Share |

Neil Gorsuch: Judicial Humility and Religious Pluralism

Thomas Berry

When you decide cases for a living, it can be difficult to admit that you don’t know something. But from the very beginning of his career, Supreme Court nominee Neil Gorsuch has shown a respect for the limits of what individuals — even judges — can truly understand about each other’s deeply held beliefs.

This trait has served him well in resolving difficult conflicts over moral and religious questions, and would continue to serve him well on the high court.

The earliest evidence of this approach came not in a judicial opinion, but in a work of moral philosophy on the ethics of euthanasia. In that article, Gorsuch scrutinized the “balancing tests” that had frequently been proposed in response to the problem of assisted suicide. In one typical example of such a “balancing” approach, the philosopher Ronald Dworkin had written that “there are dangers both in legalizing and refusing to legalize [assisted suicide]; the rival dangers must be balanced, and neither should be ignored.”

When it comes to judicial wisdom, sometimes the most important virtue is knowing what shouldn’t be decided.

Though such tests may seem fair in theory, Gorsuch rejected them as fundamentally impossible to apply, expressing skepticism of our ability to truly understand the deeply-held interests of others. “How,” he asked, “can one possibly compare, for instance, the interest the rational adult seeking death has in dying with the danger of mistakenly killing persons without their consent?”

After becoming a judge, Gorsuch carried this same skepticism with him, most frequently applying it in cases concerning religious exemptions under the Religious Freedom Restoration Act (RFRA). The most famous such case is Hobby Lobby v. Sebelius, in which the plaintiffs believed that their religion required a complete disassociation from health insurance policies that provided certain contraceptives.

In a concurring opinion, Gorsuch readily acknowledged that these “religious convictions are contestable. Some may even find [these] beliefs offensive.” But this was no reason to give them less weight, he wrote. Judges are forbidden, under RFRA, from diminishing the importance of sincerely held religious beliefs simply because the judge himself does not understand why others would hold them. Through this rule, the statute “does perhaps its most important work in protecting unpopular religious beliefs.”

In his Hobby Lobby concurrence, Gorsuch showed an understanding of why it is dangerous for judges to attempt to “weigh” the importance of others’ religious beliefs. Studies have confirmed Gorsuch’s intuition, that our ability to grasp what really matters to others is far worse than we assume, especially when others’ value systems are much different from our own.

As the moral psychologist Jonathan Haidt has shown, the instincts and desires of socially “conservative” and socially “liberal” minds (to use broad and imprecise terms) can diverge dramatically. Conservatives, for example, tend to place a higher value on a moral paradigm called “sanctity/degradation,” which encompasses a desire for “purity” and, crucially, a strong need for disassociation from activities seen as impure. As one manifestation of the differing attitudes toward this paradigm, a survey revealed that conservatives were much more likely to say they would never receive a clean, disease-free blood transfusion from a convicted child-molester, a desire that many liberals (and libertarians) can’t help but find baffling.

It would be a dangerous world if those with “conservative” minds frequently had the power to weigh the desires of those with “liberal” minds, and vice-versa. But inevitably, that is what happens when personal convictions are subjected to judicial tests. This is why under RFRA, as Gorsuch put it in another of his religious-liberty opinions, courts “lack any license to decide the relative value of a particular exercise to a religion.”

But if Gorsuch joins the High Court, not all of his colleagues will share his skepticism, or his faithful approach in applying RFRA. The Hobby Lobby case was appealed to the Supreme Court and affirmed by only a 5–4 vote. In dissent, Justice Ruth Bader Ginsburg performed exactly the scrutiny of other peoples’ values that RFRA forbids, writing that “the connection between the families’ religious objections and the contraceptive coverage requirement is too attenuated.” Further critiquing the beliefs of others, her dissent then attempted to draw objective moral lines between purchasing contraceptives and directing money into funds that pay for them, and between directing a woman to use contraceptives and merely providing the means for her to use them.

This is a path that Judge Gorsuch, wisely, has consistently declined to go down. When it comes to judicial wisdom, sometimes the most important virtue is knowing what shouldn’t be decided.

Thomas Berry is legal associate in the Cato Institute’s Center for Constitutional Studies.

Share |

Overgrown Wall Street Regulation Needs a Trim in 2017

Thaya Brook Knight

Well-functioning capital markets are the lifeblood of progress; without capital, companies cannot develop new communication technologies, safer cars, better pharmaceuticals, or any of the things that make modern life as comfortable and safe as it is.

While markets need rules of the road to facilitate trading, these rules don’t have to be government-created, and they certainly don’t need to be as lengthy and complex as they are. It’s time to reevaluate the existing laws and rip out the overgrowth.

Effective capital market regulation does three things: (1) creates rules of the road for exchanges (although exchanges can do this themselves); (2) deters and punishes fraud; and (3) facilitates price discovery.

Dodd-Frank added 2,300 pages and more than 22,000 pages of regulations to an already overgrown area of federal regulation. It’s time for the pruning shears.

