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This morning, the Supreme Court ruled, unanimously, that a species’ “critical habitat” for purposes of the Endangered Species Act (ESA), is habitat where the species actually lives. Accordingly, it sent Weyerhaeuser v. U.S. Fish & Wildlife Service back to the U.S. Court of Appeals for the Fifth Circuit to determine whether that’s the case for certain land involving the dusky gopher frog, as well as to see whether the federal agency properly used cost-benefit analysis in its designation.

This quick ruling, coming less than two months after argument, was a breath of fresh air. The ESA doesn’t give the government unlimited authority to do whatever it wants—and land on which a particular animal has never lived and where it can’t live can hardly be considered “critical habitat.” The Fish and Wildlife Service should look into ways of protecting critters without intruding on private property rights or abusing federal power. Good on the Supreme Court for holding bureaucrats’ feet to the fire of judicial review.

For more on the case, see this background and Cato’s brief.

Of many interesting things said during Cato’s 36th Monetary Conference, one in particular tempted me to rush to the podium to give its author a big hug. The speaker, Joe Gagnon of the Peterson Institute, was calling into question the now-conventional wisdom that, to avoid interfering with the efficient allocation of credit or otherwise involving itself in matters best left to Congress, the Fed must stick to purchasing Treasury securities, and nothing else.

“It puzzles me,” Joe said (at 00:31:36)

why people think that the Fed should only allocate credit to the government. Why is that the obvious thing to do? …What seems to me more neutral would be [for the Fed and central banks generally to] hold the market basket of all assets, and then conduct their policy proportionately in all assets. That doesn’t favor anybody or any sector — it’s neutral. It seems like the natural way to go.

Think tank employees, and employees at different think tanks especially, aren’t generally inclined to hug one another. But if one is, you can bet your boots its because the other fellow said something he’d have liked to have said himself.

In fact I’ve long been planning to write a post on the issue Joe raised, making an argument quite similar to his. I even started the project, present title and all, several months ago, only to shove it into my “drafts” folder, where it’s been gathering dust ever since. Thanks to Joe, I’m finally inspired to finish what I started.

Treasuries Only

Central banks are, ideally, supposed to regulate the scale of nominal magnitudes — things like the price level, monetary aggregates, and nominal spending — without influencing relative prices or the allocation of scarce savings. In particular, their policy actions aren’t suppose to be aimed at favoring particular security issuers or markets.

These notions suggest, for starters, that central banks should usually rely on open-market operations or other broad-based monetary operations. They’re also generally taken to mean that, when central banks can’t avoid extending “last resort” credit to particular firms, the firms so aided should be solvent and should pay market (that is, “normal” market) rates. They should, in other words, be the sort of firms private lenders themselves might assist were it not for information and transactions costs, or private credit-market disruptions, that keep them from doing so. A central bank that fails to meet these requirements is guilty of engaging in “credit policy,” meaning actions that serve not just to regulate nominal magnitudes but to interfere with the efficient allocation of scarce resources among competing users.

But while the aforementioned conditions for steering-clear of credit policy may be necessary, they aren’t sufficient, in part because whether a central bank avoids taking part in credit policy or not also depends on the assets it chooses to purchase on the open market.

So what sorts of central bank asset purchases are, and what sorts aren’t, consistent with avoiding credit policy? The conventional wisdom here — and the view Joe Gagnon questions — consists of the “Treasuries only” doctrine. That doctrine’s best-known exponent is Carnegie-Mellon economics professor (and as yet unconfirmed Federal Reserve Board of Governors nominee) Marvin Goodfriend, who happens to have shared his opinions on the topic at another Cato Institute event: the 2008 Symposium of the Shadow Open Market Committee.

According to Goodfriend, “Monetary policy refers to Federal Reserve policy actions that change the stock of high-powered money, i.e., currency plus bank reserves.” In contrast, “[t]he Fed takes a credit policy action …  by shifting the composition of its assets holding high-powered money fixed.”

When the Fed substitutes an extension of credit for a Treasury security in its portfolio, the Fed can no longer return to the Treasury the interest it had received on the Treasury security that it held. In other words, when the Fed sells a Treasury security to make a loan, it’s as if the Treasury issued new debt to finance the loan. Credit policy executed by the Fed is really debt financed fiscal policy. …

In effect, Fed credit policy works by interposing the United States Treasury between lenders and borrowers in order to improve credit flows. In doing so, however, the Fed essentially makes a fiscal policy decision to put taxpayer funds at risk. In the event of a default, if the collateral is unable to be sold at a price sufficient to restore the initial value of Treasury securities on the Fed’s balance sheet that was used to fund the credit initiative, then the flow of Fed remittances to the Treasury will be smaller after the loan is unwound. The Treasury will have to make up that shortfall somehow, namely, by lowering expenditures, raising current taxes, or borrowing more and raising future taxes to finance increased interest on the debt.

Because the Fed is exempt from the appropriations process, Goodfriend argues, it “should avoid, to the fullest extent possible, taking actions that can properly be regarded as within the province of fiscal policy and the fiscal authorities.” Doing that, in his view, boils down to having the Fed limit its portfolio holdings to Treasury securities. A “Treasuries only” policy, he says, “respects the integrity of fiscal policy fully” while helping “to preserve the Fed’s independence” because it “leaves all the fiscal decisions to Congress and the Treasury and hence does not infringe on their fiscal policy prerogatives.” In contrast

all financial securities other than Treasuries carry some credit risk and involve the Fed in potentially controversial disputes regarding credit allocation. When the Fed extends credit to private or other public entities, it is allocating credit to particular borrowers, and therefore taking a fiscal action and invading the territory of the fiscal authorities.

Fiscal Doublespeak

There is, to say the least, something fishy about the claim that, by sticking to buying Treasury securities, the Fed avoids “invading the territory of the fiscal authorities.” The claim is admittedly true enough if one takes the term “invasion” literally to suggest a hostile incursion, meaning one that does harm to the parties encroached upon, in this case by chipping away at the Treasury’s earnings. So far as Goodfriend is concerned, so long as the Treasury benefits from the Fed’s operations, the Fed hasn’t tread on fiscal turf at all. On the contrary: it might gobble-up all the Treasury (and guaranteed agency) securities it likes, without being guilty of “taking a fiscal action.”

But Goodfriend’s is, surely, an overly restrictive view.  As I’ve argued elsewhere,

[w]hile confining the Fed to Treasury purchases may enhance its long-run contribution to government revenue, it cannot be said to minimize its fiscal footprint. On the contrary: It involves the Fed quite decidedly in the allocation of credit, albeit in a manner that favors the federal government over other parties.

There is, indeed, no older nor more frequently-recurring theme in the history of money than that concerning the tendency of governments, whether despotic or democratic, to treat monetary institutions over which they exercise some degree of control as official piggy banks, whether by debasing official coins or by pressuring fiat-money issuing central banks to finance their debts, even when doing so means allowing inflation to run wild.

Seen against this historical background, including plenty of recent experiences, the suggestion that central banks can best avoid entangling themselves in their governments’ fiscal affairs by devoting their resources to buying government debt sounds like a bad joke. This isn’t to say that Goodfriend is an apologist for inflationary finance, or for inflation itself. On the contrary: if he’s anything he’s an inflation hawk. But the fact remains that his understanding of what constitutes fiscally-neutral monetary policy leaves a lot be be desired.

Yet that hasn’t stopped others who also dislike inflation and inflationary finance from embracing that same understanding. Consider this 2012 article by Charles Plosser, who was then President of the Philadelphia Fed. Plosser starts out by reiterating what we might call the old-time (as opposed to new-fangled) “fiscal-neutrality” religion. “It is widely understood,” he says,

that governments can finance expenditures through taxation, debt — that is, future taxes — or printing money. In this sense, monetary and fiscal policy are intertwined through the government budget constraint. Nevertheless, there are good reasons to prefer an arrangement that provides a fair degree of separation between the functions and responsibilities of central banks and those of the fiscal authorities. For example, in a world of fiat currency, central banks are generally assigned the responsibility for establishing and maintaining the value or purchasing power of the nation’s monetary unit of account. Yet, that task can be undermined or completely subverted if fiscal authorities independently set their budgets in a manner that ultimately requires the central bank to finance government expenditures with significant amounts of seigniorage in lieu of tax revenues or debt. The ability of the central bank to maintain price stability can also be undermined when the central bank itself ventures into the realm of fiscal policy.

So far so good. But when it comes to saying how we should go about achieving the desired “separation between the functions and responsibilities of central banks and those of the fiscal authorities,” Plosser offers us a textbook case of cognitive dissonance by serving-up Goodfriend’s “Treasuries only” elixir, in the shape of his own similar proposal for a new “accord” that would prevent the Fed from acquiring other sorts of assets. “I have long argued,” Plosser says,

for a bright line between monetary policy and fiscal policy, for the independence of the central bank, and for the central bank to have clear and transparent objectives. I have also stressed the importance of a systematic approach to monetary policy that serves to limit discretionary actions by the central bank. Furthermore, I have proposed a new accord between the Treasury and the central bank that would severely limit, if not eliminate, the central bank’s ability to lend to private individuals and firms outside of the discount window mechanisms. I have noted that decisions to grant subsidies to particular market segments should rest with the fiscal authorities — in the U.S., this means Congress and the Treasury Department — and not with the central bank. Thus, the new accord would limit the Fed to an all-Treasuries portfolio, except for those assets held as collateral for traditional discount window operations.

Just how the accord in question would prevent the Fed from “financ[ing] government expenditures with significant amounts of seigniorage in lieu of tax revenues or debt” Plosser doesn’t say. But the answer is simple enough: it wouldn’t. It wouldn’t prevent the Fed from employing its powers in a way that unduly favors not private-sector firms or markets, but the Federal government itself. Here again, the problem obviously isn’t that Plosser doesn’t mind inflationary finance. It’s that he has embraced a flawed doctrine of what it means for the Fed to avoid “fiscal” operations as much as possible.

From “No Treasuries!” to “Treasuries Only”

Before we consider alternatives to the “Treasuries only” understanding of fiscally neutral monetary policy, let’s take a quick detour into the Fed’s early history, for the sake of illustrating just how far the newfound understanding of how to keep the Fed clear of fiscal policy veers from the orthodoxy that prevailed when the Fed was founded.

Although the original Federal Reserve Act allowed Fed banks to purchase U.S. government securities, it was understood that such purchases would be exceptional, and that the Fed’s interest-earning assets would consist mainly of short-term commercial, agricultural, or industrial paper presented to it for rediscounting by its member banks. That understanding reflected the conventional wisdom, supported on one side by the “real bills” doctrine, according to which confining rediscounting to certain kinds of commercial paper would prevent inflation, and on the other by the view that central bank lending to the government was dangerous, because, as David Marshall explains, it could end up “tying the supply of credit to the spending whims of the government.”

