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

  1. This first suggestion actually comes in two parts: The Texas National Security Review hosted two policy roundtables. “The Future of Conservative Foreign Policy” includes essays from Elliott Abrams, my colleague Emma Ashford, John Fonte, Henry R. Nau, Nadia Schadlow, Kelley Beaucar Vlahos, and Dov S. Zakheim. “The Future of Progressive Foreign Policy” includes essays from Heather Hurlburt, Adam Mount, Loren DeJonge Schulman, and Thomas Wright. If you’re looking to hit the highlights, I really recommend Emma Ashford’s contribution (of course), as well as Adam Mount’s and Heather Hurlburt’s. 
  2. If you’re interested in the conflict and Yemen, check out this interactive website, “Visualizing Yemen’s Invisible War,” that provides both narrative and data on the war. 
  3. Trump’s Push to Boost Lethal Drone Exports Reaps Few Rewards,” Lara Seligman. It turns out the Department of Defense and the U.S. Air Force aren’t completely sold on President Trump’s idea to sell advanced drone technology worldwide. Fascinating.

Writing in National Review, Charles C.W. Cooke decries the pharaonic spectacle of the modern presidential funeral. “Whether he was a great man or a poor one, George H. W. Bush was a public employee.” In order to honor his passing, Cooke asks, do we really need to shut down the stock market, postal service, and much of the nation’s capital for a national day of mourning? The whole business marks “another step toward the fetishization of an executive branch whose role is supposed to be more bureaucratic than spiritual.” I’m glad he said it first, but he’s absolutely right.

Our first president, ever conscious of the precedents he could set, didn’t want an elaborate state funeral. “It is my express desire that my Corpse may be Interred in a private manner, without parade, or funeral Oration,” Washington declared in his will. 

You’ve got to respect that—but, of course, we didn’t. Instead, “there was a massive public funeral at Mount Vernon,” Brady Carlson recounts in his 2016 book Dead Presidents, with a parade organized by Washington’s Masonic lodge, including “musicians, clergy, troops, and a riderless horse, a military tradition reportedly dating back to the age of Genghis Khan”—along with funeral orations by four ministers, topped off with “three general discharges of infantry, the cavalry, and eleven pieces of artillery, which lined the banks of the Potomac.”

The passing of the ninth U.S. president, William Henry Harrison, the first to die in office, set more precedents still. The interminable inaugural address that supposedly killed him featured Whiggish professions of deference to the legislature and the people–the president as a modest “accountable agent, not the principal; the servant, not the master.” Yet, according to the White House Historical Association, ‘the 30-day ceremonials surrounding the death of Harrison were modeled after royal funerals.” “There were bells, cannons, and funeral dirges,” Carlson writes, the White House was draped in black as “the late president and his casket rode in a black and white carriage pulled by six white horses, escorted by a pallbearer for each of the country’s twenty-six states and held up on a raised dais so the ten thousand people who turned up could see.” 

We fought a revolution to rid ourselves of kings, but, ironically enough, in the mother country, the sendoff for a former head of government tends to be decidedly less regal. The last British Prime Minister to get a state funeral was Winston Churchill. The pomp surrounding Margaret Thatcher’s 2013 funeral blurred the lines, a development the Telegraph’s Peter Oborne condemned as a “constitutional innovation… foolish and wrong”: 

Our constitution is defined by a rigorous separation between the head of state (the monarch) and the head of government (the prime minister). This marks us out from other countries, such as the United States of America, where the head of state and chief executive are merged in one person. As Anthony Sampson wrote in the Anatomy of Britain, the advantage of the British system is that “the head of state could represent the nation with all its traditional pomp and splendour, while the head of government appeared in a more workaday role”

Still, the funerals of other recent prime ministers have tended to respect that distinction, typically featuring no more pageantry than might be accorded any prominent private citizen.  

In America, by contrast, presidents are legally entitled to state funerals, whose details are meticulously prescribed in the 133-page Army Pamphlet 1-1. “Regulations say up to four thousand military and civilian support personnel can take part in state funeral services …. And typically the sitting president announces government offices will close for the day of the funeral.” 

The president described in the Federalist was to have “no particle of spiritual jurisdiction.” Yet there’s an unsettling, quasi-mystical orientation toward government at work in much of the ritual. While lying in state in the Capitol Rotunda, the president’s body is placed atop the Lincoln Catafalque: the funeral bier constructed for our 16th president–one of the holy relics of the American civil religion. Above him hangs the cathedral-like ceiling, which features the fresco “The Apotheosis of Washington,” painted by Constantino Brumidi in 1865. It depicts the first president “sitting amongst the heavens in an exalted manner, or in literal terms, ascending and becoming a god.” I generally find the so-called “New Atheists” insufferable, but we could use a little of their militant impiety when it comes to our presidential cult.  

George H.W. Bush’s funeral arrangements have been comparatively modest as these things go. So were Gerald Ford’s back in 2007. The man who proclaimed himself “a Ford, not a Lincoln” and toasted his own English muffins was praised once again for his humility because he skipped the horse-drawn processional. Instead, his 587-page funeral plan included a motorcade tour of Alexandria with stops at the World War II and Lincoln memorials and a military “missing man” flyover by 21 F-15E Strike Eagles at the burial in Grand Rapids.

The modern presidency, Cooke observes, smacks more of Caesar than of Coolidge. Here, as elsewhere, we could profit from Silent Cal’s example. “Coolidge’s will,” Carlson notes, “was just twenty-three words long, and his funeral ceremony lasted a mere five minutes.” In death, as in life, he was not a nuisance. 

The most popular piece of legislation in the House of Representatives—with 329 cosponsors—would phase out and eliminate the per-country limits for employment-based green cards, while doubling the limits for family-based immigrants. These per-country limits discriminate against nationals of countries with high demand for green cards. For employment-based immigrants, immigrants from India receiving green cards in 2018 waited a decade, Chinese immigrants waited 3 years, while everyone else waited less than a year.

It is fundamentally unfair to make equally qualified employees of U.S. businesses wait ten times as long based on their birthplace. Rather than selecting employees solely on who has the best resume, employers now also have to consider who has the right home country. Moreover, the wait times distort the market and keep immigrants with more experience and higher wage offers from receiving green cards. My analysis earlier this year showed that the per-country limits artificially suppress the average wage offer for most employer-sponsored immigrants by $11,592.

In August, however, Director of U.S. Citizenship and Immigration Services Francis Cissna who runs the legal immigration bureaucracy for the Trump administration appeared to criticize the change for undermining the “diversity” of immigrants. “It would indeed ameliorate the situation of Indian nationals,” he said. “But it would also have other effects on the diversity or flow more generally – and national representation amongst the employment-based immigration pool.”

“Diversity” is, indeed, the main argument for the country limits. But even assuming that the government has a legitimate interest in promoting diversity, is the argument even valid? Of course, the per-country limits result in diversity of, as Cissna put it, “national representation.” But using “nations” is a poor proxy for individual diversity. Compare immigrants from the European Union and Indians in the EB-2 green card lines for employees of U.S. businesses with master’s degrees, the line where nearly 70 percent of the employer-sponsored Indians are waiting.

Table: Comparison of India and European EB-2 Immigration

  India European Union Nations

1

28

Population

1,324,171,354

509,678,144

EB-2 Country Cap(s)

2,802

78,456

EB-2 Actual Issuances

2,879

5,239

Percent of Cap Used

100%

7%

Wait for a Green Card

10 Years

0 Years

Backlog of Applicants

433,368

0

Sources: Annual Report of the Visa Office; Visa Bulletin

The European Union has a collective country EB-2 quota 28 times higher than the quota for India because it is made up of 28 individual nations. It ends up using just 7 percent of that quota, but this is still almost twice as many green cards as all of India in the EB-2 category. This disparity exists even though the European Union has only 40 percent as many people as India. This seems unfair, but we’re told that this is alright because the EU—composed of 28 countries—is much more diverse than India.

Yet India has virtually the same number of official languages as the EU (22 v. 24). It has at least six major religions—Hinduism, Islam, Christianity, Sikhism, Buddhism, and Jainism—while the EU only has three—Christianity, Judaism, and Islam. Indian immigrants in America reflect this religious diversity as well: only half are Hindu, while the rest are Muslims, Sikhs, Jains, Christians, or others. The number of ethnic groups in each location is difficult to pin down, but India and the EU appear to have similar levels of ethnic diversity. Wikipedia lists 22 Indo-Aryan peoples, rivalling the roughly 28 nationalities in the EU. India is, of course, a geographically diverse area as well.

The fact is that nationality is not a very good approximation of individual diversity. On this point, Director Cissna’s statements were not strictly false, but they are misleading. Even if we grant that the EU is more diverse, is it so much more so that it justifies giving Indians 4 percent as many green cards? The only important legal difference is that India is considered a single state, while the EU, though it has a governing body, is still considered 28 different states, so it receives 28 times as many potential green card slots.

Of course, I find the entire idea that the government should attempt to micromanage the religious, linguistic, ethnic, or racial diversity of the United States ridiculous. The government has no legitimate interest in trying to keep out immigrants on these grounds or making them wait longer because of them. If it were proposed to discriminate directly on these grounds, that would be clear to anyone, but only because we disguise the discrimination as diversity in “national representation,” people excuse it.

Diversity should occur naturally as Americans—acting as family members, employers, or consumers—freely interact with people around the world. The government should not tip the scales to make the country more diverse or less diverse than it would otherwise be. In any case, employer-sponsored green cards are supposed to serve economic goals, not social engineering.

We know that the country caps, which started in 1924, did grow out of the Chinese Exclusion Act of 1882 and the Asiatic Bar Zone of 1917, which were explicitly efforts at racial engineering. Even when Congress reformed the country limits in 1965 to make them equal across countries, supporters of the legislation reassured  skeptics that America would not be flooded “hordes of Africans and Asians.” The reason Congress didn’t simply get rid of the caps was explicitly to keep down Asian and African immigration. The arguments have changed, but the end result is the same, and this type of government intervention is as inappropriate now as it was then.

In his comments, Director Cissna also recognized some of the problems that long waits can create, as employees are stuck with their employers and can be taken advantage of, and that the wait times are unfair toward Indians. But he’s wrong to emphasize the loss in diversity. Indians are a very diverse group themselves, and even if they weren’t, it is none of the government’s business anyway.

Ryan Bourne and I proposed that America adopt a Canadian-British innovation to encourage more personal savings. Those nations created accounts that are like supercharged Roth IRAs, and which have revolutionized savings for families at all income levels.

Republicans in Congress adopted the idea and included USAs in their Tax Reform 2.0 package, which passed the House in September. Individuals would deposit after-tax funds in the accounts, and then the earnings would grow tax-free and could be withdrawn at any time for any reason with no taxes or penalties. USAs would allow Americans to save without the restrictions and complexity of other vehicles.

