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The Trump administration has announced it is suspending so-called “risk adjustment” payments to insurers who participate in ObamaCare’s Exchanges, and cutting spending on so-called “navigators,” who help (few) people enroll in ObamaCare plans. 

The Washington Post’s Catherine Rampell and other ObamaCare supporters are calling these steps sabotage. In fact, what these steps will do is make the costs of ObamaCare’s supposedly popular preexisting-conditions provisions more transparent.

Risk-Adjustment (Bailout) Payments to Insurers

ObamaCare’s so-called “risk adjustment” program exists to funnel money to insurers who enroll lots of sick people who cost more in claims than they pay in premiums. Without it, insurers probably wouldn’t participate in ObamaCare. We may therefore confidently describe the risk-adjustment program as a bailout designed to rescue insurers from the costs of ObamaCare’s preexisting-conditions provisions. 

The risk-adjustment program does a better job of protecting insurance companies than sick patients. Those preexisting-conditions provisions literally punish insurers for offering coverage that the sick find attractive. They therefore create powerful financial incentives for insurers to make their offerings unattractive to the sick.

The risk-adjustment program is supposed to counteract those incentives. Anecdotal evidence and empirical research both show it’s not working. The risk-adjustment program is failing to counteract the perverse incentives that ObamaCare itself creates. ObamaCare coverage is therefore getting worse for many sick patients. Don’t worry, the insurance companies come out okay. Insurers can mitigate whatever losses the bailouts don’t cover with even more restrictive benefit designs to keep the sick away. Sick patients fare less well.

Reducing or eliminating spending on the risk-adjustment program would reveal more of the harms of the preexisting-conditions provisions. More of the cost would fall on insurers, who would respond by offering even more restrictive coverage, or exiting the market. More such transparency might finally push Congress to repeal those provisions and put health care for the sick on a more stable footing. 

In February, a federal district court in New Mexico ordered the Centers for Medicare & Medicaid Services to cease using its methodology for making risk-adjustment payments until the agency adequately explains that methodology. On July 7, the agency announced it will not make any risk-adjustment payments until the issue is resolved.

The insurers will eventually get their bailouts. But the delay will cost them money and add uncertainty to the process. Those effects in turn may lead insurers to take even greater steps to protect themselves from the costs of the preexisting-conditions provisions—thereby making those costs more transparent.

Cutting Navigator Spending

ObamaCare authorizes CMS to make grants to “navigators”—i.e., groups who are supposed to help people enroll in ObamaCare plans. They are a waste of taxpayer money, and likewise hide the costs of ObamaCare’s preexisting-conditions provisions.

According to CMS, navigators received $63 million for plan year 2017 and $36 million for plan year 2018. In both years, they signed up less than 1 percent of ObamaCare enrollees. “During grant year 2016-2017,” CMS reports, “seventeen of those Navigators enrolled fewer than 100 people at an average cost of $5,000 per enrollee.” That’s more than the cost of the health insurance, in many cases. The Wall Street Journal reports, “One grantee took in $200,000 to enroll a grand total of one person. The top 10 most expensive navigators collected $2.77 million to sign up 314 people.” The Las Vegas Review-Journal editorializes, accurately, “the navigator scheme is a make-work government jobs program rife with corruption and highly susceptible to scam artists. It’s a slush fund for progressive constituent groups.”

The navigator program also hides the cost of ObamaCare’s preexisting-conditions provisions. Since the sick will reliably enroll in ObamaCare even without navigators, those whom navigators end up enrolling are going to be disproportionately healthy. Thus navigators are also helping to hide the costs of those provisions by spreading the costs across more (healthy) people. Cutting spending on navigators will likewise reveal more of the costs of those provisions.

The Trump administration announced it is cutting spending on navigators to $10 million for plan year 2019. It should eliminate the program entirely. The less the federal government spends on navigators, the more transparent ObamaCare’s costs will be.

* * * 

When ObamaCare supporters complain about such steps, they are describing transparency as sabotage. Think about what that means.

The anxiety leading up to this week’s NATO summit is unusually intense, thanks in large part to President Trump’s fractious relationship with European allies. Trump’s political values are often in tension with that of his transatlantic counterparts, and the White House is inching ever closer to an all-out trade war with Europe and Canada, but the real drama of the NATO summit will center on Trump’s brash accusations of allied free-riding. He recently sent letters to many European capitals berating them for not meeting their pledge to spend at least 2 percent of GDP on defense.

In a post at the International Institute for Strategic Studies, Lucie Béraud-Sudreau and Nick Childs try to push back on the notion that providing for European defense is all that costly for the United States. While it is true that the $602.8 billion the United States spent on its military in 2017 “was the equivalent of 70.1% of aggregate spending by all NATO member states,” this exaggerates the true cost, they argue.

Direct U.S. spending on European defense, by their estimate, is only about $30.7 billion in 2017 and $36 billion in 2018, or between 5.1% and 5.5% of the total U.S. defense budget.

How do they calculate this number? They tally up the cost of three things: (1) direct funding for NATO, including common procurements; (2) the costs of the U.S. military presence in Europe; and (3) U.S. foreign military assistance.

Now, $30-$40 billion every year is nothing to sniff at. That is an enormous chunk of change for an America that is $21 trillion in debt to be spending on the defense of a region that is remarkably rich, powerful, and safe.

The problem, however, is that this understates the true cost of America’s NATO commitments. It is misleading to count the U.S. contribution to NATO solely as a sum of direct annual costs. The tally should also account for the indirect cost of maintaining a military big enough to fulfill our security commitments in Europe. It must account for some share of the permanent force structure that would shift to the reserves, or disappear entirely, if the United States wasn’t pledged to treating an attack on Paris, France or Podgorica, Montenegro as synonymous with attacks on Paris, Texas, or Portland, Maine. This more inclusive count is very difficult if not impossible to calculate with precision, but it is more honest.

Moreover, if the debate about NATO burden sharing boils down to bickering over budget accounting, it would seem like proponents of the status quo are playing hide the ball. The object of U.S. foreign policy is to discourage other countries from spending more on defense. It is disingenuous to pretend otherwise. Free riding is not a bug of U.S. grand strategy, it is a feature of it — a point made perhaps too candidly by the Manhattan Institute’s Claire Berlinski: “How is it, then,” she asks, “that suddenly, we’re consumed with rage that Europe is ‘taking advantage’ of us? How have we forgotten that this is the point of the system? We designed it this way…”

She’s right. As Hal Brands, one of the leading scholarly proponents of America’s post-war grand strategy, explains in his book American Grand Strategy in the Age of Trump, the United States provides “protection that allows other countries to underbuild their militaries.” Or, as Christopher Layne writes in his book The Peace of Illusions, Washington “used NATO…to foreclose the possibility that the West European states would re-nationalize their security policies.”

If America is going to have a debate about security guarantees, it must be an informed one. It should not rest on downplaying the true costs of such policies, nor should it pretend that free riding is some kind of mistake. It seems rather futile to defend the strategy by arguing against its very logic.

The author thanks Christopher A. Preble and Caroline Dorminey for input on this post. 

The “fighting season” for public schools, not surprisingly, is roughly September through May, with summer vacations in June through August keeping the clash-rate down. So June doesn’t have as many new values and identity-based battles as most other months—15 were added to the Map—and we won’t be posting dispatches for August and September, unless something surprising happens. Of course, you can follow the Battle Map Twitter feed@PubSchoolFights–for new and updated conflicts whenever news breaks, and you can also search #WWFSchool, or post battles you find using that hashtag. And while the Facebook page will also slow down a bit, we’ll post interesting tussles we find there, too.  

Despite the waning action, June produced a few battles exemplifying the problems of forcing diverse people to fund a single system of government schools.

There is no bigger stage in the country—including in education—than New York City, with its 8.6 million residents and more than 1.2 million school-aged children. It is also very diverse ethnically and racially, and Mayor Bill de Blasio’s proposal to change how students are admitted to the city’s eight top high schools, from using test scores alone to admitting anyone finishing in the top 7 percent of their middle school class, sparked a battle not just about admissions, but race. While many African Americans and Hispanics, whose children have disproportionately low representation in the highly competitive schools, saw the proposal as at least a first step toward equity, many Asian Americans, whose children have disproportionately high representation, vigorously objected.

“The mayor is pitting minority against minority and that’s really messed up,” said Kenneth Chiu, president of the New York City Asian-American Democratic Club. “New York City has taken our money for several years and no one has provided help for us.”

When government controls access to schools for which everyone must pay, especially competitive admissions schools, it often creates a zero-sum game: if my child gets in, yours doesn’t. It’s a war waiting to happen, and when race is involved—indeed, when admission based on race is explicitly at issue—it stokes racial conflict, in this case primarily pitting different minority groups against each other.

In June we also saw high-profile throwdowns over what is taught in schools, especially history and sex education, subjects inextricably linked to race, moral values, politics, and other highly personal identities and values. In Michigan new social studies standards were being debated that, at least in draft form, removed some material on gay rights, Roe v. Wade, and took “democratic” out “core democratic values.” Of course, accusations of bias were lobbed back and forth.

State Sen. Patrick Colbeck (R-7th Dist.), who worked for many of the changes, said, “When I saw the bias inherent in those standards, I wanted to make changes.” Meanwhile, State Rep. Darrin Camilleri (D-23rd Dist.) called the proposed revisions a “thinly veiled attempt to push an ultra-conservative agenda.”

