Yesterday Professor Giovanni Peri presented an immigration reform plan that would auction work visas to employers.  As I wrote yesterday, Peri’s plan would diminish the misallocation of current visas but not do much to increase the quantity of work visas.  Since the real problem with America’s immigration system is a lack of work visas and green cards, Peri’s plan seeks to solve a rather miniscule problem by comparison.

Proponents of selling visas either support auctioning a limited number of visas to the highest bidders or establishing a tariff that sets prices but allows the quantity to adjust.  An immigration tariff is far superior to an auction of numerically limited work visas.  You can read my proposal in more detail here or listen  me explain it here.

Here are three reasons why an immigration tariff is better than an auction:

First, a tariff is the most market friendly way of restricting work visas.  Limiting the government’s role to setting the price of work visas, allowing the purchased quantities to adjust, would make for a much more market-friendly and flexible system.  A tariff would decrease immigration relative to open borders, but misallocation isn’t a big concern because immigrants with the most to gain would pay the tariff.

Second, an immigration tariff is more economically efficient because the quantity of work visas would adjust to market demand unlike an auction of numerically limited work visas.  When there is economic growth more people would buy work visas to keep pace with labor demand.  In slow economic times the number of visa purchases would automatically shrink.  With an immigration tariff, there is no need for a government commission to somehow figure out how many are demanded.  They can just set the price and let the market figure out the quantity.

Third, an auction system will not do much to diminish unauthorized immigration going forward.  An immigration tariff allows immigrants, temporary workers, American businesses, and families to plan ahead, save, borrow, and pool resources to pay the tariff.  Tariff prices will change, no doubt, but they won’t change all of the time as they would under Peri’s system.  An auction would provide less price certainty, fewer guarantees of entering legally, and incentivize more unauthorized immigration than a tariff.

Selling Work Visas: Auctions or a Tariff? is a post from Cato @ Liberty - Cato Institute Blog

In a blog post I wrote about two years ago, I said “Usually when I hear that a policy proposal has bipartisan support, I instinctively check for my wallet.” At that time I was lauding a bipartisan proposal to shut the USDA’s market access program (although it seems that idea didn’t get much traction) under the heading “When Bipartisanship Is Good News.”

I should have trusted my instincts; i.e., that “bipartisanship” is code for either:

(a) “we’ve just renamed a post office”;

(b) “cough up, because we’ve agreed to spend more of your money”;

(c) “brace yourself, because we’ve agreed to violate more of your liberties”; or

(d) both b and c (see, e.g., the Department of Homeland Security).

Last night we were treated to an example of (b), when the U.S. Senate in a 78 to 20 vote elected to follow the House’s lead (330 to 93, in that case) to re-authorize, with a bigger budget, the Export-Import Bank of the United States until 2014. (Please do click on the previous two links to the roll-calls so you can see how your friendly Representative or Senator voted on this taxpayer-funded slush fund for the biggest corporations in America, by the way). The bill will now go to the President for his signature.

Allow me a few comments. First, this is incredibly disappointing. One would think that this is an excellent time to shut down the Ex-Im Bank, what with bailout-fatigue, trillion dollar deficits and all. But this bill “had the backing of business and labor groups,” as this Washington Post article makes clear, and despite all of the rhetoric from both sides, it seems that Congress and the President loves them some special interest group pleadings.

Second, the fairly easily debunked talking points of Ex-Im supporters obviously resonated. Ex-Im Bank president Fred Hochburg (who one can hardly expect to do anything other than protect his job) showed an excellent ear for PR when he said “there are no Democratic or Republican exports. There are exports that create jobs. Good, middle-class jobs.” Exports! Jobs! Middle class! What’s not to love? And in the interest of non-partisanship, here’s a quote from Senator Lindsey Graham (R-SC) in response to the arguments made by what the WaPo article called ”tea party conservatives”: 

“I live in the real world and the real world is that these financing mechanisms have to be available to American manufacturers to have a share of the overseas market”

Actually, Senator, I’m glad you raised “the real world”. Because in “the real world” stuff costs money, money that isn’t manna from heaven but taken from other people. And in the real world, regulations or other market interventions distort the economy, reallocating resources from their most productive uses as identified by volunteers putting their own money at risk and towards uses directed by political entities, responding to lobbying and other features of public choice. In the real world, there is nothing special about manufacturing per se, with lots of middle class (or “upper class” jobs, if the class system is something that matters to you) created in the service sector. Also in the real world? Private finance. Lots of it, as you would know if you spoke with any of the folks producing the 98 percent of U.S. exports that don’t rely on Ex-Im.

Third, and this is somewhat parenthetical, not one — NOT ONE — Democrat in either chamber voted against corporate welfare.  Interestingly, according to the roll call for the 2002 re-authorization of the Ex-Im Bank, 26 democrats voted against re-authorization 10 years ago. So there was some opposition back when President Bush was in charge, but now that President Obama (as opposed to Candidate ”The Ex-Im Bank is little more than corporate Welfare” Obama) is supportive, apparently taxpayer guarantees for big business are ok.  The following Democratic members switched their vote from “Nay” in 2002 to “Yea” (or should that be “Yay!”?) in 2012: Andrews, Baldwin, Conyers, deFazio, Jackson (IL), Kaptur, Matheson, Nadler, Owens, Pallone, Peterson (MN), Stark, and Waters (with Kucinich not voting in 2012, but voted “Nay” in 2002). I’d be curious to hear about what caused the change of heart.

