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Correcting the “Historical Accident” of Opt-Out Requirements

Andrew M. Grossman and David B. Rivkin Jr.

Whatever the fate of mandatory “fair share” payments that nonmembers are often required to make to fund public-sector unions’ collective bargaining activities, Friedrichs will likely mark the end of requirements that dissenting workers take action to “opt out” of funding public-sector unions’ political and ideological activities, the subject of the second question that the Court agreed to consider. Although less prominent than the forced-payments issue, ending opt-out requirements would correct a serious anomaly in the Court’s First Amendment jurisprudence, one that facilitates tens of millions of dollars annually in union political spending of funds obtained through inertia, trickery, and coercion.

If everyone agrees that forcing public employees to subsidize a labor union’s political or ideological speech impinges their First Amendment rights — and the Court has been unanimous on that point for decades — then what possible justification is there for requiring workers who’ve declined to join the union to go through the arduous process of opting out from making such payments year after year? Put differently, why not allow workers who support a union’s political activities to opt in to funding them, rather than require dissenting workers to play a game of cat and mouse to stop the union from taking their money to fund ideological causes they likely oppose? We’ve never heard a compelling justification for the current “opt out” regime and, like the majority in Knox v. SEIU, suspect that there isn’t one.

Instead, as the Court recounted in Knox, “acceptance of the opt-out approach appears to have come about more as a historical accident than through the careful application of First Amendment principles.” In early cases, workers subject to the Railway Labor Act sought relief from being forced to fund unions’ political activities, and the Court assumed (the statute saying nothing one way or the other) that allowing them to affirmatively object to funding such expenditures would be sufficient to protect their rights. Without any reasoning or analysis, the Court in Abood further assumed that the opt-out approach discussed in those prior statutory cases was sufficient to remedy the First Amendment violation when a public employee is coerced into subsidizing political or ideological speech by the threat of loss of governmental employment.

Ending opt-out requirements would correct a serious anomaly in the Court’s First Amendment jurisprudence.”

But that was a dubious assumption, for both legal and practical reasons. As a legal matter, the opt-out approach plainly violates the cardinal rule that procedures involving compelled speech and association must be “carefully tailored to minimize the infringement” of First Amendment rights. Under the opt-out approach, dissenting workers bear the risk that, if they are unsuccessful in following the opt-out procedure reluctantly administered by the union, their money will be used to further political and ideological ends with which they do not agree. The labor union, whose constitutional rights are not at stake, bears no risk at all — by default, it gets the money.

As a practical matter, labor unions have not made it easy for workers to opt out of funding political activities. No union of which we’re aware presumes that workers who have declined to join it — and therefore presumably don’t support its political activities — wish to opt out from subsidizing those activities. Nor do unions presume that workers who opted out last year, the year before, etc., might wish to do so again this year — workers must go through the process of objecting every single year, except for where courts have mandated otherwise. Opt-out requests are typically permitted only during an annual “objection period,” and unions do the bare minimum required by law to publicize workers’ opt-out rights. Other materials provided by the union often attempt to sow confusion over opting out. For example, the California Teachers Union enrollment form gives the impression that teachers can join the union without funding its political activities; the relevant checkbox, however, only concerns whether a portion of dues will be allocated to the union’s political action committee. Forms used by other unions give workers the opportunity to opt out of relatively small PAC contributions and receive a refund. In either instance, workers still pay the full subsidy for the union’s own political activities. The point of this chicanery is to confuse workers into thinking that they’ve exercised their opt-out rights when they actually haven’t. And then there’s the intimidation and harassment often leveled against workers attempting to exercise their opt-out rights.

These difficulties arise from the inherent conflict of interest in requiring a labor union to administer the procedures for workers who object to funding its own activities. Of course the unions don’t want to make it easy to opt out. As a result, the courts have been forced to constantly police unions’ grudging administration of the opt-out process. It is strange, when you think about it, that workers’ First Amendment right to be free from compelled speech and association is at the mercy of the very organizations that the workers are seeking to resist.

These issues came to a head in Knox, a 2012 decision concerning a challenge by dissenting workers forced to pay into an “Emergency Temporary Assessment to Build a Political Fight–Back Fund” intended for politicking. Because “a special assessment billed for use in electoral campaigns” went beyond anything the Court had previously considered, it gave the opt-out issue a fresh look. Applying the general First Amendment principle that “individuals should not be compelled to subsidize private groups or private speech,” it held that a public-sector union imposing a special assessment or dues increase partway through the year may not exact any funds from nonmembers without their affirmative consent.

This affirmative consent, or “opt-in,” requirement drew criticism from Justice Sonia Sotomayor (in concurrence, joined by Justice Ruth Bader Ginsburg) and Justice Stephen Breyer (in dissent, joined by Justice Elena Kagan). Justice Sotomayor agreed that the union was constitutionally required to provide an additional notice to workers and opportunity to make their choice, but she faulted the majority for (in her view) reaching beyond those issues to hold that affirmative consent was required. Justice Breyer, in turn, argued that the union had reasonably complied with the Court’s precedents by reducing the special assessment charged to workers who had already objected by the proportion of total dues that it had spent on political activities in the previous year.

Notably, neither separate opinion offered any defense on the merits of requiring workers to opt out from subsidizing unions’ political speech. Although recognizing that the majority “cast serious doubt on longstanding precedent,” Justice Sotomayor made no attempt to address the validity or correctness of that precedent. Justice Breyer deemed the majority’s approach “particularly unfortunate” because its logic seems “to apply, not just to special assessments, but to ordinary yearly fee charges as well,” which means that “the opinion will play a central role in an ongoing, intense political debate” — one that he would have the Court avoid entirely. The most he ventured on the merits of the question was that an opt-in requirement might not do much good, because “the additional protection it provides primarily helps only those who are politically near neutral.”

But even that tepid objection falls apart under scrutiny. The reality is that the burden of opt-out requirements has artificially suppressed objections. According to the Bureau of Labor Statistics, thirty-three percent of state government workers and forty-six percent of local government workers are represented by labor unions. About eight percent of those workers have declined union membership — a prerequisite to opting out of paying political subsidies. Yet polls consistently reportthat about a quarter of state and local employees subject to collective-bargaining agreements identify themselves as Republicans, with another thirty percent or so identifying as independent. It is no secret that unions’ political expenditures overwhelmingly favor the Democratic Party and its candidates — for example, ninety-eight percent of the American Federation of Teachers’ donations go to Democrats. This means that, due to opt-out requirements, more than three million public-sector workers are paying to subsidize a political party that they have refused to join, with one million of those workers identifying as members of the opposing party.

So far as we’re aware, there isn’t any good argument in favor of requiring employees to bear the often-considerable burden of objecting so as to avoid paying into labor unions’ political coffers. But there is an honest one. In a moment of candor, a teachers’ union explained in litigation that it favors opt-out requirements because they allow unions to “take advantage of inertia on the part of would-be dissenters who fail to object affirmatively.” In fairness, one can certainly understand why labor unions would want to collude with state and local politicians to exact political funds from unwilling employees who may not know how to satisfy convoluted opt-out procedures or are reluctant to bear the burden of doing so.

But it’s more difficult to understand how such a scheme could ever withstand the careful application of First Amendment principles.

David B. Rivkin, Jr., and Andrew M. Grossman practice appellate litigation in the Washington, D.C., office of Baker & Hostetler LLP. They filed an amicus brief in support of certiorari in Friedrichs v. California Teachers Association on behalf of the Cato Institute, where Mr. Grossman is an adjunct scholar.

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Instability in China

Steve H. Hanke

The plunging Shanghai Stock Exchange and the sudden reversal in the yuan’s appreciation have caused fears to spread beyond China’s borders. Is something wrong with the world’s growth locomotive? In a word, yes.

The most reliable approach for the determination of nominal gross domestic product (GDP) and the balance of payments is the monetary approach. Indeed, the path of an economy’s nominal GDP is determined by the course of its money supply (broadly determined).

The accompanying chart of China’s money supply and private credit tells us why China’s economy is in trouble. The annual trend rate of money supply (M2) growth is 17.1%. In early 2012, M2 was growing at an annual rate of 20% — well above the trend rate. Then, M2’s annual growth rate suddenly plunged to 15% and has been drifting down ever since.


Today, the annual M2 growth rate is a bit above 10%. In consequence, nominal GDP will decline from its current level. This spells trouble for China, and the rest of the world. These prospective troubles are already baked in the cake.

Just why has the M2 annual growth rate declined? One factor behind the decline has been recent hot money capital flight. This shows up when we decompose the reserve money (state money) produced by the People’s Bank of China. The foreign exchange contribution to state money is no longer pulling the rate of state money up. It is pulling it down (see the accompanying monetary composition chart).


How did China arrive at this point — a point of high uncertainty and potential economic instability? A look at China’s exchange-rate regimes provides a window into these troubled waters. Since China embraced Deng Xiaoping’s reforms on 22 December 1978, China has experimented with different exchange-rate regimes. Until 1994, the yuan was in an ever-depreciating phase against the U.S. dollar. Relative volatile readings for China’s GDP growth and inflation rate were encountered during this phase.

After the maxi yuan depreciation of 1994 and until 2005, exchange-rate fixity was the order of the day, with little movement in the CNY/USD rate. In consequence, the volatility of China’s GDP and inflation rate declined, and with the yuan firmly anchored to the U.S. dollar, China’s inflation rates began to shadow those in America (see the accompanying exchange-rate table). Then, China entered a gradual yuan appreciation phase (when the CNY/ USD rate declined in the 2005-14 period). In terms of volatility, economic growth and inflation rates, China’s performance has deteriorated ever since it dropped exchange-rate fixity. This ever-appreciating yuan vis-á-vis the U.S. dollar phase appears to have ended this August, with a small yuan depreciation.


