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Updated: 35 min 3 sec ago

Puerto Rico's Faux Pension Reform

5 hours 44 min ago

Ike Brannon

It is official: Puerto Rico has entered into the “Title III” bankruptcy that many feared would be the ultimate outcome of the Puerto Rico Oversight, Management, and Economic Stability Act passed by Congress last summer. This includes the island’s largest public pension plan, the Employee Retirement System, for which the Commonwealth commenced bankruptcy proceedings this week.

Some conservatives initially rejoiced upon the passage of PROMESA, believing that it could prove to be a formula to fix the pension problems that plague many of the states, especially my home state of Illinois. That seemed to have been the intent, at least: When Congress passed PROMESA the House leadership made it clear that it hoped to facilitate serious reforms across the Puerto Rican government, including its underfunded pension systems.

PROMESA opens the door to significant pension reform through three provisions. First, the legislation contemplates that the board would engage an independent actuary to analyze funding and the sustainability of existing benefits for any territorial pension plan that is materially underfunded (as are every one of Puerto Rico’s pension plans).

Congress passed legislation that sought to help the commonwealth and establish a formula for other states, but the resulting plan won’t fix much.

Second, PROMESA requires that a fiscal plan only provide “adequate” funding to pensions during the restructuring process (that is, it does not specify that the board achieve “full” funding at or near current benefit levels in perpetuity).

Third, it specifies that the Commonwealth and other covered entities (such as its myriad public corporations) that are participating employers are afforded the authority to restructure their pension obligations as well under Title III.

However, it is important to note that the House Natural Resources Committee responsible for drafting PROMESA clearly indicated in its section-by-section summary of the bill that the bill does not “reprioritize pension liabilities ahead of the lawful priorities or liens of bondholders as established under the territory’s constitution, laws, or other agreements.”

This provision was included to avoid a repeat of the costly mistakes made in Detroit, where pension reform was shunted aside and the city simply got out of its financial morass by forcing bondholders to take a disproportionate share of the losses, often out of line with the city’s legal debt hierarchy. To this day, Detroit cannot access the municipal lending market on traditional terms.

In spite of these explicit provisions, the oversight board approved a fiscal plan that does just the opposite while doing little to reform Puerto Rico’s retirement systems.

The oversight board retained Pension Trustee Advisors, a Colorado-based firm, to undertake the required review of funding and the sustainability of the pension system, but this has yet to be done. Given the alacrity by which the island’s government embraced bankruptcy, PTA seems to have been retained instead to merely validate a pre-wired, aggregate 10 percent reduction in pension obligations. This matches an arbitrary number publicly proposed by the board in a January letter to the commonwealth.

This is a missed opportunity and is a manifestation of the oversight board’s apparent ambivalence toward PROMESA.

The ostensibly independent actuary should have been permitted to analyze the financial situation and offer creative solutions to Puerto Rico’s pension problems, where—admittedly—one size does not necessarily fit all. For example, contractually based “basic” benefits earned through years of service should be treated differently than legislatively based “system administered benefits” (which include assorted bonuses and cost-of-living adjustments) that might be taken away by the same legislative pen with which they were bestowed. Likewise, existing retirees should be treated differently than active employees, whose accumulated contributions might be returned and invested in a 401(k) style system in lieu of further accruing pension benefits.

At a minimum, the oversight board could greenlight a reform for the Puerto Rico Teachers Retirement System—struck down in 2014 on a technicality—that would have provided an estimated $3.7 billion of savings. There are myriad other ideas that an engaged actuary and a motivated oversight board could explore to achieve meaningful and sustainable reform for Puerto Rico.

The lack of serious reform is made all the more glaring by a recent government move that served to exacerbate the pension issue. Governor Ricardo Rossello signed into law a single employer legislation, which creates the risk that all employee retirement systems liabilities—including those of the commonwealth’s municipalities and public corporations—could be shifted to the commonwealth’s general fund. It’s problematic because the commonwealth and its central government agencies were responsible for only 60 percent of the unfunded actuarial liability, as just one of many participating employers.

This faux reform will prove a costly mistake for many stakeholders. Unfortunately, it seems that both Judge Laura Taylor Swain, who is overseeing the bankruptcy proceeding, and Governor Rossello may nonetheless support it. The governor has adopted an increasingly populist tone toward protecting the pensions in full since being elected on a platform of working with bondholders. Meanwhile, Judge Swain recently made a point of stating that her vision strived to “safeguard pensions.”

If “safeguard” means moving forward without serious reform, then Puerto Rico is on the path to wasting this golden opportunity presented by PROMESA to make significant changes to the government’s various retirement systems that would make them solvent over the long term. Any short-run political gain of the sort that seems to preoccupy the current government will only entail a far larger degree of long-run economic and financial pain, as a post-Rossello and post-oversight-board Puerto Rico would be left to grapple with the same spiraling problem down the road with far less leeway to enact unilateral fixes. The unstated purpose of the board—as it has been whenever it’s been used—is to take the political heat off of the government and allow it to do economically beneficial but politically unpopular reforms. Puerto Rico’s government seems to not recognize this.

Ike Brannon is president of Capital Policy Analytics and a visiting fellow at the Cato Institute.

Senator Manchin's Latest Attempt at Curbing Opioid Addiction Is a Very Bad Idea

5 hours 58 min ago

Jeffrey A. Singer

Earlier this month, in an effort to help stem the nation’s rise in opioid addiction and overdose, Sen. Joe Manchin (D-WV) introduced a bill that purports to solve that problem. The bill would require the Food and Drug Administration to revoke the approval of one opioid pain medication for each new opioid pain medication the FDA approves for health care practitioners to prescribe.

As a practicing surgeon who prescribes pain medication for my postoperative patients, I think the senator’s proposal will not only make the opioid problem worse, but also create new problems as well.

This proposal essentially caps the number of arrows I may have in my quiver. Every patient is unique. It is not unusual for a patient in pain to have a poor response — or even an adverse reaction — to a pain medication that works well in most other patients. On many occasions, I need to try on my patient several different types of opioids, sometimes in combination with other types of analgesics, until I get my patient relief from pain. I need as many options as possible. Demanding the removal of one existing option for every new option that arises hampers and intrudes on my ability to complete my primary mission: the relief of suffering.

Sen. Manchin’s proposal is another example of a well-intended but inappropriate intrusion into the practice of medicine and the patient-doctor relationship by people who presume the ability to engineer human behavior.

It also invites unintended consequences. Suppose a new opioid is approved that is found to be faster acting and more effective in relieving pain, yet has a higher potential for addiction and respiratory depression than those already approved. Is it really a good idea to remove from doctors’ armamentarium a less potent and less dangerous opioid to make room for the new one?

It is not rare for a newly approved drug, several months after its introduction into the marketplace, to be found to have serious adverse effects not previously demonstrated during FDA clinical trials, and then be pulled from the market by the manufacturer or the FDA.

Suppose this happens with a new opioid that replaced an older one under Sen. Manchin’s bill? Does the old one get re-approved? Or is the practitioner left with even fewer options?

Finally, if Sen. Manchin thinks that limiting the number of opioids legally available will prevent addicts from obtaining their opioid of choice, then maybe he hasn’t heard about the Heroin epidemic. Heroin was banned in the US in 1924, but remains readily available and in fact has become a popular substitute for opioid addicts who are cut off by their prescribers and turn to the black market for relief. In 1924, morphine was the most common intravenous drug to which people were addicted. When heroin was totally banned, it became much more attractive than morphine for drug dealers to promote, because they had no competition from the legitimate market, and soon heroin overtook morphine in sales.

Removing popular opioids from the legal market merely transfers drug options from health care practitioners to black market drug dealers.

Sen. Manchin’s proposal is another example of a well-intended but inappropriate intrusion into the practice of medicine and the patient-doctor relationship by people who presume the ability to engineer human behavior. I appreciate the senator’s concern, but if he is looking for an answer to the opioid abuse problem the answer lies in “harm reduction.” Let doctors be doctors. Let them exercise their professional judgment and work with patients who have opioid dependency, confidentially and compassionately.

If a doctor decides it is less harmful for the patient to get a refill of the opioid prescription than to send the patient to the street, the doctor should be able to do so.

Naloxone is an effective antidote to the respiratory depression that arises from an opioid overdose. It is available in intravenous, subcutaneous (like an insulin injection), and nasal spray form. Pharmacists should be allowed to dispense naloxone without a prescription, and naloxone should be made more readily available to first responders. This is already happening in some states, such as New Mexico.

If Senator Manchin really wants to help solve the problem, he should stop doubling down on the same strategy that has failed us since the 1920s and try something new.

Jeffrey A. Singer practices general surgery in Phoenix, AZ and is an adjunct scholar at the Cato Institute.

Trump's Budget Proposal Isn't Perfect, but It's a Start

10 hours 15 min ago

Michael D. Tanner

Our annual budget theater has now begun: President Trump has released his proposed FY 2018 budget, and Congress has pronounced it “dead on arrival.” This yearly ritual has become such a part of Washington life that presidential budgets should probably be delivered to Capitol Hill in a crepe-draped carriage drawn by six black horses. Still, even if Trump’s budget is not going to become law, it offers an important opportunity to reshape the fiscal landscape.

Let’s start by giving credit where credit is due: Trump’s proposal would reduce the growth in federal spending by $3.6 trillion over ten years, resulting in a balanced budget by 2027. Yes, this projection relies on unrealistic levels of economic growth and cuts that are never going to happen, but it still makes Donald Trump the only president even to aspire to balancing the budget since Bill Clinton in 2001.

In many ways, Trump’s plan shows that, like presidents before him, he has discovered he can’t actually balance the budget simply by eliminating “waste, fraud, and abuse.” The only way to truly reduce federal spending is to reduce federal spending. And that means cutting programs that are popular, supported by powerful special interests, or both. Hence the screams of pain and outrage.

For all its flaws, the president’s plan could prompt a sorely needed conversation about fiscal reform.

Trump’s budget challenges the Washington notion that, once enacted, every program — no matter how unnecessary, ill conceived, or unsuccessful — is forever sacrosanct. Trump would eliminate such sacred cows as the Corporation for Public Broadcasting, the National Endowment for the Arts, and the Legal Services Corporation. He would significantly slash funding for the Departments of Commerce and Energy. And he would shift education funds to charter schools and school-choice efforts.

It’s not just Democratic or liberal oxen that would be gored by this budget, either. Trump would also cut agricultural subsidies near and dear to the hearts of red-state congressmen, and corporate-welfare programs such as the Overseas Private Investment Corporation (OPIC).

Much of the early criticism of Trump’s proposal has been focused on its cuts to what is euphemistically called the “social safety net.” Those cuts have generally been described as “savage” or “devastating.” But we should recall but that they are just a sliver of a welfare system that extends to more than 100 programs and costs nearly $1 trillion in both federal and state funds each year.

In particular, Trump would reduce Medicaid spending by roughly $610 billion over ten years (on top of some $800 billion in cuts that were part of the Obamacare-replacement bill that recently passed the House) and $193 billion in reductions to the food-stamp program.

It is important to understand that the Medicaid cuts are reductions from the projected baseline, not from current spending levels. That means that, even if Trump’s budget were to become law, Medicaid would still spend more in ten years than it does today, albeit less than was previously planned. Moreover, most of the projected reductions wouldn’t take place until after 2020, meaning they are less than solid. Still, the Medicaid cuts would undoubtedly force states to make some tough decisions about whom to cover and how. This is especially true of those states that have expanded Medicaid under Obamacare, though states would also be given more flexibility to experiment with better and more efficient ways to deliver program services under the House’s health-care bill.

As for food stamps, the cuts would be real, but spending on the program has expanded exponentially in recent years. It essentially doubled under President George W. Bush, and doubled again under President Obama. Trump’s budget would basically return the program to roughly the level of funding it received in the first year of the Obama administration, not a year generally known as the Great American Famine. With the Great Recession now in the rear-view mirror and unemployment once again approaching pre-recession levels, it is not unreasonable to reduce spending on such counter-cyclical welfare programs.

