Tag Archives: us domestic policy

July 28, 2016 – The Politics of Good Intentions, Heckling for Peace, and the Fed Holds Interest Rates Steady

Update on the DNC
President Obama was the headliner at Day 3 of the Democratic National Convention, and he didn’t disappoint. A solid speech as normal and, sadly, no memorable teleprompter interruptions. The message was one of optimism for the future and celebration of the accomplishments made already–not by him, but in typical Democratic fashion, by all of us. At one point, in a pointed rebuke to Donald Trump’s popular slogan, Obama remarked “America is already great.”

Obama’s speech highlighted the important tension Democrats have to wrestle with this season. They have to simultaneously acknowledge that things aren’t perfect while taking credit for some progress. That’s a difficult balancing act, particularly in an environment where many people clearly are not happy with the country’s current trend lines. If all was well, the Bernie and Trump movements would not have been more than a blip this year.

After the speech, it’s clearer than ever that Hillary is running as the continuation candidate, and Obama’s rhetorical effectiveness reminded us why she is inclined to be framed as his third-term.

It is far less clear that this will work, however.

If it was literally Obama’s third-term, he would probably win easily. But Obama has the ability to deliver effective speeches and isn’t widely disliked as a human being. Inexplicably high speaking fees notwithstanding, Hillary doesn’t have either of those qualities. That’s going to make the general election an uphill battle.

One other item evident from Obama’s appearance is that the Democratic Party is cementing its brand as the politics of good intentions. It does not matter whether something is right, or whether it might have disastrous long-term effects. What matters is what they meant to accomplish. Thus, in an introductory video, the auto bailout program was not presented for what it was–namely, massive corporate welfare for a company that did not deserve more resources. In the video though, this was an act of political courage because Obama did it to protect the workers.

President Obama also took the opportunity to spike the football on the Affordable Care Act, noting that health care is no longer a privilege but a right. It doesn’t matter that that system is already showing clear signs of breaking down, and is, as we suggested in a prior article, inherently unstable economically. No problem, the goal was to give people access to healthcare. The fact that in the long-run, it will work directly counter to this end does not matter. Only the intention counts.

The same analysis could be offered of many other points in the speech as well. Interestingly, the disastrous Libyan intervention–perhaps,the greatest example of good intentions gone awry in the Obama years–did not appear in the speech. This is intriguing since, to counter Donald Trump, Democrats have lately been making much ado about the importance of facts. The truth is that neither party has shown much interest in them–not in the ones that matter.

Heckling for Peace
Amid otherwise predictable proceedings at the DNC, there was one bright spot that the Bernie folks (and apparently Oregonians) most likely deserve the credit for. When former Defense Secretary Leon Panetta came to the podium to explain why Hillary Clinton is the best warmonger for the Oval Office, he was interrupted with chants for peace: “No More War!” It’s a nice reminder that, in spite of President Obama, at least some Democrats are still on the side of peace.

Federal Reserve Keeps Interest Rates Flat
The Federal Open Market Committee finished today, and Fed Chair Janet Yellen announced that the Fed will be keeping a key interest rate target stable. The Fed implied that the economy is clearly strengthening, which has many people expecting the next rate hike in September.

In reality, it’s very unlikely the Fed will raise rates again before the election is over. The last time they tried this, the stock market quickly plummeted. Their cautious actions since suggest they understand just how fragile the economy is, even if they’re unwilling to say so publicly. That’s why they won’t raise rates and won’t risk throwing the election even more certainly to Donald Trump.

Progress Against Occupational Licensing in Kentucky

A small but wonderful story emerged out of Kentucky last week. Thanks in part to efforts by the libertarian Institute for Justice organization, Governor Matt Bevin signed a new bill into law that exempts natural hair braiders in Kentucky from needing a license to practice their craft.

Natural hair braiding is popular among people of African descent, and in Kentucky, many of the practitioners were recent immigrants from countries in West Africa. This new bill will make it easier to make a living by eliminating the need for them to take 1,800 hours of training, which could cost up to $20,000. Such training requirements would be onerous in any context, but they are particularly egregious in this case as the standard training courses typically do not involve anything related to hair braiding.

Like most regulations, these rules also had a disproportionately negative impact on poor people. If you come from a wealthy family that can put you through college or let you live at home, then the requirement of taking 1,800 hours of education is annoying but surmountable. You can afford to go without an income for a year while taking classes and living rent-free.