The Heritage Foundation has released an excellent new analysis of USAs by Adam Michel. Michel discusses how USAs would boost personal savings, simplify taxes, and help lower-income families. He discusses the success of USA-style accounts in Canada and Britain, and he also notes that South Africa has introduced the accounts.   

Michel concludes that USAs would “help families build their own financial security through a single, simple, and flexible account.” Family financial security should be a bipartisan goal, and so USAs could be something that the parties work on together next year in a split Congress.

More reading on USAs:

https://object.cato.org/sites/cato.org/files/pubs/pdf/tbb-77-update-2.pdf

https://www.cato.org/blog/universal-savings-accounts-can-fix-401k-leakage

https://www.cato.org/blog/universal-savings-accounts-usas-introduced

http://thefederalist.com/2015/05/11/a-tax-reform-we-can-all-support/

https://www.cato.org/blog/universal-savings-accounts-usas

Ilya Somin offers a typically thoughtful case for why a second Brexit referendum would not be a betrayal of the 2016 result. His argument, as I read it, is this: Theresa May’s likely defeat on her dreadful proposed Withdrawal Agreement grants an opportunity to reassess the wisdom of leaving the EU. Given a referendum was the means of making the decision to leave, a referendum is a perfectly legitimate mechanism to test whether the public still wants to. Ergo, deciding to ultimately Remain in a second referendum would not betray the result of the first vote.

I disagree.

A second referendum so soon would violate the U.K.’s convention of having one-off constitutional referendums, the results of which are respected for a generation. The U.K. has had major referendums in the past on remaining within the European Economic Community (1975), changing the general election voting system (2011), deciding whether Northern Ireland should join the Republic of Ireland (1973), and Scottish Independence (2014). The results of all these constitutional decisions have been implemented without discussion of the need to check again whether people really meant to vote as they did. In the case of the EU, the gap between the EEC vote and 2016 was 41 years.

That is why, in the government leaflet that was sent to all households during the referendum campaign urging people to vote remain, the government promised to implement the result. It told the public “This is your decision. The Government will implement what you decide.” The implication was clear: the vote would be respected and delivered upon. And the result was clear: people wanted to leave the EU. Reassessing now would be an explicit breach of that promise.

For Brexit has not been delivered. We are still in the Article 50 process, and, as it stands, the U.K. will indeed leave on March 29th 2019, with or without a deal (unless Parliament intervenes). One cannot possible say “we tried Brexit and decided it wasn’t for us” when you haven’t even left. So if the second referendum did end up with a vote to Remain, and that was upheld, it would send a clear message to the public: only results that go a certain way are respected. Such a situation would fundamentally and irrevocably undermine faith in Britain’s democratic processes.

There’s another point. Referenda are relatively rare in Britain, but they usually arise because of an overwhelming public appetite or mandate for them, being rubber-stamped in some local or national election manifesto. No such offerings were made by either major party at the last election.

Polling furthermore suggests the public opposes a second referendum too, as do the leaders of both major political parties. Far from a so-called “People’s Vote” (as if the last vote was for llamas or something) it is the unreconciled Remainer MPs in Parliament who are pushing for a re-run. A likely reaction to a ballot forced on an unwilling public would therefore be mass boycotts and questionable legitimacy.

Indeed, it is difficult to think of what more the British public could do to show they really mean business on leaving the EU. UKIP and an increasingly Eurosceptic Conservative party won over 50 percent of the vote in a proportional system in the 2014 European elections. A Conservative party promising a referendum won an outright majority in 2015. Both the Conservative and Labour parties promised to respect the result and leave the EU’s institutions in their 2017 manifesto. The one party that pushed to reverse the result, the Liberal Democrats, did pathetically in the 2017 election.

I understand that these results were not what many wanted - especially those who see Brexit as a blow to liberty. It is peculiar to me having lived in the EU to hear it talked about as if it some pinnacle of libertarianism that no sovereign state could better. But in judging Brexit by the near-term loss of free movement or the problems associated in the short-term with no deal, some libertarians make a fundamental category error: confusing a constitutional decision with a policy bundle.

The referendum question did not ask what the trade relationship with the EU should be, or what immigration policy might be after Brexit, or whether the UK wanted a withdrawal deal or not. It was a constitutional instruction that the U.K. wanted to leave the EU’s institutions. All that other stuff is ordinary policy decision-making within the domain of a sovereign polity, and Britain will as pro- or anti-liberty as its people and politicians decide. 

But the referendum was about self-determination, and which government entities create the laws by which people are governed. To reject it or run it again would be like requesting whether the U.S. should rejoin the British empire every time a President adopts a set of policies those in Congress do not like.

Of course, at some stage the UK might want to revisit its constitutional decision. Its Parliamentarians may even agree with Ilya on the desirability of another vote before Brexit has happened. But that does not negate the fact that ignoring the first vote through not delivering on it (rowing back on a promise to do so), while defying conventions on the frequency and process by which referendums are delivered, would itself represent a betrayal of the democratic mandate.ᐧ

We learned last week that the 2017 drug overdose numbers reported by the US Centers for Disease Control and Prevention clearly show most opioid-related deaths are due to illicit fentanyl and heroin, while deaths due to prescription opioids have stabilized, continuing a steady trend for the past several years. I’ve encouraged using the term “Fentanyl Crisis” rather than “Opioid Crisis” to describe the situation, because it more accurately points to its cause—nonmedical users accessing drugs in the dangerous black market fueled by drug prohibition—hoping this will redirect attention and lead to reforms that are more likely to succeed. But the media and policymakers remain unshakably committed to the idea that the overdose crisis is the product of greedy pharmaceutical companies manipulating gullible and poorly-trained doctors into over-prescribing opioids for patients in pain and ensnaring them in the nightmare of addiction.

As a result, most of the focus has been on pressing health care practitioners to decrease their prescribing, imposing guidelines and ceilings on daily dosages that may be prescribed, and creating surveillance boards to enforce these parameters. These guidelines are not evidence-based, as Food and Drug Administration Commissioner Scott Gottlieb seems to realize, and have led to the abrupt tapering of chronic pain patients off of their medication, making many suffer desperately. An open letter by distinguished pain management experts appeared last week in the journal Pain Medicine criticizing current policies for lacking a basis in scientific evidence and generating a “large-scale humanitarian issue.” 

Current policy has brought high-dose prescriptions down 41 percent between 2010 and 2016, another 16.1 percent in 2017, and another 12 percent this year. Yet overdose deaths continue to mount year after year, up another 9.6 percent in 2017.

One might expect the obvious prevalence of heroin and illicit fentanyl among overdose deaths would make policymakers reconsider the relationship between opioid prescribing, nonmedical use, and overdose deaths. The data certainly support viewing the overdose crisis as an unintended consequence of drug prohibition: nonmedical users preferred to use diverted prescription opioids and, as supplies became tougher to come by in recent years, the efficient black market responded by filling the void with cheaper and more dangerous heroin and fentanyl.

Yet many defenders of the status quo believe the population of nonmedical users mostly derives from patients who were inappropriately prescribed opioids for a painful condition, e.g., a high school athlete prescribed opioids for a broken leg who becomes transformed into a drug addict. If that is the case, then reducing opioid prescribing in conjunction with better drug interdiction and expansion of drug rehab facilities should gradually eradicate the problem.  But the data do not support this. Undoubtedly, some patients, once exposed to an opioid for the treatment of a painful condition, enjoy the euphoria and “buzz,” and long to have that experience again. When presented with an opportunity to re-experience that drug nonmedically say, at a party, they happily indulge. But that is an exception, not the typical case.

The National Survey on Drug Use and Health has repeatedly found that less that 25 percent of nonmedical users of prescription opioids obtain their opioids from a doctor. Three-quarters get them from a friend, a relative, or a dealer. And a study of more than 27,000 OxyContin addicts entering rehab between 2004 and 2008 found 78 percent said the drug was never prescribed for them for any medical reason, 86 percent took the pills to get “high” or get a “buzz”, and 78 percent had a history of prior treatment for substance abuse disorder. 

But if that isn’t enough to create doubt among those who still adhere to the theory that the population of nonmedical users is largely made up of former patients, then let’s return to the National Survey on Drug Use and Health. Page 7 of the report examines “past month nonmedical use of pain relievers among adults aged 12 or older” and finds that rate essentially flat from the years 2002 to 2014. Page 26 of the same survey reports on “pain reliever use disorder in the past year among adults aged 12 or older” from 2002 to 2014 and shows that rate to be flat as well over that time period. (For reasons that are unclear, the NSDUH stops reporting on those data points in subsequent years.) Meanwhile, the volume of opioids prescribed between 1999 and 2015 tripled. Tripling the number of opioids prescribed did not appear to affect the rate of nonmedical use or prescription opioid abuse disorder.

So why have drug overdose deaths shot up so much in recent years?

As a study from the University of Pittsburgh Medical Center examining CDC data going back to the 1970s recently revealed, “Death rates from drug overdoses in the U.S. have been on an exponential growth curve that began at least 15 years before the mid-1990s surge in opioid prescribing, suggesting that overdose death rates may continue along this same historical growth trajectory for years to come.” The study’s senior author went on to say:

The current epidemic of overdose deaths due to prescription opioids, heroin and fentanyl appears to be the most recent manifestation of a more fundamental, longer-term process…understanding the forces holding these multiple individual drug epidemics together in a tight upward exponential trajectory will be important in revealing the root causes of the epidemic, and this understanding could be crucial to prevention and intervention strategies.

The study’s lead author, Hawre Jalal, MD, Ph.D said:

There is no regular or predictable pattern to the overdose rates for any of these drugs. Cocaine overdose death rates curved down and up and down and back up over the past 20 years. Methadone deaths have been on a downturn since the mid-2000s. Prescription opioids have been on a fairly steady, steep climb. Heroin deaths shot up in 2010, followed in 2013 by synthetic opioids, such as fentanyl. Methamphetamine appears to be on the verge of its own dramatic climb. Nonetheless, when we plot the annual sum of all drug overdoses, we get a remarkably smooth, inexorable exponential curve.

An NBC News reporter summed up the study by stating: “It [the overdose crisis] started before the availability of synthetic opioids, and may have only a little to do with the prescribing habits of doctors or the pushy habits of drugmakers the team at the University of Pittsburgh found.”

And a 2017 Washington University study found that 33.3 percent of heroin addicts entering rehab in 2015 initiated nonmedical drug use with heroin, as opposed to 8.7 percent in 2005.

More and more people have been using licit and illicit drugs nonmedically since the late 1970s. Some may be self-medicating in response to anxiety, depression, alienation, despair. And people are taking greater risks with their drug choices. 