If the Trump administration is making a mistake here, it is in treating welfare cuts as a budgetary matter rather than attempting wholesale reforms of a system that has failed to help poor people escape poverty or become self-sufficient. It is hard to see how Trump’s cuts to Medicaid and SNAP, or what are likely to be ineffectual work requirements, will substantially change the dynamics of a dysfunctional welfare system.

Moreover, the cuts to social programs might not have to be as deep if the budget didn’t include some unnecessary spending increases, including a $19 billion program for paid family leave. In addition, Trump is seeking some $200 billion in new infrastructure spending. That’s better than his campaign promise of $1 trillion or more, but it still amounts to a wasteful pretext for yet more legislative pork. Trump would also hike defense spending by a hefty 4.6 percent, without any clear justification beyond “more is better.” Spending restraint needs to apply to programs Republicans like as much as it does to programs they hate.

Perhaps the biggest problem with Trump’s budget is its continued failure to deal with the biggest drivers of our long-term debt: Social Security and Medicare. Without a willingness to reform these two programs, which together account for 38 percent of federal spending, it will be impossible to stem the future tide of red ink.

Trump’s budget will inevitably provoke a great deal of sound and fury, most of it signifying nothing. There is about as much chance of Congress’s passing his proposal as there is of his deleting his Twitter account. But, if it sets a new baseline of discussion in which we finally commit to restraining the size, scope, and cost of government, it will prove invaluable nevertheless.

Michael Tanner is a senior fellow at the Cato Institute and the author of Going for Broke: Deficits, Debt, and the Entitlement Crisis.

Trump Bows to the Saudis

Tue, 05/23/2017 - 15:47

John Glaser and Benjamin H. Friedman

President Donald Trump’s Middle East trip has been a tragedy disguised as farce. Amid the gaffes, glowing orbs and gaudy receptions, the Trump administration moved deliberately to take Saudi Arabia’s side in the region’s sectarian struggles and undermine the fragile détente with Iran brought on by the Obama administration’s nuclear deal.

Toadying up to Saudis is morally grotesque but familiar. What now makes it tragic is the obvious lack of strategic payoff. The benefit is negligible and the likely cost is more terrorism and higher chances of a disastrous war with Iran.

Whether Trump bent, bowed or curtsied before King Salman in receiving a gold medal, in policy terms, the trip was an emphatic U.S. bow to the Saudis. Trump praised Saudi counterterrorism efforts without a word of criticism for their funding of Wahhabi extremists around the world. He offered the Saudis a massive $110 billion arms deal despite the fact that their brutal bombing of Yemeni civilians makes it potentially illegal. Trump even adopted the Saudi pretense that their Yemen campaign serves counterterrorism.

The president and two cabinet secretaries awkwardly joined a Saudi sword dance without evident concern for the country’s use of swords to behead people for offenses like political dissent, sorcery and being gay. No administration official criticized the kingdom’s abysmal human rights record whatsoever.

Trump saved his fire for Iran. As Iranian voters delivered a resounding victory for reformists eager to negotiate further openings with the international community, Trump criticized Iran’s animus towards the United States and Israel and aid to terrorists and extremist groups that “spread destruction and chaos across the region.” The hypocrisy of making these remarks alongside the Saudi rulers is remarkable.

The president’s kowtowing to Saudi Arabia has no benefits and big costs.

For decades, the Saudi regime has funded the establishment of mosques abroad that teach an extreme interpretation of Sunni Islam hostile to Jews and the United States, while often looking the other way when private Saudi donors and charities directly fund terrorist groups like al-Qaida and the Islamic State group. As a classified 2013 State Department cable explained, “donors in Saudi Arabia constitute the most significant source of funding to Sunni terrorist groups worldwide.” Hillary Clinton, in a leaked emails from 2014, wrote that Saudi Arabia was “providing clandestine financial and logistic support to ISIL and other radical Sunni groups in the region.”

By agreeing with the Saudis that Iran is the real source of the region’s problems and rewarding them with an arms deal, the Trump administration just encourages their malfeasance. That’s ironic for a “counterterrorism” mission. But the trip’s effect on Iran may be its biggest blow to U.S. security.

The trouble isn’t so much Trump’s criticism of Iran, which is partly accurate, though ill-timed, but the policy shift it reflects. The regional posture Trump is eager to restore - U.S. friendship with Saudi Arabia and antagonism toward Iran - always rested on shaky reasoning. Changed circumstances have now made that posture more or less deranged.

One reason for that is that Iran is on the U.S.-side in Iraq and Syria, where Iranian-backed militias, including Hezbollah are helping fight the Islamic State group. It’s true that these militias might threaten political reconciliation, but that’s more a reason to work with the Iranians than to shun them.

A second reason to shift stances in the region is change in energy markets. The conventional wisdom that said America should lash itself to the Sauds to ensure steady oil supply followed misapprehensions about global energy markets. Saudi production never turned on U.S. support, and their supply problems were not as big a threat to the U.S. economy as generally thought. Still, to the extent U.S. reliance on Saudi oil production drove the alliance, the shale revolution and increased U.S. energy production undercuts it.

Third, the Iran nuclear deal is a peaceful means to influence Iranian politics, but renewed U.S. antagonism could easily upend it. Iran is not a unified entity. Moderate forces have gained sway in Iran. But Trump’s more antagonistic approach only plays into the narrative of Iranian hardliners wedded to hostile policies. That’s a recipe for undermining the nuclear deal and letting U.S. hawks put us back on the path to war with Iran.

The Trump administration’s plunge to the Saudi side is an unfortunate return to the status quo. Hostility to Iran and friendship with Gulf States is a kind of Washington foreign policy dogma created by a history of hostility on one side and commerce on the other.

In the long term, the U.S. should distance itself from both sides. Our security doesn’t depend on extensive meddling on behalf of any side. For now though, the imperative is to stop kowtowing to the Saudis and antagonizing Tehran. The administration’s present course will only heighten the region’s instability and extremism. Things can always get worse.

John Glaser is director of foreign policy studies at the Cato Institute. Benjamin H. Friedman is a research fellow in defense and homeland security studies at the Cato Institute.

Who Said There Was Anything Fair about Trade?

Tue, 05/23/2017 - 15:35

Daniel R. Pearson

Donald Trump has repeatedly emphasized his preference for “fair trade” while casting doubt on the desirability of “free trade”. In his address to a joint session of Congress on 27 February, the president said: “I believe strongly in free trade, but it also has to be fair trade. It’s been a long time since we had fair trade.”

This may be news to the White House, but the world has never experienced a trading environment that has been entirely fair. What’s more, a country doesn’t need to worry about what other nations are doing in order to experience free trade - all it has to do is keep its borders open to imports.

First, unfairness. It’s generally accepted that life itself is unfair. Thus it should be no surprise that world trade also is unfair. Manufacturers and workers facing competition from imports are unlikely to see the situation as fair. Likewise exporting firms dealing with other countries’ import restrictions. Fairness and unfairness are very much in the eye of the beholder.

America has been dealing with trade unfairness since its early history. The Navigation Acts, imposed under English law, required all imports to be purchased from Britain. Tea from India or wine from France could enter the North American colonies only after it had cleared customs in England. Not surprisingly, many colonists found this policy to be both costly and unfair.

President Trump and other free trade skeptics fail to understand the true beauty of open markets.

Recent years have witnessed an abundance of unfairness in world trade. Japan has used regulatory policies to discourage importation of automobiles. The European Union has applied food safety standards not based on science to keep out genetically modified corn. China has used industrial planning and subsidies to encourage growth in its steel industry, thus leading to massive exports. The United States has imposed 388 antidumping or countervailing duty (AD/CVD) measures to restrict the importation of products that the Department of Commerce deems to be traded unfairly. And AD/CVD restrictions themselves are seen to be unfair by the people who pay the costs.

If trade often is not fair, can it still be beneficial? Building on Adam Smith’s earlier work, David Ricardo answered that question 200 years ago by articulating the concept of comparative advantage. Ricardo observed that it made no economic sense to pursue self-sufficiency, because no nation can do everything well.

Rather, countries should specialize in activities at which they have the strongest relative advantages, then trade to obtain other needed goods and services. Trade based on comparative advantage allows resources to be put to their highest-value uses, which helps to spur economic growth.

So, what is free trade? It does not depend on whether the policies of other countries are good or bad, or even whether they are fair. In fact, free trade is not about what other countries do at all. Rather, it exists when a country allows its own citizens the opportunity to buy and sell in the global marketplace without restrictions. People’s living standards rise when they have open access to millions of products, services, and customers available in the world market.

Judged by that criterion, the governments most committed to free trade are in Singapore and Hong Kong, cities with few natural resources that have become two of the wealthiest places on earth. Open markets played a major role in building that wealth.

Despite having an economy that is generally market-orientated, the United States can’t really call itself a free trader. It restricts imports through numerous tariffs, duties, quotas and other policies. From the perspective of individuals and businesses disadvantaged by these trade-distorting policies, they seem neither free nor fair.

Economists across the political spectrum agree that removing import restrictions always increases a country’s economic welfare. The gains to consumers are greater than any possible losses experienced by firms that compete against imports. In other words, the United States would be better off ending its tariffs and other import restrictions unilaterally, as Singapore and Hong Kong have so admirably demonstrated.

It’s time to rethink the trade policy status quo. Instead of maintaining trade restrictions to punish another country for selling low priced products, the strategy should be to eliminate import restrictions to take advantage of the other country’s foolishness. If a country is willing to transfer wealth to America by selling items at artificially low prices, perhaps it would be best just to buy them and say, “Thanks!”

But what about firms and workers that compete against unfair imports? Don’t they deserve help? Perhaps, so long as that help doesn’t involve trade-distorting subsidies or import restrictions. Governments may wish to encourage firms to restructure or to adopt new technologies. Workers who lose their jobs may benefit from some combination of unemployment compensation, educational support, and relocation assistance. The goal should be to facilitate the transition to new employment.

President Trump and other free-trade skeptics fail to understand the true beauty of open and competitive markets. A country that allows goods and services to flow freely across its borders creates a climate of opportunity for its citizens. Free trade is an approach to trade policy that a country adopts for its own benefit, regardless of what other nations may be doing. It is something we can and should do to help ourselves.

Daniel Pearson is a senior fellow in trade policy studies at the Cato Institute. He formerly served as chairman and commissioner of the U.S. International Trade Commission.

States Should Have Their Own Economic Visa Programs for Immigrants

Tue, 05/23/2017 - 14:44

Alex Nowrasteh

President Trump said that he wants a merit-based immigration system that “nations around the world, like Canada, Australia, and many others have.”

The good news for the president, then, is that there’s a bill he could get behind to create just such a system. Sen. Ron Johnson (R-Wis.) introduced a new bill earlier this month, S.1040, co-authored by Rep. Ken Buck (R-Colo.) and co-sponsored by Sen. John McCain (R-Ariz.), also known as the “State Sponsored Visa Pilot Program Act of 2017.” Their bill adopts a major component of the Canadian immigration system - visas sponsored by individual states, rather than the federal government.

This bill would create a federal economic visa that states get to regulate. The federal government stays in charge of admissions and security checks, while the state identifies the migrant and regulates their activity within its own state.

Nationwide one-size-fits-all migration laws aren’t working, so the federal government should let states try their hand at regulating economic visas.

Under this bill, states could create visas that don’t exist under the federal system. California might create a state visa for high-tech entrepreneurs while Wisconsin might create one for workers in the dairy industry. Michigan could attract investors for Detroit while Texas may want petroleum engineers. There could be hundreds of different economic visas adapted to local economies rather than just a handful of temporary federal visas for some professions.

How the state makes its own decisions is up to the state, but it would likely include input from stakeholders such as labor unions, businesses, community groups, and others. States would decide how long the visa lasts, how often it would be renewed, and these visas wouldn’t subtract from the number of visas available in other immigration programs.

This isn’t just an idea cooked up in Canada and copied in Washington, D.C.; there is real demand from the states. Colorado passed a bill to expand agricultural visas in 2008 in conjunction with the federal government. Utah passed a bill creating a state-sponsored guest worker visa program in 2011 and immediately asked the federal government for permission to run it. In 2015, Texas and California state legislators introduced numerous bills to create different state-level guest worker programs. The California bill passed its state Assembly and stalled in the Senate.