By contrast, consider the case of a new African immigrant or refugee who already knows how to braid. They may not be fully fluent in English yet and may have little verifiable / relevant job experience for potential employers. Meanwhile, if they don’t come from a wealthy background, they need to start making a living right away to support themselves and possibly their families. In this circumstance, taking a year off without any source of income and spending thousands of dollars on training probably isn’t an option at all. So they may be forced to take a low-paying job instead of using a lucrative skill they already possess, all because of government regulation.

Once we understand the consequences of the previous licensing requirements, it’s difficult to see why anyone would support such a rule. The official answer in the case of licensing is typically that it protects the consumer.

This claim should always merit skepticism, but it’s particularly preposterous in the case of hair styling. I submit to you that no one has ever incurred irreparable damage through getting a bad haircut (or hair braid, as the case may be). And if they have, that actually just helps my case–since the deliverer of such a haircut was almost certainly required to be licensed when they did it.

No, that’s not what this licensing rule was about. If you want to understand why a law exists, you should look for the private interests, not the public ones. In the case of hair braiding licenses, there are two key beneficiaries:*

  • The people involved in implementing the licensing system, whose salary is partly dependent on the licensing system continuing to exist. And, 
  • The for-profit colleges that provide the education that is required for the licenses. A significant part of their business can evaporate overnight if license requirements are weakened.

According to the Institute for Justice, the initiative to exempt hair braiders from licensing faced only one source of opposition. And it came from one of the special interest groups mentioned above. From the press release (emphasis added):

The effort faced only one attack. After the House Licensing and Occupations Committee approved the bill unanimously and it was sent to the full House, Rep. Hubert Collins—whose wife chairs the Kentucky Board of Hairdressers and Cosmetologists—introduced a last-minute floor amendment that would still have made it impossible for braiders to work legally. (He told the media that he had not spoken to his wife about the issue.) But in the face of overwhelming support for braiding freedom, Rep. Collins did not bring his amendment up for a vote—he simply voted no. S.B. 269 passed the House 86-8.

Fortunately, the special interest group could not successfully defend an indefensible law. So Kentucky’s market is now that much freer than it was before. Consumers get more options; and new African immigrants can start a business without fear of legal reprisals. It’s a beautiful example of how the much-hated concept of deregulation can help poor people, consumers, and entrepreneurs all at the same time. The only ones who suffer are the rent-seeking special interests, whose jobs and profits depend on government rules rather than individual preferences.

*Another possible beneficiary of strict licensing could be individual practitioners who already spent the time and money needed to get a license. These people understandably might not like to see their investment become next to worthless. Having said this, the benefit they receive is neither as significant nor as visible as the benefits earned by the other groups. For this reason, they would likely produce less opposition to possible reforms than the groups mentioned above.

Due Process Might Let Some Bad People Go Free, Use It Anyway

One aspect of the Orlando Shooting that has been widely reported is the fact that the FBI interviewed shooter multiple times and found insufficient evidence to prove criminality. Indeed, we noted this in our own coverage, and it is a very important fact.

However, it’s a fact that’s easy to be misused. On the one hand, it shows the apparent futility of mass surveillance–this guy was flagged for additional investigation and nothing got through. Given that successful mass surveillance would likely look a lot like this, with a future terror suspect being well before the actual attack, it should make the argument for additional mass surveillance or policing powers thoroughly absurd. Here, existing tools worked in the sense of identifying a potential threat. But because predicting a future terrorist or terror attack is very difficult, it did not actually prevent the atrocity in this case.

The problem is that this argument can also be spun in the other way. Here, the focus is not on the apparent futility of counterterror efforts, but on the question of why exactly the FBI let this man go? There are several interesting possible explanations for this, in addition to the obvious one that he wasn’t a credible threat and had done nothing criminal. There’s also the suggestion that the FBI’s resources may have been distracted by some de facto terrorist entrapment jobs elsewhere in Florida, which have very little to do with keeping American safe. It has also been suggested that the FBI’s policy of pursuing every lead prevents them from focusing resources on the real threats that may unfold over a longer period. And of course, there’s the sentiment expressed by the reliably awful Senator Lindsey Graham, “The FBI closed this file because the Obama administration treats radical Islamic threats as common crimes.” Because, of course, everyone knows that responsible people Call It Radical Islam (TM) and would use the military to bomb people in countries on the other side of the world to solve it once and for all. Just like we solved terrorism after 9/11 by bombing Afghanistan and … wait, that didn’t happen.

