Policy Institutes

With the takeover of the New York state senate by liberal-leaning Democrats, prospects are improving for such measures as S2857A, sponsored by Sen. Kevin S. Parker (D-Brooklyn), which would require owners of firearms to carry $1 million in liability insurance. There are a number of problems with that idea, one of which turns out to be distinctive to New York. 

The general problems with gun insurance mandates were aired when the idea began to circulate widely a few years ago. Perhaps the biggest is that courts would and should strike down mandates aimed at burdening or doing away with the exercise of a constitutional right. As David Rifkin and Andrew Grossman wrote in 2013:  

Insurance policies cover accidents, not intentional crimes, and criminals with illegal guns will just evade the requirement. The real purpose is to make guns less affordable for law-abiding citizens and thereby reduce private gun ownership. Identical constitutionally suspect logic explains proposals to tax the sale of bullets at excessive rates.

The courts, however, are no more likely to allow government to undermine the Second Amendment than to undermine the First. A state cannot circumvent the right to a free press by requiring that an unfriendly newspaper carry millions in libel insurance or pay a thousand-dollar tax on barrels of ink—the real motive, in either case, would be transparent and the regulation struck down. How could the result be any different for the right to keep and bear arms?

And there’s a special problem with trying to pull this kind of thing in New York, as our friend R.J. Lehmann, insurance expert at the R Street Institute, observes in a Twitter thread today: “New York now wants to require people to hold a kind of insurance that it sanctioned the NRA and an insurance broker earlier this year for selling at all.” In that case, Gov. Andrew Cuomo claimed that private companies Lockton and Chubb conspired with the National Rifle Association to insure liability “against the public interest.”  Lehmann goes on to say (Twitter breaks omitted): 

In its complaint against Lockton, [New York’s regulator] said the Carry Guard program “provided insurance coverage that may not be offered in the New York State excess line market, specifically: (a) defense coverage in a criminal proceeding that is not permitted by law; (b) liability coverage for bodily injury or property damage expected or intended from the insured’s standpoint in an insurance policy limited to use of firearms and that was beyond the use of reasonable force to protect persons or property; and (c) coverage for expenses incurred by the insured for psychological counseling support.” If such coverages are contrary to New York state law, clearly one cannot require New York citizens to purchase them. 

Section 1 of Sen. Parker’s S2857A requires a gun owner to maintain a liability insurance policy of at least a million dollars “specifically covering any damages resulting from any negligent or willful [emphasis added] acts involving the use of such firearm while it is owned by such person.” Gun control advocates commonly draft insurance mandates to cover willful rather than merely negligent acts as part of their goal to drive up the cost of insurance, in part by pinning on gun owners legal responsibility for the purposeful acts of others. 

Judge Jon S. Tigar of the U.S. District Court for the Northern District of California recently struck down a Trump administration policy barring asylum for those who do not enter through a legal port of entry.  Tigar’s major point is that Trump’s order conflicts with a statute that specifically says that those who entered illegally are eligible for asylum.  Despite this temporary ruling against the administration’s asylum order, a higher court will probably approve Trump’s action by invoking I.N.A. 212(f) that, according to the Supreme Court decision in the Travel Ban case, seems to give the president nearly unlimited power to ban whomever he wants from coming here no matter what the rest of the law says.  I hope I’m wrong, but I wouldn’t bet against that outcome.

Some commentators are outraged by the court order blocking president Trump’s change to asylum because they think it violates the national sovereignty of the U.S. government to determine who can enter without limitation.  Outside of the fringes, debates about national sovereignty are rare in the context of immigration policy because the Supreme Court has frequently affirmed Congress’s plenary (read unlimited) power to pass any immigration law it wants because of inherent power vested in the national sovereignty of the United States.  Despite some arguments that seek to limit that power or that it was invented almost a century after the Constitution was enacted, this inherent power is not seriously challenged and almost nobody would consider it illegitimate.

Those Supreme Court cases cited foundational scholars in the field of international law to support the majority’s opinion that Congress had plenary power over immigration.  In this context, international law refers to the customs, behaviors, and evolving rules that regulated the intercourse between governments and foreign individuals.  The two most cited international law scholars in the above Supreme Court decisions, supporting Congress’s unlimited power to restrict the movement of people across borders, are Emer de Vattel and Samuel von Pufendorf.  A recent article in the European Journal of International Law by Vincent Chetail shows just how selectively the Supreme Court cited those two scholars.

Before summarizing Chetail’s research on Vattel and Pufendorf, one must understand that they inherited and altered an international legal tradition that preceded them by centuries. 

Chetail’s paper begins with the work of Francisco de Vitoria (1480-1546), who is frequently portrayed as the founder of international law (also known as the law of nations).  He argued that the free movement of persons is a cardinal feature of international law through the right of communication, meaning that the right of humans to communicate with each other implies that they also have the right to move in order to communicate.  He used this to argue that when the Spaniards sailed to the Americas, they had no right of conquest or to occupy the Americas.  However, he went on to argue that Spaniards did “have the right to travel and dwell in those countries so long as they do no harm to the barbarians.”  This right supposedly comes from the law of nations, which derives from natural law and is not abridged by the division of the world into nations.  Vitoria argued that the right of free movement is mandatory so long as it does not cause harm to the host society, meaning crime.  He even argued, quite radically, that nations that refuse admission to non-criminals are committing an act of war.  Vitoria applied his argument to Europeans, arguing that “[I]t would not be lawful for the French to prohibit Spaniards from traveling or even living in France, or vice versa, so long as it caused no sort of harm to themselves; therefore it is not lawful for the barbarians either.”  Vitoria argued that these principles also support universal free trade, free navigation, and birthright citizenship. 

Chetail then moves on to discuss the work of Hugo Grotius (1583-1645), who endorsed Vitoria’s description of international law and refined it further by arguing that individuals have a right to leave their own country and to enter and remain in another.  In essence, Grotius argued that in order for there to be a right to emigrate, there must also be a right to immigrate.  He even argued, like Vitoria, that the right of movement can be taken by force if it is unjustly denied by the government.  Those who are criminals, would harm society, or skirt essential duties like repaying loans can be barred from immigrating or emigrating under Grotius’s theory.  He applies the same limitations on emigrating as he does on immigrating. 

Next, Chetail looks at the work of Samuel von Pufendorf (1632-1694).  He was the first international law scholar who argued that state sovereignty and the state’s power to choose whom to admit dominated any natural right of movement.  Pufendorf argued that individuals have the right to emigrate, but not to immigrate.  He did not elaborate on why his opinion differed from that of Grotius and Vitoria on this matter.  However, Pufendorf did write about two exceptions: shipwrecked sailors and some asylum seekers.  He wrote:

[I]t is left in the power of all states, to take such measures about the admission of strangers, as they think convenient; those being ever excepted, who are driven on the coasts by necessity, or by any cause that deserves pity and compassion. Not but that it is barbarous to treat, in the same cruel manner, those who visit us as friends, and those who assault us as enemies [emphasis added].

Those exceptions aren’t as broad as they first seem.  Although he argued that states should accept foreigners because “we see many states to have risen to a great and flourishing height, chiefly by granting license to foreigners to come and settle amongst them; whereas others have been reduced to a low condition, by refusing this method of improvement,” Pufendorf ultimately argued that those humanitarian concerns of admitting asylum-seekers should only occur when the host state decides to so do. 

Pufendorf reversed the reasoning of Grotius and Vitoria.  They argued that free movement was the general rule with some specific exceptions, but Pufendorf argued that no movement was the general rule with some specific general exceptions and total state control otherwise. 

Christian von Wolff (1679-1754) is the next philosopher of international law in the tradition of total state control over migration.  Wolff’s main contribution was to argue that the sovereign owns the nation, and he exercises this power as an individual property holder does regarding entry of people onto his land.  

Wolff does grant several exceptions to this general state power.  Foreigners have a right to enter a country if they do not harm the state.  This right of harmless use means that foreigners can travel through a nation’s territory on their way elsewhere, that asylum seekers or refugees have the right to enter and remain, and that “foreigners must be allowed to stay with us for the purpose of recovering health, … study, … [or] for the sake of commerce.”  Wolff went on to write that “permanent residence in [a nation’s] territory cannot be denied to exiles by a nation, unless special reasons stand in the way [emphasis added].”         

Those exceptions seem like strong limitations on the power of states to deny entry, but Wolff pulls a lawyer’s trick to argue that foreigners have the right to enter if those above conditions are met but also that there is no enforcement mechanism.  Thus, Wolff argues that states have total control over entry and no private actor can commit violence to enforce the right of admission.  Foreigners have a right to ask for admission under Wolff’s system and the state is morally bound to accept many of them, but the state is legally free to refuse them. 

The last international law scholar that Chetail writes about is Swiss author Emer de Vattel (1714-1767), who is also the most important, as he is cited extensively in the Supreme Court cases discussed above.  Vattel synthesized the work by the earlier scholars.  He argued that there is a qualified power of state sovereignty to control immigration with the two substantial caveats of innocent passage and necessity.  Innocent passage and necessity can only be denied using excellent reasons regarding the security of the admitting state.  He wrote:

[T]he introduction of property cannot be supposed to have deprived nations of the general right of traversing the earth for the purposes of mutual intercourse, of carrying on commerce with each other, and for other just reasons. It is only on particular occasions when the owner of a country thinks it would be prejudicial or dangerous to allow a passage through it, that he ought to refuse permission to pass. He is therefore bound to grant a passage for lawful purposes, whenever he can do it without inconvenience to himself. And he cannot lawfully annex burdensome conditions to a permission which he is obliged to grant, and which he cannot refuse if he wishes to discharge his duty, and not abuse his right of property [emphasis added].

The fact that Vattel argues for exceptions is important because the Supreme Court didn’t recognize these exceptions when it quoted him in the 1892 case Nishimura Ekiu v. United States:

It is an accepted maxim of international law, that every sovereign nation has the power, as inherent in sovereignty, and essential to its self-preservation, to forbid the entrance of foreigners within its dominions, or to admit them only in such cases and upon such conditions as it may see fit to prescribe. Vattel, lib. 2, §§ 94, 100.

Chetail doesn’t pull any punches when criticizing the judges who wrote the Nishimura Ekiu decision:

At the time of this judgment, the authority of Vattel proved to be instrumental in justifying a radical breakdown from the time-honoured tradition of free movement … the famous dictum of the US Supreme Court was based on a biased and selective reading of Vattel. In fact, the two earlier-quoted passages from the Swiss author were taken out of their context, with the overall result of providing a partial account of his views on the admission of foreigners. This misreading of Vattel has prevailed until now among US judges.

Most relevant to the ongoing chaotic situation on the Mexican border where many migrants stormed it and were repelled by tear gas, is that Vattel seems to endorse a right to illegal entry if legitimate entry is unjustly blocked by the government.  Recall that asylum-seekers, which includes those fleeing dire poverty under Vattel’s definition, fall under the necessity exception:

When a real necessity obliges you to enter into the territory of others – for instance, if you cannot otherwise escape from imminent danger, or if you have no other passage for procuring the means of subsistence, or those of satisfying some other indispensable obligation – you may force a passage when it is unjustly refused.

Vattel, one of the two intellectual heavyweights whom the Supreme Court cites to justify Congress’s plenary power over immigration, argued that the government cannot bar asylum-seekers and many other migrants from entering the United States and that those unjustly refused entry can do so illegally – a very radical position.  According to Vattel, that right is not restricted and can be enforced against the will of any sovereign so long as illegal entry is the only way to safeguard an essential interest of the foreigner.        