So, why did China drop exchange-rate fixity in 2005? After all, China’s fixed-rate regime had performed very well. Pressure from the U.S. and many nonsensical mercantilist’s arguments caused China to abandon fixity in 2005.

The wrong-headed thinking in Washington is that exchange-rate flexibility in China would result in an ever-appreciating yuan against the greenback. Forget all the talk about the glories of a market-determined, flexible exchange-rate. That rhetoric is just a cover for Washington’s real agenda: an ever-appreciating yuan.

The United States has recorded a trade deficit in each year since 1975. This is not surprising because savings in the U.S. have been less than investment. The trade deficit can be reduced by some combination of lower government consumption, lower private consumption or lower private domestic investment. But, you wouldn’t know it from listening to the rhetoric coming out of Washington.

This is unfortunate. A reduction of the trade deficit should not even be a primary objective of federal policy. Never mind. Washington seems to thrive on counter-productive trade and currency wars that damage both the U.S. and its trading partners.

From the early 1970s until 1995, Japan was an enemy. The mercantilists in Washington asserted that unfair Japanese trading practices caused the U.S. trade deficit and that the U.S. bilateral trade deficit with Japan could be reduced if the yen appreciated against the dollar — a weak dollar policy. Washington even tried to convince Tokyo that an ever-appreciating yen would be good for Japan. Unfortunately, the Japanese complied and the yen appreciated, moving from 360 to the greenback in 1971 to 80 in 1995.

In April 1995, Secretary of the Treasury Robert Rubin belatedly realized that the yen’s great appreciation was causing the Japanese economy to sink into a deflationary quagmire. In consequence, the U.S. stopped arm-twisting the Japanese government about the value of the yen and Secretary Rubin began to evoke his now-famous strong-dollar mantra. But, while this policy switch was welcomed, it was too late. Even today, Japan continues to suffer from the mess created by the yen’s appreciation. As Japan’s economy stagnated, its contribution to the increasing U.S. trade deficit declined, falling from its 1991 peak of almost 60% to 9% in 2014. While Japan’s contribution declined, China’s surged from slightly more than 9% in 1990 to 47% in 2014. With these trends, the Chinese yuan replaced the Japanese yen as the mercantilists’ whipping boy.

Interestingly, the combined Japanese-Chinese contribution has actually declined from its 1991 peak of over 70% to only about 56% in 2014. This hasn’t stopped the mercantilists from claiming that the Chinese yuan is grossly undervalued, and that this creates unfair Chinese competition and a U.S. bilateral trade deficit with China.

This raises an obvious question: does a weak yen or yuan vis-á-vis the dollar (in nominal terms) explain the contribution of Japan and China to the U.S. trade deficit? After all, this exchange-rate argument (read: competitive advantage) is what the mercantilists use to wage war. When it comes to Japan, whose contribution to the U.S. trade deficit has been declining for the past twenty years, there is a very weak relationship between the yen’s strength and Japan’s contribution to the trade deficit. Certainly not something worth going to war over. And as for China, the relationship between the strength of the yuan and China’s contribution to the U.S. trade deficit contradicts the mercantilist conjecture. Indeed, the Chinese yuan has appreciated in nominal terms relative to the greenback over the past twenty years, and so has the Chinese contribution to the U.S. trade deficit.

It isn’t only the mercantilists’ pols who don’t understand that nominal exchange rates don’t have much to do with trade deficits. Some economists — most notably C. Fred Bergsten of the Peterson Institute for International Economics and supply-side guru Arthur B. Laffer — don’t seem to understand the economics behind the U.S. trade deficit, which has been with us since 1975. Those economics were fully explained by one of my occasional collaborators, the late Ronald I. McKinnon from Stanford University. Indeed, he elaborated on them in his last book, The Unloved Dollar Standard: From Bretton Woods to the Rise of China (2013). In short, the U.S. trade deficit is the result of a U.S. savings deficiency, not exchange rates. As a result, the trade deficit can be reduced by some combination of lower government consumption, lower private consumption or lower private domestic investment. You wouldn’t know this basic truth by listening to the rhetoric coming out of Washington.

What should China do? First, Beijing should stop listening to Washington. Second, it should adopt a free-market, exchange-rate regime — like the currency board system in Hong Kong. Since 1983, the HKD/USD exchange rate has been fixed at 7.8, and the Hong Kong dollar has been fully convertible and fully backed by U.S. dollar reserves. By adopting such a fixed-rate regime, Beijing would dump instability and embrace stability.

Steve H. Hanke is a professor of Applied Economics at The Johns Hopkins University in Baltimore and a Senior Fellow at the Cato Institute in Washington, D.C. You can follow him on Twitter: @Steve_Hanke

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In N.J., It Pays to Be Poor

Michael D. Tanner

When you hear the term “welfare state,” most people think of Europe and countries like Denmark or France. No doubt those countries offer a wide range of benefits targeted to the middle class, retirees, and so forth. But according to a new study released by the Cato Institute this week, someone who is poor might just be better off here in New Jersey.

The federal government currently funds more than 100 anti-poverty programs. While no one participates in all of them, many can and do collect assistance from multiple programs.

In New Jersey, a mother with two children under the age of five who participates in six major welfare programs (Temporary Assistance for Needy Families (TANF), Supplemental Nutrition Assistance Program (SNAP or food stamps), housing assistance, the Low Income Home Energy Assistance Program (LIHEAP), the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), and free commodities) would receive a benefits package worth $30,575 per year.

Using a similar measure, Cato found that benefits in Europe ranged from $38,588 per year in Denmark to just $1,112 in Romania. In fact, New Jersey’s welfare system can be more generous than every country included except Denmark. The benefits package is higher than in well-known welfare states as France ($17,324), Germany ($23,257) and even Sweden ($22,111).

Moreover, this benefit package doesn’t include Medicaid, which would be worth roughly $8,150 for this household, because Europe’s health care systems are not targeted to the poor, unlike Medicaid.

New Jersey has the fifth-highest benefit package in the United States, but overall the U.S. fits comfortably in the middle of the pack when it comes to providing for the poor.

One of the problems with these welfare systems is that they can create situations where participants have little incentive to increase work effort because they would lose most of their earnings through lower benefits or higher taxes, while also having to bear the costs associated with going to work like transportation: these people would see little tangible improvement in their standard of living by taking up a job, working more hours or moving up the job ladder.

People in these programs are not lazy, but they are also not stupid. Like everyone else, they respond to incentives. If welfare pays better than work, people on welfare will be less likely to work.

Indeed, economists often discuss the danger that high marginal tax rates can discourage economic activity. But some of the highest effective marginal tax rates in the world are for someone leaving welfare for work.

By creating such a big disincentive for work, our tangled, ineffective welfare system can harm the same low-income people it is supposed to help, in addition to the taxpayers who must fund nearly $1 trillion per year in anti-poverty spending. After all, the evidence strongly suggests that work, even in a low-paying entry level job, is an important route out of poverty: fewer than 3 percent of Americans who work full-time are poor.

Many EU countries have recognized some of these problems and begun to reform. For example, several countries have consolidated multiple programs in their patchwork welfare systems. Others have strengthened work requirements or established time limits for benefits. Still others have established or expanded work-based tax credits or transitional assistance to increase the value of work. In many cases, these reforms are tentative, but they are steps in the right direction.

In that sense, despite the conventional wisdom that welfare in Europe is more expansive and entrenched than in the United States, at least some of these countries are farther along than the United States in terms of recognizing some of these problems and taking steps to address them.

That’s why it is so disappointing that Gov. Chris Christie, who casts himself as a get-things-done reformer, has done little to address New Jersey’s troubled welfare system. In FY 2013, more than 10 percent of head of household recipients had been on the program for more than 60 months and this year the preliminary work participation rate has hovered around 26 percent. The state also continues to employ a waiver exempting able-bodied adults without dependents from SNAP’s work requirement.

Christie did veto a bill that would have leveraged federal SNAP dollars by giving people energy assistance without regard to their heating and cooling expenses, but that is far short of the bold action he has promised in other areas.

Michael D. Tanner is senior fellow at the Cato Institute. Charles Hughes, a research associate at Cato, also contributed to this oped.

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DC Has a Bigger Welfare State than Any European Country besides Denmark

Michael D. Tanner and Charles Hughes

When you hear the term “welfare state,” most people think of Europe and countries like Denmark or France. No doubt those countries offer a wide range of benefits targeted to the middle class, retirees, and so forth. But according to a new study released by the Cato Institute this week, someone who is poor might just be better off here in D.C.

The federal government currently funds more than 100 anti-poverty programs. While no one participates in all of them, many can and do collect assistance from multiple programs.

In D.C., a mother with two children under the age of five who participates in six major welfare programs — Temporary Assistance for Needy Families (TANF), Supplemental Nutrition Assistance Program (SNAP or food stamps), housing assistance, home energy assistance, Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), and free commodities) would receive a benefits package worth $34,963 per year.

D.C. has the second highest benefit package in the United States, but overall the U.S. fits comfortably in the middle of the pack when it comes to providing for the poor.”

Using a similar measure, Cato found that benefits in Europe ranged from $38,588 per year in Denmark to just $1,112 in Romania. In fact, the District’s welfare system can be more generous than every country included except Denmark. The benefits package is higher than in well known welfare states as France ($17,324), Germany ($23,257) and even Sweden ($22,111). Moreover, this benefit package doesn’t include Medicaid, which would be worth roughly $8,140 for this household, because Europe’s health care systems are not targeted to the poor, unlike Medicaid.

Of course, D.C. has the second highest benefit package in the United States, but overall the U.S. fits comfortably in the middle of the pack when it comes to providing for the poor.

One of the problems with these welfare systems is that they can create situations where participants have little incentive to increase work effort because they would lose most of their earnings through lower benefits or higher taxes, while also having to bear the costs associated with going to work like transportation: these people would see little tangible improvement in their standard of living by taking up a job, working more hours or moving up the job ladder.