Many other state legislatures have passed bills, resolution, and introduced legislation to create a state-sponsored visa program. However, even the bills that became law failed to create a new visa because they had to ask the federal government for permission to run their programs. Permission wasn’t granted. Johnson and Buck’s state-sponsored visa bill solves that problem by creating a federal legal framework through which states can create their own state-sponsored visa programs under federal oversight.

The success of similar programs in Canada and Australia provide support for the American version. About 96% of the Canadian program’s migrants to Manitoba, British Columbia, Alberta, and Saskatchewan were employed within a year. They filled important niches in the labor market that made Canada’s program an integral part of its merit-based immigration system. Canadian provinces understand local economic conditions and which immigrants are demanded better than Canada’s federal government.

Most importantly, this reform would correct many of the failings and inefficiencies in our current immigration policy.

The current visa system is inflexible. The Johnson-Buck bill fixes that by allowing states to sign compacts with each other to share state-sponsored migrants. For example, the states of Washington, Oregon, and California could all share state-sponsored farmworkers who move with the harvest. Furthermore, any state-sponsored workers cannot be tied to a single employer.

Lastly, the Johnson-Buck bill actually incentivizes states, migrants, and employers to follow the law. If enough state-sponsored migrants break the visa rules then their numbers are automatically cut, migrants or their employers have to pay bonds that they would forfeit if they break the visa rules, and states aren’t allowed to participate. But if a state follows the rules, the number of visas allocated to it increases by 10% a year. A carrot-and-stick approach to immigration enforcement will be more effective than merely demanding compliance.

The Johnson-Buck bill is innovative for another two reasons. First, migrants on the state-sponsored visa can earn green cards through the already existing green card system. This bill doesn’t create a new path to green cards, but merely allows workers to use existing pathways similar to how H-1B visa workers can sometimes be sponsored for green cards. Second, states can allow current illegal migrant workers to apply for state-sponsored work visas. This is entirely up to state discretion, but it is vital for local economies to have the option to legalize parts of their workforce.

There is little competition between native-born American workers and foreign-born workers. The most negative economy-wide peer-reviewed finding is that American workers with less than a high-school education, who are about 9% of the workforce, saw their wages decline by 1.7% from 1990 to 2010 due to immigration while the wages for workers in other educational groups increased. New immigrant workers compete with other immigrants, not with native-born workers.

Nationwide one-size-fits-all migration laws aren’t working, so the federal government should let states try their hand at regulating economic visas. Federalism currently allows states to experiment with education, welfare, and drug policies with great success. The Johnson-Buck bill would allow them to experiment with immigration policy too.

Alex Nowrasteh is an immigration policy analyst at the Cato Institute.

Trump's 'Draconian' Budget Barely Dents Spending Increases

Tue, 05/23/2017 - 14:21

Chris Edwards

President Trump issued his first federal budget Tuesday, and critics have been quick to call the proposals cruel and heartless. It would cut federal spending by $3.6 trillion over the next 10 years, which does sound massive. But consider that total spending over that period is expected to be an unfathomable $53.5 trillion, and so Trump’s reforms would be a reasonable 6.7 percent reduction.

Critics like to call the cuts “draconian” — one non-profit even said it was “taking us back to the Stone Age” — without acknowledging that they are a drop in a bucket compared to the overall growth in spending in the past decade.

The 2007 federal budget was $2.8 trillion. In 2016, it was $3.85 trillion — an increase of 37.5 percent.

Overspending by the last occupant of the White House caused federal debt to roughly double from $10 trillion to $20 trillion. That was a cruel and heartless policy because it imposed huge costs on young Americans. Their prosperity is undermined by ongoing borrow-and-spend policies. We don’t know whether Trump will end up being more fiscally responsible than President Obama. But he does get credit for challenging the status quo in his budget and pursuing belt-tightening across a range of federal programs.

Many members of Congress are denouncing and dismissing the proposed cuts, but they are in denial of the large reforms needed to ward off a Greek-style financial crisis in this country.

The plan would cut Medicaid, the huge health program for low-income families. Medicaid spending exploded from $118 billion in 2000 to $389 billion today because there are few incentives for cost control in the program. State governments are rewarded for expanding the program with more federal aid, which makes no sense. The Trump budget proposes ways to cap each state’s federal aid payment.

The food stamp program is also on the chopping block. The program’s cost has soared from $18 billion in 2000 to $71 billion today. Yet demand for the program should have plunged in recent years, as the U.S. unemployment rate has fallen to 4.4 percent. The Trump budget would tighten work requirements and share program costs with the states.

The budget would reform Social Security Disability Insurance. This program has also grown excessively — from $56 billion in 2000 to $144 this year. A key problem is that SSDI discourages disabled Americans who can work, and often want to work, from entering the labor force. The Trump budget would change program rules to encourage work, while also cutting the program’s large fraud problem.

Trump targets the excessive benefits paid to federal workers. The Congressional Budget Office found that federal workers receive benefits 47 percent higher, on average, than comparable private-sector workers. Unlike the vast majority of private workers, federal workers receive both a defined-contribution and a defined-benefit pension. Trump’s budget would cut the latter.

The earned income tax credit is a spending program that has soared in cost from $32 billion in 2000 to about $70 billion today. The program is plagued by an error and fraud rate of more than 20 percent, and the budget would generate savings by tackling that waste.

President Trump campaigned against crony capitalism, and he is following through with cuts to farm subsidies. Farm aid skews toward wealthy households. In 2015 the average income of farm households was $119,880, which was 51 percent higher than the $79,263 average of all U.S. households. The budget would tighter the income limits and the per-farmer payments on the subsidies.

Finally, the Trump budget would cut a wide range of so-called discretionary programs. Many of these programs — such as education and housing subsidies — are properly state and local responsibilities. If the states believe that programs are crucial, they can pony up the funding themselves. There is no magic money tree in Washington, as the $20 trillion federal debt makes clear.

Trump’s budget would increase spending on defense, infrastructure, paid leave, and a few other items. But it would cut overall projected spending substantially. The plan would eliminate the budget deficit within a decade and would spur economic growth by encouraging more people to join the labor force.

Many members of Congress are denouncing and dismissing the proposed cuts, but they are in denial of the large reforms needed to ward off a Greek-style financial crisis in this country. We are headed in that direction with business-as-usual budgeting in Washington. The Trump budget is a challenge to Congress to start paring back our dangerously bloated welfare state.

Chris Edwards is editor of http://www.DownsizingGovernment.org at the Cato Institute.

General Election 2017: Forget the Outrage, Prime Minister Theresa May Should Not Have U-Turned on Social Care

Tue, 05/23/2017 - 09:51

Ryan Bourne

When is a U-turn not a U-turn? When it’s made by strong and stable Prime Minister Theresa May, of course, who insisted yesterday that her sudden pledge to cap the amount of money people will pay towards their social care was in no way a change of tack.

The Tory leader put on an impressive show of defiance, but is fooling no one. While the move is understandable, and will ease political pressure on her campaign, it is a shame she didn’t stick to her guns.

The original manifesto proposal was a reasonable conservative compromise to the UK’s social care dilemma, and a simple evolution of what has been the case for years.

While the move is understandable, and will ease political pressure on her campaign, it is a shame she didn’t stick to her guns.

Right now, individuals who move into a residential home finance their social care costs themselves by depleting their assets down to a floor of £23,250. Below that, the state pays.

But after the publication of a report by Andrew Dilnot in 2011, there has been well-orchestrated pressure to shift the burden of financing away from individuals to taxpayers. Campaigners wail about old people “losing their homes” as cover for the self-entitled demands of those set to inherit.

Dilnot’s solution to this perceived problem was to impose a total lifetime social care cost cap of £35,000 per individual. Once your social care costs exceed that, taxpayers would pay. The government had planned a somewhat higher £72,000 cap starting in 2020. But the major financial implication of capping at all was taxpayer protection of the “children’s” inheritances, particularly those of the very wealthy, who tend to stay in social care for longest.

In last week’s manifesto, the Conservatives rightly abandoned this overhaul, sticking with the “safety net” approach, rather than broader taxpayer insurance. They would equalize the means tests for residential and home-based social care, increase the generosity of the asset floor to £100,000 (from £23,250) and enable all to defer payment until death.

This looked like a fair (but still generous) compromise. It would maintain a significant safety net for an individual requiring social care, and his or her family. For the taxpayer, it prevents an expensive new commitment to an unfunded liability, important given demographic trends. And it entrenches the idea the first port of call for paying for care should not be the state, but individuals themselves.

Given most potential inheritees will themselves tend to be older with large assets and numerous options, including paying for care out of their income, renting out the parent’s home or using equity release, this is reasonable.

One can see why the left-wing nationalisers - who want to grow the NHS by integrating social care - would object, but what are the conservative gripes, aside from naked self-interest?’

Some say it is unjust because outcomes are determined by luck or chance. Have a heart attack or cancer, your family gets to keep the full estate. Suffer dementia for years and then pass away, and the assets are depleted to £100,000, eroding the inheritance.

But life itself is a lottery. Many factors which contribute to wealth accumulation owe something to luck. Homeowners have been lucky, for example, that policymakers have imposed tight planning laws that drive up house prices. Government cannot correct for all instances of luck and should not try.

Another objection is that this approach discourages saving. Some believe it will encourage people to spend, dish out their wealth through gifts earlier in life, engage in behaviour that will make quick death more likely, whilst those who do “the right thing” will be penalised.

Certainly there are some perverse incentives, but the instances of those living it up and then falling back on the taxpayer are the price you pay for a safety net. The alternatives are no safety net whatsoever or a hugely expensive nationalisation of care funding.

The policy was not perfectly constructed, but its motivations were rational, coherent, pro-individual freedom and fiscally sensible. While the wish and hope of having more money to inherit is understandable, it is not the taxpayer’s job to provide it, and the Prime Minister should not have bowed to pressure.

Ryan Bourne occupies the R Evan Scharf Chair in the Public Understanding of Economics at the Cato Institute in Washington DC.

The Trump Administration's Iran Policy Is Dangerous and Flawed

Tue, 05/23/2017 - 08:35

Emma Ashford

Donald Trump’s visit to Saudi Arabia was a huge success. The Saudis wisely pandered to the new president’s foibles, rolling out the red carpet for a lavish celebration. Even Trump’s speech on Islam, a potential minefield, was generally well-received by his hosts.

Yet while Trump’s speech — and his strong criticism of Iran — may have been pleasing to his Gulf States’ hosts, it should worry Americans. Pushing back on Tehran allows Trump to symbolically break with Obama’s policies and is popular among congressional Republicans, but it is also dangerous, with the potential to undermine the nuclear deal, slow the fight against Isis, and embroil the United States more deeply in parochial regional struggles.

Indeed, though Congress and the White House are at odds on issues from health care to Russia, they generally share a determination to ratchet up pressure on Iran, whether via sanctions, regional military support or arms sales. This pushback is often attributed to Iran’s ballistic missile testing: though the nuclear deal does not in fact obligate Iran to stop testing, policymakers have pushed for a US response, arguing that the tests violate the spirit of the agreement.

Trump’s strong criticism of Iran may have been pleasing to his Saudi Arabian hosts, but it should worry Americans.

More broadly, congressional Republicans and the White House have consistently portrayed the Obama administration as ‘soft’ on Iran, arguing that the nuclear deal has allowed Iran to destabilize the region. During the Republican primaries, most candidates called for the nuclear deal itself to be overturned.

Thankfully, Trump’s cabinet appointees — and the president himself — have since shied away from unilaterally ending the nuclear deal. Yet most express support for a more assertive policy towards Iran, including Secretary of Defense James Mattis, who has described Iran as “the biggest destabilizing force in the Middle East.”

And while Trump’s first National Security Advisor Mike Flynn may have departed the administration, the Riyadh speech appears to echo many of the ideas expressed in Flynn book, in particular conflating Iran with Isis and al-Qaida.

Unfortunately, the new administration’s approach to Iran is fundamentally flawed.

Take Congress’ perennial favorite policy — sanctions — as an example. In response to the missile tests, the Trump administration has already added to existing sanctions lists. But a bill currently working its way through the Senate would be much more impactful, giving the president broad authority to sanction those who deal with Iran’s missile program, and potentially applying broad terrorism sanctions to the Iranian Revolutionary Guard Corps (IRGC).

