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Last week, I highlighted how the DC authorities will be “among [the] first in [the] nation to require child-care workers to get college degrees.” Basic economics tells us this will restrict the supply of potential careers, raise prices, and, I fear, over time lead to a demand for more subsidies to “make child care more affordable.”

There was another possibility I did not explore. Today’s Washington Post suggests that subsidizing supply is on the agenda instead:

Mayor Muriel E. Bowser (D) has offered a $15 million proposal to address the acute shortage of licensed child-care options for the city’s infants and toddlers, an issue that has gained urgency amid a baby boom. Her 2018 budget includes competitive grants to help high-quality providers expand or open centers and would also make space available for child-care facilities in three city-owned or leased buildings.

A basic principle that policymakers should follow is “first do no harm.” DC has a general affordability and availability problem, which is screaming “restricted supply.” But now the DC authorities are having to subsidize supply in part to overcome the reductions in supply caused by their own policies. Watch for calls for more demand-side support next.

The result? More and more government control over this crucial economic, social, and familial aspect of life.

I’ve got a new piece at the Institute for Humane Studies’ Learn Liberty explaining the basics of how politicians rig district lines to reward friends and punish foes, the entrenchment of an established political class that results, and how it might be combated. Snippet:

In a classic single-party gerrymander, the party in power packs opposition voters densely into as few districts as possible, thus enabling its own voters to lead by a comfortable margin in a maximum of districts. When a legislature is under split party control, the theme is often bipartisan connivance: you protect your incumbents and we’ll protect ours. Third-party and independent voters, as is so common in our system, have no one looking out for their interests….

Geographic information systems (GIS) methods now allow members of the public using inexpensive software to analyze the full data set behind a map. In several states, that has meant members of the public could offer maps of their own or make well-informed critiques of legislators’ proposed maps. In one triumph for citizen data use, the Pennsylvania Supreme Court invalidated a map drawn by lawmakers as clearly inferior to a map that had been submitted independently by an Allentown piano teacher.

Separately, I generally agree with what Aaron Blake writes in a new Washington Post piece: with so many other solid reasons to end gerrymandering, there’s no need to over-sell two arguments frequently invoked against it, the polarization thesis and the “GOP-fixed House” thesis.

On the much-noted trend in national politics toward ideological polarization, it seems clear that gerrymandering is but one contributing factor among many. The U.S. Senate, for which districting is not an issue, has followed a path not too far from that of the House, with virtually all Senate Democrats now to the left of virtually all Senate Republicans and stepped-up party-line cohesion on voting. And states with relatively fair districting maps have experienced polarization with the rest. So, yes, reform will probably make a difference at the margins for those who would like there to be more swing or contestable seats, but don’t expect miracles.

And while gerrymandering today on net benefits Republicans (which has not always been the case), it is probable for reasons Blake explains that fair/neutral districting would still have produced a GOP-run House in 2016. An important reason is that Democratic voters are so concentrated in cities.

For some of the many other reasons the cause is worth pursuing no matter which party (if any) you identify with, check out my IHS piece or, for somewhat more detail, my chapter on the subject in the new Eighth Edition of the Cato Handbook for Policymakers. I’ve previously written several pieces about my experience dealing with the problem in my own state of Maryland.

Attorney General Jeff Sessions apparently plans to entrust criminal justice “reform” to Steven H. Cook,

a former street cop [turned] … federal prosecutor … [who] saw nothing wrong with … life sentences for drug charges [or] … the huge growth of the prison population. 

This news is not surprising given Sessions’ views on the drug war (“good people don’t smoke marijuana”). But the Sessions/Cook perspective is still depressing:

Law enforcement officials say that Sessions and Cook are preparing a plan to prosecute more drug and gun cases and pursue mandatory minimum sentences. The two men are eager to bring back the national crime strategy of the 1980s and ’90s from the peak of the drug war, an approach that had fallen out of favor in recent years as minority communities grappled with the effects of mass incarceration.

The “silver” lining is that Sessions’s position–drug users are bad people–makes the issue as stark as possible: do we, as a society, believe in individual liberty or not? Much opposition to the drug war (e.g., campaigns against mandatory minimums) avoids that question.

Mandatory minimums are misguided, but mainly because drug trafficking and possession should not be crimes in the first place.  

The Drug War will end only when opponents focus on the fundamental issue: drug use is an individual decision, and government has no right to interfere.

Speaking to reporters aboard Air Force One yesterday, President Trump strongly condemned the recent nerve gas attack in Northern Syria: “I think what Assad did is terrible…. a disgrace to humanity,” he declared: “something should happen.” Last night, US forces hit a Syrian airfield with 59 Tomahawk missiles launched from destroyers in the Eastern Mediterranean. This was something, and it it happened. For a political outsider, Trump’s picked up “politician’s logic” pretty fast.  

I won’t hazard a guess at what Trump’s exercise in Tomahawk humanitarianism means for our ongoing involvement in the Syrian civil war. His own Secretary of State is less than coherent on the subject, alternately announcing that “steps are underway” to remove Assad and that there’s been “no change” in US “policy or posture relative to our military activities in Syria.” But the airstrikes are clarifying in one respect: they confirm the worst fears about our 45th president’s hairtrigger temperament and disdain for legal limits on his ability to wage war.

Thus far, the administration has said nothing about the legal authority for the strikes. There’s not much that can be said: they’re plainly illegal. He had neither statutory nor constitutional authority to order them.

Earlier today, Sen. John McCain insisted that the strikes were covered by the Authorization for the Use of Military Force (AUMF) Congress passed in 2001. True, the 2001 AUMF, targeting the perpetrators of the 9/11 attacks, has proven an impressively stretchable statute: in Syria alone it already supposedly covers Al Qaeda affiliates and the ISIS operatives beheading them. But it’s hard to see how it can be stretched far enough to underwrite military action against Assad, who’s at war with both. The legislators who voted for that AUMF in 2001 thought they were authorizing our 43rd president to fight Al Qaeda and the Taliban; it’s safe to say none of them imagined they were giving our 45th president the power to take all sides in a future Syrian civil war.

Without statutory cover, all that’s left is an appeal to presidential power under Article II of the Constitution. But that document vests the bulk of the military powers it grants in Congress, with the aim of “clogging, rather than facilitating war,” as George Mason put it. In that framework, the president retains the power to “repel sudden attacks” against the US; but he does not have the power to launch them. Candidate Barack Obama had it right in 2007 when he told reporter Charlie Savage that “The President does not have power under the Constitution to unilaterally authorize a military attack in a situation that does not involve stopping an actual or imminent threat to the nation.”

As president, Obama violated that pledge repeatedly, but his decision not to attack Syria after its use of chemical weapons in 2013 was one of the few occasions where he honored it. While insisting in public that he had all the authority he needed to wage war without Congress, in private, Obama told aides he agreed with the position he’d outlined to Savage in 2007. Still, Obama aide Ben Rhodes told Savage, “it was still a choice, not a necessity, to go to Congress because ‘it’s not like the lawyers couldn’t have come up with a theory.’”

While we’re waiting to see what legal theory Trump’s lawyers come up with, it’s worth worrying about the practical dangers presented by a system that allows the president to wage war at will. 

The Framers’ allocation of constitutional war powers was informed by their skeptical view of human nature. As Madison put it: “In war, the honours and emoluments of office are to be multiplied; and it is the executive patronage under which they are to be enjoyed. It is in war, finally, that laurels are to be gathered, and it is the executive brow they are to encircle. The strongest passions and most dangerous weaknesses of the human breast; ambition, avarice, vanity, the honourable or venial love of fame, are all in conspiracy against the desire and duty of peace.” 

In the 70-odd days since he became president, Donald Trump has been finding out the hard way that government doesn’t work like a business. Judges can push back; the Freedom Caucus won’t vote for your bill just because you told them to. The buck may stop at the president’s desk when it comes to public expectations, but the threat of “you’re fired” is of limited use when the president’s facing down the permanent bureaucracy or coordinate branches of government. Contemplating the prospect of an Eisenhower presidency, Harry Truman famously remarked: ”He’ll sit here, and he’ll say, ‘Do this! Do that!’ And nothing will happen. Poor Ike—it won’t be a bit like the Army.”

Except, of course, when it comes to ordering the US military into battle: the president’s role as commander-in-chief of US armed forces is one of the few aspects of the job where his power matches his absurdly vast responsibilities. He can say “do this! Do that!”—and something will happen. And that can be tempting, particularly when your approval ratings are about where Nixon’s were as Watergate unfolded.