This post is not an argument for one or another of the views held by the above-mentioned writers, but instead a summary of fascinating recent work by a professor of international law on an important subject.  The most shocking thing is how selectively the Supreme Court cited Vattel over a century ago to grant Congress a vast and unrestricted power that Vattel did not recognize.  

On December 7, 2015, President Trump called for a Muslim ban. This ban later turned into “extreme vetting” policies, which—according to Trump—had the same goal. Now nearing the 2-year mark of his administration, an accurate assessment of these policies is now possible. All the major categories of entries to the United States—refugees, immigrants, and visitors—are significantly down under the Trump administration for Muslims or applicants from Muslim majority countries.

91% fewer Muslim refugees

President Trump has dramatically reduced the number of Muslim refugees. According to data from the U.S. Department of State—which records the religions of refugees—Muslim refugees peaked at 38,555 in fiscal year (FY) 2016, fell to 22,629 in FY 2017, and reached just 3,312 in FY 2018—a 91 percent decline from 2016 to 2018. Refugees of other faiths have also seen their numbers cut, though not to the same extent as Muslims. The share of refugees who were Muslims dropped from 45 percent in FY 2016 to 44 percent in FY 2017, and then again to 15 percent in FY 2018. President Trump has reversed the earlier trend under President Obama, where Muslim refugee admissions increased.

Figure 1: Muslim Refugee Admission
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30% fewer immigrants from majority Muslim countries

Approvals for immigrant visas—that is, for permanent residents—for nationals of the 48 majority Muslim countries have fallen from 117,444 in FY 2016 to 104,228 in FY 2017 to 82,260 in FY 2018—a 30 percent drop overall. The share of new immigrants entering from abroad from majority Muslim countries has fallen as well, from 19 percent in FY 2016 to 18 percent in FY 2017 to 15 percent in FY 2018. This also reflects a change in the prior trend. From 2009 to 2016, immigrants from Muslim majority countries increased from 80,435 to 117,444.

Figure 2: Immigrant Visa Issuances for Nationals of Majority Muslim Countries
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The decline in immigrant visas occurred primarily in the family reunification categories, which President Trump refers to as “chain migrants.” From FY 2016 to FY 2018, the number of family-sponsored immigrants declined by 29,607—a 36 percent decline. Special immigrants—interpreters and other partners of the U.S. military mainly from Iraq and Afghanistan—accounted for the rest of the reduction. In FY 2018, there were 45 percent fewer immigrant visas for special immigrants than in FY 2016.

Figure 3: Immigrant Visa Issuances for Nationals of Majority Muslim Countries by Type
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18% fewer visitors from majority Muslim countries

Though they were already relatively low to begin with, nonimmigrant visa approvals—temporary visas for workers, students, and tourists—from Muslim majority have also declined 18 percent from 2016 to 2018. In 2016, the Obama administration issued 856,886 nonimmigrant visas to nationals of Muslim majority countries. In 2017, this number fell to 718,535. By 2018, it had dropped to 702,375—154,511 fewer than 2016. The declines occurred among both tourist visas and other visa categories.

Figure 4: Nonimmigrant Visa Issuances for Nationals of Majority Muslim Countries
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Explanations for the Decline in Visas and Refugees

Since President Trump establishes the refugee quotas for each region of the world and for each fiscal year, his decision to cut the quota and distribute the cap away from the Muslim world explains the drop in Muslim refugee issuances. For FY 2017, President Trump established the lowest refugee quota in the history of the refugee program. 

The primary cause of the decline in the immigrant visa approvals is the travel ban that has singled out for exclusion eight majority Muslim countries since January 2017: Chad, Iran, Iraq, Libya, Syria, Somalia, Sudan, and Yemen. Chad and Sudan have been completely removed from the list, and while Iraq is not officially designated, the latest proclamation from September 2017 singles Iraqis out for additional scrutiny.

The eight travel ban countries explain 65 percent of the decline in immigrant visa issuances for Muslim majority countries. Immigrant visa issuances for these countries have fallen 72 percent from FY 2016 to FY 2018. The travel ban explains only 28 percent of the decline in nonimmigrant visa issuances from Muslim majority countries. Nationals of the travel ban countries received 62 percent fewer nonimmigrant visas in 2018 than in 2016.

Figure 5: Immigrant and Nonimmigrant Visa Issuances for Travel Ban Countries
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Beyond the travel ban, President Trump has imposed “extreme vetting” policies that make immigrating more bureaucratic and costly for everyone. He has massively increased the length of immigration forms, adding new subjective “security” questions. According to the American Immigration Lawyers Association, more applications for Muslims are disappearing into an “administrative processing” hole, where applications are held up for security screening. Undoubtedly, some Muslims simply want to avoid the United States where stories of profiling and discrimination abound.

Conclusion

The bottom line is that the Trump administration is leading a major overhaul in the types of travelers, immigrants, and visitors who are coming to the United States. His administration reduced Muslim refugees by 91 percent and has overseen a 30 percent cut to immigrant visas for majority Muslim countries and an 18 percent cut to temporary visas. These policies lack a valid national security justification, but they are nonetheless having a significant effect. President Trump is certainly following through on his promise to limit Muslim immigration, even if a “total and complete shutdown” has not happened.

Table 1: Refugee Admissions by Religion
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Table 2: Immigrant Visa Issuances for Nationals of Majority Muslim Countries
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Table 3: Nonimmigrant Visa Issuances for Nationals of Majority Muslim Countries
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Dangerous tensions between Russia and Ukraine are spiking again.  The latest catalyst was a November 25 clash between Russian and Ukrainian warships in the Kerch Strait, which connects the Black Sea to the Sea of Azov.  That narrow strait separates Russia’s Taman Peninsula from Crimea.  Despite Moscow’s annexation of the latter in 2014, Kiev still considers Crimea to be Ukrainian territory, a position that the United States and its allies back emphatically.  Moreover, passage through the strait is the only maritime link between Ukraine’s Black Sea ports and those on the Azov.  Kiev views the strait as international waters and relies on a 2003 bilateral navigation treaty to vindicate its position.  

With the annexation of Crimea, however, Russia now regards the waterway as its territorial waters.  When three Ukrainian ships violated Moscow’s demand for 48 hours-notice and official permission for transit (a procedure Kiev had followed a few months earlier). Russian security forces intervened, ramming one ship and firing on the others, wounding several Ukrainian sailors, and then seizing the offending vessels. 

The United States and the other NATO members reacted with fury to this incident.  In an address to the UN Security Council, U.S. Ambassador Nikki Haley blasted Moscow for “outlaw actions” and stated that the “outrageous violation of sovereign Ukrainian territory is part of a pattern of Russian behavior.”  NATO held an emergency meeting with the Ukrainian government, and NATO Secretary General Jens Stoltenberg expressed the Alliance’s “full support for Ukraine’s territorial integrity and sovereignty, including its full navigational rights in its territorial waters under international law.”   

Ukraine’s leaders want far more than NATO’s moral support, however.  In addition to a boost in U.S. arms sales, Kiev is seeking a show of military force by the Alliance.  Indeed, President Petro Poroshenko expressed the hope that NATO members “are now ready to relocate naval ships to the Sea of Azov in order to assist Ukraine and provide security.”

Leaving aside the problem than much of the Sea of Azov is too shallow (in some portions no more than 6 meters in depth) to accommodate most NATO warships, attempting to use the Kerch Strait without Moscow’s permission would create a horrifically dangerous crisis.  Even moving NATO ships to the eastern waters of the Black Sea adjacent to the Strait would constitute a perilous provocation.  Unfortunately, some political leaders, media figures, and policy experts are pushing for such a deployment.  Sen. Sen. Robert Menendez (D-NJ), for example, called for tougher sanctions against Russia, additional NATO exercises on the Black Sea and more U.S. security aid to Ukraine, “including lethal maritime equipment and weapons.”

As I discuss in a new article in the American Conservative, going down the path of increasing U.S. and NATO support for Ukraine is unwise on both strategic and moral grounds.  Contrary to the narrative that Western journalists and politicians push, the quarrel between Russia and Ukraine is not a stark struggle between an aggressive, dictatorial Goliath and an innocent, beleaguered, democratic David.  Ukraine is, at best, a quasi-democratic country with a worrisome overlay of ultra-nationalism and even neo-fascism.  The relative merits of the territorial claims between Moscow and Kiev are complex and murky.  In any case, that dispute is a parochial matter that warrants a studiously neutral stance on the part of the United States.   

U.S. officials need to disregard reckless calls for a show of force or a demonstration of “resolve” in response to the Kerch Strait incident. There is nothing at stake in that dispute, or even the larger controversy over the status of Crimea, which impinges on the vital interests of the American people.  Instead of increasing its security connections to Kiev, as hawks are recommending, the United States would be wise to reduce its entanglement.  

 

 

The Center for Immigration Studies (CIS) just released a new report that purports to show that 63 percent of non-citizen households are on welfare compared to 35 percent of native-born households in 2014.  The purpose of this report was to justify the president’s new public charge rule.  For years, CIS and I have debated this topic and this blog is yet another installment.  Please follow these links to read the previous installments.

There are a few issues with the CIS report and an unsound methodological choice that they made that results in inflating the welfare use rates for immigrants and natives.  I’m just going to make two points below.

First, the welfare use rate reported by CIS is much higher than the welfare use rates estimated by the Department of Homeland Security (DHS) even though they both relied on the Survey of Income and Program Participation (SIPP).  DHS did look at 2013 and CIS looked at 2014, but one year shouldn’t make much of a difference as no new big welfare laws were passed then.  The biggest difference between the DHS and CIS analysis is that CIS used households as a unit of analysis and DHS used individuals (more on this below).  Table 1 shows the differences.  CIS reports much higher welfare use for natives, the foreign-born, and non-citizens for every program.  Table 2 shows just how much higher CIS’ estimates are for every welfare program relative to DHS’ estimates.  Relative to DHS’ estimates, CIS estimates that native-born welfare use rates are an average of 95 percent higher, foreign-born use rates are an average of 173 percent higher, and non-citizen use rates are an average of 208 percent higher. 

 

Table 1

Estimated Welfare Use Rates by the Organization that Conducted the Analysis

 

Department of Homeland Security (2013)

Center for Immigration Studies (2014)

Benefit Program

Natives

Foreign Born

Non-Citizens

Natives

Foreign Born

Non-Citizens

Cash or non-cash

20.9

20.9

22.6

30.4

49.5

57.7

Cash benefits

3.4

3.7

1.8

7.7

9.6

6.3

SSI

2.4

3.2

1.3

6.3

8.2

4.5

TANF

0.8

0.3

0.4

1.3

1.1

1.4

GA

0.3

0.2

0.2

NA

NA

NA

Non-cash benefits

20.4

20.4

22.3

NA

NA

NA

Medicaid

16.1

15.1

15.5

23.3

41.9

49.9

SNAP

11.6

8.7

9.1

15.2

18.4

23

Housing Vouchers

1.6

1.7

1.4

4.7

5.1

3.9

Rent subsidy

3.9

4.8

4.3

NA

NA

NA

Sources: Center for Immigration Studies, Table 1; Department of Homeland Security, Table 11.