Policymakers and the media like simple explanations and solutions for complex problems, and the opioid overprescribing narrative fits the bill. But as H.L. Mencken said, “For every complex problem there is an answer that is clear, simple, and wrong.”

The root causes of the present-day overdose crisis are decades-long psychosocial/cultural trends intersecting with the lucrative opportunities offered by drug prohibition. Ending drug prohibition will not curb the growing tendency for people to use drugs nonmedically. But it will reduce much of the harm that results.

Various proposals for “central bank digital currency” (CBDC) have been under discussion for several years now. The central bank of Ecuador launched a digital currency in 2015 — and shut down the failed project three years later. A number of economists have addressed the topic.

What is a CBDC? It is a payment medium that would be denominated in the established fiat money unit, not in any new unit. There are two main models: (1) a digital token that, like traditional coins and currency notes, and like Bitcoin, passes peer-to-peer without going through the interbank clearing system, presumably validated by a distributed-ledger blockchain system; and (2) account balances that individuals and businesses can directly hold on the books of the central bank, retail versions of the balances that commercial banks presently hold there for interbank payments. The latter model is not really properly called a currency, being a deposit-transfer system, but it is put under the “digital currency” umbrella because it resembles fiat currency notes in being a liability of the central bank, and as such a “final” means of payment, and because transactions would settle nearly instantly on a single balance sheet.[1]

The debate over CBDCs was recently revived by the IMF’s Managing Director Christine Lagarde in a speech suggesting, rather tentatively, that central banks should consider issuing some kind of digital currency so as to keep up with the times. (Why on earth the IMF continues to exist, long after the demise of the Bretton Woods system that it was created to support, is a question for another time.)

Lagarde begins her speech with a potted history of money. Although she does not attribute the origin of money to the state, she suggests that the state helps to improve money. Once bank-issued money arose, “spearheaded by the Italian bankers and merchants of the Renaissance,” trust in the issuer became important. Thus: “Trust became essential—and the state became the guarantor of that trust, by offering liquidity backstops, and supervision.” The timeline matters here. In fact, Italian bankers began providing money payments via transferable account balances some time before 1200 AD, whereas European states provided nothing in the way of “liquidity backstops, and supervision” until many centuries later. So state guarantees were not essential to the spread of bank-issued money historically. Nor was the popularity or safety of private banknotes, as issued by 17th century London goldsmiths, or by 18th and 19th-century Scottish or Canadian bankers, historically dependent on state guarantees.

Lagarde rightly notes that “the fintech revolution … questions the role of the state in providing money.” She points to the recent proliferation of digital private payment providers “from AliPay and WeChat in China, to PayTM in India, to M-Pesa in Kenya” and namechecks “cryptocurrencies such as Bitcoin, Ethereum, and Ripple.” She expresses her own position on the desirable monetary role of the state in surprisingly tentative language: “Some suggest the state should back down. Still, I am not entirely convinced. … I believe we should consider the possibility to issue digital currency. There may be a role for the state to supply money to the digital economy.”

On the plus side of the CBDC ledger, Lagarde proposes that a central bank digital currency “could satisfy public policy goals, such as (i) financial inclusion, and (ii) security and consumer protection; and to provide what the private sector cannot: (iii) privacy in payments.” Wait, what? It is of course laughable that a government would itself provide greater privacy in payments than it allows private institutions to provide. Could this have been a joke intended to lighten the mood of the speech? The private sector can in fact provide as much financial privacy as customers desire, as numbered Swiss bank accounts once did, and as “privacycoin” crypto projects today remind us. Lack of privacy stems from government restrictions, not from private-sector inability.

Lagarde says that “There may be scope for governments to encourage private sector solutions” to the problem of financial inclusion “by providing funding, or improving infrastructure.” More effective ways to encourage private sector solutions to banking the unbanked would be (a) deregulation, especially not requiring permission for innovations in mobile and other payment platforms, (b) guarantees not to interfere in private payment platforms once launched, and (c) guarantees on the privacy of private sector accounts from government surveillance, which might help to attract some of the warily unbanked to deposit use.

To her credit, Lagarde recognizes that people value the privacy provided by currency: “Cash, of course, allows for anonymous payments. We reach for cash to protect our privacy for legitimate reasons: to avoid exposure to hacking and customer profiling, for instance.” But she is vague at best, and dissembling at worst, on how deposits on the central bank’s books would insure privacy. She promises that customer identities “would not be disclosed to third parties or governments unless required by law,” but adds: “Anti-money laundering and terrorist financing controls would nevertheless run in the background. If a suspicion arose it would be possible to lift the veil of anonymity and investigate.” Would any suspicion by a policeman or tax collector be enough to lift the veil? If so, then the CBDC would be no more private than ordinary current-day bank deposits. J. P. Koning not unfairly characterizes what Lagarde offers as a “Faustian bargain”: “The state will issue digital currency that protects us from information snoops in the private sector, on the condition that it gets a back door.”

In the US and Europe, at least, banks today are required to notify regulators of large or “suspicious” deposit and withdrawal activities, and are expected to surrender account information to the authorities on a written request, without a court order or a search warrant.[2] It is hard to imagine that any government would instruct or allow its central bank to create accounts with greater privacy protection against the national government than commercial bank accounts have.

In the background to Lagarde’s speech is a November 2018 IMF staff discussion note on CBDC that she cites. [3] The note itself does not offer a brief for CBDC, but rather enumerates plusses and minuses. Comparing CBDC to cash, demand deposits, and non-bank private digital payment media, the note’s authors find that “CBDC would not strictly dominate any of these alternative forms of money.”

The staff discussion note emphasizes the hope of Keynesian macroeconomists that “interest-bearing CBDC would eliminate the effective lower bound on interest rate policy,” but points out that it would have this effect “only with constraints on the use of cash.” It is the abolition of easily stored cash that allows a central bank to impose negative interest rates, not the introduction of CBDC in either form.

The IMF note acknowledges a case for stronger payments privacy:

There are legitimate reasons people may prefer at least some degree of anonymity—potentially when it comes to everyone except the government, and regarding the government unless a court order unlocks encrypted transaction information. It is a way to avoid customer profiling—commercial use of personal information, for example, to charge higher mortgage rates to people who purchase alcohol. Another advantage of anonymity is limiting exposure to hacking. Moreover, anonymity is often associated with privacy—widely recognized as a human right (as stated in the Universal Declaration of Human Rights [Article 12] and elsewhere).

The note also observes that a central bank offering retail deposits “could increase risks to financial intermediation. It would raise funding costs for deposit-taking institutions.”

Just as importantly on the minus side, although not mentioned in either Lagarde’s speech or the IMF staff note, is that diverting deposits from commercial banks to the central bank will shrink the funding for the economic-growth-enhancing small business loans that commercial banks provide, in favor of central bank holdings of sovereign debts and government-favored private securities (for the Fed at present, mortgage-backed securities).[4] The IMF authors of the note observe that in a world where CBDC accounts replace both currency and ordinary checking deposits “only the commercial bank could create money.” Correspondingly, in a world of CBDC alone, only the central bank would direct the loanable funds marshalled by checking deposits.

[1] Bordo and Levin (2017) have suggested that private commercial banks should provide the front end for access to the central bank’s balance sheet, because they are better at customer service. Designated “digital cash” account balances at commercial banks would differ from ordinary account balances only in that balance transfers between accounts would be nearly instantly settled. Near-instant settlement would be enabled by the commercial banks holding “segregated reserve accounts” at the central bank, linked to their customers digital cash accounts, and presumably backed by high or even 100-percent, reserves. Under their proposal commercial banks would act as so many central bank branch agencies. Their proposed system would have all the same drawbacks of outright CBDC accounts discussed herein.

[2] Under the Right to Financial Privacy Act of 1978, a bank or other financial institution is protected from customer lawsuits for disclosing customer account information to a US federal agency (BATF, DEA, FBI, IRS, etc.) that subpoenas it in connection with suspected illegal activity. The agency is required only to notify an individual customer (but not a business customer) of the request, giving the customer ten days to seek legal redress. In court the agency does not need to meet the Fourth Amendment standard of probable cause. Under later statutes including the Patriot Act, notice is not required where the individual is suspected of drug trafficking, espionage, or terrorism. In a recent law review article, W. F. McElroy notes that today “the privacy of financial records from unwarranted government intrusion is under siege.”

[3] Tommaso Mancini-Griffoli, Maria Soledad Martinez Peria, Itai Agur, Anil Ari, John Kiff, Adina Popescu, and Celine Rochon, “Casting Light on Central Bank Digital Currency,” IMF Staff Discussion Note (November 2018).

[4] For theory and evidence on this point see Lastrapes and Selgin (2012).

[Cross-posted from Alt-M.org]

I have previously described in detail the reforms that America’s immigration system needs. In this post, I want to highlight what I think the general principles behind those reforms should be. Three basic principles should guide immigration reform: openness, equal treatment, and flexibility. Reform should make America more open to immigrants, should treat all immigrants equally as individuals, and should be flexible enough to respond automatically to changes in the economy or society.

1) Openness to new immigrants. Reform should make it easier to immigrate legally, not more difficult. This pillar protects the rights of Americans to associate, contract, and trade with people born in other countries. These people might be their family members, friends, employees, or employers, but ultimately, restrictions on immigration are restriction on the liberty of Americans. Reform should recognize the presumptive right—overcome only for very good reasons—of Americans to freely interact with foreigners on U.S. soil.

Of course, the freedom to associate across borders also benefits Americans—even those who don’t participate directly with the immigration system—by expanding the pool of employees, consumers, investors, and entrepreneurs who produce goods and provide services that improve the quality of life of all Americans. The social capital that immigrants bring with them makes America a stronger, safer country. Immigrants marry, have children, and participate in religious groups at higher rates than the U.S.-born population, and it is precisely for these reasons that they have much lower rates of criminality.

As a practical matter, there are many ways to move toward a more open immigration system. My list of reforms gives specific examples. But here is a general blueprint: grant indefinite work visas to anyone with a job in the United States, confer legal permanent residency on anyone who works for 5 years, and remove the quotas on green cards for immediate family members—adult children and siblings of U.S. citizens as well as spouses and minor children of legal permanent residents.

2) Equal treatment for new immigrants. America has a long legacy of discriminating against certain types of immigrants, from the Chinese Exclusion Act to the Asiatic Bar Zone to the National Origins Quota System. Unfortunately, this legacy is not entirely purged from the statute books. Today, the government still attempts to micromanage the ethnic makeup of legal immigrants by limiting nationals of any particular country to no more than 7 percent of the total green cards. These “per-country caps” discriminate against immigrants from high-demand countries like India, China, and Mexico, while discriminating in favor of those from less populous countries like those in Europe. The caps are not only an affront to the fundamental principles of fairness but they are economically harmful, forcing immigrants with more experience and higher wage offers to wait longer than others.