As my colleague Julian Sanchez warns, “We are at the extremely dangerous stage where Trump is realizing he can automatically command the news cycle by ordering missile strikes.” Worse still, he can also—at least temporarily—get the approval he seems to crave. His drive-by bombing has already earned him strange new respect from neoconservative #NeverTrump-ers, who appear to believe that the mercurial celebreality billionaire is at his least frightening when he’s literally blowing things up. Centrist pundit Fareed Zakaria echoed that grotesque logic on CNN earlier today: “I think Donald Trump became president of the United States last night.”

As much as he disdains the media establishment, Trump revels in this sort of praise. It may not be long before he free-associates about it in interviews: “my airstrikes–which got terrific ratings, by the way….” And when the glow fades, he may be tempted to light it up again.

 

Here’s a joke: a Republican, a Democrat, the director of a left-wing think tank, three AEI scholars, and Ivanka Trump walk into a bar. What do they agree on?

The answer: they want federally mandated paid leave or child care, effective immediately.

You aren’t laughing? Well, you’re in good company – this joke isn’t funny, especially for women. Paid leave and child care policies have been tried in a variety of contexts, and to advocates’ dismay, the consequences are not universally beneficial to women.

As an example, take Chile, which in 2009 mandated employer-provided childcare for working moms. According to recent research, women employed by affected Chilean firms were paid between 9 and 20 percent lower wages than comparable female Chilean workers following policy implementation.

And the impact of women’s labor policies is arguably worse in Spain, which is struggling with the fallout of a 1999 policy that aims to protect women with children against layoffs [1] but in practice harms them: a natural experiment shows that after policy implementation, Spanish employers were less likely to hire childbearing-aged women, less likely to promote child-bearing-aged women, and more likely to lay child-bearing-aged women off.

Although Spain and especially Chile are different in myriad ways that limit extrapolation to a U.S. context, it’s hard to dismiss home-grown evidence. Though the United States doesn’t have a federally-mandated paid leave policy, it did enact a federally mandated unpaid leave policy, Family & Medical Leave Act (FMLA), in 1993. And despite FMLA being an accepted part of the modern legislative fabric, the consequences of the policy are not all stellar. Analysis suggests women hired after the policy are five percent more likely to be employed but eight percent less likely to be promoted.

Though the U.S. hasn’t adopted a paid leave mandate, a few states have. Research on policy outcomes in California show female labor force participation rates rising after implementation of unpaid leave (maybe good?), along with childbearing-aged female unemployment rates and unemployment duration rising (unambiguously bad). This is probably because the mandate made women universally more expensive in employer’s eyes, whether they intend to use it or not.

So why don’t the Ivankas of the world seem to care about these negative repercussions, at least as much as the imagined benefits of women’s policies? The most gracious interpretation is that modern advocates are uninformed. It could also be that it is inconvenient information.

And although advocates would like to paint a rosy picture, the reality is that some women, perhaps many, would be collateral damage under a federally mandated policy. For negatively affected women, that’s a lot more tragic than it is funny.

[1] This protection is granted if the worker had previously asked for a work-week reduction due to family responsibilities.

Many have started supporting a so-called merit-based immigration system since President Trump mentioned it a few months ago. A merit-based immigration system could mean just about anything but most define it as a system that admits more highly skilled and educated immigrants, as in Canada, and fewer lower-skilled and family-based immigrants as currently enter under America’s immigration system. Despite the lack of any significant legal or regulatory changes, new immigrants are becoming more highly educated immigrants over time even relative to natives.

The share of admitted immigrants who have at least a college education increased from 22 to 39 percent 1993 to 2015 (Figure 1). Over the same period, the share of admitted immigrants who are high school dropouts dropped from 37 percent to 27 percent. Virtually all of that change occurred since 2007 when illegal immigration slowed down and the number of Chinese and Indian immigrants began to grow relative to Mexicans. Although the American system does not select for education, it does not intrinsically favor the uneducated either.  

Figure 1
Share of New Immigrants by Education & Year of Admission

Source: Current Population Survey and author’s calculations

Immigrants in 1993 were less educated than natives in that year when controlling for age (Figure 2). However, new immigrants were more likely than natives to have a college or above education by 2015 (Figure 3).

 Figure 2

Share of New Immigrants and Natives by Education, 1993
Source: Current Population Survey and author’s calculations

Figure 3
Share of New Immigrants and Natives by Education, 2015

Source: Current Population Survey and author’s calculations

The percentage of dropout immigrants is still high in the United States relative to natives and to new immigrants in Australia and Canada. However, if this trend continues without any legal reforms then education of newly admitted immigrants in the United States will look more and more like those of countries with so-called meritocratic immigration systems. Rather than only counting immigrants under the employment-based green card category as meritocratic, the education and skills of all immigrants should be considered.

By a vote of 54-45, the Senate today concluded the long, bruising battle to confirm President Donald Trump’s nomination of Judge Neil Gorsuch to the U.S. Supreme Court. Chief Justice John Roberts is scheduled to swear Judge Gorsuch in at 9:00 a.m. on Monday morning. We can now look forward to the Court’s return to its normal practices, taking and deciding cases without the prospect of 4-4 decisions hanging over it.

Judge Gorsuch has often been likened to Justice Antonin Scalia, whose seat he will assume, and for good reason, for he too is a textualist and an originalist in his approach to constitutional and statutory interpretation. But he comes from a later generation, one immersed in the debates between liberals, conservatives, and classical liberals over the proper interpretation of the Constitution and the role of judges under it. During his confirmation hearings, for example, Judge Gorsuch spoke favorably of the Court’s decisions in cases like Meyer v. Nebraska and Pierce v. Society of Sisters, where the Court upheld parental rights not expressly found in the Constitution. That bodes well for his appreciation for the rich moral, political, and legal theory that stands behind and informs the often broad language of the Constitution, as his own graduate study at Oxford in natural law would suggest.

Speaking of generational change, an interesting historical note was just brought to my attention by a personal friend with whom I served in the Reagan administration, Chicago attorney Joseph A. Morris. As a law clerk for Justice Anthony Kennedy, Justice Gorsuch will be the first U.S. Supreme Court justice ever to serve on the bench alongside the justice for whom he clerked. The play between them will be fun to watch! Congratulations Judge, soon to be Justice, Neil Gorsuch.

Congratulations to Neil Gorsuch, who will be sworn in Monday as the newest Supreme Court justice. Gorsuch’s mentor, Justice Byron White, liked to say that each new justice makes for a new court, and I look forward to the breath of fresh air, intellectual rigor, collegiality, and constitutional seriousness that Justice Gorsuch will bring. I’m also glad that our nation’s political debate can move beyond this toxic episode and that we won’t ever have to discuss nuclear options with regard to judges ever again. 

With his decision to launch missile strikes against an airfield in Syria, President Donald Trump has apparently learned a lesson that eventually dawns on all American presidents, especially in the post-Cold War era: with great power comes great responsibility. I call it the power problem.

The power problem was encapsulated in the exchange between then-U.N. Ambassador Madeleine Albright and Gen. Colin Powell, at the time the Chairman of the Joint Chiefs of Staff:

What’s the point of having this superb military that you’re always talking about if we can’t use it?

Relieved of the burdens to justify U.S. military actions solely on the basis of our own national security interests, U.S. presidents and the foreign policy elites who advise them have gone searching for other reasons to use force. There will never be a shortage of aggrieved parties pleading for help. There is, however, a shortage of countries willing to help.

U.S. military power, and our willingness to use it, have discouraged others from possessing power of their own. They can reasonably claim that they lack the capability to act.

The United States doesn’t have that luxury. From the moment when a president arrives in the Oval Office, he possesses vast power, and few constraints on how it is used.

Using it wisely requires tremendous discipline, and a willingness to endure the criticisms of those who will accuse you of everything from callousness to mendacity – both when you act, and when you refuse to do so.

Trump’s repeated invocation of the doctrine “America First” suggested that he would not be swayed by such criticisms. And, in the past, he has suggested that the United States should not become involved in Syria’s civil war. In September 2013, for example, Donald Trump urged President Obama via Twitter not to attack Syria. 

But now, just 77 days into his presidency, he has created an inevitable rejoinder for every successive foreign policy crisis, anywhere in the world: “Mr. President, you struck Syrian government forces in April 2017. Why are you not striking [insert name of petty tyrant here] in response to equally grievous actions against [petty tyrant’s people]?”

In his statement last night justifying the use of unilateral force against Bashar al-Assad’s forces in Syria, President Trump explained “It is in this (sic) vital, national security interest of the United States to prevent and deter the spread and use of deadly chemical weapons.” 

It is a debatable point, and one that deserves to be debated. A new authorization for the use of military force (AUMF) would be a good place to start. There are risks, including conflict with nuclear-armed Russia. There are reasonable questions about what effect such strikes will have on Assad’s capacity to carry out similarly brutal killing by purely conventional means. And, lastly, having now introduced a very small increment of U.S. military power directly into the Syria conflict, some will wonder whether that signals a willingness to use much more. Those who castigated Barack Obama for refusing to intervene decisively in the Syrian civil war, including Sens. John McCain and Lindsey Graham, hope so. The question is whether President Trump, in the face of all this uncertainty, will be able to resist the temptation to escalate.