In Fairfax County, Virginia—the nation’s 11th largest district—an on-going war over its Family Life Education program produced a new battlefront, as proposed standards reportedly removed “clergy” from a list of trustworthy adults. Religion, then, was directly involved in the battle, even though the public schools are supposed to be religiously neutral. Of course they can’t be, which the perpetual sex education debate in Fairfax County and countless other districts has made crystal clear. Religious values are unavoidably entangled with matters of sex.

Speaking of impossible religious neutrality, check out the op-ed Corey DeAngelis and I wrote a couple of weeks ago presenting the case that, constitutionally, true religious neutrality requires school choice, then read this blog post—and the law review article to which it links—to get a much deeper treatment of the matter. If nothing else, it will help you pass the time, and contemplate a sustainable path to peace, as September inevitably approaches.

President Trump and others who are mistakenly troubled by trade deficits with specific countries should at least get the facts straight.  To fret about trade deficits in goods alone (ignoring services) is hopelessly old-fashioned in a world where the most exciting business and investment opportunities are typically in the service industries.   U.S. businesses are famously outstanding in software and communications services, health and education services, food and lodging services, legal, financial, accounting and marketing services, and so on.  Hollywood, Wall Street, Madison Avenue, Las Vegas and D.C.’s K-Street lawyers have always been known for their services, not “making stuff.”

The table shows a rapidly growing U.S. trade surplus in services with many important economies and regions.  The U.S. services surplus tripled from 2003 to 2017 with Canada and was 7-times larger for the EU, 12-times larger for South Korea, 25-times larger for China.   Rising trade surpluses in services have become large enough to more than offset the trade deficit in goods with some major trading partners – notably Canada.   For all countries combined, of course, the surplus in services is not yet large enough to offset the familiar cyclical uptick in the trade deficit in goods (most imported goods are industrial components and materials).  But it does not take much imagination or statistical expertise to envision an interesting trend in that direction.


Recently David Beckworth and Martin Sandbu, among others, have drawn attention to an interesting paper by James Bullard and Riccardo DiCecio unveiled in Norway earlier this year. In it, Bullard and DiCecio investigate a model economy possessing both a large private credit market and “Non-state contingent nominal contracting (NSCNC).” They conclude that, in such an economy, NGDP targeting is the “optimal monetary policy for the masses.”

Here is David Beckworth’s intuitive explanation for that finding:

The basic idea is that in a world of fixed-price nominal debt contracts (i.e. the real world), a NGDP level target provides better risk sharing among creditors and debtors against economic shocks than does a price stability target.

This is because a NGDP level target makes inflation countercyclical. During recessions, inflation rises and causes creditors to bear some of the unexpected pain by lowering the real debt payments they receive from debtors. During booms, inflation falls and allows creditors to share in some of the unexpected gain by increasing the real debt payments they receive from debtors. Debtors, in other words, bear less risk during recessions but also share unexpected gains during expansions.

NGDP level targeting, in other words, causes a fixed-price nominal debt world to look and feel a lot like an equity-world. In a similar spirit, some observers have called for a risk-sharing mortgages as a way to avoid another Great Recession. The point of this paper is that the same benefit that such risk-sharing mortgages would bring can be had by having a central bank target the growth path of NGDP.

Although Bullard and DiCecio’s specific argument is novel, the idea that fluctuations in the general price level can actually contribute to optimal risk sharing in a world of fixed nominal debts is itself by no means knew. Bullard and DiCecio themselves refer to previous work making the same basic argument by Evan Koenig and Kevin Sheedy , while in my previous article here I traced the idea all the way back to Samuel Bailey’s (1837) classic monograph, Money and its Vicissitudes in Value.

I myself first cottoned-on to the view that what’s now called NGDP targeting is more conducive to what economists nowadays call achieving optimal risk sharing in a world with many fixed nominal debt contracts (but which used to be called avoiding “debtor-creditor injustice”) while working on my PhD dissertation in the early 1980s. Back then I still didn’t know about Bailey, though I did discover a few other works — all written some years before — supporting my perspective.

My conclusions eventually found their way into my dissertation, and thence into my first (1988) book, The Theory of Free Banking. I later expanded and refined them in Less than Zero (1997, especially pp. 41-5; new edition forthcoming!). Because my earlier discussion is especially informal and intuitive, I thought that persons interested in more recent works addressing the same issue, like those of Koenig, Sheedy, and Bullard and DiCecio, might find it of interest, if not helpful to their understanding of these much more sophisticated works. So here it is, with no changes save (1) the addition of a new note; (2) the removal of two original notes that contained references only; and (3) the insertion of ellipses in place of a phrase that would seem meaningless here, where it has been stripped of its context.


To address the problem of debtor-creditor injustice, one must first understand how different kinds of price changes actually affect the well-being of parties on either side of a debt contract. One also has to have a definition of injustice. For the latter we may adopt the following: parties to a long-term debt contract may be said to be victims of injustice caused by price-level changes if, when the debt matures, either (a) the debtors on average find their real burden of repayment greater than what they anticipated at the time of the original contract and creditors find the real value of the sums repaid to them greater on average than what they anticipated; or (b) the creditors find the real value of the sums repaid to them smaller on average than what they anticipated and debtors find their real burden of repayment smaller than what they anticipated at the time of the original contract. When injustice occurs the parties to the debt contract, if they had had perfect foresight, would have contracted at a nominal rate of interest different from the one actually chosen.

It is not always appreciated that not all movements in the general level of prices involve injustice to debtors or creditors. Unanticipated general price movements associated with changes in per-capita output…do not affect the fortunes of debtors and creditors in the same, unambiguous way as do unanticipated price movements associated with monetary disequilibrium.* Where price movements are due to changes in per-capita output, it is not possible to conclude that unanticipated price reductions favor creditors at the expense of debtors. Nor can it be demonstrated that unanticipated price increases favor debtors at the expense of creditors. The standard argument that unanticipated price changes are a cause of injustice is only applicable to price changes caused by unwarranted changes in money supply or by unaccommodated changes in money demand.

This is so because in one of the cases being considered aggregate per-capita output is changing, whereas in the other it is stationary. In both cases a fall in prices increases the value of the monetary unit and increases the overall burden of indebtedness, whereas a rise in prices reduces the overall burden, other things being equal. In the case where per-capita output is stationary (the monetary disequilibrium case), the analysis need go no further, and it is possible to conclude that falling prices injure debtors and help creditors and vice versa. Were parties to long-term debt contracts able to perfectly anticipate price-movements, they would, in anticipation of higher prices, contract at higher nominal rates of interest; in anticipation of lower prices they would contract at lower nominal rates of interest. In the first case the ordinary real rate of interest is increased by an inflation premium; in the latter, it is reduced by a deflation discount. These adjustments of interest rates to anticipated depreciation or appreciation of the monetary unit are named the “Fisher” effect, after Irving Fisher who discussed them in an article written just before the turn of the century.

When per-capita output is changing, one must take into account, in addition to the Fisher effect, any intertemporal-substitution effect associated with changes in anticipated availability of future real income. Here (assuming no monetary disequilibrium) reduced prices are a consequence of increased real income, and increased prices are a consequence of reduced real income. Taking the former case, although the real value of long-term debts increases, debtors do not necessarily face a greater real burden of repayment since (on average) their real income has also risen. In nominal terms they are also not affected because, as distinct from the case of falling prices due to a shortage of money, their nominal income is unchanged. Thus debtors need not suffer any overall hardship: the damage done by the unanticipated fall in prices may be compensated by the advantage provided by the unanticipated growth of real income. If the parties to the debt contract had in this situation actually negotiated with the help of perfect foresight, their anticipation of reduced prices would have caused the nominal rate of interest to be reduced by a deflation discount — the Fisher effect. But their anticipation of increased real income would also reduce their valuations of future income relative to present income, raising the real component of the nominal rate of interest — the intertemporal-substitution effect. Since the Fisher effect and the intertemporal substitution effect work in opposite directions it is not clear that the perfect-foresight loan agreement would have differed from the one reached in the absence of perfect foresight — at least, the direction in which it would have differed is not obvious. So there is no reason to conclude that a monetary policy that permits prices to fall in response to increased production would prejudice the interests of debtors.

Similarly, to allow prices to rise in response to reduced per-capita output would not result in any necessary injustice to creditors, even if the price increases were not anticipated. Here the Fisher effect in a perfect-foresight agreement would be positive, and the intertemporal substitution effect would be negative, so it cannot be said a priori that the perfect-foresight nominal rate of interest would differ from the rate agreed upon in the absence of perfect foresight.


*By “monetary disequilibrium” I mean unanticipated changes in nominal spending (MV or, equivalently, Py). Earlier in my book I explain that a monetary policy “that maintains monetary equilibrium [is one] that prevents price changes due to changes in the demand for money relative to income without preventing price changes due to changes in productive efficiency.” I would have chosen my terms more carefully had I known better.

[Cross-posted from]

Just as no single person can be judge, jury, and executioner, no single bureaucratic agency head may create rules and enforce them, and do so without meaningful oversight from Congress or the president. In a case before the U.S. Court of Appeals to the Fifth Circuit, Cato has filed a brief arguing that the director of the Consumer Finance Protection Bureau has been granted both rule-making and rule-enforcing powers far beyond what is constitutionally permissible—and the vague and arbitrary way in which he’s been using them violates the due-process protections of the Fifth Amendment.

