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As the $867 billion farm bill goes to the president for his signature, the Congressional Budget Office reminds us why farm subsidies don’t make much sense.

CBO just released a new “options” report that includes more than 300 pages of ideas for reducing budget deficits. The report suggests ways that Congress could cut farm subsidies, and it describes how the world has changed since these programs were put in place in the 1930s:

During the Great Depression of the 1930s, the 25 percent of the population that lived on farms had less than half the average household income of urban households; federal commodity programs came about to alleviate that income disparity.

One argument for eliminating Title I commodity support programs is that the structure of U.S. farms has changed dramatically since then: The significant income disparity between farm and urban populations no longer exists. In 2014, about 97 percent of all farm households (which now constitute about 2 percent of the U.S. population) were wealthier than the median U.S. household. Farm income, excluding federal program payments, was 52 percent higher than median U.S. household income.

Moreover, payments made through programs that support commodity prices and incomes are concentrated among a relatively small portion of farms. Three-quarters of all farms received no farm-related government payments in 2014; most program payments, in total, went to mid- to large-scale farms (those with annual sales above $350,000).

Title 1 refers to ARC, PLC, and other programs that shovel billions of taxpayer dollars to the growers of corn, soybeans, wheat, and other crops.

Let me reiterate:

  • About 97 percent of all farm households are wealthier than the median U.S. household.
  • Farm income was 52 percent higher than median U.S. household income.
  • Subsidies are slanted toward the largest farms.

Further arguments against farm subsidies are here, here, and here.

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

  1. The Senate just passed (and I mean, just passed, that’s why the Defense Download is going out a bit late today) SJ Res 54: Ordering the withdrawal of U.S. military support for the war in Yemen as a function of the War Powers Resolution. Expect to see a lot of media coverage over the next few days on what this could mean moving forward. If you want to catch up on how we got here, take some time to view the event we held here at Cato last week. 
  2. Options for Reducing the Deficit: 2019-2028,” Congressional Budget Office. All the budget wonks like me are rejoicing over a new edition of this report. The 2017 version was significantly outdated because many of the long-term plans have changed substantially in two years. 
  3. U.S. Budget Deficit Hits Wildest on Record for Month of November,” Sarah McGregor. If there was any doubt that the CBO report was badly needed and that the federal budget is hurdling in an unsustainable direction, read this piece. 
  4. New defense topline could break budget cap by $100B; analysts question strategy,” Tony Bertuca. You’ve probably heard a lot of defense topline numbers from the Trump administration over the past two weeks: originally it was $744B request for 2019, then the President wanted to cut that number to $700B, and has now reversed course and might actually seek a $750B request for next year. Click through to see what experts from across the political spectrum have to say about these prospective changes. 

Last week was a busy one for advocates of reforming the Jones Act. On Thursday the Cato Institute held a well-attended conference on the subject that featured a veritable Who’s Who of Jones Act experts and reform advocates. Video of the conference has now been posted, and those who were unable to participate or watch live should make sure to check out the many outstanding presentations that were made.

But ours was not the only gathering where the law was placed under scrutiny. Last week also saw a panel discussion held on the Jones Act as part of the National Hispanic Caucus of State Legislators’ (NHCSL) annual summit in San Diego. Unfortunately, the panel consisted only of myself and a moderator as invitations to groups supportive of the 1920 law apparently went unanswered. Nevertheless, the discussion was lively and opposition to the law in abundance.

Just how abundant became clear the next day, when the NHCSL voted on a resolution calling for the law’s repeal. Co-sponsored by New Jersey State Senator Nellie Pou and Pennsylvania State Representative Ángel Cruz, it passed by an overwhelming 56-10 margin.

The resolution, whose provisions include a call for NHCSL members to put forward similar measures in their respective legislatures calling for the Jones Act’s repeal, already appears to be bearing fruit. Puerto Rico Rep. José Aponte has announced his intention to introduce such a resolution. Others are sure to follow.

These are only the latest signs of support, particularly at the grassroots level, for reform of this failed law. Earlier this year, for example, the New York City Bar Association endorsed a permanent Jones Act exemption for Puerto Rico.

Unfortunately, too many in Washington still don’t grasp the necessity of revisiting the Jones Act. But even here in D.C. there is good news to be found, with reform advocates set to be bolstered by the arrival of newly elected Rep. Ed Case of Hawaii. A longtime opponent of the law, Case was victorious in his race against another Jones Act critic, Cam Cavasso. Congressional races where the nominees from both major political parties compete to burnish their anti-Jones Act credentials is certainly a refreshing change and would seem to speak to mounting opposition to the law.

The Jones Act has existed for over 98 years, and the edifice’s immediate collapse is unlikely. But cracks in the foundation are beginning to appear. 

In a recent talk, my Harvard colleague Martin Feldstein posits ten answers:

An entrepreneurial culture. Individuals in the U.S. demonstrate a desire to start businesses and to grow them. There is little opprobrium in the U.S. for failing and starting again.

A financial system that supports entrepreneurship. The United States has a more developed system of equity finance than the countries of Europe, including angel investors who are willing to finance startups and a very active venture capital market that helps finance those firms as they grow. The U.S. also has a large decentralized banking system with more than 7,000 small banks that provide loans to entrepreneurs.

World-­‐class research universities. Universities provide much of the basic research that drives high-­‐tech entrepreneurship. Faculty members and doctoral students often spend time with nearby startups, and the culture of the universities and the businesses encourages this activity. Top research universities attract the best students from around the world, many of whom end up staying in the United States.

Efficient labor markets. U.S. labor markets link workers and jobs, unimpeded by labor unions, state owned industries and excessively restrictive labor regulations. Less than 7 percent of the private sector U.S. labor force is unionized, and there are virtually no state owned enterprises. While the U.S. does regulate working conditions and hiring, the rules are much less onerous than in Europe. As a result, workers have a better chance of finding the right job, firms find it easier to innovate, and new firms find it easier to get started and grow.

A population that is growing, including from immigration, and geographically mobile within the United States. America’s growing population means a younger and therefore more trainable and flexible workforce. Although there are restrictions on immigration to the United States, there are also special rules to provide access to the U.S. economy and a path to citizenship based on individual talent and industrial sponsorship. A separate “green card lottery” system provides a way for eager people to come to the United States. The country’s ability to attract qualified immigrants has been an important reason for its prosperity.

A culture and a tax system that encourage hard work and long hours. The average employee works 1,800 hours per year, substantially more than the 1,500 hours worked in France and the 1,400 hours worked in Germany (although not as much as the 2,200 hours in Hong Kong, Singapore and South Korea.) In general, working longer hours means producing more and therefore means higher real incomes.

A supply of energy that makes North America energy independent. Natural gas fracking in particular has provided U.S. businesses with plentiful and relatively inexpensive energy.

A favorable regulatory environment. Although U.S. regulations are far from perfect, they are less burdensome on businesses than the regulations imposed by European countries and the European Union.

A smaller government than in other industrial countries. According to the OECD, outlays of the US governments at the federal, state and local levels totaled 38% of GDP while the corresponding figure was 44% in Germany, 51% in Italy and 57% in France. The higher level of government spending in in other countries implies not only a higher share of income taken in taxes but also higher transfer payments that reduce incentives to work.