 

Table 2

Percentage Difference Between CIS and DHS Welfare Use Rate Estimates

Benefit Program

Natives

Foreign Born

Non-Citizens

Cash or non-cash

45%

137%

155%

Cash benefits

126%

159%

250%

SSI

163%

156%

246%

TANF

63%

267%

250%

GA

NA

NA

NA

Non-cash benefits

NA

NA

NA

Medicaid

45%

177%

222%

SNAP

31%

111%

153%

Housing Vouchers

194%

200%

179%

Rent subsidy

NA

NA

NA

 Sources: Center for Immigration Studies, Table 1; Department of Homeland Security, Table 11; author’s calculations.

 

Second, CIS chose to use a head of household unit of analysis rather than an individual unit of analysis.  This means that they designated some households as headed by non-citizens and others as headed by natives based on SIPP responses.  Thus, CIS’ analysis counts many native-born American children, American citizen spouses in immigrant households, and doesn’t control for the size of the households.  CIS does show welfare household use rates without non-citizens in them, but the entire household unit of analysis is a flawed way to look at welfare use rates.  The DHS sided with Cato on this long-standing issue as it measured individual welfare use rates and didn’t bother with an antiquated head of household measure.  The only close approximations to a household or family-level analysis that DHS conducted were in Tables 16 and 17 of its report, but it only compared citizens to non-citizens.  Tables 16 and 17 unsurprisingly find that people with more children have higher welfare use rates.

DHS isn’t the only organization to agree that the individual is the proper unit of analysis.  According to the massive report on the economic and fiscal consequences of immigration published National Academy of Sciences (NAS), the individual is the proper unit of analysis for fiscal cost analysis.  Since welfare use rates are a subset of fiscal cost analyses, it makes sense to use the individual rather than the household.  The NAS authors wrote:

 

households are not stable over time and because the costs and benefits originating in mixed households often need to be divided between native-born and foreign-born members—as opposed to having to ascribe them exclusively to one group or the other—the individual unit of analysis is more flexible and empirically feasible for dynamic analyses (338).

 

Even in static analyses, the NAS argues that the problem of how “to define an immigrant household (339)” breaks in favor of an individual unit of analysis to at least maintain consistency between the dynamic and static methods.  This is a big change from the NAS’ previous study in 1997 that argued for households as the unit of analysis.

The DHS and NAS both agree with Cato scholars that the individual is the proper unit of analysis in a welfare cost analysis by nativity.  CIS is on the other side of that issue.  I am not making an appeal to authority, but CIS should have to make a better case for why it persists in using the household level of analysis.

CIS’ analysis is not compelling.  A competing analysis of the same data by DHS, using the individual unit of analysis that Cato scholars have recommended, found that all immigrants have a welfare use rate identical to natives and that non-citizens only have a slightly higher usage rate. 

Cato scholars are very concerned with immigrant welfare use, which is why we’ve authored a study on how to eliminate non-citizen welfare use that is now in the form of legislation introduced by Representative Grothman (R-WI).  His bill would do more to save taxpayer dollars and reduce welfare use among immigrants than any refined public charge rule.  Although CIS and I do not agree on many of the facts regarding immigrant welfare use, we should be able to agree that approaches like those of Representative Grothman are better than a revised public charge rule. 

 

Welcome to the Defense Download! This new round-up is intended to highlight what we at the Cato Institute are keeping tabs on in the world of defense politics every week. The three-to-five trending stories will vary depending on the news cycle, what policymakers are talking about, and will pull from all sides of the political spectrum. If you would like to recieve more frequent updates on what I’m reading, writing, and listening to—you can follow me on Twitter via @CDDorminey.  

  1. This first suggestion actually comes in two parts: The Texas National Security Review hosted two policy roundtables. “The Future of Conservative Foreign Policy” includes essays from Elliott Abrams, my colleague Emma Ashford, John Fonte, Henry R. Nau, Nadia Schadlow, Kelley Beaucar Vlahos, and Dov S. Zakheim. “The Future of Progressive Foreign Policy” includes essays from Heather Hurlburt, Adam Mount, Loren DeJonge Schulman, and Thomas Wright. If you’re looking to hit the highlights, I really recommend Emma Ashford’s contribution (of course), as well as Adam Mount’s and Heather Hurlburt’s. 
  2. If you’re interested in the conflict and Yemen, check out this interactive website, “Visualizing Yemen’s Invisible War,” that provides both narrative and data on the war. 
  3. Trump’s Push to Boost Lethal Drone Exports Reaps Few Rewards,” Lara Seligman. It turns out the Department of Defense and the U.S. Air Force aren’t completely sold on President Trump’s idea to sell advanced drone technology worldwide. Fascinating.

Writing in National Review, Charles C.W. Cooke decries the pharaonic spectacle of the modern presidential funeral. “Whether he was a great man or a poor one, George H. W. Bush was a public employee.” In order to honor his passing, Cooke asks, do we really need to shut down the stock market, postal service, and much of the nation’s capital for a national day of mourning? The whole business marks “another step toward the fetishization of an executive branch whose role is supposed to be more bureaucratic than spiritual.” I’m glad he said it first, but he’s absolutely right.

Our first president, ever conscious of the precedents he could set, didn’t want an elaborate state funeral. “It is my express desire that my Corpse may be Interred in a private manner, without parade, or funeral Oration,” Washington declared in his will. 

You’ve got to respect that—but, of course, we didn’t. Instead, “there was a massive public funeral at Mount Vernon,” Brady Carlson recounts in his 2016 book Dead Presidents, with a parade organized by Washington’s Masonic lodge, including “musicians, clergy, troops, and a riderless horse, a military tradition reportedly dating back to the age of Genghis Khan”—along with funeral orations by four ministers, topped off with “three general discharges of infantry, the cavalry, and eleven pieces of artillery, which lined the banks of the Potomac.”

The passing of the ninth U.S. president, William Henry Harrison, the first to die in office, set more precedents still. The interminable inaugural address that supposedly killed him featured Whiggish professions of deference to the legislature and the people–the president as a modest “accountable agent, not the principal; the servant, not the master.” Yet, according to the White House Historical Association, ‘the 30-day ceremonials surrounding the death of Harrison were modeled after royal funerals.” “There were bells, cannons, and funeral dirges,” Carlson writes, the White House was draped in black as “the late president and his casket rode in a black and white carriage pulled by six white horses, escorted by a pallbearer for each of the country’s twenty-six states and held up on a raised dais so the ten thousand people who turned up could see.” 

We fought a revolution to rid ourselves of kings, but, ironically enough, in the mother country, the sendoff for a former head of government tends to be decidedly less regal. The last British Prime Minister to get a state funeral was Winston Churchill. The pomp surrounding Margaret Thatcher’s 2013 funeral blurred the lines, a development the Telegraph’s Peter Oborne condemned as a “constitutional innovation… foolish and wrong”: 

Our constitution is defined by a rigorous separation between the head of state (the monarch) and the head of government (the prime minister). This marks us out from other countries, such as the United States of America, where the head of state and chief executive are merged in one person. As Anthony Sampson wrote in the Anatomy of Britain, the advantage of the British system is that “the head of state could represent the nation with all its traditional pomp and splendour, while the head of government appeared in a more workaday role”

Still, the funerals of other recent prime ministers have tended to respect that distinction, typically featuring no more pageantry than might be accorded any prominent private citizen.  

In America, by contrast, presidents are legally entitled to state funerals, whose details are meticulously prescribed in the 133-page Army Pamphlet 1-1. “Regulations say up to four thousand military and civilian support personnel can take part in state funeral services …. And typically the sitting president announces government offices will close for the day of the funeral.” 

The president described in the Federalist was to have “no particle of spiritual jurisdiction.” Yet there’s an unsettling, quasi-mystical orientation toward government at work in much of the ritual. While lying in state in the Capitol Rotunda, the president’s body is placed atop the Lincoln Catafalque: the funeral bier constructed for our 16th president–one of the holy relics of the American civil religion. Above him hangs the cathedral-like ceiling, which features the fresco “The Apotheosis of Washington,” painted by Constantino Brumidi in 1865. It depicts the first president “sitting amongst the heavens in an exalted manner, or in literal terms, ascending and becoming a god.” I generally find the so-called “New Atheists” insufferable, but we could use a little of their militant impiety when it comes to our presidential cult.  

George H.W. Bush’s funeral arrangements have been comparatively modest as these things go. So were Gerald Ford’s back in 2007. The man who proclaimed himself “a Ford, not a Lincoln” and toasted his own English muffins was praised once again for his humility because he skipped the horse-drawn processional. Instead, his 587-page funeral plan included a motorcade tour of Alexandria with stops at the World War II and Lincoln memorials and a military “missing man” flyover by 21 F-15E Strike Eagles at the burial in Grand Rapids.

The modern presidency, Cooke observes, smacks more of Caesar than of Coolidge. Here, as elsewhere, we could profit from Silent Cal’s example. “Coolidge’s will,” Carlson notes, “was just twenty-three words long, and his funeral ceremony lasted a mere five minutes.” In death, as in life, he was not a nuisance. 

The most popular piece of legislation in the House of Representatives—with 329 cosponsors—would phase out and eliminate the per-country limits for employment-based green cards, while doubling the limits for family-based immigrants. These per-country limits discriminate against nationals of countries with high demand for green cards. For employment-based immigrants, immigrants from India receiving green cards in 2018 waited a decade, Chinese immigrants waited 3 years, while everyone else waited less than a year.

It is fundamentally unfair to make equally qualified employees of U.S. businesses wait ten times as long based on their birthplace. Rather than selecting employees solely on who has the best resume, employers now also have to consider who has the right home country. Moreover, the wait times distort the market and keep immigrants with more experience and higher wage offers from receiving green cards. My analysis earlier this year showed that the per-country limits artificially suppress the average wage offer for most employer-sponsored immigrants by $11,592.

In August, however, Director of U.S. Citizenship and Immigration Services Francis Cissna who runs the legal immigration bureaucracy for the Trump administration appeared to criticize the change for undermining the “diversity” of immigrants. “It would indeed ameliorate the situation of Indian nationals,” he said. “But it would also have other effects on the diversity or flow more generally – and national representation amongst the employment-based immigration pool.”

“Diversity” is, indeed, the main argument for the country limits. But even assuming that the government has a legitimate interest in promoting diversity, is the argument even valid? Of course, the per-country limits result in diversity of, as Cissna put it, “national representation.” But using “nations” is a poor proxy for individual diversity. Compare immigrants from the European Union and Indians in the EB-2 green card lines for employees of U.S. businesses with master’s degrees, the line where nearly 70 percent of the employer-sponsored Indians are waiting.

Table: Comparison of India and European EB-2 Immigration

  India European Union Nations

1

28

Population

1,324,171,354

509,678,144

EB-2 Country Cap(s)

2,802

78,456

EB-2 Actual Issuances

2,879

5,239

Percent of Cap Used

100%

7%

Wait for a Green Card

10 Years

0 Years

Backlog of Applicants

433,368

0

Sources: Annual Report of the Visa Office; Visa Bulletin

The European Union has a collective country EB-2 quota 28 times higher than the quota for India because it is made up of 28 individual nations. It ends up using just 7 percent of that quota, but this is still almost twice as many green cards as all of India in the EB-2 category. This disparity exists even though the European Union has only 40 percent as many people as India. This seems unfair, but we’re told that this is alright because the EU—composed of 28 countries—is much more diverse than India.

Yet India has virtually the same number of official languages as the EU (22 v. 24). It has at least six major religions—Hinduism, Islam, Christianity, Sikhism, Buddhism, and Jainism—while the EU only has three—Christianity, Judaism, and Islam. Indian immigrants in America reflect this religious diversity as well: only half are Hindu, while the rest are Muslims, Sikhs, Jains, Christians, or others. The number of ethnic groups in each location is difficult to pin down, but India and the EU appear to have similar levels of ethnic diversity. Wikipedia lists 22 Indo-Aryan peoples, rivalling the roughly 28 nationalities in the EU. India is, of course, a geographically diverse area as well.