When Bipartisanship Is A Dirty Word is a post from Cato @ Liberty - Cato Institute Blog

The Italian economy contracted for a third quarter in a row, deepening the country’s recession and adding to the fire of the euro crisis. Italy is the third largest economy in the Eurozone, and many view it as the endgame of an eventual collapse of the common currency because it is too big to fail. Neither the EU nor the IMF have enough cash to rescue it. If the country defaults, that would probably spell the end of the euro.

Austerity is being blamed for Italy’s economic troubles. Chiara Corsa, an economist at UniCredit, wrote that “The key factor is austerity, which is weighing heavily on consumption and investment.” Recent local elections saw the rise of anti-austerity parties. Paul Krugman warned about this back in December when he described the austerity push of Prime Minister Mario Monti as “self-defeating” and “delusional.”

However, as is the case for Britain, France and Greece, commentators are unclear about what austerity means for Italy, although many seem to imply spending cuts. For example, if Krugman’s criticism about Italian austerity is consistent with his critiques about austerity elsewhere in Europe, we know he means spending cuts. So let’s take a look and see if there has been any:

* Using GDP deflator.
Source: European Commission, Economic and Financial Affairs.

Spending in nominal terms increased by a yearly average of 4.1% between 2000 and 2009, and then fell slightly the following year. In 2011 government spending was just 0.14% below its 2009 level. As for spending in real terms, there’s no cut whatsoever. And as a share of the economy, total spending reached a peak in 2009 at 51.6% of GDP, and it fell to 49.6% last year, a decline far from significant.

So what’s austerity all about in Italy so far? According to The Financial Times, the “government’s €30 billion austerity package, passed in December, was heavily oriented towards tax increases rather than spending cuts, an emphasis that is now widely recognized by ministers as having driven Italy deeper into recession.” The FT adds that the Monti administration is facing “intense pressure from business, politicians and the public to shift the burden of austerity away from heavy taxation towards cuts in public spending.” As a result, the Italian Prime Minister announced €4.2 billion in spending cuts starting in June, still less than 1% of total public spending. That doesn’t sound savage to me.

But it’s quite fascinating to see the hysteria surrounding non existent spending cuts and its supposedly negative impact on economic growth. For example, last December The Economist warned:

“But too great an emphasis on austerity in the short run risks sending the continent’s economy into a deep recession; the latest data on Italian industrial production showed an annual fall of 4.1% in October, even before budget cuts were introduced by the new government.”

Interestingly, according to The Economist, spending cuts were somehow responsible for a decline in economic output in Italy even before being implemented!

If austerity is to blame for Italy’s recession, we need to be clear that by austerity we mean mostly tax increases with almost no reduction in government spending.

Looking at Austerity in Italy is a post from Cato @ Liberty - Cato Institute Blog

The recent losses at JP Morgan have renewed calls to break up the banks and/or increase regulation of the banks.  I’ve written elsewhere why I believe these losses do not justify more regulation, particularly of the Volcker rule variety.  While I have some sympathy with the break them up view, and a number of people for whom I have great respect have argued for that position, I think that position is ultimately flawed beyond repair.

First any size limit would be arbitrary.  I don’t know anyone who thought that Bear Stearns was too big to fail ex ante.  I still don’t believe Bear was too big to fail.  More importantly, when it comes to banking, small is not always safer.  The most obvious example is the savings and loan crisis, which cost, on net, more than the TARP.  That was all small institutions.  And don’t forget over 300 small banks have failed this time around.  There is also some research suggesting that the more concentrated your banking system is, the more stable it is.  Just look at Canada for one example.  There are several others, and again this finding holds up to empirical testing.

If the ultimate concern is risk to the taxpayer, due to the backing of the Federal Deposit Insurance Fund, then it would seem to be that the obvious answer, and easy to implement, is to limit the amount of insured deposits that can be held by any one bank.  The previous limit was 10 percent of the insurance fund, although that could be breached by organic growth (rather than via merger).  We should reduce the limit to 5 percent and make such a hard cap.  If banks want to take uninsured deposits that’s fine, as long as we limit the risk to the FDIC.  And we should also roll back the extensions of deposit insurance coverage in Dodd-Frank.  Few households have $250,000 in deposits (and that is just per person, per account).  Ultimately we should go back to the pre-1980′s level of about $40,000 and limit that to total coverage per person.  If we want to reduce the taxpayers’ exposure, then the more effective way, in my view, is to limit the bank safety net or at least limit the extent that the safety backs any one bank.

Limit Access to Deposit Insurance Fund is a post from Cato @ Liberty - Cato Institute Blog

Professor Giovanni Peri today made an interesting proposal to auction work visas to the highest bidding employer. His reform is similar to an auction proposal made by Gary Becker, but more specific. His idea is innovative and deals with transitioning from the current maze of quotas, visa categories, and other barriers to a more open system that better allocates visas to the highest bidders.

