted Sunday, but “I have no plan right now. Actually, we’re getting along very well with China.” OK, then: never mind!
But we’d be fools to shrug this episode off as another unsettling, but ultimately meaningless Trumpian brainspasm, like nuking hurricanes or buying Greenland. For decades now, Congress has defined national emergencies downwards, investing the executive branch with dangerous new powers the president can trigger by saying the magic words. Trump has only begun to explore the possibilities, and there may be more competent would-be authoritarians waiting in the wings.
The statute Trump specified, the International Emergency Economic Powers Act of 1977 (IEEPA), gives the president an imposing array of unilateral powers to deploy against “any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States” if he “declares a national emergency with respect to such threat.” Granted, Trump’s definition of “emergency” may differ from yours, mine, and the dictionary’s. “For many years, this has been going on,” he explained Sunday, “in many ways, that’s an emergency.” But if history is any guide, federal judges will be extremely reluctant to second-guess “the wisdom of the President's judgment concerning the nature and extent of [the] threat.”
So, “case closed”? Could Trump order U.S. companies to pack up and come home? Not quite; but he could make it extremely difficult for them to do business in and with China. The IEEPA gives the president staggeringly broad powers to block transactions and freeze assets in which any foreign government or foreign national has an interest. And Trump’s not wrong to think he might get away with using the law as a trade-war bludgeon. A Congressional Research Service report published two months before Trump first started threatening to use IEEPA to hike tariffs, opined that such a use was unlikely, but probably permissible.
The National Emergencies Act of 1976, the framework statute that was supposed to rein in presidential emergency powers, won’t be much help either. It originally allowed Congress to terminate presidential emergencies by majority vote, but thanks to a 1983 Supreme Court decision, the law now requires termination via joint resolution, subject to the president’s veto. Under the current emergency-powers regime, then, the president gets to do what he wants unless a congressional supermajority can be assembled to stop him.
The good news is that Trump’s norm-busting on emergency powers has spurred a bipartisan reform effort in Congress. On July 24, the Senate Homeland Security and Governmental Affairs Committee moved an important emergency-powers reform bill forward by an 11-2 majority. That bill, Senator Mike Lee’s (R-Utah) ARTICLE ONE Act, would amend the National Emergencies Act to void new emergency declarations within 30 days unless Congress affirmatively approves them. Once approved, new emergency declarations require annual reapproval by Congress. The A-1 Act thus changes the current default setting—the president proposes, and the president disposes—to one in which any emergency edicts he issues rapidly expire without legislative sanction.
The A-1 Act also addresses IEEPA abuse: thanks to an amendment offered by Senator Tom Carper (D-DE) and approved by voice vote, it would restrict the president’s ability to use the 1977 law to hike tariffs. The IEEPA, it clarifies, “does not include the authority to impose duties or tariff-rate quotas or… other quotas on articles entering the United States.”
That’s an important change, but it comes with a pretty significant exception: even under the Carper amendment, the president can use the IEEPA for blanket bans of “all articles, or all of a certain type of article, imported from a country from entering the United States.” Nor would authorities claimed under the IEEPA sunset 30 days after the declared emergency. The A-1 Act exempts IEEPA emergencies from the new framework; they remain renewable at-will by the president unless affirmatively repealed by Congress over the president’s veto.
All but three of the 34 currently active national “emergencies” rest on the 1977 law. The case for an IEEPA carve-out is that the bulk of those 31 are fairly uncontroversial, and requiring yearly congressional reapprovals would be cumbersome. That case was far more compelling before President Trump started threatening to weaponize IEEPA against major trading partners and the American consumer.
Even so, the ARTICLE ONE Act would constitute a major improvement over the current emergency powers regime, and a possible foundation for future reforms. The courts are unlikely by themselves to impose the necessary restraints. It’s Congress that got us into this mess, and it’s going to be up to Congress to get us out.
I was sad to read this news:
BEIJING—An independent Chinese think tank that has served as a rare bastion for liberal economic thought will shut down, citing government pressure as President Xi Jinping ’s campaign to silence dissent rolls on.
This is bad for China and bad for the world.