The fact is that nationality is not a very good approximation of individual diversity. On this point, Director Cissna’s statements were not strictly false, but they are misleading. Even if we grant that the EU is more diverse, is it so much more so that it justifies giving Indians 4 percent as many green cards? The only important legal difference is that India is considered a single state, while the EU, though it has a governing body, is still considered 28 different states, so it receives 28 times as many potential green card slots.

Of course, I find the entire idea that the government should attempt to micromanage the religious, linguistic, ethnic, or racial diversity of the United States ridiculous. The government has no legitimate interest in trying to keep out immigrants on these grounds or making them wait longer because of them. If it were proposed to discriminate directly on these grounds, that would be clear to anyone, but only because we disguise the discrimination as diversity in “national representation,” people excuse it.

Diversity should occur naturally as Americans—acting as family members, employers, or consumers—freely interact with people around the world. The government should not tip the scales to make the country more diverse or less diverse than it would otherwise be. In any case, employer-sponsored green cards are supposed to serve economic goals, not social engineering.

We know that the country caps, which started in 1924, did grow out of the Chinese Exclusion Act of 1882 and the Asiatic Bar Zone of 1917, which were explicitly efforts at racial engineering. Even when Congress reformed the country limits in 1965 to make them equal across countries, supporters of the legislation reassured  skeptics that America would not be flooded “hordes of Africans and Asians.” The reason Congress didn’t simply get rid of the caps was explicitly to keep down Asian and African immigration. The arguments have changed, but the end result is the same, and this type of government intervention is as inappropriate now as it was then.

In his comments, Director Cissna also recognized some of the problems that long waits can create, as employees are stuck with their employers and can be taken advantage of, and that the wait times are unfair toward Indians. But he’s wrong to emphasize the loss in diversity. Indians are a very diverse group themselves, and even if they weren’t, it is none of the government’s business anyway.

Ryan Bourne and I proposed that America adopt a Canadian-British innovation to encourage more personal savings. Those nations created accounts that are like supercharged Roth IRAs, and which have revolutionized savings for families at all income levels.

Republicans in Congress adopted the idea and included USAs in their Tax Reform 2.0 package, which passed the House in September. Individuals would deposit after-tax funds in the accounts, and then the earnings would grow tax-free and could be withdrawn at any time for any reason with no taxes or penalties. USAs would allow Americans to save without the restrictions and complexity of other vehicles.

The Heritage Foundation has released an excellent new analysis of USAs by Adam Michel. Michel discusses how USAs would boost personal savings, simplify taxes, and help lower-income families. He discusses the success of USA-style accounts in Canada and Britain, and he also notes that South Africa has introduced the accounts.   

Michel concludes that USAs would “help families build their own financial security through a single, simple, and flexible account.” Family financial security should be a bipartisan goal, and so USAs could be something that the parties work on together next year in a split Congress.

More reading on USAs:

https://object.cato.org/sites/cato.org/files/pubs/pdf/tbb-77-update-2.pdf

https://www.cato.org/blog/universal-savings-accounts-can-fix-401k-leakage

https://www.cato.org/blog/universal-savings-accounts-usas-introduced

http://thefederalist.com/2015/05/11/a-tax-reform-we-can-all-support/

https://www.cato.org/blog/universal-savings-accounts-usas

Ilya Somin offers a typically thoughtful case for why a second Brexit referendum would not be a betrayal of the 2016 result. His argument, as I read it, is this: Theresa May’s likely defeat on her dreadful proposed Withdrawal Agreement grants an opportunity to reassess the wisdom of leaving the EU. Given a referendum was the means of making the decision to leave, a referendum is a perfectly legitimate mechanism to test whether the public still wants to. Ergo, deciding to ultimately Remain in a second referendum would not betray the result of the first vote.

I disagree.

A second referendum so soon would violate the U.K.’s convention of having one-off constitutional referendums, the results of which are respected for a generation. The U.K. has had major referendums in the past on remaining within the European Economic Community (1975), changing the general election voting system (2011), deciding whether Northern Ireland should join the Republic of Ireland (1973), and Scottish Independence (2014). The results of all these constitutional decisions have been implemented without discussion of the need to check again whether people really meant to vote as they did. In the case of the EU, the gap between the EEC vote and 2016 was 41 years.

That is why, in the government leaflet that was sent to all households during the referendum campaign urging people to vote remain, the government promised to implement the result. It told the public “This is your decision. The Government will implement what you decide.” The implication was clear: the vote would be respected and delivered upon. And the result was clear: people wanted to leave the EU. Reassessing now would be an explicit breach of that promise.

For Brexit has not been delivered. We are still in the Article 50 process, and, as it stands, the U.K. will indeed leave on March 29th 2019, with or without a deal (unless Parliament intervenes). One cannot possible say “we tried Brexit and decided it wasn’t for us” when you haven’t even left. So if the second referendum did end up with a vote to Remain, and that was upheld, it would send a clear message to the public: only results that go a certain way are respected. Such a situation would fundamentally and irrevocably undermine faith in Britain’s democratic processes.

There’s another point. Referenda are relatively rare in Britain, but they usually arise because of an overwhelming public appetite or mandate for them, being rubber-stamped in some local or national election manifesto. No such offerings were made by either major party at the last election.

Polling furthermore suggests the public opposes a second referendum too, as do the leaders of both major political parties. Far from a so-called “People’s Vote” (as if the last vote was for llamas or something) it is the unreconciled Remainer MPs in Parliament who are pushing for a re-run. A likely reaction to a ballot forced on an unwilling public would therefore be mass boycotts and questionable legitimacy.

Indeed, it is difficult to think of what more the British public could do to show they really mean business on leaving the EU. UKIP and an increasingly Eurosceptic Conservative party won over 50 percent of the vote in a proportional system in the 2014 European elections. A Conservative party promising a referendum won an outright majority in 2015. Both the Conservative and Labour parties promised to respect the result and leave the EU’s institutions in their 2017 manifesto. The one party that pushed to reverse the result, the Liberal Democrats, did pathetically in the 2017 election.

I understand that these results were not what many wanted - especially those who see Brexit as a blow to liberty. It is peculiar to me having lived in the EU to hear it talked about as if it some pinnacle of libertarianism that no sovereign state could better. But in judging Brexit by the near-term loss of free movement or the problems associated in the short-term with no deal, some libertarians make a fundamental category error: confusing a constitutional decision with a policy bundle.

The referendum question did not ask what the trade relationship with the EU should be, or what immigration policy might be after Brexit, or whether the UK wanted a withdrawal deal or not. It was a constitutional instruction that the U.K. wanted to leave the EU’s institutions. All that other stuff is ordinary policy decision-making within the domain of a sovereign polity, and Britain will as pro- or anti-liberty as its people and politicians decide. 

But the referendum was about self-determination, and which government entities create the laws by which people are governed. To reject it or run it again would be like requesting whether the U.S. should rejoin the British empire every time a President adopts a set of policies those in Congress do not like.

Of course, at some stage the UK might want to revisit its constitutional decision. Its Parliamentarians may even agree with Ilya on the desirability of another vote before Brexit has happened. But that does not negate the fact that ignoring the first vote through not delivering on it (rowing back on a promise to do so), while defying conventions on the frequency and process by which referendums are delivered, would itself represent a betrayal of the democratic mandate.ᐧ

We learned last week that the 2017 drug overdose numbers reported by the US Centers for Disease Control and Prevention clearly show most opioid-related deaths are due to illicit fentanyl and heroin, while deaths due to prescription opioids have stabilized, continuing a steady trend for the past several years. I’ve encouraged using the term “Fentanyl Crisis” rather than “Opioid Crisis” to describe the situation, because it more accurately points to its cause—nonmedical users accessing drugs in the dangerous black market fueled by drug prohibition—hoping this will redirect attention and lead to reforms that are more likely to succeed. But the media and policymakers remain unshakably committed to the idea that the overdose crisis is the product of greedy pharmaceutical companies manipulating gullible and poorly-trained doctors into over-prescribing opioids for patients in pain and ensnaring them in the nightmare of addiction.

As a result, most of the focus has been on pressing health care practitioners to decrease their prescribing, imposing guidelines and ceilings on daily dosages that may be prescribed, and creating surveillance boards to enforce these parameters. These guidelines are not evidence-based, as Food and Drug Administration Commissioner Scott Gottlieb seems to realize, and have led to the abrupt tapering of chronic pain patients off of their medication, making many suffer desperately. An open letter by distinguished pain management experts appeared last week in the journal Pain Medicine criticizing current policies for lacking a basis in scientific evidence and generating a “large-scale humanitarian issue.” 

Current policy has brought high-dose prescriptions down 41 percent between 2010 and 2016, another 16.1 percent in 2017, and another 12 percent this year. Yet overdose deaths continue to mount year after year, up another 9.6 percent in 2017.

One might expect the obvious prevalence of heroin and illicit fentanyl among overdose deaths would make policymakers reconsider the relationship between opioid prescribing, nonmedical use, and overdose deaths. The data certainly support viewing the overdose crisis as an unintended consequence of drug prohibition: nonmedical users preferred to use diverted prescription opioids and, as supplies became tougher to come by in recent years, the efficient black market responded by filling the void with cheaper and more dangerous heroin and fentanyl.

Yet many defenders of the status quo believe the population of nonmedical users mostly derives from patients who were inappropriately prescribed opioids for a painful condition, e.g., a high school athlete prescribed opioids for a broken leg who becomes transformed into a drug addict. If that is the case, then reducing opioid prescribing in conjunction with better drug interdiction and expansion of drug rehab facilities should gradually eradicate the problem.  But the data do not support this. Undoubtedly, some patients, once exposed to an opioid for the treatment of a painful condition, enjoy the euphoria and “buzz,” and long to have that experience again. When presented with an opportunity to re-experience that drug nonmedically say, at a party, they happily indulge. But that is an exception, not the typical case.

The National Survey on Drug Use and Health has repeatedly found that less that 25 percent of nonmedical users of prescription opioids obtain their opioids from a doctor. Three-quarters get them from a friend, a relative, or a dealer. And a study of more than 27,000 OxyContin addicts entering rehab between 2004 and 2008 found 78 percent said the drug was never prescribed for them for any medical reason, 86 percent took the pills to get “high” or get a “buzz”, and 78 percent had a history of prior treatment for substance abuse disorder. 

But if that isn’t enough to create doubt among those who still adhere to the theory that the population of nonmedical users is largely made up of former patients, then let’s return to the National Survey on Drug Use and Health. Page 7 of the report examines “past month nonmedical use of pain relievers among adults aged 12 or older” and finds that rate essentially flat from the years 2002 to 2014. Page 26 of the same survey reports on “pain reliever use disorder in the past year among adults aged 12 or older” from 2002 to 2014 and shows that rate to be flat as well over that time period. (For reasons that are unclear, the NSDUH stops reporting on those data points in subsequent years.) Meanwhile, the volume of opioids prescribed between 1999 and 2015 tripled. Tripling the number of opioids prescribed did not appear to affect the rate of nonmedical use or prescription opioid abuse disorder.

So why have drug overdose deaths shot up so much in recent years?