The one  problem with Peri’s proposal is that it does not meaningfully increase the number of work visas. The limited number of work visas, not the distribution, is the main problem with America’s immigration system.  Instead, he calls for reallocating visas from families to the employment based category. He then wants American employers to bid for the limited quantity of work visas issued quarterly. A government commission would adjust the quantity and immigrants would be free to move between employers who purchase visas.

Economists like Becker and Peri are rightly concerned with how societies allocate scarce resources to different uses, but the scarcity of work visas is an artificial one created by the government, not one that results from a scarcity of the factors of production or other inputs. This is why there should be no numerical limits on the quantity of work visas issued even if they are priced. Charging for work visas is a substantial improvement over the current system, as I say here, here, here, and here. Most of the welfare gains come from allowing the quantity of visas to adjust to the price, not the other way around. An efficient visa selling process will operate more like a tariff than an auction.

For normal goods and services, a rising price incentivizes consumers to limit their consumption and producers to increase production. A government commission tasked with adjusting visa quantities would face political rather than market incentives and not increase visas in response to rising prices. Unless the incentives are carefully aligned, the result would probably be a more arbitrary and numerically limited immigration system.

Another problem with Peri’s proposal is that it only allows employers to bid for work visas. Immigrants should also be able to bid because they have the most to gain from migrating and have a better notion of their value on the labor market. Immigrants already pay to be smuggled into the United States—some Chinese pay $75,000 per person—so that money might as well be collected by the federal government instead of a coyote. If employers buy visas for specific immigrants, contracts or bonds can effectively guarantee compliance.

Peri’s proposal is a thoughtful and serious attempt to reform immigration but it does not address the main problem with our immigration system: too few work visas.

Selling Work Visas is a post from Cato @ Liberty - Cato Institute Blog

In today’s Wall Street Journal, Sen. Jim DeMint (R-SC) and Rep. Kevin Brady (R-TX) advise the states to get their fiscal houses in order instead of holding out hope for a bailout from federal taxpayers. That’s sound advice. However, the states already effectively get bailed out by federal taxpayers each and every year.

The first chart shows that the federal government has accounted for over a third of total state spending in recent years. The increase can be attributed to federal “stimulus” spending. The federal government’s share will retreat as the economy (hopefully) continues to strengthen and federal policymakers limit spending increases in the face of mounting debt. However, getting the federal government’s share of total state spending back to, say, 30 percent would be nothing to celebrate.

The post-stimulus decrease in Washington’s generosity to the states has state and local officials—and the special interests that ultimately benefit from the Beltway-to-State money laundering operation—concerned. Reporters typically relay these concerns to the public without adding any historical context. The following chart provides that context, and it indicates that the concern shouldn’t be that the states won’t be getting as much money; rather, the concern should be that the states have become dangerously reliant on federal money.

So here’s another suggestion for state and local officials. If you want to spend more money than Washington will give you, go out and tell your taxpayers that you want to increase their taxes to pay for it.

[See this Cato essay for more on why the federal government should cut aid to the states.]

The States Are Already Getting Bailed Out is a post from Cato @ Liberty - Cato Institute Blog

Yesterday, countless newspapers published a really disappointing story by Noam Levey that the Los Angeles Times ran under this title:

Global push to guarantee health coverage leaves U.S. behind; China, Mexico and other countries far less affluent are working to provide medical insurance for all citizens. It’s viewed as an economic investment.

The article is little more than a puff piece for the hotly contested idea of universal coverage. It gives zero space to the competing strain of thought that the less the government does for the poor, the sick, and the vulnerable, the better off they will be.

It quotes “Dr. Julio Frenk, a former health minister in Mexico and dean of the Harvard School of Public Health” as saying, “As countries advance, they are realizing that creating universal healthcare systems is a necessity for long-term economic development.” A necessity? Gosh. It’s a wonder the United States ever became the world’s largest economy.

It speaks of such government guarantees as being popular, when what it really means to say is that people are dependent on the government for their health care and frightened to death that someone might take it away.

It laments the fact that the United States is an “outlier” because it fails to guarantee access to health care for all citizens, which “stands in stark contrast to America’s historic leadership in education…Long before most European countries, the United States ensured access to public schooling.” Yet it makes no mention of how U.S. students fare poorly in comparison to those in other advanced countries.

It devotes no time to the costs of such guarantees, other than to say that they are sometimes “more than twice what was expected.” But don’t worry, those costs are borne by the government. It does not say where governments get all that money. I guess we’ll never know.

Speaking of taxes, it makes no mention of how taxes suppress economic development. Evidently, unlike other taxes, those that support government-run health care systems do not incur the deadweight loss of taxation.

But the article was at its most ridiculous when it suggested that the health care sectors in poor countries like Rwanda and Ghana might possibly be ahead of the United States in any way whatsoever. As I have written about Rwanda:

The United States generates many of the HIV treatments currently fighting Rwanda’s AIDS epidemic, as well as other medical innovations saving lives there and around the world.  More than any other nation, we create the wealth that purchases those and other treatments for Rwandans and other impoverished peoples.  The United States is probably closer to providing universal access to medical care for its citizens — and, indeed, the whole world — than Rwanda.  Rwanda’s “universal” system leaves 8 percent of its population uninsured. Though official estimates put the U.S. uninsured rate at 15.4 percent, the actual percentage is lower; and again, uninsured Americans typically have better access to care than insured Rwandans.  The real paradox is here that Rwandan elites think the United States is doing something wrong.