Paul Warburg, one of the Federal Reserve System’s chief architects, expressed the prevailing attitudes at the time of the Fed’s founding especially clearly and succinctly in his essay on “The Discount System in Europe,” originally included among the publications of the National Monetary Commission and then republished in Essays on Banking Reform in the United States (1914, p. 154):

Notes issued against discounts mean elasticity based on the changing demands of commerce and trade of the nation, while notes based on government bonds mean constant expansion without contraction, inflation based on the requirements of the government without connection of any kind with the temporary needs of the toiling nation. Requirements of the government should be met by direct or indirect taxation or by the sale of government bonds to the people. But to use government bonds or other permanent investments as a basis for note issue is unscientific and dangerous.

Nor were such beliefs peculiar to the U.S. Because central bank purchases of government securities, even in the open market, were widely seen as equivalent to direct lending to governments, the belief that such purchases ought to be strictly limited was one held by most economists. As Ralph Hawtrey puts it in The Art of Central Banking (1933, p. 131),

the acquisition of Government securities by the central bank is regarded as opening the door to inflation. It is usual for the power of the central bank to lend to the Government to be carefully circumscribed, and the dividing line between lending direct and buying Government securities in the market may be rather a fine one.

In those days no less than today, Marshall reminds us, “it was thought that a well-run central bank should be free from political influence.” But the fear then was that “extensive holdings of government debt might compromise central bank independence,” and not that central bank purchases of commercial paper would do so.

That this early understanding was soon to be turned on its head must surely rank among the more fascinating developments in the history of modern monetary thought. The process began when, following the United States’ entry into World War I, under pressure from Treasury Secretary William McAdoo (who was an ex officio member of the Federal Reserve Board), the Fed reluctantly started buying substantial quantities of Treasury securities at above-market prices.

At that time, as Kenneth Garbade reports (p. 3),  the Directors of the Federal Reserve Bank of New York memorialized their misgivings, while expressing their conviction “that the normal services of the Bank as fiscal agent will best be rendered by assisting in distributing Government securities rather than by acting as a purchaser of them” and that their wartime action “should not be considered as establishing a precedent or a policy which will necessarily be followed in the future.”

But the Great Depression was to dash any hope of such opinions being heeded. Instead, during it the collapse of the markets for bankers’ acceptances and other sorts of commercial paper, the first appearance of short-term Treasury bills, and the fiscal exigencies of the New Deal, would collectively lead the Fed to shift to a Treasuries-only regime.[1]

It was while this shift was taking place, in the spring  of 1933, that the Board of Governors granted the Fed banks permission to purchase up to $1 billion of government securities for the express purpose of helping the Treasury to market its debt. A second precedent was thus established for the Fed’s agreement, during World War II, to formally commit itself to helping to finance the war by using open-market purchases to peg the interest rate on Treasury bills at a low level of just 3/8 percent. The Fed’s substantial involvement in the market for Treasury securities thus ended up doing just what the Fed’s founders feared it might do, to wit: transforming the Fed into a handmaiden of the U.S. Treasury.

The Fed’s commitment to support the market for government bonds was still in effect when, during the Korean War, an increase in the CPI inflation rate to over 21 percent caused the Board of Governors, led by then-Chairman Thomas McCabe, to renounce it. Although that singular act of defiance cost McCabe his job, it also set the stage for the famous “Treasury Accord” by which the Fed was ultimately freed from any obligation to support the prices of government securities.

Ironically, it’s from the 1951 Treasury Accord that Marvin Goodfriend draws inspiration for his own proposed “‘Accord’ for Federal Reserve Credit Policy,”  a chief element of which is a commitment to the “Treasuries only” doctrine that helped make the original Accord necessary in the first place.

A Better Approach

If a “fiscally neutral” Fed is neither a Fed that sticks to Treasuries only nor one that can direct credit willy-nilly to any firm or asset market it chooses, what is it?

Joe Gagnon’s suggestion that the Fed “hold the market basket of all assets” has the distinct advantage of being intuitively appealing, jibing as it does with established notions of monetary neutrality in the broad sense. Unfortunately, that intuitive appeal is more  than matched by the suggestion’s unattractiveness as a practical policy. Who, for one thing, wants to see the Fed get into the business of buying real assets? And, stepping back down to planet earth, who really wants to see it taking a leaf from the central banks of Japan and Switzerland by loading-up on stocks, which make up a large share of all U.S. financial assets?

MIT’s Deborah Lucas points the way toward a more pragmatic solution. “A central bank policy is fiscal,” she proposes, “when it confers a net subsidy to a private entity, or when it has a direct effect on government spending or revenues.” This definition, Lucas notes,

makes no special distinction between transactions involving Treasury securities and those involving private securities. If the Federal Reserve were to purchase a Treasury bond at an above-market price it would have a fiscal effect measured by the amount of the overpayment. However, if the Federal Reserve were to purchase a high-risk mortgage or corporate bond at a fair market price, there would be no fiscal effect because there is no subsidy. Relatedly, the assumption of credit risk is not in itself fiscal; along with other priced risks such as prepayment, interest rate and liquidity risk, it only gives rise to fiscal effects when the Federal Reserve transacts at non-market prices.

While Lucas’s point seems perfectly reasonable, and has the merit of suggesting that central banks can avoid engaging in credit policy, including the shunting of savings toward the U.S. Treasury, without having to buy every asset under the sun, it still fails to add-up to a practical proposal. Instead it begs the question: just how is the Fed to avoid favoring the issuers of certain assets by buying them at above-market prices? How, in particular, can it do so while refusing to purchase certain kinds of financial assets at any price?

Flexible OMOs

As it happens, I think I have an answer to those questions. It consists of the plan I proposed in 2017 for “flexible” open-market operations, as published in the Heritage Foundation volume, Prosperity Unleashed. Although that proposal is aimed at reforming the Fed’s procedures for supplying emergency credit to illiquid but solvent institutions, the “flexible open-market operations” (or “flexible OMOs”) it calls for would also serve to make the Fed’s operations fiscally neutral.

Flexible OMOs would do this for three reasons. First, they would  have the Fed standing ready to purchase, in its routine open-market operations,[2] not just Treasury or agency securities but a much broader set of assets, consisting of all those marketable securities that can presently qualify as collateral for the Fed’s discount-window loans. Second, they would be undertaken not with a score or so of “primary dealers” only, but with numerous counterparties, including all banks that might be eligible for discount window loans as well as all those counterparties presently taking part in the Fed’s overnight reverse repurchase (ON-RRP) operations. Third, flexible OMOs would be undertaken using a version of Paul Klemperer’s “product-mix” auction procedure specifically designed to prevent the Fed from favoring any particular securities  or counterparties.

Although flexible OMOs would allow the Fed to purchase private  securities, it would not allow it to arbitrarily steer credit toward particular private security issuers, holders, or markets. Instead it would allow counterparties possessing private securities, as well as those equipped with Treasuries, to bid for federal funds. Nor would its terms discriminate in favor of particular securities, except to the extent of giving proportionately larger haircuts to riskier ones, comparable to those that the Fed presently applies to different sorts of collateral in its discount-window lending.

While flexible OMOs are themselves fiscally neutral, they can only serve to keep a central bank employing them fiscally neutral if it relies upon them exclusively, rather than in combination with other lending operations. But the beauty of flexible OMOs is precisely that, apart from being fiscally neutral themselves, they allow a central bank that relies upon them in undertaking its ordinary monetary policy operations to dispense with other types of lending and with supplemental (ad-hoc or standing) lending facilities and programs. Instead, all counterparties that might otherwise be assisted through such supplemental programs would be eligible to take part in routine OMOs, using any collateral that might have secured for them a direct central-bank loan.

Done right, flexible OMOs serve to make a central bank’s asset purchases neutral, not by having it purchase Treasury securities only, or by having it purchase the whole “market basket” of assets, but by having it purchase, especially during occasions of financial distress, the same basket of assets private-market financial firms might themselves be willing to purchase, or to treat as acceptable collateral, in ordinary times. Achieving fiscal neutrality thus goes hand-in-hand with having central banks efficiently fulfill their last-resort lending duties.

_________________________

[1] That the Banking Act of 1935 prohibited the Fed from purchasing securities directly from the Treasury, compelling it to buy them on the open-market only, did nothing to  discourage or otherwise interfere with the shift in question. Nor did it serve to limit the Fed’s ability to finance the government’s deficits. Although some supporters of the measure may simply have failed to understand that the Fed could assist the Treasury just as effectively by buying its securities in the open market as it might by dealing directly with it, then Fed Chairman Marriner Eccles was almost certainly on to something in attributing it “to certain Government bond dealers who quite naturally had their eyes on business that might be lost to them if direct purchasing were permitted” (Garbade 2014, p. 7).

[2] My plan assumes that the Fed relies on regular open-market operations to achieve its operating target. That is, it assumes a “corridor” system of monetary control, rather than the “floor” system currently in place. Concerning why a corridor system should be preferred to a floor system see my recently-published book, Floored!

[Cross-posted from Alt-M.org]

The 1990 Global Change Research Act requires quadrennial  “Assessments” of the effects of global climate change on the U.S. The first was published in 2000, the second in 2009 (the G.W. Bush Administration chose to ignore the law), the third in 2014, and the fourth, last Black Friday.

We contributed extensive public comments on the penultimate draft of the latest Assessment, which has changed very little between the review draft and the final copy. The final version contains the same fatal flaws we noted earlier this year. It’s based upon a family of climate models that are predicting far more warming than has been occurring in the all-important tropical atmosphere. It should have used the one model (out of the 102 available runs) that actually gets things right, the Russian INM-CM4, but it relied upon the average warming produced by all 102. INM-CM4 has the least warming of all of them, but doing the right thing—using the one that works—would have pretty much gutted climate change as a serious issue.

These reports take several years to produce, and the current one was largely a product of the Obama Administration. If there’s a Trump Administration when the next one is scheduled (2022), it is likely to be very different. Why the current regime just didn’t do as Bush did and simply elide the 1990 law is probably so it will get another crack at it in 2022.

Our lengthy technical comments still apply.

Is cake-baking art, and if so, can someone be compelled to bake one in violation of his or her religious beliefs? More specifically, can a Christian baker refuse to design a wedding cake for a same-sex couple due to her sincere religious objections to same-sex marriage?

Wait, didn’t the Supreme Court already resolve these questions in the Masterpiece Cakeshop case earlier this year? Actually no; the Court declined to answer these and related important issues, instead ruling narrowly in the baker’s favor because the state civil rights commission displayed animus toward his religious beliefs. There was even unresolved disagreement over whether the baker refused to sell the couple a custom cake or any cake. In short, the Court’s decision was really a minor work, not a masterpiece.

But the Court’s punt, to mix metaphors, didn’t kick the can very far down the road. While the Washington Supreme Court is going through the motions of reconsidering the Arlene’s Flowers case in light of Masterpiece, an Oregon case involving another baker has reached the Supreme Court’s doorstep. Melissa and Aaron Klein are practicing Christians who owned and operated a bakery where they made and sold custom wedding cakes. An administrative law judge fined them $135,000 (!) for refusing to make a wedding cake for a same-sex couple, putting them out of business. Even though the Kleins had gladly served the couple in the past, and merely objected to helping celebrate this particular ceremony, Oregon state appellate court upheld the fine.