Morbid joking aside, the Senator’s camp has emerged as a dominant one. Obviously, the argument goes, people like Mateen shouldn’t be released into society because look what happened. Thus, we should get rid of whatever restrictions prevented the FBI from holding him.

It’s not hard to follow the train of thoughts that gets you to the conclusion above. The issue is that those restrictions amount to basic due process, and they’re kind of the foundation of the criminal justice system, at least in theory. The assumption here is that expanding police powers in this way, by effectively allowing the government to hold people on mere suspicion of wrongdoing rather than any actual proof, the government would be able to prevent these attacks. This is unlikely to be true, but in a time of intense anxiety and fear after a very public attack, many people are desperate for anything to help.

All of which makes Glenn Greenwald’s recent article in The Washington Post a very timely and welcome defense of due process. The whole piece is exceptional and I’d encourage you to read it in full if you’re remotely on the fence on this subject. This excerpt offers a look into his conclusion:

…based on what we know, the FBI acted properly [in this case]. Agents have the power they need, and they were right to close the case on Mateen. Just because someone successfully carried out a violent mass attack does not prove that police powers were inadequate or that existing powers were misapplied. No minimally free society can prevent all violence. In the United States, we do not hold suspects for crimes they have not committed.

In some ways, it’s an old argument–there’s a trade-off between liberty and security, and in the wake of terror attack, people only look at one side of the coin. But as Greenwald himself notes, this argument needs to be rehashed in the wake of every terror attack. Because there will also be politicians willing to promise the impossible by sacrificing rights that ought to be off the table.

And with that, here’s the link to Greenwald’s article:

The FBI was right not to arrest Omar Mateen before the shooting

DC Considers Cracking Down on Short-term Rentals

A new article at the Foundation for Economic Education discusses how local politicians in Washington DC are considering imposing new requirements on short-term rental providers. Per FEE author Iain Murray, the new proposed regulations would require an owner to:

*Submit their properties to a full inspection to ensure compliance with fire, health, building, and zoning codes, and ensure that the property complies with Americans with Disabilities Act requirements; 

*Send a notification letter to neighbors about their intent to rent out their property;

*Operate the license under their personal name and not through a corporate entity;
be present throughout the visitor’s stay; and 

*Only advertise through a hosting platform like AirBnB if they have a business license.

The best part is that, if these regulations are violated, they can be punished by fines or imprisonment (!) up to six months.

It seems clear that, if passed, these regulations would be sufficiently onerous to be effective. And of course, that’s precisely the problem. The new regulations would discourage private room-sharing, eliminating (or reducing) a source of income for many property owners in the area and raising the cost of visiting DC for many would-be travelers. Meanwhile, the likely beneficiaries are the established interests–primarily hotel chains and possibly some DC residents, who are opposed to having a guesthouse in their neighborhood.

In a way, this is a small issue. Even if the proposed bill is passed, it only affects DC and it only affects one industry within DC. But in another way, it’s nearly a perfect archetype of a bad regulation. Indeed, it has almost every attribute we would expect from a new economic regulation, namely the following:

