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During the presidential campaign, Donald Trump promised legislation that “fully repeals ObamaCare.” Monday night, the Republican leadership of the House of Representatives released legislation it claims would repeal and replace ObamaCare. Tuesday afternoon, Vice President Mike Pence will travel to Capitol Hill to pressure members of Congress to support the bill. On Wednesday, two House Committees will begin to mark-up the legislation. House and Senate leaders are hoping for quick consideration and a signing ceremony, maybe by May, so they can move on to other things, like tax reform and confirming Supreme Court nominee Judge Neil Gorsuch.

Everyone needs to take a step back. This bill is a train wreck waiting to happen.

The House leadership bill isn’t even a repeal bill. Not by a long shot. It would repeal far less of ObamaCare than the bill Republicans sent to President Obama one year ago. The ObamaCare regulations it retains are already causing insurance markets to collapse. It would allow that collapse to continue, and even accelerate the collapse. Republicans would then own whatever damage ObamaCare causes, such as when the law leaves seriously ill patients with no coverage at all. Congress would have to revisit ObamaCare again and again to address problems they failed to fix the first time around. ObamaCare would consume the rest of Congress’ and President Trump’s agenda. Delaying or dooming other priorities like tax reform, infrastructure spending, and Gorsuch. The fallout could dog Republicans all the way into 2018 and 2020, when it could lead to a Democratic wave election like the one we saw in 2008. Only then, Democrats won’t have ObamaCare on their mind but single-payer.

First, let’s look at how the main features of this bill fall short of repeal.

Medicaid Expansion

ObamaCare expanded Medicaid to able-bodied adults below 138 percent of the federal poverty level. The federal government covers a much larger share of the cost of covering Medicaid-expansion enrollees than enrollees in the “old” Medicaid program—currently 95 percent, bottoming out at 90 percent in 2020. So far, 31 states have chosen to implement the Medicaid expansion; 19 have declined.

The House leadership’s bill would not even start to repeal ObamaCare’s Medicaid expansion until 2020, more than two and a half years from now, and even then would repeal it only one enrollee at a time. In 2020, states could no longer enroll new able-bodied adults into the Medicaid expansion. Yet the federal government would continue to pay for each and every continuously covered able-bodied adult who enrolled in the expansion before then. And it would do so at the enhanced ObamaCare matching rate, in perpetuity, until an enrollee leaves the program. If the House leadership has its way, we may be decades away from full repeal of the Medicaid expansion.

For the two-plus years between enactment and 2020, the House leadership bill would continue to allow states both to opt into the expansion and to go on an enrollment binge, for which the federal government could be paying for decades. It is likely that the number of states participating, and the number of people enrolled in the Medicaid expansion will be higher after “repeal” than before.

Which means the Medicaid expansion may never disappear at all. By 2020, the constituency for preserving the Medicaid expansion would be much larger than it is now. More states, more voters, and more special interests will resist repealing the expansion than do today. As I discuss below, Congress will likely be more Democratic than it is today.

When eventually we see a Congressional Budget Office score of the bill (House leadership has numbers, but they’re not sharing them), it may show a reduction in federal spending on the Medicaid expansion after 2020. I would not bet on that happening.

Medicaid Reform

Currently, Congress matches states’ spending on their Medicaid programs. When a state spends $1 on its program, Congress contributes between $1 and $3. This creates a pay-for-dependence incentive. It encourages states to expand both enrollment and benefits far beyond what they would if states bore the full marginal cost.

The House leadership bill would reform the Medicaid program by converting it to a system of “per capita block grants.” It would give each state a fixed amount of money per enrollee, with the amount varying by the type of enrollee (aged, blind, disabled, children, non-expansion adults, and expansion adults).

A per-capita block grant would therefore resemble ObamaCare’s Medicaid expansion. States would get additional federal dollars for each additional person they enroll in their programs. But states would face the full marginal cost of providing new or existing benefits to enrollees. Just as ObamaCare’s Medicaid expansion creates incentives for states to expand their programs to able-bodied adults, while reducing access to care for the aged, blind, disabled, children, and pregnant women, the House leadership bill would create (or preserve) an incentive to expand enrollment to less vulnerable populations while cutting benefits for more vulnerable populations.

Private-Insurance Overhaul

Economists describe the basic architecture of ObamaCare’s overhaul of private health insurance as a three-legged stool. The three legs of the stool are (1) “community rating” price controls that force insurers to charge healthy and sick people of a given age the same premium, and only allow premiums to vary from older to younger enrollees by a ratio of 3 to one, (2) an individual mandate that penalizes taxpayers who do not purchase a government-designed health plan, and (3) subsidies to help low-income people purchase that compulsory, overpriced health insurance. The House leadership plan retains all three legs of the stool, as well as many other ObamaCare provisions designed to mitigate the damage done by the community-rating price controls.

The first thing the House leadership’s bill does is expand ObamaCare by appropriating funds for the law’s so-called “cost-sharing” subsidies, something no previous Congress has ever done.

The House leadership bill retains the very ObamaCare regulations that are threatening to destroy health insurance markets and leave millions with no coverage at all. ObamaCare’s community-rating price controls literally penalize insurers who offer quality coverage to patients with expensive conditions, creating a race to the bottom in insurance quality. Even worse, they have sparked a death spiral that has caused insurers to flee ObamaCare’s Exchanges nationwide, including driving all insurance companies from the market in 16 counties in eastern Tennessee. As of next year, 43,000 Tennesseans in those counties could have no way to obtain coverage. Nearly 3 million Exchange enrollees are just one more carrier exit from the same fate.

The leadership bill would modify ObamaCare’s community-rating price controls by expanding the age-rating bands (from 3:1 to 5:1) and allowing insurers to charge enrollees who wait until they are sick to purchase coverage an extra 30 percent (but only for one year). Even with these changes, however, premiums would remain high, ObamaCare would continue to make it easier for people to wait until they are sick to purchase coverage, and the law would continue to penalize high-quality coverage for the sick. In fact, the House leadership’s decision to leave ObamaCare’s community-rating price controls in place while relaxing its “essential health benefits” requirements would cause coverage for sick to deteriorate even faster than ObamaCare does.

It is because the House leadership would retain the community-rating price controls that they also end up retaining many other features of the law. Observers have started to notice that successive iterations of the bill look increasingly like ObamaCare.

For example, the House leadership bill retains and modifies another leg from the three-legged stool: ObamaCare’s advanceable, refundable, and means-tested tax credits for health insurance. Though they sound like tax cuts, ObamaCare’s tax credits are actually 94 percent government outlays and only 6 percent tax reduction. The House leadership’s tax credits are likely to be similarly lopsided.

House leaders are retaining all that government spending—again, we don’t yet know how much ObamaCare spending the bill retains—largely because retaining community rating drives premiums unnecessarily high. Ironically, due to congressional budget rules, the fact that there are tax credits in the bill makes it impossible for Republicans to repeal ObamaCare’s community-rating price controls and other regulations. The CBO reportedly has projected that if the bill repealed those regulations, the price of insurance would fall so much that many more people would take advantage of the tax credits, and the bill would run afoul of budget rules by increasing federal deficits. Republicans evidently cannot repeal ObamaCare’s regulations if they hold on to health-insurance tax credits.

The tax credits could create a very thorny problem for both House and Senate Republicans. The House leadership bill prohibits the use of its tax credits for health plans that cover abortion. Due to an arcane Senate rule, Democrats likely can and will strip any such restrictions from the bill before final passage. This means that if the House bill ever makes its way to President Trump’s desk, it could subsidize abortion even more than ObamaCare does.

To the extent the bill’s modified tax credits are tax reduction, however, they are the functional equivalent of ObamaCare’s individual mandate. The flip side of tax credits that are available solely to those who purchase health insurance is that those who do not purchase insurance must pay more to the IRS than those who do. Just like a mandate. And since the effective penalty is just an increase in the taxpayer’s income-tax liability, tax credits for health insurance are actually more coercive than ObamaCare’s individual mandate, because the IRS has many more tools it can use to collect the penalty.

Conservatives deny any similarities between an individual mandate and a tax credit for health insurance. But consider the following. ObamaCare’s individual mandate penalty for single adults is $695 or 2.5 percent of income, whichever is greater. Suppose that instead, Congress had simply enacted a tax with those features, and then come back and provided an equivalent tax credit for anyone who purchases health insurance. The end result would be identical to ObamaCare’s individual mandate. But which would it be, a tax credit or a mandate?

Like ObamaCare’s tax credits, the House leadership’s tax credits would involve burdensome projection and verification of the taxpayer’s income (taxpayers above a certain threshold are ineligible for credits) as well as whether the taxpayer has an offer of qualified health insurance from an employer (taxpayers with an offer of coverage from an employer are ineligible).

Finally, the House leadership creates a new program of matching grants to states to fund things like Exchange subsidies, insurer bailouts, high-risk pools, and perhaps a “public option,” even after Republicans spent years railing against many of these things. If states don’t use the money, the federal Centers for Medicare & Medicaid Services can use the funds for insurer bailouts. The funding formula for this new grant program appears to reward high-cost states.

Taxes

The House bill zeroes out the individual and employer mandates and outright repeals all manner of ObamaCare taxes, including: the tax on over-the-counter medications; the additional 10-percent tax on non-medical HSA withdrawals; the limits on health flexible spending arrangement contributions; the medical device tax; the tax on poor and/or sick patients (the AGI threshold for the medical-expenses deduction reverts from 10 percent to 7.5 percent); the “Medicare” “payroll” tax; the net-investment tax; the tanning tax; the tax on insurance-executive compensation; the health-insurance tax; and the pharmaceutical-manufacturers tax.

In a pretty crass budget gimmick, the bill retains the “Cadillac tax” on high-cost health plans but delays its onset until 2025.

Swallowing the Republicans’ Agenda

Republicans don’t seem to have any concept of the quagmire they are about to enter with this bill.