It does not punish small family businesses. It does not protect investors from stupid decisions. It certainly does not promote social causes. Current government regulation attempts to do all of these things, but it does each of them poorly and imposes needless costs on the system as a whole.

One of the most confounding things about securities regulation is how difficult it can be for a company to know it’s even selling securities. Take a young chef starting a new restaurant.  If this chef asks a few friends to “go in on” her new business and offers to share the profits with them, does she know she’s probably conducting an illegal securities offering? Probably not.

These types of informal securities offerings happen all the time. When a regulation is routinely broken, with no discernable harm, that regulation is probably a bad one.

Attempts at investor protection fare no better under existing law. To the extent that investor protection is a legitimate goal of securities regulation, its focus should be on deterring fraud and facilitating disclosure, not preventing a bad investment, but current regulations go much further than this.

For example, average investors are legally barred from buying some of the most attractive stocks because of rules that restrict investment to only individuals who are rich. It’s as though Neiman Marcus was required by law to lock its doors against anyone earning less than $200,000 a year, even if shoppers had money to buy and Neiman wanted to sell.

The rationale behind this restriction is that people of average means are less able to understand sophisticated investments than their richer compatriots, and are less able to withstand financial loss. The consequence is that those everyday investors are kept out of the upside benefits too. Now, nothing about being a publicly traded company makes it immune from ruin, or from being a poor investment.

If the dot.com bubble of the 1990s taught us anything, it’s that an initial public offering (IPO) doesn’t protect a company from going down or from taking its investors down, too. But even if public companies weren’t the best investment, it is not the government’s place to restrict people from doing dumb things with their money. I may want to spend $2,000 on a designer handbag; should the government tell me I can’t even if I have the money in the bank?

Regulations aimed at social causes may be the most harmful, not only because they manipulate the securities laws into doing something entirely outside of their intended use, but because they require financial regulators to wade into unfamiliar territory, with often disastrous results.

Under one Dodd-Frank rule, for example, public companies must disclose the supply chain for certain minerals. Its stated purpose is to alleviate the humanitarian crisis in the Democratic Republic of the Congo by limiting the funds available to war lords.

But instead of reducing warfare, the rule may have instead reduced investment in a developing country desperate for growth, as companies have steered clear of the region for fear of making inaccurate disclosures about the supply chain.

The SEC recently began a review of this rule, hopefully leading to its repeal, but the only way to prevent future misguided rulemaking is for lawmakers to refrain from shoehorning social causes (admirable though they may be) into entirely unsuitable regulatory regimes.

If federal securities regulation exists, it should be carefully cabined to ensure that it hews to the three principles outlined above. Dodd-Frank added 2,300 pages and more than 22,000 pages of regulations (and counting) to an already overgrown area of federal regulation. It’s time for the pruning shears.

Thaya Brook Knight is associate director of financial regulation studies at the Cato Institute.

Share |

Advice for the President on NAFTA Renegotiation: Don’t Fix What Ain’t Broke

Daniel J. Ikenson

Scapegoating trade for problems real and imagined has been a prominent part of American electoral politics for 25 years. So, during the campaign, when candidate Donald Trump referred to the North American Free Trade Agreement as “the worst trade deal ever negotiated,” his rhetoric wasn’t especially alarming.

But President Trump’s recent announcement that his administration will reopen and renegotiate NAFTA is cause for deep concern. It’s not that NAFTA is a perfect agreement that wouldn’t benefit from some updating. The concern is that Trump will reach for a sledgehammer instead of a scalpel.

The president claims that NAFTA has been a failure, and cites America’s $60 billion bilateral trade deficit with Mexico as the evidence. In his mistaken view, exports are Team America’s points and imports are the foreign team’s points, so the deficit means we are losing. And the reason the United States is losing is because U.S. negotiators were outsmarted in the early 1990s or our trading partners—especially Mexico—have been cheating with impunity. Outside of the Trump administration, one would be hard pressed to find an economist who believes that the trade balance is a measure of the efficacy of trade policy.

It’s not that NAFTA is a perfect agreement that wouldn’t benefit from some updating. The concern is that Trump will reach for a sledgehammer instead of a scalpel.

NAFTA went into effect in 1994 and provided for the gradual elimination of almost all tariffs and many other impediments to trade among the North American countries. As a share of aggregate GDP, the value of U.S.-Mexico trade doubled between 1994 and 2015. Beyond leading to lower prices and more choices for consumers, trade barrier elimination delivered the conditions necessary to permit transnational specialization in production. Essentially, the removal of barriers allowed the factory floor to break through its walls and cross borders, so that tasks spanning the spectrum from product conception to production to consumption could be performed in the places where it made the most economic sense to perform those tasks.

The result was the emergence of a globally competitive, integrated North American production platform, in industries from agriculture and food processing to automobile and machinery manufacturing.