Yet most of the proposed sanctions would likely be more symbolic than practical. And while applying sanctions to the IRGC could impose economic costs on the Iranian economy, it carries substantial risks. Adding new sanctions, even if they do not technically violate the terms of the Iran deal, could strain the deal, driving a wedge between the United States and our European allies, who are broadly satisfied with Iran’s Joint Comprehensive Plan of Action compliance.

The results of the Iranian election on Friday confirm that the Iranian people continue to support the deal and seek increased engagement with the outside world. The nuclear deal itself is hardly perfect, but it prevents Iran from developing a nuclear weapon; failure of the deal would be a step backwards. Worse, if new sanctions cause the deal to fail, it is the United States that will appear culpable to the international community.

The Trump administration also appears to be seeking a regional pushback against Iran. On a recent trip to Riyadh, Defense Secretary Mattis discussed Yemen, telling the press “We’ll have to overcome Iran’s efforts to destabilize yet another country.” Though he went on to reference a United Nations process, off-the-record defense officials say that the administration is seriously considering providing additional military support and weaponry to the campaign in Yemen.

The administration has signaled its support for Saudi Arabia’s assertive anti-Iranian foreign policy in other ways too: Trump’s visit to Saudi Arabia included the announcement of a multibillion dollar arms sale, including a THAAD battery like the one recently deployed to South Korea.

Again, however, these steps are primarily symbolic and carry risks. Though Iran has sent some weapons to Yemen’s Houthis, the group is not truly an Iranian proxy like Hezbollah. Getting the US military more deeply involved in Yemen’s civil war — helping the Saudis with their assault on Hodeidah port, for example — would only bog down American forces, worsen Yemen’s dire humanitarian situation, and cost Iran little.

Raising tensions with Iran in Yemen and elsewhere also risks slowing the anti-Isis campaign in Syria, one of the few places we share a common goal with Iran. It could even place US troops in Iraq and other war zones in danger of retaliation from Iranian-linked Shi’ite militia groups in that conflict.

Ultimately, despite the president’s remarks in Riyadh, neither he nor congressional Republicans appear to have a coherent strategy towards Iran. The desire to appear tougher than Obama on Iran is understandable, but the administration’s approach risks collapsing the Iran deal and undermining American interests elsewhere in the region. Hardly a winning strategy.

Emma Ashford is a Research Fellow in Defense and Foreign Policy Studies at the Cato Institute.

Washington's Shameful Fondness for Saudi Arabia

Tue, 05/23/2017 - 08:13

Ted Galen Carpenter

President Trump’s state visit to Riyadh and his actions there should deeply trouble all Americans. The president not only inked a deal to sell the Kingdom $110 billion in U.S. armaments, but he greatly intensified the overall security relationship. He proposed a Middle East version of NATO—a thinly disguised, Saudi-led alliance against Iran—and indicated that there would be strong U.S. backing for that association. Trump also celebrated the establishment in Riyadh of a global center to combat extremism.

It is difficult to justify those measures on the basis of rational U.S. security calculations. It is impossible to do so on the basis of any decent moral considerations. Unfortunately, President Trump is perpetuating and intensifying an extremely questionable bilateral relationship that has gone on for decades.

Unfortunately, President Trump is perpetuating and intensifying an extremely questionable bilateral relationship that has gone on for decades.

Saudi Arabia is an exceptionally duplicitous power that cannot be considered a U.S. ally, much less a friend. Indeed, given the Kingdom’s track record of promoting Islamic radicalism, building a center to combat global extremism in Riyadh is akin to having placed a center to combat fascism in 1930s Rome or Berlin. As Malou Innocent and I document in our book, Dubious Partners, the Saudi regime abets extremism in multiple ways. Riyadh has funded schools (madrassa) in various Muslim countries for decades to promote the Wahhabi religious cult that has intimate ties with the royal family. Wahhabi clerics indoctrinate youth in a most virulent anti-Western perspective.

Numerous analysts have noted that 15 of the 19 hijackers on 9-11 were Saudi nationals, but that was hardly the extent of Riyadh’s culpability. Some Saudi officials had at least a disturbingly tolerant relationship with Al Qaeda for years before those terrorist attacks. And the promotion of armed extremist groups did not begin or end with that association. As early as the 1980s, Riyadh made a concerted effort, in collusion with Pakistan, to make sure that the bulk of the financial and military assistance that Washington was providing Afghan insurgents resisting the Soviet occupation went to the most extreme Islamist factions. More recently, Riyadh backed extremist forces trying to unseat the governments of Iraq and Syria. Some of those groups eventually coalesced to form ISIS.

In terms of moral considerations, Washington’s de facto alliance with Saudi Arabia is even less justified. Riyadh has a dreadful human-rights record, not only treating women and religious minorities in a shabby fashion, but routinely imprisoning and executing even peaceful critics of the regime. The Saudi-led war in Yemen has been characterized by deliberate attacks on civilians and an assortment of other war crimes, including the use of banned cluster bombs. Washington’s willingness to endorse Riyadh’s military campaign, and even provide logistical support to it, makes America an accomplice in those atrocities.

Some of the U.S. emphasis on close ties with Saudi Arabia reflects the ongoing American obsession with viewing Iran as a mortal threat to stability in the Middle East. That simplistic perspective misconstrues the nature of a Sunni-Shiite struggle for dominance in the region. Washington has always favored Saudi Arabia in that contest, but Trump’s actions makes the bias far more pronounced. That is a mistake on both a strategic and a moral level. There are far more Sunnis than Shiites in the Middle East, and thanks to Saudi Arabia, there are also even more Sunni extremists than Shiite extremists. The United States should not have a dog in an Iranian-Saudi fight, but if the Trump administration felt it had to pick a side, it probably chose the wrong one. Fostering an Arab NATO puts America in the middle of not only the current Sunni-Shiite struggle, but even more long-standing Arab-Persian tensions. Moreover, tilting toward the stronger side is counterproductive if Washington’s goal is greater stability. It is as myopic as if Richard Nixon and Henry Kissinger had decided to tilt toward the Soviet Union rather than China in that bilateral feud.

Iran is hardly an admirable power, but the U.S. refrain that Tehran is the chief state sponsor of terrorism is overdone. Indeed, given Riyadh’s track record, Saudi Arabia may be a stronger candidate for that title. Domestically, Iran is certainly a repressive society, but it does have some features of openness. Women have a better status there than in the Saudi kingdom, and there are competitive (if constrained) elections featuring candidates with different views. None of that is allowed in Saudi Arabia.

Trump and his advisers seem oblivious to all of this. A key illustration came when Secretary of State Rex Tillerson held a joint press conference with the Saudi foreign minister. All American journalists (who might ask the Saudi official probing questions) were excluded. Tillerson spent much of the session condemning Iran for supporting terrorism and practicing repression at home. The secretary admonished the Iranians to withdraw their backing from terrorist groups and move toward greater democracy and freedom domestically.

To criticize Iran for its domestic failings while on the same platform with an official of a totalitarian theocracy was appalling. Saudi Arabia makes Iran, for all its faults and repressive aspects, look like a Jeffersonian democracy. Even if Tillerson had no sense of shame, he should at least have had a sense of irony in lecturing Tehran in the setting he chose.

The close U.S. association with Saudi Arabia has long been a stain on America’s honor. Trump and Tillerson have deepened that stain.

Ted Galen Carpenter, a senior fellow in defense and foreign policy studies at the Cato Institute, is the author of 10 books, the contributing editor of 10 books, and the author of more than 650 articles on international affairs.

The High Cost of Not Paying Your Bills: Puerto Rico's Bankruptcy Bodes Poorly for Its Future

Tue, 05/23/2017 - 07:52

Ike Brannon

Earlier this month Puerto Rico essentially declared bankruptcy, marking its latest attempt to climb out of its fiscal black hole. However, this will not be any sort of panacea, and this drastic step — which is the largest government bankruptcy in U.S. history — could leave the island in a spot just as problematic as it is in today.

Bankruptcies are prone to being messy, complicated and contentious, whether it’s a person, company or municipality that’s declared bankruptcy. However, there are a few rules set forth in the bankruptcy law that delineate which debtors get paid back first and who goes to the end of the line.

The first rule is that debtors who lent money backed by some sort of collateral, or with an explicit promise that their claims take precedence, get their money before the rest. For instance, homeowners can’t get out of their mortgage via bankruptcy because to get the mortgage they pledge their house as collateral. Companies often pledge certain assets to back their loans as well.

In the last few years, however, there has been a concerted attempt to circumvent such practices for political expediency.

Congress cannot simply walk away from this just because it passed legislation.

For instance, in the Chrysler bankruptcy in 2009 the Obama administration applied no small amount of pressure to enable the UAW pension funds — which were low on the repayment list — to have their debts paid back at the expense of the bondholders, who lent money under terms that included an explicit provision that they would be paid back first.

When the city of Detroit went bankrupt, the administration again interceded to benefit the city’s current and future pensioners at the expense of the secured creditors, who received a haircut on their promised repayments.

Puerto Rico is currently $73 billion in debt, which is close to 100% of the island’s annual output. It owes a sizeable portion of this to the island’s current and future pensioners: Puerto Rico’s pension fund is woefully underfunded. It also owes billions to general obligation bondholders — whose investments are guaranteed by the island’s constitution — and to COFINA (also known as Puerto Rico Sales Tax Financing Corp.) bondholders, who hold debt explicitly backed by sales-tax revenues.

The government wants to greatly reduce its payments to these creditors — and others — in order to avoid further spending reductions and to minimize necessary reductions in pension benefits, among other priorities. While such actions may appear to be a reasonable and fair outcome, the reality is that setting aside established law and precedent has long-term ramifications that go beyond Puerto Rico.

This is problematic because there are numerous other states — my home state of Illinois comes to mind — that are also in dire financial straits. The Prairie State has been effectively running a deficit for at least a decade and is burdened by a public pension that will likely go bust the next time there is a recession.

Illinois also has taken a page out of the Puerto Rico playbook by beginning to demonize its bondholders as greedy investment bankers profiting off the misery of others.

While such rhetoric plays well with the voters — and that is to whom Puerto Rico’s new governor, Ricardo Rossello, is clearly playing — it makes escaping the island’s financial predicaments more problematic. Once the Puerto Rican government and its oversight committee reach some sort of arrangement for moving the island forward, it will need to re-engage with capital markets to borrow money — whether it be for capital improvements, short-term credit arrangements, or something else.

If Puerto Rico spends the next year denigrating its lenders and trying to break contracts, few investors will want to take a chance lending money to the island again. Put simply, the market cannot credibly believe future repayment promises no matter what steps Puerto Rico takes — at least not until it returns to economic expansion and solvency.

What’s more, if Puerto Rico successfully breaks these covenants, municipal bondholders in Illinois — and elsewhere — are going to perceive that their investments now contain much more risk than they had previously perceived, and will demand a higher interest rate to take it.

In short, Puerto Rico’s shenanigans may hasten Illinois’ insolvency.

The reality is that the island’s government never negotiated in good faith with its debtors, as PROMESA requires. It postponed holding talks until the stay on litigation was about to expire, and then proposed that non-Puerto Rico Electric Power Authority bond owners would take up to a 77% haircut, an offer that they knew would be rejected.

What’s more, the rhetoric that this is a fight between Wall Street bankers and the poor pensioners is a crock: The holders of Puerto Rico bonds are pensioners across the country (and some who happen to be Puerto Ricans) who put their savings into an investment they assumed was safe.

Puerto Rico should be forced to negotiate with their creditors in good faith before giving them access to a Title III bankruptcy, and the interests of the fifty states in the union should be considered before it is permitted to blithely stiff its creditors. Congress cannot simply walk away from this just because it passed legislation.

Ike Brannon is a visiting fellow at the Cato Institute and president of Capital Policy Analytics.

Take a Hike

Mon, 05/22/2017 - 15:21

Ike Brannon

For politicians, giving away money is fun, but telling others to give away money is even better. That’s what the Washington, D.C., government is contemplating as it debates a new rule that would have employers subsidize people who neither take the Metro nor drive to and from work. They want to give a little something to the people who walk or bike to work.