A decentralized political system in which states and local governments compete.Competition among states and communities encourages entrepreneurship and work. States also compete for businesses and for individual residents with their legal rules and tax regimes. Some states have no income taxes and have labor laws that limit unionization. The United States is perhaps unique among major high-­‐ income nations in its degree of political decentralization.

Note that most of these credit small government, directly or indirectly, for U.S. economic success. Government is bigger in the United States than libertarians would like; but overall, still better (i.e., smaller) than in most countries.

Some member states of the United Nations just adopted the “Global Compact for Safe, Orderly and Regular Migration.”  The compact is a legally non-binding statement of principles regarding the treatment of non-humanitarian immigrants, the sharing of information, support for the rule of law in adjudicating immigration matters, and international cooperation.  Practically, this compact does not amount to much as it is legally non-binding and doesn’t change any laws.  However, the compact has garnered a lot of international attention since the United States, Austria, Australia, Chile, the Czech Republic, Italy, Hungary, Poland, Latvia, Slovakia, and the Dominican Republic pulled out of the drafting and negotiation process. 

 

The obvious context of the contentious debate over the compact is the rise of anti-immigration politics in much of the world – especially in the countries that dropped out of drafting the compact.  Additional context comes from the United Nations World Population Policies Database, which was last updated in 2015.  It designated the legal immigration policies of countries in the recent past.  The broad policies are to maintain current levels of immigration, raise them, lower them, no intervention, and no official legal immigration policy.  The database is constructed of answers to multiple choice questions about legal immigration policy by bureaucrats in national immigration departments and bureaus that implement immigration policy. 

 

Of the ten countries that dropped out of the migration compact, seven had a government policy to maintain levels of legal immigration, two had a policy to raise legal immigration, and one had no official policy on the matter as of 2015.  Over the following three years, all ten of these countries dropped out of the migration compact.  Dropping out doesn’t matter for actual policy today as the migration compact doesn’t change any laws, but it does signal how rapidly national policy positions can change in just a short time.  The 2017 responses to these questions have not been released yet, but I suspect that bureaucrats in those countries will have very different answers from what they gave in 2015.

 

Globally, 61 percent of governments in the world had a policy to maintain their current levels of immigration as of 2015 (Figure 1).  Twelve percent had policies to raise their levels of immigration and 13 percent to lower them.  In 1996, 30 percent of governments had policies to maintain levels of immigration, 4 percent had policies to raise the level of immigration, and 40 percent sought to lower the levels.  Worldwide immigration policies changed dramatically from 1996 to 2015 and they are likely to be shifting back somewhat. 

 

Figure 1: National Immigration Policies
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Figure 2 shows national immigration policies in 2015 controlling for population.  Fifty-five percent of the world’s population lived in a country with a policy to maintain the level of legal immigration in 2015, compared to 29 percent who lived in a country with a policy of raising it, and 10 percent with a country that wanted to lower it.  The results here are quite different relative to Figure 1 where each country is weighted equally.  Many more people lived in countries with policies to raise levels of immigration than in countries to lower them. 

 

Over time, the difference is even starker.  In 1996, 59 percent of people in the world lived in countries with a policy to maintain current levels of legal immigration, 30 percent lived in countries with a policy to lower immigration, and only 0.4 percent lived in countries with a policy to increase legal immigration.  As a percentage of the world population, 74 times as many people lived in countries with more open immigration policies in 2015 than in 1996.

 

Figure 2: National Immigration Policies, Controlled for Population
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The ten countries that dropped out of the Global Migration Compact show that many governments in the world are turning against legal immigration in symbolic ways.  Their individual national policies have likely shifted in a more restrictive direction as well.  However, countries in the world had much more open immigration policies in 2015 than in 1996.  Although the current global trend is worrying, it would be very difficult to roll back all the global gains over the last several decades. 

 

Both conservatives and liberals have proposed a federal entitlement program to provide paid family leave benefits. Ivanka Trump wants a new national plan, as does Alexandria Ocasio-Cortez. Some conservatives want to raid Social Security to provide paid leave benefits.

However, Vanessa Brown Calder has explained why government paid leave benefits are not the answer. Family leave is an expense that should be covered by employers voluntarily or by personal savings.

People should plan ahead for life’s contingencies and inevitabilities. Young people should learn to restrain their consumption and save so that they are prepared for costs down the road, including the costs of family leave, unemployment, and retirement.

Unfortunately, the natural inclination to save has been undermined by government. Rising hand-outs of all types have reduced the desire to save as well as the ability to save as taxes have risen to pay for the welfare state.

Fortunately, the government hasn’t yet completely killed a belief in personal responsibility and financial prudence.

A new survey by Emily Ekins examined public views about a possible government paid leave program. As an alternative to a new spending scheme, one survey question asked whether people favored tax-advantaged savings accounts that could be used for family leave costs. More than three-fourths (78%) of Americans approved, with strong support from Democrats, Republicans, men, and women.

Family leave expenses could be handled by Universal Savings Accounts (USAs), which would be a simple and flexible method for all Americans to save for all types of planned and unplanned expenses. The problem now, as Adam Michel notes, is that federal tax rules tell people, “Don’t bother saving unless you save for retirement.” But all types of personal savings are good, and none would face tax penalties with USAs within annual contribution limits.

As for paid leave proposals, there is a knee-jerk tendency in Washington to think that new spending programs are the answer to every challenge that people face. But the goal of public policy should be to wean people off government and remove barriers to self-sufficiency. USAs would be one step toward that goal.

On the campaign trail in 2016, Donald Trump railed against the federal government’s almost $20 trillion of debt, and he boldly promised to eliminate it “over a period of eight years.”

That would have been nearly impossible, and now that he is president, Trump has changed his mind anyway. Told by his advisors that the soaring debt may generate a crisis years down the road, Trump said bluntly, “Yeah, but I won’t be here,” according to The Daily Beast.

Sure enough, Trump is acting like the debt is someone else’s problem. Last year’s tax cut increased deficits, the discretionary spending deal earlier this year was a budget buster, and soaring entitlement costs have garnered little interest from the Oval Office.

For the rest of this piece, see The Hill.

“Late Capitalism,” with its implication of a system due to come to an end, is such an irritatingly pretentious trope. Noah Rothman at Commentary traces some of its recent appearances in complaints that “range from lamentations over long work weeks and the commodification of blood donations to violent fantasies about the prospect of an inter-class shooting war in America,” those examples being taken from Vice News alone. Last year Annie Lowrey traced the lefty roots of the phrase (Werner Sombart and Frankfurt School via Frederic Jameson) and noted that “late capitalism” has become a popular wording in places like The New Yorker and The Atlantic, the outlet in which she was writing. 

It’s definitely not the sort of phrase that’s novel any more, its circulation having taken off in the 1970s per Google Ngram. My theory is that by now it’s been Late Capitalism for so long that we’ve moved on to the insomniac Late Late and Late Late Late versions. Then you glance outside and what do you know? It’s Capitalism Dawn.

Republicans have criticized the socialism of Democrats such as Rep. Alexandria Ocasio-Cortez, but they should reflect on their own party’s socialist vote in the Senate yesterday. The upper chamber voted 87-13 for the bloated monstrosity known as the farm bill, which funds farm subsidies and food stamps. Republicans in the Senate voted in favor 38-13.