ObamaCare’s Exchanges are already on the brink of collapse. Since this bill does not repeal the community-rating price controls, repeals the individual mandate, shifts the benefits from ObamaCare’s tax credits up the income scale, and tasks states with devising new bailout schemes of uncertain timing and efficacy, the threat of death spirals will remain. Even where the individual market does not collapse, the coverage will get increasingly worse for the sick. If the tax credits (read: subsidies) for low-income Americans are less than under ObamaCare, many more low-income patients will lose coverage. Premiums will continue to rise. Republicans will take the blame for all of it, because they will have failed to repeal ObamaCare, or learn its lessons, when they had the chance.

The leadership bill therefore creates the potential, if not the certainty, of a series of crises that Congress will need address, and that will crowd out other GOP priorities, in late 2017 before the 2018 plan year begins, and again leading up to the 2018 elections. If Congress gets health reform wrong on its first try, health reform could consume most of President Trump’s first term. Pressure from Democrats, the media, and constituents could prevent Republicans from moving on to tax reform, infrastructure spending, or even Supreme Court nominees.

Partial Repeal Is the Road to Single Payer

Flubbing ObamaCare would at once united and embolden Democrats while dividing the GOP base, driving the former to the polls in 2018 and 2020 while causing the latter to stay home. If ObamaCare is not doing well, and Republicans take the blame, it will create the potential for the sort of wave election Democrats experienced in 2008, when they captured not just the House and the presidency, but a filibuster-proof, 60-vote supermajority in the Senate. If that happens, and ObamaCare is not doing well, Democrats will be less interested in rescuing ObamaCare than repealing and replacing it themselves—with a single-payer system.

ObamaCare opponents often muse that supporters designed the law to fail because it would give them the excuse to enact a single-payer system. Republicans have a choice. They can either prevent that future from unfolding, or they can help it along.

Conclusion

Widespread voter dissatisfaction with ObamaCare produced Republican gains in 2010 and 2014, and a GOP sweep in 2016. President Trump and congressional Republicans pledged full repeal of the law, and to replace it with free-market reforms. The parts of the country that stood the most to gain from ObamaCare swung the most to President Trump. That looks suspiciously like a mandate. The good kind.

Source: The Economist

If Republicans care about covering people with expensive medical conditions, they should stick to that promise. Making health care better, more affordable, and more secure requires first repealing all of ObamaCare’s regulations, mandates, subsidies, and taxes. Next, Congress should block-grant the Medicaid program, giving each state a fixed sum of money that does not change from year to year, combined with full flexibility to target those funds to the truly needy. (If states want to cover less-needy populations, like able-bodied adults, they can pay 100 percent of the marginal cost of that coverage.)

Finally, and crucially, Congress needs to enact reforms that make health care more affordable, rather than just subsidize unaffordable care. To make health insurance more affordable, Congress should free consumers and employers to purchase health insurance licensed by states other than their own. To drive down health care prices, Congress should expand existing tax-free health savings accounts into “large” HSAs. Large HSAs would be a larger effective tax cut than the Reagan and Bush tax cuts combined, adding $13,000 to the wages of a typical worker with family coverage. Large HSAs would drive down prices by making consumers cost-conscious at every margin, and would reduce the problem of preexisting conditions by freeing consumers to buy portable coverage that stays with them between jobs. Sen. Jeff Flake (R-AZ) and Rep. Dave Brat (R-VA) have introduced legislation to create Large HSAs.

The House Republican leadership bill does not replace ObamaCare. It merely applies a new coat of paint to a building that Republicans themselves have already condemned. Since the most important asset health reformers have is unified Republican opposition to ObamaCare, at least in theory, it would set the cause of affordable health care back a decade or more if Republicans end up coalescing around this bill and putting a Republican imprimatur on ObamaCare’s core features. If this is the choice, it would be better if Congress simply did nothing.

But this can’t be the only choice. Right?

President Trump signed a new executive order temporarily banning all immigration from several majority-Muslim countries. The entire point of the new order is to place his ban on more secure legal footing, but in several respects, the new order actually undermines the defenses that he has given over the past month.

“Delaying implementation puts our country in peril!”

After a judge temporarily blocked enforcement of the original order for a few days to get a hearing to listen to further arguments on both sides, President Trump tweeted:

Just cannot believe a judge would put our country in such peril. If something happens blame him and court system. People pouring in. Bad!

In other words, the delay threatened U.S. security. Yet this new executive order does not become effective for more than a week. Does the president’s delayed rollout also “put our country in peril”? The president’s legal team will have a more difficult time arguing that another judicial delay will cause “irreparable harm” to the U.S. this time.

“Current vetting is totally inadequate!”

President Trump in his speech to Congress said:

It is not compassionate, but reckless, to allow uncontrolled entry from places where proper vetting cannot occur. …That is why my administration has been working on improved vetting procedures.

In other words, these nationalities must be completely banned because the current vetting is worthless. Yet this new order allows people who currently have a valid visa to come. If the vetting process is so inadequate, then exempting current visa holders makes no sense. They are still a threat even if they have gone through the process. 

“This is about better vetting, not banning people.”

The president in his original executive order stated:

To ensure that adequate standards are established to prevent infiltration by foreign terrorists or criminals… I hereby suspend entry into the United States… of such persons for 90 days.

Thus, the whole point of this “temporary” ban is to give the administration 90 days to review the vetting. It’s not about keeping people out. If that’s so, then why does the new executive order restart the clock to 90 days? 37 days have passed since the order was enacted. Why would the time when the prior order was suspended not count against the 90-day review? It seems obvious that it’s because the review was a fraud, and the real goal is about banning people. It was unable to accomplish its goal due to the judge’s order, so the new order restarts.

The new order also cites the case of a Somali who was brought over when he was a child who then became a terrorist as a reason for the ban. Yet that is not a failure of vetting that is a failure of assimilation. Using this example would imply that this ban is not about vetting and that the president has no plans to keep it temporary.

“President Obama came up with the list!”

President Trump stated:

The seven countries named in the Executive Order are the same countries previously identified by the Obama administration as sources of terror.

This assertion was based on the fact that the list of seven countries was drawn from a law that Congress passed in 2015 that required Iraqis, Iranians, Syrians, Sudanese, and any other nationality that the president decided to have a valid visa before entering the United States. President Obama added Libyans and Somalis to this list. Here’s the problem: President Trump took Iraq off the list, which means that now he can no longer claim that his list is the same as President Obama’s or is based on a congressional statute. It’s now his list and his alone.

President Trump’s updated executive order used the Bowling Green terrorists as a justification for his policy changes even though they weren’t planning a domestic terrorist attack. His order states that “in January 2013, two Iraqi nationals admitted to the United States as refugees in 2009 were sentenced to 40 years and to life in prison, respectively, for multiple terrorism-related offenses.” Those two Iraqi nationals were Mohanad Shareef Hammadi and Waad Ramadan Alwan and they were each convicted of multiple terrorism offenses—but they were not convicted or even charged with attempting to carry out a terror attack on U.S. soil despite some erroneous media reports to the contrary. 

Hammadi and Alwan were arrested in an FBI sting operation. Hammadi pled guilty to a 12-count indictment on multiple charges of providing material support to foreign terrorists, material support for a designated terrorist organization, exporting a missile system that could destroy aircraft, and fraudulently procuring a U.S. passport. Alwan pled guilty to a 23-count indictment that included engaging in terrorism against Americans overseas, teaching someone how to make a bomb, providing material support to foreign terrorists, material support for a designated terrorist organization, and exporting a missile system that could destroy aircraft. The FBI rendered all of the weapons inert before allowing Hammadi and Alwan to handle them so nobody was ever in any real danger.

Alwan did show a confidential informant how to build bombs but, according to the Department of Justice, those lessons were provided “with the intent that they be used to train others in the construction and use of such IEDs for the purpose of killing U.S. nationals overseas, including officers and employees of the United States.” The press release that announces Hammadi’s guilty plea doesn’t mention any support for domestic terrorist attacks. Additional court documents show neither Alwan nor Hammadi was charged or convicted of planning a domestic terror attack.

Upon their indictment, David J. Hale, U.S. Attorney for the Western District of Kentucky said, “Whether they seek shelter in a major metropolitan area or in a smaller city in Kentucky, those who would attempt to harm or kill Americans abroad will face a determined and prepared law enforcement effort dedicated to the investigations and prosecutions necessary to bring them to justice.”

Upon their sentencing in 2013, Assistant Attorney General Monaco said, “These two former Iraqi insurgents participated in terrorist activities overseas and attempted to continue providing material support to terrorists while they lived here in the United States. With today’s sentences, both men are being held accountable.” 

Neither of those statements by U.S. attorneys, the numerous press releases I linked to above, nor the court documents show that Alwan or Hammadi was convicted or charged with planning a domestic terrorist attack. The sting operation was designed to show the two terrorists shipping weapons and money abroad to support insurgent operations against American forces in Iraq, not against Americans on U.S. soil. Alwan and Hammadi thought they were providing material and money for insurgents to kill Americans abroad—a serious crime but not one targeting Americans on U.S. soil. The overarching purpose of Trump’s new executive order is to protect the “nation from terrorist activities by foreign nationals admitted to the United States.” The convictions of Alwan and Hammadi do not support the supposed overarching purpose of Trump’s executive order.  

I’ve already explained, in a post over at Just Security, some of the law and background surrounding what we know about Donald Trump’s incendiary claim that his predecessor wiretapped his phones at Trump Tower during the presidential campaign, and I’d suggest reading that if you want to delve into some of the wonky details, but I thought it might be worth a separate point to pull out some of the critical points and remark on how the story has evolved since Saturday.