As a study from the University of Pittsburgh Medical Center examining CDC data going back to the 1970s recently revealed, “Death rates from drug overdoses in the U.S. have been on an exponential growth curve that began at least 15 years before the mid-1990s surge in opioid prescribing, suggesting that overdose death rates may continue along this same historical growth trajectory for years to come.” The study’s senior author went on to say:

The current epidemic of overdose deaths due to prescription opioids, heroin and fentanyl appears to be the most recent manifestation of a more fundamental, longer-term process…understanding the forces holding these multiple individual drug epidemics together in a tight upward exponential trajectory will be important in revealing the root causes of the epidemic, and this understanding could be crucial to prevention and intervention strategies.

The study’s lead author, Hawre Jalal, MD, Ph.D said:

There is no regular or predictable pattern to the overdose rates for any of these drugs. Cocaine overdose death rates curved down and up and down and back up over the past 20 years. Methadone deaths have been on a downturn since the mid-2000s. Prescription opioids have been on a fairly steady, steep climb. Heroin deaths shot up in 2010, followed in 2013 by synthetic opioids, such as fentanyl. Methamphetamine appears to be on the verge of its own dramatic climb. Nonetheless, when we plot the annual sum of all drug overdoses, we get a remarkably smooth, inexorable exponential curve.

An NBC News reporter summed up the study by stating: “It [the overdose crisis] started before the availability of synthetic opioids, and may have only a little to do with the prescribing habits of doctors or the pushy habits of drugmakers the team at the University of Pittsburgh found.”

And a 2017 Washington University study found that 33.3 percent of heroin addicts entering rehab in 2015 initiated nonmedical drug use with heroin, as opposed to 8.7 percent in 2005.

More and more people have been using licit and illicit drugs nonmedically since the late 1970s. Some may be self-medicating in response to anxiety, depression, alienation, despair. And people are taking greater risks with their drug choices. 

Policymakers and the media like simple explanations and solutions for complex problems, and the opioid overprescribing narrative fits the bill. But as H.L. Mencken said, “For every complex problem there is an answer that is clear, simple, and wrong.”

The root causes of the present-day overdose crisis are decades-long psychosocial/cultural trends intersecting with the lucrative opportunities offered by drug prohibition. Ending drug prohibition will not curb the growing tendency for people to use drugs nonmedically. But it will reduce much of the harm that results.

Various proposals for “central bank digital currency” (CBDC) have been under discussion for several years now. The central bank of Ecuador launched a digital currency in 2015 — and shut down the failed project three years later. A number of economists have addressed the topic.

What is a CBDC? It is a payment medium that would be denominated in the established fiat money unit, not in any new unit. There are two main models: (1) a digital token that, like traditional coins and currency notes, and like Bitcoin, passes peer-to-peer without going through the interbank clearing system, presumably validated by a distributed-ledger blockchain system; and (2) account balances that individuals and businesses can directly hold on the books of the central bank, retail versions of the balances that commercial banks presently hold there for interbank payments. The latter model is not really properly called a currency, being a deposit-transfer system, but it is put under the “digital currency” umbrella because it resembles fiat currency notes in being a liability of the central bank, and as such a “final” means of payment, and because transactions would settle nearly instantly on a single balance sheet.[1]

The debate over CBDCs was recently revived by the IMF’s Managing Director Christine Lagarde in a speech suggesting, rather tentatively, that central banks should consider issuing some kind of digital currency so as to keep up with the times. (Why on earth the IMF continues to exist, long after the demise of the Bretton Woods system that it was created to support, is a question for another time.)

Lagarde begins her speech with a potted history of money. Although she does not attribute the origin of money to the state, she suggests that the state helps to improve money. Once bank-issued money arose, “spearheaded by the Italian bankers and merchants of the Renaissance,” trust in the issuer became important. Thus: “Trust became essential—and the state became the guarantor of that trust, by offering liquidity backstops, and supervision.” The timeline matters here. In fact, Italian bankers began providing money payments via transferable account balances some time before 1200 AD, whereas European states provided nothing in the way of “liquidity backstops, and supervision” until many centuries later. So state guarantees were not essential to the spread of bank-issued money historically. Nor was the popularity or safety of private banknotes, as issued by 17th century London goldsmiths, or by 18th and 19th-century Scottish or Canadian bankers, historically dependent on state guarantees.

Lagarde rightly notes that “the fintech revolution … questions the role of the state in providing money.” She points to the recent proliferation of digital private payment providers “from AliPay and WeChat in China, to PayTM in India, to M-Pesa in Kenya” and namechecks “cryptocurrencies such as Bitcoin, Ethereum, and Ripple.” She expresses her own position on the desirable monetary role of the state in surprisingly tentative language: “Some suggest the state should back down. Still, I am not entirely convinced. … I believe we should consider the possibility to issue digital currency. There may be a role for the state to supply money to the digital economy.”

On the plus side of the CBDC ledger, Lagarde proposes that a central bank digital currency “could satisfy public policy goals, such as (i) financial inclusion, and (ii) security and consumer protection; and to provide what the private sector cannot: (iii) privacy in payments.” Wait, what? It is of course laughable that a government would itself provide greater privacy in payments than it allows private institutions to provide. Could this have been a joke intended to lighten the mood of the speech? The private sector can in fact provide as much financial privacy as customers desire, as numbered Swiss bank accounts once did, and as “privacycoin” crypto projects today remind us. Lack of privacy stems from government restrictions, not from private-sector inability.

Lagarde says that “There may be scope for governments to encourage private sector solutions” to the problem of financial inclusion “by providing funding, or improving infrastructure.” More effective ways to encourage private sector solutions to banking the unbanked would be (a) deregulation, especially not requiring permission for innovations in mobile and other payment platforms, (b) guarantees not to interfere in private payment platforms once launched, and (c) guarantees on the privacy of private sector accounts from government surveillance, which might help to attract some of the warily unbanked to deposit use.

To her credit, Lagarde recognizes that people value the privacy provided by currency: “Cash, of course, allows for anonymous payments. We reach for cash to protect our privacy for legitimate reasons: to avoid exposure to hacking and customer profiling, for instance.” But she is vague at best, and dissembling at worst, on how deposits on the central bank’s books would insure privacy. She promises that customer identities “would not be disclosed to third parties or governments unless required by law,” but adds: “Anti-money laundering and terrorist financing controls would nevertheless run in the background. If a suspicion arose it would be possible to lift the veil of anonymity and investigate.” Would any suspicion by a policeman or tax collector be enough to lift the veil? If so, then the CBDC would be no more private than ordinary current-day bank deposits. J. P. Koning not unfairly characterizes what Lagarde offers as a “Faustian bargain”: “The state will issue digital currency that protects us from information snoops in the private sector, on the condition that it gets a back door.”

In the US and Europe, at least, banks today are required to notify regulators of large or “suspicious” deposit and withdrawal activities, and are expected to surrender account information to the authorities on a written request, without a court order or a search warrant.[2] It is hard to imagine that any government would instruct or allow its central bank to create accounts with greater privacy protection against the national government than commercial bank accounts have.

In the background to Lagarde’s speech is a November 2018 IMF staff discussion note on CBDC that she cites. [3] The note itself does not offer a brief for CBDC, but rather enumerates plusses and minuses. Comparing CBDC to cash, demand deposits, and non-bank private digital payment media, the note’s authors find that “CBDC would not strictly dominate any of these alternative forms of money.”

The staff discussion note emphasizes the hope of Keynesian macroeconomists that “interest-bearing CBDC would eliminate the effective lower bound on interest rate policy,” but points out that it would have this effect “only with constraints on the use of cash.” It is the abolition of easily stored cash that allows a central bank to impose negative interest rates, not the introduction of CBDC in either form.

The IMF note acknowledges a case for stronger payments privacy:

There are legitimate reasons people may prefer at least some degree of anonymity—potentially when it comes to everyone except the government, and regarding the government unless a court order unlocks encrypted transaction information. It is a way to avoid customer profiling—commercial use of personal information, for example, to charge higher mortgage rates to people who purchase alcohol. Another advantage of anonymity is limiting exposure to hacking. Moreover, anonymity is often associated with privacy—widely recognized as a human right (as stated in the Universal Declaration of Human Rights [Article 12] and elsewhere).

The note also observes that a central bank offering retail deposits “could increase risks to financial intermediation. It would raise funding costs for deposit-taking institutions.”

Just as importantly on the minus side, although not mentioned in either Lagarde’s speech or the IMF staff note, is that diverting deposits from commercial banks to the central bank will shrink the funding for the economic-growth-enhancing small business loans that commercial banks provide, in favor of central bank holdings of sovereign debts and government-favored private securities (for the Fed at present, mortgage-backed securities).[4] The IMF authors of the note observe that in a world where CBDC accounts replace both currency and ordinary checking deposits “only the commercial bank could create money.” Correspondingly, in a world of CBDC alone, only the central bank would direct the loanable funds marshalled by checking deposits.

[1] Bordo and Levin (2017) have suggested that private commercial banks should provide the front end for access to the central bank’s balance sheet, because they are better at customer service. Designated “digital cash” account balances at commercial banks would differ from ordinary account balances only in that balance transfers between accounts would be nearly instantly settled. Near-instant settlement would be enabled by the commercial banks holding “segregated reserve accounts” at the central bank, linked to their customers digital cash accounts, and presumably backed by high or even 100-percent, reserves. Under their proposal commercial banks would act as so many central bank branch agencies. Their proposed system would have all the same drawbacks of outright CBDC accounts discussed herein.

[2] Under the Right to Financial Privacy Act of 1978, a bank or other financial institution is protected from customer lawsuits for disclosing customer account information to a US federal agency (BATF, DEA, FBI, IRS, etc.) that subpoenas it in connection with suspected illegal activity. The agency is required only to notify an individual customer (but not a business customer) of the request, giving the customer ten days to seek legal redress. In court the agency does not need to meet the Fourth Amendment standard of probable cause. Under later statutes including the Patriot Act, notice is not required where the individual is suspected of drug trafficking, espionage, or terrorism. In a recent law review article, W. F. McElroy notes that today “the privacy of financial records from unwarranted government intrusion is under siege.”

[3] Tommaso Mancini-Griffoli, Maria Soledad Martinez Peria, Itai Agur, Anil Ari, John Kiff, Adina Popescu, and Celine Rochon, “Casting Light on Central Bank Digital Currency,” IMF Staff Discussion Note (November 2018).

[4] For theory and evidence on this point see Lastrapes and Selgin (2012).

[Cross-posted from Alt-M.org]

I have previously described in detail the reforms that America’s immigration system needs. In this post, I want to highlight what I think the general principles behind those reforms should be. Three basic principles should guide immigration reform: openness, equal treatment, and flexibility. Reform should make America more open to immigrants, should treat all immigrants equally as individuals, and should be flexible enough to respond automatically to changes in the economy or society.

1) Openness to new immigrants. Reform should make it easier to immigrate legally, not more difficult. This pillar protects the rights of Americans to associate, contract, and trade with people born in other countries. These people might be their family members, friends, employees, or employers, but ultimately, restrictions on immigration are restriction on the liberty of Americans. Reform should recognize the presumptive right—overcome only for very good reasons—of Americans to freely interact with foreigners on U.S. soil.

Of course, the freedom to associate across borders also benefits Americans—even those who don’t participate directly with the immigration system—by expanding the pool of employees, consumers, investors, and entrepreneurs who produce goods and provide services that improve the quality of life of all Americans. The social capital that immigrants bring with them makes America a stronger, safer country. Immigrants marry, have children, and participate in religious groups at higher rates than the U.S.-born population, and it is precisely for these reasons that they have much lower rates of criminality.