Because the structure of the Constitution is so important in preserving the checks and balances between branches of government, courts have looked harshly on schemes that “delegate” those powers away from where constitutional text places them. The president, for instance, may appoint someone to execute his powers over a certain area of law, such as the attorney general as head of the justice department. This doesn’t violate the “nondelegation” doctrine because the president maintains control; he can direct a general policy of prosecution or non-prosecution and he can fire the AG. So long as the president has the power to remove an officer, the power delegated remains ultimately in presidential hands.

The CFPB structure is unique; it creates a single director as head of the organization, but insulates him from presidential removal except “for cause.” The president therefore has no control over this segment of law enforcement. The agency isn’t accountable to Congress either, even though Congress typically has the “power of the purse” and can deny funds to an executive department if it believes executive powers are being abused. Not so with the CFPB, which has independent access to Federal Reserve funds, without needing to seek approval from Congress or the Federal Reserve.

In addition to being financially independent from Congress and insulated from the President, the CFPB retains a tyrannical mix of legislative freedom and executive discretion. The Dodd-Frank Act grants the agency power to punish “unfair”, “deceptive,” and “abusive” practices, but also grants the CFPB’s director the power to define those terms. To date, the director has declined to clearly define those terms, choosing to define them on a “case by case” basis. But he has begun prosecuting people anyway, which is a glaring violation of due process.

We at Cato, as at all think tanks, are engaged daily in the battle of ideas—and it never ends. As an illustration, consider a basic issue that from the outset has animated our work at the Center for Constitutional Studies, the constitutional role of the courts. We’ve encouraged judges to be neither “activists,” in the mold often of the Warren and Burger Supreme Courts, nor “restrained” and deferential to the political branches, as many conservatives had urged in response, but “engaged” in limiting governments to their authorized powers while securing rights consistent with the Constitution’s guarantees. And we, along with others who’ve shared that understanding, have seen a marked shift on that issue, especially among many conservatives. In fact, it is often liberals today who charge conservatives on the Supreme Court with “judicial activism” when they hand down decisions like they often did in the term just ended.

That’s why I was disappointed when I saw that the Wall Street Journal’s Dan Henninger, whose Thursday column is usually outstanding, was last week urging President Trump to replace retiring Justice Kennedy with someone who would end “judicial overreach”—as if that were the problem today. So I sent a letter to the Journal, which they’ve run today under the heading, “Correcting the Record on Judicial Activism.” Because the Journal is behind a paywall, let me reprint it here:

Daniel Henninger’s otherwise excellent Thursday column came up short this week (“Trump Blows Away a Penumbra,” July 5). His hope that President Trump’s new Supreme Court pick will end “judicial overreach” is understandable, but the far larger problem, as always, is legislative and executive overreach, for which the court is the constitutional remedy.

To be sure, the Warren and Burger Courts often did overreach. But since those days, the debate among conservatives and libertarians has slowly shifted from judicial “restraint” to “engagement,” aimed at checking lawless political activism (see my 1991 Wall Street Journal op-ed “Rethinking Judicial Restraint”).

To see why, look simply at Griswold v. Connecticut, the 1965 decision Mr. Henninger cites as the source of judicial overreaching. True, the court’s resort to “penumbras” and “privacy” to explain why Connecticut’s statute prohibiting the sale and use of contraceptives was unconstitutional strained credulity. A classic case of right result, wrong reasons, the court should have noted first that the state enacted that law under its basic police power—its power, mainly, to protect the rights of its citizens. The court should then have asked simply: Whose rights is this law protecting? Connecticut would have come up empty-handed. This was a pure “morals” statute, promoted by some, against the liberty of others.

Notice, there’s no need here to speak of “privacy” or to discover rights. The burden is on the state to justify its act, failing which there’s a right, by implication, to sell and use contraceptives. Nor does the holding in Roe v. Wade follow, because there the police power may very well be protecting the rights of unborn children. That is a decision properly left to states.

But beyond the constitutional infirmities with Mr. Henninger’s argument is a practical problem. What Senate moderate would vote for a nominee who believes that states have the kind of unbridled power that was at issue in Griswold—or in many decisions since, especially economic liberty cases where courts today are increasingly checking unconstitutional power? Proper judging means principled engagement, not judicial deference.

In no particular order, here is a list of a few problems that comprehensive immigration reform should address (a few of which are mentioned in the immigration chapter of the Cato Handbook for Policymakers):

1. A far too restrictive system overall.
2. Static immigration quotas.
3. Quotas on nationalities—the law micromanages immigrant demographics.
4. Immigrants wait in line for decades.
5. Immigrant workers are counted against multiple quotas.
6. There’s a limit for immigrants with “extraordinary ability”.
7. Workers without college degrees only get 5,000 green cards.
8. The president can end the refugee program unilaterally.
9. No immigration category for entrepreneurs.
10. No way to create new immigration categories without congressional action.
11. Immigrants generally cannot apply for permanent residency on their own.
12. Spouses and minor children of new immigrants count against the quotas.
13. There’s a quota on new spouses and minor children of current permanent residents.
14. Children of temporary workers grow up here, wait in line with their parents for permanent residency, and get kicked out of line on their 21st birthday.
15. Immigrants can live here for decades without receiving permanent residency.
16. Illegal immigrants cannot leave and reapply to return legally.
17. Spouses and children of temporary workers are banned from working.
18. The law requires immigrants to pretend that they don’t want to immigrate.
19. Forcing employers to advertise positions that are already filled.
20. Temporary workers cannot easily change jobs.
21. No temporary visas at all for year-round workers without college degrees.
22. Noncitizens can access federal welfare programs after five years.
23. The president can ban any immigrants that he doesn’t like.
24. No opportunity to appeal visa denials.
25. The burden of proof is on immigrants and their sponsors, not the government.
26. America has closed borders with a few holes.

1. A far too restrictive system overall. Since 1820, the United States admitted on average 30 percent more legal immigrants per capita (0.45 percent of the population per year) than it did in 2017 (0.35 percent of the population), so the current rate is low historically. More importantly, the U.S. net immigration rate—legal and illegal—ranks in the bottom third of the 50 countries with the highest per-capita GDP in the world, and the U.S. share of foreign-born residents is also in the bottom third. This is at a time when population growth is at its lowest levels since the Great Depression, and the U.S. birthrate is the lowest on record. Congress should make it far easier to immigrate legally.

2. Static immigration quotas. Since 1990, Congress has not updated the quotas for the legal immigration system. During that time, the population of the United States has increased 30 percent and the economy has doubled. Quotas—to the extent that they exist at all—should be linked to economic growth (in the case of employment-based immigrants) or population growth (in the case of family-sponsored immigrants), so they don’t immediately become antiquated.

3. Quotas on nationalities—the law micromanages immigrant demographics. Congress treats immigrants differently based on where they were born (literally their place of birth—they can’t even escape this system by getting citizenship in another country). No “country” (i.e. nationals or former nationals of that country) can receive more than 7 percent of the total green cards in a category. These per-country limits are why Indian immigrants sponsored by their employers may have to wait decades for a green card, while other immigrants sponsored by their employers don’t have to wait at all. Congress should repeal the per-country limits and ban discrimination based on nationality.

4. Immigrants wait in line for decades. The symptom of the low quotas and differential treatment for individual nationalities is that nationals from certain countries must wait a long time to immigrate. Siblings and adult children of U.S. citizens from Mexico and the Philippines who are receiving their green cards right now waited two decades. Those who are applying for their green cards now will die before they reach the front of the line because so many applicants have piled up in the backlog since 1998. Immigrant workers from India have had decade-long waits, but those applying right now will wait more than a century. Such wait times are not reasonable. Congress should raise the quotas, but at the same time, it should also limit wait times to no more than 5 years.

5. Immigrant workers are counted against multiple quotas. 88 percent of immigrants sponsored by their employers for permanent residence already live in the United States. Most of them entered as temporary workers on H-1B temporary visas. When they entered, many were counted against the H-1B quota of 85,000 temporary visas. Now that they are in the country, they count again against the employer-sponsored green card limits. If the goal of quotas is to limit increases in the population or rapid changes in labor force competition, it makes no sense to double count immigrants, once when they enter and once when they apply for permanent residence. Immigrants should be counted a single time at their initial entry and not again.

6. There’s a limit for immigrants with “extraordinary ability”. The EB-1 green card category is for immigrants who have “extraordinary ability in the sciences, arts, education, business, or athletics which has been demonstrated by sustained national or international acclaim” as well as internationally renowned academics and multinational executives. These are the Nobel laureates, scientists, NBA players, and business leaders whose accomplishments contribute to the U.S. economy and society in profound ways. Yet this category inexplicably has a quota of 40,000 (including spouses and children). There is even a waiting list for such immigrants of over 58,000 immigrants. Congress should exempt these workers from the green card limits.