  • There’s no basis on the public record to support the allegation that phones at Trump Tower were wiretapped, or that the Trump campaign was targeted for electronic surveillance, let alone on the orders of Barack Obama. Former Director of National Intelligence James Clapper has publicly denied it, and FBI Director James Comey has reportedly been pressing for a disavowal from the Justice Department. This appears to be something Trump concocted on the basis of (deep breath now) his own misreading of a misleading Breitbart News article based on a talk radio host’s summary of months-old reports in the British press. Those news stories—which conspicuously haven’t been reported out by the deeply-sourced intelligence journalists at U.S. outlets, and so should be taken with a grain of salt—concern some sort of order, purportedly sought by the FBI from the Foreign Intelligence Surveillance Court, targeting Russian banks in order to follow up intelligence leads concerning possible transfers of funds from Russia to Trump aides. If the reports are true, that’s vastly different from what Trump alleged, and not obviously improper on its face, though when intelligence surveillance intersects domestic politics, even indirectly, there’s always an elevated risk of abuse.
  • The White House has been dodging and weaving a bit in its public statements following Trump’s allegations on Twitter. Initially, aides told multiple reporters that they thought the president had been reacting to the Breitbart piece, which was circulated internally on Friday. But, as I explain in more detail in my Just Security post, the sources drawn on for the Breitbart piece don’t actually support Trump’s claims. More recently, spokeswoman Kellyanne Conway insinuated that Trump may have some other classified basis for his accusations. She’s called on the FBI to release more information, while other White House officials have suggested it should fall to Congress to investigate. This is all, to put it mildly, grossly irresponsible. If the president has classified information about improper surveillance of his campaign, he is empowered to declassify it. If he’s not sure whether to believe what he reads on the Internet, the head of the executive branch is not limited to relying on Breitbart News to learn about the activities of his own intelligence community. But it should be wholly unacceptable for Trump to level serious accusations of criminal abuse of intelligence authorities by his predecessor,  then punt to Congress when pressed to produce evidence.  
  • The fact that Trump is apparently unshakable in his conviction on this point, with one spokesman indicating that he doesn’t believe Comey’s denial, is one more data point confirming that the relationship between the White House and the intelligence community had become untenably dysfunctional.  At the most recent Cato Surveillance Conference, a panel of former senior intelligence professionals voiced concern that Trump might be unwilling to accept intelligence that conflicted with his preconceptions. Some skepticism of the intelligence community is, to be sure, both healthy and justified, but if the president is more inclined to trust thinly-sourced conspiracy theories on talk radio than his own FBI director, that seems to quite starkly validate the panelists’ concerns. Signaling that intelligence output is going to be disregarded whenever the facts aren’t to the president’s liking is how you get politicized intelligence, which is detrimental to national security and, in the worst case, can lead to outcomes like foreign wars over nonexistent Weapons of Mass Destruction.
  • Notwithstanding all that, it could not hurt for Congress to kick the tires a bit and ask to be briefed on what intelligence tools have been employed in the course of the Russia inquiry, to what extent they may have ensnared either the communications or other records pertaining to Trump associates, and how widely any such information was subsequently disseminated. Not, again, because there’s any reason to credit Trump’s dramatic claims, but because the crossroads where foreign intelligence meets domestic politics is inherently a high-risk territory. Our history is, alas, replete with instances of information gleaned from foreign intelligence surveillance—often pursuant to investigations that were, in their inception, perfectly legitimate—later being improperly used to advance a political agenda. Quite apart from Trump’s most recent allegations, news headlines over the past month have been dominated by intelligence leaks that create the appearance of a war between the administration and elements of the intelligence community, which as I’ve written previously, is unlikely to end well for American democracy whichever side comes out on top.  
  • To the extent all this has awakened some members of Congress to the potential for abuse inherent in so-called “incidental” collection of Americans’ communications and other information as a byproduct of foreign-targeted surveillance, one hopes that newfound awareness outlives this news cycle. Many of the same officials now incensed by leaks harmful to the Trump administration have pooh-pooed concerns about the scale of collection on U.S. citizens under §702 of the FISA Amendments Act of 2008, which must be reauthorized—and ought to be reformed—by the end of the year. Several pundits have made the Obama administration’s loosening of the rules for sharing raw intelligence collected by the NSA pursuant to Executive Order 12333 part of their narrative about a “soft coup” against Trump by the “Deep State.” Surely they should be even more worried about the fact that the FBI can query NSA’s vast databases of §702 intercepts for the communications of Americans, exempt even from the statutory requirement (which does apply to CIA and NSA) to count and report on how often such “backdoor searches” occur. If such easy access to intercepts presents an unacceptable risk of political abuse, surely the solution is not simply to purge the current intelligence bureaucracy and stuff it with more devout loyalists, but to change the rules that make it possible. 

I’ll have more, no doubt, as this strange story continues to play out.

The reason for President Trump’s reissued executive order is to “protect the Nation from terrorist activities by foreign nationals admitted to the United States.” A further justification buried in the executive order is that “[s]ince 2001, hundreds of persons born abroad have been convicted of terrorism-related crimes in the United States.” 

What exactly is a “terrorism-related crime”? There is no definition in U.S. statutes. The phrase “terrorism-related” does appear but mostly in reference to actions of government officials in response to terrorism such as a terrorism-related travel advisory. One use of the phrase “terrorism-related” that makes the most sense in this context comes from the anti-terrorism Information Sharing Environment (ISE) that integrates information which the GAO defined as relating to “terrorism, homeland security, and law enforcement, as well as other information.” That’s so broad that a reasonable person can’t possibly see “terrorism-related” as synonymous with “terrorism.”

If the people counted as “terrorism-related” convictions were really convicted of planning, attempting, or carrying out a terrorist attack on U.S. soil then supporters of Trump’s executive order would call them “terrorism convictions” and exclude the “related.” After all, when people are convicted of murder we don’t call it a “murder-related conviction.” We call it murder.

The most famous list of terrorism-related convictions is that published by Senator Sessions in 2016 that shows 580 convictions from 9/11 until the end of 2014 (the link isn’t working now for some reason). Sessions’ list appears to be the source of the worry that “hundreds of person born abroad have been convicted of terrorism-related crimes in the United States.”   

Only 339 of the 580 terrorism-related convictions on Sessions’ list were actually convicted of a terrorism crime. The other 241 (42 percent) were not convicted of a terrorism crime. “Terrorism-related” apparently includes investigations that begin due to a terrorism tip but then ended in non-terrorism convictions. My favorite examples of this are the convictions of Nasser Abuali, Hussein Abuali, and Rabi Ahmed. An informant told the FBI that the trio tried to purchase a rocket-propelled grenade launcher but the FBI found no evidence of that. The three individuals were instead convicted of the non-terrorist crime of receiving two truckloads of stolen cereal—which is not terrorism.

An additional 92 (16 percent) convictions were of U.S.-born citizens whose plots would not have been prevented by Trump’s executive order. 

That leaves 247 (43 percent) who were foreign-born and actually convicted of a real terrorist offense. Of those, 180 were convicted of material support for foreign terrorists, attempting to join foreign terrorist organizations, planning a terrorist attack abroad, or a similar offense taking place abroad. Twenty-seven were extradited to the United States and tried here for any one of the offenses listed abroad. Only 40 were convicted of planning, attempting, or carrying out a terrorist attack on U.S. soil. Future immigrants and non-immigrants who are similar to those 40 terrorists are the intended focus of Trump’s executive order.  They only comprise 6.9 percent of the 580 “terrorism-related” convictions listed by Senator Sessions.

At most, only 58 percent of the “terrorism-related” convictions given as the likely justification for this executive order can be classified as actual terrorism. The other 42 percent were not convicted of a terrorism offense. Only 6.9 percent were convicted or attempting, planning, or carrying out a terrorist attack on U.S. soil.

As a note, Stanford University associate professor of law Shirin Sinnar recently received an answer to a FOIA that showed 627 convictions to the end of 2015 but I have not been able to parse them by terrorism or non-terrorism convictions.    

If this new executive order had been what was was signed initially—combined with the normal interagency process and briefing of border officials as to how to implement it—President Trump wouldn’t have provoked the type of political response he did or the legal quagmire he entered. This order is much more narrowly tailored, providing exemptions not just to those with green cards and other valid visas, but also people with significant contacts to United States, students, children, urgent medical cases, and other special circumstances—and Iraq is necessarily treated as a special case—as well as spelling out reasons for the remaining restrictions.

As it stands now, the tweaks in the new executive order would normally put these actions firmly within the executive’s authority under the relevant immigration laws: presidents have broad discretion over refugee programs and to suspend entry of certain classes of foreigners on national security grounds. But, in large part due to the botched development and implementation of the previous order, this isn’t the normal case and courts will likely be less deferential to assertions of executive power here than they would otherwise be.

And then there are the atmospherics of what so many people consider to be a “Muslim ban.” Just because a presidential candidate uses hyperbolic language during a campaign—or his surrogates use similarly inartful language on national TV—doesn’t mean that any policy in that area is constitutionally suspect, but some judges will surely see it that way.

Finally, all that’s before getting into the wisdom of this policy. Refugees generally aren’t a security threat, for example, and it’s unclear whether vetting or visa-issuing procedures in the six remaining targeted countries represent the biggest weakness in our border defenses or ability to prevent terrorism on American soil.

After a long battle with cancer, Ambassador Clayton Yeutter passed away on Saturday at the age of 86 at his home in Potomac, Maryland. With his passing, the world parts not only with a brilliant, effective, accomplished leader, but an extraordinarily generous, decent man whose enduring kindness and humble demeanor made politics and policymaking in Washington more tolerable for all involved.

Clayton Yeutter had a long an illustrious career spent in both the private and public sectors, as well as in academia, but he is probably best known for his service during the Ronald Reagan and George H.W. Bush administrations.

As Reagan’s U.S. Trade Representative from 1985 to 1989, Ambassador Yeutter presided over implementation of the very first U.S. bilateral free trade agreement (with Israel) and he launched and oversaw negotiation of the U.S.-Canada Free Trade Agreement, which evolved into the North American Free Trade Agreement, to include Mexico, in 1994.

As USTR, Ambassador Yeutter also launched and advanced the “Uruguay Round” of multilateral trade negotiations in 1986, under the auspices of the General Agreement on Tariffs and Trade, which resulted in broader and deeper reductions in global barriers to trade than had previously been achieved, and it established the World Trade Organization in 1995.