But the nature of production and commerce has changed considerably in the internet age that has emerged and evolved over the past quarter century. NAFTA lacks rules dealing with 21st century issues, such as e-Commerce, business data transmissions, trade in services industries that didn’t exist 25 years ago, and it includes provisions that might be worth reconsidering. While there is certainly scope for carefully considered reforms, massive overhaul that dramatically changes the rules and incentives undergirding the North American production platform would be enormously disruptive, and potentially disastrous.

Of course, NAFTA has its critics who would like nothing more than to blow up the status quo. Peter Navarro, who heads Trumps’ newly established National Trade Council, wants to see those trans-national production and supply chains dismantled and situated entirely in the United States. He and incoming Commerce Secretary Wilbur Ross (who Trump designated to lead the NAFTA renegotiation) believe that imports detract from economic growth and that the United States should be more self-sufficient.

According to the Financial Times, “Mr. Navarro said one of the administration’s trade priorities was unwinding and repatriating the international supply chains on which many US multinational companies rely, taking aim at one of the pillars of the modern global economy.” Of course those views are consistent with Trump’s threatening tweets, in which he has warned U.S. companies with supply chains running through Mexico that their products, when imported back into the United States, will face penalties.

Ever since Ross Perot’s 1992 warning of “a giant sucking sound” coming from Mexico to vacuum up U.S. investment, factories, and jobs, NAFTA has been a symbol of corporate free trade agreements run amok. Despite an abundance of evidence to the contrary, the view that NAFTA killed U.S. manufacturing jobs is alive and kicking in the age of Trump.

Bureau of Labor Statistics data show that in the 14 years between 1979 (the year in which U.S. manufacturing jobs peaked at 19.4 million) and 1993 (the last year before NAFTA implementation), the manufacturing sector shed 2.7 million jobs. In the 14 years between 1993 and 2007, manufacturing shed 2.9 million jobs. In other words, the pace of job decline in manufacturing was virtually unchanged between the periods. It’s worth mentioning that manufacturing jobs actually increased by 800,000 in the first five years following NAFTA’s implementation.

University of California economic historian Brad DeLong — not a raging free trader — estimates that NAFTA may be responsible for net job losses of about 0.1 percent of the U.S. workforce, which amounts to fewer jobs than are added to payrolls in an average month. Other factors, especially the increase in output attributable to productivity gains, explains much of the reduction in manufacturing jobs.

The president’s unorthodox views and impulsive tendencies are causing trepidation and uncertainty. Threats of 35 percent tariffs, aversion to seeing the company called out by name in a menacing tweet, and fear of political retribution have kept much of the business community cowering in silence. The uncertainty has undoubtedly deterred, deferred, and reversed cross-border investment decisions. Expect that to continue to be the case until greater clarity of purpose and scope of the NAFTA renegotiations emerges.

Dan Ikenson is director of the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies.

Share |

Neil Gorsuch and the Structural Constitution

Ilya Shapiro and Frank Garrison

The Framers designed a system whereby the primary method of protecting individual rights lay in dividing the power of government both vertically and horizontally (federalism and the separation of powers, respectively). This innovation, applying a blend of ancient and Enlightenment-era political philosophy, would prevent anybody in the ruling class from gaining too much power over the people.

But our constitutional jurisprudence has not always reinforced this structure. Indeed, over the past century we have seen more and more power transferred from the states to the federal government — and from the judicial and legislative branches to the executive. The main protection for freedom became what the Founders originally considered a redundant afterthought, the Bill of Rights (which, as the late Justice Scalia liked to say, most tin-pot banana republics have). With the nomination of Judge Neil Gorsuch to the Supreme Court, however, there is renewed hope for a renaissance in enforcing the Constitution’s structure as the means for securing and protecting ordered liberty.

He well grasps the importance of limiting government to protect rights.

Like Justice Scalia — whose seat Gorsuch is tapped to fill — the nominee applies the Constitution’s original meaning to these structural provisions, and he recognizes the importance of limiting government to protecting rights. But Gorsuch has been more willing than Scalia was to take them seriously and not just defer to executive agencies, because he recognizes the damage that the modern administrative state has wrought on individual liberty.

In United States v. Nichols (2015), Gorsuch confronted the delegation of the legislative power to the executive branch. And so he considered the “non-delegation doctrine,” which comes directly from Article I of the Constitution: “All legislative powers herein granted shall be vested in a Congress of the United States.” That seems pretty clear, but the Supreme Court, in nodding toward the practicalities of modern government, has allowed congressional delegation of the lawmaking power if there is an “intelligible principle” for the executive to follow. In practice, Congress gives very few principles, much less intelligible ones; instead, it passes vague statutes with little guidance for how to implement them. This gives the executive free rein to promulgate rules that have the binding force of law.

In his Nichols dissent, Gorsuch invoked the Framers to explain the importance of keeping legislative power in Congress:

The framers of the Constitution thought the compartmentalization of legislative power not just a tool of good government or necessary to protect the authority of Congress from the encroachment by the Executive but essential to the preservation of the people’s liberty… . By separating the lawmaking and law enforcement functions, the framers sought to thwart the ability of an individual or group to exercise arbitrary or absolute power.