7. Workers without college degrees only get 5,000 green cards. In the Immigration Act of 1990, Congress limited the number of green cards provided to those without a college degree to no more than 10,000. In 1997, Congress passed a law that temporarily cut this meager amount in half. In 2016, the Pew Research Center estimated that there were about 11.3 million unauthorized immigrants in the United States. The vast majority of these have no college degree or U.S. citizen family members who could sponsor them for green cards, meaning that employer sponsorship would theoretically be their only option. But the number of green cards that the law provides is literally a rounding error in Pew’s estimate of the illegal population. To prevent future illegal immigration and provide a legal way for U.S. businesses to hire these workers, Congress should make more green cards available for lesser-educated workers.

8. The president can end the refugee program unilaterally. In and of itself, the fact that the president can permit more refugees is no problem. That is important when a crisis breaks out somewhere in the world. But the idea that the president can unilaterally shut down the entire refugee program, as President Trump has almost done, is absurd. Congress should establish a floor for refugee admissions, and it should permit private refugee sponsorship by individuals, as Canada already does. The easiest way to implement private sponsorship would be to expand family sponsorship categories to extended family members and exempt immediate family of citizens and legal permanent residents who are refugees from the green card limits or, alternatively, create a new category for sponsored refugee immigrants. This category would enable U.S. citizens to have a role in the number of refugees and allow them to target refugees for aid with whom they have a personal connection.

9. No immigration category for entrepreneurs. As the rest of the world tries to roll out the red carpet for entrepreneurs, the United States still has no permanent residence category specifically for immigrants who start or want to start businesses. While the United States does have a couple of temporary visa categories that allow some entrepreneurs to set up shop here (E-1 or O-1), they have no way to become permanent residents. Immigrants need a sponsor—either an employer or family member with citizenship to petition on their behalf. During their time in temporary status, entrepreneurs have to continuously apply for renewals and hope each successive administration still believes their economic contributions are valuable enough to receive renewals. As I’ve written before, this uncertainty discourages immigrant entrepreneurs from using these options to start businesses. Congress should create a broad entrepreneurship category for immigrants to receive permanent residence.  

10. No way to create new immigration categories without congressional action. Congress will never perfectly predict the future needs of the United States at any point in time. Even the best reforms will leave holes that will only become apparent years later. One solution would be to allow the administration far more discretion to design and create new categories. A better idea would be to create a state-sponsored visa program where state governments could set criteria for immigrants that they believe their states need (which could factor in applications from business, family members, or humanitarian groups). Canada’s Provincial Nominee Program would be one model for this approach. This idea would decentralize the making of programs and rules among the states, so that updates wouldn’t need to wait for a national crisis to catch the attention of the federal government.

11. Immigrants generally cannot apply for permanent residency on their own. U.S. immigration law has no mechanism for immigrants without sponsorship by an employer or family members. Unlike Canada, the United States has no “points” pathway to permanent residence that would allow immigrants to apply based on characteristics (years in the United States, English language ability, etc.) without needing to wait for someone to do so for them. This deficiency results in immigrants being totally unable to control their own destinies, and particularly for immigrant workers, it requires them to rely on their employers, which have no incentives to apply on their behalf if the immigrant already has temporary status that can be extended. It also results in workers working for years in temporary statuses with no way to apply directly for green cards. In addition to the employer-sponsored pathways, Congress should create points-based tracks for higher- and lower-educated immigrants.

12. Spouses and minor children of new immigrants count against the quotas. When immigrants sponsored by family members or employers receive their green cards (permanent residence), their spouses and minor children are also eligible for green cards. Rather than only counting the primary applicant—the worker or the family member—against the immigration quotas, the government counts the spouses and children as well. If the purpose of quotas is to establish the desired level of workers or siblings, it makes little sense to reduce that level based on whether the worker or sibling is married or has children. This arbitrarily reduces the immigration quotas by up to 70 percent in certain categories. The fluctuation in the actual levels of workers or family members throws needless uncertainty into the immigration process for legal immigrants and their sponsors. Congress should exempt spouses and minor children of immigrants from the quotas.

13. There’s a quota on new spouses and minor children of current permanent residents. Although spouses and minor children of new immigrants are counted against the quotas, they at least can generally receive permanent residence more or less simultaneously. They wait longer, but they wait together. By contrast, foreign spouses who marry an immigrant who already has permanent residence in the United States must wait more than a year before they can apply to immigrate (and then they have to wait again while that application is processed). Immigration law should never treat the nuclear family in this way. There should be no quota on spouses and minor children of current residents, just as there is no quota on spouses and minor children of U.S. citizens.

14. Children of temporary workers grow up here, wait in line with their parents for permanent residency, and get kicked out of line on their 21st birthday. The law stipulates that to receive status as a child of a new immigrant (as explained in #12), they must be under the age of 21. Because of the long wait times, this means that immigrants can enter the country as the minor children of temporary worker, an employer can sponsor their parent, and then they can wait in line with their parents for 5 or 10 years, but as soon as they turn 21, they “age out,” meaning that their application for permanent residence essentially disappears. They drop out of the green card queue entirely. They either must self-deport or seek out another temporary status, such as a student visa. They essentially become legal immigrant Dreamers, as they are in an equivalent position to those illegal immigrants who entered as children and are now in DACA. This could be remedied by using the age of the immigrant at the time they initially enter the line, rather than when they reach the front of it, for the purpose of the final green card application.

15. Immigrants can live here for decades without receiving permanent residency. #14 highlights a broader issue. America has a variety of temporary statuses that foreigners can use to live in the United States temporarily. They can enter as children of temporary workers (H-4), then transition to student status (F-1), then become temporary workers themselves (H-1B), and then receive an indefinitely renewable status as an entrepreneur (E-1). They could live in this country for decades without ever being able to apply for permanent residence (see #9, #11, #14). Of course, this is an even more significant problem for illegal immigrants. A person who has lived in the United States a decade or more should be guaranteed permanent residence. At that point, America is their home. The law should recognize that fact.

16. Illegal immigrants cannot leave and reapply to return legally. One component of all good governance is self-compliance. The government should not need to rely on force to keep everyone in line. People who make mistakes need ways to correct those mistakes on their own without the intervention of law enforcement. Until 1996, this is the way immigration law worked. If someone made a mistake or entered illegally, they could leave the country and apply for whatever visa they could. But the Illegal Immigration Reform and Immigrant Responsibility Act of 1996 created the “3-and-10-year bars”—which make it illegal to return for 3 years after living in the country illegally for 180 days or 10 years after living illegally for a year. This incentivizes immigrants to remain in the United States in illegal status. It is counterproductive and results in a larger illegal population. Congress should repeal the bars entirely.

17. Spouses and children of temporary workers are banned from working. This ban—partially lifted by the Obama administration in 2014 for certain spouses of H-1Bs who had been in the country for more than six years and soon to be reimposed by President Trump—is pointless. Why would the country want immigrants to be here and not have them contribute? It makes no sense. Anyone staying in the United States for more than a year should be permitted to work legally.

18. The law requires immigrants to pretend that they don’t want to immigrate. To qualify for most temporary visas, immigrants must show that they have “a residence in a foreign country which he has no intention of abandoning.” This requirement imposes all sorts of pointless headaches on different types of immigrants. If foreigners want to come to the United States to get married or engaged, they cannot use a tourist visa or the Visa Waiver Program, even though these are the easiest methods to use to travel to the United States. If they do visit, and their partner proposes to them, the government can accuse them of immigration fraud. This also means that employers cannot petition for green cards for foreign students or seasonal workers (H-1Bs for high skilled workers get an exception). This effectively prohibits legal immigration for them. It is one thing to require temporary visitors to prove that they will return if they will be required by law to do so, but it is pointless to require them to do so when they can legally stay in the country as a permanent resident. The law should simply require immigrants to prove that they will comply with their terms of admission.

19. Forcing employers to advertise positions that are already filled. As #5 points out, 88 percent of immigrants sponsored by their employers for permanent residence already live in the United States generally as temporary workers. Yet the law requires all employers to receive a “labor certification” that proves that there are no workers as qualified as the immigrant for whom they are petitioning. In and of itself, this protectionism would be unhealthy, but it is even worse that employers are required to do this theater for current employees. This wastes everyone’s time because almost no one will be as qualified as the person already doing the job.

For this reason, it is very rare for labor certifications to be denied. This means that the law requires employers to post what are essentially fake advertisements for ghost positions, but they receive real applicants who they have to interview and otherwise fool into believing this is a real position only to then reject them. In other words, the system wastes the time of not only employers and government adjudicators—it directly harms the very people it is supposed to help. Just requiring employers to pay a fee or a tariff would make more sense as a protectionist measure.

20. Temporary workers cannot easily change jobs. Because their status is entirely tied to their employment, temporary workers cannot simply walk away from a job. This places them at a substantial disadvantage when negotiating for wages and benefits. One of the main impediments to quickly transitioning from one job to another is the protectionist labor market regulations that employers must go through in order to hire a temporary worker. Once a worker is already in the United States, these regulations should not apply because an immigrant moving from one U.S. business to another does not increase the total competition for jobs.

In fact, allowing temporary workers to easily change or quit jobs helps protect U.S. workers by removing the non-market reason for employers to favor foreign workers—namely that the workers cannot easily leave the employer. Temporary workers should have an extended grace period to find a new jobs if they quit their initial employer, and their subsequent employer should be permitted to immediately hire them.