Unfortunately, it’s not just the Rwandan elites. For my thoughts on how sensible people can make such insensible comparisons between the United States and other nations, read the rest of my post on Rwanda.

Another Fairly Insane Cross-National Health Care Comparison is a post from Cato @ Liberty - Cato Institute Blog

Rum subsidies in U.S. Caribbean islands have sparked an internal trade war and are inviting a World Trade Organization (WTO) challenge from ill-affected countries in the region. According to an envoy representing a number of Caribbean countries that recently came to Washington, the U.S. government is unwittingly funding industrial policy in the U.S. Virgin Islands and Puerto Rico by tying aid dollars to rum production in a way that is inconsistent with our trade obligations and may cause the destruction of the entire foreign Caribbean rum industry. Under current law, U.S. Caribbean islands receive money from the U.S. treasury based on how much rum they import to the mainland. In recent years, they’ve begun to use that money to increase the amount of rum they produce,  so they can get even more money. Although the total amount of money involved is low enough to keep it under Congress’s (myopic) radar, the resulting subsidies are too high for independent Caribbean economies to compete against. Unless Congress places restrictions on how the money can be used, the United States could once again find itself in the embarrassing position of being taken before the WTO for accidentally ruining the economy of a small Caribbean island.

The antagonist in this saga is something known as the “rum cover-over” program. As it does with all distilled spirits, the federal government charges an excise tax of $13.50 per proof gallon of rum sold in the United States. This equates to roughly $2 per bottle. Under the cover-over program, almost all of that money is directly granted to the U.S. Virgin Islands and the Commonwealth of Puerto Rico using a complex formula so that each receives a share of the money based on how much rum it produces relative to the other. The tax is collected from sales of all rum imported to the mainland, even from other countries, and in 2010 the cover-over amounted to approximately $450 million—$100 million to the Virgin Islands and $350 million to Puerto Rico.

The industrial death spiral began when the government of the U.S. Virgin Islands cleverly discovered that, instead of using the money for infrastructure and welfare programs, it could use the bulk of the money to entice Captain Morgan producer Diageo to relocate there from Puerto Rico. Because the move will increase rum production in the U.S. Virgin Islands relative to Puerto Rico, the subsidy more than pays for itself by it helping the territory capture a larger share of cover-over funds.

Puerto Rico initially asked Congress for help. There is currently no rule on how the two entities can spend the cover-over funds, so Puerto Rico’s non-voting delegate to Congress, known as a Resident Commissioner, proposed legislation that would cap at 15 percent the portion of the funds that could be used to subsidize rum production. When that effort failed, the Puerto Rican government reportedly responded by ramping up its own subsidy programs. The result has been an expensive trade war over mainland consumer tax dollars granted in return for rum production.  For perspective on how important this is for the players involved, it’s worth noting that the U.S. Virgin Islands government has an annual budget of just under $1 billion dollars and is hoping to increase its cover-over revenue from $100 million to $240 million.

The new twist on this saga comes from the detrimental effect this subsidy war has had on rum production in other parts of the Caribbean. Matched up against firms receiving U.S. subsidies reported to be close to or even to exceed production costs, producers in other Caribbean countries are unable to compete in the U.S. market on price. These economies generally rely on tourism and raw material exports and have precious few value-added industries. If the United States is interested in economic development in the region, the least it could do is refrain from crippling emerging industries with unfair subsidies. While the two U.S. Caribbean governments spend federal tax dollars to entice major rum brands to their islands in order to earn more federal tax dollars, the rest of the Caribbean is struggling just to stay afloat.

It should not be surprising then that the form, size, and effect of these subsidies establish a strong case that the United States is in violation of its trade obligations, and Caribbean representatives have raised the possibility of a challenge at the WTO. WTO rules prohibit subsidies that are targeted to a single industry and cause injury to that industry in the territory of another member. Also, the size and amount of production covered by these subsidies may be so great that they could be considered “contingent in fact on export performance”—a kind of subsidy that is strictly prohibited.

This situation is certainly not just a local issue between two somewhat-foreign governments. The program implicates U.S. trade obligations toward vulnerable Caribbean neighbors, and Congress, being the enabler of the dispute, is already involved. A program that directly pits two U.S. jurisdictions against each other in a fight for hundreds of millions of dollars with no strings attached is unjustifiably irrational, and no one should be surprised that it hasn’t gone well. Capping the amount of the cover-over funds that can be used to support rum production, as originally proposed by Puerto Rico, is an effective and painless way to fix the problem, or at least to keep it from getting worse.

Caribbean Trade Dispute Gives the U.S. a Rum for Its Money is a post from Cato @ Liberty - Cato Institute Blog

Tonight at 6:00 pm ET, Brian Doherty will discuss his new book Ron Paul’s Revolution: The Man and the Movement He Inspired, with comments by Sen. Rand Paul, in Cato’s Hayek Auditorium.

You can, as always, watch it live at www.cato.org/live.