I feel a particular connection to Unirule because, at Tom Palmer's suggestion, I once nominated Mao Yushi -- one of Unirule's founders, and a Cato Friedman prize recipient -- to receive an honorary degree from Harvard. So far, the committee has not selected him.
Here is that nomination statement (which, true confessions, Tom wrote):
Nomination Mao Yushi
Areas of Expertise
Mao Yushi was originally trained in railroad engineering and developed an interest in the economics of markets in socialist China. He was punished in the 1950s for suggesting that if there is no pork for sale, the price should be allowed to rise. His support for rational economic policies did not waver and he was punished severely during the various waves of economic chaos and repression. In 1981 when working at the China Academy of Railway Sciences he published a paper on the foundations of optimal resource allocation, which laid a mathematical foundation for the use of prices to allocate scarce resources among competing uses. That led to greater work and efforts to institute economic reforms based on sound economics. To continue that work, in 1993 he co-founded Unirule Economic Research Institute, which has since published many papers on the Chinese economy, including such sensitive subjects as the reliability of economic data from the government and the unprofitability, when calculating implicit subsidies, of the large state owned enterprises. In addition to pioneering the science of applied economics in China, he has been one of China’s most effective public educators and his book Economics in Everyday Life became a major bestseller in China. He tirelessly explains and applies the fundamental insights of economics to everyday life.
Suggested one-sentence degree citation
This degree has been awarded in recognition of Mao Yushi’s contributions to the economics of resource allocation and his pioneering role in applying economic science to illuminate and guide the transition from central planning to market allocation.
An impartial summary of the nominee’s accomplishments
Mao Yushi is widely considered one of the most important figures in the development of modern China. His own writings played an important role, but his establishment of a number of institutions has had far reaching impact. In 1993 he co-founded the Unirule Economic Research Institute, which has transformed economic discourse in China and published a vast array of detailed studies on economic transformation, municipal finance, trade policy, state subsidized industries, and many other topics. He has also pioneered non-state charitable and mutual aid practices in China, including his work co-establishing the Fuping Development Institute, which helps mainly rural and inland Chinese people to acquire skills and training to succeed economically and transform the more remote provinces of China. His work establishing and promoting those institutions led to many others that have proliferated across China. More recently Mao established the Society for Humanistic Economics to spread public education about economics and to promote an open and tolerant society. His widely read essays frequently combine universal economic principles with well known Chinese cultural themes to explain the importance of the prices, economic residuals, and non-tuistic economic behavior.
Mao has made a mark on China as an outspoken advocate of intellectual openness. He was an early signer of the Charter 08. Liu Xiabo, who was imprisoned for his role in Charter 08 and later received the Nobel Peace Prize in 2010, wrote of Mao, his “bravery is worthy of our respect.” He was named one of China’s 50 most distinguished citizens by Southern People’s Weekly in 2004 and is widely considered one of the most influential living intellectuals in China. In 2012 he was awarded the Milton Friedman Prize for Advancing Freedom by the Cato Institute. His essay “Returning Mao Zedong to Human Form” was published in the influential journal Caixing and set off a major debate in China about Mao’s legacy. It was taken down and later published in a shorter version in the Wall Street Journal. He is known for his public criticism of what he calls “privilege rights” and his insistence that a just and prosperous society requires a strong foundation of legal equality and the rule of law.
I will nudge the honorary degree committee to consider Mao Yushi again!
This past week was an eventful one for trade policy, and not in a good way. In the trade world these days, no news is good news, and any tweets are probably bad news. President Trump's trade policy has been stridently protectionist, abusive of the constitutional separation of powers, destructive to U.S. alliances, and fundamentally flawed as a strategy to achieve its stated goals.
Last week, President Trump was agitated by China's retaliatory tariffs (which were in response to tariffs previously imposed by the Trump administration), and in reaction to the Chinese retaliation, Trump announced on Twitter some retaliation for the retaliation, this time bumping up the various existing and promised tariffs by 5 percentage points. In doing so, he escalated a trade war that has been quickly spiraling out of control. By the end of 2019, if all tariff threats are implemented as planned, the vast majority of Chinese imports to the United States and U.S. exports to China will be subject to tariffs. And not just the low tariffs which had become the norm in recent years: the Chinese imports in question will be subject to tariffs of either 15% or 30%, which is a significant tax. American importers, retailers, producers, and consumers will feel the effects.