If he succumbs, Americans could find themselves sucked into yet another elective military quagmire in the Middle East.

Amid increasing tensions between Washington and Beijing over economic and security matters, Chinese President Xi Jinping is in Florida today and tomorrow for meetings with President Trump.  Although economic frictions between the world’s two largest economies are nothing new, the safeguards that have helped prevent those frictions from sparking an explosion and plunging the relationship into the protectionist abyss may no longer be reliable.

As I noted in this recent Cato Free Trade Bulletin: 

Never have the U.S. and Chinese economies been more interdependent than they are today. Never has the value of the bilateral trade and investment relationship been greater. Never has the precarious state of the global economy required comity between the United States and China more than it does now. Yet, with Donald J. Trump ascending to power on a platform of nationalism and protectionism, never have the stars been so perfectly aligned for the relationship to descend into a devastating trade war.

What are those safeguards and why might they no longer be reliable?

First, U.S. multinational business interests that used to favor treading lightly with China, and provided a policy counterweight to U.S. import-competing industries advocating protectionism, have grown disillusioned by the persistence of policies that continue to impede their success in Chinese markets. Many think a more aggressive posture from Washington, even if that makes matters worse for them in the short run, is overdue.

Second, the pro-China-trade lobbies in Washington have grown sheepish in their advocacy on account of an economic study that went viral last year, ascribing massive U.S. jobs losses to trade with China, and because many fear political retribution from challenging Trump’s assumptions.  Full-throated support for the relationship has become conditional support.

Third, now more than ever before, U.S. policymakers, media, and the public are less inclined to look at the bilateral economic relationship in isolation from the strategic and geopolitical aspects of the relationship.  Segregating the issues in the past allowed us to focus on the win-win elements of trade, where there was broad enough agreement that mutual benefits could be derived, without being distracted by the issues where the United States and China are less likely to agree.  Today, our economic frictions are viewed through the prism of our geopolitical differences – and that makes trade disputes more difficult to manage.

Fourth, probably more so than at any time since 1989, there is political “appetite” for a trade war. By that I mean that both Trump and Xi could extract some domestic political capital from the initiation of trade hostilities. Trump’s base and plenty of business and other interest groups believe China has it coming and—after all—as Trump suggests, China has much more to lose from a trade war given its $350 billion trade surplus with the United States. Meanwhile, Xi’s difficulties righting the Chinese economy, which has been suffering its slowest growth in 25 years, threaten him and the party with a crisis of legitimacy.  Being able to blame domestic economic woes on protectionist or otherwise aggressive foreign policies would enable Xi to tap into a vast reservoir of Chinese nationalism, and would reduce the burdens of reform that confront him today.  But make no mistake: a trade war between the United States and China would have profoundly adverse consequences in both countries and—depending on its course—could devastate the global economy. So there’s that.

Fifth, there are a number of legitimate gripes about Chinese AND U.S. trade policies that can no longer go unresolved. Beijing and Washington have been tightening the vices on one another’s companies in a number of different ways, and in some cases violating established rules.  The focus of Trump’s criticism of China has been its currency policy, which has been a non-issue for nearly a decade.  As is often the case, the politics lags the economics, but Chinese suppression of the value of its currency is simply irrelevant (as an economic matter).  In fact, over the past two years, China has burned through $1 trillion of foreign reserves, purchasing Chinese renminbi on currency markets to prevent its value from depreciating further.

Among the list of potentially legitimate gripes made about Chinese policies are:

  • Massive subsidization of industries
  • Relatively high tariffs on goods imports and barriers to the provision of services by foreigners
  • Widespread restrictions on foreign investment in a multitude of Chinese industries
  • Forced transfer of technology imposed on foreign companies seeking to establish presence in China
  • Indigenous innovation policies that grant preferences to companies that develop and register intellectual property in China
  • Insufficient enforcement of intellectual property rights
  • Barriers to digital trade, including web filtering and blocking, and restrictions on data flows and cloud computing
  • The continued prominence of state-owned enterprises, which don’t face the same market constraints that private companies face
  • Discriminatory application of China’s Anti-Monopoly law
  • Scope for discriminatory application of China’s new Cybersecurity Law and National Security Law

Among the list of potentially legitimate gripes made about U.S. policies are:

  • Continued discriminatory, non-market economy treatment of Chinese companies in U.S. antidumping cases
  • Discriminatory application of the U.S. countervailing duty law, which punishes Chinese exporter (and U.S. importers) twice for the same alleged infraction
  • Opaque and possibly discriminatory procedures at the U.S. Committee on Foreign Investment in the United States (CFIUS), which reviews and can block proposed acquisitions of U.S. companies by foreigners on grounds of threats to national security
  • Proposed expansion of CFIUS’s remit to include an economic security element, a food security element, and to extend covered transactions beyond acquisitions to include green field investments
  • The unofficial, but commercially consequential blacklisting of acquisitions by and products made by certain Chinese information and communication technology companies

Many of the complaints about Chinese policies could have been addressed through the Trans-Pacific Partnership had President Trump not withdrawn the United States from that agreement. In fact, the TPP offered the clearest path to compelling favorable changes in China’s economic policies because China would have seen most of its major trade partners join the TPP, and would have had no better alternative than to join itself.  That’s where the leverage (in the form of a carrot, not a stick) to compel China to play by the rules resided.  And, for now at least, that leverage is squandered.

So, absent any obvious remaining carrots, some in Washington and around the country are encouraging a more strident tack with China.  In today’s Washington Post, Rob Atkinson from the Information Technology and Innovation Foundation, calls for what looks like some form of international sanctions against China.  It seems a sure path to trade war.

A better idea, as articulated by my colleagues Simon Lester and Huan Zhu in this new paper, would be to launch bilateral trade negotiations to accomplish resolution of some or all of these issues in a very direct manner.  Simon and Huan argue:

If the United States wants to promote the liberalization of Chinese trade and investment policy, it needs to engage with China in a more positive way. To this end, it should sit down with China and negotiate a new economic relationship, one that goes beyond the terms of the WTO. In particular, the United States should initiate formal negotiations on a trade agreement with China. Negotiations of this kind will be a challenge, especially with a president who has been so critical of China. However, negotiations offer the best hope for addressing concerns about China’s economic policies and practices.

Of course, like all trade negotiations, this one would be politically difficult.  But considered against the alternatives, a bilateral trade deal is well worth serious consideration.

 

Today’s removal of the filibuster – a parliamentary tool effectively requiring 60 votes to proceed with a vote on a matter – for Supreme Court nominees is the long overdue denouement of a process that began not with Senate Republicans’ refusal to vote on Merrick Garland, or even Harry Reid’s elimination of the filibuster for lower-court nominees in 2013, but with Reid’s unprecedented partisan filibusters in 2003. Recall especially the record 7 failed votes to end the filibuster of Miguel Estrada, who was blocked primarily because Democrats didn’t want President Bush to appoint the first Hispanic Supreme Court justice.

The Senate is now restored to the status quo ante, such that any judicial nominee with majority support will be confirmed. That’s a good thing.

RIP Partisan Filibuster (2003-2017)

A well-known obstacle to the greater popularity of Bitcoin as a medium of payment is the high volatility of its exchange value. This volatility results from its built-in quantity commitment: because the number of Bitcoins in existence stays on a programmed path, variations in the real demand to hold Bitcoin must be accommodated entirely by variations in its unit value. When demand goes up, there is no quantity increase to dampen the rise in price; and vice-versa for a fall in demand.

Not surprisingly, several cryptocurrency developers have thought of creating a cryptocurrency with a price commitment — namely a pegged exchange rate with the US dollar — rather than a quantity commitment, in hopes of greater popularity. The aim is to create a system in which dollar-denominated payments can be made with the ease, security, and low cost of Bitcoin payments, but without the exchange-rate risk.

The development of “Blockchain 2.0” platforms has enabled the launching of a variety of new digital assets, including such dollar-pegged (and euro-pegged and gold-pegged) currencies. As we will see, the histories of early (2014-2016) dollar-pegged cryptocurrencies show a series of flops. But one project, Tether, has become a late-blooming success. Tether had $55 million in circulation as of March 29, 2017, making it the #13 largest cryptocurrency. To keep this size in perspective, a brick-and-mortar US institution with $55 million in deposits is a tiny bank or a mid-size credit union, and Tether is currently only 1/300th the size of Bitcoin.