But if you prefer the old-fashioned, 20th-century technology of television, it appears that C-SPAN will broadcast the event live. And probably again later in the evening, as is their wont.

Television schedules always subject to change, of course.

Live Tonight at 6: Brian Doherty and Rand Paul is a post from Cato @ Liberty - Cato Institute Blog

A new report published today by the Project on Defense Alternatives  argues for $17-$20 billion in immediate savings to the Fiscal Year 2013 defense budget. I co-authored the report along with Benjamin Friedman of Cato, and PDA’s Carl Conetta, Charles Knight, and Ethan Rosenkranz. Those savings come from 18 line items—personnel, weapons systems, and programs—that could be implemented quickly. Adjustments to U.S. national security strategy are not a prerequisite for these options, which are relatively low-hanging fruit.

The 2013 defense authorization bill will move to the House floor this week. Many members are expected to offer amendments, some allowing savings in the defense budget. During the debates that are about to ensue,, it is important to keep in mind just how large the defense budget has become. As our paper notes, the national defense base budget constitutes 52 percent of discretionary spending, separate from the war account. Since 2000, it has risen by 90 percent in nominal terms and 42 percent in real terms. If Washington is serious about addressing the nation’s massive fiscal challenge, many programs will have to be cut or reformed. The Pentagon should not be expected to bear all of the costs; other departments and agencies will also have to contribute. But there has not yet been a significant decline in the Pentagon’s base budget, contrary to what some have claimed.

The Budget Control Act (BCA) of 2011 places an initial discretionary spending cap on National Defense for 2013 at $546 billion. Both President Obama’s request, and the House Republican’s budget exceed the BCA caps. In addition, the BCA requires $110 billion in spending cuts in January 2013 via sequestration, half of which need to come from DoD. Neither the White House nor Congress plans for that to occur; both sides hope to amend the law and achieve equal deficit reductions by other means. As it currently stands, though they disagree on how. Republicans want to cut other spending, Democrats to raise taxes. The options outlined in our paper could facilitate these negotiations, by revealing savings in the DoD budget that will not damage our national security.

The savings options in the report focus on reducing or curtailing:

•  Assets and capabilities that mismatch or substantially exceed current and emerging military challenges;
• Assets and capabilities for which more cost-effective alternatives exist;
• Investments that are tied to the past, reflecting bureaucratic inertia or individual’s service interests, rather than current collective defense needs;
• Acquisition programs that exhibit serious, persistent cost overruns, while failing to deliver  promised capability, and
• Acquisition programs that are based on immature or unproven technologies.

Further savings are possible if we rethink our strategy, missions, and national security commitments. Ben Friedman and I have long argued this point. Until then, the options presented in “Defense Sense” are limited in scope in an effort to pave the way toward responsibly balancing national security ends, ways, and means.

Although I encourage everyone to look at the report, here are just five of the 18 cuts that policymakers should immediately consider:

• Military personnel in Europe: Remove additional 10,000 military personnel by end of FY 2013; save $100 million in FY 2013 and $188 million per year once complete
• Active-component military personnel: Reduce end-strength by an additional 10,000 personnel; save $400 million in FY 2013 and $860 million recurring annual savings once complete
• Missile Defense: Focus on procurement and end-stage development on systems with proven, reliable, cost-effective capability (see report for details); save $2.5 billion in FY 2013
• F-35 Joint Strike Fighter: Cancel USMC variant; buy equivalent numbers F/A-18 E/F; save $1.8 billion in FY 2013
• Littoral Combat Ship (LCS): End procurement at 10 and seek alternative; save $2 billion in FY 2013

Cross-posted from the Skeptics at the National Interest.

New Paper Argues for Immediate, Practical Cuts in Military Spending is a post from Cato @ Liberty - Cato Institute Blog

There’s a rift within the U.S. school choice movement as to whether private school choice programs should cover every child or focus only on the poor. Fortunately, the cause of this disagreement is not so much that the two sides have different goals but that they have different assumptions about what will achieve those goals. And the nice thing about assumptions is that they can very often be tested against the real-world evidence. What actually works better: universal access to the education marketplace, or universal dependence on a government program? That’s the question I try to answer over at the RedefinEd blog today, in a post responding to veteran voucher campaigner Howard Fuller.

Universal Dependence or Universal Access? is a post from Cato @ Liberty - Cato Institute Blog

Richard Thaler writes in the New York Times:

Justice Scalia is arguing that if the court lets Congress create a mandate to buy health insurance, nothing could stop Congress from passing laws requiring everyone to buy broccoli and to join a gym…Can anyone imagine Congress passing a broccoli mandate law, much less the court allowing it to take effect?

Yes annnnd…yes. Next question.

Surely, the justices have the conceptual resources to draw a distinction between the health care market and the market for broccoli. And even if they don’t, then all the briefs, the zillions of blog posts and a generation’s worth of economic literature can help them.

If drawing a constitutionally meaningful distinction between the markets for health insurance and broccoli is child’s play for Thaler, he should school all the brief- and blog-post-writers who so far have failed. That would have been a more productive use of his thousand words than his build-up to this thesis:

If you are opposed to a policy, state your case based on the merits — not on the imagined risk of what else might happen down the road. The path of that road is so unpredictable that it may even produce a U-turn.