It is not hyperbole to call the farm bill “socialism.” It will spend $867 billion over the next decade, thus pushing up government debt and taxes. It includes large-scale wealth redistribution in the form of food stamps. At its core is central planning, which is obvious when you consider that the bill is 807 pages of legalese laying out excruciating details on crop prices, acres, yields, and other micromanagement. Furthermore, the bill lines the pockets of wealthy elites (landowners), which is a central feature of socialism in practice around the world.

The bill does not represent incremental reform toward smaller government. It is an extension and expansion of big government programs.

Many Republican senators who claim to be conservative voted for farm bill socialism yesterday. They voted for wealth redistribution, central planning, and ultimately higher taxes. Yet on their official Senate websites, these members who approved socialism yesterday nonetheless claim to favor conservative budget policies.

In alphabetical order …

Sen. Roy Blunt: “Unfortunately, bigger government, more spending, higher taxes, and more debt has created an inequality crisis of opportunity in our country.”

Sen. Bill Cassidy: “The national debt is more than $20 trillion. Fiscal responsibility is not an option, it’s a necessity to ensure the long term financial health of the United States. We must get federal spending under control by cutting wasteful, duplicative programs and ensuring taxpayer dollars are spent wisely.”

Sen. Bob Corker: “A key leader on our nation’s fiscal challenges, Bob is one of the few members of Congress to put pen to paper and produce a bill that would set our country on a path to fiscal solvency. As one of the most fiscally conservative members of Congress, he continues to fight against Washington’s all too common practice of generational theft.”

Sen. John Cornyn: “Congress must also be careful stewards of your tax dollars, focusing on lowering annual deficits and recovering from our $18 trillion debt so future generations can enjoy the same opportunities available today. By eliminating excessive spending and increasing economic activity over time, we can reduce the current budget deficit.”

Sen. Mike Crapo: “Our nation faces many threats but perhaps the biggest is our growing, unsustainable national debt … It is an urgent issue for many Idahoans who agree we must reduce our spending and balance the federal budget.”

Sen. Ted Cruz: “He has consistently voted against raising the debt ceiling, insisting that any debt ceiling increase be accompanied by structural reforms, such as a balanced budget amendment, to better control the way Washington spends money. Sen. Cruz believes that Washington’s out-of-control spending robs prosperity from our children and grandchildren, and that economic growth necessitates a smaller, less regulation-heavy federal government.”

We are only up to “C” in the alphabet here, but you can see the dissonance between the conservative self-image of many Republican members and their actual behavior.

These folks get elected because they claim to be conservative and claim to be worried about overspending and debt. But actions speak louder than words.

More on the farm bill here and here.

In the foundational criminal-procedure case of People v. De Bour (1976), the New York Court of Appeals (the state’s highest court) held that a police officer may approach a private citizen on the street to request information as long as there is “some articulable reason sufficient to justify the police action which was undertaken”—which need not rise to an indication of criminal activity. De Bour distinguished this “level one” encounter from more intrusive police actions, such as (1) a “common-law inquiry” of individuals, which must be supported by a “founded suspicion that criminality is afoot,” (2) a forcible stop of an individual that must be supported by reasonable suspicion that person was involved in a crime, and (3) an arrest of an individual, which must be supported by probable cause.

This framework remains in effect, but with one wrinkle: in 1994, the Court of Appeals in People v. Reyes held that an officer’s shouted command to “stop!” is a level-one encounter. The conviction of one Ali Cisse depends on the continued validity of Reyes.

On the night of his arrest, Mr. Cisse, then 17, was walking with three friends in Manhattan. A uniformed officer directed Cisse to stop, “hold up and turn around.” Cisse complied, and the officer noticed an L-shaped bulge in Cisse’s clothing that the officer identified as a firearm. The officer arrested Cisse and seized the firearm and other evidence, which placed Mr. Cisse near the scene of a robbery. The trial court denied Cisse’s motion to suppress the evidence and, relying on Reyes, the state appellate court affirmed.

Yet, the hallmark of a level-one encounter is that it is not “threatening” or “intimidating.” Mr. Cisse thus filed a petition with the Court of Appeals to argue that the police officer performed a “common-law inquiry,” which is a more intrusive interaction than authorized in that circumstance. He maintains that the lower courts misapplied the De Bour framework by relying on Reyes.

Cato and the Brennan Center for Justice have joined together on an amicus brief in support of Cisse. We ask the court to overrule Reyes and hold that an officer’s command to “stop” represents a level-two encounter under De Bour. Twenty-five years of developments in both the law and social science show that a police command to “stop” is more than a mere request for information. Nationwide and state-level research confirms that citizens (including New Yorkers) find police commands to be “threatening” and “intimidating.” Reports show that officers frequently resort to physical force when a subject does not immediately respond to verbal commands, even where the subject poses no imminent threat to the officer or others.

For a level-one encounter, we argue that the “right to walk away” must be restored. Citizens have a right to walk away from police encounters unless they have been seized. “Flight” may give rise to reasonable suspicion when “combined with other specific circumstances indicating that the suspect may be engaged in criminal activity”. The problem lies is the fact that “flight” is often indistinguishable from a suspect’s refusal to abide by a command to stop. To reinstate the right to walk away, the court should require the police to have a basic level of suspicion before they issue a command to stop. 

In a November 27 Wall Street Journal article, “Raise Rates Today to Fight a Recession Tomorrow,” Martin Feldstein reminded us he has been repeatedly cheerleading since 2013 for the Fed to raise interest rates faster and higher “to prevent the overvaluation of assets” whose prices “will collapse when long-term interest rates rise.” I critiqued one of Feldstein’s similar articles in 2017.

November 27 was an odd time to be fretting about overvaluation. The day before Mr. Feldstein’s article appeared, a headline in the same newspaper – “Stocks, Bonds Face Year in Red” – observed that “stocks, bonds and commodities are staging a rare simultaneous retreat” 

Yet Feldstein urged the Fed to keep pushing short-term rates higher (3.4% “will not be high enough”) to somehow ease the pain of a supposedly inevitable increase in long-term interest rates (even if inflation stays near 2%), and to also make it easier to lower short-term rates in response to some future recession, a recession probably caused by the Fed raising rates too much (see graph).

Mr. Feldstein defined “overvalued assets” in terms of historical averages. “The price-earnings ratio is nearly 40% above its long-term average,” he warned. But that is because long-term interest rates are more than 50% below their long-term average. The yield on 10-year Treasury bonds averaged 6.5% since 1970, ranging from 1.8% in 2012 to 13.9% in 1981.  The p/e ratio almost always moves higher when long-term interest rates move lower.  

Why are long-term interest rates so low? Because inflation has remained persistently low, and because the Fed can’t push short-term rates much above inflation for long without provoking asset liquidation and recession.  The graph uses the GNP deflator (blue line) to gauge inflation because it covers the whole economy and is available over many decades. The fed funds rate clearly rises with higher inflation and falls with lower inflation, so the notion of raising the funds rate to reduce inflation is self-contradictory. Even before Irving Fisher (1896) economists such as Thornton and Mill understood that nominal interest rates rise and fall with inflation, with real interest rates being cyclical but relatively stable.   