The Tether white paper explains in more detail the motivation for developing a dollar-pegged cryptocurrency by listing advantages to individuals using it for dollar-denominated transactions rather than using dollars held in “legacy bank” accounts:

  • Transact in USD/fiat value, pseudonymously, without any middlemen/intermediaries
  •  Cold store USD/fiat value by securing one’s own private keys
  • Avoid the risk of storing fiat on [cryptocurrency] exchanges ­– move crypto­fiat in and out of exchanges easily
  • Avoid having to open a fiat bank account to store fiat value

In sum, “Anything one can do with Bitcoin as an individual one can also do with” a dollar-pegged cryptocurrency, namely, “avoid credit card [or debit card] fees,” maintain greater privacy, “remit payments globally” more cheaply, and access blockchain financial services.

But what is the claimed advantage over using Bitcoin? It is the expectation of wider acceptance in payments, because of the advantages to merchants of accepting a dollar-pegged cryptocurrency over accepting Bitcoin in a US-dollar-dominated economy:

  • Price goods in USD/fiat value rather than Bitcoin (no moving conversion rates/purchase windows)
  • Avoid conversion from Bitcoin to USD/fiat and associated fees and processes
The Flops

First we consider the projects that have flopped. Three projects were launched in September 2014: CoinoUSD, NuBits, and BitUSD. Their pegging mechanisms were different, and are difficult to describe briefly (partly because they were not all entirely transparent), but two common features are important to note.

  1. The rate-pegging mechanisms were not programmed into a source code, like Bitcoin’s quantity commitment, but relied on non-programmed policy actions by a trusted central authority.
  2. None used the traditional currency pegging method of having the issuer hold reserves in physical dollars or dollar-denominated debt securities. (On the NuBits mechanism see this critique by a BitUSD promoter. On the BitUSD mechanism see this critique by the CoinoUSD developer.)

We can examine the fortunes of each project by looking at its price and “market capitalization” (value-in-circulation) history on the cryptocurrency tracking site CoinMarketCap.com.

CoinoUSD

CoinoUSD, which began trading in December 2014, was developed by a for-profit payments firm called Coinomat and built on the blockchain of the NXT cryptocurrency. (In November 2014 NXT was the #6 cryptocurrency with a market cap of $19 million; currently it ranks #38 with a market cap around $13 million.) CoinoUSD reached a market cap plateau of $2.7 million in early 2016, but shut down in early 2016, due to a “payout glitch” that flooded customers with free CoinoUSD units, making it impossible to maintain the exchange value at $1. Coinomat announced a reboot in which the erroneous payout would be reversed and said, “NXTUSD will replace CoinoUSD completely, and enhance it,” but this appears not to have happened. Since then it has had a market cap of zero, and its webpage at the Coinomat site declares it “disabled until further notice.”

NuBits

The history of NuBits, also a for-profit enterprise, shows that it gained only a similarly small market foothold. Its market cap plateaued early on below $2.5 million, and since April 2015 has remained below $1 million. In June 2016 NuBits had a devaluation crisis, with the price falling to 20 cents. Its rate-pegging intervention mechanism, despite claiming many layers of reinforcement, was not robust and failed. Although the price later returned to par, today NuBits shows very little market activity. Since January 2017 the market cap has hovered around only $135,000, with daily trading volume in the neighborhood of $2000.

BitUSD

BitUSD is built on the blockchain platform of the cryptocurrency BitSharesX. Its highest market cap plateau was around $1 million soon after introduction, but it fell to below $200,000 in April 2015 and is currently less than $110,000.

BitUSD uses a novel pegging system that so far has proven robust. A piece promoting BitUSD emphasizes that “the bitUSD is an asset that is not backed by real dollar in someone’s bank account.” (It claims this a virtue: “We cannot trust anyone to hold and secure a physical asset so that people can redeem it eventually. History has repeatedly shown: It doesn’t work!” In fact, history shows the major banks in unhampered banking systems routinely justifying the public’s trust by redeeming their liabilities on demand for decades. Paypal works on the same supposedly non-working model, backed by Paypal’s dollar deposits at Wells Fargo Bank.) By contrast, BitUSD are created through collateralized forward currency contracts. The network provides an escrow service that credibly ensures repurchase (or “redemption”) of the BitUSD at or near par. Someone who wants to acquire BitUSD, say in order to buy from a seller who prefers a dollar-denominated medium of exchange, offers a contract: so many BitShares (hereafter BTS) for a certain amount of new BitUSD. Under the BitShare network rules, the acquirer must not only pay at the outset in BTS but also agree to post collateral in BTS equal to the value of the bid. If the bid is accepted by another network participant, explains the BitUSD white paper, “the collateral and purchase price are held by the network until the BitUSD is redeemed” by some third party repurchasing it. The acquirer of BitUSD thus puts 200% collateral into a contract “that only allows access to these BTS when the BitUSD are paid back.” In effect the acquirer is shorting the dollar price of BTS.

Note that the new BitUSD units are initially 200% collateralized not in dollar-denominated assets, but in BTS. If BTS fall 25% or more against the dollar, such that the value of the BTS collateral declines to 150% or less of the value to be repaid, under the network rules redemption can be compelled by any BitShares miner who “enforces a margin call.” (It should be noted that to enforce the collateral rules, the BitShares network relies on trusted human agents to inform it about the current $ price of BTS.) The system then “uses the backing BitShares to repurchase the BitUSD…thereby redeeming it.” Conversion back into dollars is thus not always at the initiative of the holder, as it is for a holder of ordinary demandable bank liabilities. Instead a BitUSD holder faces a risk of “forced settlement.” If the value of BTS falls so quickly “that the margin is insufficient, then the market price of the BitUSD may fall slightly below parity for a short time if there is insufficient demand for BitUSD relative to the supply of sellers.”

The white paper concludes: “The critical thing to understand is that BitUSD is an asset used to hedge a position in BitShares against changes in the price of USD and is not supposed to have an exact 1:1 exchange rate with USD.” A close look at the chart indeed shows that the price of 1BitUSD has not been exactly $1. It has vibrated around $1 but has not experienced any lasting devaluation. Nonetheless its clientele has declined and is currently small. No doubt this reflects in part the declining popularity of BTS, its market cap having fallen from more than $60 million in September 2014 to around $15 million today.

The Success: Tether

Now to the success story. Tether was launched in February 2015. In contrast to the previous contenders, as the chart shows, it started slowly and has grown in market cap. The series of discrete steps in its market cap path indicates that there have been a series of large purchases. The most recent step, on Wednesday, March 29, 2017, raised the value in circulation to $55 million from $45 million. Logically these are not speculative position-takings, because there are no capital gains to be had so long as the price per tether remains solidly pegged (or “tethered”) to $1. And Tether has in fact successfully maintained a steady peg throughout its history with only one small and brief blip. The steps are presumably big acquisitions for transaction use. Transactions volume in recent weeks has been running mostly in the neighborhood of at $20-40 million per day.

Tether transfers are executed using the Bitcoin blockchain. Tether’s pegging mechanism is also not programmed into a source code, but it is the traditional one: the issuer holds dollar-denominated reserve assets and pledges to redeem Tethers on demand. (Euro-Tethers have recently been introduced, but I focus here on dollar-Tethers.) According to the official FAQ, “Tether Platform currencies are 100% backed by actual fiat currency assets in our reserve account. Tethers are redeemable and exchangeable pursuant to Tether Limited’s terms of service. The conversion rate is 1 tether USD₮ equals 1 USD.”

The parent Tether firm, in other words, operates like a currency board: It holds 100%+ dollar-asset backing, and passively swaps Tethers for dollars and back again. Like a currency board, it can earn interest income by holding some of its dollar-denominated assets in interest-bearing form. The Tether white paper reveals that Tether’s dollar reserves are currently held in accounts at two major Taiwanese commercial banks: Cathay United Bank and Hwatai Bank. (Why these particular banks? “They also provide banking services to some of the largest Bitcoin exchanges globally,” they are okay with Tether’s business model, and they are experienced at compliance with Know-Your-Customer and Anti-Money-Laundering regulations.)  It adds that “additional banking partners are being established in other jurisdictions” to reduce political risk of the accounts being frozen. Tether is thus not a “100% reserve” institution in the sense of a money warehouse holding 100% literal cash reserves (which would mean Federal Reserve notes in a vault).

How does a potential purchaser of Tether verify the 100% backing claim? The website declares: “Our reserve holdings are published daily and subject to frequent professional audits. All tethers in circulation always match our reserves.” A webpage does give dollar values for assets and liabilities, but does not identify the auditors or provide copies of the audit reports, so the claim of being “fully transparent” is somewhat exaggerated. The transparency is as great as that of historical note-issuing banks, however. And perhaps the important test of trustworthiness is that Tethers have in practice been redeemed every day at par for about two years.