People in these programs are not lazy, but they are also not stupid. Like everyone else, they respond to incentives. If welfare pays better than work, people on welfare will be less likely to work.

Indeed, economists often discuss the danger that high marginal tax rates can discourage economic activity. But some of the highest effective marginal tax rates in the world are for someone leaving welfare for work.

By creating such a big disincentive for work, our tangled, ineffective welfare system can harm the same low-income people it is supposed to help, in addition to the taxpayers who must fund nearly $1 trillion per year in anti-poverty spending. After all, the evidence strongly suggests that work, even in a low-paying entry level job, is an important route out of poverty: fewer than 3 percent of Americans who work full-time are poor.

Many EU countries have recognized some of these problems and begun to reform. For example, several countries have consolidated multiple programs in their patchwork welfare systems. Others have strengthened work requirements or established time limits for benefits. Still others have established or expanded work-based tax credits or transitional assistance to increase the value of work. In many cases, these reforms are tentative, but they are steps in the right direction.

In that sense, despite the conventional wisdom that welfare in Europe is more expansive and entrenched than in the United States, at least some of these countries are farther along than the United States in terms of recognizing some of these problems and taking steps to address them.

The District’s welfare system has a poor track record of helping people transition to work. It exempts able-bodied adults without dependents, who made up a 28 percent of participating households in 2013, from SNAP’s work requirements. Only 22 percent of applicable TANF participants fully participate in the work requirements. Long-term TANF participants have fared worse: an auditor’s investigation focusing on people who received benefits for over 60 months found that only 12 percent were able to maintain a job for six months.

In one glimmer of positive progress, the District was able to raise the number of participants who exited due to increased income from 1,058 in 2013 to 1,708 in 2014, but low work participation rates could limit further gains.

Michael Tanner is a senior fellow and Charles Hughes is a research associate at the Cato Institute.

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One Solution to the Immigration Debate

Alex Nowrasteh

Conservatives are torn over the issue of legalization for illegal immigrants. Some, like Sen. Marco Rubio, support a path to citizenship for many illegal immigrants, while others, like political scientist Peter Skerry, support legalizing them without a path to citizenship. A third group of conservatives opposes any and all efforts to legalize illegal immigrants in the United States. These groups have stalemated into three intellectually armed camps under the constant watch of a near-unified liberal opposition that supports legalization with a path to citizenship for virtually all illegal immigrants.

The Senate’s immigration reform bill in 2013 included a one-size-fits-all legalization that was the focal point of political opposition. Despite the opposition, that legalization plan would have legalized only about 70 percent of illegal immigrants, according to the Congressional Budget Office. Other proposals for immigration reform and legalization have failed continuously over the last decade. But a better path toward legal status and an easier political debate over legalization are possible.

The policy preferences of path-to-citizenship conservatives and legalization-without-citizenship conservatives can be combined into one reform package that will outweigh opposition by the anti-legalization conservatives and attract liberal support. The reform idea proposed here is a three-tiered legalization system that allows otherwise law-abiding illegal immigrants to individually choose for themselves whether they want to be on a path to citizenship or just want permanent legal residency without the option to naturalize. Instead of a one-size-fit all legalization program, which has failed to pass Congress every time it has been proposed since 2001, a three-tiered plan would allow illegal immigrants to pick for themselves and be politically viable with liberals and pro-reform conservatives.

This three-tiered legalization plan would move American immigration policy away from the one-size-fits-all mindset that dominates political thinking on this topic.”

We are debating immigration legalization because American immigration law is schizophrenic.

On one hand, social reformers want to centrally plan and manage the inflow of immigrants. Laws supported by these reformers are quixotic and assume the government has the incentive, ability and information to accurately and wisely determine which immigrants should come here and what skills they should have. Complementary to that hubris is an undeserved confidence that the new immigration laws will actually be followed. The late labor historian, economist, and immigration restrictionist Vernon M. Briggs Jr. found that illegal immigration is a result of U.S. immigration restrictions that were unrealistic given American demand for immigrants and were never properly enforced despite desperate efforts to do so.

On the other hand, Congress has forgiven illegal immigrants for breaking American laws on several occasions. Every major immigration reform in the 20th century was accompanied by legalization. The Immigration Act of 1924 that closed the borders with Southern and Eastern Europe and tightened them with Asia was followed by an amnesty in 1929. The administration of the Bracero Program from 1942 to 1964 granted numerous work permits to illegal immigrants, but not a path to citizenship. Another amnesty was again passed in 1958. The Immigration Act of 1965 and the Immigration Reform and Control Act of 1986 also amnestied illegal immigrants, the latter being the largest by far.

This cycle of reform followed or accompanied by legalization will repeat itself, but the form that this takes is still up for debate. The no-legalization portion of the conservative movement will continue to delay reform but public opinion is steadily moving against them. If conservatives want to shape any future legalization or, better yet, take credit for it, I propose a three-tiered legalization scheme that can unite pro-reform conservatives, earn a lot of liberal agreement, and gain the support of much of the immigrant rights community.

It is important to understand the characteristics of illegal immigrants before detailing this new reform idea. The Pew Research Center carefully studies the characteristics of illegal immigrants. The center estimates that in 2012, there were about 11.2 million illegal immigrants who comprised 3.5 percent of the U.S. population, 26 percent of all immigrants, and 5.1 percent of all workers. Illegal immigrant men were more likely to be employed than native or legal immigrant men, but the opposite was true for women. They are lower-skilled and have lower household incomes.

More than a third of unlawful immigrants lived in California and Texas. Forty-seven percent lived in households with children compared to 21 percent of U.S.-born Americans. Up to 16.6 million people, including the U.S.-born citizen children of illegal immigrants and their legal spouses, live in a household where one immediate family member is an illegal immigrant. Eighty-one percent are from Mexico, Central or South America and the Caribbean. As of 2011, 85 percent of illegal immigrants have resided in the United States for more than five years, while 63 percent have been here for 10 years or longer.

Three-tiered legalization

The tiered legalization process I propose contains three different options available to otherwise law-abiding illegal immigrants. Under this plan, the individual illegal immigrant could choose one path to legal status and could not switch to another at a later date, except maybe by paying an enormous penalty. This plan assumes no other changes in the immigration laws, no enforcement triggers that would have to be met before legalization could begin, and no regulations that would bar the immigrant from getting a green card through marriage or military service.

  • The first path is a work permit. This allows the illegal immigrant to work, travel and live in the United States legally. This visa should require a small initial fee of $100, plus the paperwork costs, and a renewal fee of $25 every two years so long as the worker is residing in the United States and complies with the terms of the permit. If the worker decides to move outside the United States, then he should have the ability to return with this permit upon payment of the renewal fee. If he decided to return to his home country for years, he can retain the ability to come back and work legally in the future. The migrant will lose the permit and be deported if he is convicted of a crime. This permit will not allow the legalized immigrant to sponsor any family members to immigrate and he or she is permanently barred from all means-tested welfare benefits.
  • The second path is permanent non-citizen residency very similar to that proposed by Skerry. This is a green card in every sense except that it does not allow the immigrant to become a citizen. He or she can live, work, travel, sponsor immediate family members for real green cards, and purchase firearms but not naturalize. The fee should be the same as a green card — $1,070 — and it should be renewed every 10 years like the green card. Permanent non-citizen residents should not have access to means-tested welfare programs until they renew it for a second time. At such point, the immigrants in this category should have the same limited access as green card holders who have resided in the United States for more than five years, dependent upon their state of residency. Permanent non-citizens convicted of serious felonies or a series of misdemeanors, like current green card holders, will be deported after their imprisonment.
  • The third path should eventually lead to citizenship. It should begin with a registered provisional immigrant status that costs $1,070, denies the owner access to means-tested welfare and is similar to the legalization provision in the 2013 Senate bill. The provisional immigrant permit transforms into a normal green card after the immigrant passes an English fluency exam, takes a series of American history and civics classes, has lived continuously in the United States for five years, has shown steady employment, and has found a number of American citizens who know him and can attest to his willingness and desire to become an American citizen. If the provisional immigrant does not fulfill any of those requirements in a decade or changes his mind, he should be granted permanent non-citizen residency under the second path. If he does fulfill the requirements, he would have the option to pay another $1,070 to gain a normal green card that would eventually lead to citizenship if the immigrant chooses to naturalize and follow the terms of residency.

Each path to legal status has a different series of benefits and costs. The work permit is the cheapest, but also the most limiting. The permanent non-citizen residency option is more expensive, but allows for the immigrant to sponsor additional immediate family members to immigrate. The green card is the most expensive and can eventually allow the immigrant to become a citizen and participate in America’s political system. Crucially, this system will work only if switching between these tiers is not allowed, except for a large fee.

This legalization plan would satisfy conservatives who support citizenship and the Skerry wing who support legalization without citizenship. Illegal immigrants overwhelmingly come here for economic opportunity, so most would choose a work permit or permanent non-citizen residency. Those options are much cheaper and offer almost all of the economic benefits as a green card without a path to citizenship. After the 1986 amnesty, only 45 percent of the newly legalized immigrants even chose to become citizens by 2009, showing that they were happy with their green cards because it allowed them to legally work and live as they please without the fear of deportation. If the cheaper permanent non-citizen residency or work permit options were available in 1986, then even more of the amnestied immigrants would have chosen it. The lesson from this is that the path to citizenship component of the green card is the least valuable portion of that document while the legal work authorization, ability to travel, and family sponsorship options are most important.

However, a work permit or permanent non-citizen residency are not enough by themselves. Some illegal immigrants want to become American citizens, especially Dreamers who were brought here at young ages and grew up in the United States. Legalization without the option of citizenship is politically unstable for them. If illegal immigrants who want citizenship are legalized, but cannot even become citizens, then they will politically agitate, lobby and eventually succeed in earning citizenship for themselves — probably with the help of left-wing groups who currently favor a path to citizenship.