When Feldstein predicted a stock market crash “when long-term interest rates rise” he explicitly did not predict a rise in inflation. His prediction relied instead on a key conceptual ambiguity: What does a “normal” interest rate mean, and why should we presume that global bond markets gravitate toward such a historical norm?

Former Senator Phil Gramm and Michael Solon, writing in the December 11 Wall Street Journal, redefine “normal” to mean arbitrarily excluding the high interest rates of 1977-82 and also the low interest rates of 2009-2018. After further subtracting inflation, this leaves them with a postwar trimmed average rate of 1.2% for real Treasury “borrowing costs” (presumably a weighted blend of short-term and long-term rates). “This suggests,” they conclude, “that if the Fed could meet its 2% inflation target during this recovery, Treasury borrowing costs might stay close to the 3.2% range.” 

The authors nevertheless raise concerns that if borrowing costs rose to 4.8% – which implies 3.6% inflation – it could become difficult to roll over the accumulated Obama-era debt without the Fed monetizing too many Treasury bills and bonds (paying for them by crediting bank reserves that currently pay interest). They conclude, convincingly, that firm spending caps and making peace on trade would make the future economy far more predictable and secure.

The day after Feldstein’s article, Fed Chairman Jerome Powell questioned the wisdom of continually raising short-term interest rates regardless of economic reality.  His comments greatly increased prices of stocks and bonds until “Tariff Man Tuesday” terrified world investors. Yet Chairman Powell’s changing conjectures about the fed funds rate being either near or far from to some unknowable “neutral rate” seem nearly as arbitrary and unsettling as Mr. Feldstein’s divinations about U.S. long-term rates reverting to an ancient average.

To sum this all up: 1. Stock prices have been high relative to earnings because bond yields have been low; 2. Bond yields have been low because the fed funds rate has been low; 3. The fed funds rate has been low because inflation has been low. 

Anyone predicting a sizable increase in long-term interest rates must also be predicting a sizable increase in inflation. Because inflation is largely a global phenomenon, however, it would be extremely challenging to persuasively predict higher inflation (and therefore higher bond yields) while much of the world economy is struggling to expand, the dollar has been rising and commodity prices falling.

President Trump told Democratic leaders Tuesday that he would be “proud” to shut the government down if Congress refuses him $5 billion for a border wall. A shutdown is virtually the only situation where Trump could back himself into such a corner that he would accept the wall-for-Dreamers trade that Democrats offered, but he rejected, earlier this year. Yet Democrats aren’t even bringing immigrants up. This is a tragedy for the immigrants who are counting on them.

After Democrats listened to Trump rant about “terrorists” coming across the border—who a Trump wall would supposedly keep out—all they could say is that they wanted more security and that they didn’t want to shut the government down. That’s not good enough. Democrats need a pro-immigrant exchange for wall funding—a deal where both sides can walk away with a win. If they don’t, Trump could win this fight, leaving immigrants with nothing to show for the wall.

Democrats have entirely dropped their demand from earlier this year that any wall funding be tied to the Dream Act—which would provide status to unauthorized immigrants brought to the country as children. Indeed, House Minority Leader Nancy Pelosi told the media that those are “two different subjects,” and she wouldn’t reup the offer. Democrats have even already given Trump a way to claim victory by agreeing to $1.6 billion border “fence” funding for this year.

So as it stands right now, Democrats are going into a shutdown fight over immigration where the worst case scenario for Trump is $1.6 billion in fences, and the best case scenario for Democrats is nothing. That’s a terrible negotiating stance. They should at least say, “We’re happy to give you more money if you give us one of our immigration priorities.” That gives Trump a landing spot where he can get his $5 billion, but Democrats and immigrants get something in return.

Perhaps the political calculation is that Trump will harm himself long term with a lengthy shutdown, but when Republicans shut down the government in 2013—while they took a short-term hit in the polls—it made no difference to their 2014 outcomes. Indeed, the GOP kept the House and took over the Senate that year. Trump remembers this, and even thinks that the shutdown could have worked for Republicans, so he may just hold for what he wants.

Democrats may think they won the House this year by ignoring immigration. But Trump won’t allow them to do that, so as a strategic manner, they should put up a pro-immigrant counteroffer, and leave it out there just in case Trump will take their life preserver during his shutdown. It’s still a very long shot, but without the offer, the shutdown brings them no upside and plenty of downside.

Congress and the White House are Republican. The latter proposed modest reforms to food stamps and farm subsidies in its budget. The House passed modest reforms to food stamps. Liberal and conservative analysts favor reforms to farm subsidies, which are actually subsidies to wealthy landowners.

Yet Congress is set to pass an $867 billion farm/food stamp bill with virtually no smaller-government reforms, and the president will probably sign it. The 800-page bill is backed by an 800-pound lobbying gorilla with two muscular arms—the farm lobby and the anti-poverty lobby.

Where does an 800-pound gorilla sit? Wherever it wants to, including on American taxpayers.

I said the bill is “appalling.” Heritage says it is a “nightmare.” NTU says it will “expand welfare to the wealthy.” R Street and AFP say it is “a huge jumble of subsidies.”

Politico says the farm bill is a “win for Democrats,” noting:  

Leaders of the House and Senate Agriculture committees rejected sweeping changes to the Supplemental Nutrition Assistance Program [i.e. food stamps] that House Republicans and President Donald Trump had sought, clearing a path for bipartisan support in both chambers. The final bill also sidesteps a Senate attempt to tighten limits on subsidies for wealthier farmers.

The bill, which has an estimated price tag of $867 billion over a decade, could have a floor vote in the House as soon as Wednesday. Quick passage in the House would allow the Senate to vote on the bill later this week.

… The deal is a win for Democrats, who unanimously opposed the House plan to impose stricter work requirements on millions of participants in SNAP, formerly known as food stamps. SNAP helps nearly 40 million low-income Americans buy groceries and accounts for more than 75 percent of the farm bill’s total price tag.

… Trump has repeatedly said he wanted the farm bill to include stricter SNAP work rules, but lawmakers told reporters the president is expected to sign the final deal even though it lacks those provisions.

… The final compromise doesn’t cut SNAP benefits or change eligibility criteria in any significant way.

… A controversial proposal from Sen. Chuck Grassley (R-Iowa) to curb how many farm managers can qualify for commodity subsidies also didn’t make the cut.

… Commodity subsidies, which can cost around $5 billion to $8 billion a year and are sent out when farmers’ average revenue or crop prices fall below certain levels, are expected to increase under the bill.

Dairy producers will get added protection, as well, because lawmakers decided to make it less expensive for them to enroll in support programs. House Agriculture ranking member Collin Peterson (D-Minn.), who is expected to take over the panel next year, has said the changes will make it nearly impossible for smaller dairy operations to lose money.

Federal crop insurance, which subsidizes about 60 percent of farmers’ premiums and shields producers from weather-related disasters or profit losses during any one year, will continue. The program is not means-tested.

The Cato 2018 Paid Leave Survey, a new national poll of 1,700 U.S. adults, finds that nearly three-fourths (74%) of Americans support a new federal government program to provide 12 weeks of paid leave to new parents or to people to deal with their own or a family member’s serious illness. A quarter (25%) oppose establishing a federal paid leave program. However, support slips and consensus fractures when costs are considered.