Last year, President Trump introduced more discrimination into the system by banning all entries from six countries. This effectively imposes a country quota of zero for Iran, Libya, Syria, Somalia, and Yemen. This means that even if an Iranian or Syrian is eligible for a green card under the normal channels, they would still be barred from immigrating. The president previously labeled this an extension of his “Muslim ban” concept. In order to end this discrimination, and prevent it from returning, Congress needs to repeal the per-country limits and bar the president from reimposing similar limitations without explicit authority from Congress.

3) Flexibility to changes in the economy and society. Congress has not updated America’s immigration system in 28 years. During that time, America’s population has grown by a third, and its economy has doubled. Yet the immigration quotas and categories have not changed at all. In order to prevent the immigration system from becoming antiquated, it’s not enough for Congress to merely update it based on what would be best for today—it needs to build a system that is flexible enough to adapt to changes that will happen in the future. Otherwise, the new system will become outdated soon after it is implemented.

Ideally, Congress would end arbitrary quotas on immigration. The government should impose qualitative, not quantitative limits, on immigration. Hard numerical limits are the most rigidity-inducing aspect of the legal immigration system and cause the most harm, but if Congress does maintain quotas, it should go beyond merely updating them. It should link family-based quotas to population growth (or the number of families in the United States) and link employment-based quotas to economic growth, growing as the economy grows.

This would prevent the numbers of immigrants from becoming outdated, but the categories and regulations under which those immigrants enter also fall out of line with the needs of the economy. Consider the fact that there are no programs for lesser-skilled temporary workers who want to work in year-round jobs because Congress in 1990 believed that employers only needed seasonal workers. While Congress can plug the holes as best it can, it should also grant the ability to states to sponsor immigrants based on whatever criteria that the state wants. Canada already has this type of immigration program for its provinces. This would allow states to essentially invent new green card categories, even while the numbers remain largely the same.

With these principles in mind, Congress can construct an immigration system that will provide for America’s economy and society long into the 21st century.

Many macreconomists believe that the Fed needs to keep raising rates now so it can lower them in future to combat a recession.  See, for example, my colleague Martin Feldstein’s recent op-ed in the WSJ.

I have always been puzzled by this argument; it seems to assume an asymmetry in the effects of raising versus lowering rates. 

Specifically, if raising rates now will hurt the economy just as much as lowering them later will help, why is the net effect beneficial? To a first approximation, one might expect a symmetric effect, which makes the standard case for higher rates now unconvincing.

In an end-run around Congress, the Trump administration has proposed a revision to the H-1B work visa program, which provides temporary visas to skilled foreign workers. The Department of Homeland Security (DHS) states that it is issuing the visas pursuant to President Trump’s “Buy American and Hire American” Executive Order, which vaguely requires agencies “to protect the interests of United States workers in the administration of our immigration system.”

One important aspect of this new 139-page proposal flatly contradicts the scheme that Congress created, and for this reason, it may never take effect. The stated goal of this particular portion of the regulation is to “prioritize petitions filed on behalf of beneficiaries who have attained a master’s or higher degree” (p. 44), but the specific changes that it makes contradict the intent of Congress and would have—in earlier years—reduce the total number of H-1B visas. 

Under current law, H-1B visas have a quota of 65,000 (8 U.S.C. 1184(g)(1)(A)(vii)). However, there are several categories of H-1Bs who are exempt from this quota—college professors, nonprofit researchers, and those with a master’s degree or higher for a U.S. university (8 U.S.C. 1184(g)(5)). The master’s degree holder exemption, however, has a separate cap of 20,000. Once the number of visas for master’s degree holders reaches 20,000, any additional count against the overall cap (8 U.S.C. 1184(g)(5)(C)).

DHS’s new revision to the H-1B program, however, would first count master’s degree holders against the overall H-1B cap of 65,000 and only then count them against the master’s exemption, the opposite of what the law requires. DHS comments (pp. 10-11):

Changing the order in which USCIS selects beneficiaries under these separate allocations will likely increase the total number of petitions selected under the regular cap for H-1B beneficiaries who possess a master’s or higher degree from a U.S. institution of higher education each fiscal year … Conversely, this process will likely decrease the total number of petitions selected for H-1B beneficiaries with less than a master’s degree …

In recent years, the H-1B cap is filled immediately, so DHS puts all the applications in two lotteries. First, the master’s degree holders are selected, and then after that, any master’s degree holders who aren’t selected are placed in the second lottery. Inverting the order increases the probability of master’s degree holders being selected in the initial allocation.

The problem here is twofold. First, the statute clearly prohibits counting master’s degree holders against the overall H-1B cap until after the master’s exemption is filled. To quote the statute (8 U.S.C. 1184(g)(5)(C)) directly:

(5) The numerical limitations contained in paragraph (1)(A) shall not apply to any nonimmigrant alien … who … (C) has earned a master’s or higher degree from a United States institution of higher education (as defined in section 1001(a) of title 20), until the number of aliens who are exempted from such numerical limitation during such year exceeds 20,000. (Emphasis added)

DHS cannot legally count master’s degree holders against the overall H-1B quota before the master’s exemption is filled. In other words, Congress did not want to increase the probability of master’s degree holders being selected in the overall H-1B cap. It just wanted to provide a guarantee of 20,000 visas for master’s degree holders. Not only does DHS not address the statutory issue here, it never even quotes the statute directly. On this point, it merely states (p. 11):

DHS believes that amending its regulations in this manner would increase the chances that beneficiaries with a master’s degree or higher from a U.S. institution of higher education would be selected under the H-1B regular cap, which is generally consistent with congressional intent in enacting section 214(g)(5)(C) to prioritize these workers … (Emphasis added)

I find the use of the word “generally” here to be a telling admission. Either this change is consistent with congressional intent or it is not. It cannot be “generally” consistent. “Generally” implies that in some respects, it may not be consistent.  Whoever chose to include that word must have known that it was not, in every respect, consistent with the law.

The second problem with this change is that it is a clever effort to decrease H-1B admissions. DHS writes (p. 26):

USCIS is proposing to count all registrations [including master’s degree holders] toward the H-1B regular cap projections first, even in years when a random selection process [i.e. a lottery] at the end of the initial registration period may not be necessary. (Emphasis added)

In years where the cap is not immediately filled, the new scheme could thwart the intent of Congress in another way: by reducing the overall number of visas available. Suppose 20,000 master’s degree holders apply during a year, while 65,000 bachelor’s degree holders apply. There should be enough visas for everyone under Congress’s scheme. But under DHS’s regulation, the 20,000 master’s degree holders would be counting against the 65,000 cap throughout the year. Once that’s hit, then there’s maybe 5,000 master’s degree holders left and 15,000 bachelor’s degree holders. But only the 5,000 can get visas under the master’s exemption, resulting in a 15,000 visa cut to the H-1B program. Something like this situation would probably have occurred during the FY 2011 allocation, which took 10 months to fill.

DHS never even acknowledges this issue, implying that the change could never matter to the overall numbers. The Trump administration has once again disguised a potential cut to legal immigration as a “merit-based” immigration reform, and it has done so in violation of the law. While the president has thwarted the plain meaning of other statutes in the past in order to cut immigration, the statute is so clear that he might just lose this time.

In March of this year, Forbes published an article with the following lede:

The Economist has called them “an addiction to corporate cocaine.” Reuters has called them “self-cannibalization.” The Financial Times has called them “an overwhelming conflict of interest.” In an article that won the HBR McKinsey Award for the best article of the year, Harvard Business Review has called them “stock price manipulation.” These influential journals make a powerful case that wholesale stock buybacks are a bad idea—bad economically, bad financially, bad socially, bad legally and bad morally.

There is no shortage of hand-wringing over “excessive” stock buybacks, either in the academic literature or in the popular media. Such criticisms are misguided in two crucial ways. Methodologically, they overstate the scale of the problem (such as it is) by observing gross payouts instead of payouts net of issuance, and by neglecting the extent to which firms are simply substituting low-interest debt for equity financing. Second, while accusing shareholders of myopia and executives of cupidity, such critics are not taking a properly panoptic view of the function that buybacks serve in the broader equity ecosystem.    

I.

A 2018 report by the Roosevelt Institute cites a statistic that lies at the heart of alarmism over the size and scale of stock buybacks:

Over the last decade-and-a-half, firms have sent 94 percent of corporate profits out to shareholders, in the form of buybacks, as well as dividends, leaving companies to argue that there is little available for employee compensation or investment.[1]

But other recent research dramatically qualifies such despair. Harvard researchers Jesse Fried and Charles Wang offer a persuasive rejoinder to concerns over the scale of equity outlays:

During 2007-2016, S&P 500 firms distributed to shareholders more than $4.2 trillion through stock buybacks and about $2.8 trillion through dividends. These cash outflows, totaling $7 trillion, represented 96% of these firms’ net income during that decade. But during this same period, S&P 500 firms absorbed, directly or indirectly, $3.3 trillion of equity capital from shareholders through share issuances. Net shareholder payouts from S&P 500 firms were therefore only about $3.7 trillion, or 50% of these firms’ net income.[2]

Moreover, this figure pertains only to those firms listed on the S&P 500, which are relatively mature, vs. publicly traded firms not listed on the index. When accounting for unlisted public firms, who are net importers of capital, the share of corporate income channeled into buybacks and dividends falls further, to 41%.[3] Yet net equity outlays don’t necessarily translate into a reduced cash position. Low-interest rates mean that firms can afford to reorient their balance sheets away from equity and toward debt financing. In fact, in the years 1989-2012, fully 42% of equity payouts were offset by a debt issuance that same year.[4] In a recent working paper, Mark Roe takes direct aim at this argument:

Low interest rates pushed corporate America to substitute low-interest debt for stock. Viewed as a capital structure decision, the double trend—more low-interest debt, less equity—fits the short-termist critique poorly. Overall, public firms have more cash, not less.[5]

Not only do public corporations retain more of their earnings than is indicated by gross equity outlays (including debt financing, total corporate cash balances rose from $3.3 to $4.5 trillion between 2007-2016[6]), there is evidence to suggest that this extra liquidity is flowing into long-term investments such as R&D. Again quoting from Fried and Wang:

Further, we show that public firms deployed much of this capacity for investment in R&D and CAPEX. In absolute terms, total investment (R&D and CAPEX) rose to a record level. And relative to revenues, total investment rose to levels not seen since the late 1990s economic boom.