There are roughly 56,000 residents of American Samoa who are non-citizen nationals of the United States and there is no large-scale political movement to grant them citizenship. But that is a paltry number compared to the 11.2 million illegal immigrants in the United States. Millions of green card holders are eligible for citizenship but they choose not to apply. They actually have the choice to do so, which makes the system work. Past or current experiences with non-citizens are inapplicable to a mass-legalization without the option for eventual citizenship.

If this plan is adopted, some illegal immigrants will initially choose the work permit or permanent non-citizen residency option, but then seek an upgrade to a more expensive path. To satisfy liberals who will be sympathetic to those who change their minds, there should be a way for them to move from a non-citizenship path to a green card. To satisfy conservatives, moving from a non-citizenship path to a citizenship path should be more expensive and difficult than the three simple paths laid out here. There should be other requirements for upgrading, such as close family ties in the United States, the recommendation of numerous American citizens, English fluency and work requirements. An immigrant who chooses to downgrade, say from the path to citizenship to permanent non-citizen residency or a work permit, should be compensated for the difference in price.

Objections and rebuttals

Political coalitions, with the exceptions of anti-legalization conservatives and citizenship-for-everybody liberals, will be satisfied by this three-tiered approach. Pro-citizenship conservatives should be satisfied because there is an option for illegal immigrants to naturalize. Conservatives who favor legalization without citizenship will be satisfied because the majority, possibly an overwhelming majority, will choose the legalization options that do not lead to citizenship. Thus, conservative fears that legalized immigrants will eventually form an impenetrable Democratic voting bloc will be severely attenuated.

Current illegal immigrants will be happy with this three-tiered system, too. Those illegal immigrants who want to become citizens can do so by following a more expensive route to legal status, while those who just want to work, live and travel to and from the United States legally can do that. Pricing a pathway to citizenship higher than the other options allows the individual immigrant to pick his future level of involvement in the political and economic system of the United States. Most importantly, the choice would be up to the individuals involved — something denied by every other proposed one-size-fits-all legalization plan. The three-tiered legalization is also an improvement over the current system, even taking into account President Obama’s executive actions to temporarily legalize some illegal immigrants. The resident’s actions are temporary, only cover a fraction of the unauthorized immigrant population, and can be overturned by the courts or the executive actions of the next president. A three-tiered solution passed by Congress would resolve those concerns.

Most liberals, with the exception of the citizenship-for-everybody wing, would also be satisfied because the immigrant community would be satisfied. This three-tiered plan would cause a fissure between liberals in the citizenship-for-everybody lobby and other liberals, but it would not be enough to fracture their coalition. Although most of the legalized population would not choose the path to citizenship, those who want to will be able to do so. Several private liberal and immigrant rights groups would likely mobilize to convince many of the legalized immigrants to choose the green card path to citizenship option.

Legalization does not need to be limited to two choices: legalization with a path to citizenship or no legalization at all. Among illegal immigrants, there is a range of skills, ambitions and desires for citizenship. The current legal immigration system allows a range of dozens of different visas for those seeking to come to the United States. Although those legal options are too limited given American demand for immigrants and their desire to come, they do include many work and student visas that do not lead to citizenship while others do. A legalization program for illegal immigrants that creates a similar range of choices will better satisfy both the immigrants and many political coalitions better than a single option.

Individual illegal immigrants choosing one of these three options for themselves, and sticking with their choice, is the key to a sustainable legalization system. On one hand, conservatives for legalization, but not citizenship, are right that most illegal immigrants do not want it although a loud minority does. Citizenship-for-everybody liberals, on the other hand, want a path to citizenship for illegal immigrants despite only some of the immigrants themselves actually demanding it. Instead of the government choosing for everybody, Congress should create three options and let the immigrants choose for themselves.

The U.S. immigration system is too restrictive and enforcement alone will not solve the problem despite numerous attempts to beef up security. Millions of unauthorized immigrants are the result of this poorly functioning system. Many people think that the U.S. government should not legalize people who broke our immigration laws. Those laws and the immigration reality are in conflict and reality is winning — as it always does. Modernizing the legal immigration system and reforming enforcement are necessary to halt illegal immigration in the future, but so is legalizing the illegal immigrants already here.

Disagreement over legalization has politically held up efforts to reform the rest of the immigration system. If we can resolve the dispute over legalization then the rest of the immigration system should be simple to reform by comparison. This three-tiered legalization plan outlined here would move American immigration policy away from the one-size-fits-all mindset that dominates political thinking on this topic. The three-tiered system will legalize peaceful unauthorized immigrants, give each of them an individual choice of how to do it, and be politically acceptable to most conservatives and liberals.

Alex Nowrasteh is the immigration policy analyst at the Cato Institute’s Center for Global Liberty and Prosperity.

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The Latest Climate Kerfuffle

Patrick J. Michaels

Are political considerations superseding scientific ones at the National Oceanic and Atmospheric Administration?

When confronted with an obviously broken weather station that was reading way too hot, they replaced the faulty sensor — but refused to adjust the bad readings it had already taken. And when dealing with “the pause” in global surface temperatures that is in its 19th year, the agency threw away satellite-sensed sea-surface temperatures, substituting questionable data that showed no pause.

The latest kerfuffle is local, not global, but happens to involve probably the most politically important weather station in the nation, the one at Washington’s Reagan National Airport.

Are political considerations superseding scientific ones at the National Oceanic and Atmospheric Administration?”

I’ll take credit for this one. I casually noticed that the monthly average temperatures at National were departing from their 1981-2010 averages a couple of degrees relative to those at Dulles — in the warm direction.

Temperatures at National are almost always higher than those at Dulles, 19 miles away. That’s because of the well-known urban warming effect, as well as an elevation difference of 300 feet. But the weather systems that determine monthly average temperature are, in general, far too large for there to be any significant difference in the departure from average at two stations as close together as Reagan and Dulles. Monthly data from recent decades bear this out — until, all at once, in January 2014 and every month thereafter, the departure from average at National was greater than that at Dulles.

The average monthly difference for January 2014 through July 2015 is 2.1 degrees Fahrenheit, which is huge when talking about things like record temperatures. For example, National’s all-time record last May was only 0.2 degrees above the previous record.

Earlier this month, I sent my findings to Jason Samenow, a terrific forecaster who runs the Washington Post’s weather blog, Capital Weather Gang. He and his crew verified what I found and wrote up their version, giving due credit and adding other evidence that something was very wrong at National. And, in remarkably quick action for a government agency, the National Weather Service swapped out the sensor within a week and found that the old one was reading 1.7 degrees too high. Close enough to 2.1, the observed difference.

But the National Weather Service told the Capital Weather Gang that there will be no corrections, despite the fact that the disparity suddenly began 19 months ago and varied little once it began. It said correcting for the error wouldn’t be “scientifically defensible.” Therefore, people can and will cite the May record as evidence for dreaded global warming with impunity. Only a few weather nerds will know the truth. Over a third of this year’s 37 90-degree-plus days, which gives us a remote chance of breaking the all time record, should also be eliminated, putting this summer rightly back into normal territory.

It is really politically unwise not to do a simple adjustment on these obviously-too-hot data. With all of the claims that federal science is being biased in service of the president’s global-warming agenda, the agency should bend over backwards to expunge erroneous record-high readings.

In July, by contrast, NOAA had no problem adjusting the global temperature history. In that case, the method they used guaranteed that a growing warming trend would substitute for “the pause.” They reported in Science that they had replaced the pause (which shows up in every analysis of satellite and weather balloon data) with a significant warming trend.

Normative science says a trend is “statistically significant” if there’s less than a 5 percent probability that it would happen by chance. NOAA claimed significance at the 10 percent level, something no graduate student could ever get away with. There were several other major problems with the paper. As Judy Curry, a noted climate scientist at Georgia Tech, wrote, “color me ‘unconvinced.’”

Unfortunately, following this with the kerfuffle over the Reagan temperature records is only going to “convince” even more people that our government is blowing hot air on global warming.

Patrick J. Michaels is director of the Center for the Study of Science at the Cato Institute.

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Inspector Gotcha

Walter Olson

After years of Wall Street–friendly Democrats and Republicans with crossover appeal, of Chuck Schumers and Michael Bloombergs and Hillary Clintons and George Patakis, New Yorkers were finally ready for a candidate from the authentic Left. The election victor, who’d worked closely with the Working Families Party and financed his run with nearly $1 million from unions, was a true movement progressive, at home in the sorts of gatherings where “Joe Hill” might be sung and people know who Emma Goldman was. Writing in—where else?—The Nation, the victor had earlier called for a resurgent Left to get beyond a mere “checklist” politics of demands and issues to a more “transformational” sort of politics, which, while promising to “make our lives better,” would also require that we “root out the assumptions about politics or economics or human nature that prevent us” from doing that. Of finding common ground and reaching across aisles, enough had been heard already: the real challenge was to “slow down the bone-crushing machinery of the contemporary conservative movement.”

These might sound like pages from the 2013 ascension of leftist New York City mayor Bill de Blasio. But, in fact, the script played out three years earlier, when New York’s progressives scored a breakthrough by electing as the state’s attorney general Eric Schneiderman, who had no prosecutorial experience but, as Ben Smith noted in a Politico profile the next year, had “spent his career building an ideological infrastructure for the left.” After edging out Nassau district attorney Kathleen Rice by 34 to 32 percent in a five-candidate primary, the Upper West Side state senator went on to win by 11 points in November against Republican candidate Dan Donovan. Last year, he won reelection against GOP challenger John Cahill, this time by a 13-point margin.

New York attorney general Eric Schneiderman has zealously used his office to pursue cases favored by left-wing activists.”