Read about the full survey results here.

The survey found 54% of Americans would be willing to pay $200 a year in higher taxes, a low-end estimate, in exchange for a 12-week federal paid leave program. If the program were to cost them $450 in taxes a year—the mid-range estimate—52% of Americans would oppose it, while 56% would oppose if it cost them the high range estimate of $1,200 in taxes. (Low, mid, and high range cost estimates are based off of potential costs of the Family and Medical Insurance Leave Act (FAMILY Act). See here for further explanation of cost estimates).

What Trade-Offs Would Americans Make for Federal Paid Leave?

The survey also investigated Americans’ willingness to deal with other potential or likely trade-offs that research finds could result from establishing a federal paid leave program. Americans would oppose establishing a federal paid leave program if it had the following effects:

  • If it required the government to cut funding for other programs such as Social Security, Medicare, and education: 76% oppose and 21% favor
  • If it reduced employer-provided benefits such as health care benefits and vacation days: 68% oppose and 29% favor
  • If people who don’t use the program still had to pay higher taxes to fund it: 62% oppose and 36% favor
  • If people would receive smaller pay raises in the future: 60% oppose and 38% support
  • If it caused the national deficit to rise: 57% oppose and 40% favor

Research from OECD countries suggests federal paid leave programs may slow the pace of women’s career advancement. Thus, the survey investigated if Americans feel this would be an acceptable trade-off for establishing a federal program. The survey finds 69% would oppose and 29% would favor a federal paid leave program if women became less likely to get promoted and become managers as a result.

Partisan Consensus on Paid Leave Breaks Down When Costs Considered

At first, majorities of Democrats (88%), Republicans (60%), and independents (71%) all support establishing a new government program to provide 12 weeks of paid family or parental leave. However, consensus breaks down once the costs and trade-offs of the program are considered. 

Democrats turn against a federal paid leave program for the following reasons: if it meant they’d receive smaller pay raises in the future with 49% in favor and 49% opposed; if the program caused fewer women to get promoted and become managers (63% opposed); if it meant employers would reduce benefits workers receive like health care benefits and vacation days (63% opposed); or if government spending on Social Security, Medicare, or other programs had to be cut (74% opposed). However, Democrats say they’d be willing to pay higher taxes, as high as $1,200 per year to establish the program, with 60% in favor. In contrast, Republicans turn against federal paid leave if it costs them $200 a year or more, with 63% opposed. Independents are split on raising their taxes $200 a year but turn against the program if it cost them $450 or more a year, with 56% opposed.

Americans Are Cautious of 6-Month Federal Paid Leave Program

Americans are more cautious of establishing a 6-month federal paid leave program. Even before considering costs, 48% of Americans support and 50% oppose creating a 6-month federal paid leave program. Support drops to about a third if a 6-month program cost the average employee $525 a year (66% oppose, 32% in favor), or $750 a year (68% oppose, 31% in favor), or $2,100 a year (69% opposed, 28% in favor) in higher taxes.

New Parents: Childcare Costs and Flexible Work Arrangements More Important than Paid Leave 

Nearly two-thirds (63%) of new mothers say that more affordable daycare (24%), more flexible work schedules (22%), and the ability to work remotely (17%) are more important than more paid parental leave (12%) to help them balance work and family. New mothers also report that the ability to work part-time hours (10%) and have extended afterhours childcare (10%) would best help them balance work and family obligations. The survey included an oversample of mothers of children under the age of 3 to enhance precision of these results. Parents of children under 18 also prioritize more flexible work schedules (26%), ability to work remotely (23%), and more affordable childcare (20%) ahead of more paid parental leave (10%). 

Americans Support Parental Leave Savings Accounts

More than three-fourths (78%) of Americans support cultivating a culture of saving for parental and family leave through establishing a new tax-advantaged saving account for family and medical leave. Twenty percent (20%) oppose this proposal. Establishing family and medical leave savings accounts enjoys rare bipartisan support with majorities of Democrats (82%), Republicans (80%), and independents (69%) in support of offering tax advantages to people who set aside money for this purpose.

Estimating Costs of a Federal Paid Leave Program

The survey also measured how many Americans might use a federal paid leave program and how many weeks they might use, if it were available to them. The survey found that 24.8% of current workers said they wanted or needed to take leave in the past 1 year, after the birth or adoption of a child, to care for an ill family member, or to deal with their own serious medical condition. If Americans were offered 66% of their current pay, but not more than $1000 per week, they say they would have taken the following:

  • Those taking parental leave would have taken an average of 9 (median) or 13 (mean) weeks
  • Those taking leave to care for a family member would have taken an average of 9 (median) or 12 (mean) weeks
  • Those taking leave to deal with their own serious medical condition would have taken an average of 9 (median) or 14 (mean) weeks of leave

These data show that while people overwhelmingly support the general idea of more paid leave, they aren’t willing to accept most of the costs necessary with establishing a new federal government program for this purpose. You can learn more about how women and men think differently about federal paid leave and its costs along with other findings from the survey here.

Read about the full survey results and analysis here.

For public opinion analysis sign up here to receive Cato’s upcoming digest of Public Opinion Insights and public opinion studies.

Methodology

The Cato Institute 2018 Paid Leave survey was designed and conducted by the Cato Institute in collaboration with YouGov. YouGov collected responses online during October 1-4, 2018 from a national sample of 1,700 Americans 18 years of age and older. Restrictions are put in place to ensure that only the people selected and contacted by YouGov are allowed to participate. The margin of error for the survey is +/- 2.4 percentage points at the 95% level of confidence. 

Government subsidies cause much avoidable damage. Politicians say they just want to “help” people. But giving people hand-outs invariably changes their behavior and often induces them to make harmful decisions. The negative side effects of subsidies ripple outwards in every direction leading to calls for more help, more regulations, and more government. The politicians never accept any blame, and their impulse is to layer more subsidy Band-Aids on top.

In environmental policy, I’ve written about how subsidies, including federal flood insurance and infrastructure spending, have induced people to live in dangerous flood zones along rivers and seacoasts. Since 1970, the number of Americans living in Special Flood Hazard Areas has increased from 10 million to more than 16 million. Government policies drew them in.

Stanford’s Jeffrey Ball writes in the Wall Street Journal that a parallel set of insurance and infrastructure subsidies has induced Californians to live in dangerous fire zones, greatly exacerbating the damage caused by recent wildfires:

The historically deadly wildfires that have roared through California this fall, and a string of similarly destructive ones over the past two years, are boosting calls to do more to slow climate change. But another underlying problem has contributed to the fires’ tragic damage: For decades, California, supposedly the greenest of states, has artificially lowered the cost of encroaching on nature by living in the woods.

Permissive building codes, low insurance rates and soaring taxpayer spending on firefighting and other services have provided an economic framework that has encouraged people to flee the state’s increasingly expensive cities for their leafy fringes. 