Gorsuch’s opinions have also questioned the constitutional implications of granting deference to administrative agencies through judge-made doctrines. These doctrines — emanating from the cases in which they were derived, such as Auer, Chevron, and Brand X — require courts to defer to agency interpretations of ambiguous statutes and regulations. Chevron and Auer deference allow agency “experts” to fill gaps in these ambiguities to craft policy — essentially letting the executive write legislation. Brand X, for its part, requires courts to defer to post-hoc executive interpretations of statutes even after a federal court has already construed the statutes’ meaning — conferring on the executive the judicial power to have the final say on “what the law is” (to quote Chief Justice John Marshall in the foundational case of Marbury v. Madison). Gorsuch wrote a much-heralded opinion (and separate concurrence!) in Gutierrez-Brizuela v. Lynch (2016) analyzing whether these doctrines violate the Constitution’s separation of powers.

But it is another case — which he says “would make James Madison’s head spin” — that stands out for his consideration of how these doctrines affect individual liberty. In De Niz Robles v. Lynch (2015), an executive-agency adjudication cited Chevron and Brand X to essentially overrule federal court precedent interpreting an immigration statute, applying it retroactively even though the defendant had relied on the courts’ previous interpretation of the law.

The government argued that it could do this because the law was ambiguous. Gorsuch, writing for the majority in striking down the government’s ruling, pointed out that even if these rules are not seen as violations of our Constitution’s structure under current precedent, these doctrines when combined can work together to infringe on “second-order constitutional protections sounding in due process and equal protection.”

Of course, even as Gorsuch’s administrative-law jurisprudence shows a devotion to the Constitution’s original design, no judge is perfect. When it comes to the dormant commerce clause — the idea that states can’t impose regulations that impede interstate commerce even if Congress hasn’t expressly forbidden them to do so — Gorsuch, in our view, gets it wrong. In two recent opinions, Gorsuch questioned the doctrine’s constitutional foundation (as did Justice Scalia, we hasten to add). While the commerce clause has been invoked since the New Deal as a warrant for nearly unlimited federal power, its inverse actually seems more faithful to a founding document concerned with the free flow of commerce throughout the nation.

That’s a complicated and highly technical legal dispute that generally cuts across jurisprudential lines. But it just goes to show that while not everyone will agree with Judge Gorsuch’s analysis in every area of law, he has shown a willingness to respect the judicial duty and enforce the Constitution’s structural protections against federal overreach. That approach will make a welcome addition to the Supreme Court.

Ilya Shapiro is a senior fellow in constitutional studies at the Cato Institute. Frank Garrison is a legal associate at the Cato Institute.

Share |

Oil and the Golden Constant

Steve H. Hanke

Since its recent high of almost $108/bbl in June 2014, we have witnessed a stunning collapse, and a subsequent bounce back, in the price of oil. In February 2016, West Texas Intermediate (WTI) was trading at $26/bbl, a 76% plunge from its June 2014 high. It has since clawed its way back to $53.70/bbl (February 20th). Thanks to the “golden constant,” I was able to anticipate the course of crude’s bounce back. Indeed, the price of crude has doubled since its cyclical nadir. Just as I predicted.

Thanks to the “golden constant,” I was able to anticipate the course of crude’s bounce back.

How did I nail the course of crude’s price, and where is the price of oil going from here? To answer these questions, we must have a model – a way of thinking about the problem. In this case, a starting point is Roy W. Jastram’s classic study, The Golden Constant: The English and American Experience 1560-2007. In that work, Jastram finds that gold maintains its purchasing power over long periods of time, with the prices of other commodities adapting to the price of gold.

Taking the broad lead from Jastram, I developed a model. It employs the price of gold as a long-term benchmark for the price of oil. The idea being that, if the price of oil changes dramatically, the oil-gold price ratio will change and move away from its long-term value. Forces will then be set in motion to move supply and demand so that the price of oil changes and the long-term oil-gold price ratio is reestablished. This represents nothing more than a reversion to the mean. It explains why spot prices of gold and crude are parallel to each other and why the oil-gold price ratio hovers around 0.0721 (see the accompanying chart).

image

Sure enough, following crude’s price plunge, the world’s largest oil companies slashed capital expenditures for drilling and exploration by 40% in the 2015-2016 period alone. The major companies have reined in their appetites for mega projects, preferring smaller ones with much shorter time horizons. As night follows day, oil and gas field discoveries have hit a 60-year low.

Just how long will it take for the oil-gold price ratio to mean revert? My calculations (based on post-1973 data) are that a 50% reversion of the ratio will occur in 13.7 months. This translates into a WTI spot price of $57/bbl by February 2017. It is worth noting that, like Jastram, I find that oil prices have reverted to the long-run price of gold, rather than the price of gold reverting to that of oil. In short, the oil-gold price ratio reverts to its mean via changes in the price of oil.