21. No temporary visas at all for year-round workers without college degrees. Because of #7, #11, and #18, the only way for lesser-educated workers to work legally in the United States is with a temporary work visa. Existing law has two options for that—the H-2A for agricultural workers and H-2B for non-agricultural workers—but both the H-2A and H-2B visa regulations prohibit year-round employment. The jobs must be seasonal, meaning that if the job is a permanent, these visas won’t work. A temporary visa for permanent positions already exists for high-skilled positions (the H-1B), but there is no counterpart for lesser-skilled workers. The effect is that industries like dairy, meat processing, and construction all operate at a disadvantage compared to industries that can access these seasonal worker programs.

22. Noncitizens can access federal welfare programs after five years. Even though the fiscal effect of immigration is quite positive overall, and even though poor immigrants use  less welfare programs on average at lower rates than other poor Americans, there are still good reasons to limit the welfare state to U.S. citizens. This limitation would go a long way to assuage one of the only legitimate concerns about immigration. It would also prevent immigrants from being denied a green card based on the fear of them becoming a “public charge” and encourage them to naturalize, a process that could aid political assimilation. Most importantly, welfare acts as a disincentive to work, and for this reason, there is some suggestive evidence that when Congress in 1996 restricted welfare for immigrants during their first five years in the country, it had no significant negative effect on their overall income or health insurance rates. More entered the labor force, which resulted in higher incomes and more employer-provided health insurance.

23. The president can ban any immigrants that he doesn’t like. In 1952, Congress passed a statute that authorizes the president to suspend “the entry of all aliens or any class of aliens” if he finds them to be “detrimental.” This power is untethered by any constraints, and as the travel ban case proves, the Supreme Court is willing to allow the president to ban immigrants based on the thinnest of pretexts. Sweeping power of this kind is incompatible with the rule of law and cedes lawmaking power to the president in a way that would shock our founders. Congress should require courts to use strict scrutiny when evaluating these types of actions by the president.

24. No opportunity to appeal visa denials. Immigrants and their sponsors can appeal immigration decisions by U.S. Citizenship and Immigration Services to the Administrative Appeals Office, and if their rights are violated by immigration agencies in the United States, they can challenge the decisions in court. But visa denials by consular officers for foreign applicants seeking to travel or immigrate to the United States cannot be appealed, and thanks to the court-invented doctrine of consular non reviewability, courts almost always turn down immigrants and their U.S. citizen sponsors who challenge consular officers’ determinations—even when they are flagrantly contrary to law or violate fundamental rights of citizens. Given that a single visa denial can doom an immigrant’s chance of ever coming to the United States, such determinations should be subject to both types of review—administrative and judicial. Congress can remedy this situation by creating a Visa Appeals Board like the Administrative Appeals Office and authorizing judicial review.

25. The burden of proof is on immigrants and their sponsors, not the government. In a free society, people are innocent until proven guilty. In the immigration system, immigrants are guilty until proven innocent. The government should have to prove its reasons for keeping someone out rather than forcing immigrants and their sponsors to prove that they will not pose a problem. This is especially relevant for employers attempting to hire foreign temporary workers from abroad. In those cases, the employer must prove to the Department of Labor that the foreign worker will not adversely affect the wages and working conditions of Americans. A better system would require the Department of Labor to prove that the foreign worker will adversely affect their wages and working conditions. This was how the labor regulations worked for the Bracero guest worker program in the 1950s and 60s. Congress should return to this earlier system and require the government to prove why it wants to keep immigrants out.

26. America has closed borders with a few holes. Similar to #25, an overarching problem with America’s immigration system is that it assumes that everyone is ineligible to immigrate unless the government grants them permission to do so. A better system would presume all are eligible to immigrate unless the government has a good reason to prevent them from doing so. This system would be far simpler and focus government’s enforcement apparatus solely on those who either are threats to the property, lives, or health of Americans or who cannot support themselves without substantial government assistance. America is so far from this system right now that it is basically immigration prohibition. Like alcohol prohibition—which had exceptions for home brews, communion wine, medicinal patent liquor, rubbing alcohol, and industrial alcohol—America’s immigration prohibition has exceptions, but the basic story is this: America is closed to almost everyone who wishes to come.

Brett Kavanaugh is a strong pick for the Supreme Court.

In his 12 years on the D.C. Circuit, Judge Kavanaugh has demonstrated a devotion to legal text and constitutional principle. I admire his dedication to the Constitution’s structural protections for liberty, his steadfast defense of the rights of speech and religious conscience, and most notably his willingness to question the excesses of the regulatory state. He has repeatedly affirmed that judges serve not as the champions of faction, but as the readers of laws and adjudicators of disputes.

While there will no doubt be cases where the future Justice Kavanaugh and Cato do not see eye-to-eye, I hope that he will not flinch in those super-hard cases where Chief Justice Roberts may be inclined to bend over backwards to uphold a law or split the baby by rewriting it. I wish him a speedy confirmation; there is literally nothing in his record that justifies the smears and demagoguery he’s about to face.

Private services account for 69% of GDP, and 128.2 million jobs in June. In the Bureau of Economic Analysis industry accounts, private service industries “consist of utilities; wholesale trade; retail trade; transportation and warehousing; information; finance, insurance, real estate, rental, and leasing; professional and business services; educational services, health care, and social assistance; arts, entertainment, recreational, accommodation, and food services; and other services (except public administration).”

Goods-producing industries, by contrast, “consist of agriculture, forestry, fishing, and hunting; mining; construction; and manufacturing.” All of these goods-producing industries combined accounted for only 20.7 million jobs this June. That was fewer goods-producing jobs than in July 2000 (24.7 million) or August 1979 (25 million) or even May 1969 (22.9 million).  In other words, all long-term U.S. job growth has been in service occupations, not in manufacturing, mining, construction, and agriculture.

The United States is predominantly a service economy.  Many world-famous U.S. enterprises provide services all over the world – including entertainment, transportation, legal services, chain restaurants, advertising, accounting, medical tourism and college degrees.  In fact, rising U.S. service exports accounted for a third of total exports from January through May, and the U.S. surplus in services shrunk the total deficit by 31%.

Yet when President Trump and his trade war generals talk excitedly about bilateral trade deficits, they invariably talk only about goods - never services.  Commerce Secretary Wilbur Ross, for example, published “Free Trade Is a Two-Way Street” in The Wall Street Journal, writing only about “trade in goods” – as though a third of U.S. exports, most U.S. jobs and 69% of U.S. GDP is not worth mentioning.

A reporter for (a financial website) inadvertently provided an excuse for widespread journalistic neglect of U.S. service exports by writing, “Please note that the Census provides trade data by country for goods only, not services.” That might have been a helpful warning if it was true. But Census does provide trade data for goods and services for most important countries, and for groups of countries such as the EU and OPEC.

Country trade data for goods and services are so commonly neglected, that I am going to post the data in several posts about various regions of the world, starting with Asia.

“Last year, we lost $500 billion on trade with China,” Trump said at a March 23 news conference. That was fake news. The correct number was $335.7 billion once we count the $40.2 billion U.S. surplus in services. And there’s no excuse for not counting services. But everyone also forgets that Hong Kong is part of China and has no tariffs against the rest of China or the U.S. or anyone else (neither does Singapore). It’s like a Chinese Free Trade Zone. Since Hong Kong ran a $35 billion trade deficit with the U.S. in 2017, that leaves the combined China/Hong Kong net trade deficit with the U.S. at $300.6 billion – $200 billion less than the President claimed.

President Trump might nonetheless claim “we lost” $300 billion in trade with China last year, except getting $300 billion in desirable industrial and consumer goods from China was a U.S. gain, not a loss. Why else would we have bought the goods?

The benefit from trade comes from imports. Exports are the cost.

Foreigners don’t sell us goods because they’re collecting dollars as a hobby. U.S. dollars can ultimately be spent only on U.S. goods, services and assets, and they are frequently used to buy U.S. services and assets rather than goods.

If people in counties like Japan, India or China find better and safer investment opportunities in U.S. tech stocks and small caps than in their own local markets, then they have an incentive to sell us something to get the dollars to invest here. I long ago dubbed that “The Investment Opportunity Theory of Trade.” Foreigners bidding-up the value of U.S. equity or property is not American “borrowing.” And contrary to Mr. Trump it’s a win-win deal – not a loss.

This news report from the Washington Post is a striking example of the absurd costs of complex tariff systems:

Brand-new Ford Transit Connect vans, made in Spain, are dropped off at U.S. ports several times a month. First, they pass through customs — and then workers hired by the automaker start to rip the vehicles apart. The rear seats are plucked out. The seat belts in back go, too. Sometimes, the rear side windows are covered with painted plates. Any holes left in the floor are patched over. 

Why? Because there’s a 25 percent tariff on imported pickup trucks and work vans, but only a 2.5 percent tariff on passenger vans. So even with all the extra effort of building a passenger-quality van, and then dismantling it, it’s still cheaper to do that than to pay a substantial tax on the import. 

The story is also a reminder of how bad policies can linger for decades. In the early 1960s Europeans increased their purchases of American chicken. European governments responded by imposing tariffs on chicken imported from the United States. In retaliation, President Lyndon B. Johnson imposed a 25 percent tariff – known as the “chicken tax” – on potato starch, dextrin, brandy, and light trucks. Tariffs on the other products were eventually lifted, but the high tax on light trucks remains. Thus the counterproductive construction and destruction. And by the way, this is no secret; the Wall Street Journal wrote about Ford’s practice in 2009.