Right now the federal government allows companies to provide up to $255 in parking benefits a month tax-free to employees; a similar amount can be provided tax-free to people who take mass transit. The proposal being considered would have companies give a similar sum to people who walk or bike to work. Since there’s no federal tax break for these activities, these incentives would, in effect, be cash payments to simply say “thank you for walking.”

Here’s a general rule: If we subsidize everything, we are effectively subsidizing nothing. It is of course true that the federal government should not be giving tax breaks for parking: In general, in-kind compensation should never be incentivized over cash compensation (look at the mess that the tax break for employer-provided health insurance created) but this is especially true for an activity that has no salutary benefit for society at all. Like driving to work.

Mass transit is already subsidized in the U.S., so additional tax subsidies don’t make a whole lot of sense either-unless we look at it in the context that we are already giving a tax break for parking.

A proposal by the D.C. city council to pay pedestrians who walk to work exposes the idiocy of subsidizing any kind of commuting.

Since walking to work doesn’t add to congestion on the streets or on our mass transit systems we should probably favorite it most of all, but there’s still no strong reason to subsidize it. Unless, that is, we consider the sad reality we’re already subsidizing all other forms of transit.

The obvious answer to this conundrum is that the federal government should scrap the tax break for employee parking and mass transit. Since the tax reform effort being contemplated by Congress and the White House will be looking for every single dime possible to pay for possible rate reductions, this is as good a time as any to end this benefit.

The Transit Center, a research institute devoted to transportation research, estimates that getting rid of the parking and mass transit subsidies would save over $100 billion over the next decade-enough to fund a portion of any Trump infrastructure plan to boot.

My first boss, a kind man by the name of John Kerrigan, was a terrible public speaker, and whenever he was obliged to give a talk he would utter two minutes of trite banalities before pausing to recognize one group of people in the audience and asking them to stand, then another, and another until he had everyone standing and clapping for themselves. He would then leave the stage.

The D.C. walking subsidy strikes me as something he’d appreciate.

Ike Brannon is a former economist in the White House Office of Management and Budget and fellow at the Cato Institute.

How Would Corporate Tax Reform Benefit Workers?

Mon, 05/22/2017 - 07:56

Ike Brannon

Reducing the tax on capital income by reducing the corporate tax rate would undoubtedly result in an increase in capital investment, most economists would agree. Bob Lucas, the nobel-prize winning economist at the University of Chicago, once remarked that reducing or eliminating taxation on capital income was the closest thing he has ever seen to a free lunch, in terms of the concomitant increase in investment and economic growth that would create.

However, in the debate over the current tax reform, few people have discussed the impact that a lower corporate tax rate would have on the labor market. In a research paper forthcoming in Tax Notes, Andrew Hanson of Marquette University and I look at the empirical literature that examines the impact that corporate taxation has on the labor market—an aspect of tax reform that is not as well understood.

Put broadly, there are two different channels through which a lower capital tax rate can impact labor market decisions. The first is via the substitution effect: a lower capital tax rate makes plant and equipment cheaper, so firms have an incentive to substitute capital for labor.

A lower corporate tax rate isn’t a panacea, but it would make the U.S. economic environment more competitive and boost investment.

But there is also the scale effect: reducing the cost of capital lowers the effective cost of doing business, so firms increase their scale of operations. As a result, businesses invest in more capital and labor.

The essential question is which effect dominates. Andrew and I reviewed the economic studies pertinent to this question and the evidence suggests that a lower corporate tax rate boosts employment and wages.

Put briefly, there are two different strands in the literature pertinent to this question: One strand studies the question via different corporate tax rates at the state level while the other looks at corporate tax rate differences across countries.

We believe that the state corporate tax rate differences are most relevant for understanding how a corporate tax rate reduction at the federal level may impact labor markets, because the economic environment is—of course—the same as it would be for federal rate changes.

The research is by no means unanimous of course, but the most relevant studies by our account (most notably by William Harden and William Hart) find that a one percentage point increase in the corporate tax rate would increase unemployment by .2%-.5%. A 10-20% reduction in the rate—the range that the Trump Administration has proposed— would translate to a 2%-10% boost in long-run employment.

The impact on income is of a similar magnitude: The studies we find most compelling (by Alexander Ljungqvist and Michael Smolyansky, as well as Harden and Hart) suggest that a one percentage point reduction in the corporate income tax would boost income by .3% to .6%; for the 10-20% rate reduction on the table, that translates to a long-term boost in income of 3%-12%.

The most interesting research that uses international data looks at how corporate tax rate differences impacts foreign direct investment and the location of international firms.

Work by Johannes Voget suggests that the location of multinational corporations is quite sensitive to the corporate tax rate, and that an increase in repatriation taxes of 10 percentage points boosts the number of firms relocating by 2.2%.

Research by Harvard economist Mihir Desai suggests that workers bear somewhere between 45% and 75% of the burden of the corporate tax rate, meaning that high corporate rates reduce employment and wages, harming workers more than consumers and shareholders.

Taxing corporate income is a very expensive way to collect income or to achieve tax rate equity in terms of foregone economic growth. We can do better.

A lower corporate tax rate isn’t a panacea, but it would make the U.S. economic environment more competitive and boost investment. Both would benefit the American worker.

Ike Brannon is a visiting fellow at the Cato Institute and president of Capital Policy Analytics, a consulting firm in Washington DC.

Howard County's Anti-Sugar Campaign Is No Example for the Rest of the Country

Mon, 05/22/2017 - 07:41

Walter Olson

Many public health advocates feel you need to be nudged for your own good, by law if necessary, into making better choices about what to eat and drink. Have you heard about their latest triumph, the Howard County Miracle?

NPR reported on it in March: “A three-year campaign in Howard County, Md., aimed at curbing the community’s sweet tooth led to a significant decline in sales of sugary drinks.” The public-private effort “led to a 20 percent decrease in sales of soda and a 15 percent decline in fruit drink sales between January 2013 and December 2015,” as reported by local grocery stores.

In the past, not all government efforts to change the public’s sipping habits have gone smoothly. New York Mayor Michael Bloomberg’s battle against supersized drinks was widely joked about and eventually struck down in court. Philadelphia’s new soda tax has driven many residents to shop at suburban grocery stores.

Yes, the plan probably had some good elements with the bad. But it sowed divisiveness, put government resources to improper purpose, and rested on a premise of frank paternalism.

But the Howard County experience “provides a road map for other communities to reduce consumption of sugary drinks,” according to one of its many favorable write-ups.

So what happened in Howard County?

It began with the sort of public-private partnership where the exact line between private and public can seem to blur. The Horizon Foundation got its start in 1998 when Johns Hopkins acquired the county’s public hospital and sweetened the deal with a $70 million endowment to advance the health of county residents. That combination of hefty funding and vague mission allows Horizon, along with supporting local endeavors in fields from geriatrics to mental health, to march off in directions pretty much of its choosing.

Horizon enjoyed extensive local political connections, and county officials were glad to team up with it. One distinctive thing about the resulting campaign was how many different channels it got into: social media, TV and outdoor advertising, visits to pediatricians urging them to counsel patients about childhood obesity and beverage choices, and much more.

At the same time, the government actors moved forward on policy ideas to restrict beverage availability in schools and public property such as parks, as well as vending machines. Howard County had no authority under state law to impose a soda tax, so that idea was out. But the constant activity on multiple fronts helped build momentum and, perhaps, roll over what scattered opposition there was.

Assuming the steep drop in beverage sales to be accurate, it’s hard to know what the ultimate impact was on calorie intake. (Dieters shooed away from one source of calorie intake have been known to turn in solace to another.) It’s also hard to know to what extent the effect will last now that the campaign has ended.

What we do know is that Howard County is not at all statistically typical of the United States.

It routinely figures in lists of the ten highest-income counties in the country, on best-places-to-live lists, and on lists of the best public schools. It has been named the nation’s healthiest county. Its largest community, Columbia, was founded in 1967 as a planned city (“The Next America!”) and from the start has attracted residents interested in social progress, self-improvement, fitness and the outdoors, and other causes. While racially diverse it is not notably economically so, with a heavily white-collar workforce and low poverty rate. Its electorate is rich in independent “swing” voters who keep up on the news. The most popular bumper sticker representing the county carries the slogan “Choose Civility.” Admirable? In many ways yes. Typical? No.

One ploy used in the campaign to get residents’ attention was for cheerful young people to wander public parks going up to complete strangers who they saw drinking high-calorie beverages and in what NPR describes as a “playful, polite” way, offer them a bottle of something else with few or no calories. Let’s just say this technique may not scale to a full national roll-out.

In one curious way, however, the campaign broke sharply from the reasonable tone for which the county is known. Along with other, less controversial messages, the campaign designed both advertisements and media-friendly live demonstrations attacking soft-drink companies as heartless villains, and vilifying their executives personally. The ads ran in the pricey Baltimore market, most of which reaches viewers outside Howard County. These ads and demonstrations followed the model pioneered in “tobacco control” campaigns, and sporadically deployed since by public health campaigners against the vendors of fast food, beer, salty snacks, and ice cream.

Need it be pointed out this is ugly stuff, which sits uncomfortably with the “Choose Civility” stickers?

Now, a private nonprofit answerable to not much of anybody is perfectly free to concoct “Two Minutes Hate” stunts attacking fellow citizens. It’s far more doubtful that a local government should be lending its imprimatur to such efforts. And here’s where the blurring of private-public lines comes in handy: if a message is too hot, it can be assigned to the private side of the partnership. Likewise, the private message money can help promote the passage of legislation, which is kind of like lobbying, even as the public expenditures support the private messaging, and so on — ‘round and ‘round in a convenient circle.

It’s not as if Howard County Unsweetened, as the campaign was called, escaped an eventual pushback rooted in public opinion. As things got underway, then-County Executive Ken Ulman, who later ran for lieutenant governor as Anthony Brown’s running mate in an ill-fated campaign, made the cause his own. Ulman’s appointees put county government resources at Horizon’s disposal.

But Ulman’s successor, Republican Allan Kittleman, elected in 2014, tapped into voter sentiment that the paternalism had gone too far: “I trust Howard County residents and employees to make their own decisions about what to eat.” On taking office Kittleman overturned the parks policy, lest it threaten to banish the sorts of ordinary refreshments that families were used to having available at Fourth of July festivities and other community celebrations.

Yes, the vaunted Howard County plan probably had some good elements with the bad. But it sowed divisiveness, put government resources to improper purpose, and rested on a premise of frank paternalism. When it arrives in your community, you might want to respond as you might to a second pitcher of cola — by pushing it away with a polite, “no thanks.”

Walter Olson is a senior fellow at the Cato Institute.

Repeal Minimum Markup Law

Mon, 05/22/2017 - 07:32

Ike Brannon and Will Flanders

At a time when Wisconsin is considering hiking its gas tax, it’s a good time to consider how Wisconsin law keeps gas prices (and the prices of other goods) artificially high. It’s called the “minimum markup” law, or the Unfair Sales Act, and it ensures that prices for products such as gas, alcohol, tobacco and prescription drugs don’t go too low. The findings of a new study we co-authored dispels the myths surrounding the law and argues that it should be repealed.

A Depression-era relic, the minimum markup law seeks to protect Wisconsinites from “cutthroat competition,” whereby a gas station owner could crush his competitors by charging a price so low that the other stations go broke trying to match him. Once the competition has been dispatched, the theory goes, the remaining survivor can charge monopoly prices and gouge consumers indefinitely.

It’s time for full repeal of this vestige of the Great Depression and allow a freer market to flourish in Wisconsin.

To prevent this, gas stations and other retailers are required to “markup” their merchandise beyond what they may wish to charge. In the case of gas stations and tobacco sellers, competitors are allowed to sue anyone violating the Unfair Sales Act for damages, increasing the likelihood of complaints.

Similar and equally archaic laws remain in place in a number of states throughout the country. Fifteen states, including Wisconsin, have minimum markup laws that apply to most retail goods, and an additional eight states have such laws applied specifically to gasoline.