As a practical matter, there are many ways to move toward a more open immigration system. My list of reforms gives specific examples. But here is a general blueprint: grant indefinite work visas to anyone with a job in the United States, confer legal permanent residency on anyone who works for 5 years, and remove the quotas on green cards for immediate family members—adult children and siblings of U.S. citizens as well as spouses and minor children of legal permanent residents.

2) Equal treatment for new immigrants. America has a long legacy of discriminating against certain types of immigrants, from the Chinese Exclusion Act to the Asiatic Bar Zone to the National Origins Quota System. Unfortunately, this legacy is not entirely purged from the statute books. Today, the government still attempts to micromanage the ethnic makeup of legal immigrants by limiting nationals of any particular country to no more than 7 percent of the total green cards. These “per-country caps” discriminate against immigrants from high-demand countries like India, China, and Mexico, while discriminating in favor of those from less populous countries like those in Europe. The caps are not only an affront to the fundamental principles of fairness but they are economically harmful, forcing immigrants with more experience and higher wage offers to wait longer than others.

Last year, President Trump introduced more discrimination into the system by banning all entries from six countries. This effectively imposes a country quota of zero for Iran, Libya, Syria, Somalia, and Yemen. This means that even if an Iranian or Syrian is eligible for a green card under the normal channels, they would still be barred from immigrating. The president previously labeled this an extension of his “Muslim ban” concept. In order to end this discrimination, and prevent it from returning, Congress needs to repeal the per-country limits and bar the president from reimposing similar limitations without explicit authority from Congress.

3) Flexibility to changes in the economy and society. Congress has not updated America’s immigration system in 28 years. During that time, America’s population has grown by a third, and its economy has doubled. Yet the immigration quotas and categories have not changed at all. In order to prevent the immigration system from becoming antiquated, it’s not enough for Congress to merely update it based on what would be best for today—it needs to build a system that is flexible enough to adapt to changes that will happen in the future. Otherwise, the new system will become outdated soon after it is implemented.

Ideally, Congress would end arbitrary quotas on immigration. The government should impose qualitative, not quantitative limits, on immigration. Hard numerical limits are the most rigidity-inducing aspect of the legal immigration system and cause the most harm, but if Congress does maintain quotas, it should go beyond merely updating them. It should link family-based quotas to population growth (or the number of families in the United States) and link employment-based quotas to economic growth, growing as the economy grows.

This would prevent the numbers of immigrants from becoming outdated, but the categories and regulations under which those immigrants enter also fall out of line with the needs of the economy. Consider the fact that there are no programs for lesser-skilled temporary workers who want to work in year-round jobs because Congress in 1990 believed that employers only needed seasonal workers. While Congress can plug the holes as best it can, it should also grant the ability to states to sponsor immigrants based on whatever criteria that the state wants. Canada already has this type of immigration program for its provinces. This would allow states to essentially invent new green card categories, even while the numbers remain largely the same.

With these principles in mind, Congress can construct an immigration system that will provide for America’s economy and society long into the 21st century.

Many macreconomists believe that the Fed needs to keep raising rates now so it can lower them in future to combat a recession.  See, for example, my colleague Martin Feldstein’s recent op-ed in the WSJ.

I have always been puzzled by this argument; it seems to assume an asymmetry in the effects of raising versus lowering rates. 

Specifically, if raising rates now will hurt the economy just as much as lowering them later will help, why is the net effect beneficial? To a first approximation, one might expect a symmetric effect, which makes the standard case for higher rates now unconvincing.

In an end-run around Congress, the Trump administration has proposed a revision to the H-1B work visa program, which provides temporary visas to skilled foreign workers. The Department of Homeland Security (DHS) states that it is issuing the visas pursuant to President Trump’s “Buy American and Hire American” Executive Order, which vaguely requires agencies “to protect the interests of United States workers in the administration of our immigration system.”

One important aspect of this new 139-page proposal flatly contradicts the scheme that Congress created, and for this reason, it may never take effect. The stated goal of this particular portion of the regulation is to “prioritize petitions filed on behalf of beneficiaries who have attained a master’s or higher degree” (p. 44), but the specific changes that it makes contradict the intent of Congress and would have—in earlier years—reduce the total number of H-1B visas. 

Under current law, H-1B visas have a quota of 65,000 (8 U.S.C. 1184(g)(1)(A)(vii)). However, there are several categories of H-1Bs who are exempt from this quota—college professors, nonprofit researchers, and those with a master’s degree or higher for a U.S. university (8 U.S.C. 1184(g)(5)). The master’s degree holder exemption, however, has a separate cap of 20,000. Once the number of visas for master’s degree holders reaches 20,000, any additional count against the overall cap (8 U.S.C. 1184(g)(5)(C)).

DHS’s new revision to the H-1B program, however, would first count master’s degree holders against the overall H-1B cap of 65,000 and only then count them against the master’s exemption, the opposite of what the law requires. DHS comments (pp. 10-11):

Changing the order in which USCIS selects beneficiaries under these separate allocations will likely increase the total number of petitions selected under the regular cap for H-1B beneficiaries who possess a master’s or higher degree from a U.S. institution of higher education each fiscal year … Conversely, this process will likely decrease the total number of petitions selected for H-1B beneficiaries with less than a master’s degree …

In recent years, the H-1B cap is filled immediately, so DHS puts all the applications in two lotteries. First, the master’s degree holders are selected, and then after that, any master’s degree holders who aren’t selected are placed in the second lottery. Inverting the order increases the probability of master’s degree holders being selected in the initial allocation.

The problem here is twofold. First, the statute clearly prohibits counting master’s degree holders against the overall H-1B cap until after the master’s exemption is filled. To quote the statute (8 U.S.C. 1184(g)(5)(C)) directly:

(5) The numerical limitations contained in paragraph (1)(A) shall not apply to any nonimmigrant alien … who … (C) has earned a master’s or higher degree from a United States institution of higher education (as defined in section 1001(a) of title 20), until the number of aliens who are exempted from such numerical limitation during such year exceeds 20,000. (Emphasis added)

DHS cannot legally count master’s degree holders against the overall H-1B quota before the master’s exemption is filled. In other words, Congress did not want to increase the probability of master’s degree holders being selected in the overall H-1B cap. It just wanted to provide a guarantee of 20,000 visas for master’s degree holders. Not only does DHS not address the statutory issue here, it never even quotes the statute directly. On this point, it merely states (p. 11):

DHS believes that amending its regulations in this manner would increase the chances that beneficiaries with a master’s degree or higher from a U.S. institution of higher education would be selected under the H-1B regular cap, which is generally consistent with congressional intent in enacting section 214(g)(5)(C) to prioritize these workers … (Emphasis added)

I find the use of the word “generally” here to be a telling admission. Either this change is consistent with congressional intent or it is not. It cannot be “generally” consistent. “Generally” implies that in some respects, it may not be consistent.  Whoever chose to include that word must have known that it was not, in every respect, consistent with the law.

The second problem with this change is that it is a clever effort to decrease H-1B admissions. DHS writes (p. 26):

USCIS is proposing to count all registrations [including master’s degree holders] toward the H-1B regular cap projections first, even in years when a random selection process [i.e. a lottery] at the end of the initial registration period may not be necessary. (Emphasis added)

In years where the cap is not immediately filled, the new scheme could thwart the intent of Congress in another way: by reducing the overall number of visas available. Suppose 20,000 master’s degree holders apply during a year, while 65,000 bachelor’s degree holders apply. There should be enough visas for everyone under Congress’s scheme. But under DHS’s regulation, the 20,000 master’s degree holders would be counting against the 65,000 cap throughout the year. Once that’s hit, then there’s maybe 5,000 master’s degree holders left and 15,000 bachelor’s degree holders. But only the 5,000 can get visas under the master’s exemption, resulting in a 15,000 visa cut to the H-1B program. Something like this situation would probably have occurred during the FY 2011 allocation, which took 10 months to fill.

DHS never even acknowledges this issue, implying that the change could never matter to the overall numbers. The Trump administration has once again disguised a potential cut to legal immigration as a “merit-based” immigration reform, and it has done so in violation of the law. While the president has thwarted the plain meaning of other statutes in the past in order to cut immigration, the statute is so clear that he might just lose this time.

In March of this year, Forbes published an article with the following lede:

The Economist has called them “an addiction to corporate cocaine.” Reuters has called them “self-cannibalization.” The Financial Times has called them “an overwhelming conflict of interest.” In an article that won the HBR McKinsey Award for the best article of the year, Harvard Business Review has called them “stock price manipulation.” These influential journals make a powerful case that wholesale stock buybacks are a bad idea—bad economically, bad financially, bad socially, bad legally and bad morally.

There is no shortage of hand-wringing over “excessive” stock buybacks, either in the academic literature or in the popular media. Such criticisms are misguided in two crucial ways. Methodologically, they overstate the scale of the problem (such as it is) by observing gross payouts instead of payouts net of issuance, and by neglecting the extent to which firms are simply substituting low-interest debt for equity financing. Second, while accusing shareholders of myopia and executives of cupidity, such critics are not taking a properly panoptic view of the function that buybacks serve in the broader equity ecosystem.    

I.

A 2018 report by the Roosevelt Institute cites a statistic that lies at the heart of alarmism over the size and scale of stock buybacks:

Over the last decade-and-a-half, firms have sent 94 percent of corporate profits out to shareholders, in the form of buybacks, as well as dividends, leaving companies to argue that there is little available for employee compensation or investment.[1]

But other recent research dramatically qualifies such despair. Harvard researchers Jesse Fried and Charles Wang offer a persuasive rejoinder to concerns over the scale of equity outlays:

During 2007-2016, S&P 500 firms distributed to shareholders more than $4.2 trillion through stock buybacks and about $2.8 trillion through dividends. These cash outflows, totaling $7 trillion, represented 96% of these firms’ net income during that decade. But during this same period, S&P 500 firms absorbed, directly or indirectly, $3.3 trillion of equity capital from shareholders through share issuances. Net shareholder payouts from S&P 500 firms were therefore only about $3.7 trillion, or 50% of these firms’ net income.[2]

Moreover, this figure pertains only to those firms listed on the S&P 500, which are relatively mature, vs. publicly traded firms not listed on the index. When accounting for unlisted public firms, who are net importers of capital, the share of corporate income channeled into buybacks and dividends falls further, to 41%.[3] Yet net equity outlays don’t necessarily translate into a reduced cash position. Low-interest rates mean that firms can afford to reorient their balance sheets away from equity and toward debt financing. In fact, in the years 1989-2012, fully 42% of equity payouts were offset by a debt issuance that same year.[4] In a recent working paper, Mark Roe takes direct aim at this argument:

Low interest rates pushed corporate America to substitute low-interest debt for stock. Viewed as a capital structure decision, the double trend—more low-interest debt, less equity—fits the short-termist critique poorly. Overall, public firms have more cash, not less.[5]

Not only do public corporations retain more of their earnings than is indicated by gross equity outlays (including debt financing, total corporate cash balances rose from $3.3 to $4.5 trillion between 2007-2016[6]), there is evidence to suggest that this extra liquidity is flowing into long-term investments such as R&D. Again quoting from Fried and Wang:

Further, we show that public firms deployed much of this capacity for investment in R&D and CAPEX. In absolute terms, total investment (R&D and CAPEX) rose to a record level. And relative to revenues, total investment rose to levels not seen since the late 1990s economic boom.