Dollar-pegged cryptocurrencies, by contrast to Bitcoin, separate blockchain-secured payments from the speculative holding of an irredeemable private currency. Thus they provide a potential window for learning how much of the demand for cryptocurrencies is transactional, and how much is speculative. The competition among dollar-pegged cryptocurrencies provides something of a market referendum on the relative credibility of alternative pegging arrangements. The much larger size achieved by Tether suggests (though not definitively, because other factors are also in play) a popular verdict that its pegging mechanism is more credible than those of CoinoUSD, Nubits, or BitUSD. It will be interesting to watch Tether’s progress from this point on, and to observe whether its model is copied by other entrants.

[Cross-posted from Alt-M.org]

Americans may take for granted that if they’re ever accused of a crime, they can choose their own attorney to represent them. The Supreme Court has ruled that Americans have a right to counsel in serious criminal cases, and nobody seriously argues that the government should make that important decision for us.  

Yet that is exactly what happens across the country when defendants are too poor to hire their own attorneys.  While other countries such as the United Kingdom have long allowed indigent defendants to choose their own lawyers, American jurisdictions historically restrict that choice to either a court-appointed lawyer or an assigned public defender. 

In 2010, the Cato Institute published a study, Reforming Indigent Defense, which proposed a client choice model where poor persons accused of crimes would be able to choose their own attorney to represent them in court. If the accused opted for the public defender, he could make that choice, but if he wanted to explore other options, he could do that also.  The Texas Indigent Defense Commission became aware of the Cato report and decided to give it a try with a pilot program in Comal County, near San Antonio. The program went into operation in 2015.  

Today, the Justice Management Institute released an evaluation based on two years of data from the Comal Client Choice program.  The report, called The Power of Choice: The Implications of a System Where Indigent Defendants Choose Their Own Counsel, suggests that the program is working as well or better than the old system across a variety of metrics.  

The JMI study looks at four factors to assess the viability of the Comal program:

  • Does the model impact the quality of representation?  
  • Does the model produce a higher level of satisfaction and procedural justice?
  • Does the model impact case outcomes?
  • What is the impact of the model on overall cost and efficiency?

The study compares the results of Client Choice participants with the representations of defendants who chose to use the pre-existing court-appointment system.

While some aspects of representation were the same for both groups (for instance, client assessments of how hard their lawyers worked were not statistically distinguishable), participants in the Client Choice program were able to meet with their lawyers more quickly, had a stronger sense of fairness, and were more likely to either plead to lesser charges or exercise their right to trial than their peers.  The report also finds that the Client Choice program did not increase costs in the system.

Perhaps as important as any objective metric, a majority of defendants who were offered the ability to choose their own attorney opted to do so, suggesting that giving indigent defendants some agency in their choice of representation has a value in itself.  Freedom of choice matters to people.  

In too many jurisdictions, indigent criminal defense is in a state of crisis. Texas is in the vanguard with its Client Choice program. Hopefully these promising results will encourage more jurisdictions to consider injecting choice and market principles into their indigent defense systems.

The Supreme Court has ruled that Americans have a right to counsel in serious criminal cases. 

The meetings today and tomorrow between President Trump and President Xi in Florida are unlikely to delve deeply into substantive policy issues.  Rather, the focus will be on establishing a good relationship between the two leaders, in order to lay the foundation for future cooperation.  Trade and security tensions between the two countries will be discussed, but probably only in broad terms.

But difficult talks on the substance of these issues are inevitable. The question is how to approach the disagreements most productively.

On trade, there have been long-standing concerns from U.S. industry about a number of Chinese trade practices (including allegations of intellectual property theft, high tariffs, discriminatory regulations, non-commercial behavior by state-owned companies, and overcapacity in the production of steel and other goods).  To date, the U.S. government approach to addressing these concerns has consisted largely of litigation at the WTO, trade remedy cases (mainly anti-dumping and countervailing duties), and high-level dialogues between the two governments, but these actions have failed to resolve most of the concerns.  Litigation at the WTO can be helpful, but only in those areas where the WTO has rules, and there are many gaps in those rules; trade remedy cases impose tariffs that harm Americans, and do little to resolve the underlying problems with Chinese trade practices; and the dialogues tend to be broad, vague, and unenforceable.

The Trump administration has hinted at adding new unilateral trade restrictions into the mix (beyond trade remedy cases), but such measures are likely to lead to retaliation by China, which could escalate the current tensions into a tit-for-tat trade war.  If that happens, the big losers will be ordinary Americans and Chinese who would feel the brunt of any tariff increases.

In a Free Trade Bulletin published yesterday, my colleague Huan Zhu and I argue that a better approach to these issues would be to sit down with China and negotiate a formal trade agreement to deal with as many of these issues as possible.  For example, with regard to existing tariff levels, the two countries could agree to an across the board lowering of tariffs, a standard feature of trade agreements.

There will be a number of political obstacles to such a negotiation, and don’t expect any big announcement about it at the Trump-Xi meeting.  But as the U.S. government develops its trade policy over the coming months, it may begin to realize the limitations of the alternative approaches to addressing concerns about China.  Trump administration officials have emphasized that the trade deals it negotiates will be bilateral, rather than multilateral.  Why not try to negotiate a bilateral agreement with China, one of our biggest trading partners, and the one that is the source of so many trade concerns?

Puerto Rico came to Congress last year because it desperately needed some sort of help: after a decade of deficit financing, it is now $72 billion in the hole. It owes much of that money to traditional individual investors and savers across the United States, who have lent it money over the last decade, and even more to current and future pensioners.

The law that Speaker Ryan pushed through Congress, PROMESA, was meant to be that help. It provided the island’s government with breathing room to get its fiscal act together and authorized an Oversight Board to oversee its finances and–crucially–give it the political cover to make difficult decisions and negotiate with its many creditors.

Unfortunately, neither the government nor the Oversight Board have followed the law and, as a result, it looks destined to fall short of meeting its goals of restoring fiscal responsibility on the island and returning Puerto Rico to the capital markets.

To date, neither the Board nor the Puerto Rican government has had discussions with its creditors on the either the development of the fiscal plan or any process for debt negotiations. Instead, their activities have culminated in the Oversight Board certifying a fiscal plan from the Commonwealth that falls short of–or outright ignores–requirements in PROMESA. The plan does relatively little to reform what’s broken in the Puerto Rico government, including wayward spending and bloated pension system, and instead achieves short-run fiscal solvency via significant haircuts for the creditors that, in violation of the statute, do not comport with the lawful or constitutional priority of Puerto Rico’s obligations.

In response, a group of creditors that owns over $13 billion of the island’s debt recently sent a letter to the members of the island’s Oversight Board asking it to reject the government’s fiscal plan. The signees are a diverse group, including general obligation bondholders, COFINA bondholders, a bond insurer, and others who do not always share the same perspective. However, they all agree that the plan is so flawed it cannot be considered a serious starting place for debt negotiations. Key among their objections is that the fiscal plan clearly violates PROMESA by both ignoring the law’s explicit call that it “respect the lawful priorities or lawful liens” that exist. The plan does this both by making debt subordinate to every single other government expense and by muddying the clear seniority of the various different creditor groups.

Some bondholders are clearly senior. For instance, the island’s constitution promises that the government will use “all available resources” to pay the holders of general obligation bonds before anyone else. That assurance allowed Puerto Rico to borrow that money at a low-interest rate relative to riskier revenue-backed bonds.

Others expect dedicated revenue pledges to be respected. For instance, COFINA bonds, created to offer deficit borrowing capacity beyond the constitutional limit on general obligation debt, are backed by revenue generated by the island’s sales tax. Whether that diversion of resources was legal remains to be seen, but Puerto Rico managed to increase its borrowing capacity by promising these bondholders first dibs on this revenue stream.

Yet, in spite of the clear seniority of these creditors, the governor recently proposed what amounts to a magnanimous side deal with creditors of Puerto Rico’s utility–PREPA–that excludes these and all other creditors, a maneuver that makes little sense and smacks of political favoritism. It will almost certainly prolong negotiations with other creditors and potentially derail the credit markets’ faith and interest in helping Puerto Rico build a future.

The issue of debt priority is not the only infirmity of the plan highlighted by creditors. For starters, top line expenses grow by billions rather than shrink. There is an annual cushion of $600 million for anticipated deficits beyond the plan for the various agencies outside the general fund. It budgets $500 million per annum for infrastructure spending without considering that much of this could be privately financed–although investors may be naturally wary of lending money to any entity on the island, no matter what is promised. And all this is against a forecast of revenue declines unsupported by historical experience or analysis.