  • Regulation pushed by special interests. Costs are shared widely, mostly among consumers
  • Creates artificial competitive advantage for existing businesses relative to new competitors.
  • Preexisting legal remedies should have been sufficient to address any actual problems that existed.
About the only thing this regulation is missing is that it doesn’t appear to disproportionately harm poor people like most such regulations. Still 3 out of 4 is pretty good score.
So let’s run through the key elements.
Pushed by Special Interests
In this case, the main interest groups are hotels and their labor unions, as noted in the article. It’s not difficult to see how they would benefit from such rules. If AirBnB can’t operate in DC, that means more revenue for hotels and more job security for their employees. This much is straightforward.
The reason such groups are strong enough to get legislation like this seriously considered may be less obvious. There are many more people that benefit from AirBnB (travelers, businesses catering to tourists, and property owners that rent spaces out) than those that would stand to benefit from this legislation. So how is it that rules like this can possibly gain traction?
Well, economists would argue the problem is one of concentrated benefits and diffuse costs. The net impact of the regulation is likely to make us all, on balance, worse off, and more individuals will be harmed and helped. The trouble is that the harm that each individual experiences (a slightly higher vacation cost, for instance) is much smaller than the benefit that can be gained by the hotel industry by eliminating their competition legislatively. As a result, the hotel industry has a much stronger incentive to hire lobbyists pushing this bill than anyone else has to oppose it. For the hotels, it’s a huge issue; for us, it’s a minor inconvenience. So hotels can easily win.
And of course, it goes without saying that the resources the hotels and unions expend on lobbying to get a bill past are basically wasteful for the economy as a whole. Lobbyists of this sort do not create value for anyone. Instead, they are just trying to transfer market share to their clients, away from a superior competitor in AirBnB and other short-term rental services. In other words, it’s like that old adage: “If you can’t beat them, hire K Street to get politicians to outlaw their business model.”
It Benefits Established Interests
It’s not a coincidence that hotels would already meet most of the requirements that would be expected of the short-term rentals, like getting a fire inspection or having a proper business license. Superficially, these may seem like reasonable enough requirements, but each one raises the costs of participating in the markets and thus gives a relative advantage to businesses that already meet them.
The same dynamic plays out with most new economic regulations. People often assume that businesses despise new regulations, and on a personal level, that may be true. But most of the time, new regulations have the unintentional (or intentional, depending on your cynicism) consequence of strengthening the relative position of the larger companies in the industry. For example, if new costly regulations got imposed on app developers tomorrow, the major casualties won’t be Apple or Google. They already have large compliance and legal teams that can deal with whatever the government decides to throw at them. Instead, it’s the small business and the start-up that gets hit–because now they’re forced to hire a new resource or spend time complying with a new rule instead of refining or selling their product. So all businesses may hate regulations, but it’s typically the small businesses that bear the brunt of the consequences.
It’s Completely Unnecessary
This is probably the most important point of all. One of the apparent catalysts for the push to regulate DC’s private short-term rental market was a high-profile rental that was used for extravagant celebrity parties, much to the chagrin of the neighbors. To the extent that local politicians aren’t just looking for donations from the hotel lobbies, this is the good intention the regulation aims at–ensuring tranquility in the neighborhoods and preventing abuses from rowdy tourists, or something like that.
But there’s no need for explicit regulations to address this need. In general, enforcing the legitimate property rights of the neighbors should be sufficient. Property rights already protect me from having a next door neighbor that decides to play loud music till ungodly hours of the morning. That’s why I can, just as the neighbors did in DC, call the cops and file complaints against unduly loud residents in my area. And if the behavior persists, I could conceivably sue the property owner for damages because they have violated my property rights. On the contrary, if the short-term tenants are doing nothing to violate my property rights, I have no legitimate or legal way to object to their presence. That is how it should be.
It’s equally important to note that while most interpretations of property rights would offer legal protection against disruptive and unduly obnoxious neighbors, requiring a fire inspection and a business license would do nothing at all to solve this problem. Nor would requiring the owner of the property to be a particular type of legal entity. Other than preventing short-term rentals altogether, there’s really no plausible mechanism for how the new regulations would prevent the abuses observed.
And if we wanted to remove any ambiguity from what’s included in property rights, individuals could also negotiate homeowners’ agreements (HOAs) within their neighborhoods. Such agreements are already widely used and would stipulate explicitly the acceptable uses of the property, noise restrictions, etc. As with property rights, enforcement of HOAs doesn’t require a new regulation. It just requires the government to enforce private contracts, which it is already empowered to do.
In other words, the basic powers of government are already designed to solve any of the actual problems created by short-term rentals. And the new regulations being proposed are nothing but the cynical ploy of an industry that is unable or unwilling to compete legitimately.* In this way, this small example from DC showcases the attributes common to economic regulations in general. And like most (if not all) other economic regulations, the justification for DC’s short-term rental regulations quickly falls apart.
*The hotel industry might be able to make a case that the existing regulations on them actually prevent them from competing fairly right now. But even if that’s true, that’s an argument for lifting regulations on hotels, not making things worse for everyone.

Large Health Insurer Withdraws Further from Obamacare and the Economics of Pre-existing Conditions

Bad news for the Affordable Care Act this week as United Healthcare–the country’s largest health insurance company–announced it’s going to withdraw from two more state healthcare exchanges, this time in California and Illinois. This comes on the heels of announcing plans to withdraw from most of the other states as well, as Zero Hedge reports.