If anything, these large gross capital movements, and net equity outlays, are a sign of economic efficiency, not destructive short-termism. As John Cochrane explains in the Wall St. Journal, if Company A is short on investment ideas but long on cash, and Company B is facing the opposite situation, a share buyback allows investors to reallocate their capital to its higher-value use (in the hands of Company B).[7] Nonetheless, critics maintain not only that the scale of buybacks is immense, but that their influence is malign.

II.

i.

Share buybacks, to the extent that they are in fact occurring, are highlighted as one of many symptoms of a greater pathology plaguing our economy: short-termism.

Contra the proponents of the efficient markets hypothesis, who argue that prices on the stock market incorporate all extant information about a firm’s current and expected future profits - discounted accordingly - there exists a considerable economics literature that grants the premise that shareholders are rational, but that posits that this individual shareholder rationality does not aggregate to rationality at the market level. One such market failure is said to obtain in publicly traded equities, known variously as “short-termism, “quarterly capitalism”, or, more formally, the “myopia hypothesis.”

While accusations of stock-market short-termism are intellectually buttressed by different arguments[8], the most common strain of the “myopia hypothesis” proceeds as follows: the managers of publicly traded firms, whose shares trade in deep and liquid markets, are hostage to the over-diversified and under-informed marginal shareholder, who moves the share price not in response to new information about a firm’s fundamentals, but in response to the latest, easily digestible quarterly earnings report. Instead of undertaking investments in the present that might have a substantial return several years down the road, managers are induced to mimic the priorities of transient shareholders uninterested in a firm’s long-term strategy. Future-oriented firms that resist this temptation will be penalized, finding it more difficult to raise capital. This will in turn affect their bottom line, jeopardizing their ability to even survive to the point at which they would reap the returns from their long-term investments.

The seeming insuperability of such incentives has led to calls for a variety of legal remedies: from relatively minor vesting restrictions on executive stock options to a wholesale paradigm shift from our free-wheeling “liberal market economy” to a Franco-Germanic-Japanese style “coordinated market economy” in which patient, farsighted institutional bloc-holders substitute for a dispersed set of myopic, over-diversified shareholders.[9]  While few policymakers have the stomach to commit hari-kari on our institutional innards in such a wholesale fashion, more “modest” proposals are advanced (and often achieved) by figures such as Barack Obama and Elizabeth Warren on a routine basis, but without the redeeming Swiftian irony or humor.[10] One such cure proposed for the short-termism disease is a restriction on share buybacks. I will spend the remainder of this post summarizing why critics find buybacks to be problematic, countering this diagnosis with arguments as to the important role that buybacks play in equity markets, and will suggest that this proposed “cure” is likely to be iatrogenic.

ii.

If corporations are disincentivized from reinvesting their profits into the firm, as the short-termists claim, what are they to do with their earnings? Disburse them to shareholders, either in the form of dividends or share buybacks. Shareholders force corporations to eat their seed corn without a thought for next year’s harvest. The lower a firm’s free cash flow, the less ability it retains to take on new investments, even those with a high net-present-value. But no matter: the corporate form is not to be treated as the vehicle for the transformation of debt and equity into a value-added product, but as a piñata full of cash.

Forbes’ Steve Denning articulates buybacks’ contribution to short-termism thusly:

 

 [Corporate executives] hit upon a magic shortcut: why bother to create new value for shareholders? Why not simply extract value that the organization had already accumulated and transfer it directly to shareholders (including themselves) by way of buying back their own shares? By reducing the number of shares, firms could, as a result of simple mathematics, boost their earnings per share. The result was usually a bump in the stock price—and short-term shareholder value.

Moreover, in many progressive circles, share buybacks are a hair’s breadth from outright fraud. Legally ambiguous prior to a 1982 rule change by the SEC which provided clear “safe harbor” provisions for the practice, buybacks have since become a key tool in corporate finance.[11]

Rather than serving a sensible capital rebalancing purpose, such critics claim that buybacks are used to game the next earnings report to appease shareholders and juice executive compensation metrics. By reducing a corporation’s cash (an asset), buybacks increase Return on Assets (ROA) as well as Earnings per Share (EPS) by reducing the number of shares outstanding.

For many academics and policymakers, stock buybacks are not merely presumptively illegitimate, but are illegitimate per se. William Lazonick, in the aforementioned (award-winning) Harvard Business Review article “Profits without Prosperity”, states bluntly that “the reasons commonly given to justify open-market repurchases all defy facts and logic” (emphasis mine). He goes on to claim that “the only plausible reason for this mode of resource allocation” is the greed of corporate executives. He is similarly forthright in his prescription:

The American public should demand that the federal government agency that is supposed to regulate the stock market rescind the “safe harbor” that enables corporate executives to manipulate stock prices…the SEC may well be advised to make open-market repurchases illegal.[12]

But is it possible that share buybacks serve a legitimate financial function? If so, any restrictions on corporations’ ability to restructure their liabilities in this way will have unintended consequences that may completely offset any salutary effects such a restriction might have.

Because share prices often rise in anticipation of an announced buyback program, critics claim that corporate executives repurchase shares to goose the company’s short-term valuation, to which their own stock options are tied. But this same empirical pattern is also consistent with a properly incentivized management returning cash to shareholders when the company lacks investment opportunities with sufficiently high net present values.

As Hoover fellow John Cochrane explains, not every firm in the economy faces the same spectrum of profitable investment opportunities at the same time. It is therefore efficient for cash to flow from those firms that have the lowest marginal returns on investment to those that have the highest. Skeptics of this argument maintain that these “mature” firms with a reduced need for cash will, by virtue of their longevity, have developed “dynamic capabilities” that would allow them to exploit a functionally inexhaustible set of investments whose returns exceed the hurdle rate.[13] But even ignoring organizational diseconomies of scale and granting this heroic assumption, we cannot wish away one of the core features endemic to the relationship between a corporation’s shareholders and its managers: agency costs.

Because a corporation’s management does not fully internalize the impact of its actions on the firm’s share price, there exists an incentive misalignment vis-à-vis shareholders.[14] Managers are perennially tempted to allocate the firm’s resources towards assets that do not benefit shareholders, but instead improve managerial consumption (in Cochrane’s example, a fleet of corporate Ferraris.) Such waste need not be so conspicuous, however. Subtler forms, such as “empire building”, consist of mergers and acquisitions which are not value-maximizing, but which serve to aggrandize the power of the CEO. Thus, even assuming that management could steer a firm’s cash toward profitable investment opportunities, there is no guarantee that it will. The rise in a firm’s share price after the announcement of a buyback can therefore be explained by shareholders recalculating the probability that the firm’s cash is going to be squandered on such suboptimal investments. That cash, once returned to investors, is now free to find its way into a small business loan, a growing firm’s shares, a venture capital fund, or a variety of other uses. The much-lamented fact that executive compensation is increasingly tied to share price may in fact be an efficient mechanism by which managers are incentivized to redistribute free cash flow back to shareholders instead of allocating it toward non-profit-maximizing assets.[15]

If buybacks are indeed a possible mechanism by which management can artificially meet a compensation metric (eg EPS, ROA) the problem lies in the structure of the corporate contract, not with buybacks themselves. Presumably, if managers are incurring large opportunity costs by returning cash that could have gone toward profitable investments, this will harm a firm’s share price insofar as investors downwardly adjust their expectation that these funds will be used profitably. This line of reasoning merely grants the assumption that shareholders are at least as perceptive as the critics of buybacks, who so confidently claim to know that managers are foregoing high-return investments.[16] But, having granted this assumption, management’s ability to “trick” the market via buybacks disappears, as shareholders will penalize the firm’s valuation for its unwillingness to undergo profitable investments.

Even allowing for management to systematically and repeatedly manipulate share prices via buybacks to line their own pockets to the detriment of the firm, the logic of natural selection should militate against the persistence of firms with such maladaptive compensation packages. Firms that incentivize their management to sacrifice long-term growth for the sake of juicing EPS will eventually be out-competed in the market by firms that have a more adaptive compensation structure.

Buybacks, moreover, allow firms to nimbly modify their capital structure in response to changing market conditions. As mentioned in Part I Section III, firms have been using share buybacks to rebalance their liabilities away from equity and towards debt partly in response to historically low interest rates, a “great trade” according to Home Depot’s CFO.[17] Firms also calibrate their mix of debt and equity financing as a function of expected future rates of the relative costs of capital. In raising the cost of reversing a round of equity issuance, restrictions on buybacks make forecasting errors much more painful.

One particularly ironic use toward which share buybacks might be deployed is as a defense against shareholder underpricing of a firm’s value.[18] If shareholders are systematically mispricing a firm’s shares relative to its fundamentals, perhaps by underestimating or overly discounting future growth, management can send a costly signal of its belief that the shares are undervalued by repurchasing and then reissuing them in the future for a capital gain.

      

[1] Stock Buybacks: Driving a High-Profit, Low-Wage Economy, Palldino 2018

[2] Fried and Wang 2018

[3] Id

[4] Farre-Mensa, Michaely, and Schmalz (2018)

[5] Roe 2018

[6] Supra, note 2

[7] Op-ed March 5, 2018

[8] In 1989, economist Jeremy Stein published a highly influential article titled Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior. It explicates a model in which corporate managers are trapped in a prisoner’s dilemma vis-a-vis other managers. Anticipating that investors will use current earnings as the best forecast of future earnings, each manager is eager to unilaterally inflate the next earnings report and thereby reap an advantage in attracting equity capital. This can be accomplished by relatively innocuous accounting gimmickry, or by genuinely harmful dereliction of longer-term investments. The systemic effect of these individually rational strategies is an equilibrium in which all short-term earnings are inflated but to nobody’s advantage. This is but a particular strain of a larger literature, which details the various mechanisms by which share prices may be caused to deviate from fundamentals without alleging that investors are irrational (a school of thought with a similarly impressive pedigree, with seminal contributions from Robert Shiller, Brad DeLong and Lawrence Summers).    

[9] Hall and Soskice (2000) “Varieties of Capitalism”

[10] Eg Elizabeth Warren’s Accountable Capitalism Act and the incorporation of say-on-pay mandates in the Dodd-Frank Act

[11] Rule 10b-18

[12] Lazonick (2014)

[13] Treece (2011)

[14] Jensen and Meckling (1976)

[15] Grossman and Hart 1982; Jensen 1986, 1989; Hart and Moore 1995; Hansmann 1996

[16] Palladino (2018)

[17] Ma (2016)

[18] Stein (1996)

At the G20 meeting in Buenos Aires today, the renegotiated NAFTA – in the U.S., the new agreement is referred to as the United States - Mexico - Canada Agreement, or USMCA – was signed by the three parties. The big question now is, what will Congress think of the agreement as it decides whether to ratify it? One aspect of this question is, what will the Democrats who now control the House think of it? And to get even more specific, I’m very curious to see what progressives think of it. While she is in the Senate rather than the House, Senator Elizabeth Warren may be a good indicator of what many progressives think. Yesterday, Senator Warren gave a speech at American University in which she set out “her vision for a progressive foreign policy that works for all Americans.” She covered a lot of ground, and I won’t go through all of it, but here is a key bit on trade policy:

By the time the 2008 global financial crash came around, it only confirmed what millions of Americans already knew: the system didn’t work for working people - and it wasn’t really intended to.