During the first two years of the George H.W. Bush administration (1989-91), Yeutter served as Secretary of Agriculture, where he was instrumental in steering U.S. agricultural policy back to a more market orientation, from which it had deviated in the mid-1980s. The 1990 farm bill (The Food, Agriculture, Conservation, and Trade Act of 1990) included reductions in agricultural subsidies that were negotiated during the Uruguay Round.

Yeutter held other high-profile positions, including an eight-year stint as President and CEO of the Chicago Mercantile Exchange—a period during which the volume of trade in agricultural, currency, and interest rate futures more than tripled. He served as Republican National Committee Chairman for two years, following the death of Lee Atwater.

In recent years, Yeutter was a partner at the law firm of Hogan and Hartson and then a senior adviser at the firm, after it merged to become Hogan Lovells.

My colleagues and I benefitted from Clayton’s knowledge, experience, and insights, as he served in an advisory capacity to the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies. Over the years, Clayton was always generous with his time. He read everything we published in the Cato trade center, frequently offering kind words of endorsement or gentle points of dissent.

Even as he was enduring wrenching and sometimes debilitating treatment for cancer, Ambassador Yeutter graciously participated in numerous trade policy events at Cato, speaking with his signature booming voice, offering encouragement to continue the fight for free trade, and holding court with his throngs of admirers in the policy world and in the media.

Last year, we held a conference to showcase the results of our comprehensive study on the Trans-Pacific Partnership and the then-85 year old’s still razor-sharp analytical and communications skills were on full display (starting at the 10 minute mark of the 3rd session).

Clayton Yeutter was born at the outset of the Great Depression in Nebraska’s worsening dustbowl, where he grew up, was educated, and met his first wife. Yeutter received a B.S., a J.D. and a Ph.D. in Agricultural Economics from the University of Nebraska–Lincoln. During the Korean War, between undergraduate and graduate studies, Yeutter served in the U.S. Air Force.

Clayton has innumerable professional pursuits and accomplishments to his name. He operated a 2,500 acre farming enterprise in Nebraska for 18 years; he taught agricultural economics and agricultural law at the University of Nebraska; he served as Chief of Staff to the Governor of Nebraska; he directed the University of Nebraska’s mission in Colombia, which was at the time the largest agricultural technical assistance program in the world; he held various positions within the U.S. Department of Agriculture during the Nixon and Ford administrations, including as Assistant Secretary of Agriculture for International Affairs and Commodity Programs and Deputy Special Trade Representative in the USTR’s office; he was a senior partner in the Nebraska-based law firm of Nelson, Harding, Yeutter & Leonard; he served on numerous corporate boards, including those of ConAgra Foods, Caterpillar Inc, and Texas Instruments.

After graduating from the University of Nebraska, in 1952, Yeutter married his first wife, Jeanne Vierk, with whom he had four children. Two years after Jeanne’s death, Yeutter married Cristena Bach with whom he adopted and raised three daughters.

Clayton was not only a hard-working, brilliant, accomplished man, but a genuinely decent, caring, and honest person of integrity, who was always willing to share his time and opinions on matters far and wide.

I liked and respected him deeply, and will always remember his generosity and the wisdom of his advice. Clayton was a rare breed in Washington, who exemplified decency and, through his demeanor and actions, reminded us that politics and the policy debate can be conducted without the vitriol and mean-spiritedness that has become all too common.

In 2015, the Clayton K. Yeutter Institute of International Trade and Finance was established at the University of Nebraska-Lincoln to help prepare students for the promise and pitfalls of an increasingly interconnected global economy. It’s hard to avoid the symbolism of the passing of a man of great integrity and humility, who believed with all of his fiber in the importance of international trade, investment, and cultural openness, at a time when that worldview and those values are under assault, especially in the United States.

Yeutter is survived by his wife, seven children, nine grandchildren, and one great-granddaughter. A memorial service will be held at 2 p.m. on April 8 at The Fourth Presbyterian Church, 5500 River Road, Bethesda, Maryland. Contributions may be directed to the University of Nebraska Foundation for the support of the Clayton Yeutter Institute of International Trade and Finance.

President Trump today issued a revised version of his infamous executive order to temporarily ban the issuance of new green cards and visas for nationals from Iran, Syria, Yemen, Libya, Somalia, and Sudan. The new order dropped Iraq, which eviscerated Trump’s argument that the list of banned countries is based on an existing list in U.S. law. The order also cuts the number of refugee admissions by about 37 percent compared to the post-1975 average number of annual refugees admitted—from 79,329 per year to just 50,000. However, there were 110,000 refugees scheduled to be admitted in 2017 so the actual decrease in refugees this year is a whopping 55 percent under this executive order. The Trump administration thinks this new order addresses many of the legal challenges made against the first version.

Introduction

When the first version of this order was signed at the end of January, Cato’s research showed that the actual domestic terrorism risk from nationals of those six countries was minor and that the order stands on shaky legal ground. For this iteration of the executive order, I intend to show that the permanent decrease in refugees costs native-born Americans more than we’d save from fewer terrorism deaths. This cost-benefit analysis does not look at the cost of temporarily reducing green cards and other visas.

Results

If Trump’s refugee reduction eliminated all deaths from refugee terrorists then it will cost native-born Americans about $159.4 million per life saved, which is about 10.6 times as great as the $15,000,000 per statistical life estimates if the average number of refugee admissions had stayed at 79,329 going forward (Figure 1). In other words, such a policy would reduce your annual chance of dying a terrorist attack committed by a refugee on U.S. soil from one in 3.64 billion per year to zero at a cost of $159.4 million per life saved. 

However, President Trump’s executive order is not decreasing refugee flows by 37 percent in 2017. The Obama administration slotted 110,000 refugee admissions for 2017, so this year’s reduction is actually 55 percent. If I assume that the new 110,000 annual admission figures would have been the new normal in the absence of Trump’s executive order, the economic costs increase to $326 million per life saved for a 100 percent reduction in your chance of dying in a refugee terrorist attack on U.S. soil. The economic costs incurred are about 21.7 times as great as the cost for a single death by refugee terrorist in this scenario (Figure 1). 

Figure 1

 

Average Number of Refugees Would Have Continued

Obama’s Boosted Number of Refugees Would Have Continued

New Chance of Being Killed in Refugee Terror Attack on U.S. Soil

100% Reduction in Refugee Terrorism

$159,356,197

$326,004,018

Zero

To break even, Trump’s decrease in the refugee program would have to save one life per year if the average number of 79,329 refugee admissions had continued or about two lives per year if President Obama’s boosted refugee numbers are considered the new baseline. Regardless, there would have to be an unrealistically large and sustained increase in deaths committed by refugee terrorists in attacks on U.S. soil to justify this reduction in numbers.

Methods

The above cost-benefit analysis is similar to that which Greg Ip at The Wall Street Journal published but with some minor changes.

I estimate the economic benefits of refugees to American natives. This figure is known as the immigration surplus which ignores all of the economic benefits to the immigrants themselves and instead focuses entirely on the economic benefit to native-born Americans. George Borjas estimates the immigration surplus at 0.24 percent of America’s $17.194 trillion GDP. Over 43 million immigrants are currently living in the United States. From 1975 to the end of 2015, about 3.3 million entered as refugees. I assume that 1/3 of those refugees are deceased. From this, I am able to make a rough estimate of the annual immigration surplus per refugee that I further decrease by 50 percent because refugees tend to be poor (although this doesn’t matter as much for the immigration surplus). The result is that each refugee increases the wages of native-born Americans by $476.61. I then multiply that lost immigration surplus per year by the number of fewer refugees admitted. I then take the chance of dying annually in a refugee terrorist attack and divide it by the current U.S. population to estimate how frequently a death would occur if the chance remains constant which estimates a death by a refugee terrorist once ever 11.4 years. Multiplying the wage loss by the number of refugees who have been locked out by the number of years it would have taken for another refugee-terrorist death yields the $159.4 million cost per life saved. 

Yearly economic benefit for Americans from all immigrants is $41,265,600,000 according to lowest estimates from Borjas ($17.194 trillion times 0.24 percent). Multiply that by .0503 (percent that’s refugee) to get $2,077,246,422. Divide that by the stock of immigrants currently alive who entered as refugees (2,179,170) to get $953.24 wage benefit to all Americans per year, per refugee. I then assume that they only add half that amount because they are poor so the result is $476.61 immigration surplus per refugee per year.

From 2000 through the end of 2015, 6,329 immigrants and non-immigrants were ineligible for visas because of terrorist activities or association with terrorist organizations (Figure 1). A full 99.5 percent of the denials were for terrorist activities. Keeping terrorists, criminals, and other national security threats out of the United States is one of the federal government’s important immigration responsibilities but many of the people denied a visa shouldn’t have been. An overly broad definition of providing “material support” to terrorists results in bans that make little sense and do nothing to defend Americans from terrorist attacks.

For example, a young man who was living with his uncle in Colombia was attacked by paramilitaries who then forced the young man to march for several days.  Along the way, paramilitaries shot and killed many of those in the man’s group. Often times he was forced to watch the executions and, at times, to dig the graves of the dead. Sometimes the man was told that it was his own grave he was being forced to dig. The government denied his attempt to settle in the United States because his forced digging of graves provided “material support” in the form of “services” to a terrorist organization. 

Another example is of a Liberian woman who was abducted, raped repeatedly, and held hostage by LURD rebels after they invaded her house and killed her father. During this time they forced her to cook, clean, and do laundry. She eventually escaped and is now in a refugee camp but her attempted resettlement in the United States was put on hold because the tasks she had done for the rebels, such as doing laundry, provided “material support” in the form of “services” to a terrorist organization. 