But freedom of expression, as protected by the First Amendment, doesn’t only secure the ability to say what you wish. It also prevents the government from compelling you to say something you don’t agree with. Cake-baking, as anyone who has seen one of countless TV shows can confirm, is an expressive art form. Accordingly, bakers, as artists, cannot be forced to convey messages that violate their beliefs—whether based in religious or secular values. To live according to one’s own conscience is the foundational principle of a free society. If people who agree with same-sex marriage are the only ones allowed to operate businesses related to weddings, freedom of expression will become a hollow principle in that regard.

Cato, the only organization in the entire country to have filed Supreme Court briefs supporting same-sex couples seeking to get married and vendors who don’t want to participate in those weddings, has now filed a brief supporting the Kleins’ petition to the U.S. Supreme Court. Although quite similar to Masterpiece Cakeshop, the Kleins’ case is neater, with fewer distractions unrelated to the core question of expression. For starters, there is no allegation that the Oregon Bureau of Labor and Industries showed anti-religious animus. Moreover, the Kleins did not sell off-the-shelf cakes to the general public; they created only custom cakes.

The Court should take the case to clarify that the First Amendment protects people from having to convey messages or express support for ceremonies with which they disagree. Klein v. Oregon Bureau of Labor & Industries presents an inquiry into the scope and nature of expression itself—and much like a good cake, we hope that the Court finds these issues too enticing to pass up.

With the impending arrival of Amazon HQ2, New York City and northern Virginia need to make some changes. At the top of the list is reforming zoning regulations to reduce the shock of a rush of workers and their respective families into already strained housing markets.

Amazon has promised 25,000 jobs to each headquarters city, and that could mean up to 25,000 new Amazon workers in each area. In addition to Amazon-specific jobs, tech jobs have a multiplier effect, and it is estimated every new high tech job creates five non-high tech jobs. That would mean 125,000 new jobs each in New York City and northern Virginia as a result of Amazon’s move.

It’s likely that a portion of these workers and their families reside within New York City and northern Virginia areas already. But even adding part of 125,000 workers and their respective families to Long Island City and National Landing will add pressure to housing markets in these neighborhoods.

Housing prices are already high in both places: the median home in Queens, NY (where Long Island City is located) is valued at $640K and the median home in Arlington, VA (where National Landing is located) is north of that, at $660K. These figures are roughly three times the national median home price, and prices in both markets are on-trend to grow over the coming year.

Complacency by officials in the face of increased demand will lead to continued declines in housing affordability. Without proactive regulatory reform, New York City and northern Virginia will continue shutting working class people and minorities out of their communities, which is what happened in San Francisco when tech workers arrived and city officials remained complacent about regulatory policy.

So, what can be done? Local government needs to reduce regulatory barriers to housing development to contain housing costs. Here are a few ways they can do that:

1. Increase allowable development density – yes, even in New York City.

Maintaining or improving housing affordability means ensuring housing supply meets demand for housing. But in urban areas, land in the most desirable areas has already been developed, so in order to increase housing supply developers need to build up. Unfortunately, New York City and northern Virginia prohibits this through their zoning codes.  

Despite its reputation for towering high rises, the majority of New York City is zoned for one- or two-family homes. And surprisingly, an estimated 98% of residential structures in Queens – where Amazon HQ2 is located – are three stories or less. With Amazon on its way, restrictions on density must be relaxed to accommodate growth. New York City must continue increasing allowable density in the boroughs.

Meanwhile, although Virginia’s National Landing location is relatively more dense than many locations in the DC/Virginia metro area, its neighbors to the North and South have severely restricted development density. For example, large swaths of DC are zoned for three to four story homes (see: Capitol Hill), and between one-third and one-half of Alexandria, Virginia is zoned for single family homes (Amazon Headquarters is partially located in Alexandria). DC and Alexandria should upzone and let property owners decide if it makes sense to build more densely.

2. Relax or eliminate parking requirements.

Outside of Manhattan and a few locations in Long Island City, parking is mandated in New York City, even in transit-connected areas. These requirements should be relaxed so individuals can decide what the appropriate ratio of parking to housing is. Developers are more familiar with consumer’s needs than New York City’s planners are, and it’s likely many buildings require less parking than what’s currently mandated.

Providing parking comes at a substantial cost to developers, which pass unrecouped costs on to tenants. Streetsblog recently reported on a New York City developer that paved a basement and parts of first and second stories to provide city-required parking in a transit-connected area that didn’t need parking to begin with. The developer estimated the mandated parking requirement resulted in a $12 million-plus loss, and the space could have been used for something more productive.

Amazon HQ2 is located in Long Island City, where parking requirements are higher than the New York City average.  And although parking requirements were reduced for new subsidized housing near transit in New York City in 2016, the changes did not apply to market-rate residences, so parking requirements for market-rate residences still need an overhaul.

3. Streamline permitting processes.

Under Mayor De Blasio’s administration, New York City has made efforts to improve the building permitting experience and increase permitting transparency. Still, there are problems. For example, the City’s environmental permitting process, which is invoked in the case of “most discretionary land use actions considered by the City Planning Commission” is lengthy, costly, and unpredictable.

Estimates suggest that environmental permitting costs between $100,000 for and $2.5 million for a typical construction project, and takes 6 months to complete. Exempting projects that are likely to be compliant would increase efficiency and reduce costs.

Although northern Virginia doesn’t have local environmental assessment laws like New York City does, cities like Alexandria, Virginia have an excessive amount of regulation and development oversight. For example, there is “a 200 page design guideline guidebook on the special considerations associated with development in this historic downtown area alone… In Alexandria, there are around 25 citizen boards managing architectural, archaeological, environmental, historical, urban design and related planning considerations for proposed development. This number excludes task forces with other specific planning functions, like determining parking standards for new development.”

This web of decision makers and regulations will reduce housing development in the area south of National Landing and push prices up. In order to accommodate growth, Alexandria must overhaul and streamline this process.

Besides these recommendations, New York City and northern Virginia can relax construction standards and codes, reduce rehabilitation requirements associated with remodeling existing housing stock, reduce impact fees and exactions on development, legalize non-traditional affordable housing (accessory dwelling units, single room occupancies, manufactured housing, etc) where applicable, and expand urban development areas in Virginia. In order to avoid penalizing future and existing development, cities can collect taxes on land value instead of property.

New York City and northern Virginia have a lot of work to do to overhaul regulatory barriers to housing supply and provide an affordable home for current and future residents. The good news is there are a lot of ways to get started.

Many major political changes over the last few years are related to immigration. From the rise of Eurosceptic political parties in Germany, France, Italy, and elsewhere, to Brexit, and the U.S. election of Donald Trump, many political commentators are blaming these populist and nationalist political surges on unaddressed anti-immigration sentiment among voters. Although anti-immigration opinions certainly have a role to play in those political upsets, voter feelings of chaos and a lack of control over immigration are likely more important.

President Trump focused his campaign on the “build the wall” chant that capitalized on the perception of chaos at the southwest border where the worst from Mexico were supposedly crossing. His campaign platform called for cutting legal immigration, mandating universal E-Verify, and many of the other bells and whistles demanded by restrictionists over the years, but “reduce legal immigration” never became a chant because it doesn’t play on the perception of immigration chaos that fueled his political rise.     

The theory is that the perception of greater chaos and less control over immigration leads to opposition to immigration, even the legal variety, and greater political support for harsh repressive methods. Images of Syrians arriving by the boatload and illegal immigrants scaling border walls or walking through the desert spread the perception that immigration is out of control and that crackdowns are needed to regain control. Consequently, few people want to liberalize immigration when there’s a crisis.

As long as many people perceive chaos at the border then anti-immigration appeals will have an effect greater than the share of nativists in the electorate, as I wrote about here. The key idea here is “perception.” The number of people crossing the border illegally is down dramatically since the Bush years, the Border Patrol is much larger, homicide rates on the border are down, but those trends don’t seem to matter so long as the perception of chaos remains.

At this point, the question for supporters of liberalized immigration is: Why not give the other side a border wall and other enforcement schemes? That could decrease chaos and build support for future immigration liberalization. The downside to that is that more enforcement would make known additional illegal actions on the border and, thus, could increase the perception of chaos. Even if a border wall reduced illegal entry by 90 percent, a border wall would ensure that 100 percent of the remaining entries would be recorded and broadcast to a public that would perceive more chaos than ever before even though the amount of illegal immigration is radically reduced.    

Immigration politics in foreign countries support the perception of chaos and lack of control theory. Canada is considering an increase in legal immigration and the Australian government is considering a decrease as a way to cope with their absurdly restrictive land ordinances in Melbourne and Sydney. Importantly, the proposed policy reforms in both countries are moderate, not the result of an election but of gradual reform, and aren’t supported by recent massive changes in public opinion. In Britain, public worries about immigration diminished substantially after the Brexit vote either because the public thought that they regained control of the border through Brexit or because the surge of Syrian refugees abated. 

If the above theory is true, where does this leave us? 

First, it means that many types of immigration argument and analysis will be unlikely to politically solving the problem with exceptions for research that diminishes the perception of chaos. Arguments over the skill mix of immigrants, the assimilation of the second generation, or the fiscal effects don’t change opinions. Those issues matter for the real-world effects of immigration, of course, but they do not much affect the political debate.

Second, ignorance is the main roadblock to a more liberalized immigration policy. In all Western countries, respondents greatly exaggerate the size of the foreign-born population. The more ignorant respondents are more anti-immigration. Those levels of ignorance likely extend to ignorance of the actual levels of immigration enforcement and chaos. If there is a poll out there asking Americans about whether there should be more immigration enforcement as well as asking them about what they think the current level is, my bet is that there’d be a strong correlation between those who say there is no enforcement and that the government needs to cut immigration.    

Third, this means that those of us who favor liberalized immigration should especially favor reforms that reduce the perception of chaos. Thus, reforms that prevent caravans, illegal immigrants scaling border fences, and asylum seekers in prison cells should be adopted.

Fortunately, there are many reforms that liberalize immigration and reduce perceptions of chaos. Allowing more low-skilled immigrants in on temporary work permits would reduce the number of illegal immigrants crossing the border. Asylum seekers cannot apply from their home countries, perhaps allowing them to do so before coming here will help reduce the number of caravans. Private refugee or humanitarian sponsorship would also take the pressure off border personnel. Limiting the possibility of border detention to only serious potential security risks will reduce the perceived chaos and criminality. Opposing a border wall and the hiring of additional border patrol agents will reduce the opportunities for interactions with border crossers and cut the opportunities for reported illegal activity. 

If the perception of chaos/control thesis is correct, this means that efforts such as the RAISE Act and broader efforts to increase “merit” based immigration at the expense of lower-skilled immigration will not be politically effective. 

There is enough immigration research to fill libraries. That research has undoubtedly affected the opinions of the public and shaped elite opinion about immigration policy, but additional increases in public support for liberalized immigration may only come when the public is convinced that immigration is under control and when it perceives the system as less chaotic. Despite the current elections of politicians and political parties opposed to immigration, public opinion is moving in a more pro-immigration direction. Perceptions of control and order will push support over the line.