… For years, Cal Fire, the state wildfire-fighting agency, has been spending increasing sums to put out wildfires, as has the U.S. Forest Service. Already by 2006, according to an audit, most of the money the forest service was spending to put out large fires was “directly linked to protecting private property” in the wildland-urban interface. Meanwhile, at public cost, government has been encouraging more development by pushing infrastructure—roads, utilities, rescue services—ever farther into the forest.

… Once a house is built in California’s [wildland-urban interface areas], the state’s unusually low insurance rates have the effect of shifting much of the real cost. The average California homeowner pays about $1,000 a year in homeowner’s insurance—about half the level in Florida or Texas, two other states with markedly rising incidences of natural disasters believed linked to climate change.

That is a result of state policy, not an accident. California has an elected state insurance commissioner, one of 11 in the country who are elected, who caps the rates private insurance companies may charge.

… Other government payments further tilt the economics. Taxpayer-funded state grants commonly pay for brush-removal and other fire-prevention efforts in high-risk areas. When fires happen, taxpayers foot the bill to put them out. In 2011, the state began charging a fee to WUI homeowners to fund firefighting and prevention, causing an outcry; in 2017, it was rescinded as part of a larger piece of environmental legislation.

For more on government failure, see here.

 

 

 

The late President G.H.W. Bush famously reneged on his “no new taxes” pledge and signed the “Bush tax increase” on November 5, 1990, to take effect the following January.   The new law was intended to raise more revenue from high-income households and unincorporated businesses.  It was supposed to raise revenue partly by raising the top tax rate from 28% to 31% but more importantly by phasing-out deductions and personal exemptions as income on a joint return climbed above $150,00  (the phase-outs were called the PEP and Pease provisions).  

Treasury estimates expected revenues after the 1990 budget deal to be higher by a half-percent of GDP.  What happened instead is that revenues fell from 17.8% of GDP in 1989 to 17.3% in 1991, and then to 17% in 1992 and 1993.  Instead of rising from 17.8% of GDP to 18.3% as initial estimates assumed, revenues fell to 17%.  In fact, revenues did not climb back to the 1989 level of 17.8% of GDP until 1995, despite much higher excise taxes since 1991.

Another way to gauge the 1990 and 1993 tax increase is to measure the revenue gains in real 2009 dollars, adjusted for inflation.  According to Table 1.3 of the Historical Statistics in the U.S. Budget, real revenues (in 2009 dollars) soared from $1,308.8 billion in 1980 to $1,654.6 billion in 1990 (26.4%), as the top tax rate fell from 70% to 28%.  After the Bush tax increases in 1991 and retroactive Clinton tax increases in 1993, by contrast, revenues were virtually no higher in 1993 than they had been before – $1,655.7 billion.  GDP in 1993 was a bit larger than in 1990 but revenues fell as a percent of GDP despite higher excise taxes.

A recession began in October 1990, just as the intended tax increase was being acted.  To blame the weak revenues of 1991-93 entirely on that brief recession begs the obvious question: To what extent was a recession that began with a tax increase caused or at least worsened by that tax increase?   

Some describe the Bush tax increase of 1990 act of great political courage and bipartisan cooperation which supposedly helped shrink the budget deficit “by $492 billion … over just five years.”   But that figure too was (1) just an estimate, (2) only 30% of it was ostensibly to come from higher taxes, and (3) most of the hoped-for added revenue was not from higher income tax on couples earning over $150,000 but from higher excise taxes on gasoline, alcohol, tobacco, telephones, etc.  The gas tax went up a nickel; the beer tax was doubled.  Nearly 10% of the revenue windfall was expected from a new luxury tax on cars, yachts, airplanes, furs, and jewelry which devastated those businesses (contributing to the recession) before being repealed in less than a year.

Journalists who look back at what happened to tax revenues after tax rates were raised or lowered, such as Washington Post fact checker Glenn Kessler, commonly rely on an updated version of a 1998 working paper by Treasury economist Jerry Tempalski.  However, Tempalski only presented estimated effects on revenues, not actual effects.   “Treasury estimates a bill when it is enacted… and sometimes reestimates a bill for several subsequent January budgets,” Tempalski explained, but some of “the first post-enactment estimates proved not very accurate.”  Tax changes were often phased-in or phased-out, yet “the estimates… include no adjustment to capture the long-run, fully-phased-in effect of the tax bills.”  Early estimates looked ahead only two years, later ones covered four.

These antiquated revenue estimates tell us nothing about what actually happened after tax laws were changed.  They only tell us what notoriously erroneous revenue estimators expected.  Yet the Tempalski estimates have been repeatedly cited as evidence that lower tax rates never even come close to “paying for themselves”  by such leading journalists as Washington Post fact-checker Glenn Kessler and Lori Robertson of FactCheck.org, and even by the chief economist for Tax AnalystsMartin A. Sullivan

In the same vein, estimated revenue effects of the 1990 “tax increase” are still being cited as if they are facts rather than discredited old estimates.   When discussing tax increases (or tax cuts), journalists and economists must take care to distinguish between intended effects on revenue and actual effects.  Fact checkers can’t fact check the old estimates because they’re not facts. Estimates are just estimates.  

 

Let’s start with some counterfactual history. 

You may find it a waste of time, I think, however, it’s relevant to ask how broad and robust the protection of free speech would be in the US if it hadn’t been for civil rights organizations like the American Civil Liberties Union, and later Jewish organizations and the NAACP? 

Would a First Amendment doctrine based on viewpoint neutrality and the emergency principle have developed in the US? Or would the country have seen a development similar to Europe where hate speech – however it is defined - is criminalized and evil words to a far higher degree are seen as evil actions and therefore, cannot count on constitutional protection?   

Without holding Samuel Walker, professor emeritus of criminal justice at the University of Nebraska, responsible for my interpretation, I think it’s fair to conclude after having read his prolific and still extremely topical book Hate Speech: The History of an American Controversy (1994) that the American courts’ libertarian interpretation of the First Amendment and the widespread support for an uninhibited, robust and wide-open public space in the US would not have materialized without advocacy groups committed to free speech. 

At a time when the support for free speech is sliding and people on the left and on the right are more than willing to shut down their opponents it’s worth revisiting professor Walker’s story of why hate speech is protected in the US and why the current First Amendment doctrine has played a crucial and positive role in creating the necessary environment for tolerance and inclusion of groups that for decades if not centuries were not seen as belonging to American society. There was nothing inevitable about this development. American law and policy could have gone in a very different direction. 

A banal though fundamental point is that good ideas do not defeat bad ideas in and by themselves. They only prevail if there are groups and individuals willing to explain and defend them. That’s basically the reason why the US free speech tradition is different from the European one in spite of the commitment to democracy on both sides of the Atlantic. Ideas have no force in the world without advocates. In twentieth-century Europe there were no civil rights organizations with a position similar to the ACLU’s on free speech. 

It’s a common fallacy to think that the US from the very beginning was exceptional when it comes to the protection of free speech; that the First Amendment from the foundation of the republic meant that Americans enjoyed more or less the same legal right to freedom of expression as they do today. 

As a matter of fact, for the first 150 years the US wasn’t that different from the rest of the world. A few years after the adoption of the Bill of Rights (1791) Congress passed the Alien and Sedition Acts that among other things criminalized making false statements that were critical of the government. President Adams used the law to imprison his political adversaries. In general, the US federal and local governments introduced the same arguments and the same kind of legal instruments as other states around the world to silence challenges to the status quo, i.e. national security, blasphemy, obscenity, offensiveness, protection of the public order and morals and safeguarding the social peace. 