Beyond tariffs, Trump made the following over-the-top, anti-free market demand in relation to China: "Our great American companies are hereby ordered to immediately start looking for an alternative to China, … ." That sounds borderline authoritarian as well as extremely harmful to the U.S. companies operating in and selling products in China (ceding the Chinese market to European and Japanese competitors makes no sense). How could Trump possibly have the power to do such a thing? There is, in fact, a statute that gives the president emergency powers that might be broad enough for this executive power grab, but of course it is subject to judicial and legislative oversight. One would hope that those co-equal partners in the U.S. government would play their role and prevent a president from executing such an order.
Trump's defenders will say that a trade war has been going on with China for years and that Trump is the one who finally had the courage to fight back. It is true that the best defense of Trump's approach to trade is that China really does engage in bad trade practices (such as high tariffs and subsidies, and a failure to protect intellectual property). Unfortunately, the Trump administration's aggressive trade policy is not focused only on China. The administration has been abusing the power Congress delegated to the president over the years and is targeting just about every major U.S. trading partner (and when it does take on China it does not do so very effectively)
With regard to the role of Congress, Article I, Section 8 of the Constitution gives Congress power over customs duties and regulating commerce with foreign nations. Over the years, however, Congress has delegated a fair amount of this power to the president. Most presidents have used the power to focus on signing trade agreements that promoted trade with other countries, through mutual tariff reductions and other forms of liberalization. By contrast, President Trump has done very little of this. His negotiations with other countries have mostly focused on reopening old trade deals in order to make trade less free; and he has invoked a statute, rarely used in recent years, that gives him the power to impose tariffs on the basis of "national security" considerations, even in industries where such concerns have little basis. In this way, with regard to domestic trade practices, Trump has pushed the United States in a far more protectionist direction than anything seen since the 1930 Smoot-Hawley tariffs.
The results have been clear and unsurprising: Higher costs for consumers. A number of studies have come out showing that most of the costs of the tariffs are being borne by U.S. consumers (either ordinary purchasers or businesses who use imported goods as inputs in their own manufacturing).
The domestic trade policy disruption also has an impact on international affairs, as our trading partners are being hurt too. The Trump administration has imposed tariffs and quotas on steel and aluminum imports from most trading partners (in response to which, many of these partners have retaliated with tariffs of their own); and it has threatened tariffs on imports of automobile imports, which would be a massive tax imposed on U.S. consumers. These actions, along with Trump's attacks on the World Trade Organization, have made our allies less likely to work with us in the effort to push China to liberalize.
The Trump administration has offered up the explanation that the U.S. tariffs are necessary in order to negotiate trade liberalizing deals with these countries. But that logic is undermined by all the deals negotiated by past administrations without such tariff threats, as well as the continued failure of the administration to achieve new liberalization. Any tiny bits of liberalization on the part of foreign governments (e.g., through the renegotiated NAFTA, or a talked about U.S-Japan trade deal), are dwarfed by what was negotiated by the Obama administration through the Trans Pacific Partnership, from which Trump withdrew rather than look for a path for it to be passed by Congress.
Trump's misguided approach to trade policy may be based on a number of factors, and it is difficult to get into his head fully. It is worth noting, however, that he has called himself a "tariff man." Perhaps that is all the explanation we need. An additional factor is almost certainly his misunderstanding of the concept of trade deficits. When Trump sees that the United States has a trade deficit with a country, he automatically thinks that the United States is "losing." But that is not how trade works. The trade balance is not a scorecard, and having a trade deficit with a country does not mean you are losing to them.
There was a point where Trump and his trade advisers suggested he wanted a world with "zero tariffs, zero barriers, zero subsidies." That statement seemed like a fantasy at the time, and the ensuing months have proved it to be clearly false. Tariffs continue to climb, and massive farm subsidies have been authorized to bail out the farmers hurt by Trump's trade war. We are in the midst of what feels like a "forever trade war." Cooler heads are sure to prevail some day, but how much damage will be done in the meantime?