This is the second entry in a two-part series on the rise of index funds in U.S. equities markets. This post is for the intrepid reader interested in a thorough survey of the empirical and theoretical literature concerning the implications of institutional investors. In the first entry of this series, I disputed the mechanisms by which index funds are argued to exert an outsized influence on the firms within their portfolios. But in this second entry, I will instead grant this key premise of the anti-trust advocates’ argument: index funds, either individually or as a group, have a significant degree of influence over major decisions made by the firms in their portfolio. But the anti-trusters then go on to argue that index funds will deploy this power to induce these firms’ management to restrict intra-industry competition. While management at any given firm in an industry will be unwilling to unilaterally disarm, the fact that index funds are simultaneously invested in all of the publicly-traded incumbents in an industry allows for a solution to the prisoners’ dilemma dynamic which would otherwise thwart efforts at oligopolistic collusion.

I.

In this post I will grant the premise that index funds, as the plurality shareholders of a given firm, will be able to select for a management team and board of directors willing to pursue their preference for maximizing total industry profits instead of individual firm profits. In this sense, we have a principal-agent model in which the principal (index funds) keeps its agent (the firm’s management) on a tight leash. This power indeed presents the potential for index funds to diminish the value of the individual firm, thereby harming the other shareholders. Yet this same governance dynamic which allows for the possibility of such speculative, thinly substantiated harm to shareholders[1]<, similarly offers a corrective for a much greater and empirically ever-present agency cost which confronts all publicly traded firms: managerial rent-seeking.

Since the publication of Berle and Means’ The Modern Corporation and Private Property in 1932, the Ur-text of corporate governance theory, scholars have elaborated on and formally modeled the profound asymmetry between a corporation’s relatively small and cohesive management team and its dispersed shareholders (Manne 1964; Clark 1986; Easterbrook and Fischel 1991). Shareholders face a collective action problem vis-a-vis the managers who allocate their capital on their behalf: no individual shareholder is sufficiently incentivized to incur costs monitoring the management to ensure these funds are being directed toward their profit-maximizing use, because any gains which accrue from such monitoring must be distributed amongst the shareholders pro-rata, and cannot be internalized by the individual who does the monitoring.

Compounding the asymmetries which inhere in the ownership vs. control relationship are a variety of state and federal laws which increase the collective action costs faced by shareholders when attempting to replace bad management. In two highly influential law review articles, Bernard Black discusses a variety of legal impediments to coordinated shareholder action, ranging from costly SEC disclosure requirements, encumbrances on proxy campaigns, and legislation such as the Williams Act which regulate tender offers[2][3]. A more recent analysis by Gilson and Gordon (2013) indicates that many of these regulatory frictions persist. Whenever transaction costs to takeovers are raised, the market for corporate control becomes less liquid, allowing for a firm’s management to extract greater wealth transfers from a firm’s creditors and shareholders. Alan Schwartz put the effects of such legislation bluntly in his 1986 article Search Theory and the Tender Offer Auction which predated the rise of index funds: “Capital markets cannot overcome the inefficiency the Williams Act creates”.

            Between their structural disadvantage as monitors and the institutional deformities introduced by the political process, shareholders face a severe principal-agent problem vis-a-vis management. A massive literature, known as the “Managerial Power Perspective”, has emerged to document the ways in which corporate charters and compensation practices have in practice been disproportionately shaped by CEOs and other senior executives (see Bebchuk and Fried’s 2004 book Pay Without Performance, as well as Bebchuk, Cohen and Ferrell 2009, for an excellent overview). Exorbitant salaries, golden parachutes, and poison pills are some of the many ways in which, according to this perspective, corporate governance in practice deviates in a pro-management direction from the “optimal contract” which would otherwise obtain in a competitive, low-transaction cost landscape of symmetrically informed arms-length deals between management and shareholders. Indeed, many of the same progressive concerns, such as income inequality, which animate the anti-trust proposals of the “common ownership” paradigm are similarly leveled against the menacing figure of the rent-seeking, imperial CEO. 

It is ironic, then, that the rise of index funds is likely to be ameliorative of this very principal-agent problem. The “common ownership” paradigm argues that index funds have perverse incentives insofar as they will induce management to reduce intra-industry competition, thereby harming the firm’s other shareholders. This amounts to an intra-shareholder wealth transfer. However, even according to this perspective, index funds will not be willing to abide the classic example of a wealth transfer from shareholders to management[4]. Such managerial rent-seeking can come in many forms: salary in excess of marginal product of labor, personal consumption of perquisites, “empire building” which entrenches management by raising its replacement cost, and so on ad infinitum. In such instances, index funds will not countenance this non-profit-maximizing behavior, because it is not in pursuit of maximizing total industry profits. Instead, index funds will be incentivized to minimize managerial rent-seeking, the benefit of which will redound to all of the firm’s shareholders. I will now discuss both the theoretical and empirical literature which demonstrates that index funds can, and do, leverage their role as large institutional investors to combat managerial malfeasance, misfeasance, and general misbehavior.    

  

II.

A critical assumption underlying the Berle-Means managerial dominance paradigm is a set of shareholders dispersed such that no individual shareholder is sizable enough to internalize a sufficiently large pro-rata share of the gains to monitoring the corporation’s management. Yet this Olsonian dynamic is challenged by the presence of institutional investors, who would in fact be properly incentivized to do so. A large empirical literature notes the active involvement of institutional investors in overseeing managerial initiatives, consistent with their theoretical ability to internalize a sufficient portion of the gains which accrue from such activity: “A recent survey found that 63 percent of very large institutional investors have engaged in direct discussions with management over the past five years, and 45 percent had had private discussions with a company’s board outside of management presence”[5] (also see: Edmans 2009; Edmans & Manso 2011; Bharath 2013; McCahery et al 2016). 

Moreover, the transaction costs involved in mounting a formal shareholder challenge to management  (e.g. voting on a resolution or a change in the board of directors, or soliciting votes in a proxy contest) are substantially lowered when the concentration of said shareholders increases. Concentration lowers these costs by, for example, making intra-shareholder communication much easier (Appel et al 2017). Between their individual incentives to monitor management and their role in reducing coordination costs to challenging it, institutional investors are capable of being a key counterweight to managerial rent-seeking and inefficiency. Indeed, the same empirical literature which raises the specter of rent-seeking CEOs simultaneously notes the strong and negative correlation between the presence of institutional investors and pro-management corporate charters, as measured by an “entrenchment index”:

[The index consists of] four constitutional provisions that prevent a majority of shareholders from having their way (staggered boards, limits to shareholder bylaw amendments, supermajority requirements for mergers, and supermajority requirements for charter amendments), and two takeover readiness provisions that boards put in place to be ready for a hostile takeover (poison pills and golden parachutes).[6]

Other comprehensive studies surveying both the U.S. and Europe have similarly discovered an inverse relationship between institutional shareholders and such value-destroying provisions (Bebchuk, Cohen and Wang 2008; Edmans 2013), as well as institutional investors’ greater likelihood of voting against management instead of obeying the much-lamented  “always vote with management” rule of thumb which prevails amongst passive investors (Appel et al 2015, 2017; He, Huang and Zhao 2017).            

But not so fast, say the theorists of “common ownership”. Index funds are unlike other institutional investors: their portfolios are diversified such that incurring costs in monitoring any given firm’s management will almost certainly exceed the benefits which accrue as a result. They will instead be content to broadcast their preference for managers and directors willing to soft-peddle intra-industry competition, carefully husbanding their oversight resources so as to scrutinize managers’ performance on that particular metric. Any managerial rent-seeking detected in the process will be purely incidental to their primary goal of monitoring for aggregate industry profit-maximization.  

Even granting this premise, it remains true that index funds qua common owners will be incentivized to punish managerial rent-seeking when detected. Thus, there is the potential for an institutional complementarity between these passive owners, with a latent preference for managerial competence and fidelity, and activist shareholders.[7]

III.

The modus operandi of an activist investor is to scour the market for a firm whose existing capital could be allocated more profitably in the hands of a more competent or less rent-seeking management. Then, a move to acquire a controlling stake in the firm is attempted by either purchasing a sufficient number of shares directly or by initiating a proxy battle whereby non-activist shareholders’ votes are recruited for the purposes of replacing the incumbent managers and/or directors. The lower the transaction costs involved in this process, the more liquid the market for corporate control, meaning that capital will flow into the hands of managers most capable of profitably deploying it (Fischel and Easterbrook 1989). Yet there are a variety of statutes and regulations which coagulate this market (as described in Part I of this post). Onerous SEC disclosure requirements triggered by acquiring a certain percentage of outstanding shares, the Williams Act and its restrictions on tender offers, and many other legal frictions raise the transaction costs involved in waging a corporate takeover.

Moreover, these political costs merely compound the difficulty which inheres in such an activist campaign when faced with widely dispersed, passive shareholders. Grossman and Hart articulated the free-rider problem facing an activist shareholder making a tender offer in their seminal 1980 article. Each individual shareholder is willing to hold out against accepting a tender offer if 1) their share is individually insufficient to effectuate a transfer in control and 2) the offer price is lower than the expected share price post-transfer. The communication costs involved in soliciting proxy votes are similarly prohibitive when shares are highly dispersed and turnover at a rapid rate. 

Institutional investors, including index funds, thereby present a more concentrated shareholder landscape to activist investors seeking to oust bad management. The coordination costs of corralling a few key shareholding blocs, rather than a dispersed herd, may be surmountable if the management is sufficiently incompetent or extractive. Moreover, assumption 1 of the Grossman and Hart model is now violated. By lubricating the market for corporate control in this way, index funds may potentiate the influence of activist arbitrageurs.[8] This large group of inert shareholders may not proactively sniff out rent-seeking managers, but may nonetheless serve as a transmission vector for an activist determined to do so.

Given that the less fragmented shareholder structure brought about by index funds increases the returns to activist investing, we would expect such investors to disproportionately target firms with a higher percentage of their shares held by institutions. Indeed, the empirical evidence overwhelmingly affirms this to be the case. To quote from one of the most recent such studies:

We analyze whether the growing importance of passive investors has influenced the campaigns, tactics, and successes of activists. We find activists are more likely to pursue changes to corporate control or influence when a larger share of the target company’s stock is held by passively managed mutual funds. Furthermore, higher passive ownership is associated with increased use of proxy fights and a higher likelihood the activist obtains board representation or the sale of the targeted company. Our findings suggest that the large ownership stakes of passive institutional investors mitigate free-rider problems and ultimately increase the likelihood of success by activists.

A corroborating anecdote, cited in the above article:

For example, the activist hedge fund ValueAct was successful in obtaining a seat on Microsoft’s board with less than 1% of stock because Microsoft recognized that other large institutional investors backed the fund’s demand.

A comprehensive study of all attempts at activist takeovers in closed-end funds (CEFs) between 1988 and 2003 found:

We use three proxies for the ease of communication among the stockholders of a particular fund. The first is turnover, which measures the frequency at which the shares of the CEF change hands. A high turnover rate indicates greater costs of communication because frequent changes of shareholders make it difficult to locate and inform them of an activist’s intent. The second variable is the average size of trade in the fund’s shares. Larger trades indicate that, on average, shareholders hold bigger positions in the fund, and thus, the fund has fewer shareholders which are easier to communicate with.