Meanwhile, the island’s pension, which is $48 billion in the hole, would not see any significant reductions in benefits or any other changes. In fact, there is little fiscal reform anywhere to be found in the budget: it calls for payroll expenses to increase by $1.5 billion in the next decade, with operational expenses rising by $400 million as well. In no way does this budget present a step towards fiscal solvency. 

Moreover, the plan’s call for bondholders to be compensated only after the island meets its other obligations makes a mockery of PROMESA. The budget calls for just $400 million to be set aside for bondholders in 2018, when $2.3 billion of interest payments will be due.

The island’s new governor, Ricardo Rosselló, has made achieving statehood a primary goal of his administration. However, the political reality is that there’s already little appetite for such a thing amongst the Republican Congress, and his manifest refusal to deal squarely with its fiscal morass only hurts the cause. Even Governor Rosselló admits the island’s government has a sizeable credibility gap. Its continued refusal to share pertinent financial information with Congress more than six months after the passage of PROMESA is only the most recent manifestation of the inherent problem here.

For Puerto Rico to ever have a chance to become a state–and to avoid it becoming a new federal entitlement–it has to fix its fiscal problems and restore its credibility. Its proposed budget does little to reform the economy and promises to keep the island shut out of capital markets for years to come.

Even worse, allowing the Commonwealth and Oversight Board to flout the principles of PROMESA will increase the potential liability at the federal level. Without access to the markets and no respect for private contracts, revenues will decline and the prospects for growth will vanish, and the island’s 3.5 million citizens will continue fleeing to the mainland.

There are already several state governments with woebegone budget problems that may be looking down the road towards some sort of federal bailout. No one has any appetite to add another to the list–not when the Republicans already spent a modicum of political capital to pass PROMESA in the first place. The side deal with PREPA only exacerbated an already bad situation.

For Puerto Rico to ever have a chance to become a state it has to first fix its fiscal problems and resume economic growth. The proposed budget does little to reform the economy and promises to keep the island shut out of capital markets for years to come. 

Comments on the National Highway Traffic Safety Administration’s proposed vehicle-to-vehicle communications mandate are due next on Wednesday, April 12. This is one of the rules that was published just before President Trump was inaugurated. If approved, it will be one of the most expensive vehicle safety rules ever, adding around $300 dollars to the price of every car, or (at recent car sales rates) well over $5 billion per year. 

Despite the high cost, the NHTSA predicts the rule will save no more than 31 lives in 2025, mainly because it will do little good until most cars have it. Yet even by 2060, after consumers have spent well over $200 billion so that virtually all cars would have it, NHTSA predicts it will save no more than 1,365 lives per year. 

The danger is not that it will cost too much per life saved but that mandating one technology will inhibit the development and use of better technologies that could save even more lives at a lower cost. The technology the NHTSA wants to mandate is known as dedicated short-range communications (DSRC), a form of radio. Yet advancements in cell phones, wifi, and other technologies could do the same thing better for less money and probably without a mandate.

For example, your smartphone already has all the hardware needed for vehicle-to-vehicle communications. Since more than three-fourths of Americans already have smartphones, mandating similar technology in new cars is redundant. Since that mandate will take more than a decade to have a significant impact on highway safety, NHTSA could see faster implementation using smartphones instead. It could do so by developing an app that could communicate with cars and provide extra features on the app that would encourage people to download and use it.  

All of the benefits claimed for the DSRC mandate assume that no other technology improvements take place. In fact, self-driving cars (which will work just as well with or without vehicle-to-vehicle systems) will greatly reduce auto fatalities, rendering the projected savings from vehicle-to-vehicle communications moot.

A mandate that one technology be used in all cars also opens the transportation system to potential hackers. The communications would necessarily be tied to automobile controls, which means that anyone who understands it could take control of every car in a city at once. If individual manufacturers were allowed to develop their own technologies, the use of multiple systems would make an attack both more difficult and less attractive.

There is also a privacy issue: vehicle-to-vehicle also means infrastructure-to-vehicle communications, raising the possibility that the government could monitor and even turn off your car if you were doing something it didn’t like, such as drive “too many” miles per year. That’s a very real concern because the Washington legislature has mandated a 50 percent reduction in per capita driving by 2050. Oregon and possibly other states have passed similar rules.

Comments on the proposed rule can be submitted on line or mailed to:

Docket Management Facility, M–30
U.S. Department of Transportation
West Building, Ground Floor, Rm. W12–140
1200 New Jersey Avenue SE.
Washington, DC 20590.

British commentator Owen Jones was published yesterday by the New York Times, with a piece entitled “Why Britain’s Trains Don’t Run on Time: Capitalism.” I’ve learned through experience not to judge articles by headlines, but this one seems especially curious, given 89.1 per cent of trains were, in fact, on time in 2015/16—a figure that has improved somewhat since 1997, just a couple of years after some of British Rail was part-privatized.

Yet aside from the bizarre opening assertion we might judge the state of a nation by how the railways run, the purpose of the article and headline soon becomes clear: to push the case for the British left’s hobby horse—full renationalization of Britain’s rail industry.

The hook this time is the dreadful ongoing dispute that has been rumbling for almost a year between Southern Rail and the rail unions, resulting in the substantial strike action Jones cites. For those uninitiated, the dispute mainly centers around a proposed business decision by Southern rail (a train operating company granted the running of trains between London and the south coast by government) to reassign the duty of operating train doors from conductors to the train driver, allowing onboard conductors to focus solely on dealing with passengers. The unions fear this because they believe it will render the role of conductors obsolete, and reduce their power. The reason is simple. If drivers control the doors, conductor strikes will no longer be able to bring down whole services.

Yet rather than judge the strikes on this naked self-interest, Jones suggests that somehow they are a consequence of privatization and of letting “market ideology into key public services.” He then throws everything but the kitchen sink at private involvement in the railways, implying that privatization is responsible for high prices, underinvestment, substantial government subsidy, and inefficiency.

For some commentators, particularly on the left of the UK’s political spectrum, increasing prices and the fact that privatized companies make profits are evidence enough that the blame for rising costs to consumers can be laid squarely at the door of privatization itself. Jones’ article is the latest in a long line of misleading, potted histories, which utilize any problems as a hook to push for public ownership.

To understand why the article is misleading, one needs to consider what “privatization” of the railways in Britain actually entailed. Virtually all of the UK’s rail network was privately built and operated for more than 100 years before its nationalization following World War II. But the 1995 reforms did not return to this framework. Instead, the government imposed a top-down model of separating track and train, with the former kept nationalized and operation of the latter franchised out on a regional basis, such that firms could compete to operate a line for a set contracted period. This was supposedly to deal with the natural monopoly problem, but in reality fragmenting the sector eliminated potential economies of scale and scope, whilst introducing additional transactions costs. The train operating companies, who run the franchises, remain heavily regulated, having to meet certain government conditions and being very restricted in many cases on pricing.

The move to this model has certainly had mixed success. Passenger numbers have exploded since the part-privatization of the trains, and (as Ben Southwood shows here) this does not appear to be at the expense of customer satisfaction or safety, nor driven purely by economic growth or regional development. Yet undoubtedly the degree of government subsidy remains high, as do overall prices.

There is no evidence, however, that it is privatization or capitalism that is to blame for either the current strikes or high prices.

What Jones omits to tell readers is that the current situation with Southern is different to other ordinary franchises. Poor performance led to an effective merger and reorganization for the running of the line in 2015. Unlike with ordinary franchises, the government simply pays Southern’s parent company, Govia Thameslink, to operate the line and the company pays any revenues to the government. Southern has no control over prices or conditions for staff. In essence, the government is already the patron for the line, so the company has little incentive to end the dispute and the strikers are emboldened. Indeed, Britain has a long history of widespread strikes in government-owned enterprises, as anyone who lived in or studied the 1970s can attest. It is unclear then why nationalization is regarded as a solution to that problem.

Out-of-pocket rail prices in Britain do tend to be higher than many other countries. The unions exaggerate this by comparing “on the day” prices, when many British routes offer significant discounts for advanced bookings. Nevertheless, previous detailed research has found rail fares per passenger-kilometer are on average around 30 percent higher in Britain than in comparable Western European countries.

There are many reasons for this. In part, it is because Britain has deliberately shifted to a user pays system compared with others (though even then there is still around 25 percent subsidy). This is both more economically sound and also equitable, given those who use the railways tend to have relatively high incomes.

Indeed, the whole idea that nationalization could somehow deliver cheaper fares is pure fantasy. Even if we assume that the railways would be as cost effective in public ownership, profit margins for train operating companies tend to be around just 3 to 4 percent. The ‘savings’ from no longer paying out dividends to shareholders would simply not be large enough to fund a significant reduction in fares. The average household spends approximately £64 per week on transport, but only about £3.30 is spent on train fares, suggesting fare reductions would do little to boost real living standards either.