But is there really any evidence that “cutthroat competition” in the states that do not have minimum markup laws is having the effect claimed? To answer this question, the Wisconsin Institute for Law & Liberty examined nationwide data on the number of small businesses and gas stations in each state. After including a number of control variables that could plausibly impact the number of retailers — such as the condition of the state’s economy and the demand for gasoline in each state — we found no evidence that minimum markup laws increase the number of small businesses or gas stations. In other words, there do not appear to be fewer small businesses in states that do not have such laws, something one would expect to see if cutthroat competition resulting in the loss of small businesses was in fact a real world problem. What instead affects the number of retailers are common-sense factors such as the quality of a state’s economy.

The reason why the “protection” of minimum markup laws doesn’t result in an increased number of small businesses is that cutthroat competition doesn’t really work. If a competitor succumbs to such competition, his gas station — and the pumps and infrastructure — remain intact. This allows another competitor to enter the market, meaning that the cutthroat competitor simply will be faced with new competition and will not be able to earn the extra profit that would have made the scheme worthwhile. Economists refer to this phenomenon as “contestable markets.” So unless the cutthroat competitor can keep new businesses from entering the market, he will not reap the benefits of monopoly pricing.

If the Unfair Sales Act does nothing to increase competition, then it is nothing but a mechanism to transfer money from Wisconsinites to businesses through artificially inflated prices. There is no empirical evidence that it serves to protect competition, and the fact that states without such an archaic law have as many small businesses as other states ought to confirm its irrelevancy.

Two proposals in the Legislature — the Assembly GOP tax plan and a bill by state Sen. Leah Vukmir (R-Brookfield) — feature partial repeal of the minimum markup law. This is a start. But the time is long past for a full repeal of this vestige of the Great Depression and allow a freer market in Wisconsin to flourish. Consumers would benefit through lower prices and, as our study shows, small businesses are unlikely to be hurt by predatory pricing.

Ike Brannon is a former economist in the White House Office of Management and Budget and fellow at the Cato Institute. Will Flanders is research director at the Wisconsin Institute for Law & Liberty.

Donald Trump Visits Riyadh, Putting Saudi Royals before American People

Sat, 05/20/2017 - 08:04

Doug Bandow

President Donald Trump is taking his first overseas trip. After once accusing Saudi Arabia of blowing up the World Trade Center, he arrived in Riyadh bearing gifts: $110 billion in arms sales, enhanced aid for Riyadh’s brutal war in Yemen, and increased political support for the royal regime.

The U.S. alliance with Saudi Arabia never reflected shared values. The royals run what is essentially a totalitarian state, respecting neither political nor religious liberty. The regime exports its brutal values, subsidizing intolerant Islamist teachings worldwide and intervening militarily in its neighbors.

Nevertheless, the Kingdom of Saudi Arabia long was home to the world’s greatest oil reserves, giving it ready cash to spend and invest. So Washington enthusiastically embraced the regime. Despite previously criticizing the Saudis for relying on America for their defense, President Trump obsequiously addressed the monarchy. Secretary of State Rex Tillerson declared that “President Trump and members of his cabinet agreed that the U.S.-Saudi partnership should be taken to new heights.”

The two countries should cooperate when their interests coincide. But that doesn’t justify making Riyadh a defense ward of America. Especially when at the KSA’s behest the U.S. is helping kill innocent civilians in neighboring Yemen, who have done nothing against America. So far Washington has supported Riyadh’s war with some $20 billion in arms and about 2000 air refueling operations, as well as targeting information.

U.S. intervention is making Americans less safe. Thomas Juneau of the University of Ottawa observed that the conflict: “is at its root a civil war, driven by local competition for power, and not a regional, sectarian or proxy war.” But Riyadh’s aggressive war turned a local conflict into a regional sectarian struggle, drove Yemenis toward Iran, and encouraged a revival of al-Qaeda in the Arabian Peninsula, or AQAP, which now controls an estimated third of the country. Riyadh’s aggression also is morally appalling, helping kill innocents for no good geopolitical reason.

Yet the Trump administration is considering backing a plan by the United Arab Emirates to retake the Yemeni port of Hodeida. Seizing and securing the port would be more difficult than suggested—the conflict so far has highlighted the ineffectiveness of Saudi forces. Moreover, humanitarian analysts warn that the operation could result in a humanitarian catastrophe since most of Yemen’s humanitarian aid goes through Hodeida. Jeremy Konyndyk, formerly at USAID, warned that “this operation would take a country that’s been on a knife’s edge of famine for the past two years and tip it over.”

Expanding Washington’s involvement also would increase America’s stake in the conflict without much improving the likelihood of a positive outcome. A top administration official told the Washington Post that ending present restrictions might be seen as “a green light for direct involvement in a major war … We can’t judge yet what the results will be.” The consequences almost certainly would be disastrous. Of course, the Saudi royals are pleased with Washington’s willingness to underwrite tyranny and aggression, and gave President Trump—who once accused a Saudi prince of trying to “control U.S. politicians with daddy’s money”—an extravagant welcome.

Why is President Trump doubling down on an unnecessary Middle Eastern war on behalf of an authoritarian regime guilty of promoting Islamic radicalism?

Yemen is an ancient land at the southern tip of the Arabian Peninsula. The Yemeni people never welcomed outside rule and made any would-be conqueror pay a price. Two states emerged when independence was achieved during the 1960s. They suffered internal conflict, fought each other, and suffered from foreign intervention, including from Saudi Arabia. The two Yemens eventually joined in 1990, but the reunited country spent most of its recent history in conflict and war. At one point Riyadh, now loudly denouncing Iranian meddling, backed southern secessionists.

Until recently America’s main security concern was the rise of AQAP, perhaps the terrorist group’s most active affiliate. To suppress this force the U.S. relied on long-ruling Ali Abdullah Saleh, who was ousted in 2012. The ensuing national dialogue failed to deliver a political solution. He then united with the Houthis, also known as Ansar Allah (“Supporters of God”), a quasi-Shia political movement which battled him when he was in power.

Together in September 2014 they ousted his successor, Abdrabbuh Mansur Hadi, viewed as friendly to neighboring Saudi Arabia. This game of musical chairs in Sana’a was of little interest to Washington, but the KSA wanted pliant leadership in Yemen. In March 2015 Riyadh, backed by nine Arab nations, intervened in the name of confronting Iran. Yousef al-Otaiba, UAE’s ambassador to the U.S., declared: “Iran must not be allowed to create a Hezbollah-like proxy in Yemen through the Houthis.”

But area specialists uniformly dismiss such self-serving claims. The religious identification between Iran and the Houthis always was limited. The latter are Zaydis, a liberal, Shia-related sect, which some observers say is best treated as a tribal militia. In some areas Zaydis appear closer to Sunnis than Shiites.

The relationship between Iran and Houthis always has been loose at best. Noted Adam Baron of the European Council on Foreign Relations: “It’s not as if the Houthis were created by Iran, and further, it’s not as if the Houthis are being controlled by Iran. This is a group that is rooted in local Yemeni issues.” Juneau said simply: “the war in Yemen is driven by local grievances and competition for power among Yemeni actors.” Yezid Sayigh, of Beirut’s Carnegie Middle East Center, criticized “propaganda about Iranian expansionism in Yemen.”

Houthis revolted against the Yemeni government, then headed by Saleh, in 2004; in 2011 they joined demonstrations that led to Saleh’s resignation the following year. But then Houthis joined with Saleh to confront his successor, Hadi, leading to the latter’s resignation in late 2014.

Iran had little to do with these events. Saleh wanted to retake control and Houthis wanted more influence, while Hadi wanted to retain control. This kind of local dispute fueled decades of conflict in Yemen. In fact, U.S. intelligence believes that Tehran counseled against the Houthis’ Sana’a takeover.

While Houthis accepted Iran’s aid, the UN figures that Tehran began transferring weapons to the Houthis in 2009, back when they were fighting then-President Saleh, now their uneasy ally. Since then most of their weapons came from the Yemen’s already abundant supplies and military units which had remained loyal to Saleh.

Saudi Arabia’s aggression left them with little choice but to look to Tehran for additional assistance. Noted Kevin L. Schwartz of the Library of Congress: “Only after the onset of the Saudi-led campaign did the arming of the Houthi rebels by Iran increase.” And the latter has mainly involved training and ground weapons, along with modest missile deliveries. Such efforts pale in comparison to Saudi Arabia’s extensive air war.

Houthis have not turned decision-making over to Iran. Gabriele von Bruck at London’s School of Oriental and African Studies concluded “I don’t think the Iranians have influence in their decision-making. It’s not a relationship like that between Iran and Hezbollah.” Obama NSC spokeswoman Bernadette Meehan said two years ago: “It remains our assessment that Iran does not exert command and control over the Houthis in Yemen.”

Contrary to the infamous claim of an Iranian parliamentarian, Tehran does not control Sana’a (nor, in fact, Baghdad, Beirut, and Damascus, the other three capitals mentioned). Instead, noted Juneau, “Tehran has come to recognize that a minor investment in Yemen can yield limited but interesting returns,” most obviously forcing the Saudi royals to spend much more for little benefit.

Why should America get involved? Former Secretary of State John Kerry claimed that the shipment of Iranian weapons to Yemen was “not just a threat to Saudi Arabia, it is a threat to the region, [and] it is a threat to the United States.” But Houthis struck beyond Yemen’s borders only in response to Saudi aggression backed by America. Defense Secretary Jim Mattis complained of “Iranian-supplied missiles being fired by the Houthis into Saudi Arabia,” but they commenced such actions after Riyadh attacked and killed Yemenis. Saudis sowed the wind by internationalizing the conflict; now they are reaping the whirlwind as Houthi forces attempt to take the battle back to Saudi Arabia.

That is not to say the Houthis are tolerant liberals who like the U.S. But their theology is far more moderate than the Wahhabist teachings funded by the Saudi royals around the world, including in America. Religious minorities do much better in Houthi-dominated areas than in territory controlled by the Hadi-Saudi alliance. This should surprise no one, given Saudi Arabia’s refusal to allow members of any religious minority to practice their faith.

Nevertheless, the Obama administration made America an active combatant in Yemen’s civil war. The reason, apparently, was to reassure Riyadh, which was angry that Washington was not doing its bidding in Syria (ousting Bashar al-Assad) and Iran (confronting rather than negotiating with Tehran).

The Saudis have gotten bogged down in the conflict and make little effort to avoid civilian casualties, incriminating the U.S. Shortly before leaving office the Obama administration cut off some weapon shipments to Riyadh. But the Trump administration reversed course, adopting a subservient posture toward the royals. This is an awful policy for several reasons.

First, Washington is rewarding a totalitarian dictatorship for its repression. That Riyadh wants a puppet neighbor is unsurprising. But it isn’t America’s responsibility to give one to the Saudi royals.

Second, the conflict has diverted Saudi attention from the most destabilizing and dangerous force in the Mideast, the Islamic State. Riyadh is entitled to choose its own priorities, but Washington should not underwrite counterproductive Saudi efforts. After a Houthi missile attack on a U.S. warship Trump officials expressed concern about navigational freedom, especially in the Bab-el-Mandeb waterway. But Yemenis apparently attacked an American vessel because Washington was helping Saudis kill Yemenis. Before that Houthis never targeted Americans.

Third, the UN human rights coordinator called Yemen “the largest humanitarian crisis in the world.” Houthis have interfered with the delivery of humanitarian aid, but Saudis and their coalition partners have caused far more death and destruction. More than 10,000 civilians have been killed and 40,000 wounded. Saudi airstrikes, described as “indiscriminate or disproportionate” by Human Rights Watch, caused at least two-thirds of infrastructure damage and three-quarters of the deaths.

Nearly 19 million people, more than 80 percent of the population, need humanitarian aid. More than ten million have acute need for assistance. About 13 million lack access to clean water. Some 60 percent of Yemen’s people, or 17 million, are in “crisis” or “emergency” situations. The UN World Food Programme warned that the country is on the brink of “full-scale famine,” with seven million people “severely food insecure.” Some four million people already are acutely malnourished and 3.2 million have been displaced within the country. Health services have collapsed as the need for care has mushroomed.