The following chart shows the price projection based on the oil-gold price ratio model. It also shows the historical course of prices. They are doing just what the golden constant predicts: oil prices are driving the price ratio back to its mean. The model foretells a WTI spot price of $70/bbl by the end of the year, which is considerably higher than the current price of $55.10/bbl for the futures contract settling at that time.

image

Steve Hanke is a professor of applied economics at The Johns Hopkins University and a senior fellow at the Cato Institute.

Share |

A New Handbook for Both Sides of the Aisle

David Boaz

Americans seem starkly split today on a wide range of issues. That’s in large measure because the federal government has grown so much in size, scope, cost, and intrusiveness that we battle fiercely over who will exercise that power. Conservatives spent eight years deploring the Obama administration’s use and abuse of executive power through executive orders, regulations, and even guidance letters from the depths of the bureaucracy. Now liberals are aghast at those awesome powers falling into the hands of the Trump administration.

That makes 2017 a perfect time for thoughtful Republicans and Democrats to come together on measures to restore constitutional balance and rein in executive power. The latest edition of the Cato Handbook for Policymakers, released this week, provides a roadmap that addresses these issues and more.

For example, many policymakers may worry about the danger that President Trump could embroil the U.S. in another war. They could start by reaffirming the constitutional requirement that Congress decides when Americans go to war. They should also debate a new authorization for military force in the Middle East—one that is not a blanket grant of power — and a new War Powers Act with real teeth.

Democrats and Republicans can surely agree that important decisions ought to be made by the people’s branch, not by any president alone.

Domestically, Congress should remind the executive branch of the very first words of the Constitution: “All legislative Powers herein granted shall be vested in a Congress of the United States.” Congress must stop writing grand, vague laws and leaving all the rulemaking to regulatory agencies.  Congress has just rediscovered the Congressional Review Act, under which it can repeal regulations issued by agencies. Now it should consider legislation such as the Regulations from the Executive in Need of Scrutiny (REINS) Act, which would require Congress to hold an up-or-down vote on all major regulations before final issuance.

Devolving power from Washington to states and local communities can also help to ease conflicts ranging from gun rights and school locker rooms to environmental protection. While Education Secretary Betsy DeVos may have stated the problem awkwardly, it’s true that the people of Manhattan and Montana have different attitudes and experiences regarding guns. Maybe they should be able to set different rules. In 2016 the Department of Justice and the Department of Education issued “guidance” to the 13,500 school districts across the United States on how they should manage access to locker rooms and bathrooms in 99,000 public schools. Instead of a rule issued by faceless bureaucrats in Washington, why not let the people of the 50 states and thousands of communities talk through that issue and come to their own evolving answers?

The issue that may have decided the 2016 election is the widespread sense that our economy is not working as well as it should. Even before the recession, Americans feared that their children might not live as well as they did. This slow growth matters most to those who are not yet well off.

Economic woes can generate misguided policy proposals, from repeated “stimulus” programs that add to the national debt to closing off trade and investment that create jobs. Before blocking imports and creating a backlash that will also block American exports, Congress should take a hard look at the ways current U.S. law may be limiting investment and job creation. As a first order of business, the new Congress should order a comprehensive audit of the regulatory, tax, and policy environments to identify redundancies, inefficiencies, and systemic problems that artificially raise the cost of doing business in the United States.

There ought to be bipartisan agreement on undoing what we might call “regressive regulation”—regulatory barriers to entry and competition that work to redistribute income and wealth upward. Such policies at the state and local level include restrictive zoning that raises the price of housing and occupational licensing laws that restrict entry into professions ranging from teeth-cleaning to cab-driving. At the federal level Congress should take a hard look at the over-extension and abuse of copyright and patent law, and at trade and immigration restrictions that raise costs for consumers and businesses.

Another area where solutions would help is in the healthcare reform debate, which has gone on for years. For 70 years, government has been assuming greater control over consumers’ health care dollars, either by giving workers’ earnings to employers or by spending that money itself. Government decides what kind of health insurance we get, where we get it, and how doctors will practice medicine—and more patients end up falling through the cracks. The Affordable Care Act didn’t do anything to take us off that path. We need to make healthcare higher quality, more affordable, and more secure by putting patients in charge of their health care dollars and decisions.

Sometimes the best thing Congress can do on an issue is nothing. But the 80 chapters and hundreds of recommendations – ranging from corporate taxation reform to surveillance restrictions to a more restrained foreign policy—in the Cato Handbook demonstrate that a determined Congress could significantly improve American governance. And Democrats and Republicans can surely agree that important decisions ought to be made by the people’s branch, not by any president alone.

David Boaz is executive vice president of the Cato Institute.