The third variable is the percentage of institutional ownership in the fund. Institutional investors typically hold larger positions, are more informed, and are more likely to cast votes for shareholder proposals and proxy contests than retail investors (who are often blamed for apathy). Due to regulatory disclosure requirements (such as the quarterly 13F filings of holdings), they are also easier to locate and notify regarding an activist’s intent. The results of our empirical tests are consistent with the hypothesis that smaller costs of communication enhance activist arbitrage.[9] (emphasis my own)

Two exhaustive literature reviews on activist investors and their effects (to be discussed below) by Alon Brav and coauthors note a consistent shareholder pattern among firms targeted by activists:

Activists rely on cooperation from management or, in its absence, support from fellow shareholders to implement their value-improving agendas. This explains why hedge fund activists tend to target companies with higher institutional holdings…[10]

…the targets of hedge fund activism exhibit relatively high trading liquidity, institutional ownership, and analyst coverage. Essentially, these characteristics allow the activist investors to accumulate significant stakes in the target firms quickly without adverse price impact, and to get more support for their agendas from fellow sophisticated investors.[11]

Having established that index funds structurally facilitate activist takeovers, the debate over the effects of index funds now supervenes on the effect of the activists. Although such hedge funds, leveraged-buyout artists and private equity investors have been pejoratively labeled as “vultures”, the balance of the literature strongly suggests net positive effects on firm share price, both in the short term and in the long term. The above-cited reviews by Alon Brav and coauthors, while noting that activists are particularly attracted to firms with a large concentration of institutional shareholders, focus primarily on the effects of such takeovers, which they summarize as follows:

The abnormal return around the announcement of activism is approximately 7%, with no reversal during the subsequent year. Target firms experience increases in payout, operating performance, and higher CEO turnover after activism.[12]  

The evidence generally supports the view that hedge fund activism creates value for shareholders by effectively influencing the governance, capital structure decisions, and operating performance of target firms.[13]

In a more recent study, contra such claims that activists seek to “pump-and-dump” a target firm by extracting short-term profits at the expense of long-term profits, Bebchuk, Brav and Jiang adduce the following after examining the full universe of SEC Section 13D filings in the years 2001-2006:

We find no evidence that activist interventions, including the investment-limiting and adversarial interventions that are most resisted and criticized, are followed by short-term gains in performance that come at the expense of long-term performance. We also find no evidence that the initial positive stock-price spike accompanying activist interventions tends to be followed by negative abnormal returns in the long term; to the contrary, the evidence is consistent with the initial spike reflecting correctly the intervention’s long-term consequences.[14] 

In his The Problem of Twelve article warning of index fund managers’ influence, John C. Coates acknowledges that such control might depend on leveraging the threat of an activist:

When an index sponsor “engages” with a company, that company’s CEO knows that there is some material chance that a contest or activist campaign or merger will occur before that CEO’s tenure is over. CEOs listen with a keen ear in such moments.

But in arguing that an index fund might be facilitative in such an instance, he is implicitly conceding that it cannot be catalytic. That role falls to the activist- yet, crucially, the activist will only mount a campaign if he can increase that individual firm’s share value in so doing. The entire premise of the “common ownership” argument is that index funds want managers who will deprioritize the firm’s individual value. So, while it’s quite possible to leverage the threat of an activist against a rent-seeking management, it’s impossible to leverage this same threat against a competitive management, because an activist will only be interested if the post-takeover share price is greater than the pre-takeover price minus transaction costs. This incentive mismatch between index fund managers and activists renders this particular aspect of the ”common ownership” paradigm logically incoherent.

IV.

So, there we have it. The hypothetical, speculative harm of intra-industry collusion vs. the very real and endlessly documented threat of managerial rent-seeking. Moreover, the corporate governance mechanism by which this intra-industry collusion is said to be effectuated falls apart under careful scrutiny. Let’s wait until there are serious, demonstrable harms to shareholders before turning the coercive machinery of anti-trust law and the FTC against what is, on balance, a boon to shareholders and the broader economy.

[1] Azar, Schmaltz, and Tecu (2017)

[2] Black (1990)

[3] Black (1992)

[4] The dynamic outlined in Jensen and Meckling’s seminal 1976 article

[5] Ficthner et al 2017

[6] Bebchuk, Cohen and Ferrell 2009

[7] See Gilson and Gordon (2013)

[8] ibid

[9] Bradley et al 2010

[10] Brav et al 2008

[11] Brav et al 2009

[12]  supra note 10

[13]  supra note 11

[14] Bebchuk, Brav and Jiang 2015

We weren’t kidding in the title to this post. There really is something called spelt milk. There is also soy milk, rice milk, coconut milk, almond milk, hemp milk, quinoa milk, oat milk (that’s not a typo – oat milk, not goat milk, although there is also goat milk of course), and pea milk (yes, really, pea milk). But now the cow milk producers are crying to the government (multiple branches, in many countries) that these non-dairy milks should not be allowed to use the term “milk.” They claim this is about consumer confusion, but are any consumers confused about where soy milk comes from? Although recent polling suggests that a few people think chocolate milk comes from brown cows (we suspect they were just having fun with the pollsters), it’s hard to believe that people purchasing these alternative milks couldn’t figure out their source. The term “milk” has been used to describe plant-based beverages for centuries, and we shouldn’t let the dairy lobby change that.

In the United States, there are efforts underway to push both the legislative and executive branches to protect dairy producers from their non-dairy competitors by keeping the word “milk” off the competitors’ products. With support from the industry, Senator Tammy Baldwin has introduced legislation that, as she puts it, “would require non-dairy products made from nuts, seeds, plants, and algae to no longer be mislabeled with dairy terms such as milk, yogurt or cheese.” But this legislative action may not even be necessary, because here’s what may be happening soon at the Food and Drug Administration (FDA):

The head of the FDA said … that the Trump administration will move to crack down on the use of the term “milk” for nondairy products like soy and almond beverages.

The agency will soon issue a guidance document outlining changes to its so-called standards of identity policies for marketing milk, FDA Commissioner Scott Gottlieb said at the POLITICO Pro Summit.

“An almond doesn’t lactate, I will confess,” Gottlieb said, referring to the fact that the agency’s current standards for milk reference products from lactating animals.   The move would be a major boon for dairy groups, which have been struggling amid dropping prices and global oversupply. The industry has petitioned FDA to enforce marketing standards for milk, but the agency has not previously addressed the issue.

We are not scientists, but his statement about almonds not lactating sounds right to us. But regardless of whether almonds or other plants lactate, there is a long history of using the term “milk” for plant-based products that do not lactate. Smithsonian Magazine recently put it this way: “Linguistically speaking, using ‘milk’ to refer to the ‘the white juice of certain plants’ (the second definition of milk in the Oxford American Dictionary) has a history that dates back centuries.” We didn’t check all the dictionaries, but here are a couple that illustrate the point. The online edition of Webster’s Dictionary, 1828 defines milk as: 

1. A white fluid or liquor, secreted by certain glands in female animals, and drawn from the breasts for the nourishment of their young.

2. The white juice of certain plants.

3. Emulsion made by bruising seeds.

Along the same lines, the Oxford English Dictionary defines milk as: 

1. An opaque white fluid rich in fat and protein, secreted by female mammals for the nourishment of their young.

‘a healthy mother will produce enough milk for her baby’

1.1 The milk from cows (or goats or sheep) as consumed by humans.

‘a glass of milk’

1.2 The white juice of certain plants.

‘coconut milk’

1.3 A creamy-textured liquid with a particular ingredient or use.

‘cleansing milk’

And the American Heritage Dictionary of the English Language defines milk as:

1. A whitish liquid containing proteins, fats, lactose, and various vitamins and minerals that is produced by the mammary glands of all mature female mammals after they have given birth and serves as nourishment for their young.

2. The milk of cows, goats, or other animals, used as food by humans.

3. Any of various potable liquids resembling milk, such as coconut milk or soymilk.

4. A liquid resembling milk in consistency, such as milkweed sap or milk of magnesia.

All of these definitions include non-dairy liquid substances as examples of what can be considered milk. Thus, identifying these products as “milk”  is nothing new. In fact, in examining the etymology of the word milk, it appears that “milk-like plant juices” date back to the 13th century, with some even showing up in medieval cookbooks.

The issue has also arisen outside the United States. The Codex Alimentarius Commission, an international body that develops food standards, defines milk as “the normal mammary secretion of milking animals obtained from one or more milkings without either addition to it or extraction from it, intended for consumption as liquid milk or for further processing.” However, the Codex standard for the use of dairy terms also stipulates that the restrictive use of the term “milk” for labelling of milk, milk products or composite milk products “shall not apply to the name of a product the exact nature of which is clear from traditional usage or when the name is clearly used to describe a characteristic quality of the non- milk product.” So there appears to be some flexibility in how countries apply this standard, and Codex even notes that “Plain soybean beverage is the milky liquid prepared from soybeans” and that some countries refer to soybean beverages as “soybean milk.”

So what have other countries done in regulating non-dairy milk products? It may be helpful to first take a look at the European Union’s rules, as Europeans famously tend to have fairly strict food labelling standards. Milk is no exception. In fact, this very debate played out in a European Court of Justice case in 2017, Verband Sozialer Wettbewerb eV v TofuTown.com GmbH, where German company TofuTown argued that it clearly identified its products as plant-based, and thus should not be prohibited from calling its products “Soyatoo tofu butter” or “Veggie cheese” for instance. But EU rules prohibit the use of these terms for non-dairy products, so in this case TofuTown’s descriptions of its products were found to be in violation. 

At the same time, the EU rules do allow Member States to make exceptions, noting that the restrictions on marketing a product as a “milk” product “shall not apply to the designation of products the exact nature of which is clear from traditional usage and/or when the designations are clearly used to describe a characteristic quality of the product” (this language mirrors that of Codex). Notably, products such as almond milk and coconut milk are exempt, among many other common designations, such as nut butters. 

Closer to home, it appears that Canada is even stricter in its approach than the EU. The Canadian Food Inspection Agency states that “Milk, unless otherwise designated, refers to cow’s milk” (though goat’s milk is ok too) and provides strict guidelines for the marketing of milk products. However, some plant-based beverages can be considered “milk product alternatives” and the Canada Food Guide, which provides information to Canadians about diet and nutrition, suggests “fortified soy beverages” as an alternative to milk. They just can’t refer to it as “milk” on the label. (The mom of one of this post’s authors has verified that her carton of almond milk doesn’t have the word milk on it anywhere—there’s some small print that reads “fortified almond beverage.” Her mom still referred to it as milk, however, suggesting that government policy may not reflect common language usage.) 

To illustrate how these products look on the shelves in the EU and Canada, we enlisted some skeptical friends and family members (who couldn’t see how this could possibly be related to our work) to take pictues:

So what’s going on in the United States, and why is Sen. Baldwin pushing the DAIRY PRIDE Act (Defending Against Imitations and Replacements of Yogurt, Milk, and Cheese To Promote Regular Intake of Dairy Everyday)? Whatever happened to American exceptionalism, and are we on our way to adopting the metric system now? Hint—the word to focus on here is “promote.” It is no secret that the U.S. dairy industry has been in decline (Americans drink 18 gallons of milk a year, compared to 30 gallons back in the 1970s), while almond milk has witnessed the opposite trend, with sales growth of 250% in the last 5 years. Taking into all the various milks, non-dairy milk has seen sales grow by 61% over the last five years. 