This is all occurring after health insurance companies discovered that the expenses of covering new enrollees on the healthcare exchanges greatly exceeded the new premiums. It was well understood that many of the people that gained coverage on these new exchanges would tend to be sicker people–the exchanges exist, in part, to increase accessibility to people who didn’t have coverage before. One of the main reasons they did not have had coverage before is that they may have had an expensive pre-existing condition that meant insurance companies either wouldn’t cover them, or wouldn’t cover them for an agreeable fee. Obviously, taking on many new sick patients is not a good business proposition from the perspective of insurance companies. However, the hope was that there were many uninsured healthy people as well, who would flock to the exchanges as well for fear of paying the tax penalty imposed on those without coverage. This was intended to offset the losses from taking on new sick patients. And in case even this force proved insufficient to make the insurance companies whole, there was also the vaguely named risk corridor program, that was designed to cap losses of the insurance companies that participated in the exchanges (that is, subsidize them).

In practice, covering new patients on the statewide exchanges generally proved to be even more unprofitable than originally anticipated. The risk corridor program quickly ran out of resources to subsidize insurers hit hardest, and thus, health insurance companies are basically left with two options: rapidly raise premiums or withdraw from these exchanges altogether and focus resources elsewhere. They have been doing a combination of the two. And the pace of the premium hikes being planned shows just how dire the situation is. Here’s a chart of some of the most incredible increases planned around the country, courtesy of the Wall Street Journal:

From a policy or economics perspective, perhaps the most important issue here is the question of pre-existing conditions. The case for disallowing insurers to discriminate on pre-existing conditions is, I’ll grant, superficially persuasive–the idea of a senior with cancer getting denied care precisely because they have cancer is clearly appalling. But understanding economics often means tracing things through, recognizing how we got here, as well as the likely short-term and long-term effects of any given solution. Economic laws take effect over a period of time, so it’s best to avoid making decisions based on a snapshot.

To understand the issue properly, we must first ask what is the purpose of insurance? The answer is that it is intended to protect us against unforeseen events and tragedies. Individuals occasionally have tragedies befall them, but on the whole, our society is remarkably safe, healthy, and prosperous. Thus, insurance allows us to share the risk with all these other people, most of whom will go relatively unscathed, so we all bear a small cost but no one will suffer a massive loss. The insurance company earns a profit for coordinating this risk-sharing mechanism.

When we think of pre-existing conditions, it’s best to consider an analogy with less emotional baggage to see the issue clearly. Let’s try homeowner’s insurance.* This exists to protect against, among other things, the possibility of a fire burning down your house. It doesn’t happen often, but if it does, homeowner’s insurance will give you the money to rebuild. In my experience, when you go to buy homeowner’s insurance, they will have you fill out a form to describe your house (square footage, bedrooms, garage, year built, closest fire station, etc.) and they may even conduct a brief inspection to see if your home appears to be a reasonable risk. And obviously, it goes without saying that, if your home was already burned down / burglarized / etc., they would not insure your house against that damage. To do so would be financial suicide.

Now suppose the government passes a law prohibiting insurers from discriminating based on existing fire damage. Obviously, everyone with a recently burned down house will apply for coverage. The insurance companies will be forced to provide coverage, promptly pay out large amounts of money, and go bankrupt. If the policy exists long enough and is thoroughly enforced, the end result is that no home insurer will be left standing.

Bringing it back to health insurance, this is essentially what we’re doing with respect to pre-existing conditions. Effectively, the Affordable Care Act forces insurance companies to place bets (that is, provide coverage) that they know they will lose. The economics of this are straightforward. If it persists long enough, it will destroy all health insurance companies, unless they can find legal ways to deny coverage to sick people, which many are currently attempting to do.

Note that the above line of reasoning is making no moral judgments whatsoever. It’s not saying that people with major pre-existing conditions are bad people, deserve to suffer, are mooching off the system, or anything of that sort. It’s simply analyzing the predictable economic consequences of such a policy, consequences which are unfortunately beginning to show. And here’s where the divergence between short-term and long-term effects is quite striking. In the short-run, requiring companies to cover pre-existing conditions is likely to be beneficial to those sick patients in reducing their immediate costs and/or increasing their care. But in the long-term (which isn’t that long), it’s liable to destroy health insurance for everyone, sick and healthy alike.

Now we can bring in the moral dimension properly. Supporters of the Affordable Care Act certainly try to claim the moral high-ground on this subject by pointing to the short-term benefits noted above. Meanwhile, opponents are cast predictably as heartless, insensitive, greedy, etc. But is it really morally superior to support a system that offers some short-run benefits at a cost of total collapse in a few years? The answer probably depends on where you’re sitting. If you’re a very sick person with only a couple years to live anyway, and won’t be around for the collapse to follow, it’s a good deal. For society at large, however–even counted in purely utilitarian terms–it’s difficult to see how deliberately putting health insurers on a unsustainable course will make us all better off.**

Economist John Maynard Keynes once famously dismissed criticisms of the long-term consequences of his ideas by saying that “In the long-run, we’re all dead.” However, one wonders if he would have felt the same if he knew that the “long-run” turned out to be just a few years hence. In healthcare, that increasingly appears to be the reality.