Unlike his predecessors Eliot Spitzer and Andrew Cuomo, Schneiderman is not likely to found a cult of personality or publicly burn with an ambition for higher office. What he does make a show of doing is to remember the people who put him in office—labor advocates, community activists, and the sorts of Upper West Siders for whom progressive ideology is not just an Election Day predilection but a way of life—and help them get what they want. And while Schneiderman has clashed repeatedly with other prominent Democrats, it is a tribute to his staying power that both President Barack Obama and now Governor Andrew Cuomo saw fit to lure him into the tent with concessions and recognition rather than leave him to snipe outside.

Beyond the confines of Washington, D.C., the attorney general of the State of New York is, in some ways, the public official most feared by America’s business community, and for reasons that go beyond the famous tenure of hyperactive AG Eliot Spitzer. (See “Enforcer-in-Chief.”) While New York may now be only the fourth-largest state by population, it remains the nation’s center of finance and marketing. What’s more, unlike any other state’s attorney general, New York’s AG can draw on the uniquely prosecutor-empowering Martin Act of 1921, aimed primarily at financial fraud, the scope of which Nicholas Thompson, now of The New Yorkersummarized in Legal Affairs 11 years ago:

It empowers him to subpoena any document he wants from anyone doing business in the state; to keep an investigation totally secret or to make it totally public; and to choose between filing civil or criminal charges whenever he wants. People called in for questioning during Martin Act investigations do not have a right to counsel or a right against self-incrimination. Combined, the act’s powers exceed those given any regulator in any other state. Now for the scary part: To win a case, the attorney general doesn’t have to prove that the defendant intended to defraud anyone, that a transaction took place, or that anyone actually was defrauded. Plus, when the prosecution is over, trial lawyers can gain access to the hoards of documents that the case has churned up and use them as the basis for civil suits.

After wielding such extraordinary compulsory process, New York’s AG can then, entirely at his discretion, keep the resulting testimony and documents private or release them in full or in snippets, affording him a ready means of trying cases in the press or assisting private groups that may be fighting against the businesses. As Thompson relates, New York lawmakers armed the office with such extraordinary powers on the understanding that they would be used to keep out fly-by-night operators. That was until Spitzer went back on the unspoken deal and turned the act against established businesses, quickly bringing Merrill Lynch and other leading names of American finance to their knees. His successors have never looked back.

Personnel, as they say, is policy: for his chief of staff, the newly sworn-in attorney general Schneiderman chose not some career legal type but the up-and-coming political director of Unite Here, the hotel union. (His director of advocacy, like his top campaign advisor, had previously worked for the politically formidable Service Employees International Union, or SEIU.) And it doesn’t take long browsing Schneiderman’s official AG website—with its separate divisions for “social justice” and “economic justice”—to know that this is not the attorney general of Tennessee or Idaho. True, some of Schneiderman’s projects—a revamp of charities law, closer monitoring of prescription-drug writing, measures against cell-phone theft—might also interest a more conservative attorney general. Equally prominent, however, have been Schneiderman’s legal efforts directed at the so-called gun-show loophole or his threats of fraud actions against energy firms for allegedly overoptimistic projections of the benefits of upstate gas fracking—though, in that case, Schneiderman was just borrowing a page from his predecessor, Cuomo, who had browbeaten utilities into issuing more climate-change warnings—again, ostensibly, as a matter of investor protection.

For the labor movement, no issue has been dearer in recent years than the cause of low-wage work, the aim being both legislated wage mandates and the organizing of low-paid service workers into unions. Schneiderman has been in the fight all along, pushing hard on “wage theft”—a term that represents a continuum of practices, ranging from bald larceny by dishonest casual-labor jobbers to, say, not paying employees overtime if they once sent a work-related e-mail from their cell phone after office hours. He has taken a particular interest in harrying fast-food operators, the unions’ biggest and most elusive quarry. Schneiderman is so close with the unions that, when he sought $2 million in extra pay for deliverers from a Papa John’s franchisee, an official with the SEIU’s Fast Food Forward coalition learned about the suit—and wrote up a blurb in praise of it—before the pizza operator had gotten word.

In both New Jersey and New York, so-called price-gouging statutes—disliked by many economists but popular with voters—make it a punishable offense to charge high prices for scarce supplies like fuel or generators during an emergency. In the aftermath of Superstorm Sandy, as the Wall Street Journal noted, New Jersey’s attorney general—who usually keeps a low profile, as he is not elected but appointed by that state’s governor—decided to go after several retail stores that he felt had committed well-defined infractions of the law. Schneiderman, by contrast—and stirring much more press notice—chose to file subpoenas aimed at exposing the identity of nameless middlemen (businesses or individual persons—it wasn’t clear) who had advertised gasoline at high prices on Craigslist, citing a vague legal provision against the charging of “unconscionably excessive” prices. Going after anonymous Craigslist vendors represents a more intrusive kind of enforcement, one that blurs the lines between public and private, between regulated businesses and what might turn out to be homeowners with an extra stock of gasoline in their garage. Schneiderman’s action left a much wider swath of private actors feeling as if they were being watched.

In the ongoing battles over the new “sharing economy” institutions of Uber, Lyft, and AirBnB, the views of many progressives coincide neatly with the interests of well-organized players in the New York economy. Though these services are enormously popular with young and urban consumers, they are anathema to the serious Left (Salon: “Why Uber Must Be Stopped”) while imperiling the interests of taxi-medallion owners, hotel operators (and their unions), and, in some cases, city bus drivers. (While millions of Americans bridle at the notion of government telling them what they can do with their homes or cars, New Yorkers—between rent regulation and alternate-side-of-the-street parking—are used to it.)

Matthew Feeney of Cato, a specialist in sharing-economy issues, notes that urban policymakers face a choice when these services arrive in their cities: they can insist that they conform to every existing regulation that governs their competitors, from inspections to commercial licenses; or they can devise new regulations (or reform old ones) so as to bring the services largely aboveground, with greater likelihood of imposing on them taxes, supervision, and methods of consumer recourse. Schneiderman, he says, “is quite safely in the camp” of the regulatory hawks. In one celebrated episode, he subpoenaed the private identity and personal information of tens of thousands of New Yorkers who had put their units on AirBnB, though the ensuing furor over privacy led to a “clarification” that the attorney general’s goal—for the moment, at least—was only to root out renters of multiple units and those who had gone into renting units as an occupation.

“Arbitrary and Capricious”

When New York attorney general Eric Schneiderman filed charges of unlawful redlining against two banks in the Rochester and Buffalo areas—they had concentrated their lending in the suburbs—he drew an unusual rebuke from Frank H. Hamlin III, CEO of another small upstate bank, Canandaigua National Bank and Trust, which had not been charged. In a letter to shareholders, Hamlin reassured them that his own bank’s relations with its regulators “are healthy. I am, however, extremely suspicious of the arbitrary and capricious manner in which various agencies (prosecutors) are abusing the legal system in order to further their own political and economic interests.” And he noted a foundational problem: “The regulations are vague in explaining what conduct is actually prohibited.” That gives enforcers plenty of discretion as to when to file complaints and against whom.

Hamlin went on to explain that one of the two banks that Schneiderman targeted “has chosen to merely fold while the other has chosen to fight. I can understand the decision to fold. The potential sanctions are severe on both corporate and personal fronts. One must decide whether to put the livelihood of their employees and potentially their own personal liberty on the line or merely cry ‘uncle’ and give the ‘people’ its pound of flesh and go on with life.

“Those who choose to fight are forced to depend upon a legal system that has mutated its focus from time-honored legal principle and justice to efficiency and political expediency,” he wrote. “I can assure you, there is no such thing as ‘efficient justice.’ ”

Finally, Hamlin warned against assuming that any decision to fold was an indicator of ultimate guilt. “The reason that 98 percent of prosecutions are settled instead of taken to trial is not the result of defendants saying, ‘Aw shucks, you caught me.’ It has to do with a fundamental and reasonable lack of faith that our legal system is working properly.”

When the letter began to attract press notice, the bank declined further comment, saying that the letter spoke for itself. Speaking out is all well and good, but in New York, it’s important not to rile up the authorities by doing so too loudly.

The hard-charging attorney general has sometimes had to back off when his overzealousness runs into inconvenient facts. “Herbal Supplements Filled with Fake Ingredients, Investigators Find,” shrieked a CBS headline this past February, heralding what was supposed to be one of Schneiderman’s biggest enforcement actions—but soon turned into one of his most embarrassing.

The initial news coverage was breathless. “Many pills and capsules sold as herbal ‘supplements’ contain little more than powdered rice and house plants, according to a report released Monday by the office of New York state attorney general Eric Schneiderman,” ran The Atlantic’s report. “An investigation found that nearly four of five herbal supplements do not contain the ingredients listed on labels, and many supplements—tested from among leading store-brand products sold at GNC, Target, Walmart, and Walgreens—contain no plant substance of any kind at all.”

The dietary-supplements business has historically benefited from a congressionally prescribed regime of light federal regulation, and it had already come under suspicion. Extracts of such plants as Saint-John’s-wort, ginseng, and echinacea were often marketed with doubtful and unproved health claims that minimized the risks of overdose and side effects. Reports had also come in about sloppy manufacturing and mislabeling: a study last year of supplements sold as ginkgo biloba, for example, found that a disturbingly high 16 percent did not appear to contain any of the advertised plant.

But Schneiderman’s February announcement appeared to prove that the problems were worse than anyone had dreamed. His office had commissioned its own private tests of popular supplements from some of the nation’s biggest retailers, and the results were startling: 79 percent had no trace of DNA from the labeled plants. There seemed no other explanation but that the business was dominated by outright fraud. The AG backed up his charges by sending cease-and-desist letters to retailers, and private class-action suits followed within days.