Those who are denied a visa for this reason can get an exemption based on their individual circumstances, whether the material benefit was knowingly or intentionally given to terrorists, for certain medical reasons, and on a group-by-group basis for those who aided foreign groups supported by the U.S. government. A full 55 percent of those who are originally denied a visa on terrorism grounds are eventually overcome for this reason. The high waiver rate shows just how unnecessary and arbitrary many of these visa denials are in order to prevent domestic terrorist attacks. 

Figure 1

Visas Denied for Terrorism and Those Overcome by Waivers

Denied All      

212(a)(3)(B) Terrorist Activities

212(a)(3)(F) Terrorist Organizations

2000

101

0

2001

84

0

2002

49

25

2003

100

2

2004

77

0

2005

112

2

2006

120

0

2007

256

1

2008

418

0

2009

470

0

2010

621

0

2011

690

0

2012

890

0

2013

619

1

2014

707

2

2015

982

0

All

6296

33

      Overcome All    

212(a)(3)(B) Terrorist Activities

212(a)(3)(F) Terrorist Organizations

2000

31

0

2001

0

0

2002

0

0

2003

15

0

2004

26

0

2005

37

1

2006

39

1

2007

138

0

2008

266

0

2009

343

0

2010

387

0

2011

483

0

2012

470

0

2013

352

0

2014

457

0

2015

426

0

All

3470

2

Source: State Department, Report of the Visa Office, Statistical Table XX https://travel.state.gov/content/visas/en/law-and-policy/statistics/annual-reports.html

Since at least the days of ancient Athens—which Demosthenes tells us had a five-year statute of limitations for nearly all cases—governments have limited the time period within which punishment or compensation may be sought. Statutes of limitations exist to protect defendants from vindictive or arbitrary lawsuits and prosecutions brought long after their memories have faded and records that might have been used to rebut a claim lost. They ensure that we need not spend our lives constantly anxious about the possibility of the distant past coming back to haunt us over half-forgotten slights.

These are the basic animating purposes behind 28 U.S.C. § 2462, which imposes on the federal government a five-year limitations period for any “action, suit, or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise,” and the Supreme Court’s unanimous 2013 opinion in Gabelli v. SEC (in which Cato also filed a brief) finding no valid justification for the Securities and Exchange Commission to pursue enforcement actions seeking civil penalties more than five years after the relevant conduct had occurred.

Unfortunately, the SEC didn’t learn its lesson and has consistently attempted to circumvent and subvert Gabelli by arguing that the relief it seeks in its years-overdue enforcement actions—monetary disgorgement, injunctions requiring defendants to obey the law, and declaratory judgments that laws were violated—is actually “equitable” and not a form of civil penalty covered under § 2462. Disgorgement—requiring a defendant to return their ill-gotten gains—has indeed traditionally been a way to remedy unjust enrichment rather than a punishment, but the SEC’s use of it has been anything but equitable.

The agency has brought disgorgement actions not to make the victims of wrongdoing whole, aid in public securities-law enforcement, or encourage private compliance, but to punish unsuspecting defendants for decades-old conduct, destroy their reputations and careers, and score massive financial judgements that go straight to the vaults of the U.S. Treasury rather than the pockets of any victims. When one actually looks at what the SEC is doing in context, it becomes clear that this “equitable” relief is functionally a “civil fine, penalty, or forfeiture, pecuniary or otherwise,” subject to § 2462’s five-year limitations period.

While a careful application of § 2462 is itself sufficient to resolve this case, it is also important to note the serious reasons that actions like those taken by the SEC are in deep opposition to good public policy. Allowing the SEC—an administrative juggernaut more than capable of bringing meritorious claims in a timely manner—to pursue antiquated claims distracts the agency from its stated priorities of pursuing current malfeasance. It also misleads Congress and the public into believing that modern markets are rife with misconduct, in addition to casting a never-ending shadow of potential liability over anyone involved in financial markets.

This is why Cato has filed an amicus brief in support of Charles Kokesh, a man now entangled in the SEC’s stale web, to urge the Court to put an end to the SEC’s gamesmanship and categorically hold that the agency may not institute an enforcement action seeking disgorgement or injunctive/declaratory relief more than five years after the underlying conduct occurred.

The Supreme Court will hear argument in Kokesh v. SEC on April 18, with a decision expected by the end of June.

This week, the United Nations’ special rapporteur for housing presented a new report in Geneva. In it, she condemns the evils of “deregulation of housing markets,” “capital investment in housing,” “excess global capital,” and even takes neo-liberalism to task twice over its “requirement that private actors ‘do no harm’” and “do not violate the rights of others.” Who knew that respecting individual rights was controversial? 

Included in the report are superstitious allusions to banks, investors, and money. Throughout, the U.N.’s special rapporteur trains her angst on markets, and concludes that markets are “undermining the realization of housing as a human right.”

However, in spite of burdensome regulation, worldwide markets are becoming better at providing housing to the poor. For evidence, just look at the data: the percentage of the urban population that is living in slums (houses with inadequate space, sanitation, water, durability, or security) has fallen consistently over the past twenty-five years. 

In some regions, the number has declined even more rapidly. In South America, the percentage of the urban population living in slum housing fell a whopping 37.7 percentage points over the twenty-five year period. 

 

Meanwhile, the house price index, or price of housing relative to average disposable income per person declined by 25% worldwide since 1970.

The special rapporteur paints a dismal picture of housing in the United States, which is puzzling given a plethora of U.N. member states with genuinely dire conditions that go unmentioned, like Zimbabwe, Cuba, and Venezuela. Still, conditions are even improving in the United States. Housing has become less crowded and more comfortable: as household size has fallen, the median and average SF per home has consistently grown.

Aside from these omissions, the U.N. special report lacks a conceptual understanding of economics and finance. There are many glaring examples:

  1. Luxury apartment buildings are not the enemy of low-cost housing. Thanks to filtering, the addition of luxury apartments to a city means that lower-income households have additional, improved-quality housing when luxury options are built. 
  2. Housing is not an investment, and as long as bureaucrats continue to talk about it this way over-consumption will occur. As John Allison explains, “We live in a house, and therefore we consume the house. Houses are not used to produce other goods.” As we saw during the financial crisis, policies that encourage over-consumption of housing harm the poor.
  3. The implied belief that investors somehow conspire to build luxury condominiums worldwide highlights a gross misunderstanding of the way financial markets operate. Investors don’t decide what type of housing to build, private developers do based on local market signals. For that matter, developers don’t even really decide what to build, often local government’s zoning regulations decide for them.
  4. The reason that real estate is typically purchased by Limited Liability Corporations (LLCs) is not due to a conspiracy to anonymously purchase housing and “alienate” people from their communities. LLCs are used because tax codes and other government regulation encourage their use.
  5. Mortgages in the context described don’t become “speculative investments” due to changes in market conditions; they could not meet the standard for a speculative investment. Speculative investments are typically understood as a class of investments that are short-term in nature and based on asset pricing dislocation.
  6. Bondholders can’t own rental properties (unless they become equity holders through bankruptcy proceedings). Bondholders own debt, not equity.

In light of this confusion, the special rapporteur recommends “a full range of taxation, regulatory and planning measures in order to … prevent speculation and excessive accumulation of wealth.” It seems likely that if the U.N. had an understanding of the vast regulatory web that strangles the production of housing in the developed world, she might have come to a different conclusion.

Recently, some people have wondered aloud at the worldwide crisis of faith in elite international governing bodies. When the U.N. produces a report replete with economic and financial incompetence, an omission of counterarguments and counter facts, and brimming with ideological bias, it simply isn’t difficult to understand.

In two earlier posts on this blog, I described how President Trump said he had required the use of American steel in the Keystone XL and Dakota Access pipelines, while the reality seemed to be only an interagency consultation that would “develop a plan” on the issue and had some important qualifiers (only “to the maximum extent possible and to the extent permitted by law”).  Now Politico is reporting that any such requirement will not apply to Keystone:

The Keystone XL Pipeline will not be subject to President Donald Trump’s executive order requiring infrastructure projects to be built with American steel, a White House spokeswoman said today.

Trump signed the order calling for the Commerce Department to develop a plan for U.S. steel to be used in “all new pipelines, as well as retrofitted, repaired or expanded pipelines” inside the U.S. projects “to the maximum extent possible.”

By the White House’s judgment, that description would not include Keystone XL, which developer TransCanada first proposed in 2008.

“The Keystone XL Pipeline is currently in the process of being constructed, so it does not count as a new, retrofitted, repaired or expanded pipeline,” the White House spokeswoman said.

Assuming this report holds up (I’d like to hear it from additional White House sources), it is a small victory for free trade.  There is still a great deal of uncertainty on the direction of U.S. trade policy right now, but at least for the moment I have a bit of hope.  Cooler heads seem to have prevailed on this one issue.  Perhaps they will have similar success on other issues.

Raj Chetty, the head of Stanford’s “Equality of Opportunity” project, recently released a paper called “The Fading American Dream” co-authored with another economist, a sociologist, and three grad students. It claims that “rates of absolute mobility have fallen from approximately 90% for children born in 1940 to 50% for children born in the 1980s.” [Though the study ends with 2014, when most of those “born in the 1980s” were not yet 30.]

The title alone was sure to attract media excitement, particularly because the new study thanks New York Times columnist David Leonhardt “for posing the question that led to this research.” 

Leonhardt, in turn, gushed that Chetty’s research “is among the most eye-opening economics work in recent years.”  He explained that he asked Chetty to “create an index of the American dream” which “shows the percentage of children who earn more money… than their parent earned at the same age.”  The result, he concludes, is “very alarming. It’s a portrait of an economy that disappoints a huge number of people who have heard that they live in a country where life gets better, only to experience something quite different.”

“Another Chetty-bomb just exploded in the mobility debate,” declared a Brookings Institution memo: “Only half of Americans born in 1980 are economically better off than their parents. This compares to 90 percent of those born in 1940.”

At Vox.com,  Jim Tankersley proclaimed “The  American Dream [is] collapsing for young adults.”