Fourth, Hadi’s restoration would not offer political stability. His support was limited even before Riyadh’s intervention, coming more from the West than his own people; backing a brutal foreign attack on his nation has won him no friends. Indeed, warned Zimmerman, “The hodgepodge coalition against the al-Houthi-Saleh faction fractures rapidly once the question of power is on the table. None of the main component forces supports Hadi for president and few would support the return of the Yemeni central state as it was.” There’s also a separate southern secessionist movement which would try to defenestrate Hadi if he was restored.

Fifth, support for KSA brutality endangers Americans by creating and empowering another adversaries. Washington has turned itself into an enemy of the Yemeni people. U.S. policymakers expressed shock when Houthi forces apparently shot a missile at an American naval vessel, but America is a de facto belligerent and U.S. warships therefore are a legitimate target. The only surprise is that Houthis did not strike sooner.

Internationalizing the war also internationalized the weapons. Vice Admiral Kevin Donegan complained of equipment which Yemeni forces didn’t previously possess: “there was no explosive boat that existed in the Yemeni inventory.” That was before Saudi Arabia turned a civil war into an international sectarian conflict.

Moreover, there should be no surprise, let alone shock, if angry Yemenis turn to terrorism. Fear of that possibility may explain the administration’s attempt to ban visitors from that nation.

Sixth, the Saudi war effort aided the rise of the Islamic State and Salafi militias. AQAP also is on the rise. The Crisis Group recently warned that the organization “is stronger than it has ever been.” Noted a recent report from the State Department, AQAP and the Islamic State have “exploited the political and security vacuum left by the conflict between the Yemeni government and Houthi-led opposition.” AQAP has been “significantly expanding its presence in the southern and eastern governorates” while ISIL has gained “a foothold in the country.” The Crisis Group explained that al-Qaeda “is thriving in an environment of state collapse, growing sectarianism, shifting alliances, security vacuums and a burgeoning war economy.”

AQAP’s rise threatens the U.S. Argued former Pentagon official Andrew Exum, Yemen’s campaign “has distracted both the United States and its key partners—namely the Emirates—from the fight against AQAP, one of the few al-Qaeda franchises with the demonstrated will and capability to strike the United States.” Even before, America’s allies had shown little interest in battling al-Qaeda. Journalist Laura Kasinof observed that Hadi, lacking internal support, “cozied up to the Islamists” before his ouster. Zimmerman reported that his regime tacitly cooperated with AQAP in some regions. Moreover, “The Saudi-led coalition tolerates AQAP’s presence on the battlefield, so long as the group fights against the al-Houthi-Saleh forces.”

The Pentagon has felt it necessary to intervene more directly against AQAP, with drone attacks, airstrikes, and special operations forces raids, with costly and controversial results. More strikes are likely, as the president relaxes White House oversight of the war effort. To the extent the organization gains resources and followers, it might succeed in its efforts to hit the American homeland. If so, the Obama and Trump administrations will share the blame.

Candidate Donald Trump was highly critical of President Barack Obama’s foreign policy. Why, then, is President Trump doubling down on an unnecessary Middle Eastern war on behalf of an authoritarian regime guilty of promoting Islamic radicalism? Why is he subordinating fundamental American interests and values to those of a country which has provided more terrorists who attacked Americans than any other and done more to finance international terrorism than any other? Why is he entangling the U.S. in another distant, irrelevant, and unwinnable Mideast conflict after criticizing U.S. intervention in Iraq and Libya?

Americans have good reason to engage the KSA, despite its behavior. However, the Trump administration should not genuflect toward Riyadh. Washington should not sacrifice U.S. interests to benefit the Saudi royals. American officials should not enable the killing—murder, really—of people who have never harmed this nation.

Unfortunately, the administration appears fixated on Iran. Yet, observed Mustafa Alani, director of Dubai’s Gulf Research Center: “It is a myth that Iran is strong.” Tehran is at best a modest regional power, lagging well behind Saudi Arabia. President Trump complained in January that Iran is “going to have Yemen,” along with Iraq and Syria: “They’re going to have everything.” But Washington gave, if that’s the right word, Iraq to Tehran through its foolish invasion and Syria contains little to possess.

Moreover, nothing in Sana’a’s history suggests that any Yemeni faction would sacrifice their country’s autonomy. Said Zimmerman: “The al-Houthi leadership retains its independence from Iran and has pushed back on Tehran’s statements and offers repeatedly.” Von Bruck argued that “The Houthis want Yemen to be independent, that’s the key idea, they don’t want to be controlled by Saudi or the Americans, and they certainly don’t want to replace the Saudis with the Iranians.”

Ironically, in Yemen Tehran is only doing what Saudi Arabia and far more distant America are doing, actively intervening with military force to promote its interests. Iran has as much as Saudi Arabia and far more than America at stake in the Yemen war. Imagine Washington’s reaction if Iran fomented civil war in Mexico, attempting to overthrow a government aligned with the U.S.

Ultimately, a political settlement is necessary, one which puts the interests of the Yemeni people before that of either the Saudi royals or Iranian mullahs. Alas, so far the UN negotiating effort has excluded a role for the Houthis and thereby “ignores the fundamental grievances and local conflicts that generated the war in the first place,” noted Zimmerman. Such an effort won’t result in peace or stability. All foreign parties should step back. Added Zimmerman: “Sound American strategy would reach out to the al-Houthis along with other sub-state actors in Yemen, seek common ground with them, and work to facilitate a meaningful resolution of the conflict—including the underlying popular grievance that are driving it.”

Riyadh’s policy is at a dead-end. Saudi Arabia offered to make peace with Iran, if Tehran essentially surrendered all of its interests. The totalitarian monarchy in Riyadh proclaimed its support for Yemen’s “elected government,” headed by a man with minimal public support. After two years of embarrassing military failure, the deputy crown prince proclaimed that “time is in our favor.”

Instead of doing the monarchy’s bidding, the Trump administration should remember that the U.S., not Saudi Arabia, is the superpower, and Washington’s obligation is to the American people, not Saudi Arabia’s royals. Indeed, President Trump recently reiterated his criticism of Riyadh: “Frankly, Saudi Arabia has not treated us fairly, because we are losing a tremendous amount of money in defending Saudi Arabia.”

But the problem with the bilateral relationship runs far deeper: America is losing its moral soul by aiding Riyadh in a brutal, aggressive war against an impoverished neighbor. Nothing warrants supporting the promiscuous killing of civilians who have never threatened America. Escalation only guarantees greater failure.

The Yemen war is a disaster. Noted Perry Cammack of the Carnegie Endowment, “By catering to Saudi Arabia in Yemen, the United States has empowered AQAP, strengthened Iranian influence in Yemen, undermined Saudi security, brought Yemen closer to the brink of collapse, and visited more death, destruction, and displacement on the Yemeni population.” Washington should end this conflict.

Doug Bandow is a Senior Fellow at the Cato Institute. He was a former Special Assistant to President Ronald Reagan, and is a Senior Fellow in International Religious Persecution with the Institute on Religion and Public Policy.

Governments Should Stop Trying to Fix "Broken" Markets, and Focus on Not Breaking Them

Fri, 05/19/2017 - 09:55

Ryan Bourne

“The market is not working as it should” has been Theresa May’s economic justification for energy price caps. In most public policy debates it suffices to yell “market failure” or the “market is broken” to rationalise any intervention you desire. How many times in the past few years have we heard about a broken housing/childcare/energy market without any analysis of the underlying causes?

Economists, at least, have a very clear definition of market failure: a deviation from a perfectly competitive world with perfect information, no transactions costs, and no effects on third parties from the production or consumption of the good or service.

Theoretical government policies can then supposedly be applied to remedy situations where these assumptions do not hold. But judge any industry, from food through to manufacturing to healthcare, by the unattainable standards set out above, and they will be deemed failures.

The real question is not whether markets are perfect, but whether government interventions to solve perceived failures do more harm than good. In other words, markets may not be “perfect”, but that does not mean they are perfectable by governments.

This is pertinent, because both Theresa May and Jeremy Corbyn have used the “broken market” terminology regularly to justify their policies. The impression they give us is that laissez faire, free market capitalism is failing and ripping off consumers and tenants, requiring an interventionist government.

“Doing something” for the sake of acting to “restore faith” in markets is as naïve as it is ahistorical.

In fact, the truth is closer to the exact opposite for the housing, childcare and energy sectors they talk most about. The desire now to “do something” stems from previous policy mistakes to try to correct market failures — or, as economists would call it, “government failure”.

To stop the supposed market failure of urban sprawl and unplanned communities, for example, Britain introduced greenbelts, land use planning regulations and essentially nationalized development rights in the mid-20th century.

The economists Christian Hilber and Wouter Vermeulen estimated that as much as 35pc of the average house price can now be attributed to these planning constraints. High rents and prices, as well as insufficient building, are primarily caused by very tight land-use planning laws.

Indeed, the Conservative party has implicitly admitted this by pledging less generous compensation for land owners subject to compulsory purchase orders. Granting only the value of the land today rather than the potential value with planning permission means the Government gets to retain the uplift when permission is granted. They want to do this precisely because this premium is high, showing how distortive the Government’s monopoly power on development is.

The proposed fixes from the Conservatives and Labour, in the form of council house building or rent controls, are simply ill-thought-through responses.

The past two decades have also seen the Government more involved in childcare on market failure grounds. Childcare would be underused absent state support, we were told, because parents would not fully recognize the social benefits of more women working or early education. Regulation was required because uninformed parents would not choose the right amount of “high quality” care.

Successive governments have therefore formalized the sector and regulated it more heavily, contributing to higher prices and ballooning subsidies. The UK now has some of the most stringent staff: child ratios in Europe, and mandates that staff and childminders are in effect early years’ educators. The number of childminders has fallen by more than half as a result. Now, surprise, politicians are worried about the affordability of care.

In energy, prices actually plunged in the UK between 1990 and 2004 when the sector was privatized and liberalized. Now, environmental obligations to solve the market failure of climate change continue to raise bills, and come on top of increased wholesale prices.

Stephen Littlechild has highlighted on these pages how it was the energy regulator Ofgem’s 2008 attempts to eliminate “unfair” price discrimination too which actually led to an upward compression with lower tariffs raised. Its restrictions on doorstep selling and marketing likewise contributed to lower customer switching rates.

Now the Conservatives see both high bills and low switching as problems and want to intervene further with a price cap. Yet nobody from the party can explain how this will make providers more efficient and able to deliver the lower prices economically.

The lesson is clear: government intervention has been highly damaging. To make the sectors more competitive and responsive, any government would need to unpick the knot of existing policies rather than engage in further crude interventions.

Adopting price controls and subsidies simply to signal you care would be a mistake. “Doing something” for the sake of acting to “restore faith” in markets is as naïve as it is ahistorical. Most interventions by the Government have perverse consequences, without solving the perceived problem. This leads to more frustration and a growing demand for ever-tougher action.

Ryan Bourne holds the R Evan Scharf Chair for the Public Understanding of Economics at the Cato Institute.

No, Mr. President, You Don't Have the 'Better Ideas' on Trade

Fri, 05/19/2017 - 07:42

Daniel R. Pearson

In an interview with The Economist earlier this month, President Trump provided a noteworthy answer to the question, “Do you think you’ve permanently changed the Republican Party’s position on trade?”

Trump’s response: “No. Because there’ll always be someone that comes along with another idea but it’s not a better idea. We have the better idea.”

Unfortunately, the president’s proposals on trade simply don’t qualify as “better ideas.” If actually put into practice, they would impose large costs on U.S. consumers, on businesses that utilize imports and on exporting firms likely to be hit by other countries’ retaliatory actions. They also would undermine American freedoms by curtailing the fundamental right of people to engage in commerce.

Economists have understood for decades that a country always reduces its economic welfare by implementing trade restrictions.

One of the president’s ideas is to apply “massive”, “reciprocal” tariffs to punish countries that have trade surpluses with the United States. Lashing out at other nations may be viscerally satisfying, but instituting new tariffs certainly does not guarantee that the targeted country will implement desired reforms.

Experience from the Smoot-Hawley Tariff Act of 1930 suggests other countries are likely to respond by retaliating against American exports. That sad episode featured tit-for-tat tariff increases that shrank global trade by two-thirds from 1929 to 1934, thus serving to deepen and lengthen the Great Depression.