Share |

Trump’s New Currency Plan a Flimsy Attempt to Confront China

James A. Dorn

The White House would like to label China a “currency manipulator” but doing so would risk harming U.S.-China relations. So, the tone has softened and the tactics have changed. The newly established National Trade Council (NTC), operating out of the White House, is proposing that China not be singled out in the currency war.

Rather, any country found to be lowering the foreign exchange value of its currency to spur exports would be subject to penalties administered by the Commerce Department.

Currency manipulation would be considered an unfair subsidy and U.S. companies that claimed significant harm could petition for anti-subsidy remedies under the proposed change in U.S. trade law. The problem is that the World Trade Organization has never considered currency manipulation to be an actionable subsidy and is unlikely to change its stance.

A new exchange rate policy, if implemented, would cause confusion, promote protectionism, and flame nationalism.

But there are deeper problems. Anyone who has been following U.S.-China trade relations understands that the NTC’s proposal is really aimed at China. President Trump’s appointment of Peter Navarro — a rabid protectionist and author of the book “Death by China” — as head of the NTC should signal the real intent of the proposed change in tactics. If all countries are treated equally under the currency manipulation measure, then how can China complain?

The new measure would immediately be used against China even though the U.S. Treasury, in its semiannual report, has never labelled China a currency manipulator. Moreover, the IMF announced in May 2015 that China’s currency — the renminbi (RMB, also known as the yuan) — was no longer undervalued.

Eswar Prasad, former head of the IMF’s China Division and now a professor at Cornell University, argues that, at present, market forces are more likely moving the RMB-dollar exchange rate than government intervention designed to subsidize exports.

In his new book, “Gaining Currency: The Rise of the Renminbi,” Prasad criticizes the schizophrenic nature of U.S policy — we lecture China to have a more market-oriented exchange rate regime, but threaten to penalize China whenever the yuan falls relative to the dollar, no matter the reason.

In particular, the People’s Bank of China has undertaken policy changes to allow more flexibility in the exchange rate mechanism. In April 2012, the band around the central parity was widened to plus/minus 1 percent, and was further widened to 2 percent in March 2014.

The purpose of doing so was to prevent one-way speculation. From June 2005 to June 2014, the RMB had appreciated against the U.S. dollar, making it easy for speculators to bet on a further appreciation. Adding more flexibility to the RMB-dollar exchange rate would help stem such speculation.

Market forces, however, were at work to lower the foreign-exchange value of the RMB. Slower economic growth, expectation of higher U.S. interest rates and greater uncertainty about the future of China’s liberalization all combined to put downward pressure on the yuan.

Beijing recognized those forces and, on Aug. 11, 2015, unexpectedly devalued the RMB relative to the dollar by nearly 2 percent. The PBOC also gave the market more play in setting the so-called daily reference rate (i.e., the opening RMB-dollar exchange rate or “central parity”).

The sudden devaluation shook the markets as speculators began to sell yuan. The RMB continued to fall relative to the dollar (it declined by another 2 percent in the two days following the official devaluation), and the PBOC had to reverse course by intervening to prop up the yuan. Since then, China has burned through nearly $1 trillion of its foreign exchange reserves to defend the yuan.

During 2016, the yuan fell by 7 percent against the dollar. The expectation of further depreciation has led to large capital outflows as people and companies flee the RMB, even in the presence of tight capital controls.

There is no doubt that even though the depreciation of the yuan reflects market forces, the NTC would be inclined to label China a currency manipulator under the proposed rule change.

Special interest groups favoring protectionism would jump on the band wagon and demand remedies. China would no doubt point to the manipulation of interest rates by the Fed as a form of currency manipulation and turn to the WTO to resolve the dispute.

The politicization of exchange rate policy would continue to divert attention from China’s success in liberalizing trade since 1978, when only a few state-owned enterprises had trading rights and tariff and nontariff walls were high.

The difficulty of determining whether exchange rates are falling due to deliberate intervention to spur exports or because of market forces means the new policy, if implemented, would cause confusion, promote protectionism, and flame nationalism. It is a flimsy basis for confronting a major trading partner like China.

Instead of employing new tactics to improve U.S.-China relations by generalizing currency-manipulation policy to all countries, the U.S. should be thinking of how to encourage China to further liberalize its institutions and let markets be the primary force in setting the RMB-dollar exchange rate.  

James A. Dorn is Vice President for Monetary Studies and a Senior Fellow at the Cato Institute.

Share |

If Gorsuch Pick Leads to ‘Crisis,’ Dems Should Look in Mirror First

Roger Pilon

Facing a Supreme Court nominee with impeccable qualifications, Democrats are now crafting an indirect assault on President Trump’s nomination of Judge Neil Gorsuch to fill the court’s empty seat.

Unfortunately, the president’s recent judicial attacks aren’t helping things. In fact, they play directly into the Democrats’ emerging strategy — to charge that we’re “careening toward a constitutional crisis” over judicial independence, as Sen. Richard Blumenthal (D-Conn.) argued.