“Sons born in 1984 are only 41 percent likely to earn more than their fathers, compared to 95 percent of sons born in 1940,” wrote USA Today reporter Nathan Bomey.  “If the American dream is defined as earning more money than your parents,” said Bomey, “today’s young adults are just as likely to have a nightmare as they are to achieve the dream.”

The Chetty study proved to be a politically irresistible story, since it appears to confirm a popular nostalgia for the good old days and belief that it has become more and more difficult to get ahead. But that is not what the study really shows.  What it really shows is:

First: Incomes were extremely low in 1940, so it was quite easy to do better 30 years later.

Second: Doing better than your parents is not defined by your income at age 30, but by income and wealth accumulated over a lifetime (including retirement).

Third: A rising percentage of young people remain in grad school at age 30, so their current income is lower than that of their parents at that age but their future income is likely to be much higher.

Consider those three points in more detail.

Regarding the First point, it should be no surprise that children born during the Great Depression or World War II did better than their parents. Of course they did. We don’t need an intricate statistical study to make such an obvious point.

I was born on a Texas Army base in 1942 where my father was a lieutenant earning $167 a month. That was not a difficult target for me to exceed in 1972.  

Comparing incomes of children and their parents at age 30 over many decades tells us more about the very low incomes of poorly-educated and poorly-employed parents in the early decades than it does about the incomes of their children more recently.  

Only 38.1% of Americans age 25–29 had a high school diploma or higher in 1940, compared with 75.4% in 1970. Only 25.7% of American age 18–24 were enrolled in college in 1970, compared with 40.5% in 2015.

To return to the “absolute mobility” of children born in the 1940s would require another 1930-38 Great Depression, another World War, and a massive loss of college degrees. 

Turning to the Second point, “Fading American Dream” depends entirely on an indefensible caricature of that dream—namely, as earning more than your parents did at a very young age (30).

The study claims “One of the defining features of the ‘American Dream’ is the ideal that children have a higher standard of living than their parents.”  But that means over a lifetime (importantly including retirement)—not just at age 30. Labor incomes of peak at age 50 for most college grads, and in the mid-50s for those with advanced degrees. Investment incomes commonly peak in retirement.

The Graph from Advisor Perspectives shows cumulative changes in real median income by age groups from 1967 to 2015. Median income rose much more at ages 45–64 than it did at ages 25–34, and the growth of median income has been fastest by far for those over age 65 (thanks in large part to rapid growth of tax-favored savings plans for retirement).

To judge yourself a failure at age 30 because your income had not yet passed your father’s income at the same age would be a psychological problem, not an economic problem.

Finally, switching to the Third point, a large and growing share of college grads now remain in graduate school past age 30, so (unlike their parents) they have little or no earned income. That would have been quite unusual at age 30 in 1940-80. The “average graduate student today is 33 years old. Students in doctoral programs are a bit older.”  Grad students have low current incomes at age 30, but high lifetime incomes.

An Urban Institute report finds “The share of adults ages 25 and older who have completed graduate degrees rose from eight percent in 1995 to 10 percent in 2005, and to 12 percent in 2015, growing from 34 percent to 37 percent of individuals with bachelor’s degrees.”

Most men born around 1940 went to work right after high school, assuming (often wrongly) they waited to finish high school.  By age 30 most men my age had many years of valuable work experience, known as “human capital” or on-the-job-training. Most of us married in our twenties and were in two-earner families with children by age 30.

Chetty and company compare incomes of children at age 30 with the ages of their parents when sampled sometime between the ages of 25 and 35.  Most parents of those turning 30 in the study’s last year (2014) were born during the Reagan years of 1983-89 when economic growth averaged 4.4% a year. To compare incomes between President Reagan’s boom years and President Obama’s prolonged slump reflects the poor economy of 2008–2014, not poor “mobility.”  Those born in 1984 turned 30 in 2014, when median household income was $53,718 in 2015 dollars—6.5% below 2007 and nearly the same as $53,367 in 1989 (when tax rates were much lower).  

The finding of a 2014 study by Chetty and Emmanuel Saez that “measures of intergenerational mobility have remained extremely stable for the 1971–1993 birth cohorts” is still credible and relevant.  Mr. Chetty’s latest 30-year parent-child comparisons involving those born from 1940 to 1984, by contrast, are not credible and not relevant.

In an effort to justify its massive global warming regulations, the Obama Administration had to estimate how much global warming would cost, and therefore how much money their plans would “save.” This is called the “social cost of carbon” (SCC). Calculating the SCC requires knowledge of how much it will warm as well as the net effects of that warming. Needless to say, the more it warms, the more it costs, justifying the greatest regulations. 

Obviously this is a gargantuan task requiring expertise a large number of agencies and cabinet departments. Consequently, the Administration cobbled a large “Interagency Working Group” (IWG) that ran three combination climate and economic models. A reliable cost estimate requires a confident understanding of both future climate and economic conditions. The Obama Administration decided it could calculate this to the year 2300, a complete fantasy when it comes to the way the world produces and consumes energy. It’s an easy demonstration that we have a hard enough time getting the next 15 years right, let alone the next 300.

Consider the case of domestic natural gas. In 2001, everyone knew that we were running out. A person who opined that we actually would soon be able to exploit hundreds of years’ worth, simply by smashing rocks underlying vast areas of the country, would have been laughed out of polite company. But the previous Administration thought it could tell us the energy technology of 2300. As a thought experiment, could anyone in 1717 foresee cars (maybe), nuclear fission (nope), or the internet (never)? 

On the climate side alone, there’s obviously some range of expected warming, often expressed as the probabilities surrounding some “equilibrium climate sensitivity” (ECS), or the mean amount of warming ultimately predicted for a doubling of atmospheric carbon dioxide. In the UN’s last (2013) climate compendium, their 100+ computer runs calculated an average of 3.2°C (5.8°F). A rough rule of thumb would be that this is also an estimate of the total temperature change predicted from the late 20th century to the year 2100.

That forecast is simply not working out. Since 1979, when global temperature-sensing satellites became operational, both satellite and weather balloon data show that the lower atmosphere is warming at about half the rate that was predicted. And in the area that is supposed to show the most integrated warming, in the tropics from about 15,000 to 45,000 feet, there’s two to three times less warming being observed than would be “forecast” by the UN’s models if they are run backwards from today. At the top of the active weather zone there, the forecast warming is a stunning seven times more than has been observed.

Since around the time that the last UN report was being written, a spate of scientific papers has been published showing that the ECS is quite a bit lower than the UN’s number, by 40-60 percent, depending upon the study.

It seems like there’s quite a conspiracy of nature when it comes to observed versus predicted warming, with various measures all telling us that we’re seeing about half as much warming as we are supposed to in the bulk atmosphere. Further, the Obama Administration assumed a distribution of possible warming that was way to hot at the extreme end, 7. 1°C or 12.9°F, a number that Science magazine recently said was “implausibly high” in a different model.

On the economic side, how much something will cost by the year 2300 requires some estimate of economic growth between now and then. It’s called the discount rate, and there are actually guidelines for how to do this put out in 2003 by the Office of Management and Budget. The higher the discount rate, the less that warming costs that far out into the future. OMB says that “you should provide estimates of net benefits using both 3 percent and 7 percent.”

The latter figure drove the cost of warming down too far for the Obama Administration’s liking, and the cost actually went below zero assuming 7 percent and an ECS not far from what may be the most realistic value. That means it could be a net benefit, something Denmark’s Richard Tol has been saying for decades, as long as it doesn’t warm too much. The Administration wouldn’t go near that, so, in contravention of the OMB guidance, they simply did not use the 7 percent rate, as Kevin Dayaratna of the Heritage Foundation notes.  

For more information on the social cost of carbon, take a look at my testimony from earlier this week before the House subcommittees on the environment and on oversight. A lot came to light in the hearing, which will go a long way towards an EPA justification to cease and desist on its onerous Clean Power Plan and other Obama Administration climate regulations. 

With a presidential administration that is disliked for myriad reasons openly pushing school choice, what had been kind of a cold war over choice for years has exploded into a hot one. And the tip of the anti-choice spear seems to be the New York Times. Last week it ran a piece by New America education director Kevin Carey suggesting that choice has been “dismal,” and doubled down on that yesterday with an attack on choice as an academic “failure.”

Is it a failure? First, the vast majority of random-assignment studies of private school voucher programs—the “gold-standard” research method that even controls for unobserved factors like parental motivation—have found choice producing equivalent or superior academic results, usually for a fraction of what is spent on public schools. Pointing at three, as we shall see, very limited studies, does not substantially change that track record.

Let’s look at the studies Carey highlighted: one on Louisiana’s voucher program, one on Ohio, and one on Indiana. Make that two studies: Carey cited Indiana findings without providing a link to, or title of, the research, and he did not identify the researchers. The Times did the same in their editorial. Why? Because the Indiana research has not been published. What Carey perhaps drew on was a piece by Mark Dynarski at the Brookings Institution. And what was that based on? Apparently, a 2015 academic conference presentation by R. Joseph Waddington and Mark Berends, who at the time were in the midst of analyzing Indiana’s program and who have not yet published their findings.

Next there is Ohio’s voucher program. The good news is that the research has been published, indeed by the choice-favoring Thomas B. Fordham Institute. And it does indicate that what the researchers were able to study revealed a negative effect on standardized tests. But Carey omitted two important aspects of the study. One, it found that choice had a modestly positive effect on public schools, spurring them to improve. Perhaps more important, because the research design was something called “regression discontinuity” it was limited in what it was able to reliably determine. Basically, that design looks at performance clustered around some eligibility cut-off—in this case, public schools that just made or missed the performance level below which students became eligible for vouchers—so the analysis could not tell us about a whole lot of kids. Wrote the researchers: “We can only identify with relative confidence the estimated effects…for those students who had been attending the highest-performing EdChoice-eligible public schools and not those who would have been attending lower-performing public schools.”

That is a big limit.