The Post goes on to report:

Tariff engineering has a long history. 

In the 1880s, the Supreme Court ruled it was acceptable for a sugar importer to intentionally darken refined sugar with molasses to lower the grade and secure a lower duty. Three decades later, the court took up the case of a company accused of trying to evade a 60 percent duty on strung pearls by instead shipping loose pearls with holes pre-drilled for stringing. Those faced only a 10 percent duty….

For example, some athletic shoes, such as Converse All-Stars, come with just enough fuzzy cloth on the rubber soles to qualify them as lower-duty slippers. In the early 1980s, the United States imposed a tariff on motorcycles with engines larger than 700 cubic centimeters in a bid to protect U.S.-based Harley-Davidson, so Japanese companies turned to making 699-cubic-centimeter motorcycles instead. 


Sugar import quotas also create opportunities for gaming the system, which the government tries to block. In 1985, the Wall Street Journal and then the New York Times reported that the Reagan administration had slapped emergency quotas on “edible preparations” such as jams, candies, and glazes—and even imported frozen pizzas from Israel—lest American companies import such products for the purpose of extracting the sugar from them. Apparently it might have been cheaper to import pizzas, squeeze the tiny amount of sugar out of them, and throw away the rest of the pizza than to buy sugar at U.S. producers’ protected prices.

A U.S. tariff is a tax on the American people. That’s easy to see. American consumers and businesses are forced to pay higher prices for the goods they want to buy. What is not so obvious is all the deadweight loss such obstacles to trade create. Businesses and consumers may have to shift their purchases to a less-preferred domestic alternative. And as the reports above indicate, companies sometimes go to great lengths to get around the obstacles created by tariffs, quotas, and other barriers to trade. Just think of all that wasted labor and material involved in getting a Ford passenger van from a Spanish factor to an eager American consumer. This is pure waste, waste that literally makes America poorer. In the case of the chicken tax, the waste is related to a 1963 executive order that’s never been rescinded. The sugar quotas benefit a highly concentrated, politically effective industry and impose costs on far more businesses.

Tariffs impose costs on Americans. We should be reducing and eliminating them, not expanding them.

On Tuesday, Donald Trump took to Twitter to draw attention to an important story about a large scale National Security Agency surveillance program—though largely for the wrong reasons.  

Wow! The NSA has deleted 685 million phone calls and text messages. Privacy violations? They blame technical irregularities. Such a disgrace. The Witch Hunt continues!

— Donald J. Trump (@realDonaldTrump) July 3, 2018

There are two significant errors here and one important truth.  The first error is that NSA is in the process of deleting “Call Detail Records”—or metadataabout phone calls and text messages, not the calls and messages themselves.  The second error is that the records being purged were acquired pursuant to a counterterrorism authority: They have nothing to do with Special Counsel Robert Mueller’s investigation into Russian interference in the 2016 presidential election (or “The Witch Hunt,” as Trump is fond of characterizing it). The important truth is that the dramatic purge of hundreds of millions of records is indeed an attempt to remedy “technical irregularities” that led to privacy violations: the acquisition by NSA of large numbers of private telecommunications records it was not legally entitled to receive.  The New York Times reported on this in late June, and David Kris, former head of the Justice Department’s National Security Division, wrote a helpful explanatory post for Lawfare.

I can offer a bit of additional perspective because I participated in a call held by intelligence officials with privacy advocates on Monday, July 2nd to discuss the CDR deletion.  As those officials described it, the issue arose as a result of problems in the systems of the telecommunications providers from whom these records were sought. This introduced errors into some of those records, which were not immediately detected because the problem only manifested itself under specific circumstances—the officials were, understandably, unable to go into any technical detail here.  But when those records were subsequently fed back into the system as part of regular requests for additional records, those initial errors were compounded, leading to NSA obtaining records it was not authorized to receive.  Since the erroneous records are difficult to identify, NSA opted to purge the entire database, though now that the technical issues have been resolved, they will be able to repopulate it by re-requesting records for which there’s still an applicable Foreign Intelligence Surveillance Court order in place.

That’s what we got on the call, but it’s probably necessary to have a bit of background to understand what it really means in practice.  Until 2015, as we learned from disclosures by former NSA contractor Edward Snowden, NSA was collecting nearly all domestic calling records in bulk.  When analysts had a phone number they believed was linked to a foreign terror group, they queried this number against that massive database, pulling up not only the phone numbers in direct contact with that initial number, but the numbers in contact with those numbers, and then the numbers in communication with those second-degree contacts. In short, they built up a kind of social network graph extending out to three degrees of separation, or three “hops”, from an initial suspicious number.  The USA Freedom Act of 2015 put an end to the practice of indiscriminate bulk collection, instead allowing NSA to obtain two “hops” worth of contacts from an initial suspicious number by making requests, approved by the Foreign Intelligence Surveillance Court, directly to telecommunications providers, rather than maintaining an enormous database itself.  

So imagine what happens if (and here I’m necessarily speculating a bit about the nature of the errors) some technical glitch causes records to include wrong numbers—numbers the target of that FISC order wasn’t really in communication with.  At that step, NSA has gotten records it is legally entitled to, though they contain some inaccuracies.  But when those wrong numbers are fed back to the telecoms the NSA ends up improperly receiving the call records of people who were not really in direct contact with the initial target—records NSA lacks legal authority to collect.

The first thing to note about this situation is that it’s still less violative of privacy than the initial NSA bulk program, under which the agency received everyone’s call records. The second is that it’s a good illustration of how small errors can easily be magnified by feedback loops when doing telecommunications analysis, and of how those errors can go undetected for years at a time thanks to the sheer volume of data involved.  Needless to say, had NSA been authorized to seek an additional third “hop,” those additional iterations would have magnified the improper collection by another order of magnitude. The secrecy around the process means that the providers from whom records are sought may have limited ability to detect errors when they occur—but also that they have few real incentives to scrupulously limit production: They face no legal liability for coughing up too much information about their customers. And while these errors may not have anything to do with Donald Trump’s “Witch Hunt,” it seems entirely possible they may have led to innocent people being inappropriately subjected to further scrutiny: Since NSA itself can’t easily identify which records it obtained in error, we will probably never know.

As far as we can tell at present, this was a genuine mistake that NSA has now taken steps to correct.  But the fact that it persisted unnoticed for as long as it did, and the way the iterative nature of the program worked to magnify small initial errors, should make us skeptical of the wisdom of relying on intelligence tools that require this kind of large scale data collection.

One of the benefits of school choice is that it allows students with varying needs and backgrounds to choose which schooling model helps them achieve the best educational outcomes. An extensive literature on charter schools, one of the most visible alternatives to traditional public schools, has found that charters with certain characteristics and policies tend to have positive results. Most of this literature focuses on non-profit schools, but a recent study finds that the advantages of charters extend to for-profit schools. 

In their recent paper, University of Michigan economists Susan Dynarksi, Daniel Hubbard, Brian Jacob, and Silvia Robles estimate the educational impact of one of the largest for-profit charter school networks in the country, National Heritage Academy (NHA), which enrolls over 50,000 students in 9 states. Using randomized lottery admissions at NHA schools in Michigan, they find that attending a NHA charter school for one year is associated with an increase in math achievement and positive—though not statistically significant—impacts on other outcomes.

Also of note, the authors find that non-poor, non-urban students benefited the most from one year at NHA. Most of the prior literature has found the opposite, that low-income, urban students receive a larger share of the benefits.  And similar to results for non-profit charters, the authors find that certain key characteristics—such as a “No excuses” culture, providing extra time for core subjects, and frequent diagnostic assessments—are what seem to drive the positive results.

The study is the first evidence on the impact of for-profit charter schools, and it indicates that for-profits can provide similar advantages as non-profits. As non-profit and for-profit charters expand, these benefits will continue to offer different types of students the best opportunities for academic success.

In 1996 John Perry Barlow penned A Declaration of the Independence of Cyberspace, a radical call for complete online freedom. The document begins with an optimistic word of caution for states the world around; “Governments of the Industrial World, you weary giants of flesh and steel, I come from Cyberspace, the new home of Mind. On behalf of the future, I ask you of the past to leave us alone. You are not welcome among us.”

The internet did not develop as Barlow had hoped, as Jacob Mchangama illustrates in the latest episode of his podcast, Clear and Present Danger: A History of Free Speech. He notes that the “digital promised land turned into a dystopia of surveillance, disinformation, trolling and hate, to which governments responded with increasingly draconian measures.” China has simply banned foreign social media platforms like Facebook and Twitter, while inside the “great firewall,” the government manipulates its population’s infoscape through a combination of flooding popular sites with positive comments and the prohibition of specific characters. Elsewhere, states pressure social media companies to establish sophisticated censorship mechanisms with threats of regulation and liability imposition.

 “The Great Disruption: Part I,” interrogates the claim that the disruptive effects of the internet and social media on the spread of information are historically unprecedented. In some ways, of course, the internet’s effects are unparalleled. But throughout the podcast, Mchangama demonstrates that they are less novel than they might appear. The human rights lawyer turns to the early 16th century and the Great Disruption, a period of social and religious upheaval sparked by the invention of the Gutenberg printing press in 1447.