And it’s still not working. Tomorrow, the Trump Administration will likely sign a renegotiated NAFTA deal. 

There’s no question we need to renegotiate NAFTA. The federal government has certified that NAFTA has already cost us nearly a million good American jobs - and big companies continue to use NAFTA to outsource jobs to Mexico to this day.

But as it’s currently written, Trump’s deal won’t stop the serious and ongoing harm NAFTA causes for American workers. It won’t stop outsourcing, it won’t raise wages, and it won’t create jobs. It’s NAFTA 2.0.

For example, NAFTA 2.0 has better labor standards on paper but it doesn’t give American workers enough tools to enforce those standards. Without swift and certain enforcement of these new labor standards, big corporations will continue outsourcing jobs to Mexico to so they can pay workers less.

NAFTA 2.0 is also stuffed with handouts that will let big drug companies lock in the high prices they charge for many drugs. The new rules will make it harder to bring down drug prices for seniors and anyone else who needs access to life-saving medicine.

And NAFTA 2.0 does little to reduce pollution or combat the dangers of climate change - giving American companies one more reason to close their factories here and move to Mexico where the environmental standards are lower. That’s bad for the earth and bad for American workers.

For these reasons, I oppose NAFTA 2.0, and will vote against it in the Senate unless President Trump reopens the agreement and produces a better deal for America’s working families.

How can we make the system fair for working Americans? Lots of ways.

  • We can start by ensuring that workers are meaningfully represented at the negotiating table and build trade agreements that strengthen labor standards worldwide.
  • We can make every trade promise equally enforceable, both those terms that help corporations and those that help workers.
  • We can curtail the power of multinational monopolies through serious antitrust enforcement.
  • We can work with our international partners to crack down on tax havens. 

Those four changes would fundamentally alter every trade negotiation. 

I disagree with most of her views on the impact of NAFTA, but putting that aside, what I’m curious about here is what it would take to get her to support the new NAFTA. I’ve read through her remarks a couple times now, and I still can’t figure out precisely what changes she wants and expects in NAFTA 2.0 in order to vote for it. First of all, the tax haven and monopoly issues are not likely to be addressed seriously through a trade agreement anytime soon, so we can ignore that part. On the other hand, the labor protections and worker issues are already in the new NAFTA, and the Trump administration pushed for changes in this area that gave labor groups far more than President Obama’s Trans Pacific Partnership did. So what is Senator Warren’s goal with these statements? Is she laying the groundwork for a “no” vote on the agreement, regardless of any additions to the agreement the Trump administration might accept? Or are there changes on labor rights that would satisfy her and get her to vote in favor?

My instinct is that she will not vote for any trade agreement negotiated by Trump, but we’ll see. Perhaps there is more potential with the younger progressives in Congress who are not as wedded to the economic nationalist views of senior Democrats. Has anyone asked Alexandria Ocasio-Cortez what she thinks of trade liberalization and whether there is a trade agreement she could support? I’m curious whether she and other young progressives who are open to immigration could also be open to trade. I’ve seen her sound skeptical about trade deals on Twitter, but now she will be governing rather than campaigning, and that could make her think more deeply about whether blocking trade with people in other contries is really a good policy.

The Illinois legislature has enacted a law, over the veto of Gov. Bruce Rauner (R), that will strip consumer protections from patients with preexisting conditions, throw them out of their health plans, deny them health care, and expose them to bankruptcy. Naturally, it did so in the name of…helping patients with preexisting conditions. 

The new law imposes limits on so-called “short-term” health plans. Federal law exempts short-term plans from ObamaCare’s costly and punitive health insurance regulations. As a result, short-term plans allow enrollees to purchase only the coverage they value, frequently cost half as much as ObamaCare plans, and offer broader choice of providers than ObamaCare plans. Thanks to new federal rules, short-term plans can last up to 12 months, be renewed for up to 36 months, and can enable enrollees who fall ill to keep paying low, healthy-person premiums indefinitely, making access to care more secure for the sick. Critics acknowledge the new rules could extend health insurance to 2 million previously uninsured Americans.

Consumers appear to value the broader choices that the new rules offer. The web site eHealth reports that the share of unsubsidized insurance purchasers who chose a short-term plan over an ObamaCare plan rose from 56 percent during the last enrollment period to 70 percent during this enrollment period. (See graph.)

Voters appear to believe the benefits of these new rules outweigh the costs. Polling shows voters support the new rules by nearly a two-to-one ratio–even if purchasers choose less coverage than ObamaCare requires, and even if ObamaCare premiums rise as a result. (See chart nearby.) There is reason to believe the new rules will reduce ObamaCare premiums. (See below.)

Illinois legislators, responding to critics who complain short-term plans are “junk” insurance, have decreed that short-term plans can last no longer than six months and that enrollees whose short-term plans expire must wait 60 days before purchasing a subsequent plan. The Sargent Shriver National Center on Poverty Law tweeted about the new law, “GREAT NEWS! SB1737 is law, and Illinois will now protect healthcare consumers with pre-existing conditions.”

That is exactly backward. The new Illinois law does not protect patients with preexisting conditions. It does not outlaw “junk” insurance. It creates junk insurance by taking protections away from short-term plan enrollees and exposing patients with preexisting conditions to denied care and bankruptcy.

Under prior law, short-term plans could provide many Illinois residents with seamless coverage. Residents could purchase short-term plans that could cover them indefinitely, but at least until the next ObamaCare open-enrollment period, at which point they could enroll in an ObamaCare plan without facing medical underwriting or denials of coverage. 

The new law outlaws short-term plans that last more than six months. Now, by law, short-term plan enrollees who develop cancer or other expensive illnesses will lose that coverage when their plan reaches the six-month limit. This ban will not affect healthy consumers. When their six-month plans expire, healthy consumers can just wait the required 60 days and purchase a new six-month plan. The ban will instead hurt patients with preexisting conditions–specifically, those who fall ill while enrolled in a short-term plan or during the 60-day waiting period. The new law will throw those patients out of their plans, leaving them with preexisting conditions and no health insurance at all for up to 12 months. 

As a direct result of the new law:

  • Any Illinois resident who purchases a short-term plan on January 1, 2019 and subsequently gets a cancer diagnosis will lose that coverage on June 29 and face six months of expensive medical bills with no coverage. She will not be able to obtain a new short-term plan, because her cancer will be a preexisting condition. She also will not be able to get coverage through ObamaCare for six months–i.e., until January 1, 2020. Yes, ObamaCare prohibits insurers from denying coverage on the basis of preexisting conditions, but it also generally denies coverage to everyone outside of a six-week open-enrollment period at the end of each year.
  • The same fate will befall any Illinois resident who gets a cancer diagnosis during the 60-day waiting period. By law, they will face months and months of expensive medical bills with no coverage. They will be unable to purchase another short-term plan, and they will be locked out of ObamaCare. 

This is exactly what happened to Jeanne Balvin. Similar rules imposed by the Obama administration threw Balvin out of her short-term plan, leaving her with $95,000 in medical bills and no insurance to help pay them. (The new federal rules supersede the Obama-era rules.) 

Had Illinois legislators just done nothing, or even just upheld Rauner’s veto, short-term plans could have covered Illinois residents throughout ObamaCare’s entire coverage-denial period. Instead, Illinoisans with preexisting conditions will face months and months of expensive medical bills with no coverage at all.

This is perverse. Illinois legislators knew that canceling short-term plans hurts patients with preexisting conditions. We know they knew, because they included a provision in the new law that forbids insurers from canceling short-term plans  “before the expiration date in the policy, except in cases of nonpayment of premiums, fraud,” or at the option of the enrollee. And yet the legislature will now rescind short-term plans from patients with preexisting conditions within six months of their diagnosis, no matter how much human suffering it may cause.

Supporters claim that crippling short-term plans is necessary to protect patients with preexisting conditions. If short-term plans offer lower-cost coverage to healthy consumers, they argue, healthy consumers will flee ObamaCare plans. ObamaCare premiums would then rise to the point of threatening ObamaCare’s economic and/or political viability, thereby threatening access to care for patients with preexisting conditions currently enrolled in ObamaCare plans. Among the many flaws in this argument is the fact that short-term plans can actually reduce ObamaCare premiums by keeping expensive patients out of ObamaCare’s risk pools. The new federal rules allow short-term plan enrollees to purchase “renewal guarantees” that give them the right to keep purchasing short-term plans at low, healthy-person premiums even after they develop expensive medical conditions. Short-term plans can thus reduce ObamaCare premiums by keeping expensive patients out of those risk pools, just as the pre-ObamaCare individual market kept many expensive patients out of state high-risk pools. The presumed harms that more flexible short-term plans could inflict on patients with preexising conditions in ObamaCare plans are attenuated and uncertain. The harms that the Illinois law will inflict on patients with preexisting conditions who are enrolled in short-term plans are definite, immediate, and concrete.

There is no way to dress up laws restricting short-term plans as anything other than government rationing of care to the sick. The activists and politicians who supported this law are not patient advocates. They are callous ideologues who are willing to deny care to sick patients for the sake of protecting ObamaCare.

Conventional wisdom argues that the opioid epidemic has resulted from excessive opioid prescribing, but the evidence shows just the opposite. Restrictions on opioid prescribing have pushed opioid users into the black market, where they overdose on illicit fentanyl, not prescription opioids (mainly because they cannot assess potency).   Reason’s Jacob Sullum has a nice recent piece on this point.

Yet policymakers keep doubling down on the conventional wisdom.  The U.S. Attorney for Massachusetts, Andrew Lelling, has just anounced new scrutiny of doctors who prescribe opioids:

US Attorney Andrew E. Lelling has sent letters to “a number of medical professionals” alerting them that their opioid prescribing practices “have been identified as a source of concern.”

In a statement released Thursday, Lelling said that the professionals who received the warning had prescribed opioids to a patient within 60 days of that patient’s death or to a patient who subsequently died from an opioid overdose.

The letters inform the professionals that it’s illegal to prescribe opioids “without a legitimate medical purpose, substantially in excess of the needs of the patient, or outside the usual course of professional practice.” It acknowledges that the prescriptions may have been medically appropriate, however.

Such actions will scare medicial professionals into even less prescribing, force more patients into the black market, and increase the frequency of opioids overdoses.