Finally, we come to the Louisiana study, which was random-assignment. Frankly, its negative findings are not new information. The report came out over a year ago, and we at Cato have written and talked about it extensively. And there are huge caveats to the findings, including that the program’s heavy regulations—e.g., participating schools must give state tests to voucher recipients and become part of a state accountability system—likely encouraged many of the better private schools to stay out. There are also competing private choice programs in the Pelican State. In addition, the rules requiring participating private schools to administer state tests are new, and there is a good chance that participating institutions were still transitioning. Indeed, as Carey noted, the study showed private school outcomes improving from the first year to the second. That could well indicate that the schools are adjusting to the change. And as in Ohio, there was evidence that the program spurred some improvements in public schools.

Choice advocates should not cheer about the latest research, but in totality, the evidence does not come close to showing choice a “failure.” Indeed, the evidence is still very favorable to choice. And the primary value of choice is not necessarily reflected in test scores: it is freeing families and educators to choose for themselves what education is best.

Monetarism is often misunderstood, overlooked, forgotten, or even derided. Yet its basic logic, resting on the quantity theory of money, is evident and remains important in a world of pure fiat monies.

Most major central banks have abandoned monetary targeting in favor of setting interest rates to achieve long-run price stability and full employment. China is an exception. Since 1998, the People’s Bank of China (PBC) has used money growth targets to guide monetary policy aimed at maintaining stable nominal income growth and preventing excess inflation (see Figure 1).

Figure 1: PBC Monetary Framework[1]

That said, the PBC’s use of monetary targeting is embedded within China’s centrally planned and largely nationalized financial system. The PBC is subject to oversight by the State Council; the financial system is dominated by state-owned banks; capital markets are highly regulated; and interest rates and exchange rates are distorted. Just as the Chinese government refers to its unique mix of markets, statism, and communist ideology as “Socialism with Chinese Characteristics,” we can call the PBC’s monetary targeting “monetarism with Chinese characteristics.”

Use of Monetary Targets in China

UBS economist Tao Wang and her team describe the PBC’s use of monetary targets:

Unlike some developed central banks that directly target certain policy interest rates or inflation, the PBC has targeted broad monetary aggregates such as M2 since 1998 to achieve its key macroeconomic objectives. The M2 growth target is usually set by adding together the GDP growth and CPI inflation targets plus a few percentage points for “financial deepening.” Although the PBC has tried to increase the use of price-based policy instruments, to date it still relies mainly on managing the quantity of base money supply and directly controlling credit growth to help achieve its desired broad money growth [Wang et al. 2017: 2].

The PBC is not an independent central bank. It is governed by, and reports to, the State Council. Policymakers set targets for the growth of monetary aggregates based on plans for CPI inflation and real GDP growth—the sum of which is equal to the growth of nominal income. The simple quantity theory of money, which lies behind monetarist logic, specifies that to achieve nominal income growth of x percent per year, the quantity of money should grow at a similar rate, with some adjustment made for changes in the income velocity of money:

(1)        ΔM/M = ΔP/P + Δy/y – ΔV/V.

The PBC does not directly control the money supply, which can be expressed as

(2)        M = mB,

where m is the money multiplier and  B is base money (i.e., currency held by the public plus bank reserves).

To achieve its target for money growth, the PBC relies on controlling the monetary base and uses various instruments to regulate the flow of credit (see Figure 1).[2] The state-run banking system in China means that newly created base money can be multiplied into a much larger stock of bank money (Figure 2). When state-owned commercial banks have excess reserves, they lend them out to meet the credit plans handed down to them, creating a multiple expansion of demand deposits. The increase in M will then flow into the economy, first impacting output and employment, and later the price level.

 Figure 2. The M1 Money Multiplier in China Is Working

Adherence to a monetary rule with Chinese characteristics since 1998 prevented nominal GDP growth from dipping below 10 percent from 2000–13, even during the 2008 global financial crisis (Figure 3).[3]  However, with the slowdown in real GDP growth during the last several years, NGDP growth has slowed as well.

 Figure 3. Real and Nominal GDP Growth, China 

Financial Repression in China

On the surface, it may seem that PBC has been reasonably successful in using monetary targeting to maintain steady nominal income growth and prevent excessive inflation. But any assessment ought to consider that Chinese monetary policy is implemented in the context of China’s illiberal and inefficient financial system.

The Chinese financial system is characterized by financial repression—in the form of low or negative real interest rates on deposits at state-owned commercial banks, capital controls, and credit rationing. State-owned banks favor lending to state-owned enterprises (SOEs), rather than more efficient private enterprises, resulting in a misallocation of capital. Deposit rates are purposefully kept below lending rates to keep state-owned banks profitable and generate tax revenue. Inflation can turn real deposit rates negative, adversely affecting savers. Finally, below-market lending rates at state-owned banks create an excess demand for loanable funds and result in the use of quotas to ration credit.

China has allowed more flexibility in setting interest rates but still uses benchmark rates to maintain a positive net interest margin at state-owned banks. Private enterprises that find it difficult to obtain low-interest loans in the state sector move to the shadow banking system where they must pay a much higher interest rate. The lack of investment alternatives, and strict control of capital outflows, has resulted in more than 50 percent of national income being saved. Financial deepening and liberalization have reduced the scope of financial repression, but the financial sector is still under strong state control.

While it is true that China has intervened to lower the foreign exchange value of the yuan, more recently the PBC has tried to stem capital outflows by defending the yuan against the U.S. dollar, and in so doing is using up scarce foreign exchange reserves. That is, the PBC is propping up the yuan-dollar rate by buying yuan in the foreign exchange market and selling dollars. To offset the decrease in base money—and prevent deflation—the PBC must sterilize the foreign exchange intervention by buying securities (central bank bills, etc.) from state-owned banks, adding reserves to the banking system. But this is a tricky business because the larger the capital outflows, which put downward pressure on the yuan, the higher the probability of further downward pressure on the yuan-dollar exchange rate. This reality makes it increasingly difficult to defend the peg and manage the money supply.

Monetarism with Chinese characteristics— in which the PBC targets M2 in line with planned NGDP growth— is therefore compromised by inconsistent, competing policy goals (see “Policy Objectives” in Figure 1), and hindered by heavy state intervention in capital markets. The dominance of state-owned banks in China’s financial system, which  lend to SOEs and take their marching orders from the PBC under the visible hand of the State Council, means constant fine-tuning of monetary and credit policy.

Lessons

In a fiat money world, central banks need an anchor in the form of a monetary rule. The quantity theory of money predicts a close relationship between money growth and NGDP growth over the longer-run. By targeting monetary aggregates since 1998, China has helped prevent severe inflation and recession. Nevertheless, the lack of PBC independence, the existence of multiple objectives for monetary policy, and financial repression weaken the implementation of monetarism in the form of either a Friedman-style constant money growth rule or a McCallum rule targeting NGDP.

The Fed and other central banks could learn from China’s experience with money supply targeting while recognizing the dangers of credit allocation. China pays interest on both required and excess reserves, but the rate on excess reserves is far below lending rates.[4] Unlike the United States, the money multiplier has not collapsed in China: increases in base money have increased the money supply and nominal income.

If the Fed adopted a simple monetary rule, abolished interest on excess reserves,  reduced the size of its balance sheet, ended credit allocation, and lessened onerous  macro-prudential regulation, there would be a much higher probability that the money multiplier would return to normal and another financial crisis avoided.

___________________________________________

This blogpost is drawn from a recent Cato Institute working paper, James A. Dorn, “Monetarism with Chinese Characteristics,” [Cato Institute Working Paper No. 42, February 14, 2017]. Please see this paper for more detail on Chinese monetary targeting and more thorough recommendations for American and Chinese policymakers.

[1] Notes: RRR is required reserve ratio; OMO is open market operations; MLF is medium-term lending facility; PSL is pledged supplementary lending; SLO is short-term liquidity operations; SLF is standing lending facility; LDR is the loan-to-deposit ratio. Source: Wang et al. (2017: 2).

[2] Burdekin and Siklos (2008a: 84–85) argue that interest-rate controls preclude the PBC from targeting interest rates. Thus, a better fit for China is to target monetary aggregates and use a McCallum-type monetary rule. See McCallum (1988).

[3] I chose 10 percent NGDP growth as a reasonable target based on planned real output growth of 7 percent per year and inflation of 3 percent per year.

[4] The PBC pays 1.62 percent on required reserves and 0.72 percent on excess reserves, which is substantially less than the prime lending rate of 4.35 percent.

[Cross-posted from Alt-M.org]

Support for the ACA’s community-rating provisions flips from 63%-33% support to 60%-31% opposed if it harms the quality of health care. 55% say more free-market competition not government management would best deliver high-quality affordable health care. FULL RESULTS (PDF)

Most polling of the Affordable Care Act finds popular support for many of its benefits when no costs are mentioned. However, a new Cato Institute/YouGov survey finds that support plummets, even among Democrats, if its popular provisions harm the quality of health care. The poll finds that risks of higher premiums, higher taxes, or subsidies to insurers are less concerning to Americans than harm to the quality of care. 

By a margin of 63% to 33%, Americans support the ACA’s community-rating provision that prevents health insurers from charging some customers higher rates based on their medical history. However, support flips with a majority opposed 60%-31% if the provision caused the quality of health care to get worse.

Majorities also come to oppose the ACA’s community-rating provision if it increased premiums (55% oppose, 39% favor), or raised taxes (53% oppose, 40% favor). However, threats to the to quality of care appear to be a pressure point for most Americans.

When respondents were asked follow-up questions about specific types of quality reductions, Americans turned against the ACA’s community-rating provision most if:

  • It limits access to medical tests and treatments (66% oppose, 27% favor)
  • People have to wait several months before seeing a specialist to receive medically necessary care (65% oppose, 25% favor)
  • It limits access to top rated medical facilities and treatment centers for serious illnesses (62% oppose, 31% favor).
  • If people received more surprise medical bills for services they thought were covered (64% oppose, 25% favor)

Democrats Turn Against ACA’s Popular Provisions When Quality at Risk

Democrats are key to the shift on quality. Majorities of Democrats (58%) would be willing to pay more in health insurance premiums or pay higher taxes (60%) to prevent insurers from charging higher rates to people with preexisting conditions. But a majority would oppose (55%) this rule if it meant the quality of health care would get worse. 