Economists have understood for decades that a country always reduces its economic welfare by implementing trade restrictions. Fortunately, better ideas are available that would expand economic opportunities and raise American living standards. Here are some suggestions:

First, give up on the obsession with bilateral trade deficits and surpluses. Bilateral trade flows certainly can be influenced by government policies, but they also are driven by underlying economics. All countries — even the United States — are relatively better at doing some things than others. Each nation should follow David Ricardo’s advice and specialize in activities at which it has the strongest comparative advantages, then trade to obtain other needed goods and services.

Second, recognize that the overall U.S. trade deficit is not determined by trade policies, either in this country or overseas. By definition, a nation runs a current account deficit whenever it invests more than it saves. The trade deficit is the largest component of the U.S. current account. If the White House wishes to reduce the trade deficit, it should focus on policies to increase savings or to reduce domestic consumption. The best way to do this would be to eliminate the federal budget deficit.

Third, abandon the impulse to raise tariffs to levels that would be reciprocal to high tariffs imposed by some nations. It’s true that U.S. tariffs are relatively lower than those of many other countries. World Bank data show that the average applied U.S. tariff in 2010 (the most recent year with comparable data) was 1.57 percent, while the global average was 2.69 percent.

Average tariffs are low because most products enter the United States with zero duty. The real distortions to global trade come from high levels of protection on certain politically-favored products. For instance, the United States tightly protects its sugar market through a system of tariff-rate quotas. The current gap between the world market price and the U.S. price for raw cane sugar indicates an effective level of protection in excess of 60 percent.

If sugar-exporting countries were to follow Trump’s playbook and apply reciprocal 60-percent tariffs against U.S. shipments of other goods, American exporters of airplanes and soybeans suddenly could find themselves cut off from traditional overseas markets. As the world’s third-largest merchandise exporter, many U.S. industries would be vulnerable to retaliation imposed by other nations.

Fourth, have more faith in Adam Smith’s “invisible hand.” Open and competitive markets provide more opportunities for people to earn their livings, to invest and to pursue their dreams. Capitalism spurs economic growth; government protection for favored industries slows it down. Instead of imposing new import tariffs, the Trump administration should strive to expand economic freedom by eliminating trade barriers in this country and around the world.

Fifth, acknowledge that the economy is changing at an unsettling pace. Globalization leads to some job losses, although many more are due to robots and computers. Regardless of the cause, displaced workers could benefit from adjustment assistance that provides access to education, training and relocation services.

President Trump has demonstrated an admirable ability to change positions once he sees things in a different light. He should reconsider his approach to trade, seeking policies that would work with economic forces instead of fighting against them. If he was to explain to the country how free trade would help to reassert American greatness, many people would be willing to support him. Then the president would be able to say correctly, “We have the better idea.”

Daniel R. Pearson is a senior fellow at Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies and formerly served as chairman of the U.S. International Trade Commission.

How Kosovo Poisoned America's Relationship with Russia

Fri, 05/19/2017 - 07:38

Ted Galen Carpenter

Washington, DC perpetuated and deepened its Balkan blunder a few years after the Bosnia intervention when it intervened in Kosovo. Civil strife in Serbia’s restless, predominantly Albanian province, simmered and then flared in the mid-and late-1990s. This time, Washington didn’t even make a gesture of deferring to the leading European states, but took the policy lead early on. Ultimately, the United States led a seventy-eight-day air war against Serbia, compelling Belgrade to relinquish control to a largely NATO occupation force operating under a fig-leaf resolution that the UN Security Council approved. Russia reluctantly acquiesced to that peacekeeping resolution, despite Moscow’s ties to Belgrade and Russian interests in the Balkans going back well into the nineteenth century.

That step reflected Russia’s military, economic and diplomatic weakness following the disintegration of the Soviet Union. Despite anger at NATO’s policy, there was little Russian leaders felt they could do in response to the West’s intrusion into a traditional Russian sphere of influence. Even with Moscow’s surprisingly passive response, though, Washington’s arrogance nearly produced a tragedy. In the closing days of the fighting, Moscow dispatched a token peacekeeping contingent to Kosovo, without prior authorization from the Western powers. NATO’s supreme commander, U.S. Army Gen. Wesley Clark, ordered the British commander on the scene, Gen. Mike Jackson, to seize the airport outside Kosovo’s capital, Pristina, and prevent the Russian troop planes from landing—by force, if necessary. Jackson flatly disobeyed Clark’s order, stating bluntly that he wasn’t going to start World War III for the American general.

The Kosovo intervention set some terrible precedents. A supposedly defensive U.S.-led alliance attacked a country that had not attacked any NATO member, disregarded Moscow’s angry protests, and forcibly detached the province of a sovereign country, placing it under international control. That set of worrisome precedents was compounded by the actions that the United States and its allies took in early 2008. Kosovo wanted to declare its formal independence from Serbia, but it was clear that such a move would face a certain Russian (and probable Chinese) veto in the UN Security Council. Washington and an ad hoc coalition of European Union countries brazenly bypassed the council and approved Pristina’s independence declaration.

The Kosovo intervention set terrible precedents that have come back to haunt the West.

It was an extremely controversial move. Not even all EU members were on board with the policy, since some of them worried about the wider ramifications. Spain fretted about the encouragement because such a decision might give to its own secessionist movements, especially the Basques and the Catalonians. Greece and Cyprus were deeply concerned that ratifying the forcible severing of Kosovo from Serbia could legitimize Turkey’s earlier military seizure of the northern portion of Cyprus and the subsequent establishment of the Turkish Republic of Northern Cyprus in that occupied territory.

Russia’s leaders protested vehemently and warned that the West’s unauthorized action established a dangerous, destabilizing precedent. Washington rebuffed such complaints, arguing that the Kosovo situation was unique. Under Secretary of State for Political Affairs R. Nicholas Burns made that point explicitly in a February 2008 State Department briefing. Because the situation was unique, he insisted, the West’s Kosovo policy set no precedent regarding other ethnic secessionist situations. Both the illogic and the hubris of that position were breathtaking.

The Western powers soon discovered that merely because they said their action in Kosovo established no precedent, that did not make it so. Russia demonstrated that point just a few months later. The Republic of Georgia had been dealing with secessionist efforts in two regions, South Ossetia and Abkhazia, ever since the Soviet Union dissolved at the end of 1991. President Mikheil Saakashvili’s national government in Tbilisi exercised little authority over either area, and Russian “peacekeeping” troops were on the ground in South Ossetia.

When Saakashvili’s forces launched an offensive to reassert control over South Ossetia in early August 2008 by conducting an artillery barrage against the self-proclaimed rebel capital, the Russians counterattacked and were soon advancing to the outskirts of Tbilisi. Predictably, the United States and its allies blamed Moscow for the conflict, although a subsequent European Union investigation placed most of the blame on Saakashvili. The war lasted only five days, and when it was over, the Kremlin made it clear that the bolstered Russian force would continue to protect the autonomy of both South Ossetia and Abkhazia. The parallels to NATO’s role preventing Serbia from regaining control over Kosovo were not particularly subtle.

George W. Bush’s administration condemned both Moscow’s initial invasion and the Kremlin’s subsequent actions, as did Washington’s NATO allies. But just as Russia was not in a position to do much about NATO’s conduct in Kosovo, the Western powers (short of initiating a war against Russia) could do little about Moscow’s meddling in Georgia. The episode marked another stage in the continuing deterioration of relations between the West and Russia.

The Kosovo precedent came back to haunt the United States again in 2014 when the Kremlin enhanced its military presence on the Crimea Peninsula and used it to “supervise” a referendum in which Crimea voted to secede from Ukraine. That step was a prelude to Russia’s annexation of the peninsula. Washington reacted with even greater anger than it had following Moscow’s invasion of Georgia, soon imposing an array of economic sanctions against Russia. At a press conference, President Obama fumed that Russia could not be allowed to redraw “the borders of Europe at the barrel of a gun.” None of the journalists in the room asked the president what he thought NATO had done in Kosovo.

The Kosovo intervention was an even worse U.S. foreign-policy blunder than the earlier intervention in Bosnia. It empowered an extremely unsavory political movement, the Kosovo Liberation Army, which proceeded to commit an array of human-rights abuses. The mission further transformed NATO from a defensive military alliance into a mechanism for aggressive nation-building crusades. Forcibly amputating the territory of a sovereign state created a worrisome template in the post-Cold War international system. Washington further undermined international law by bypassing the UN Security Council and using an ad hoc Western coalition to grant a secessionist entity independence. Those measures set extremely damaging precedents that have returned to plague the West. And last, but certainly not least, the actions of the United States and its NATO allies in Kosovo further poisoned relations with Russia. In every respect, the U.S.-led Kosovo mission was unwise and counterproductive.

Ted Galen Carpenter, a senior fellow in defense and foreign-policy studies at the Cato Institute and a contributing editor to the National Interest, is the author of ten books, the contributing editor of ten books, and the author of more than 650 articles on international affairs.

College Pays off, but Not Like It Should

Thu, 05/18/2017 - 07:50

Neal McCluskey

If you are prepared for college-level work, and especially if you intend to major in something in demand in the economy, by all means go to college. The price you will be charged will be inflated, but the investment will still pay off. If you are unprepared for college, however, or plan to major in a field with few job prospects, you should really think twice.

A factoid you might have heard before — the average college graduate makes around $1 million more over her working lifetime than the average person with just a high school diploma — continues to hold. There are lots of caveats — it does not account for the decreased value of a future dollar, investing what would have been tuition money would likely have produced unaccounted-for gains — but it still exists. On the whole, even with an average four-year undergraduate degree running roughly $40,000 to $134,000 in tuition and fees, depending on the type of school, college is worth the investment.

Which is not to say that degrees are priced right. They are almost certainly inflated, fueled especially by federal student aid including Pell grants, loans, and tax-favored savings plans that enable colleges to jack up their prices to capture always desirable revenue, and allow students to pay — and demand — more than they would were they using their own money or funds voluntarily given to them.

Is college worth the money? Thanks to massive, distorting subsidies extracted from taxpayers, that is a far tougher question to answer than it should be.

Numerous studies have found that aid fuels tuition cost inflation, and the “help” it provides is a major reason that for decades inflation in higher education has eclipsed even the infamous inflation rates in healthcare and housing.

Another crippling unintended consequence of gigantic subsidies — federal, state and local subsidies to colleges with student aid programs approached a combined $250 billion in 2016 — is credential inflation.

Basically, more and more degrees that represent less and less learning make having a degree not so much a sign that one possesses valuable skills and knowledge, but rather make it so that not having one is a red flag suggesting you have some sort of deficiency.

The hollowing out of degrees has been borne out in research showing declining literacy rates for people possessing bachelors and advanced degrees, and in stagnant or declining earnings for degree holders during the past 15 years. The big college wage premium is more a function of a high school diploma’s value dropping than a college degree’s rising.

This is a big reason that having a degree is no guarantee of success. According to 2014 research from the Federal Reserve Bank of New York, about a third of people holding a four-year degree are in jobs that do not require it, and are in such career tracks on a largely permanent basis. And while various types of engineering majors and a few others can make big bucks right out of college, people with softer majors, like psychology or English, can struggle to find well-paying work.

That said, investing in college is far riskier if you are teetering on the margins of preparation, or aren’t motivated to do college-level work. Poor preparation or focus are major reasons a little less than half of people who start college do not finish within six years, and many never complete. For these people, the cost of college can be an albatross even with relatively small debt. Indeed, there are higher default rates for student borrowers who owe relatively small amounts, in the $1,000 to $10,000 range, than those paying off larger sums. Defaulters have basically paid for part of college but left without getting the degree essential to increasing their earnings. For millions of such people, the “investment” in college was a significant loss, not a gain.

So is college worth the money? Thanks to massive, distorting subsidies extracted from taxpayers, that is a far tougher question to answer than it should be. For those who are truly ready for college and are focused on in-demand fields, it almost certainly is, even if it should cost far less. For everyone else? It is a far more dicey proposition.

Neal McCluskey is the director of the cato institute’s center for educational freedom.

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