What are the alternative explanations for why fares tend to be high? Geography is one. The high share of rail travel involving trips to and from London—a vast and expensive global city—raises costs compared with other countries. The structure imposed on the industry is a second, negating the potential benefits of vertical integration. Wasteful uneconomic new infrastructure spending is a third key reason, with plans now to push on with High Speed 2, an expensive new planned rail line through the west coast.

That’s not to say the current model does not have other problems. The high degree of price regulation contributes directly to the overcrowding problem, as the train operating companies cannot price discriminate and smooth usage. And the nature of the franchise system can deter investment in some circumstances (why invest significantly if you suspect you might lose the franchise?). But these are details, rather than fundamental flaws of allowing private companies to run railways.

As Britain’s history shows, private companies can and have run railways successfully. The part-privatization seen since 1995 could undoubtedly be improved upon, not least through allowing the integration of track and train and greater freedom in setting prices. Yet there is no reason to suspect nationalization would produce better results than the status quo. Indeed, given the legacy of government-owned enterprises in the U.K., the results would likely be more rent-seeking, industrial strife, poor cost control, a lack of entrepreneurship, more political interference, and an endemic misallocation of resources.

Last time around, we brought forth evidence against organismal “dumbness”—the notion that species found only in defined climatic environments will go extinct if the climate changes beyond their range. We picked on cute little Nemo, and “found,” much like in the animation, that his kind (Amphiprion ocellaris) could actually survive far beyond their somewhat circumscribed tropical reef climate.

The key was the notion of plasticity—the concept that, despite being linked to a fixed genetic compliment, or genotype, the products of those genes (the “phenotype”) changed along with the environment, allowing organisms some degree of insurance against climate change. How this comes about through evolution remains a mystery, though we may occasionally indulge in a bit of high speculation.

“Science,” according to the late, great philosopher Karl Popper, is comprised of theories that are capable of making what he called “difficult predictions.” The notion that gravity bends light would be one of those made by relativity, and it was shown to be true by Sir Arthur Eddington in the 1919 total solar eclipse. It just happened to be in totality in the Pleiades star cluster (also the corporate logo of Subaru), and, sure enough, the stars closest to the eclipsed sun’s limb apparently moved towards it when compared to their “normal” positions.

So we have been interested in a truly difficult test of phenotypic plasticity, and we think we found one.

How about a clam that lives in the bottom of the great Southern Ocean surrounding Antarctica? Specifically, the burrowing clam Laternula elliptica. According to a recent (2017) paper by Catherine Waller of the University of Hull (in the, perhaps temporarily, United Kingdom) “75 percent of the recorded specimens [of L. elliptica] are from localities shallower than 100 m,” where the populations are exposed to “low and stable water temperatures in the range of -1.9 to +1.8 °C” (the remaining 25 percent inhabit cooler waters of the continental slope down to ~700m).

Laternula elliptica

Now let’s bring the critters into the lab and torture them with climate change. Experimental analyses revealed that this saltwater clam suffers “50 percent failure in essential biological activities at 2-3°C and complete loss of function at 5°C,” rendering L. elliptica a fine example of a dumb organism—or so it was thought!

During the austral summer of 2007, Waller et al. sampled the intertidal zone (region of the coast that is submerged at high tide, but above water and in the air at low tide) at locations along James Ross Island, East Antarctic Peninsula, writing that “prior to this study, there have been no reports of [L. elliptica] animals surviving the more variable environmental conditions of the littoral [intertidal] zone south of the Antarctic Circumpolar Current.” To their great surprise, however, they report finding specimens of this clam at densities “similar to many subtidal locations,” ranging in age from one to eight years.

In other words, if the depths of the Southern Ocean warmed several degrees, they would still be happy as clams!

Commenting on their findings, the five United Kingdom researchers state that “the presence of this species in intertidal sediments raises questions about their physiological tolerances and capacity to cope with warming sea temperatures.”

We respectfully disagree. It provides answers. Indeed, for at the time of their collection by Waller et al., temperatures within the sediment were measured at 7.5°C while air temperatures were even greater at 10°C—both values far above laboratory-defined tolerance limits! This discrepancy between laboratory and field temperature tolerances, in the words of the authors, “has major implications for our understanding and interpretation of the physiological tolerances of Antarctic shallow water marine organisms. If one of the best-studied model species can be found surviving far beyond its predicted environmental envelope, then our use [of] laboratory-based experimental results may underestimate the ability of polar organisms to cope with environmental change.”

And so it is that laboratory-based analyses showing negative impacts of rising temperatures on ostensibly dumb organisms should be taken with a large grain of salt, and we can be much more optimistic for their future survival.

This seems to be an important phenomenon, to say the least. So try searching for the words “phenotypic plasticity” in the entire 829-page 2014 U.S. “National Assessment” of the effects of global warming on our country. You won’t get one hit.  

You will find one “plasticity” in a citation on Pacific Salmon. Here’s what the Assessment says:

Rising temperatures will increase disease and/or mortality in several iconic salmon species, especially for spring/summer Chinook and sockeye in the interior Columbia and Snake River basins.

And here’s what the actual paper says:

Climate change might produce conflicting selection pressures in different life stages, which will interact with plastic (i.e. nongenetic) changes in various ways. To clarify these interactions, we present a conceptual model of how changing environmental conditions shift phenotypic optima and, through plastic responses, phenotype distributions, affecting the force of selection. Our predictions are tentative because we lack data on the strength of selection, heritability, and ecological and genetic linkages among many of the traits discussed here. Despite the challenges involved in experimental manipulation of species with complex life histories, such research is essential for full appreciation of the biological effects of climate change.

The U.S. Global Change Research Program, which puts out these horrible Assessments, consumes $2.3 billion per year. Is that all you get for your money, a massive distortion of what a paper actually says?

References

Crozier, L.G. et al., 2008. Potential responses to climate change in organisms with complex life histories: evolution and plasticity in Pacific salmon. Evol Appl. 2008 May;1(2):252-70. doi: 10.1111/j.1752-4571.2008.00033.x.

Waller, C.L., Overall, A., Fitzcharles, E.M. and Griffiths, H. 2017. First report of Laternula elliptica in the Antarctic intertidal zone. Polar Biology 40: 227-230.

House Republican leaders cancelled a vote on the American Health Care Act nearly two weeks ago, after it became clear the measure would not command a majority. The conservative House Freedom Caucus objects that, far from repealing and replacing ObamaCare, the AHCA would make ObamaCare permanent. It would preserve the ObamaCare regulations that are driving premiums higher, causing a race to the bottom in coverage for the sick, and causing insurance markets to collapse. The Congressional Budget Office projects the bill would cause premiums to rise 20 percent above ObamaCare’s already-high premium levels in the first two years, and leave one million more people uninsured than a straight repeal. Oh, and it also reneges on the GOP’s seven-year campaign and pledge to repeal ObamaCare.

The House Freedom Caucus has offered to hold their noses and vote for the AHCA despite several provisions its members dislike, including a likely ineffectual repeal of ObamaCare’s Medicaid expansion, new entitlement spending, and the preservation of most of ObamaCare’s regulations. All they ask is that House leaders agree to repeal the “community rating” price controls and the “essential health benefits” mandate that are the main drivers of ObamaCare’s higher premiums, eroding coverage, and market instability. Repealing those provisions would instantly stabilize insurance markets and cause premiums to plummet for the vast majority of Exchange enrollees and the uninsured.

A collection of House moderates known as the Tuesday Group, meanwhile, has threatened to vote against the AHCA if it repeals community rating. The group has refused even to negotiate with the House Freedom Caucus. One Tuesday Group member recommended to the others, “If that call comes in, just hang up.”

In an attempt to bridge the divide, the White House has proposed to let individual states opt out of certain ObamaCare regulations, including the essential-health-benefits mandate and (presumably) the community-rating price controls. Reportedly, states could apply to the Secretary of Health and Human Services to waive some (but not all) of ObamaCare’s Title I regulations, and the Secretary would have discretion to approve or reject waiver applications based on their compliance with specified metrics, such as premiums and coverage levels. 

What might seem like a fair-minded compromise is anything but. The fact that White House officials are floating this offer means they have reneged on their prior proposal to repeal ObamaCare’s “essential health benefits” mandate nationwide. The current proposal would keep that mandate in place, and make it the default nationwide. That alone makes this “opt out” proposal a step backward for ObamaCare opponents.

Even if the White House were not displaying bad faith, an opt-out provision offers little to ObamaCare opponents. The obstacles to using such a waiver would be so great, it is unlikely any states would be able to exercise it, which would leave ObamaCare’s regulations in place in all 50 states.