We heard more of that sentiment when Yale Law’s Bruce Ackerman, appearing last week on “Here & Now,” condemned the president for trying to intimidate judges while they’re deciding cases. “Unprecedented,” he said.

What’s really behind this “constitutional crisis”? In truth, it really is ideology.

Not to be outdone, Blumenthal rushed to the microphone later that day to report that Gorsuch, in a private meeting, had called Trump’s comments “disheartening” and “demoralizing.”

And the next day on NPR’s “Morning Edition,” Blumenthal spoke again of a constitutional crisis, adding that private comments were not enough; Gorsuch has to go public, Blumenthal said. He “has to be very explicit and direct,” because “never before has a president so jeopardized the independence of the judiciary.”

How short our memories are. Perhaps Blumenthal can be forgiven because he wasn’t yet in Congress when President Obama, in his 2010 State of the Union Address, ridiculed the justices seated before him for their Citizens United decision.

And if it’s trying to intimidate judges when they have a case before them, have we forgotten Obama’s efforts to intimidate the court as it was deciding the first big ObamaCare case — which may have worked?

Judicial independence is not a trivial matter, of course, but it cuts both ways, implicating not only the president but his Senate opponents as well, as the Blumenthal interview makes clear.

Charging Trump with having established a “litmus test” regarding abortion, guns and more, Blumenthal said senators have to assume that Gorsuch meets the test — unless he “very specifically makes his views clear.”

Well, there goes judicial independence. Once nominees have to put their specific views on the record in confirmation hearings, that’s effectively where cases will be decided, politically, not in a courtroom, legally.

But, Blumenthal avers, this is a crisis “of Donald Trump’s making.”

No, senator, the crisis goes far back, and it’s virtually all of the Democrats’ making. In modern times, it began in 1987 with Sen. Edward Kennedy’s (D-Mass.) personal destruction of Judge Robert Bork, a President Reagan nominee.

It continued in 1991, with the brutal hearings for then-Judge, and now Supreme Court justice, Clarence Thomas.

And it reached a crescendo during George W. Bush’s presidency when no less than Professor Ackerman himself, citing Bush v. Gore in April 2001, demanded “a moratorium on Supreme Court appointments until the American people return to the polls in 2004.”

And in June 2001, now-Senate Minority Leader Charles Schumer (D-N.Y.) argued in the New York Times that the Senate should litmus-test nominees.

For nearly two years, Democrats refused to hold hearings for most of President George W. Bush’s appellate court nominees. And the stall resumed in Bush’s second term until the Gang of 14 broke it after Republicans threatened to end the judicial filibuster with the “nuclear option.”

That threat is again before us, of course, for which Democrats have no one to blame but their own former Senate leader, Harry Reid (D-Nev.). Yet they seem to believe that the filibuster for Supreme Court nominees will survive if only they play the judicial independence card Trump has handed them.

Thus, in that NPR interview, Blumenthal was asked whether Gorsuch deserved an up-or-down vote. When pressed, he replied: “He should receive a vote by a 60-vote threshold, which means that if we find him out of the mainstream, he should be rejected.”

So what’s really behind this “constitutional crisis”? In truth, it really is ideology. In that Times op-ed, Schumer put it plainly: “The Supreme Court’s recent 5-4 decisions that constrain Congressional power are probably the best evidence that the court is dominated by conservatives.”

Imagine that: the court constraining congressional power! Isn’t that one of the things independent judges are charged with doing when the law requires it?

The nation is deeply divided over just such questions. To settle those differences, we have rules, one of which is that elections matter. But another is that legal cases are decided under law, in the courtroom, not politically in judicial confirmation hearings that would effectively strip nominees of their independence.

So if judicial independence is to be front and center in the hearings ahead, let’s have the real thing.

Roger Pilon is vice president for legal affairs at the Cato Institute and director of Cato’s Center for Constitutional Studies.

Share |

Serious va Reforms Will Make Our Veterans Healthier, Wealthier — and Fewer

Michael F. Cannon

By naming an insider, Obama appointee Dr. David Shulkin, to head the Department of Veterans AffairsPresident-elect Trump suggests he doesn’t realize yet how big an overhaul is needed to “Make the VA Great Again.”

Shulkin understands that veterans need more choice and more resources, but the added choice he’s promising them is small-bore stuff.

Offering veterans options outside the VA for obstetrics is great. But our veterans need and deserve a far more sweeping reform. And to fix the problems at the VA, Trump and Shulkin need to realize that the VA isn’t merely failing to help veterans—it’s actually endangering them.

Here’s the real VA scandal: The agency makes it easier for Congress and the president to start unnecessary wars. The VA thereby increases the likelihood that soldiers will end up dead, traumatized, or otherwise disabled in the first place.

To fix the problems at the VA, Trump and Shulkin need to realize that the VA isn’t merely failing to help veterans—it’s actually endangering them.

This isn’t a widely expressed view, but the basic facts here are not in dispute.