If anything, these large gross capital movements, and net equity outlays, are a sign of economic efficiency, not destructive short-termism. As John Cochrane explains in the Wall St. Journal, if Company A is short on investment ideas but long on cash, and Company B is facing the opposite situation, a share buyback allows investors to reallocate their capital to its higher-value use (in the hands of Company B).[7] Nonetheless, critics maintain not only that the scale of buybacks is immense, but that their influence is malign.

II.

i.

Share buybacks, to the extent that they are in fact occurring, are highlighted as one of many symptoms of a greater pathology plaguing our economy: short-termism.

Contra the proponents of the efficient markets hypothesis, who argue that prices on the stock market incorporate all extant information about a firm’s current and expected future profits - discounted accordingly - there exists a considerable economics literature that grants the premise that shareholders are rational, but that posits that this individual shareholder rationality does not aggregate to rationality at the market level. One such market failure is said to obtain in publicly traded equities, known variously as “short-termism, “quarterly capitalism”, or, more formally, the “myopia hypothesis.”

While accusations of stock-market short-termism are intellectually buttressed by different arguments[8], the most common strain of the “myopia hypothesis” proceeds as follows: the managers of publicly traded firms, whose shares trade in deep and liquid markets, are hostage to the over-diversified and under-informed marginal shareholder, who moves the share price not in response to new information about a firm’s fundamentals, but in response to the latest, easily digestible quarterly earnings report. Instead of undertaking investments in the present that might have a substantial return several years down the road, managers are induced to mimic the priorities of transient shareholders uninterested in a firm’s long-term strategy. Future-oriented firms that resist this temptation will be penalized, finding it more difficult to raise capital. This will in turn affect their bottom line, jeopardizing their ability to even survive to the point at which they would reap the returns from their long-term investments.

The seeming insuperability of such incentives has led to calls for a variety of legal remedies: from relatively minor vesting restrictions on executive stock options to a wholesale paradigm shift from our free-wheeling “liberal market economy” to a Franco-Germanic-Japanese style “coordinated market economy” in which patient, farsighted institutional bloc-holders substitute for a dispersed set of myopic, over-diversified shareholders.[9]  While few policymakers have the stomach to commit hari-kari on our institutional innards in such a wholesale fashion, more “modest” proposals are advanced (and often achieved) by figures such as Barack Obama and Elizabeth Warren on a routine basis, but without the redeeming Swiftian irony or humor.[10] One such cure proposed for the short-termism disease is a restriction on share buybacks. I will spend the remainder of this post summarizing why critics find buybacks to be problematic, countering this diagnosis with arguments as to the important role that buybacks play in equity markets, and will suggest that this proposed “cure” is likely to be iatrogenic.

ii.

If corporations are disincentivized from reinvesting their profits into the firm, as the short-termists claim, what are they to do with their earnings? Disburse them to shareholders, either in the form of dividends or share buybacks. Shareholders force corporations to eat their seed corn without a thought for next year’s harvest. The lower a firm’s free cash flow, the less ability it retains to take on new investments, even those with a high net-present-value. But no matter: the corporate form is not to be treated as the vehicle for the transformation of debt and equity into a value-added product, but as a piñata full of cash.

Forbes’ Steve Denning articulates buybacks’ contribution to short-termism thusly:

 

 [Corporate executives] hit upon a magic shortcut: why bother to create new value for shareholders? Why not simply extract value that the organization had already accumulated and transfer it directly to shareholders (including themselves) by way of buying back their own shares? By reducing the number of shares, firms could, as a result of simple mathematics, boost their earnings per share. The result was usually a bump in the stock price—and short-term shareholder value.

Moreover, in many progressive circles, share buybacks are a hair’s breadth from outright fraud. Legally ambiguous prior to a 1982 rule change by the SEC which provided clear “safe harbor” provisions for the practice, buybacks have since become a key tool in corporate finance.[11]

Rather than serving a sensible capital rebalancing purpose, such critics claim that buybacks are used to game the next earnings report to appease shareholders and juice executive compensation metrics. By reducing a corporation’s cash (an asset), buybacks increase Return on Assets (ROA) as well as Earnings per Share (EPS) by reducing the number of shares outstanding.

For many academics and policymakers, stock buybacks are not merely presumptively illegitimate, but are illegitimate per se. William Lazonick, in the aforementioned (award-winning) Harvard Business Review article “Profits without Prosperity”, states bluntly that “the reasons commonly given to justify open-market repurchases all defy facts and logic” (emphasis mine). He goes on to claim that “the only plausible reason for this mode of resource allocation” is the greed of corporate executives. He is similarly forthright in his prescription:

The American public should demand that the federal government agency that is supposed to regulate the stock market rescind the “safe harbor” that enables corporate executives to manipulate stock prices…the SEC may well be advised to make open-market repurchases illegal.[12]

But is it possible that share buybacks serve a legitimate financial function? If so, any restrictions on corporations’ ability to restructure their liabilities in this way will have unintended consequences that may completely offset any salutary effects such a restriction might have.

Because share prices often rise in anticipation of an announced buyback program, critics claim that corporate executives repurchase shares to goose the company’s short-term valuation, to which their own stock options are tied. But this same empirical pattern is also consistent with a properly incentivized management returning cash to shareholders when the company lacks investment opportunities with sufficiently high net present values.

As Hoover fellow John Cochrane explains, not every firm in the economy faces the same spectrum of profitable investment opportunities at the same time. It is therefore efficient for cash to flow from those firms that have the lowest marginal returns on investment to those that have the highest. Skeptics of this argument maintain that these “mature” firms with a reduced need for cash will, by virtue of their longevity, have developed “dynamic capabilities” that would allow them to exploit a functionally inexhaustible set of investments whose returns exceed the hurdle rate.[13] But even ignoring organizational diseconomies of scale and granting this heroic assumption, we cannot wish away one of the core features endemic to the relationship between a corporation’s shareholders and its managers: agency costs.

Because a corporation’s management does not fully internalize the impact of its actions on the firm’s share price, there exists an incentive misalignment vis-à-vis shareholders.[14] Managers are perennially tempted to allocate the firm’s resources towards assets that do not benefit shareholders, but instead improve managerial consumption (in Cochrane’s example, a fleet of corporate Ferraris.) Such waste need not be so conspicuous, however. Subtler forms, such as “empire building”, consist of mergers and acquisitions which are not value-maximizing, but which serve to aggrandize the power of the CEO. Thus, even assuming that management could steer a firm’s cash toward profitable investment opportunities, there is no guarantee that it will. The rise in a firm’s share price after the announcement of a buyback can therefore be explained by shareholders recalculating the probability that the firm’s cash is going to be squandered on such suboptimal investments. That cash, once returned to investors, is now free to find its way into a small business loan, a growing firm’s shares, a venture capital fund, or a variety of other uses. The much-lamented fact that executive compensation is increasingly tied to share price may in fact be an efficient mechanism by which managers are incentivized to redistribute free cash flow back to shareholders instead of allocating it toward non-profit-maximizing assets.[15]

If buybacks are indeed a possible mechanism by which management can artificially meet a compensation metric (eg EPS, ROA) the problem lies in the structure of the corporate contract, not with buybacks themselves. Presumably, if managers are incurring large opportunity costs by returning cash that could have gone toward profitable investments, this will harm a firm’s share price insofar as investors downwardly adjust their expectation that these funds will be used profitably. This line of reasoning merely grants the assumption that shareholders are at least as perceptive as the critics of buybacks, who so confidently claim to know that managers are foregoing high-return investments.[16] But, having granted this assumption, management’s ability to “trick” the market via buybacks disappears, as shareholders will penalize the firm’s valuation for its unwillingness to undergo profitable investments.

Even allowing for management to systematically and repeatedly manipulate share prices via buybacks to line their own pockets to the detriment of the firm, the logic of natural selection should militate against the persistence of firms with such maladaptive compensation packages. Firms that incentivize their management to sacrifice long-term growth for the sake of juicing EPS will eventually be out-competed in the market by firms that have a more adaptive compensation structure.

Buybacks, moreover, allow firms to nimbly modify their capital structure in response to changing market conditions. As mentioned in Part I Section III, firms have been using share buybacks to rebalance their liabilities away from equity and towards debt partly in response to historically low interest rates, a “great trade” according to Home Depot’s CFO.[17] Firms also calibrate their mix of debt and equity financing as a function of expected future rates of the relative costs of capital. In raising the cost of reversing a round of equity issuance, restrictions on buybacks make forecasting errors much more painful.

One particularly ironic use toward which share buybacks might be deployed is as a defense against shareholder underpricing of a firm’s value.[18] If shareholders are systematically mispricing a firm’s shares relative to its fundamentals, perhaps by underestimating or overly discounting future growth, management can send a costly signal of its belief that the shares are undervalued by repurchasing and then reissuing them in the future for a capital gain.

      

[1] Stock Buybacks: Driving a High-Profit, Low-Wage Economy, Palldino 2018

[2] Fried and Wang 2018

[3] Id

[4] Farre-Mensa, Michaely, and Schmalz (2018)

[5] Roe 2018

[6] Supra, note 2

[7] Op-ed March 5, 2018

[8] In 1989, economist Jeremy Stein published a highly influential article titled Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior. It explicates a model in which corporate managers are trapped in a prisoner’s dilemma vis-a-vis other managers. Anticipating that investors will use current earnings as the best forecast of future earnings, each manager is eager to unilaterally inflate the next earnings report and thereby reap an advantage in attracting equity capital. This can be accomplished by relatively innocuous accounting gimmickry, or by genuinely harmful dereliction of longer-term investments. The systemic effect of these individually rational strategies is an equilibrium in which all short-term earnings are inflated but to nobody’s advantage. This is but a particular strain of a larger literature, which details the various mechanisms by which share prices may be caused to deviate from fundamentals without alleging that investors are irrational (a school of thought with a similarly impressive pedigree, with seminal contributions from Robert Shiller, Brad DeLong and Lawrence Summers).    

[9] Hall and Soskice (2000) “Varieties of Capitalism”

[10] Eg Elizabeth Warren’s Accountable Capitalism Act and the incorporation of say-on-pay mandates in the Dodd-Frank Act

[11] Rule 10b-18

[12] Lazonick (2014)

[13] Treece (2011)

[14] Jensen and Meckling (1976)

[15] Grossman and Hart 1982; Jensen 1986, 1989; Hart and Moore 1995; Hansmann 1996

[16] Palladino (2018)

[17] Ma (2016)

[18] Stein (1996)

At the G20 meeting in Buenos Aires today, the renegotiated NAFTA – in the U.S., the new agreement is referred to as the United States - Mexico - Canada Agreement, or USMCA – was signed by the three parties. The big question now is, what will Congress think of the agreement as it decides whether to ratify it? One aspect of this question is, what will the Democrats who now control the House think of it? And to get even more specific, I’m very curious to see what progressives think of it. While she is in the Senate rather than the House, Senator Elizabeth Warren may be a good indicator of what many progressives think. Yesterday, Senator Warren gave a speech at American University in which she set out “her vision for a progressive foreign policy that works for all Americans.” She covered a lot of ground, and I won’t go through all of it, but here is a key bit on trade policy:

By the time the 2008 global financial crash came around, it only confirmed what millions of Americans already knew: the system didn’t work for working people - and it wasn’t really intended to.

And it’s still not working. Tomorrow, the Trump Administration will likely sign a renegotiated NAFTA deal. 

There’s no question we need to renegotiate NAFTA. The federal government has certified that NAFTA has already cost us nearly a million good American jobs - and big companies continue to use NAFTA to outsource jobs to Mexico to this day.