Good grief. Slippery-slope arguments are about principles. As in, “If you concede this principle because you don’t mind the result here, you will no longer have it to protect you against that bad result there.” Thaler’s thesis would lead, for example, to all manner of civil-liberties violations by the state because there simply isn’t enough political support to protect all the civil liberties of various minorities. But Thaler doesn’t want us to think about things like consequences or the future.

The potential for U-turns makes no more sense as an argument against invoking slippery slopes principles, because principled arguments can help generate the U-turn that opponents of, say, ObamaCare want to see.

I take silly arguments like this to be evidence that ObamaCare supporters are in complete panic mode.

Stop Using Slippery-Slope Arguments? Where Would that End? is a post from Cato @ Liberty - Cato Institute Blog

Yesterday I asked: If JPMorgan Chase’s loss of $2 billion shows the need for more bank regulation, what should the federal government’s $1.3 trillion deficit tell us? And Michael Cannon pointed out that in the private sector, people who make big mistakes tend to lose their jobs, unlike the public sector.

Today another theme is being heard, at the Wall Street Journal, on NPR, and many more places including even here at Cato@Liberty: banks like JPMorgan, which has annual revenue of $100 billion, are just “too big to manage.”

And again I have to wonder: if large banks are too big to manage, what should we think about the federal government? The federal government is the largest landowner, the largest insurer, the largest employer, the largest banker in the country. It operates everything from a judiciary to the most complex armed force in history to numerous health insurance programs to a retirement system to a highway system to a peanut subsidy program.

If JPMorgan is too big to manage, can we possibly expect competent management of such a massive operation that doesn’t even face the feedback of profit and loss?

Too Big to Manage is a post from Cato @ Liberty - Cato Institute Blog

While perhaps more identified with eating than drinking, New Jersey Governor Chris Christie — who headlined Cato’s recent Milton Friedman Prize Dinner — signed a law in January that allowed out-of-state winemakers to sell directly to in-state consumers and retailers.  This wasn’t a spontaneous bit of New Year’s bonhomie — the U.S. Court of Appeals for the Third Circuit had ruled in Freeman v. Corzine that the previous rules benefiting in-state wineries was unconstitutional (that pesky Commerce Clause again) — but still it was a positive sign: even Wine Spectator took note.

More importantly, the district judge in charge of the nine-year lawsuit challenging that earlier law recently approved the consent decree whereby New Jersey’s new law remedied the claims brought by the out-of-state wineries.  The agreement creates an out-of-state plenary winery license (good luck saying that after having consumed too much of the the vintage) under which “foreign” wine can compete on an equal playing field with good ol’ New Jersey stock.  Specifically, the new law grants this license to out-of-state applicants, including those who sell their wares over the internet, who do not produce more than 250,000 gallons of wine per year and are duly licensed in another state.

The upshot is that the new law takes effect as of this month.

This all still seems like a bit too much regulation to me, but at least everyone is now subject to the same rules.  I may have to take advantage of this newfound freedom when I travel up to the Garden State for my college reunion in a few weeks.

For my previous writings on booze and the Commerce Clause, read this and listen to this.

Chris Christie Allows New Jerseyans to Quaff Better Wine is a post from Cato @ Liberty - Cato Institute Blog

Earlier this month, it was my distinct privilege to moderate a panel of renowned authors and activists from around the globe at the PEN World Voices festival, to discuss “Life in the Panopticon.” The folks at PEN have since posted the prepared version of my opening remarks, which try to get at the special relevance of literature to our understanding of these issues:

When we talk about surveillance and privacy—perhaps more than any other political question—we speak a language borrowed from fiction. When we’re worried about the civil liberties implications of the Patriot Act or wiretapping by the National Security Agency, we may say they are “Orwellian,” or raise the specter of “Big Brother” government. As we slip off our shoes, separate our mini-shampoo bottles, and raise our arms for the friendly agent of the Transportation Security Administration, the word “Kafkaesque” may leap to mind unbidden.

And then, of course, we have the Panopticon. In 1787, when the philosopher Jeremy Bentham first imagined a prison on the model of an “inspection house,” architected to enable total surveillance of its inmates (or patients, or students), he believed himself to be writing non-fiction—a proposal for a real structure. But the modern reader is far more likely to have encountered the Panopticon by way of Michel Foucault, whose seminal Discipline and Punish invoked it as a kind of fable or metaphor to illustrate the principle of control through observation. Though prisons on Bentham’s model were eventually constructed—long after his death—for us it is, above all, a useful fiction.

It is a fiction with increasing relevance, as technology tears down the walls of Bentham’s prison, and embeds panoptic architectures in the camera networks trained on our public streets, the computers in our homes, and the phones in our pockets. If we insist on giving it a physical address, the modern panopticon might be the massive data storage facility being constructed in Salt Lake City Utah by the National Security Agency, which will allow the complete storage of all Internet communications—or the facilities where Chinese censors aided by powerful algorithms strictly enforce the parameters of acceptable online discussion.