*I apologize if you’ve heard this analogy before as it’s far from original. But it illustrates the point well, so hopefully you’ll forgive the redundancy.

**I should note here that I’ve heard speculation that this was actually the deliberate plan of the Obama Administration all along, to bankrupt the insurers and thus make way for a single-payer system by default. If that is the true intent, then requiring coverage of pre-existing conditions makes perfect sense strategically. The above discussion focused instead on the more official justifications offered for the policy. Also, we should note that a single-payer system is unlikely to be the panacea its supporters hope for, for many of the same reasons that other central planning activities tend to fail, but we’ll leave a full discussion of that to another day.

US Circuit Court Deals a Major Blow to Civil Liberties

The 4th Circuit Court of Appeals ruled this week that the government can ask a company for a user’s location data without getting a warrant in a 12-3 decision. More specifically, they decided that asking for such information doesn’t qualify as a search under the Fourth Amendment, and therefore doesn’t require any protection.

If this sounds crazy, it should. If I keep a detailed journal of my whereabouts and travels each day and write it down in a notebook, that would be information that would require a warrant. If I use an app that records and stores the same information, it would not require a warrant, under this ruling.

Why it Matters
It’s not difficult to see how this might help law enforcement–readily knowing a suspect’s whereabouts would be quite useful indeed. And if they can get it without even demonstrating probable cause to a (likely compliant) judge, that makes it even easier by eliminating some of the bureaucracy. But this is one area where bureaucracy should be celebrated. The Fourth Amendment’s prohibition against unreasonable searches and the due process guarantees in the Constitution exist for precisely this purpose: to limit law enforcement powers. This is essential not only for protecting basic privacy but also protecting political freedom.

The standard line of argument in favor of expanded law enforcement powers, whether we’re talking about the local police or the National Security Agency, is that you shouldn’t care if you don’t have anything to hide. However, the problem with this is that there are so many laws in existence, so many in fact, that no one knows the exact number, that we’re all bound to violate some of them from time-to-time. And if a law enforcement agency has access to intimate data about your life–like location data or even just metadata showing who you call on your cell phone–it would be easy to eventually find some transgression, given enough time and desire.

The above should not come off as conspiratorial. There are actually high profile cases in the past where law enforcement has attempted to intimidate political activists by investigating them to find unrelated issues. Perhaps the most famous case was that of Martin Luther King, Jr., whom the FBI unconstitutionally spied on. The FBI found nothing criminal to charge him, but did uncover evidence of adultery and tried to blackmail King with it.

Third Party Doctrine
Back to the story at hand, the court’s ruling relied on a precedent known as the “Third Party Doctrine”. Basically, this is the idea that if you willingly share information with a private third-party (say Google, your cell phone provider, an app maker, etc.), you no longer have any expectation of privacy with respect to that information and the government can access it without a warrant. This doesn’t really make sense. If I willfully share my information with Google and the contract terms say Google won’t share it with third-parties, I should logically expect that information to remain unknown to everyone except Google. However, the courts tend to land on the side of increasing government power, and so things like the Third Party Doctrine come into being.

There’s a chance this case, or another that deals with this issue, will ultimately rise to the Supreme Court for a final ruling. But since the Supreme Court itself tends to have a pro-government power bias, it’s not clear this would improve things. The more likely path to a positive outcome would involve state level legislation that could at least prohibit state agencies this power. It’d be great if it happened on the federal level also, but expanding civil liberties is never high on Congress’s agenda.

For more on this story, you can check out the full write-up at The Intercept.

The Panama Papers and Incentives

After what’s being hailed by some as the largest data leak in history, the journalism world is now awash in documents from a law firm based in Panama, Mossack Fonseca. This doesn’t sound terribly interesting, except that this particular law firm’s specialty was setting up and administering offshore shell companies for some of the world’s wealthiest people. The leak apparently included several client lists, and some big names have shown up there. Naturally, most of the Western press is focusing on Russian President Vladimir Putin’s connections in all this (in spite of the fact Putin wasn’t actually in the list, just one of his friends). But there were some more interesting names. Pakistan’s prime minister, Iceland’s prime minister, Ukraine’s president, and the father of British prime minister David Cameron all received honorable mentions in the leak. And since many people use offshore companies for the purpose of evading taxes, the idea that many leading politicians and their colleagues are implicated in such endeavors is delightfully ironic, if unsurprising.