What a lousy deal. My colleagues at the University of Arkansas and I just released another study examining funding disparities between traditional public schools and public charter schools in 14 cities across the country. The overall finding is clear: families lose a substantial amount of education dollars when they pick charter schools for their children.

Using data from the 2015-16 school year, we find that children in charter schools receive $5,828, or 27 percent, less than their traditional public school peers each year, on average. Put differently, a family forgoes over $75,000 in educational resources for their child’s K-12 education if a charter school fits their needs better than the residentially assigned option. And, unfortunately, the funding inequities are much worse in some cities. As shown in Figure 1 below – and in the original report – children in charter schools in Washington, DC, and Camden, New Jersey receive over $10,000 less than their traditional public school peers each year.

 

But that’s not all. Our team has released four other reports over the past two decades with similar findings. And across the 8 cities with longitudinal data, the funding disparity favoring traditional public schools has grown by 58 percent since 2003 after adjusting for inflation. It’s like a swarm of mosquitoes in the summer. It’s persistent and never goes away.

 

Fortunately, one city in our sample has consistently demonstrated equitable funding across school sectors. In Houston, Texas, students in public charter schools receive only $517, or 5 percent, less than their peers in traditional public schools each year. In other words, equitable public school funding can be achieved if policymakers make the right decisions.

Families shouldn’t have to lose $5,828 each year in educational resources for each child that doesn’t fit into the one-size-fits-all education system. Thankfully, state policymakers have the authority, opportunity, and responsibility to achieve equal total funding of public school students in their states. Policymakers can deliver equitable education funding by revising state funding formulas to allow 100 percent of public education dollars to follow children to whatever school works best for them.

The latest article in the Kaiser Health News/NPR “Bill of the Month” series tells the story of Shereese Hickson, a 39-year-old disabled Medicare Advantage enrollee whose hospital charged $123,019 for two infusions of a multiple sclerosis drug:

Even in a world of soaring drug prices, multiple sclerosis medicines stand out. Over two decades ending in 2013, costs for MS medicines rose at annual rates five to seven times higher than those for prescription drugs generally, found a study by researchers at Oregon Health & Science University.

“There was no competition on price that was occurring,” said Daniel Hartung, the OHSU and Oregon State University professor who led the study. “It appeared to be the opposite. As newer drugs were brought to market, it promoted increased escalation in drug prices.”

That’s not how it’s supposed to work. New market entrants should bring more competition on price. Drug manufacturers have an incentive to capture market share by reducing their prices. But that seems to be the exception, not the rule. 

In the new Cato Institute book Overcharged: Why Americans Pay Too Much for Health Care, law professors Charles Silver and David Hyman (M.D.) show that this phenomenon occurs because government interference has eliminated incentives for pharmaceutal companies to compete on price:

Why does competition exert less influence in drug markets than it does elsewhere? One likely explanation is “parallel pricing,” which occurs when supposed competitors maintain or raise prices in lockstep. We call it “erectile pricing,” rather than parallel pricing, because we observed it when studying Viagra and other erectile dysfunction (ED) drugs…

Erectile pricing occurs with other medicines too. Insulin is a drug used by millions of Americans afflicted with diabetes. It is off-patent and made by three companies, so it should be reasonably priced. It is not. The past two decades have seen stunning price increases. Short-acting insulin, which cost about $21 in 1996, went for about $275 in 2017. And, just as with ED drugs, the prices went up in lockstep, even though there were two companies making short-acting insulin. Prices for long-acting insulins, which also had two makers, rose in tandem too.

Why does erectile pricing happen in drug markets? Many medicines are made by only a few companies, all of which are repeat players in pricing games and have learned to employ a strategy known as “tit for tat.” Whatever one company does, the others do in turn. When one raises prices, the others follow suit, knowing that if they play follow the leader, they will all get rich. The incentive to steal the market by charging less disappears because every manufacturer knows that other makers will cut their prices too, if it does. An outbreak of price competition would leave all manufacturers poorer—so they all raise prices instead of reducing them.

Ideally, tit-for-tat pricing would be unsustainable, and efforts to keep prices high would collapse, because individual producers could increase their profits by reducing their prices and stealing market share from their competitors. That appears to happen in the pharmaceutical market sector less often than it should.

Third-party payment contributes to this failure of competition. Heavily insured patients who fork over the same copays regardless of which drugs they use will not respond to rising prices by switching to lower-cost alternatives. They will buy what their doctors recommend, and their doctors will not care much about price, knowing that their patients are insured. Third-party payment may weaken drug makers’ incentive to compete for market share.

To purchase Overcharged, click here.

The National Center for Health Statistics (NCHS) just issued Data Brief Number 329, entitled “Drug Overdose Deaths in the United States, 1999-2017.” Drug overdose deaths reached a new record high, exceeding 70,000 deaths in 2017, a 9.6 percent increase over 2016. That figure includes all drug overdoses, including those due to cocaine, methamphetamines, and benzodiazepines. The actual breakdown according to drug category will be reported in mid-December. However, estimates are opioid-related deaths will account for roughly 49,000 of the total overdose deaths. 

The big takeaways, quoting the report:

- The rate of drug overdose deaths involving synthetic opioids other than methadone, which include drugs such as fentanyl, fentanyl analogs, and tramadol, increased from 0.3 per 100,000 in 1999 to 1.0 in 2013, 1.8 in 2014, 3.1 in 2015, 6.2 in 2016, and 9.0 in 2017.The rate increased on average by 8% per year from 1999 through 2013 and by 71% per year from 2013 through 2017.

-The rate of drug overdose deaths involving heroin increased from 0.7 in 1999 to 1.0 in 2008 to 4.9 in 2016. The rate in 2017 was the same as in 2016 (4.9).

-The rate of drug overdose deaths involving natural and semisynthetic opioids, which include drugs such as oxycodone and hydrocodone, increased from 1.0 in 1999 to 4.4 in 2016. The rate in 2017 was the same as in 2016 (4.4).

-The rate of drug overdose deaths involving methadone increased from 0.3 in 1999 to 1.8 in 2006, then declined to 1.0 in 2016. The rate in 2017 was the same as in 2016 (1.0).

Despite the fact that overdose deaths from prescription opioids—and even heroin—have stabilized, the overdose rate continues to climb due to the surge in fentanyl deaths. 

This has happened despite policies in place aimed at curtailing doctors from prescribing opioids to their patients in pain. Prescription surveillance boards and government-mandated prescribing limits have pushed prescribing down dramatically. High-dose prescriptions were down 41 percent between 2010 and 2016, another 16.1 percent in 2017, and another 12 percent this year.

Policies aimed at curbing prescribing are based on the false narrative that the overdose crisis is primarily the result of greedy drug makers manipulating gullible doctors into overtreating patients in pain and hooking them on drugs. But as I have written in the past, , the overdose crisis has always been primarily the result of non-medical users accessing drugs in the dangerous black market that results from prohibition. As the supply of prescription opioids diverted to the underground gets harder to come by, the efficient black market fills the void with other, more dangerous drugs. Lately, the synthetic opioid fentanyl has emerged as the number one killer.

In a New York Times report on the matter today, Josh Katz and Margot Sanger-Katz hint that policymakers are aiming at the wrong target by stating, “Recent federal public policy responses to the opioid epidemic have focused on opioid prescriptions. But several public health researchers say that the rise of fentanyls requires different tools. Opioid prescriptions have been falling, even as the death rates from overdoses are rising.”

Prescription opioids are not the cause of the overdose death crisis. Neither is fentanyl, despite the fact that it is now the primary driver of the rising death rate. The ultimate cause of the drug overdose crisis is prohibition. US policymakers should drop the false narrative and face reality, like Portuguese health authorities did 17 years ago.

Portugal, in 2001, recognized that prohibition was driving the death rate. At the time it had the highest overdose rate in Western Europe. It decriminalized all drugs and redirected efforts towards treatment and harm reduction. Portugal saw its population of heroin addicts drop 75 percent, and now has the lowest overdose rate in Europe. It has been so successful that Norway is about to take the same route.

At a minimum, policymakers in the U.S. should turn to harm reduction. They should expand syringe exchange and supervised injection facilities, lighten the regulatory burden on health care practitioners wishing to treat addicts with medication-assisted treatments such as methadoneand buprenorphine, and reschedule the overdose antidote naloxone to a truly over-the-counter drug.

Unless this happens, we should expect more discouraging news from the NCHS in the years ahead.

 

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

  1. Senate defies White House on Saudi support in Yemen,” Elana Schor. In a 63-37 vote that took place late yesterday afternoon, the Senate moved forward on a resolution to withdraw U.S. support for Saudi Arabia’s war in Yemen. Every Democratic Senator plus 14 Republican Senators voted to ensure that this issue would be hotly debated, raising public awareness and sending a clear signal that this issue will not fissile out. 
  2. Yemen: Inquiry finds Saudis diverting arms to factions loyal to their cause,” Rod Austin. More on Yemen. The top line of the article is right in the description: “Investigators say weapons from UK and US have fallen into hands of splinter groups in Yemen, some with links to al-Qaida and ISIS.” This isn’t just small arms and light weapons. The investigation revealed that diverted weapon systems include “sophisticated armoured vehicles, rocket launchers, grenades and rifles.” 
  3. How Much Will The Space Force Cost?” Todd Harrison. Interested in the Space Force? This report goes in depth on three different ways the military could organize the Space Force: a Space Corps, Space Force-Lite, and Space Force-Heavy. You can get information down to the line-item level or just hit the highlights of total cost estimates for each option. 

Twitter recently re-activated Jesse Kelly’s account after telling him that he was permanently banned from the platform. The social media giant informed Kelly, a conservative commentator, that his account was permanently suspended “due to multiple or repeat violations of the Twitter rules.” Conservative pundits, journalists, and politicians criticized Twitter’s decision to ban Kelly, with some alleging that Kelly’s ban was the latest example of perceived anti-conservative bias in Silicon Valley. While some might be infuriated with what happened to Kelly’s Twitter account, we should be wary of calls for government regulation of social media and related investigations in the name of free speech or the First Amendment. Companies such as Twitter and Facebook will sometimes make content moderation decisions that seem hypocritical, inconsistent, and confusing. But private failure is better than government failure, not least because unlike government agencies, Twitter has to worry about competition and profits.

It’s not immediately clear why Twitter banned Kelly. A fleeting glance of Kelly’s Twitter feed reveals plenty of eye roll-worthy content, including his calls for the peaceful breakup of the United States and his assertion that only an existential threat to the United States can save the country. His writings at the conservative website The Federalist include bizarre and unfounded declarations such as, “barring some unforeseen awakening, America is heading for an eventual socialist abyss.” In the same article he called for his readers to “Be the Lakota” after a brief discussion about how Sitting Bull and his warriors took scalps at the Battle of Little Bighorn. In another article Kelly made the argument that a belief in limited government is a necessary condition for being a patriot.