Like the internet, the impact of the printing press cannot be overstated. The social effects of the printing press are mirrored by the consequences of social media today. The new technology allowed a single document to be cheaply, reliably copied (making it hard for authorities to get rid of material they deemed problematic), allowed authors to effectively write anonymously (allowing them to put pen to page with less fear of consequence), and provided individuals with the ability to bypass traditional authorities and gatekeepers when creating content.

Scholars disagree on why the printing press failed to take hold in the Ottoman empire, but many think religion played a role, as some were fearful the printing press could contribute to the distribution of erroneous copies of the Qur’an. After all, the printing press had fueled religious schism in Europe. Their disruptive potentials aside, both the internet and the printing press have driven tremendous growth and economic development. The Ottomans increasingly lagged behind Western Europe in terms of literacy, science, and the spread of new ideas – “disciplines in which Muslims had previously been civilizational frontrunners.” The cost of being outside the information loop was high then, and is high now, exemplified by the fact that it would be nearly impossible to be successful starting an “offline” business or university. Societies that spurn technological adoption may be more stable in the short run, but they miss out on opportunities for future benefits, productivity, and progress.

Mchangama recounts Martin Luther used the printing press. In October 1517, Luther sent his list of 95 theses to the local printing press, prompting the Reformation that disrupted the religious unity of Europe. Mchangama compares Luther’s work to a twitter post (95 tweets?) as his arguments often were short and simplified so they could be spread widely and easily digested. They found an audience: by 1523, one third of Germany’s book titles came from Luther alone.

The effects of Luther’s work would eventually lead authorities to create and expand an index of prohibited books, and other extreme censorial measures. Luther himself would also try to take up the censor’s tools as well, eventually advocating the death penalty for blasphemy and idolatry. He condemned Michael Servetus, who was burned at the stake atop a pyre of his books. Despite the Calvinists’ best efforts, three copies of Servetus’ book survived, demonstrating the difficulty of controlling the new technology.

The past is never really past and so it is here too. Mchangama observes: “But for all the social and political progress, the explosive effects of new communication technologies has still seen liberal democracies increasingly copy the playbook of those desperate European rulers, whose world was turned upside down by the double whammy of the printing press and the Reformation.”

In short, censorship as a response to new communicative technology is not new, and we should be wary of its effects. Returning to a statement made by Mchangama earlier in the podcast, “censorship has now…gone viral,” and “the platforms once hailed as the global infrastructure of freedom and democracy, are now often seen as the enemies of these values.” The internet, much like the printing press, has “the ability to inspire innovations in political philosophy” and should be a place for free expression. Societies can respond to new divisions created by technology with skepticism and increased polarization, but the only lasting balms seem to be greater tolerance and acceptance of human freedom.

The entire series of the Clear and Present Danger podcast merits a listen. Many people discuss legal doctrines and current issues regarding freedom of speech. Mchangama covers both and more while recounting a reliable and informed history of free speech. Free speech has many detractors just now, but Mchangama shows it was ever so. The struggle for free speech should and will continue.

You can see a Cato forum with Jacob Mchangama here.

The minutes of the Federal Reserve’s June FOMC meeting were released yesterday and there were few, if any, surprises. The minutes show a policy discussion hewing close to the Fed’s normalization plan. Members view the current economic expansion as “progressing roughly as anticipated” and see the risks to the economic outlook “as roughly balanced.” Though the Fed continues to undershoot its preferred measure of inflation, the Committee continues to expect 2% inflation “on a sustained basis over the medium term.” 

Two rather new developments received attention at the meeting. The first relates to increasing tensions over trade and tariffs. FOMC members are concerned that global disruptions and trade policies will exert downward pressure on financial markets. Furthermore, several regional Federal Reserve districts report that proposed plans for capital spending across the country have already been reduced, with several contacts within districts expressing concerns over tariff policies.

The second issue is the flattening yield curve that has the potential to invert. Recently the spread between short-term and long-term Treasuries has narrowed. In the past, this compression has presaged a recession. However, the FOMC is currently split as to whether or not the current flattening is similarly a cause for concern; namely, that increasing yields on the front end of the curve are indicative of investor concern about the short-term economic outlook. Due to this split, the Fed seems inclined to take a wait-and-see approach before adjusting the path of monetary policy in response to financial market data.

Lastly, and most concerning, there was precious little revealed about the Fed’s thinking on the operational aspects of monetary policy that remain in uncharted waters.

One decision during the June meeting was to raise the interest rate paid on excess reserves (IOER) less than the top of the Fed’s range for the federal funds rate. IOER is the interest the Fed pays banks on their excess cash on deposit at the Fed. The federal funds rate is the interest rate that banks charge one another for overnight loans. Since the crisis the Fed has adopted a target “range” for the federal funds rate, rather than a single interest rate target as it did before the crisis. Now, in order to influence short-term rates in the economy, including the effective federal funds rate, the Fed adjusts the IOER. Until the recent FOMC meeting the top of this range was the IOER rate. Recently, however, the effective federal funds rate had been approaching the IOER rate, getting too close to the top of the target range for the Fed’s comfort. By raising the IOER rate less than the target range in June, the Fed intended to move the effective federal funds rate towards the middle of their range. 

But that hasn’t happened. While the effective federal funds rate has backed off the top, it remains elevated above the midpoint of the target range, hovering just four basis points below the IOER rate. While this is more of a window dressing problem than a cause for immediate concern, it is an important reminder that the current operating system, a creation of the Fed’s reaction to the financial crisis, is still very much an experiment—one with which the Fed has little experience.

Prominent economists are already considering what will become of the Fed’s new operating system. My colleague George Selgin recently discussed why the Fed’s “leaky floor” system is ultimately responsible for the recent compression between IOER and the effective federal funds rate. And Stephen Williamson, formerly of the St Louis Fed, blogged about why the adverse effects of quantitative easing and ill-targeted regulations are culpable for the trouble the Fed is facing. Unfortunately, the recent FOMC minutes give us no indication that the Fed has been wrestling with these issues in a similar fashion.

Last week, the Senate Appropriations Committee filed a report along with the appropriations bill for the Departments of Labor, Health and Human Services, and Education. The report mostly consists of broad policy recommendations and guidance for how to spend the appropriated money. On page 108 of the 273 page report, however, is a discussion of “barriers to research,” specifically, how the “Committee is concerned that restrictions associated with Schedule 1 of the Controlled Substance Act effectively limit the amount and type of research that can be conducted on certain Schedule 1 drugs, especially marijuana or its component chemicals and certain synthetic drugs.”

While the report is not law, it signals a welcome change in attitude. For decades, marijuana’s Schedule 1 status has made it very difficult for researchers and scientists to investigate the plant’s medicinal and harmful properties. In order to research marijuana legally for clinical purposes, even if you’re in Colorado and could just purchase some, you must first get a license from the DEA, then get approval from the FDA, and finally get access to the one federally authorized marijuana supply, which is grown at the University of Mississippi and run by the National Institute on Drug Abuse (NIDA). On top of that, the federally sourced marijuana is often moldy and of unpredictable quality. And then there’s funding, which has often not been forthcoming to those trying to research the possible beneficial uses of cannabis.

Taken together, all of those steps make researching marijuana more difficult than researching almost any other drug on the planet, including other Schedule 1 substances such as heroin and LSD. As the Appropriations Committee report says, “At a time when we need as much information as possible about these drugs, we should be lowering regulatory and other barriers to conducting this research.” The report thus directs NIDA to “provide a short report on the barriers to research that result from the classification of drugs and compounds as Schedule 1 substances.”

The report comes at a time when Attorney General Jeff Sessions is blocking an Obama administration attempt to make marijuana more easily available to researchers. In August 2016, the DEA began accepting applications to become an authorized marijuana supplier. Twenty-six applications were submitted but, after the administration changed over, Attorney General Sessions stalled the approval process. In response, Senators Orrin Hatch (R-UT) and Kamala Harris (D-CA) sent a letter to Sessions asking him to stop blocking research. Hatch has also introduced the MEDS Act, which is a more permanent legislative fix to the problems around marijuana research.

Federal marijuana prohibition, at least as a Schedule 1 drug, is on its last legs. Nine states and the District of Columbia have legalized recreational cannabis and 30 states have legalized medical marijuana. No one is putting that genie back in the bottle. Federal law is so antiquated, in fact, that it makes no distinction between medical and recreational use. Schedule 1 drugs have no accepted medical uses, and the difficulty of carrying out medical research is one reason marijuana still has that status. The Senate Appropriations report is just another step toward the inevitable revision of federal marijuana laws.

So EPA Administrator Scott Pruitt is gone, the environmentalists’ noirest bete noire since James Watt ran the Interior Department early in the Reagan Administration.  He will be replaced (at least temporarily) by Deputy Administrator Andrew Wheeler, a longtime Washington insider with a keen knowledge of the Agency.  He served as chief of staff for the Senate Environment and Public Works Committee, which oversees all EPA activities, and he also has extensive and diverse experience as a lobbyist.

He’s likely to be lower key than Pruitt, but also very effective, given his thick rolodex.  He’s certain to continue EPA’s efforts to separate its science advisors from its research largess.  He’ll likely continue to prioritize and streamline remediation of the 1000+ “superfund” sites nationwide, a key Pruitt program. And he most assuredly will not bring back anything like the Obama Administration’s clean power plan with its “renewable” solar and wind power mandates.  Instead, the switch from coal to more efficient gas-fired power plants is likely to continue.