Several demographic groups are less sensitive to financial costs associated with the provision. But, threats to quality narrow the gap.

For instance, 48% of Americans under 35 say they would oppose the community-rating provision if it meant their taxes would increase compared to 57% of Americans 35-54. However, two-thirds of both groups would oppose if the provision resulted in limited access to medical tests and treatments.

Americans earning above $80,000 a year (47%) are more willing than Americans making less than $40,000 a year (37%) to pay higher premiums to prevent insurers from charging higher rates to people with pre-existing conditions. However, 60% and 62% respectively would turn against the provision if it meant they’d have less access to top-rated medical facilities and treatment centers.

Quality considerations bridge the gap across partisanship, income, and age.

Quality Concerns Move People Most on Guaranteed-Issue

We find the same pattern in the second Cato Institute/YouGov survey when asking about the ACA’s guaranteed-issue provision that requires health insurers cover anyone who applies for health insurance, including those with pre-existing conditions. Support for this provision flips from 77%-20% support, to 75%-20% opposed if it caused the quality of health care to get worse. Although majorities also come to oppose the provision if it raised premiums (60%) or taxes (55%), threats to quality result in the most dramatic shift.

By asking these questions on a separate survey, respondents were not impacted by the community-rating provision questions. Thus, we find that quality is a key pressure point for most Americans in two separate surveys.

Once again, Democrats are essential to the dramatic shift on quality. Although majorities of Democrats would be willing to pay higher taxes (60%) and higher premiums (51%), a majority would oppose (65%) the guaranteed-issue provision it caused the quality of health care to decline.

The survey also found that Americans might continue their support for the ACA’s guaranteed-issue (52%) and community-rating (47%) provisions if either required Congress to provide taxpayer subsidies to private insurance companies. This indicates that Americans distinguish between potential costs, are willing to accept some more than others, but are unwilling to sacrifice on quality.

Dependent-Coverage Mandate

At first glance, a strong majority (72%) of Americans support a provision in the ACA that allows young adults to stay on their parents’ insurance plans until age 26, while 25% oppose. However support plummets to 38% and a majority would instead oppose (58%) if the provision cost $1,200 a year to allow young adults to stay on their parents’ insurance plan. (This number comes from a NBER study of the costs of the dependent-coverage mandate.)

Americans Believe Free-Market Competition Offers Path Forward

A majority (55%) of Americans say that more free-market competition among health insurers, hospitals and doctors is the “better way” to sustainably provide high-quality affordable insurance to people. Thirty-nine percent (39%) say that more government management of health insurers, doctors and hospitals would be more effective.

These results are consistent with similar polling from the Kaiser Family Foundation, which found 51% believe market competition would better reduce prescription drug prices than government regulation (40%).

Unsurprisingly, respondents line up by partisanship. A majority (59%) of Democrats believe more government management of the health care system is what’s needed while 82% of Republicans and 59% of independents believe free-market competition would be more effective.

Quality Concerns in Historical Context

The pattern of quality concerns moving public opinion the most is consistent with polling data over the past 20 years. Back in 1994, Gallup asked a similar set of questions about universal health insurance coverage. Like these results, the poll first found strong support 80%-16% for universal coverage. When Gallup asked follow-up questions, as we have done here, support declined to 55% if universal coverage raised premiums. But the poll measured the most dramatic shift against universal coverage if it were to limit the availability of health services with 69%-26% opposed. 

Once again in 2012, the Reason-Rupe poll, which I directed at the time, asked a comparable set of questions about the ACA’s community rating provision and found the same pattern. At first, the poll found a majority (52%) who supported the provision. But 50% would oppose if it raised premiums, and 76% would oppose if it reduced health care quality.

A CBS/New York Times July 2009 survey used a similar wording construction to the questions used in the Cato Institute poll. First, it asked if it was the federal government’s responsibility to guarantee insurance for all Americans, finding 55% in agreement. However, “if that meant the cost of your own health insurance would go up,” support declined to 43%. This survey did not measure how support changed if health care quality was at risk.

These surveys demonstrate that polls presenting only the benefits of health care policies risk inflating support for such policies. Support for even the most popular provisions in the ACA drop when the public is asked to consider their likely costs in concert with the benefits. Furthermore, reductions in the quality of care, more so than premium increases, have the most significant impact on support.

Survey results and methodology can be found here. The Cato Institute in collaboration with YouGov conducted two health care surveys online February 22-23, 2017. The first survey interviewed 1,152 American adults with a margin of error of  ± 2.93 percentage points. The second survey interviewed 1,103 American adults with a margin of error of ± 2.85 percentage points. The margin of error for items used in half-samples is approximately ±  5.1 percentage points.

President Trump is reportedly planning to cut the Department of State’s budget by 37 percent. I’m not an expert on the department’s activities, but it would seem ripe for cuts given the large run-up in spending in recent years.

The chart shows Department of State outlays since 1970 in constant 2016 dollars. Real spending has more than tripled the past 16 years—from $9.5 billion in 2000 to $30.9 billion in 2016. The data comes from President Obama’s last budget. You can chart spending on federal departments and agencies here at DownsizingGovernment.org.

The Trump administration apparently wants to make budget room for Department of Defense spending increases, but the Pentagon is also bloated with inefficiency, as discussed here, here, and here.

The Supreme Court in the 1990s established that “a racially gerrymandered redistricting scheme… is constitutionally suspect” under the Equal Protection Clause. Today’s more-or-less-unanimous decision in Bethune-Hill v. Virginia Board of Elections confirms that the Court is not prepared to back off or cut corners on that principle.

In particular, the Court unanimously found that a district court had been too indulgent in reviewing Virginia officials’ race-conscious drawing of lines for legislative districts. While the Court permits some race-conscious line drawing in order to meet the requirements of the federal Voting Rights Act, this is not a blank check. “Racial gerrymandering, even for remedial purposes, may balkanize us into competing racial factions,” warned Justice Sandra Day O’Connor in the first case in this series, Shaw v. Reno (Shaw I, 1993).

In that 1993 case, O’Connor and her colleagues were reviewing a set of North Carolina districts so bizarre in shape that their tactical purpose could scarcely be denied with a straight face. Today’s ruling clarifies, though there had not been much doubt before, that when there is other evidence of racial motivation, the process does not escape Equal Protection scrutiny just because the shape of districts appears normal and they do not visibly violate other sound principles of districting. 

Justice Alito in a separate and Justice Thomas in a partial concurrence would have applied even tougher scrutiny. Overall, however, the Court spoke with much unity. And that is not something to take for granted on this subject. In both Shaw v. Reno (1993) and Miller v. Johnson (1995), four dissenting Justices from the liberal wing disapproved of Equal Protection scrutiny on varying rationales. In a notably vicious editorial after Shaw I, the New York Times assailed O’Connor personally over what it saw as “a full-scale assault on the Voting Rights Act” intended to “punish” blacks and “sustain all-white politics.” 

Today – despite some academic opinion that still yearns to go back to the days when racial gerrymandering was A-OK when done with suitably progressive motives – all eight sitting members of the Court, liberal wing included, appear content to apply at least the Shaw-Miller level of scrutiny. 

Justice Kennedy wrote today’s opinion, confirming once more that he stands at the center of gravity of today’s Court on redistricting issues. Much of the speculation these days is whether Kennedy is prepared to join the liberal wing in disapproving gerrymandering done for political (typically party- and incumbent-protective), as distinct from racial, motives. By coincidence, for those interested in these issues, I have a chapter in the new 8th edition of Cato’s Handbook for Policymakers on the topic of political gerrymandering, with advice on how best to reduce its prevalence at the state level. 

Last night’s address to Congress by President Trump was devoid of detail on infrastructure investment. But in justifying his desire to harness $1 trillion of public and private funds for “new roads, bridges, tunnels, airports and railways”, the President used two lines of bad economic reasoning sadly all too prevalent in public debate on this issue.

First was to invoke the building of the interstate highway system. “The time has come,” Trump declared, “for a new program of national rebuilding.” The implication: the interstate highway system was good for the economy, so we should invest more in roads today - a common rhetorical technique, but one which confuses average with marginal.

Previous economic research has indeed found that the construction of the interstate highway system substantially boosted productivity for industries associated with road use. But the same research finds those benefits to be largely one-offs, meaning this analysis does nothing to inform us about new decisions. In fact, more recent work has found that too many new highways have been built between 1983 and 2003, and that marginal extensions to the highway system tend not to increase social welfare, because the cost savings of reducing travel times are small relative to incomes and prices.

In other words, building a highway system can boost growth. Building a second highway system? Not so much. Rather than appealing to grand projects based on historical experience, all new government projects should stand up on their own merits – ideally having high benefit to cost ratios and being things that would not be undertaken by the private sector.

The second mistake was to highlight “creating millions of new jobs” as an aim or positive of any infrastructure spending. When the government is investing to build something, it should aim to do so most efficiently. “Jobs” in this sense are a cost, not a benefit, and ones “created” only come through the diversion of resources and opportunities in other parts of the economy.

Upon visiting an Asian country in the 1960s, Milton Friedman is frequently quoted as reacting to the absence of heavy machinery in a canal build by asking why the project was being undertaken by men with shovels. Upon being told it was a “jobs program,” he is said to have remarked: “Oh, I see. I thought you were trying to build a canal. If you really want to create jobs, then by all means give these men spoons, not shovels.”

If one is concerned with improving the economic growth potential of the economy, then you would base both the selection of projects and the means of undertaking them according to that objective. Sadly, when governments are involved, other ambitions (be it stimulating particular regions, appeasing certain interests, obtaining political prestige or facilitating observable jobs) tend to interfere with the stated aim. The constant talk of the benefits of wise, productive investment is an ambition, rather than something we should expect.

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