I must confess that I didn’t know Kelly existed until I learned the news of his Twitter ban, so it’s possible that those backing his ban from Twitter might be able to point to other content that they consider more offensive that what I just highlighted. But, from what I can tell Kelly’s content hardly qualifies as suspension-worthy.

Some opponents of Kelly’s ban (and indeed Kelly himself) were quick to point out that Nation of Islam leader Louis Farrakhan still has a Twitter account despite making anti-semitic remarks. Richard Spencer, the white supremacist president of the innocuously-named National Policy Institute who pondered taking my boss’ office, remains on Twitter, although his account is no longer verified.

All of the of the debates about social media content moderation have produced some strange proposals. Earlier this year I attended the Lincoln Network’s Reboot conference and heard Dr. Jerry A. Johnson, the President and Chief Executive Officer of the National Religious Broadcasters, propose that social media companies embrace the First Amendment as a standard. Needless to say, I was surprised to hear a conservative Christian urge private companies to embrace a content moderation standard that would require them to allow animal abuse videos, footage of beheadings, and pornography on their platforms. Facebook, Twitter, and other social media companies have sensible reasons for not using the First Amendment as their content moderation lodestar.

Rather than turning to First Amendment law for guidance, social media companies have developed their own standards for speech. These standards are enforced by human beings (and the algorithms human beings create) who make mistakes and can unintentionally or intentionally import their biases into content moderation decisions. Another Twitter controversy from earlier this year illustrates how difficult it can be to develop content moderation policies.

Shortly after Sen. John McCain’s death a Twitter user posted a tweet that included a doctored photo of Sen. McCain’s daughter, Meghan McCain, crying over her father’s casket. The tweet included the words “America, this ones (sic) for you” and the doctored photo, which showed a handgun being aimed at the grieving McCain. McCain’s husband, Federalist publisher Ben Domenech, criticized Twitter CEO Jack Dorsey for keeping the tweet on the platform. Twitter later took the offensive tweet down, and Dorsey apologized for not taking action sooner.

The tweet aimed at Meghan McCain clearly violated Twitter’s rules, which state: “You may not make specific threats of violence or wish for the serious physical harm, death, or disease of an individual or group of people.”

Twitter’s rules also prohibit hateful conduct or imagery, as outlined in its “Hateful Conduct Policy.” The policy seems clear enough, but a look at Kelly’s tweets reveal content that someone could interpret as hateful, even if some of the tweets are attempts at humor. Is portraying Confederate soldiers as “poor Southerners defending their land from an invading Northern army” hateful? What about a tweet bemoaning women’s right to vote? Or tweets that describe our ham-loving neighbors to the North as “garbage people” and violence as “underrated”? None of these tweets seem to violate Twitter’s current content policy, but someone could write a content policy that would prohibit such content.

Imagine developing a content policy for a social media site and your job is to consider whether content identical to the tweet targeting McCain and content identical to Kelly’s tweet concerning violence should be allowed or deleted. You have four policy options:

        Delete Tweet Targeting McCain Allow Tweet Targeting McCain Delete Kelly’s Tweet

1

2

Allow Kelly’s Tweet

3

4

 

Many commentators seem to back option 3, believing that the tweet targeting McCain should’ve been deleted while Kelly’ tweet should be allowed. That’s a reasonable position. But it’s not hard to see how someone could come to the conclusion that 1 and 4 are also acceptable options. Of all four options only option 2, which would lead to the deletion of Kelly’s tweet but also allow the tweet targeting McCain, seems incoherent on its face.

Social media companies can come up with sensible-sounding policies, but there will always be tough calls. Having a policy that prohibits images of nude children sounds sensible, but there was an outcry after Facebook removed an Anne Frank Center article, which had as its feature image a photo of nude children who were victims of the Holocaust. Facebook didn’t disclose whether an algorithm or a human being had flagged the post for deletion.

In a similar case, Facebook initially defended its decision to remove Nick Ut’s Pulitzer Prize-winning photo “The Terror of War,” which shows a burned, naked nine year old Vietnamese girl fleeing the aftermath of an South Viernamese napalm attack in 1972. Despite the photo’s fame and historical significance Facebook told The Guardian, “While we recognize that this photo is iconic, it’s difficult to create a distinction between allowing a photograph of a nude child in one instance and not others.” Facebook eventually changed course, allowing users to post the photo, citing the photo’s historical significance:

Because of its status as an iconic image of historical importance, the value of permitting sharing outweighs the value of protecting the community by removal, so we have decided to reinstate the image on Facebook where we are aware it has been removed.

What about graphic images of contemporary and past battles? On the one hand, there is clear historic value to images from the American Civil War, the Second World War, and the Vietnam War, some of which include graphic violent content. A social media company implementing a policy prohibiting graphic depictions of violence sounds sensible, but like a policy banning images of nude children it will not eliminate difficult choices or the possibility that such a policy will yield results many users will find inconsistent and confusing.

Given that whoever is developing content moderation policies will be put in the position of making tough choices it’s far better to leave these choices in the hands of private actors rather than government regulators. Unlike the government, Twitter has a profit motive and competition. As such, it is subject to far more accountability that the government. We may not always like the decisions social media companies make, but private failure is better than government failure. An America where unnamed bureaucrats, not private employees, determine what can be posted on social media is one where free speech is stifled.

To be clear, calls for increased government intervention and regulation of social media platforms is a bipartisan phenomenon. Sen. Mark Warner (D-VA) has discussed a range of possible social media policies, including a crackdown on anonymous accounts and regulations modeled on the European so-called “right to be forgotten.” If such policies were implemented (the First Amendment issues notwithstanding), they would inevitably lead to valuable speech being stifled. Sen. Ron Wyden (D-OR) has said that he’s open to carve-outs of Section 230 of the Communications Decency Act, which protects online intermediaries such as Facebook and Twitter from liability for what users post on their platforms.

When it comes to possibly amending Section 230 Sen. Wyden has some Republican allies. Never mind that some of these Republicans don’t seem to fully understand the relevant parts of Section 230.

That social media giants are under attack from the left and the right is not an argument for government intervention. Calls for Section 230 amendment or “anti-censorship” legislation are a serious risk to free speech. If Section 230 is amended to increase social media companies’ risk of liability suits we should expect these companies to suppress more speech. Twitter users may not always like what Twitter does, but calls for government intervention are not the remedy.

In 2016, the D.C. City Council unanimously passed the Neighborhood Engagement Achieves Results (NEAR) Act, partly based on a pilot program in Richmond, California, that sought to implement a holistic approach to crime fighting. Recently, the ACLU of the District of Columbia (ACLU DC) filed suit against the Metropolitan Police Department (MPD) to implement the component of the NEAR Act that requires police to track demographic and other relevant data of individuals who police stop and frisk for weapons or otherwise search. MPD Chief Peter Newsham has admitted the department has not yet been able to comply with the law’s data collection requirement and recently a federal judge indicated that he was preparing an injunction in ACLU DC’s favor to compel the department to produce and publish the data.

As a policing researcher, the value of new empirical data is high, because, until recent decades, we haven’t had much of it. For just one example, this paucity of reliable policing data led the federal government to underestimate the number of persons shot and killed by police in the United States by about 150 percent every year. Thanks to the researchers at the Washington Post, we now know that police officers fatally shoot an average near 1,000 individuals every year instead of the roughly 400 that were annually reported by the FBI. Data is particularly helpful when trying to measure the racial and ethnic impacts of intrusive policies like stop and frisk because claims of racial bias are nearly impossible to prove in a single circumstance, but data can support or undermine claims of racial bias depending on population and other variables. While numbers by themselves cannot tell the whole story of any given policy, well-cultivated data can show where and in what circumstances disparities arise, giving researchers information to explain what is happening.

Before the judge made his announcement in the ACLU DC lawsuit, MPD had been training its officers to implement the demographic recording section of the NEAR Act. I had conversations with more than a dozen patrol officers over the past several weeks, and the NEAR Act was often a subject of discussion. While each officer I talked to said they would implement the law in line with their general order to do so, personal reactions ranged from ambivalent, to skeptical, to fearful of what implementation would bring. Most notably, officers were apprehensive about asking people who they have stopped and potentially searched for even more personal information, including their ethnicity and gender identity.

The general order posted on the MPD website states that officers should use the following statement when asking for personal information, “Per the NEAR Act, as passed by the Council of the District of Columbia, we are required to ask for your gender, race, ethnicity, and date of birth.”

But the text of the NEAR Act does not require officers to ask this personal information, only to record it.  Indeed, researchers use demographic information to discover racial and other disparities in police stops and to determine whether those disparities are driven by officer bias or by departmental policy. In either case, the relevant demographic information is the sex and race of the stopped individual that the officer observed while making a stop, not the ethnicity or gender identity of the person stopped. What’s more, the general order instructs officers to select “unknown” whenever an individual refuses to answer the questions, subverting the purpose of recording the officer’s observations because of an uncooperative subject.

According to Scott Michelman, ACLU DC’s legal co-director and lead counsel on the NEAR Act lawsuit, requiring the officers to ask the demographic data “was a police decision and it’s actually one of several examples in ways in which the District has rolled out its partial implementation that seems designed to undermine effective data collection.” Michelman continued, “We think MPD is intentionally designing a cumbersome system for the same reason they have been foot-dragging implementing it. That is, they are hostile to this law, they are hostile to its purposes, they don’t want it implemented, they don’t want the public to know whom they’re stopping and why, because they are afraid of what the data will show.”

When asked for comment, the MPD public information office responded that “There were concerns raised during [D.C. City] Council [and] community discussion[s] of the bill that officer observation of gender and race was not sufficient.” MPD also said that the current data collection is an interim step and that the full system should be operational in summer 2019. 

Irrespective of MPD’s true motivation, the general order as written puts patrol officers in a tenuous spot not only because they are going further than the law requires, but if the officers use the text in the general order, they are misrepresenting what the law is requiring them to do. MPD officers are acutely aware of the tensions between themselves and D.C. residents, particularly those who live in economically disadvantaged, racial and ethnic minority communities. Accordingly, none of the officers I spoke to wanted to antagonize individuals by intruding further into stopped individuals’ lives than was necessary, but all acknowledged they would abide by the general order.

The NEAR Act was passed with the understanding that the MPD needs to improve its relationships with the communities it patrols. The officers who are tasked with carrying out the act ought to be given instructions based on accurate information so they do not further damage the relationships they have with D.C.’s most vulnerable communities.

Even if fully implemented as envisioned, the NEAR Act’s intended outcomes are far from certain. However, the NEAR Act is the law and should be followed as written to give it the best chance of success. Both D.C. residents and MPD officers deserve that much.

 

 

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