The dairy lobby recently flexed its muscles in pushing for concessions from Canada in the U.S.-Mexico-Canada Agreement (i.e., the new NAFTA), but that’s clearly not enough for them. They’re now ramping up efforts to challenge their direct competitors, the non-dairy milk industry. While it’s not clear that changing the labelling standard would alter consumer behavior in any way, that does not mean that government intervention in this area is harmless. It uses up governing resources, and creates consumer confusion where none currently exists. Perhaps there is some small risk that Thanksgiving will be ruined when someone brings a pumpkin pie that is made with coconut milk, but we don’t think this worry merits legislative or executive action.

 

 

Like almost every week, Facebook has been in the news. Much has been said about their earlier decisions regarding the speech of Russian agents, much of it negative. Amid that debate, you might overlook Mark Zuckerberg’s latest post about Facebook’s content moderation work. Don’t. Facebook’s moderation decisions impact speech across the globe and Zuckerberg’s post is an intriguing and important statement of the company’s position.

While the post announces changes to Facebook’s appeals process, for now I will focus on the ideas and values informing their policies about online speech.

We make tradeoffs among values all the time, even tradeoffs involving freedom of speech. While free speech is a fundamental value in the United States, it nonetheless may be curtailed to prevent violence, suppress obscenity, and protect a person’s reputation, among other reasons. Over time, these other values have come to matter less relative to free speech. Speech must directly and immediately lead to violence to be restricted; that does not happen much. Courts gave up on defining obscenity and made it difficult for public figures to win libel judgments. As a constitutional matter, we limit free speech in order to realize other values; in practice, speech almost always trumps other concerns.

At least in the public sphere. We could by law or custom demand that everyone, everywhere vindicate freedom of speech. But we don’t. I have the power to exclude speakers who ask irrelevant questions at Cato forums (though I rarely exercise it). Facebook has the same power to remove the speech of individuals or organizations from their platform. As a nation we choose private governance of private property over free speech when these values come into conflict.

That brings us to Mr. Zuckerberg. Facebook protects less speech than the U.S. Supreme Court. What values matter more to Facebook in some instances than free speech? Zuckerberg believes that Facebook should “balance the ideal of giving everyone a voice with the realities of keeping people safe and bringing people together.” Safety comprises, among other things, protection against terrorism and self-harm. “Bringing people together” implies avoiding social polarization by restricting hate speech and misinformation, the latter perhaps condemned less for its falsity and more for its divisiveness. Speech that contravenes these values constitutes “harmful content” that may be removed.

More abstractly, Facebook values community a lot. It protects its members against external and internal threats and seeks to foster unity. This concern for unity (and worries about division) marks a sharp departure from First Amendment doctrine. Limiting speech to preclude violence seems more familiar to students of liberty than restrictions in pursuit of social harmony. After all, divisive and polarizing speech (including “hate speech”) enjoys full protection by the courts. In the classic struggle between the individual and community, Facebook cares more about the latter than say, the average classical liberal, or indeed, the average free speech advocate.

You might think Facebook’s values reflect the challenges of building a lasting global business. Facebook users may prefer safety and unity over free speech. Community preferences and business logic might well go together. No doubt this is part of the story. But it is not the whole story. Facebook has a commitment to community that goes beyond profitability.

Zuckerberg’s post offers a novel discussion of “borderline content” which is defined as “more sensationalist and provocative content [which]… is widespread on cable news today and has been a staple of tabloids for more than a century.” Such content does not violate Facebook’s community standards; it toes the line. Facebook restricts the distribution and virality of such content but does not remove it. Why? “At scale it can undermine the quality of public discourse and lead to polarization. In our case, it can also degrade the quality of our services.” The latter is the concern of a businessman; the former are the values of a citizen who believes his company has a social obligation to foster civic unity at some margin.

These tradeoffs and the underlying philosophy suggest two problems for Facebook. First, the traditional problem of drawing lines. Racial and religious invective divides society and thus may be removed from the platform. Easy choices, you might think. But consider harder questions. Many people found The Bell Curve by Charles Murray and Richard Herrnstein racially offensive. They specifically deplored its treatment of IQ and race. Facebook’s Community Standards specifically preclude negative mentions of either.  Should speech favoring that work be removed?  On the other hand, a couple of years ago prominent law professor Mark Tushnet argued that President Hillary Clinton should have treated conservatives and Republicans as Germany and Japan were treated after 1945 (“…taking a hard line seemed to work reasonably well in Germany and Japan after 1945.”)  Given that “taking a hard line” toward Germany after 1945 arguably led to the deaths of at least 500,000 people, should speech like Tushnet’s recommendation be banned from Facebook going forward? It will be hard to draw these lines consistently at scale while avoiding the appearance of political bias. 

Second, Facebook’s aspirations may conflict with the expectations of investors. Zuckerberg says Facebook research indicates that people want to engage with borderline content. If Facebook is a business, and businesses give customers what they want, why make it harder for customers to get the permitted content they want? More generally, Facebook managers may be mistaken about “borderline content” and about their audience. The economist Robin Hanson recently noted: ordinary people “are more interested in gossip and tabloid news than high-status news, they care more about loyalty than neutrality, and they care more about gaining status via personal connections than via grand-topic debate sparring. They like wrestling-like bravado and conflict, are less interested in accurate vetting of news sources, like to see frequent personal affirmations of their value and connection to specific others, and fear being seen as lower status if such things do not continue at a sufficient rate.” I admire Zuckerberg’s desire to improve public discourse. How widely shared is that ambition? Does our shared aspiration reflect the social norms of Facebook users? If not, should the CEO’s hopes trump his customers wants?

A final point. Much has been made of liberal bias at Facebook. Zuckerberg himself has noted that the environs of Menlo Park are quite left-leaning. It’s also true that many on the left do emphasize community over the individual as a matter of philosophy. But the community values mentioned in Facebook’s post are not necessarily those of the left. Conservatives have, at various times, argued for government action to protect community values against noxious speech. They have tended to lament divisions and praise the larger social whole (think of their view of patriotism and “our country”). Facebook’s idea of community may be either left, or right, or neither. What it cannot be is consistent with a philosophy that always accords free speech priority over social unity.

The European Union comes in for a lot of criticism, including around these parts. Not all my colleagues have been so critical. Still, burdensome regulations by an unaccountable bureaucracy would trouble any libertarian. 

But this article in the Washington Post reminded me of the original promise of the Common Market, which grew into the European Union:

The degree to which the European Union’s post-nationalist vision has transformed the continent is evident in the German region of Saarland, an area of 1 million residents hard on the French border. 

The region — marked by lush forests, gentle hills and rich coal deposits that once made Saarland an industrial jackpot — has changed hands eight times over the past 250 years. In the past century alone, it was traded between France and Germany four times.

The first of those came in the aftermath of World War I, when France claimed the territory as compensation for German destruction of France’s own coal industry.

Germany lost the land again after World War II and only got it back in 1957.

As recently as the 1990s, the nearby border was subject to strict controls. But today, it’s largely invisible. French citizens commute to Saarland for work or pop by to buy a dishwasher. Germans cross Saar into France for lunch or to pick up a bottle of wine. French — the language of the longtime enemy and occupier — is part of the fabric of Saarland, and it’s welcome.

“We’re neighbors. We’re friends. We marry each other. One hundred years ago, we killed each other. It’s been a great evolution,” said Reiner Jung, deputy director at the Saar Historical Museum in the region’s capital, Saarbrücken.

Of course, countries could drop their trade barriers without creating a supranational bureaucracy. But too many people misunderstand economics and believe giving up their trade barriers is a cost, so creating a customs union, a common market, or even a European Union may often be the only way to get the substantial benefits of free trade. And frictionless trade is even harder to achieve without multinational negotiations. So there are pros and cons to arrangements such as the European Union, but we shouldn’t underestimate the great benefits of commerce and movement across national borders.

There is a heated debate in Malaysia these days on whether the country should affirm the International Convention on the Elimination of All Forms of Racial Discrimination, or ICERD. Adopted by the United Nations General Assembly in 1969, the internal convention calls for eliminating all legal structures that favor one group over another. 

Malaysia is among a handful of countries that have neither signed nor ratified the treaty. One major reason is that many within the country’s ethnoreligious majority, the Muslim Malays, do not want to lose the privileges they have over the non-Muslim minorities such as the Chinese or Hindus. The Islamists also feel alarmed that accepting legal equality will lead to more freedom of religion, freedom of expression, or the intermarriage of Muslims and non-Muslims. 

Free Malaysia Today, a popular newssite with liberal tendencies, asked me what I think. I encouraged Malaysians to accept ICERD, and gave a reference that even the Islamists could not easily reject: The Ottoman Empire, the very seat of the Islamic Caliphate. Here is how Free Malaysia Today reported my take:

Mustafa Akyol, an award-winning author on contemporary Muslim issues, said Muslim groups who oppose the International Convention on the Elimination of All Forms of Racial Discrimination, or ICERD, should study the policies of past Islamic powers including the Ottoman caliphate with regards to equality.

“I would recommend that all those in Malaysia who oppose the ICERD on Islamic grounds read the Ottoman Constitution of 1876. It reads:

‘All subjects of the empire are called Ottomans, without distinction whatever faith they profess… [And] All Ottomans are equal in the eyes of the law. They have the same rights, and owe the same duties towards their country, without prejudice to religion.’”

The full story is available here: ”The Caliphate had ICERD, too

On December 6th, 2018 the Herbert A. Stiefel Center for Trade Policy Studies will host a full-day conference entitled, “The Jones Act: Charting a New Course after a Century of Failure.” The purpose of this event is to shine an analytical spotlight on the Jones Act, a nearly 100-year-old law that restricts the transportation of cargo between two points in the United States to ships that are U.S.-built, crewed, owned, and flagged.

While supporters of the law claim the Jones Act is essential to ensuring a robust U.S. maritime industry capable of providing a ready supply of ships and qualified sailors in times of war and other national emergencies, both the number of ships built in the United States and U.S. sailors to crew them have been in a steady decline for decades. Not only has the Jones Act failed to deliver its promised benefits, it has also imposed a variety of different costs on the U.S. economy. This conference will examine these costs in greater detail, address the validity of the Jones Act’s national security argument, and evaluate options for reform.

As part of the conference, each of our participants will submit a short essay on a particular aspect of the Jones Act. These essays will be made available here as they are submitted by our speakers, and will be reproduced in expanded form after our conference. We encourage you to read, share, and provide feedback on these essays.

This event is part of our broader Project on Jones Act Reform, which seeks to raise awareness about the Jones Act and lay the groundwork for the repeal or reform of this outdated law. We hope you will visit our project page and join the discussion on Jones Act reform.

Reserve your spot to attend our event next month, read the conference essays, and be part of the conversation. We hope to see you there!