The implicit spin on this story in most outlets is that it shows how the rich dodge taxes. And indeed, in the wake of this revelation, several governments have made it known that they are undertaking investigations to uncover any wrongdoing. There’s a chance they might even find some legitimate violations. However, it’s important to note, as Glenn Greenwald did at The Intercept, that there’s nothing illegal about setting up a shell company to avoid taxes. Greenwald suggests the real scandal here is how much of this is in fact legal.

This write-up by Matt Yglesias at Vox offers a nice primer on the uses of shell companies and what we’ve learned so far from the Panama Papers. Among the interesting facts is an internal memo at the firm in question which notes that 95% of their business was related to tax avoidance. Unfortunately, the proposed solution from Yglesias is entirely implausible–a minimum global standard of taxation and disclosure. Right. I assume that will happen about the same time as the entire world agrees on climate change legislation–more commonly known as “never”.

Greenwald and Yglesias both approach this as a problem, essentially, of political corruption and inaction. The underlying narrative is that the wealthy elite have de facto control over the political systems in the US and elsewhere such that they can avoid paying taxes. That’s probably true. And we can complain about it and denounce it all we like, but it’s not likely to change. Indeed, under Democratic President Barack Obama–which would theoretically care about the rich and their tax-dodging schemes–reports are that the US has actually become one of the most popular tax havens in the world based on the amount of secrecy it affords. Surely, some will blame this on the Republicans or Obama’s relative centrism compared to someone like Bernie Sanders. But even if we grant the unlikely scenario of a Bernie Sanders Presidency and even assume his revolution retakes the House and the Senate for the Democrats as well, we should still be skeptical that he would be able to, in fact, do anything to improve the status quo.

In order to fully prevent tax avoidance, the US government would need to craft a comprehensive reform. But obviously, the most extreme loopholes in the system today probably weren’t built into the codes intentionally. On the contrary, rich people with a 40% tax rate incentive, employed a small army of tax accountants and attorneys to come up with creative (and legal) and complicated systems to help them reduce their tax burden. For a great many people, creating favorable tax structures is a career. And there’s nothing nefarious or illegal about it. High tax rates created a demand for this service; the market met the need.  The cost of these services certainly runs in the tens or even hundreds of thousands of dollars in some cases, but that sort of service would completely pay for itself if you’re rich enough.

Thus, the question then becomes, is it likely that even a Bernie-inspired Congress is going to be able to design a tax reform that legions of well-heeled tax attorneys and accountants won’t be able to get around? The answer is absolutely not. At best, Congress would be left to play a useless and ceaseless game of whack-a-loophole every time a new one was exploited.

And even if it did miraculously succeed, it would be a hollow victory. Companies that have been unable to sufficiently avoid US corporate tax laws have simply fled the country by reestablishing their headquarters in a more favorable jurisdiction. If high wealth individuals were faced with a similarly severe threat of massive taxation, chances are some of them would do the same.

A much better solution, from virtually any angle, is to try to reduce tax rates and simplify the tax codes. Reducing tax rates reduces the incentive for people to find elaborate tax avoidance methods. If someone has a choice between paying $1M in taxes or $800k to hire a slew of tax attorneys to create a potentially suspect tax strategy that gets around them, there’s a chance they will just pay the taxes. But the higher the tax rate is, the greater that differential becomes. Similarly, simplifying the tax code, would reduce the cost of compliance and further decrease the incentive to avoid taxes. If people really care about reducing tax avoidance, we should start by decreasing the incentives.

Summing Up
Without question, the Panama Papers will continue to reveal some more major names among the offshore clientele, and hopefully even lead to some political scandals in the US. But as we learn about the clients and hear the inevitable accusations of criminality or insufficient patriotism on account of avoiding taxes, we need to remember two things: most if not all of what they did is probably legal, efforts to make it illegal in the future will fail. The solution to this problem won’t come from increased threats or regulation; it will come from first understanding that which we all intuitively know to be true: incentives matter.

Legal Marijuana Cutting into Drug Cartel’s Business

New evidence has come out regarding the impact of legalized marijuana on the drug trade, and it’s good news for just about everyone–everyone except the Mexican drug cartels. Just two years after legal recreational marijuana sales began in Colorado and Washington in 2014 (Oregon and Alaska joined later), the Mexico marijuana industry is already feeling the pinch. Prices are down, quality is up, and the number of marijuana seizures at the US-Mexico border were at their lowest level in a decade in 2015.