As the Slovenian philosopher Miran Bozovic has observed, the Panopticon is actually a fiction within a fiction: it is not the warden’s real monitoring that makes the Panopticon’s discipline effective, but the idea of the observer, hidden from view by the panoptic architecture, that forces the prisoners to always act as though they could be under surveillance. In the most efficient prison, the tower can be empty—the observer a complete fiction—so long as the inmates believe in his presence. If you want to deprive online dissidents of the advantages of Internet communications, the fiction of omniscience may be better than the real thing: the story, unlike the real policeman, can build its outpost in the citizen’s mind.

If the purpose is to gather intelligence rather than exert discipline, of course, the opposite fiction is needed—the fiction of privacy that induces the target to lower his guard and disclose his secrets. When the courts belatedly began to impose limits on the warrantless wiretapping program inaugurated by President Bush, administration officials loudly declared that the intelligence agencies had been struck blind, which we now know was almost certainly another fiction.

For both purposes—intelligence and deterrence—as far as the government is concerned, the less the public knows about the detailed structure and capabilities of the Panopticon, the better. This secrecy is the source of the familiar tension between the imperatives of intelligence and those of liberal democracy under accountable government. It may also be why we so often turn to fiction to understand surveillance—to shine a spotlight on the invisible observer, and hear the dissident voice that, in reality, falls silent under the panoptic gaze.

Our ability to understand the realities and dangers of surveillance, then, depends crucially on the stories we tell. The dystopia of Nineteen-Eighty Four is not that of Brave New World—even if our reality contains the seeds of both. The legal scholar Daniel Solove, in his important book The Digital Person, argues that modern threats to privacy are better understood through the lens of Kafka than Orwell—and that by relying too heavily on Big Brother metaphors, we misunderstand where the most pressing threats lie. If the Panopticon is made of stories, so is the gate that might lead us out of it.

Remarks on Fiction and Surveillance from PEN World Voices is a post from Cato @ Liberty - Cato Institute Blog

Last week it was revealed that derivatives trades gone bad may cost J.P. Morgan Chase bank over $2 billion. The losses apparently are still accumulating at around $150 million per day. A senior manager has already lost her job and perhaps more heads will roll.

Why do banks keep racking up such losses? The bank claims the losses were incurred on trades designed to hedge the bank’s exposure to events in Europe. They failed because relationships among asset prices (really indices of derivatives) diverged from normal patterns. Surprise! That has been the undoing of many financial bets in recent years, starting at least with the spectacular collapse of Long-Term Capital Management in 1998.

A number of factors are at work, which I examine in more detail in a longer post. The short answer is that bad policy is at least partly to blame. Large banks know from experience that they will get bailed out by taxpayers if they incur major losses (the “too-big-to-fail” policy). There are two recognized consequences of that policy. Banks are larger than they would otherwise be, and they are riskier than they would otherwise be.

There is however a third consequence, less recognized than the other two. With growing size comes growing complexity. The major banks are simply too complex too manage. Senior management cannot control the risks being taken, often because they cannot understand them. That was the case in Citibank in the 2000s and appears to be so again with Morgan.

The problems will not go away until public policy changes.

What Would J.P. Morgan Say? is a post from Cato @ Liberty - Cato Institute Blog

When, late last month, Great Britain slipped back into recession, New York Times‘ Paul Krugman saw it as a vindication of his neo-Keynesian policies. According to Krugman, Britain failed to return to growth, because David Cameron’s government stepped on the fiscal break instead of infusing the British economy with more borrowed funds. My colleagues Juan Carlos Hidalgo from Cato and Veronique De Rugy from the Mercatus Center have already pointed out that austerity in Europe is something of a chimera. Spending cuts have been small, while tax increases have been large (a bad combination, in my view). Not to beat a dead horse, but here is a take on the British situation from, so to speak, the horse’s mouth:

Tullett Prebon, a bond trader, said that “public expenditures have hardly been reduced at all” and that claims of a “big cut in public spending is bare-faced deception”.

Figures highlighted by the firm show that public spending actually rose during 2010-11 and fell by just 1.5 percent last year.

Government spending is more than £22 billion higher than it was in 2008 when the financial crisis erupted.

The majority of extra money required by ministers to fill the black hole in the finances caused by the recession is being raised from extra taxes rather than cuts in Government spending.

Dr. Tim Morgan, the global head of research at Tullett Prebon, said: “It’s high time that this mendacity was exposed for what it is. Government has done very little about its spending, has appropriated three-quarters of all gains in economic output for its own use, has carried on piling up debt – and has tried to pass all this off as ‘responsible austerity’.

“The motivation for government spin is obvious enough. On the one hand, rises in market interest rates could be a disaster, given the extent to which British households are leveraged. On the other, implementing the real cuts required to back up a genuine austerity package have proved politically unpalatable.”

Dr. Morgan warned that it seemed “improbable” that the bond markets would “continue to fall for this spin-job” and would “sooner rather than later” call the Government to account.