As late as 1928, a man was convicted for blasphemy in Little Rock, Arkansas. He put up a poster in a shop window with the words: ”Evolution is true”, ”the Bible is a lie”, ”God is a ghost”. During World War I Socialists received long prison terms for protesting the draft. Attacks from the right on the ACLU in the 1920s denounced free speech as ”un-American” because of the organization’s defense of unions and left-wing groups. In fact, anything that might have the tendency to cause social harm could be restricted including criticism of the government during times of war, discussion of birth control, and any literature with a sexual content. Government officials were allowed to ban speakers and groups they did not like. They issued injunctions against picket lines, Communists, Socialists, union meetings, and shut down debates about strikes and unions.     

The reality of American history is that meaningful protection of free speech and other individual rights has emerged only since the 1940s. The legal climate only began to change in 1931 when the Supreme Court upheld First Amendment rights of a Communist and of the publisher of an anti-Semitic newspaper – the first cases when speech deemed dangerous and offensive by the majority received constitutional protection and a vindication of the ACLU’s line. Until the 1960s free speech was considered a radical and dangerous idea. As Walker puts it: ”What millions of Americans think of as ancients and hallowed rights are of very recent origin.” 

The hate speech issue first arose in the 1920s with political and legal debates over whether to restrict offensive racial and religious speech. The same two arguments for restricting speech were repeated over and over again: First, that a particular group like the KKK or the Nazis represent a special case and a limited exception to free speech protection should be made for it, and second, that a free and democratic society has an obligation to restrict the activities of anti-democratic groups. In most European countries these arguments carried the day. Laws restricting hate speech and anti-democratic groups were adopted. 

The ACLU refuted both arguments, and their line of defense for hate speech as free speech was adopted by the courts and today serves as the foundation of American public policy and the First Amendment doctrine. The Supreme Court’s decisions were shaped by the advocacy groups that brought cases before it. The ACLU filed briefs in all the major cases through which the Supreme Court created the body of the current First Amendment law.   

The ACLU’s arguments against hate speech provisions were summed up in the 1934 statement Shall We Defend the Nazis in America? It began by challenging the argument that the Nazis with a reference to the suppression of civil liberties in Germany after Hitler’s power grab in 1933 represented a special case and should be exempted from First Amendment protection. The ACLU insisted that the rights of everybody have to be protected and defended independent of the content of their beliefs. Once you accept exemptions to free speech you cannot be sure when they will be used against yourself. In fact, the public order act that was adopted in the UK in 1936 to target Fascists was used to imprison more anti-Fascists than Fascists. Therefore, according to the ACLU, the right of Communists and Socialists are inextricably bound up with the rights of Nazis. 

This is in essence of viewpoint neutrality, the first principle on which the modern First Amendment doctrine is built. The other, the emergency principle, implies that speech has to entail a clear and present danger if it is to be exempted from First Amendment protection. The ACLU made the case for the clear and present danger test by making the point, that nobody can say for sure what speech will lead to violence. 

The ACLU and its allies knew from experience that one has to be very careful calling for banning offensive speech. First, if you are in the business of fighting for social change then most defenders of the status quo will perceive your speech as offensive. Second, terms like offensive speech are very elastic and can easily be used to target yourself the moment your opponents will have the power to move against you. 

Finally, it’s worth pointing out that the libertarian idea of individual rights has been driving the modern First Amendment doctrine. The ACLU early on came to the conclusion that the advancement of the rights of a minority or any other group were best achieved through the expansion of individual rights. That’s the reason why civil rights groups in the US abandoned group libel litigation to defend minorities against racism. They saw it as a threat to their larger goal of achieving equal rights. 

This libertarian idea lies at the heart of the conceptual difference on free speech between the US and Europe. The same can be said of the concept of tolerance. In America, tolerance is of the individual rather than the group, and it is more radical than what is practiced in the European nation states. In the immigrant American society, as Michael Walzer notes, the state is not committed to one group over another; it’s neutral. Government is not an arbiter of taste, and citizens must learn to tolerate one another as individuals, even within the group. This concept of tolerance is the consequence of the First Amendment doctrine’s focus on individual rights. 

Professor Walker concludes that “protection of free speech has helped to ensure the participation of different groups in American society, particularly the powerless.” He insists that free speech has promoted inclusion in contemporary society. Today, this point of view is not shared by those on college campuses who argue that hate speech must be prohibited in order to achieve the inclusion of the historical victims of discrimination. But the history of the hate speech issue, as presented in Walker’s book, supports just the opposite argument. “The inclusion of the powerless and the historical victims of discrimination has been aided (not fully achieved, of course) by the broadest content-neutral protection of offensive speech.”  

This blog post is part of a larger series on “Stock-Market Short-Termism” (see also my entry on share-buybacks). I will be assessing one proposed cure, corporate governance reforms, and will argue that it is likely to be iatrogenic.

 

I.

On August 15, 2018, Senator Elizabeth Warren formally introduced her “Accountable Capitalism Act”, that would, inter alia, require of all firms generating $1 billion or more in revenue that “no fewer than 40% of its directors are selected by the corporation’s employees.” In mandating that corporations include employees qua stakeholders in the firm’s major decisions, government would be putting its thumb on the scale in shifting the balance of power away from the corporate governance outcome that has emerged in the free-market: shareholders today exclusively determine the composition of the board of directors. Moreover, progressive politicians and academics would be putting a thumb in the eye of their long-standing bete-noir, the “shareholder value paradigm”.

Employee representation on the board is known as “co-determination”, part of a larger constellation of corporate governance institutions that comprise the “Rhenish model” of capitalism. Its primary exemplar, Germany, is trumpeted as the prepossessing poster child of this alternative to shareholder über alles “Anglo-capitalism”. In her press release, Senator Warren makes this inspiration explicit, claiming that she is “borrowing from the successful approach in Germany and other developed economies”. Germany’s co-determination is praised by its progressive proponents not just for its greater “economic justice”, but because it has “held back the forces of short-termism”. In a policy brief for the Roosevelt Institute titled “Fighting Short-Termism with Worker Power”, economist Susan Holmberg argues that co-determination will create “resilience against the pressures of short-termism”. Senator Warren penned an op-ed in the Wall St. Journal to accompany her formal press release, in which she argued that her bill would be a corrective against corporate executives being overly focused on “producing short-term share-price increases”.  

How, exactly, would greater employee influence over corporate governance combat short-termism? Proponents argue that employee representatives would prevent both exorbitant CEO pay and excessive share buybacks. Because the typical employee has a longer tenure at the firm than the typical shareholder, employees are therefore better custodians of the firm’s revenues, with an eye toward long-term viability, not the maximization of the next earnings report.

 

II.

The first of many red flags that appears as we proceed along this train of reasoning is that the Germanic model did not evolve organically as the result of firms realizing that increasing employee representation was in their own self-interest. As Holmberg herself notes, the 1976 Employee Co-Determination Act and related legislation impose this corporate governance paradigm on German firms, requiring that 50% of the supervisory board represent employees rather than shareholders. Conversely, in the United States, it remains perfectly legal for a firm to so structure its charter. The fact that few firms avail themselves of this eminently superior option should give one pause. The fact that German capitalism is so-characterized speaks less to the economic merits of co-determination and more to the political adroitness of its advocates.  