This outcome may sound strange at first glance, but it’s precisely what economic principles would predict. To understand this, we first have to realize that marijuana prohibition isn’t actually a categorically bad thing for marijuana suppliers. Yes, it makes their business model illegal, but this is a mixed bag. On the one hand, it clearly raises the costs of their business, as they have to take various precautions to avoid getting caught. However, it also keeps out competition from legitimate businesses, making their product more scarce. This, in turn, allows them to charge higher prices. Additionally, the black market nature of the transactions would also allow the cartels to do more price discrimination than other businesses. Most customers won’t be able or willing to compare prices among a lot of different suppliers, and this also tends to give an upper-hand to the marijuana sellers.

There is also a demand-side effect here. Certainly, there are some people that will be unwilling to do pot precisely because it is illegal. But the dramatic growth in pot use in the US over time suggests that this deterrent effect is not nearly as strong as lawmakers might hope. (And note that the study in that link referred to 2012-2013, before the recreational legalization laws took effect.)

The net effect of the above rules is that production will shift to places with laws that either more relaxed or less well-enforced–or places where the local authorities can be readily bribed to look the other way. In other words, prohibition would tend to shift production to places like Mexico. And since the entire enterprise is already illegal and cannot use the court system to settle disputes, the most violent organizations will come to dominate the industry. Instead of driving their competition out based on superior quality or pricing, they drive them out with force. The customers suffer, but the businesses that do survive make a killing. (Sorry about that.)

When you legalize pot, the above effects are reversed. There’s no reason to import pot from Mexico to Oregon, if you can already purchase it locally. And as long as complying with the regulations is not too onerous, most people will make the calculation that it’s worth making your supply chain fully legal to avoid the risks of legal consequences. Just as important, the barriers to entry for new competitors get reduced dramatically. Once the exclusive province of (mostly) criminals and hippies, marijuana production has become a lucrative business enterprise for anyone to try their hand at. The result is more professional production practices and economies of scale that couldn’t be achieved by people that had to hide their operation from the authorities.

Best of all, legal businesses will compete on who can provide the best price and quality rather than who can engage in the most gratuitous violence.

Of course, there is a chance that one byproduct of cheap, high-quality marijuana is that it will lead more people to use the drug. But this is not a serious problem. Most of the problems associated with illicit drug use derive precisely from the fact that the drugs are illegal. Yes, some drug deals end in violence. But this is precisely because they can’t in court. Some illegal drugs are also highly addictive and harmful to one’s health. And we think of this addictive quality as driving people to take desperate, often violent measures, like theft or robbery, to get a fix. Fair enough, but cigarettes are also deeply addiciting. How many stories have you heard about a tobacco junkie trying to rob someone for his next packet? I’m guessing not many. Moreover, there’s a flourishing industry focused on producing over-the-counter treatments designed to help people get over their addiction to tobacco. People can buy them cheaply, discreetly, and without judgment. Meanwhile, if someone wants to get help for an addiction to illegal drugs, they have to begin by, in effect, acknowledging they are a criminal.

Drug prohibition is a clear example of how the cure can sometimes be worse than the disease. And it doesn’t achieve its stated purpose anyways. At least in the case of marijuana, demand has been growing not shrinking in recent years. Making something illegal does not make it unwanted. So even if we did want to impose our arbitrary definition of morality on the rest of America and keep marijuana illegal, the reality of human nature would ensure our failure–certainly on pot, and probably on just about every other vice as well.

There are many compelling arguments against drug prohibition. Libertarians would correctly describe marijuana sales or usage as the epitome of a victimless crime, and suggest we shouldn’t make laws against behavior that does not infringe on anyone else’s rights. Many others would note the racially disproportionate nature of drug law enforcement, and might reasonably argue that the institutional racism built into the drug war is enough to justify its repeal.

But even if you don’t find these moral arguments compelling, economics and pragmatism should still convince us all to favor legalization. The relevant question here is not whether we think using marijuana (or other drugs) is a good idea; it will be used regardless. So the real question is whether we would prefer the drug trade to benefit enormously violent criminal organizations or nonviolent, tax-paying businesses. I’ll let you answer that for yourself.

In short, this new evidence is exactly in line with what economists and libertarians would have predicted all along. The end of the War on Drugs will also be the end of the drug cartels. Let us hope it comes soon.