But the fraud turned out to be of a rather different sort. Almost at once, experts in relevant biochemical fields—including some longtime vocal critics of the herbal-supplement industry—began to speak out: Schneiderman’s office had gotten nonsensical results by using an inappropriate test, one that neither the industry nor its regulators use to assay final purity. DNA barcode testing, which searches for a particular snippet of DNA distinctive to a plant, may be fine when checking the authenticity of a sample of unprocessed raw plant material. But dietary supplements are made by extracting the so-called active ingredient, which often means prolonged heating, use of solvents, and filtering that removes or breaks down the DNA. The better the purification methods used to isolate the active ingredient, in fact, the likelier that the original plant’s identifiable DNA will be lost. Harvard Medical School’s Pieter Cohen, a leading critic of supplement marketing, told Forbes that it was “no surprise” that Schneiderman’s tests came out negative: “Even if DNA got in, we’d expect it to be destroyed or denatured.” Meanwhile, GNC, the biggest player in supplements retailing, went back and retested the accused products from its line and found, Schneiderman notwithstanding, that all contained the labeled active ingredient.

As the chorus of scientific criticism grew, Schneiderman’s office responded with bluster, telling one news outlet: “We are confident in our testing procedures. The burden is on the industry to prove that what is on the labels is in the bottles.” Remarkably, however, it declined to disclose the methods that its testing consultant had used.

When the attorney general of a state like New York sues a national company, he virtually always manages to compel a settlement of some sort: the cost in publicity and the legal risk of mounting a long-term legal fight are just too high. But Schneiderman’s settlement with industry leader GNC was not only quick—it came less than two months after he filed the charges—but also turned out, in its fine print, to belie Schneiderman’s inevitable claims of a big consumer victory. Bill Hammond of the Daily News sums it up:

The company admitted no wrongdoing, paid no fine and was allowed to go back to selling exactly the same products manufactured in exactly the same way.

The AG who weeks earlier had strongly implied that most of GNC’s products were fake was now affirming that he found “no evidence” that the company deviated from federal regulations.

GNC did agree to conduct DNA testing going forward—but on its raw materials, not the finished products [emphasis added]. It also agreed to post signs explaining the difference between plants and processed extracts, in case consumers were confused about that.

The whole affair inflicted millions of dollars in economic damage on companies that had done nothing wrong, while sending consumers around the country into needless spasms of anger, worry, and outrage. As Hammond writes: “It turns out the one peddling snake oil was Schneiderman himself.”


Within recent memory, the office of the New York attorney general has branded defendants as lawbreakers over past actions that were plainly lawful at the time; imposed penalties under New York law on activities taking place in other states, even though neither the other states’ law, nor federal law, would have imposed penalties; extracted from defendants huge settlements related vaguely, if at all, to any underlying damages or applicable fines; and sluiced the resulting cash to politically favored New York beneficiaries, bypassing the state legislature, despite its constitutional role as overseer of public spending. These practices are controversial, but none was invented by Eric Schneiderman or, for that matter, by his New York predecessors Andrew Cuomo or Eliot Spitzer. All were first pioneered by attorneys general in other states.

State attorneys general really took off as players on the national scene in the 1970s and 1980s, a period in which the number of staff attorneys in AG offices quadrupled, according to figures in Paul Nolette’s new book, Federalism on Trial. Once the National Association of Attorneys General, or NAAG, began to take a more active role in helping beef up and coordinate formerly scattered efforts, multistate AG litigation, in which many state offices band together to file suit, began to grow, from fewer than five cases a year three decades ago to 40 to 50 cases a year more recently.

Is this a spontaneous upsurge reflecting the decentralized genius of our system? Not quite: as Nolette explains, Congress was, in fact, busy over this period funneling federal grants to state AG offices to build up their strike-force capacity against business defendants, while revamping laws to give them more enforcement power. The executive branch helped, too: “[F]ederal agencies have aggressively promoted [state AG] litigation working groups,” Nolette writes.

The 1990s tobacco campaign, culminating in a $246 billion multistate settlement in 1998, changed everything. For one thing, as I note in my book The Rule of Lawyers, it sent far more money than anyone had imagined through AGs’ offices, resulting in logrolling, cozy fee-sharing deals, and outright corruption. It also encouraged the fateful idea that AGs can and should bypass the national legislature by, in effect, making new law on issues of public interest for which progressives lacked the votes in the U.S. Congress. Thus, as Nolette demonstrates, Spitzer led a successful challenge to outlaw pharmaceutical pricing practices that were well known to federal regulators—and that Congress had declined to disturb—by going to court seeking to have them redefined as “fraud.” He also tried to use AG power to achieve nationwide gun control through litigation, though that effort failed.

When Schneiderman and Cuomo fought their 2014 tug-of-war over whether banking-settlement money should go toward the attorney general’s announced priorities or be shifted to the state’s general fund, they were reenacting a script played out many times in other states. It’s common for AGs’ offices to keep at least enough money from settlements to cover their own investigation; state laws vary widely, however, on whether they have to turn over surplus money to a general fund. When they don’t do so, the AG office can quickly become a power center, handing out (in effect) appropriations that bypass the state legislature’s scrutiny. In states like Arkansas, Massachusetts, and West Virginia, AG offices have channeled settlement funds to health nonprofits, police and fire charities, and agencies of their own choosing within state, county, and local government. Other favored beneficiaries include legal-aid programs, bar associations, and law schools—the legal profession being, of course, a key political constituency of any AG’s office. With control over big money flows, smart AGs can populate a political landscape with grateful allies. California AG Bill Lockyer was famous for doing this; he even once steered $200,000 to a stridently combative Sacramento pressure group whose activities included an “Arnold Watch,” which kept tabs on Lockyer adversary Governor Arnold Schwarzenegger.

Forty-three of the 50 states’ attorneys general are elected on ballot lines separate from their governors; the job has become legendary as a power base and springboard to higher office. With little or no involvement in the nitty-gritty of violent crime prosecution but near-total discretion over the filing of civil cases, most AGs are free to focus on popular actions that will reap uncritical publicity. Targets may murmur privately about grandstanding demagogues, but they usually want to settle fast and quietly—especially if they’re respected companies with a public image to protect. Political rivals hold their tongues, too, while campaign contributions roll in: hardly anyone wants to get on the wrong side of his state’s chief law enforcement officer. Small wonder that Bill Clinton, a former state AG himself, called it the best job he’d held in politics—and that was after he’d been elected president.

At the center of the Schneiderman record are the various settlements made between banking and financial institutions and state attorneys general. One of the AG’s biggest publicity hits came early in his tenure, when he derailed an all-but-finished deal between the other 49 attorneys general and large mortgage servicers over “robo-signing” and related practices, saying that it wasn’t punitive enough toward the companies and should be renegotiated. After winning concessions in that battle, he pulled a sequel by barging into a nearly completed settlement between investors’ lawyers and Bank of New York Mellon, bringing new allegations against the bank. (New York State wasn’t even a party to that case; Schneiderman’s office said that it was representing the public interest under what is known as the doctrine of parens patriae, or the state suing on behalf of its citizens.) Many of the lawyers who had negotiated the deals—including, in the robo-signing case, some of Schneiderman’s fellow state AGs—were furious with the late-arriving New Yorker for blowing up the product of months of negotiation. The lawyers felt that, while no settlement was perfect, battling for another year or two in court would delay the intended benefit to underwater homeowners.

But the body of opinion leftward of Senator Elizabeth Warren—what you might call the Occupy or Greek Left—was smitten. In these quarters, after all, certain articles of faith prevail: that criminal business misconduct, not foolishness or error or wrongly stimulative government policy, was the key driver of the financial bubble and subsequent crash of the 2000s; that the losses sustained by ordinary people were not primarily a function of a more general wealth destruction but were siphoned into the coffers of the superrich; and that these crimes had gone essentially unpunished, to the lasting shame of the Obama administration.

Yet the particular legal claims that these settlements address are, at best, distantly related to the Left’s narrative about the ultimate meaning of the bubble and crash. Yes, processors did improperly robo-sign paperwork that they were under obligation to review individually, much as you or I certify with a click that we “have read and agree with” contract boilerplate terms that we have no interest in reading, and much as elected officials auto-sign constituent mail that they consider to hold no surprises. A bank that was intent, for whatever reason, on writing a chancy loan—remember, the critique is that banks were misbehaving purposefully rather than by foolishness—would have done so whether or not it had waited until a human had eyeballed each page. Likewise, if one believes that the bubble immiserated America’s working classes, it’s not clear that the ideal fix is a set of securities suits insisting that returns to investors in securitized mortgages should have been higher, all culminating in remedies meant to funnel more money to investors as a class.

But why carp? Even his critics find it hard to deny that Schneiderman’s willingness to make a nuisance of himself paid off handsomely over the short and medium term. New York and other states got more money from the deals—sometimes a lot more. President Obama, tired of the friction, changed tactics and began paying the New York AG flattering attention, appointing him to head an investigatory panel and featuring him prominently at a State of the Union appearance. Just as the real-estate owner with a blocking position in a site assemblage can insist on terms, so New York could play on its holdout status to extract a high ransom in settlements—at least until the act began to wear thin from repeated use. And Schneiderman’s aggressiveness is hardly confined to the banking settlements—he has eagerly pressed redlining charges (see “ ‘Arbitrary and Capricious,’ ”) and pursued an expansion of insider-trading laws to cover a broader swath of behavior.

Altogether, the banking cases yielded billions to New York’s coffers, some tens of millions of which Schneiderman directed to legal-services programs, housing counselors, and assorted “community-development” nonprofits. These include New York Communities for Change, which shares an office building with the Working Families Party and is closely intertwined in its campaigns. “Mr. Schneiderman and the bank negotiated the terms so that he would be given sole discretion over how to allocate the money,” the New York Times reported of one nine-figure fund. That led to further fights: following a battle with Governor Cuomo, Schneiderman consented to turn over some of the windfall to the state’s general fund.