Krugman Is Wrong about Austerity in Britain – Say the Brits is a post from Cato @ Liberty - Cato Institute Blog

An amusing anecdote about the absurd excesses of our system for classifying “sensitive” documents comes by way of the Federation of American Scientists’ Project on Government Secrecy. It seems a researcher had been trying to get access to a 1993 article published in a classified NSA journal, discussing the “SIGINT” (or signals intelligence) surrounding the Soviet downing of U.S. reconnaissance aircraft. The agency had already released a heavily redacted version of the article, and was in the process of considering a request to release a more complete version when—oops!—they seem to have mistakenly published a completely unredacted version, in which sections that were supposed to be excised had been highlighted rather than obscured. This version was quickly removed—but only after FAS researchers (and presumably others) had downloaded a copy.

This seemed to put the agency in an awkward position, since the NSA’s claim that any of the article remained properly classified required it to maintain that its disclosure threatened “serious damage” to the security of the United States. Would they admit to having made such a grave error in posting the unredacted document? Or would they acknowledge—as the FAS researchers concluded from their review of the document—that there had been no real grounds after all for continuing to keep the article secret two decades later?

The NSA seems to have picked an ingenious third option:They invoked an obscure provision of a 2009 executive order permitting the declassification and release of material that would otherwise be properly classified in “exceptional cases” where the national security interest in protecting the information was “outweighed by the public interest in disclosure of the information.” So what, exactly, was so exceptional about “Maybe You Had to Be There: The SIGINT on Thirteen Soviet Shootdowns of U.S. Reconnaissance Aircraft“? Readers are welcome to scan the article and draw their own conclusions, but it’s hard to disagree with the FAS analysts’ suspicion that the agency simply decided it wasn’t in the “public interest” to admit how much information the government unnecessarily hides from the citizens who fund it.

Classification Follies is a post from Cato @ Liberty - Cato Institute Blog

NCLB Is ‘Voluntary,’ Too is a post from Cato @ Liberty - Cato Institute Blog

I was recently asked the following:

You gotta figure:

1. States defaulting on pension obligations through bankruptcy and/or action by legislatures. Some de facto defaults will likely be to promise payment at age 90 or whatever.
2. National governments, including the US, also likely defaulting on everything, gov’t bonds and so-called “entitlements.”

So, pensioners, city, state and national get at least a huge haircut on what they expected and Medicare and Medicaid just aren’t viable over time.

What are the economic implications and possible other implications?

Here’s my response:

Many US states are facing pension fund insolvency and will have to impose heavier burdens either on taxpayers, employees, or retirees, or some combination thereof. There is a precedent, although not a direct one, for a federal bailout of state and local governments: The Emergency Relief and Construction Act of 1932 provided $300 million to be lent to the states (and onward to cities and counties) for relief. Everybody understood that these loans probably would never be repaid and, in fact, they were eventually written off. This statute was the first breach of the federal “relief dam” — one that burst after FDR took office in March 1933. Despite it, three states-Arkansas, Louisiana, and South Carolina-defaulted on their debts. By the end of 1933, approximately 1,300 local governments also had defaulted and many other state and local governments verged on default.

Recently, Ben Bernanke has ruled out a bailout of states via the Fed (who believes him, given what he’s already done?) and Eric Cantor recently wrote that the states have the tools to deal with their fiscal challenges, including renegotiating agreements with public-sector unions. In his opinion, there is no reason for federal involvement in state government fiscal problems, but how policymakers will respond when the chips are down (or there’s “blood on the streets”) is anyone’s guess. Some states are in pension trouble because they assumed highly risky investment strategies that failed when asset values sank during the 2001 and 2008-09 recessions. One favorable element for some states – Arizona, Utah, Texas, NM, etc. — is their favorable demographics that could help them to slowly improve their pension and fiscal conditions.

At the federal level, the default must also occur through a “renegotiation” of entitlement promises. The Medicare actuaries have clearly indicated that the so-called Medicare fix enacted through ObamaCare is untenable. So, whether or not ObamaCare is repealed, we’re still at square one and a renegotiation must happen soon. The problem is that we always wait for the people to deliver a “clear verdict” through elections, and elections usually don’t. Leadership on this issue is sorely needed but is not forthcoming for understandable reasons. The political game is to push the adjustment costs out into the future — but eventually it will imply significantly reduced living standards for future generations. How that will come about — whether through a crisis as in Greece and Spain, or through a gradual erosion of living standards is difficult to say. The inevitability of one or the other is not in doubt. All we could say is that the probability of a resolution through a violent crisis increases the longer we continue to push the costs out.

I’m placing a high probability on the dissolution of the Euro by the end of this year. With the election results in France, Greece, and Germany, the debt roll-over requirements that Greece, Spain and Italy are facing, and the impossibility of external sources of credible “bailouts” I don’t see how it can be any other way. Some people wonder whether the periphery states will opt out first or whether Germany and stronger northern states will move first to kick them out. There are no formal exit strategies included in the European Stability and Growth Pact. I think, though, that it will be the former — the southern countries are facing austerity with, or chaos without, the Euro and now the perceived difference between the two is not very large.

To answer the last question “And then what?” I would simply say that the developed nations will all be poorer — have lower living standards, more unemployment, less growth, etc, until the boomers pass away. I predict as much in my book that examines the implications of demographic and economic trends in developed nations (it does not deal with business cycle related events). Future generations will have to re-think the state-citizen relationships — a process that we can influence.

Dealing with Fiscal Challenges is a post from Cato @ Liberty - Cato Institute Blog