Opting-Out Would Be All But Impossible

Under an opt-out, ObamaCare’s regulations—in particular, the community-rating price controls and essential-health-benefits mandate that the House Freedom Caucus has said are the price of their votes—would remain the law in all 50 states. States that do not want those regulations would have to take action (and get federal permission) to roll them back. Federal control would remain the default.

To take advantage of the waiver process, ObamaCare opponents would have to fight, again and again, in state after state, to achieve in each state just a portion of what President Trump and congressional Republicans promised to deliver in all states. Opponents would have to convince both houses of each state legislature (Nebraska excepted), plus the governor, plus the Secretary of HHS to approve the waiver, all while being vastly outspent by insurance companies, hospitals, and other special interests.

If President Trump and congressional Republicans advance an opt-out provision, they will essentially be telling ObamaCare opponents, “Thank you for spending all that money and effort electing us, but we are not going to repeal ObamaCare. Instead, we want you to spend even more money having ObamaCare-repeal fights in all 50 states. And good luck getting state officials to keep a promise they haven’t made, when we won’t even keep the promise we did make.”

(Above: President Donald Trump promised in his “Contract With the American Voter” to deliver legislation that “fully repeals” ObamaCare. It’s a contract, so that’s legally binding, right?)

Given these obstacles and the low likelihood of success, many ObamaCare opponents would decide the waiver option it isn’t worth the effort.

A Provision with a Short Shelf Life

Even if states tried to take advantage of the “opt-out,” states could not possibly enact, submit to the federal government, secure federal approval of, and implement a such waiver in time to stabilize their markets under the withering assault from ObamaCare’s regulations, as modified by the AHCA. So the “opt-out” would not even protect Republicans in willing states from the political backlash against the AHCA.

Even if states went through all those steps in time, the White House’s proposal reportedly would allow states to opt out of guaranteed issue but not ObamaCare’s ban on coverage exclusions for preexisting conditions. In other words, even if a state successfully used a waiver to stabilize their markets, Republicans would come under fire because the waivers would prevents patients with preexisting conditions from getting any coverage, even for illnesses they have not yet acquired.

Like the AHCA itself, an opt-out strategy would thus condemn Republicans to suffer electoral losses because Democrats could reasonably blame ObamaCare’s—and the AHCA’s—premium hikes, lousy coverage, and Exchange instability on Republicans and their supposedly free-market reforms.

Those Republican losses and the concomitant Democratic gains would make states less likely to use the opt-out provision, and would enable Congress to repeal it by slipping a few lines in an omnibus bill as early as 2019. With few states using the option, there would be little objection.

Even if Congress did not repeal the “opt-out” authority, a future HHS secretary could reject state waiver proposals and/or refuse to renew waivers.

Full Repeal Is Fair to Blue States. An Opt-Out Is Unfair to Red States.

An opt-out approach is also inequitable, for two reasons. States that opt out of ObamaCare’s regulations would end up subsidizing states that did not, which itself would create a disincentive for states to opt out. And while full repeal would not disadvantage states that want ObamaCare-style regulations, an opt-out approach would disadvantage states that don’t.

First, even if some states do opt out of ObamaCare’s regulations, those regulations would continue to cause instability in states that don’t opt out. That instability would likely lead Congress to bail out states where those regulations still have force. Yet all states would have to pay for those bailouts, including states that opted out of the regulations. In other words, states that made the right decision (to opt out of ObamaCare’s regulations) would have to pay to repair the damage done by states that made the wrong decision (i.e., not to opt out). This inevitable and inequitable dynamic would itself discourage states from opting out.

Second, under either full repeal or the House Freedom Caucus’ offer, states that have enacted community-rating price controls and benefit mandates themselves could keep those regulations without taking any further action. An opt-out, by contrast, would require states who don’t want those regulations to take action to remove them.

Prior to ObamaCare, for example, many states had imposed community-rating price controls on their individual and small-employer markets (see graphics below).

Under either full repeal or the House Freedom Caucus’ stipulation that Congress repeal ObamaCare’s community-rating price controls and essential-health-benefits mandate, any regulations that states have enacted would still have force. Members of Congress from states like Maine, Massachusetts, Minnesota, New Jersey, New York, and Vermont that have enacted community rating thus cannot claim they must vote against full repeal to preserve community-rating for their constituents. Both full repeal and the House Freedom Caucus’ proffer are therefore equitable, because they would let each state revert to the regulatory environment they have chosen, without taking any action.

An opt-out, by contrast, would impose community-rating and other regulations on states that do not want them, and force those states to take action to remove them. Crudely put, an opt-out is an attempt by blue states, at no benefit to themselves, to impose their will on red states.

Full repeal and the House Freedom Caucus position are an opt-in. They would give each state what it wants, because the default under an opt-in is freedom and federalism.

Conclusion

Congress should repeal all of ObamaCare’s regulations. States that then want to impose those regulations on their own citizens would have the power to do so.

The White House’s “opt-out” proposal is unworkable, and therefore gives ObamaCare opponents next to nothing. Indeed, it is an admission that the AHCA is not a repeal bill. And not only does the White House’s “opt-out” proposal not move the AHCA in the direction of full repeal, the White House’s decision to revoke its offer to repeal the “essential health benefits” mandate nationwide means this proposal moves the farther away from full repeal.

One silver lining is that this proposal implicitly concedes that community rating is not sacrosanct, and that the states rather than the federal government should decide whether those regulations apply.

Those concessions, the White House’s reneging on “essential health benefits,” and the fact that full repeal would have little impact on states that have similar regulations on the books, gives the ObamaCare opponents leverage to push President Trump to do what he should have been doing all along: push moderates and Democrats to repeal community rating, essential health benefits, and more.

If dismissing this White House proposal out of hand is not possible, the House Freedom Caucus could propose a counteroffer: that the waiver process allow states to opt out of all of Title I, including the subsidies; that the Secretary of HHS have no discretion to reject state opt-out proposals; and that when a state opts out, residents of all other states may purchase insurance licensed by that state. Such an approach would effectively repeal Title I in every state.

Absent those changes, this proposal leaves ObamaCare opponents with less than they had before.

On Monday NPR’s Marketplace shared a tale of woe that Uber has created for the hard-working blue collar men who own taxicab medallions in New York City, thereby illustrating once and for all that in today’s liberal zeitgeist, the enemy of my enemy is my friend.

In a normal world, public radio’s reflexive liberalism would greatly object to the system of taxicab medallions: A few decades ago New York City set a cap for the number of drivers and gave each driver at that time a medallion that must be displayed on the cab itself to be legal. Because demand for cabs went up over the last four decades, the medallions became more valuable. For those drivers who received theirs at the start the medallion became a wonderful gift and those that sold it did quite well. A few years ago the price of a medallion exceeded $1 million.

However, an increase in medallion value does nothing to help most drivers today, who cannot afford to buy one at any price. Instead, investment companies own most medallions, which bought them from retiring cab drivers through the years and saw them as a safe investment. And they were, at least until Uber came along. Most drivers rent a medallion from the investment company, and pay a good portion of what they earn to the company.

Normally, public radio would object to the exploitation of working class men, especially when it’s been aided and abetted by the government, but when Uber is involved all bets are off. Uber has dramatically reduced the value of these medallions, since people can drive with Uber (or its competitor, Lyft) without a medallion. The barriers to becoming a driver are now almost nonexistent–no more than the price of a car. Taxicabs have lost their effective monopoly, and consumers have gained as a result.

But that doesn’t matter here, as the liberal narrative is that these entities (and somehow not the investment companies that own medallions) are exploitative because they don’t make their drivers actual employees; they are categorized as independent contractors, as are most cabbies. What’s more, they don’t give them health insurance or a pension. Also, the person who runs Uber is apparently isn’t the nicest guy, and–most egregiously–Uber did not recognize an impromptu taxi strike at JFK airport called to protest Donald Trump’s immigration policies in January, so there’s a suspicion that the company might not be reliably Democratic.  

As a result, NPR, the New York Times, and the rest of Big Media has lit into Uber every chance it gets, and Lyft for good measure.

Consistency is the hobgoblin of little minds, of course, but I remain mystified that any media program focused on economics would lament the decline of the taxicab medallion system in New York, which hurt customers, taxi drivers and even the environment (as more people had to own cars in that inefficient system) with the only beneficiaries being the taxi fleets and investment companies that owned the medallions.

It’s also worth remarking that the left has heretofore–and correctly– complained in the past that the traditional cab system serves New York’s outer boroughs quite poorly, and that’s where lower income people tend to live.

Marketplace apparently mourns such an archaic, inefficient, and in-egalitarian system and went to great lengths to find a couple of sympathetic victims to protest a technological change that has otherwise greatly improved the lives of urban denizens just goes to show that the status quo is always difficult to change. And that too many entities base their position on any topic based on the opposition.

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