One legacy, however, was hard feelings with his fellow attorneys general—no small matter, since most big cases these days are multistate actions requiring cooperation and delicate trust among groups of AGs. In a 2013New York magazine profile, Chris Smith relates how, when Schneiderman found out that California attorney general Kamala Harris, an up-and-coming liberal, was unwilling to upset the mortgage deal, he dispatched his union-trained chief of staff to the Golden State to start up a ground game against her to motivate her to switch, even collaborating with Harris’s political rivals to do so. Such tactics are practically unheard of in the clubby world of AGs. Short-term, it worked; Harris got on board.

And long-term? One of the liberal lions of state attorney general enforcement, veteran Iowa AG Tom Miller, was scathing when he spoke to Ben Smith for his Politico profile of Schneiderman. “Can a bipartisan group of public officials form an agreement that furthers the public interest—but that’s not totally one-sided or the other and that has some elements of compromise in it? Or can something like this always or usually be destroyed by the left or the right?” And Miller was contemptuous of Schneiderman’s charge—repeated on the AG’s website even today—that the original deal would have given banks a get-out-of-jail-free card for a wide range of misconduct. It’s “not going to be a broad release,” Miller said. “He’s essentially made that up.”

Insider Trading 2.0

Eliot Spitzer took pride in the idea that, as New York attorney general, he could impose rules he saw as fair on national securities markets—regardless of whether the Securities and Exchange Commission in Washington or judges interpreting federal securities law went along. His successors have continued in this vein. Under the federal law of insider trading, for example, there’s usually nothing illegal about letting your clients trade ahead of other people on market-moving information that you yourself have generated. (That’s assuming that you haven’t obtained the information by, say, violating a trust of employment or a duty that you have as an actor in an exchange.) But Eric Schneiderman, in a series of enforcement actions he refers to as “Insider Trading 2.0,” has sought to enforce a much broader prohibition. Most notably, he forced Thomson Reuters to abandon its sponsorship of a University of Michigan consumer-sentiment survey, which had been predicated on getting for its own subscribers early access to the survey findings. (The survey had been sponsored in similar ways since the 1940s, with no complaint from regulators.)

It all has to do with Schneiderman’s idiosyncratic ideas about a level playing field, or, as he described it in a speech, ensuring that America remains “a little more equal than the rest of the world.” As Gordon Crovitz wrote in the Wall Street Journal, the underlying principle here would have banned the original Paul Julius Reuter “from using carrier pigeons in the 1850s to get news to his subscribers in Europe faster than anyone else.”

Politically, it’s hard to argue with Schneiderman’s success. Bill de Blasio is just starting to explore a place on the national stage, but the New York attorney general is already there, with a high-profile job not limited to a city constituency. “An increasingly beloved figure among progressives,” as Sam Stein called him in 2012, Schneiderman has managed to weather his famously testy relationship with Cuomo. When Zephyr Teachout mounted a lively challenge to Cuomo in the Democratic primary, it was Schneiderman (with de Blasio) who went before a Working Families Party assembly to urge activists to stand by the governor.

What’s more, in Schneiderman’s current job, the political advantages of incumbency are usually decisive: sitting AGs rarely lose their bids for reelection (New York’s Dennis Vacco was a rare exception in 1998). Last year, no AG incumbents lost their general election bids, and only one, a Republican in Arizona, lost in a primary. While Republicans in recent years have made considerable inroads into the once-Democratic-denominated AG ranks, they’ve done so almost entirely by capturing open seats. That spells years of likely incumbency ahead, should he want it, for Eric Schneiderman—and for his potential targets, years of unease about becoming his next target.

Grudge Match

Like his predecessors, Eric Schneiderman has doggedly pursued what is now a decade-long dispute over charges filed by Eliot Spitzer against Maurice (Hank) Greenberg, former chairman and CEO of insurance giant American International Group. Greenberg is a legend in American business and New York philanthropy (as well as a trustee of the Manhattan Institute, which publishes City Journal).

In 2005, Spitzer charged Greenberg and others with fraud over a reinsurance transaction between AIG and Berkshire Hathaway’s General Re that allegedly was set up to confer no real risk, thus evading accounting rules. Spitzer used the splashy charges to pressure the AIG board into removing Greenberg as chairman and CEO. In the years since, all the criminal charges and most of the civil ones against Greenberg have been thrown out or dropped, as has the monetary relief sought—leaving only two remaining civil charges, which may reach trial this summer.

The dispute has long since been overshadowed by the federal government’s 2008 bailout of AIG, though the company’s assets were sound and soon found to exceed its liabilities. American taxpayers came out of the AIG rescue with a profit of $22 billion. “Whether A.I.G. would have come close to collapse in 2008 had Mr. Greenberg been allowed to stay remains an open question,” the New York Times’s James Stewart wrote this spring.

Schneiderman’s remaining civil charges against Greenberg rest heavily on the testimony of a former General Re executive whose credibility a federal appeals court panel has questioned. Attorney David Boies, representing Greenberg, gained access in February to formerly sealed investigators’ notes that his firm says cast further doubt on the executive’s testimony; the Wall Street Journal editorialized that the revelations were “reason enough to throw out the entire case,” a position echoing that of former governor George Pataki and the late former governor Mario Cuomo, who wrote in a joint 2013 op-ed that the case against Greenberg concerned “entirely proper transactions … neither of which had any impact on the net income or shareholder equity of AIG.”

Though his office has given up its fight for criminal penalties and for damages, Schneiderman is still seeking to bar Greenberg, now 90, from working in the securities business or serving as director of a public company. Wrote Cuomo and Pataki in 2013: “Mr. Greenberg has never worked in the securities industry, and he hasn’t been an officer or director of a public company for eight [now ten] years.” Grudge match? You might call it that.

Walter Olson is senior fellow at the Cato Institute and author of The Rule of Lawyers, The Litigation Explosion, and other books.

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Donald Trump’s Eminent Domain Love Nearly Cost a Widow Her House

David Boaz

Since he shot to the top of the presidential polls, Donald Trump’s serial bankruptcies and bullying nature have made big headlines. But no one seems to have brought up a bullying business practice he’s particularly fond of: eminent domain.

The billionaire mogul-turned-reality TV celebrity, who says he wants to work on behalf of “the silent majority,” has had no compunction about benefiting from the coercive power of the state to kick innocent Americans out of their homes.

For more than 30 years Vera Coking lived in a three-story house just off the Boardwalk in Atlantic City. Donald Trump built his 22-story Trump Plaza next door. In the mid-1990s Trump wanted to build a limousine parking lot for the hotel, so he bought several nearby properties. But three owners, including the by then elderly and widowed Ms Coking, refused to sell.

As his daughter Ivanka said in introducing him at his campaign announcement, Donald Trump doesn’t take no for an answer.

Trump turned to a government agency — the Casino Reinvestment Development Authority (CRDA) — to take Coking’s property. CRDA offeredher $250,000 for the property — one-fourth of what another hotel builder had offered her a decade earlier. When she turned that down, the agency went into court to claim her property under eminent domain so that Trump could pave it and put up a parking lot.

Trump has had no compunction about benefiting from the coercive power of the state to kick innocent Americans out of their homes.”

Peter Banin and his brother owned another building on the block. A few months after they paid $500,000 to purchase the building for a pawn shop, CRDA offered them $174,000 and told them to leave the property. A Russian immigrant, Banin said: “I knew they could do this in Russia, but not here. I would understand if they needed it for an airport runway, but for a casino?”

Ms Coking and her neighbors spent several years in court, but eventually with the assistance of the Institute for Justice they won on July 20, 1998. A state judge rejected the agency’s demand on the narrow grounds that there was no guarantee that Trump would use the land for the specified purpose. “TRUMPED!” blared the front page of the tabloid New York Post.

It wasn’t the only time Trump tried to benefit from eminent domain. In 1994, Trump incongruously promised to turn Bridgeport, Connecticut, into “a national tourist destination” by building a $350m office and entertainment complex on the waterfront. The Hartford Courant reported: “At a press conference during which almost every statement contained the term ‘world class,’ Trump and Mayor Joseph Ganim lavished praise on one another and the development project and spoke of restoring Bridgeport to its glory days.”

But alas, five businesses owned the land. What to do? As the Courant reported: “Under the development proposal described by Trump’s lawyers, the city would become a partner with Trump Connecticut Inc and obtain the land through its powers of condemnation. Trump would in turn buy the land from the city.” The project fell apart, though.

Trump consistently defended the use of eminent domain. Interviewed by John Stossel on ABC News, he said: “Cities have the right to condemn for the good of the city. Everybody coming into Atlantic City sees this terrible house instead of staring at beautiful fountains and beautiful other things that would be good.” Challenged by Stossel, he said that eminent domain was necessary to build schools and roads. But of course he just wanted to build a limousine parking lot.

In 2005 the Institute for Justice took another eminent domain case to the Supreme Court. By 5-4 the Court held that the city of New London, Connecticut, could take the property of Susette Kelo and her neighbors so that Pfizer could build a research facility. That qualified as a “public use” within the meaning of the Constitution’s “takings” clause. The case created an uproar.

Polls showed that more than 80% of the public opposed the decision. Justice Sandra Day O’Connor issued a scathing dissent: “Any property may now be taken for the benefit of another private party, but the fallout from this decision will not be random. The beneficiaries are likely to be those citizens with disproportionate influence and power in the political process, including large corporations and development firms … The Founders cannot have intended this perverse result.”

Conservatives were especially outraged by this assault on property rights. Not Donald Trump, though. He told Neil Cavuto on Fox News: “I happen to agree with it 100%. if you have a person living in an area that’s not even necessarily a good area, and … government wants to build a tremendous economic development, where a lot of people are going to be put to work and … create thousands upon thousands of jobs and beautification and lots of other things, I think it happens to be good.”

When Donald Trump says: “I give to everybody. They do whatever I want,” this is what he’s talking about: well-connected interests getting favors from government. Vera Coking knows the feeling.

David Boaz is executive vice-president of the Cato Institute.

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Social Security’s 80th Anniversary Is No Cause for Celebration

Michael D. Tanner

Last Friday marked the 80th anniversary of Social Security. As befits such a significant milestone, the occasion was marked with political statements, punditry, and media perspectives — most of them wrong.