But as it’s currently written, Trump’s deal won’t stop the serious and ongoing harm NAFTA causes for American workers. It won’t stop outsourcing, it won’t raise wages, and it won’t create jobs. It’s NAFTA 2.0.

For example, NAFTA 2.0 has better labor standards on paper but it doesn’t give American workers enough tools to enforce those standards. Without swift and certain enforcement of these new labor standards, big corporations will continue outsourcing jobs to Mexico to so they can pay workers less.

NAFTA 2.0 is also stuffed with handouts that will let big drug companies lock in the high prices they charge for many drugs. The new rules will make it harder to bring down drug prices for seniors and anyone else who needs access to life-saving medicine.

And NAFTA 2.0 does little to reduce pollution or combat the dangers of climate change - giving American companies one more reason to close their factories here and move to Mexico where the environmental standards are lower. That’s bad for the earth and bad for American workers.

For these reasons, I oppose NAFTA 2.0, and will vote against it in the Senate unless President Trump reopens the agreement and produces a better deal for America’s working families.

How can we make the system fair for working Americans? Lots of ways.

  • We can start by ensuring that workers are meaningfully represented at the negotiating table and build trade agreements that strengthen labor standards worldwide.
  • We can make every trade promise equally enforceable, both those terms that help corporations and those that help workers.
  • We can curtail the power of multinational monopolies through serious antitrust enforcement.
  • We can work with our international partners to crack down on tax havens. 

Those four changes would fundamentally alter every trade negotiation. 

I disagree with most of her views on the impact of NAFTA, but putting that aside, what I’m curious about here is what it would take to get her to support the new NAFTA. I’ve read through her remarks a couple times now, and I still can’t figure out precisely what changes she wants and expects in NAFTA 2.0 in order to vote for it. First of all, the tax haven and monopoly issues are not likely to be addressed seriously through a trade agreement anytime soon, so we can ignore that part. On the other hand, the labor protections and worker issues are already in the new NAFTA, and the Trump administration pushed for changes in this area that gave labor groups far more than President Obama’s Trans Pacific Partnership did. So what is Senator Warren’s goal with these statements? Is she laying the groundwork for a “no” vote on the agreement, regardless of any additions to the agreement the Trump administration might accept? Or are there changes on labor rights that would satisfy her and get her to vote in favor?

My instinct is that she will not vote for any trade agreement negotiated by Trump, but we’ll see. Perhaps there is more potential with the younger progressives in Congress who are not as wedded to the economic nationalist views of senior Democrats. Has anyone asked Alexandria Ocasio-Cortez what she thinks of trade liberalization and whether there is a trade agreement she could support? I’m curious whether she and other young progressives who are open to immigration could also be open to trade. I’ve seen her sound skeptical about trade deals on Twitter, but now she will be governing rather than campaigning, and that could make her think more deeply about whether blocking trade with people in other contries is really a good policy.

The Illinois legislature has enacted a law, over the veto of Gov. Bruce Rauner (R), that will strip consumer protections from patients with preexisting conditions, throw them out of their health plans, deny them health care, and expose them to bankruptcy. Naturally, it did so in the name of…helping patients with preexisting conditions. 

The new law imposes limits on so-called “short-term” health plans. Federal law exempts short-term plans from ObamaCare’s costly and punitive health insurance regulations. As a result, short-term plans allow enrollees to purchase only the coverage they value, frequently cost half as much as ObamaCare plans, and offer broader choice of providers than ObamaCare plans. Thanks to new federal rules, short-term plans can last up to 12 months, be renewed for up to 36 months, and can enable enrollees who fall ill to keep paying low, healthy-person premiums indefinitely, making access to care more secure for the sick. Critics acknowledge the new rules could extend health insurance to 2 million previously uninsured Americans.

Consumers appear to value the broader choices that the new rules offer. The web site eHealth reports that the share of unsubsidized insurance purchasers who chose a short-term plan over an ObamaCare plan rose from 56 percent during the last enrollment period to 70 percent during this enrollment period. (See graph.)

Voters appear to believe the benefits of these new rules outweigh the costs. Polling shows voters support the new rules by nearly a two-to-one ratio–even if purchasers choose less coverage than ObamaCare requires, and even if ObamaCare premiums rise as a result. (See chart nearby.) There is reason to believe the new rules will reduce ObamaCare premiums. (See below.)

Illinois legislators, responding to critics who complain short-term plans are “junk” insurance, have decreed that short-term plans can last no longer than six months and that enrollees whose short-term plans expire must wait 60 days before purchasing a subsequent plan. The Sargent Shriver National Center on Poverty Law tweeted about the new law, “GREAT NEWS! SB1737 is law, and Illinois will now protect healthcare consumers with pre-existing conditions.”

That is exactly backward. The new Illinois law does not protect patients with preexisting conditions. It does not outlaw “junk” insurance. It creates junk insurance by taking protections away from short-term plan enrollees and exposing patients with preexisting conditions to denied care and bankruptcy.

Under prior law, short-term plans could provide many Illinois residents with seamless coverage. Residents could purchase short-term plans that could cover them indefinitely, but at least until the next ObamaCare open-enrollment period, at which point they could enroll in an ObamaCare plan without facing medical underwriting or denials of coverage. 

The new law outlaws short-term plans that last more than six months. Now, by law, short-term plan enrollees who develop cancer or other expensive illnesses will lose that coverage when their plan reaches the six-month limit. This ban will not affect healthy consumers. When their six-month plans expire, healthy consumers can just wait the required 60 days and purchase a new six-month plan. The ban will instead hurt patients with preexisting conditions–specifically, those who fall ill while enrolled in a short-term plan or during the 60-day waiting period. The new law will throw those patients out of their plans, leaving them with preexisting conditions and no health insurance at all for up to 12 months. 

As a direct result of the new law:

  • Any Illinois resident who purchases a short-term plan on January 1, 2019 and subsequently gets a cancer diagnosis will lose that coverage on June 29 and face six months of expensive medical bills with no coverage. She will not be able to obtain a new short-term plan, because her cancer will be a preexisting condition. She also will not be able to get coverage through ObamaCare for six months–i.e., until January 1, 2020. Yes, ObamaCare prohibits insurers from denying coverage on the basis of preexisting conditions, but it also generally denies coverage to everyone outside of a six-week open-enrollment period at the end of each year.
  • The same fate will befall any Illinois resident who gets a cancer diagnosis during the 60-day waiting period. By law, they will face months and months of expensive medical bills with no coverage. They will be unable to purchase another short-term plan, and they will be locked out of ObamaCare. 

This is exactly what happened to Jeanne Balvin. Similar rules imposed by the Obama administration threw Balvin out of her short-term plan, leaving her with $95,000 in medical bills and no insurance to help pay them. (The new federal rules supersede the Obama-era rules.) 

Had Illinois legislators just done nothing, or even just upheld Rauner’s veto, short-term plans could have covered Illinois residents throughout ObamaCare’s entire coverage-denial period. Instead, Illinoisans with preexisting conditions will face months and months of expensive medical bills with no coverage at all.

This is perverse. Illinois legislators knew that canceling short-term plans hurts patients with preexisting conditions. We know they knew, because they included a provision in the new law that forbids insurers from canceling short-term plans  “before the expiration date in the policy, except in cases of nonpayment of premiums, fraud,” or at the option of the enrollee. And yet the legislature will now rescind short-term plans from patients with preexisting conditions within six months of their diagnosis, no matter how much human suffering it may cause.

Supporters claim that crippling short-term plans is necessary to protect patients with preexisting conditions. If short-term plans offer lower-cost coverage to healthy consumers, they argue, healthy consumers will flee ObamaCare plans. ObamaCare premiums would then rise to the point of threatening ObamaCare’s economic and/or political viability, thereby threatening access to care for patients with preexisting conditions currently enrolled in ObamaCare plans. Among the many flaws in this argument is the fact that short-term plans can actually reduce ObamaCare premiums by keeping expensive patients out of ObamaCare’s risk pools. The new federal rules allow short-term plan enrollees to purchase “renewal guarantees” that give them the right to keep purchasing short-term plans at low, healthy-person premiums even after they develop expensive medical conditions. Short-term plans can thus reduce ObamaCare premiums by keeping expensive patients out of those risk pools, just as the pre-ObamaCare individual market kept many expensive patients out of state high-risk pools. The presumed harms that more flexible short-term plans could inflict on patients with preexising conditions in ObamaCare plans are attenuated and uncertain. The harms that the Illinois law will inflict on patients with preexisting conditions who are enrolled in short-term plans are definite, immediate, and concrete.

There is no way to dress up laws restricting short-term plans as anything other than government rationing of care to the sick. The activists and politicians who supported this law are not patient advocates. They are callous ideologues who are willing to deny care to sick patients for the sake of protecting ObamaCare.

Conventional wisdom argues that the opioid epidemic has resulted from excessive opioid prescribing, but the evidence shows just the opposite. Restrictions on opioid prescribing have pushed opioid users into the black market, where they overdose on illicit fentanyl, not prescription opioids (mainly because they cannot assess potency).   Reason’s Jacob Sullum has a nice recent piece on this point.

Yet policymakers keep doubling down on the conventional wisdom.  The U.S. Attorney for Massachusetts, Andrew Lelling, has just anounced new scrutiny of doctors who prescribe opioids:

US Attorney Andrew E. Lelling has sent letters to “a number of medical professionals” alerting them that their opioid prescribing practices “have been identified as a source of concern.”

In a statement released Thursday, Lelling said that the professionals who received the warning had prescribed opioids to a patient within 60 days of that patient’s death or to a patient who subsequently died from an opioid overdose.

The letters inform the professionals that it’s illegal to prescribe opioids “without a legitimate medical purpose, substantially in excess of the needs of the patient, or outside the usual course of professional practice.” It acknowledges that the prescriptions may have been medically appropriate, however.

Such actions will scare medicial professionals into even less prescribing, force more patients into the black market, and increase the frequency of opioids overdoses.

What a lousy deal. My colleagues at the University of Arkansas and I just released another study examining funding disparities between traditional public schools and public charter schools in 14 cities across the country. The overall finding is clear: families lose a substantial amount of education dollars when they pick charter schools for their children.

Using data from the 2015-16 school year, we find that children in charter schools receive $5,828, or 27 percent, less than their traditional public school peers each year, on average. Put differently, a family forgoes over $75,000 in educational resources for their child’s K-12 education if a charter school fits their needs better than the residentially assigned option. And, unfortunately, the funding inequities are much worse in some cities. As shown in Figure 1 below – and in the original report – children in charter schools in Washington, DC, and Camden, New Jersey receive over $10,000 less than their traditional public school peers each year.

 

But that’s not all. Our team has released four other reports over the past two decades with similar findings. And across the 8 cities with longitudinal data, the funding disparity favoring traditional public schools has grown by 58 percent since 2003 after adjusting for inflation. It’s like a swarm of mosquitoes in the summer. It’s persistent and never goes away.

 

Fortunately, one city in our sample has consistently demonstrated equitable funding across school sectors. In Houston, Texas, students in public charter schools receive only $517, or 5 percent, less than their peers in traditional public schools each year. In other words, equitable public school funding can be achieved if policymakers make the right decisions.

Families shouldn’t have to lose $5,828 each year in educational resources for each child that doesn’t fit into the one-size-fits-all education system. Thankfully, state policymakers have the authority, opportunity, and responsibility to achieve equal total funding of public school students in their states. Policymakers can deliver equitable education funding by revising state funding formulas to allow 100 percent of public education dollars to follow children to whatever school works best for them.

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