This month I’m participating in a Cato Unbound symposium on Child Protective Services and family rights. In its lead essay, attorney Diane Redleaf details some of the ways in which CPS agencies can arm-twist parents into so-called interim placements and safety plans that separate families with little or no judicial review.  Participant James G. Dwyer, in a response essay, takes a relatively positive view of the agencies’s work. My essay, by contrast, generally backs up Redleaf’s critique of CPS as a species of government enforcement agency gone wild: far too often, these agencies seize children from parents based on flimsy evidence, second-guess everyday parental behavior and decisions, or act on misguided Drug War zeal. 

Redleaf in her essay then goes on to raise distinctive objections about how the agencies negotiate with parents before a judge has ruled on their cases, which I paraphrase thus: 

…what sorts of policy response should apply to agencies’ practice of proffering to parents ostensibly voluntary interim placements and “safety plans”? What happens when parents regret—the next month, or the next day—having agreed to those conditions? Can they reopen the concessions they made, and how? Does it matter whether the agency has withheld information from them or menaced them with worst-case scenarios?

In my response essay, I argue that the problems with these practices are real but that legal attack on the voluntariness of interim plans is likely to be of at best limited helpfulness because our courts follow a strong presumption of enforcing settlements as written. More promising in the long run, I argue, may be to impose direct obligations on agencies to respect families’ autonomy without attacking the settlement process as such. “Safeguarding every family’s rights will, as one of its benefits, shore up families against unwise surrenders of their rights.”

 

 

Most information on Border Patrol activities along the border come from data that has already been aggregated and compiled by Customs and Border Protection (CBP), Border Patrol’s parent agency.  We acquired the Border Patrol microdata for every apprehension on the Southwest Border from September 1, 2014, through August 31, 2015.  That period adds one month from the end of the 2014 fiscal year and chops off the last month of the 2015 fiscal year.  The microdata allow us to answer specific questions about Border Patrol apprehensions that aren’t otherwise displayed in tables by CBP.  This microdata identifies an individual’s time and date of apprehension and release, which allows us back out how long they were held in Border Patrol custody. 

There is wide variation between the number of hours that illegal immigrants apprehended by Border Patrol on the SW border stay in detention based on the region of the world where they are from (Table 1).  Caribbean illegal immigrants spend an average of 61 hours in detention, but there were only 561 of them detained in 2015. 

But the most striking numbers from Table 1 is the standard deviation column.  The standard deviation measures the dispersal of the data points.  If the standard deviation is low, then the data points are all clustered about the mean.  If the standard deviation is high, the data points are spread out over a wide period.  The standard deviation for the number of hours spent in detention for Central Americans and Mexicans is about two to three times greater than the next highest standard deviation, respectively.  This is likely because of the large number of asylum claims made by Central Americans and Mexicans in 2015. 

 

Table 1

Hours Detained on SW Border by Country of Origin

Region of Origin Average Number of Hours Standard Deviation Number of Illegal Immigrants Caribbean 61.06 40.92 561 South America 47.51 32.25 4,548 Central America 44.13 105.53 130,156 Oceania 37.87 30.55 3 Asia 37.61 23.63 4,309 MENA 37.10 29.33 151 Europe/Canada 36.54 53.17 529 Mexico 35.65 144.89 186,547 Africa 23.34 28.05 56 Other/Unknown 14.72 12.36 6 All 39.26 128.31 326,866

Source: CBP Microdata.

 

Table 2 shows how many hours immigrants spend in detention by the border sector where Border Patrol apprehended them.  There’s no correlation between the number of hours an illegal immigrant is held for with the border sector in which they were apprehended, even controlling for the number of Border Patrol agents by sector.

 

Table 2

Hours Detained on SW Border by Border Region of Apprehension

Border Sector Average Number of Hours Standard Deviation Number of Illegal Immigrants Laredo 65.97 72.13 35,509 Big Bend 52.71 236.44 4,492 Rio Grande 41.06 86.95 145,493 San Diego 35.00 89.30 26,415 Del Rio 31.07 313.42 18,294 Yuma 29.81 118.89 6,633 El Paso 29.80 261.71 14,046 El Centro 28.88 66.67 12,615 Tucson 28.52 104.15 63,369 All 39.26 128.31 326,866

Source: CBP Microdata.

 

Altogether, illegal immigrants apprehended along the SW border spent over 12.8 million hours in detention in 2015 – equal to about 1,464 years of detention.  If the daily cost of maintaining a guarded bed in Immigration and Customs Enforcement (ICE) detention facilities is the same as the cost for those detained on the SW border, then it cost over $50 million in 2015 to detain those 326,866 people for more than half a million days.  

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. Today, Senator Rand Paul will take the floor to call for a vote on blocking arms sales to Bahrain—one of the countries waging war on Yemen. Senator Paul will be invoking the congressional oversight function included in the Arms Export Control Act (AECA). I’ll be watching the vote and covering its results on Twitter @CDDorminey. If you want more information on the conflict in Yemen, check out my colleague Emma Ashford’s work. For background on arms sales and congressional oversight, flip through the Risky Business report Trevor Thrall and I published earlier this year. 
  2. Incoming HASC Chair: Scale Back Plans for New Nukes,” Marcus Weisgerber. Representative Adam Smith is poised to become the House Armed Services Committee chairman and aims to “totally redo the Nuclear Posture Review” during his tenure. Cost is a motivating factor that Rep. Smith says the current plans haven’t taken seriously enough: “When you look at the needs we have in national security, the needs we have in the country and the $22 trillion debt, what they’re talking about in terms of totally rebuilding a nuclear weapons capacity in all pieces of the triad is way beyond what we can afford.” 
  3. Here’s what the Pentagon thinks the actual cost of a Space Force will be,” Aaron Mehta. Deputy Secretary of Defense Patrick Shanahan spoke to reporters this week and significantly decreased the government’s estimate of starting a Space Force. While the Air Force claimed it could cost as much as $13 billion, Shanahan’s team claims it can keep costs to the single digit billions, possibly as “low” as $5 billion. 
  4. Providing for the Common Defense,” National Defense Strategy Commission. This new report discusses the findings of a congressionally-mandated study on the 2018 National Defense Strategy (NDS) and a wide variety of emerging national security threats. The authors call for a vague yet drastic increase in defense spending, claiming it is out of their purview to estimate how much implementing the 2018 NDS will actually cost—just that current resource levels are insufficient. 

As I have written many times before, the opioid prescribing guidelines put forth by the Centers for Disease Control and prevention have been criticized for not being evidence-based. This has even caused the Food and Drug Administration to begin the process of developing its own set of guidelines.

In publishing the guidelines, the CDC emphasized they were meant to be suggestive, not “prescriptive,” pointing out that health care practitioners know their patients’ situations better than any regulators and should therefore individualize their prescribing to meet their patients’ unique needs. 

That has not prevented the majority of states from implementing opioid prescribing guidelines that place limits on the dose, amount, and length of time that doctors can prescribe opioids—usually restricting the dose of opioids to a maximum of 90 MME (morphine milligram equivalents) per day. According to the National Conference of State Legislatures at least 30 states have implemented such guidelines. These guidelines have caused many health care practitioners to return to the undertreatment of pain for which they were criticized in the 1980s and 90s. And it has driven many chronic pain patients to desperation as their doctors abruptly taper their pain medication or cut them off entirely.

The American Medical Association has gently criticized the misinterpretation and misapplication of the CDC guidelines in the past. Now two and a half years after the CDC published its guidelines, the AMA has taken a more adamant stand. This week, at the AMA’s interim meeting in Maryland, its House of Delegates resolved:

RESOLVED that our AMA affirms that some patients with acute or chronic pain can benefit from taking opioids at greater dosages than recommended by the CDC Guidelines for Prescribing Opioids for chronic pain and that such care may be medically necessary and appropriate. 

RESOLVED that our AMA advocate against the misapplication of the CDC Guidelines for Prescribing Opioids by pharmacists, health insurers, pharmacy benefit managers, legislatures, and governmental and private regulatory bodies in ways that prevent or limit access to opioid analgesia.

RESOLVED that our AMA advocate that no entity should use MME thresholds as anything more than guidance, and physicians should not be subject to professional discipline, loss of board certification, loss of clinical privileges, criminal prosecution, civil liability, or other penalties or practice limitations solely for prescribing opioids at a quantitative level above the MME thresholds found in the CDC Guidelines for Prescribing Opioids.

Sadly, the opiophobia-driven policy train left the station long ago. As an eternal optimist, my initial reaction is to think, “better late than never,” and to hope this new resolution will cause policymakers to reconsider their misguided policy. But the cynical voice inside me responds with a more negative cliché: “a day late and a dollar short.”

 

 

 

New data from the U.S. Citizenship and Immigration Services (USCIS), the agency that adjudicates immigration applications, show that denials have jumped significantly. The data for the first nine months of Fiscal Year (FY) 2018, which started in October 2017, show that denials for all manner of immigration benefits—travel documents, work permits, green cards, worker petitions, etc.—increased 37 percent since FY 2016.

As Figure 1 shows, the denial rate increased from 8.3 percent to 11.3 percent from FY 2016 to FY 2018. These statistics exclude citizenship applications and include all other immigration forms except for the Deferred Action for Childhood Arrivals and Temporary Protective Status programs, because they provide status to illegal immigrants, and President Trump has tried to cancel them almost completely. But the trends are similar regardless.

Figure 1: Denial Rate for Immigration Applications
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Figure 2 details the number of denied applications by year, with the FY 2018 projection based on the first nine months of the year. On an absolute basis, FY 2018 will see more than about 155,000 more denials than FY 2016. 

This year has seen the highest denial rate of the years for which data is available since FY 2013 (see Table 1 below). Denial rates increased from FY 2016 to FY 2018 in 19 of the 26 benefits categories for which the information was available for all years. These include the most important benefits categories like those for requesting foreign workers, applying for green cards, and asking for authorization to work or travel.

Figure 2: Total Denials for Immigration Applications
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Most dramatically, the rate of denial increased for advanced parole from 7.2 percent to 18.1 percent (Figure 3). Advanced parole gives immigrants on temporary statuses advanced permission to reenter the country after a temporary departure abroad. Skilled immigrants use advanced parole to travel abroad and avoid losing their pending green card applications.

Figure 3: Denial Rate for Advanced Parole Applications
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The denial rate for I-129 nonimmigrant worker petitions increased from 16.8 percent to 22.6 percent from FY 2016 to FY 2018 (Figure 4). Employers use the I-129 to request a foreign temporary worker to perform jobs in the United States. Common categories include the H-2A for agricultural workers and the H-1B for high-skilled workers.

Figure 4: Denial Rate for I-129 Nonimmigrant Worker Petitions
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The denial rate for employment authorization documents jumped 6 percent to 9.6 percent from FY 2016 to FY 2018 (Figure 5). Employment authorization documents (EADs) are awarded in a variety of contexts. USCIS approved nearly 2 million EADs in FY 2015. These include immigrants with asylum claims or adjustment of status applications pending more than 180 days. Students may work through Optional Practical Training program. The spouses of H-1B skilled workers can seek EADs in some circumstances, a practice that the Trump administration has announced plans to end.

Figure 5: Denial Rate for I-765 Employment Authorization Document Applications
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The denial rate for I-485 employment-based adjustment of status to permanent residence (i.e. a green card) rose from 5.9 percent to 7.9 percent from FY 2016 to FY 2018 (Figure 6). These applications are primarily from employees of U.S. businesses who are in the United States in temporary statuses, primarily the H-1B.