It should be no surprise that the presidential candidates are weighing in as well. With the exception of Donald Trump and Mike Huckabee, all the GOP candidates favor some type of Social Security reform that will reduce future benefits, although only Ted Cruz actively seeks to revive President George W. Bush’s plan for personal accounts. The Democratic presidential candidates, meanwhile, not only oppose any cuts to future Social Security benefits but are flirting with various benefit expansions.

With this in mind, it is probably worth injecting a few inconvenient truths into the Social Security debate — or at least debunking the most common untruths.

There is no Social Security crisis. Typical of this sentiment was the roughly ten thousandth column by Paul Krugman declaring, “Social Security does not face a financial crisis.” I’m not sure what Professor Krugman’s definition of a “financial crisis” is, but Social Security spent $63 billion more last year than it took in through taxes and other revenue. Generally, if one is spending more than one earns, that’s considered, if not a crisis, at least a problem. And, according to Social Security’s own trustees, that shortfall will never get better. Overall, Social Security’s unfunded future liabilities approach $26 trillion.

Social Security won’t be there for young people. This is the flip side of the “no crisis” argument. Some advocates of Social Security reform overstate the problem, implying that the program will disappear entirely. But as long as the government can force people to pay into the system, some remnant of the program will stagger on. It just won’t be as much as young people have been promised or, for that matter, a very good deal. According to projections by the Congressional Budget Office, for workers born in the 1980s, there are only enough funds to pay 76 percent of their schedule benefits; for today’s children born in the 2000s, this falls to 69 percent. And, taxes are already so high relative to benefits that young people will receive far less than they could receive if they invested their taxes privately.

The Trust Fund will save Social Security. Defenders of the current Social Security system point out that the Social Security Trust Fund contains roughly $2.8 trillion in government bonds that, in theory, can be used to pay benefits until 2034. I’m not sure that’s a great deal of comfort to today’s 47-year-old who is scheduled to retire in 2035. But more important, it misunderstands the nature of the Trust Fund. It is true that those bonds are backed by the “full faith and credit” of the U.S. government and are one of the safest investments in the world. But when the time comes to redeem the bonds, they will have to be paid back out of general revenue. And, as you may have noticed, the federal government doesn’t have a spare $2.8 trillion lying around. Perhaps the best explanation of the Trust Fund came from the Clinton administration (Hillary, take notice):

The Trust Fund has been stolen. Many conservatives suggest that Social Security would be fine if only the Trust Fund hadn’t been stolen. Sometimes, this is misattributed to the creation of the “unified budget” by Lyndon Johnson, although Social Security didn’t run more than nominal cash-flow surpluses until 1985. (Those surpluses ended in 2009.) More important, it misunderstands the federal government’s structural inability to actually save money. During the brief period when Social Security did run a surplus, that money had to go somewhere. It can’t be buried in a cigar box out behind the Treasury building. The Social Security Administration, therefore, buys Treasury bonds with the money as noted above. Once that money buys a bond, it becomes general revenue of the federal government and is spent on whatever the federal government spends money on. Those bonds will be paid back, but, as noted, that will have to come out of general revenue, meaning from current or future taxpayers.

Social Security can be fixed by lifting the cap on taxable earnings. As always, the Left’s answer to any problem is to “raise taxes on the rich.” Currently, Social Security payroll taxes are paid on the first money that you earn. (After that, you continue to pay Medicare payroll taxes, but not Social Security.) Opponents of more comprehensive reform suggest that Social Security’s problems could be solved if that cap were raised or even eliminated. Of course, such a tax hike would fall not just on the rich but on upper-middle-class professionals. Someone earning $118,500 is certainly not poor, but not exactly a Koch brother, either. More important, it wouldn’t work. Estimates showing that such a tax increase significantly reduces the program’s shortfalls rely on building up bigger balances in the Trust Fund. But as we’ve seen, such balances are meaningless except as an accounting measure. In reality, eliminating the cap entirely (without providing any additional benefits in exchange for the higher taxes) would buy Social Security just eight additional years of cash-flow solvency. By 2024, Social Security would again be paying out more than it takes in.

Social Security is not an entitlement. Many seniors object to calling Social Security and Medicare entitlements, claiming that the term brands those programs as a form of welfare when, in fact, seniors have paid taxes into those programs. However, even setting aside the issue of whether those complaints properly characterize payroll taxes, they misunderstand the meaning of entitlement. Entitlement is actually a legal and budgetary term that describes a program not subject to annual appropriation. There is no discretion about how much to spend. It’s pretty much on autopilot. By this definition, Social Security and Medicare, as well as programs such as farm-price supports, are entitlements, but — perhaps ironically — many traditional welfare programs such as Temporary Assistance to Needy Families (TANF) are not. Moreover, most of those on Social Security today will receive much more in benefits than they paid in taxes. That won’t be true for today’s young workers. Could they have done better if they had been allowed to keep those taxes and save them for themselves? Of course. But the same could be said about most taxes you pay versus what you receive from government.

Social Security taxes are saved for your retirement. Perhaps the confusion about whether Social Security is an entitlement stems from misunderstanding the relationship between payroll taxes and benefits. Social Security is, in essence, a Ponzi scheme. When you pay your Social Security taxes, none of the money you pay is saved in any way for your retirement. Instead it is used to pay benefits to those already retired. When you retire, you will rely on the next generation of workers to pay taxes to finance your benefits. That works reasonably well when there are lots of workers and only a few retirees. But we are living longer and having fewer babies. That means the burden on younger workers grows bigger and bigger.

Social Security is now 80 years old. A hard look at the facts suggests that there is not much reason for celebration.

Michael Tanner is a senior fellow at the Cato Institute and the author of Going for Broke: Deficits, Debt, and the Entitlement Crisis.

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The Iran Deal Means Game Over for U.S. Business

Richard W. Rahn

If you need another reason to oppose the Iran nuclear deal, the Obama administration has provided it in the fine print. Why would the U.S. government go out of its way to put American business at an internationally competitive disadvantage? The United States already has the highest corporate tax rate in the world, and American businesses suffer from far more regulation than most of their foreign competitors.

Now, as bizarre as it may seem, the agreement that the Obama administration just negotiated with the Iranians removes most sanctions for businesses and individuals who may wish to invest in or trade with Iran — as long as they are not Americans. Currently, the United States prohibits almost all trade and other economic activities with Iran by both U.S. and non-U.S. persons and businesses. The United States is able to enforce its will on non-American individuals and enterprises primarily by denying them easy access to the international money transfer system, making it most difficult for them to receive funds and make payments.

Under the new agreement, the United States will cease to enforce the sanctions against Iran by “non-U.S. persons.” A non-U.S. person is an individual or entity who is not a citizen, a permanent resident of the U.S., or an entity not organized under the laws of the United States, or owned and controlled by a U.S. person. As an example, a company owned by U.S. citizens that makes food-processing equipment located in Kansas City would still be prohibited from setting up a factory or sales office in Iran. However, a German or Chinese company making similar products will be allowed to invest in and set up operations in Iran, putting the U.S. company at a real disadvantage.

U.S. security is not enhanced by putting U.S. business at a competitive disadvantage for goods and services that the Iranians can easily obtain elsewhere.”

Bart Fisher, a very skilled and experienced international trade lawyer and economist, brought this destructive provision to my attention after he had carefully read the entire agreement. Economic sanctions against countries rarely work unless all major countries agree to the sanctions. Likewise, if only a handful of countries impose sanctions, it tends to be much more damaging to the countries imposing the sanctions than it is to the targeted nation.

It can be argued that there are many reasons why the proposed nuclear agreement should not be approved, including: The verification process has too many holes, the sunset clauses are too short, and the enforcement process is likely to fail. If the agreement is approved because the votes are not there to override the president’s veto, then, at a minimum, U.S. businesses should be placed on a level playing field with their foreign competitors when it comes to access to the Iranian market.

There are some exceptions to the prohibition of U.S. businesses selling to Iran, including commercial aircraft and parts. As long as the business obtains an Office of Foreign Assets Control (OFAC) license, it may export, sell and lease commercial passenger aircraft. In theory, a U.S. company selling consumer goods, e.g., household appliances, should also be able to apply and obtain a license from OFAC, provided the proposed activities are consistent with existing U.S. laws and regulations, such as the Export Administration Act and the Iran-Iraq Nonproliferation Act. But until the rules are changed by Congress, the household appliance exporter, even with an OFAC license, still could not use a U.S. bank to facilitate the transaction. As a practical matter, U.S. businesses will face much greater, if not impossible, regulations trying to compete for Iranian business against their international competition.

U.S. security is not enhanced by putting U.S. business at a competitive disadvantage for goods and services that the Iranians can easily obtain elsewhere. It is true that the administration by itself, in the agreement, could not create a level playing field for American business, given the existence of the other legal restrictions (as noted above) in dealing with Iran.

The Obama administration and others argue that the agreement needs to be passed by Congress in order to prevent war. Others argue with equal passion and logic that passing it is more likely to lead to war. The fact is for all intents and purposes the sanctions were dead by the time the agreement was announced because the Russians, Chinese and even many Europeans have already been negotiating their trade and investment deals with Iran — leaving the United States as an impotent bystander.

The distasteful reality is the nuclear genie is out of the bottle, and that any country that is willing to pay for the bomb can get it and — agreement or no agreement — the Iranians are going to do what they want. A quick and easy pre-emptive war with Iran (if that was ever possible, which is doubtful) is certainly not possible now. At the same time, the Obama administration has largely thrown away effective financial sanctions. We have lost most of whatever ability we had to control the destiny of others. But we can still control our own destiny somewhat by strengthening our economy and modernizing our military.

Richard W. Rahn is a senior fellow at the Cato Institute and Chairman of the Institute for Global Economic Growth.