When considering the likely effects Warren’s plan would have on U.S. firms, the lessons of the U.S. experience with unions will be instructive. In fact, it’s hard not to view mandatory employee board representation as a rearguard action by a labor movement that has seen private sector union membership decline from a post-war high of 34% in 1954 to just under 7% today.[1] In many respects, employee board quotas are the functional analogue of a union granted a legal monopoly to represent the employees of a given firm. While board quotas may be more efficient than unions insofar as they avoid the bargaining costs associated with bilateral monopoly, they nonetheless serve to tilt the balance-of-power over major firm decisions toward employee interests.

The first devil lurking in the details of Warren’s plan is: who counts as an employee for the purposes of allocating director votes? All employees, including management below the C-suite? Or only non-managerial employees? However the definition is generated (and gerrymandered), an insuperable problem arises, one that similarly confronted unions. A firm’s employees do not have homogeneous preferences. More senior employees on the brink of retirement have a different time-horizon than do younger employees. Employees who intend to snag a few years of experience before moving to another firm or another industry differ from employees who are dreaming of a company watch on their 20th anniversary. These varying constituencies will have starkly different preferences as to how the firm’s free cash flow is allocated: higher wages now, more long-term capital investment that will pay off in decades, or shoring up the solvency of the employee pension plan? Similarly, skilled employees will be far less averse to R&D that leads to technology - complementary to their human capital - than will the unskilled employees with whom it competes. Thus, the category error baked into co-determination is the conceptualization of “employees” as an undifferentiated bloc. Whoever the median employee voter places on the board will inevitably take actions that result in intra­-employee redistribution.

When considering the preferences that employees broadly do share, it is naïve to think that they will always redound to the long-term benefit of the firm. First, employees of all shapes and sizes uniformly prefer that less cash flow be allocated to share buybacks and dividends. Indeed, champions of co-determination celebrate the extent to which it will serve as a brake on such equity outlays. But, again, we must keep in mind the fallacy of composition: when all firms reduce outlays, the cost of capital for firms with profitable investment opportunities rises and these firms are then unable to grow (read: hire new workers) as quickly.

Moreover, employees won’t necessarily want to reinvest earnings into long-term investments like CAPEX and R&D. And forget returning this surplus to the consumer in the form of lower prices. Instead, they will be inclined to leverage their legislatively-conferred bargaining power to divert profits into wages and benefits in excess of the marginal product of their labor. Despite the romance and sloganeering, this is as much an instance of rent-seeking as corporate Ferraris and “excessive” stock buybacks. On top of higher compensation in the present, employee representatives will attempt to commit a greater percentage of the firm’s future cashflow into retirement and pension plans, rather than R&D projects with an uncertain future payoff that will anyhow make half of them redundant.

 

III.

Employee representatives will have an interest in other measures that similarly reduce the long-term flexibility of the firm. Other than pre-committing future cashflows to non-productive investments such as pension plans, employees will also prefer greater job security. In raising the costs of replacing an unproductive worker, they are thereby raising the ex-ante costs of hiring generally. Greater employee protections mean that the firm faces higher costs when restructuring the skillset and human capital composition of its workforce to meet the always-evolving market landscape. The relative prices of the highly heterogeneous labor pool are constantly in flux, and firms must be able to nimbly rebalance their personnel to adapt and stay competitive. Moreover, overly rigid job protection reduces a firm’s ability to temporarily downsize its workforce in response to exigent circumstances. Co-determination advocates might claim that buybacks, dividends, and executive bonuses should be jettisoned before employees when times get tough. But the fact of the matter remains: reducing the degrees of freedom by which a firm might respond to a given short-term adversity compromises its long-term viability. Employee representatives on the board are trading economic efficiency and adaptability for the sake of incumbent employees today. But who can blame them? They are merely responding to their constituency.      

These ossifying effects are not armchair speculation. Far from sagely stewarding tax revenues for the benefit of posterity, public sector unions have managed to rack up $4.4 trillion in unfunded liabilities, darkening the long-run fiscal outlook for many states and municipalities. The much-lamented decline in manufacturing employment in the U.S. is a story first of firms escaping the unionized Midwest to the South, and then the radical restructuring and downsizing of a less protected workforce to a small coterie of highly skilled employees intensively utilizing technology. This explains why U.S. manufacturing output has risen over the past several decades despite the precipitous drop-off in employment: to the immense benefit of U.S consumers. This process would have been seriously stymied if employees were dealt an artificially strong hand at the table via legislative fiat.

Building on a considerable theoretical literature that predicts greater employee bargaining power will reduce research into R&D and other productivity-enhancing investments,[2] subsequent meta-analyses of the empirical effects of unions confirm that they are associated with lower productivity growth, lower profits, and lower stock market valuations.[3] It’s worth noting that, particularly since 1980, Western European total factor productivity (TFP) growth has dramatically lagged behind that of the United States.[4] Insofar as unions do correlate with productivity increases, the mechanism appears to be via increased communication between workers and management. This is a goal that any half-competent management will attempt voluntarily, but that is impeded by Section 8(a)(2) of the National Labor Relation Act’s prohibition on employer-sponsored unions.

 

[1] Bureau of Labor Statistics, Union Members Summary

[2] Baldwin (1983); Grout (1984); Connollay, Hirsch, and Hirschey (1986)

[3] Doucouliagos and Laroche (2003, 2005)

[4] Fernandez-Villaverde and Ohanian (2018))

Today, on Human Rights Day, we are pleased to release the Human Freedom Index 2018. The report—copublished by the Cato Institute, the Fraser Institute in Canada, and the Liberales Institut at the Friedrich Naumann Foundation for Freedom in Germany—measures a broad array of personal, civil and economic freedoms around the world and the extent to which basic rights are protected or violated.

New Zealand and Switzerland are the two freest countries on this year’s index, while Venezuela and Syria rank last. The United States ranks 17. In 2008, it ranked 11, then fell notably until 2013, after which it rose through 2016, the latest year for which the index gathers sufficient data that is comparable globally.

My coauthor Tanja Porčnik and I unfortunately find that, compared to 2008 or to last year’s report, more countries than not have seen their level of freedom decline. Over that longer period, notable deteriorations occurred in Russia, Hungary, Argentina, and, in more recent years, Turkey. Some of the largest drops in freedom in the world occurred in Greece and Egypt, further reflecting a strengthening of populism and authoritarianism that have afflicted countries on every continent in the past decade.

Egypt
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The good news is that over the long term, freedom has spread to a diversity of countries too, including numerous ex-socialist countries, Latin American nations, one sub-Saharan African country (Mauritius) and several Asian countries that all belong to the top quartile of the freest countries in the index. Many are on the rise, and some, like Taiwan, have seen notable increases in freedom in recent years.

Taiwan
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See what broad areas of freedom have seen the biggest gains or declines in the world, where women are least free, the strong relationship between freedom and prosperity, and many more findings in this year’s report.

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

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

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

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

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

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

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

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