Figure 6: Denial Rate for I-485 Employment-Based Adjustments to Permanent Residence
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Family-sponsored applications were not spared either. USCIS rejected petitions for fiancé(e)s of U.S. citizens at a rate of 21 percent, up from 13.6 percent in FY 2016 (Figure 7). This is one of the only categories that saw the most significant increase in denials occur in FY 2017 rather than FY 2018. This could be based on the erroneous belief that the I-129F is more dangerous than other categories simply because the San Bernardino shooter was a fiancée of a U.S. citizen and used the K-1 visa category to enter the country. This coincidence hardly justifies cracking down on fiancées of U.S. citizens. 

Figure 7: Denial Rate for I-129 Petition for Alien Fiancé(e)
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The denial rate for I-485 family-sponsored adjustments to permanent residence (i.e. a green card) increased from 10.2 percent to 13 percent from FY 2016 to FY 2018 (Figure 8). These applications are primarily from spouses and parents of U.S. citizens in the United States in temporary statuses (or possibly no status) who are seeking to become legal permanent residents.

Figure 8: Denial Rate for I-485 Family-Based Adjustments to Permanent Residence
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Table 1 shows the denial rate for all benefit categories, but the ones above are the most common and important ones. President Trump has signed two executive orders that have been interpreted as a crackdown on legal immigrants, the “Buy American, Hire American” and “extreme vetting” orders. As I reported last year, USCIS dramatically increased the length and complexity of immigration forms last year. The agency has also made denying applications easier and has intimated that it would begin looking over the shoulders of adjudicators.

The administration is proposing sweeping new regulations that would only escalate these trends. The “public charge” rule would deny status to immigrants who the agency feels may use welfare in the future. Every immigration bill dealing with legal immigration that President Trump has endorsed would reduce the total numbers of legal immigrants. Clearly, the president’s goal is not just fewer illegal immigrants, but rather fewer immigrants of all kinds in the United States.

Table 1: Immigration Applications
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Last week I appeared on Hill.TV’s What America’s Thinking with Jamal Simmons to discuss what the public thinks about birthright citizenship. President Trump has proposed using an executive order to curtail birthright citizenship, which confers automatic citizenship on children born in the United States regardless of their parents’ nationality. Constitutional legal scholars say the president doesn’t have the authority to do this. What do Americans think about the value of birthright citizenship?

The Hill partnered with HarrisX to conduct a nationally representative survey of 1,000 registered voters November 2-3 to find out. First, the survey asked about a child born to a mother legally residing in the United States on a temporary visa: 57% said the child should be considered a U.S. citizen, 28% said the child should not be given citizenship, and 15% aren’t sure. 

What about children born to mothers residing in the United States illegally? Even still, a plurality (48%) support birthright citizenship for children born to mothers living in the U.S. illegally while 38% oppose and 14% aren’t sure. It would be interesting to see what Americans would think about children born to mothers who have a Green Card, but are not yet full citizens of the U.S.

HillTV_BirthrightCitizenship_1

Republicans’ opinions on birthright citizenship are far more impacted by the mother’s legal status than Democrats’ opinions. Sixty-two percent (62%) of Republicans oppose birthright citizenship for children born to mothers in the country illegally; however, opposition declines by 20 points to 45% opposed if the child is born to a mother in the U.S. on a temporary visa. Conversely, 18% of Democrats oppose if the mother is in the country illegally and 14% oppose if the mother has permission to be in the country. Thus, when thinking about birthright citizenship, Republicans tend to care more about the legal status of the parents than Democrats do. 

These results are consistent with a Pew Research Center poll that finds 57% of Americans oppose “changing the Constitution” such that children of illegal immigrants born the U.S. would not longer be considered citizens. 

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On the program, I explained that birthright citizenship has become core to America identity and something that bolsters American exceptionalism.

Many argue that birthright citizenship is a major reason the United States has been so tremendous at assimilating immigrants from many different places. Since the country’s founding, America has successfully absorbed waves of German, Irish, Italian, and Polish immigrants, among many others. Today the U.S. continues to do so with new immigrants coming from Central and South America, East and Southeastern Asia, and Africa.

Further, birthright citizenship has distinguished the U.S. from many European counterparts who have not assimilated immigrants as well into their societies. Many European countries have primarily conferred citizenship to the children of current citizens, rather than to children born within their nations’ borders. For instance, it was only in 2000 that Germany allowed children with non-German parents to acquire citizenship if at least one parent had legally resided in the country for 8 years and if the child demonstrated a link to Germany such as attending or graduating from German schools. 

Why might birthright citizenship help with assimilation? Citizenship not only confers rights and benefits upon its citizens but also places duties upon them. With citizenship comes the implicit duty to be loyal to the country’s principles and values which encourages integration within the broader American community. Francis Fukiyama points out in his excellent book Identity: The Demand for Dignity and the Politics of Resentment, that before Germany liberalized its immigration laws in 2000, there could be second- and third-generation children of Turkish immigrants, born in Germany, speaking perfect German, and having never been to Turkey, and still not be considered German. Yet, ethnic Germans living in the former Soviet Union who spoke no German could be naturalized. It’s not hard to see why a child of Turkish immigrants might feel isolated and excluded from their surrounding community under such a regime.

It may be that Americans have observed the success of birthright citizenship in successfully integrating many immigrants from differently places, including their own grandparents, or great-grandparents and so on, into the American community. It has led most Americans to accept the notion that “we are a nation of immigrants.” This historical memory may help explain why most Americans continue to support birthright citizenship today.

President Trump signed an order last week that bans asylum to people crossing the southwest border, but it exempts all migrants who “present themselves for inspection at a port of entry.” This provokes the natural question—why wouldn’t they all just do that? The answer is that without any public announcement, the government capped the number of asylum seekers that it will admit legally.

This policy is clearly in violation of the statute, which states that anyone can apply for asylum at a designated port of arrival (or anywhere else they want). More importantly, Congress specifically left the asylum category without a cap. This is different than nearly every other type of immigration, including refugees, which have limits. Indeed, there used to be a quota on how many asylees could adjust status to legal permanent resident status, but Congress repealed even that in 2005.

Congress unequivocally wanted no limits on asylum, yet the government has created one anyway. Homeland Security Secretary Kirstjen Nielsen told Fox News that the government is “metering” at ports of entry, limiting the number it will take in. When confronted about this at a press conference, she incoherently said both that they weren’t “turning away” asylum seekers but that they were telling them to go away and “come back.”

Internal documents released as a result of a lawsuit show that the Department of Homeland Security (DHS) told ports of entry that “if you determine that you can only process 50 aliens at a time, you will request that the [Mexican government] release only 50. If [Mexico] cannot or will not control the flaw, your staff is to provide the alien with a piece of paper identifying a date and time for an appointment and return [them] to Mexico.” It is illegal to return someone who has a credible fear of persecution.

DHS has stationed its agents at the exact U.S.-Mexico borderline in front of the port of entry, pushing anyone coming to request asylum legally back into Mexico. If immigrants make it onto U.S. soil, that’s supposed to entitle them to a hearing. But even when they cross the official line, officers ignore their pleas and tell them to go away. Trying to walk past them is a criminal offense.

In October 2018, the government admitted 4,177 asylum seekers in family units—that is 135 people daily—at ports. Across 48 U.S.-Mexico ports of entry, that amounts to 2.8 family units daily at each port. The most family units allowed at ports per day during the Trump administration has been 3.8. The unpublicized limit is then an average of between 2.8 and 3.8 per day.

Human Rights First researchers have reported that the government is currently admitting 2 or 3 families per day at certain entry points in recent days, though it may be more or less on any given day. But at the current average rate, it would take about 3 years for the administration to process at ports all the families who crossed between ports of entry in 2018.

Remember that these individuals are people who the government is telling to live homeless in a country that is not their own. In June, the New York Times reported that asylum seekers turned away at ports had to live on the Mexican side of the border for weeks, sleeping in “squalid” conditions and enduring 100 degree days. “We depend on strangers for food, for water, for everything,” one said. “I wanted to do everything legally, to ask for asylum in the proper way, but this is a setback I did not expect for us.”

Another told the Atlantic that she crossed the border illegally with her daughter solely because they “were turned away by U.S. Customs and Border Patrol at the Paso del Norte port of entry.” In other words, the policy encourages otherwise law-abiding people to break the law. Once they cross, their asylum claim is finally heard. Border Patrol arrested her and took away her daughter, while the Department of Justice criminally prosecuted her.

DHS complains about a lack of “resources” to process asylum seekers, which force it to turn away people at ports. But this claim is baseless. For one thing, its policy results in them needing to arrest, detain, and prosecute the tens of thousands who cross illegally between ports of entry—which the president’s memo admits is more expensive.

Moreover, the ports process more than a half a million people every day, a few hundred asylum seekers would barely be noticed. In any case, the Immigration and Naturalization Service had far fewer resources than DHS does today when Congress passed the asylum statute, and it didn’t include a “resource” exception.

President Trump’s policy is a fraud. He is simply pretending that legal ports of entry are valid options for asylum seekers when, in fact, his administration has closed them down.

The state of Indiana wanted to expand beach property available to the public along the shoreline of Lake Michigan. Much to its irritation, the beach property was already owed by many other people, as natural extensions of their homes. Indiana could have used its power of eminent domain to pay for this property. Instead, the state attempted to take the beach property without just compensation by abusing the common-law doctrine of “public trust.”

In Gunderson v. Indiana, Cato now joins the National Association of Reversionary Property Owners and two other organizations on an amicus brief supporting the property owners’ request that the Supreme Court review this practice.

The “public trust” mechanism for Indiana’s machinations was once used by kings to control public waterways. In ye olden days, kings would assume authority over waterways abutting private property to ensure that navigation and fishing could continue at a relatively uniform pace. The Indiana bureaucracy and courts reformulated the rule to extend the “trust” upwards from any actual water to the “high water mark” on the sand. This meant that even if a house had a private section of beach behind it, if the water had at some time risen upward, the property was now forfeit to the government.

This is a perversion of the “public trust” doctrine and a misreading of the common law, which preserved private property rights both by adhering to uniform decisions over time and by clearly defining what rights people could expect in their property. The “public trust” doctrine was used only to give the sovereign control over waterways for navigation and fishing. It never extended to beaches—and certainly was not meant to deprive private parties of their reasonable expectation to their own property. For the Indiana courts to invoke that power in this context is to steal property under the guise of an ancient protector.

This redefinition is a taking by any other name: what once belonged to a person now belongs to the state. And a taking, by any other name, still requires payment under the Fifth Amendment’s Takings Clause. The Supreme Court has long recognized that states attempt takings without directly invoking their powers of eminent domain. These “inverse condemnations” often come in the form of physical invasions—such as the government’s putting objects on the people’s property—or in regulations. The regulations here may not have been so wide as to deprive the owners of all their land, but the wound to their interests is still there.

The lower courts don’t have the right to kick sand in the face of Fifth Amendment and then hide behind the common law. State and local officials may wish they could step into the place of benevolent kings, but their attempts to do so here show them to be despots.

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