The lynchpin of EPA’s regulatory apparatus for global warming is the 2009 “Endangerment Finding” from emissions of carbon dioxide.  According to the 2007 Supreme Court decision in Massachusetts v. EPA, if the Agency finds that resultant global warming endangers health and welfare, it can then regulate those emissions under the Clean Air Act Amendments of 1990.

The Finding is in turn based upon prospective climate change generated by large computer models both for climate and an estimate of its “social cost”. In 2016, Science magazine carried a news story by Paul Voosen noting that all of the climate models used by the United Nations Intergovernmental Panel on Climate Change have been “tuned” to simulate 20th century climate changes.  This includes a substantial warming from 1910 to 1945, despite the fact that there was very little additional carbon dioxide in the atmosphere when it began.

In 2017, France’s Frederic Hourdin and 14 coauthors published a landmark paper called “The Art and Science of Model Tuning” in the Bulletin of the American Meteorological Society.  Among other things, they revealed that there is an “anticipated acceptable range” of output. Who decides that?

It turns out that the forecasts of 21st century climate change are subjectively bounded.  Voosen’s article describes the problems encountered at the Max-Planck Institute when their model produced seven degrees (C) of warming for doubled carbon dioxide.  “They had to get that number down”, Voosen wrote.

Then there’s the whole problem of the “social cost of carbon” calculated by the Obama Administration to justify its sweeping “Clean Power Plan”. As shown by Kevin Dayaratna and colleagues at the Heritage Foundation, that cost is extremely sensitive to changes in prospective warming, and conceivably can be negative (i.e. a benefit) for modest warming, because carbon dioxide itself is a boon to plant growth, which includes crops.

Just last month, EPA proposed a revised method to calculate the cost, which cut the previous estimate by around 85%.

The model tuning, and the subjective estimates of both the amount and costs of future warming, indeed may endanger the Endangerment Finding itself.  The new Acting Administrator should revisit that critical 2009 document.

In the 1980s, there was concern regarding the endangered sea otter population in California, so Congress passed a law by which a group of otters would be relocated to an island off the coast where they might flourish. Congress was concerned, however, that the relocated otters might cause problems for the fishermen who made their living in those same waters, and so the legislation mandated that the agency in charge set up a management zone which would prevent the otters from damaging the fisheries. It also gave legal protection to well-meaning fishermen who accidentally caused the death of a sea otter—an accident which would otherwise have grave consequences under the Endangered Species Act.

The otters flourished, the fisheries were protected, and everything worked well enough for the next few decades—until some environmental groups convinced the federal government to remove the fisheries’ protections. Congress had balanced the interests at stake when crafting the legislation, but now the feds considered that balance inconvenient. The agency rescinded the fisheries’ regulation, yet left the otters in their new home. A number of groups that depend on the fisheries were nonplussed by this change, and filed a lawsuit.

Under existing Supreme Court precedent, when agencies interpret the statutes for which they are responsible, courts grant them what is known as Chevron deference. This framework has two steps: first, the court asks whether the language of the statute is ambiguous; if it is, the court then asks whether the agency’s interpretation is anything but “arbitrary and capricious.” In other words, the agency doesn’t have to be right, but it can’t be crazy. But this framework is predicated on a text that the court can examine to judge the clarity or lack thereof. Here the statute says nothing about the circumstances whereby the fisheries protection can be rescinded; it says only that the agency must issue it.

The U.S. Court of Appeals for the Ninth Circuit didn’t care about the legal niceties. It declared that Chevron applies not only to unclear congressional commands, but to congressional silence. If the statute doesn’t say the agency can’t  do something, they court will defer to the agency’ judgement as long as it is a “reasonable policy choice.” The plaintiffs have now filed a petition asking the Supreme Court to take up their case and reject the extension of Chevron from mere ambiguity to silence.

The Cato Institute, joined by the Goldwater Institute and Cause of Action Institute, filed a brief in support of the petition. We argue that Congress alone has authority to authorize federal action. If there is no express grant of authority, then the agency is by definition not empowered to act. Allowing agencies to make up their own rules anytime Congress has neglected to preempt them would run afoul of the principles of “nondelegation,” a constitutional doctrine that holds that it is Congress that legislates, not the executive branch.

We urge the Court to take up California Sea Urchin Commission v. Combs and put a stop to this perfunctory rubber-stamping of the unaccountable administrative state.

A persistent myth surrounding the ongoing Syrian refugee crisis is that the wealthy Gulf States are not sponsoring Syrian refugees.  As I wrote in late 2015, the Gulf States did not host refugees but they were sponsoring almost 1.4 million Syrian emigrants in 2013 – about a million more than they were sponsoring in 2010 before the Syrian civil war began.  The recently released World Bank bilateral migration index for 2017 shows that Gulf Countries are still sponsoring about 1.2 million Syrians, a 12 percent decline relative to 2013 (Table 1).

Table 1: Syrians Living in Gulf States

These Syrians are technically not “refugees” because Saudi Arabia and the other Gulf States are not signatories to the 1951 UNHCR convention that created the modern international refugee system. Statements by government spokesmen in the Gulf States confirm that they have taken in large numbers of “Arab brothers and sisters in distress,” but that they do not abide by international law governing refugees. In many cases, these government extended work and residency permits to Syrians who were already there when the civil war began in 2011, allowed them to bring their families, and then permitted other Syrians to join them.

The total number of Syrians in the Gulf States declined by 12 percent from 2013 to 2017 but their share of all Syrians living outside of their home country more than halved. The number of Syrians living outside of Syria in 2017 increased by 96 percent over 2013, from about 3.9 million to 7.8 million (Table 2). About 82 percent of the global increase in the number of Syrian emigrants from 2013 to 2017 settled in Turkey and Lebanon. A full 88 percent of all Syrians who left Syria from 2010 to 2017 settled in other Middle Eastern countries. Of all Syrian emigrants globally, 85 percent living in the Middle East (Figure 1).

Table 2: Syrians Living in Other Middle Eastern Countries
Copy: Figure 1: Where Syrians Emigrants Are Living

Every additional Syrian emigrant living in the Gulf States is one fewer potential refugee elsewhere. Although the Gulf States have cut the number of Syrians living there since 2013, they are still housing over 1.2 million. The mere fact that the Gulf States have allowed large numbers of Syrians to live in their territory has helped relieve the humanitarian crisis somewhat. As much criticism as we can heap on the Gulf States for other issues, at least they allowed many Syrians to live there during the worst years of the Syrian civil war.

Several media reports citing the U.S. intelligence community and arms control experts indicate that North Korea has upgraded its infrastructure for building nuclear weapons and ballistic missiles in recent months. The revelations counteract Trump’s optimistic tweet that “There is no longer a Nuclear Threat [sic] from North Korea” following his summit with Kim Jong Un last month.

The United States should not be surprised by these developments. The Trump-Kim summit was not the culmination of a long, arduous diplomatic process as most summits are, but a high-profile meeting that had far more symbolic value than nitty-gritty arms control substance. This was the expected outcome given the short period of time to prepare for the summit and the fact that it almost fell apart just a few weeks before it happened. Additionally, Kim made no pledge to halt construction of ballistic missiles, fissile material, or related infrastructure, and it isn’t surprising that he would want to keep expanding these capabilities until it is necessary to give them up.

Concessions made by Washington and Pyongyang have built some trust and momentum for diplomacy, but this is not sufficient to achieve denuclearization. Looking ahead, U.S. negotiators should take these recent revelations seriously and press Pyongyang to reveal more information about its nuclear and missile infrastructure. The United States should also demand that North Korea allow inspectors to keep tabs on nuclear and missile facilities and verify North Korean compliance with promises to dismantle facilities as negotiations progress. Creating a robust inspection and verification regime is a necessary step to ensure that North Korea is living up to its rhetoric and taking steps toward denuclearization.

The recent revelations should also be a sobering reminder for the Trump administration that it has a long road ahead. Denuclearization is possible, but getting there will require years of careful diplomacy that fundamentally transforms the nature of U.S.-North Korea relations. The administration should disabuse itself of the notion that denuclearization will be achieved quickly and easily. The history of U.S.-North Korea relations is replete with diplomatic initiatives that failed and dashed the optimism that accompanied their announcements. Trump and his senior officials should not get ahead of themselves in declaring victory when so much work needs to be done.

While the recent revelations should curb the Trump administration’s enthusiasm, it would be unwise to conclude that diplomatic engagement with North Korea is doomed to fail. There is still value to talking with the North even if they are hiding nuclear enrichment activities and building ballistic missiles. The United States should keep up its nuclear intelligence efforts as it negotiates with Pyongyang to put together a complete picture of the North’s nuclear enterprise and verify if the North is complying with the agreements it makes. Good intelligence is an essential part of effective diplomacy and should be conducted in concert with negotiations.

The Trump administration should take Pyongyang’s efforts to conceal nuclear activity and expand its missile production capacity seriously. The Singapore summit was the start of a long process and problems like this are to be expected, especially in the early stages of talks. The Trump administration needs to set realistic goals and expectations, maintain a watchful eye over Kim’s nuclear facilities, and push for a rigorous inspection regime at the negotiating table. The photo ops are over. Time for the real work to begin.