The VA is a $178 billion agency that provides life, health, disability, and other benefits to veterans. Shulkin currently runs the $70 billion Veterans Health Administration, a completely government-owned and operated health system covering 9 million veteran-enrollees. The VHA is the largest integrated health system in the United States, and its closest analogue is the British National Health Service.

Being its own Cabinet agency separate from the Department of Defense, the VA has its own budget and appropriations. So when we account for the price tag of a war, we ought to include the costs of veterans’ benefits, one of the largest financial costs of war. These costs typically peak around 40 years after a military conflict ends.

Yet Congress doesn’t fund veterans’ benefits until the bills come due, years or decades after the war that caused the health problems. The VA thus allows Congress to ignore one of the biggest costs of war when deciding whether to authorize or fund wars. If Congress had to pay those bills up front, the added expense might dissuade Congress from starting unnecessary wars.

Paying for veterans’ benefits up front could have prevented the Iraq war. In 2002, 77 U.S. senators including Hillary Clinton voted to authorize the U.S. invasion, a vote Clinton later called a mistake. “I thought I had acted in good faith and made the best decision I could with the information I had,” she later wrote. “I still got it wrong.”

The cost of providing benefits to veterans of a war in Iraq is one bit of information that could have been estimated at the time, and that Congress could have used. By 2014, the government had already spent $134 billion on medical and disability benefits for Iraq and Afghanistan veterans, with taxpayers on the hook for another $836 billion over the next four decades, according to estimates by Harvard scholar Linda Bilmes. Those cumulative costs are several times the annual budget of the VA.

There’s a way to fix this cost-hiding while also fulfilling Trump’s plan to “ensure every veteran has the choice to seek care at the VA or at a private service provider of their own choice”: Boost pay to active-duty personnel, so they can buy private life, disability and health insurance to cover service-related losses. Congress would, in effect, be paying the war bills up front. Pre-funding veterans benefits could thus save lives and improve U.S. foreign policy by making Congress more reluctant to use force.

Just as reforming the VA’s insurance functions would make active-duty personnel safer, reforming its healthcare delivery system would make veterans healthier and wealthier, and improve medical care for civilians.

If Congress converted the VHA’s 1,700 facilities into a shareholder-owned corporation and distributed shares to veterans, then veterans would literally own the VA. Transferring ownership of the VA to veterans would constitute a huge wealth transfer to the people the VA exists to serve. The nation’s largest integrated health system would be run for veterans, by veterans.

Doing so would improve the quality of care for both veterans and civilians. Current veterans would be free to continue using the VA under existing eligibility rules, but could also patronize private-sector providers, just as paying civilians could use the reformed VA system. Competition between the new VA and other private providers would force each to improve on dimensions of quality where it is weak.

These reforms would protect taxpayers while making our veterans healthier, wealthier, and most importantly, fewer.

Michael F. Cannon is the director of health policy studies at the Cato Institute.

Share |

How Trump Is Empowering the Saudi Destruction of Yemen

John Glaser

The Trump administration seems to have abandoned the possibility of a diplomatic resolution to the Saudi-led destruction of Yemen. In his first few weeks in office Trump approved a disastrous Navy SEAL raid in the interior, parked a guided missile destroyer with history in Yemen off its coast, and now might approve major arms shipments to Arab Gulf states currently under scrutiny for war crimes in the country.

Five days after being sworn in, Trump approved a Navy SEAL operation over an intimate dinner with aides that would later rain bullets down on a rural Yemeni town. Although the White House promoted the operation as a “success,” it looks more like a very public, very tragic failure.

Not only was the primary al-Qaeda target not there, but a chaotic shootout unfolded that reportedly ended up killing 25 civilians, including nine children under the age of 13. One of the SEALs, Chief Petty Officer William Owens, was also killed. On top of that, the Yemeni government responded by withdrawing permission for future counterterrorism operations.

The New York Times reported that Yemen issued an outright ban on U.S. commando operations, a report that was later watered down by the Washington Post. It nonetheless signaled that the new administration needs to tread carefully in the future, lest they jeopardize regional counterterrorism objectives.

With an inexperienced hot-head at the Resolute Desk relying on an aide who believes we’re overdue for another global war, it’s hard to be optimistic about their commitment to diplomacy.

But not all of Trump’s decisions on Yemen have such a clear-cut counterterrorism focus. Saudi Arabia and its Gulf Cooperation Council coalition partners have waged war on Houthi rebels with nebulous ties to Iran for almost two years-and Trump now seems eager to assist them.

In his last months in office, President Obama took steps to reduce U.S. involvement following international criticism of Saudi Arabia’s indiscriminate bombing practices. The Saudis and their coalition partners have steadily racked up a high civilian death toll that was beginning to tarnish the reputation of their Western patrons. Trump, however, appears eager to cozy back up to America’s reckless Gulf clients.

Following a Houthi attack on a Saudi frigate, the U.S. Navy deployed a guided missile destroyer to the Gulf of Aden off the Yemeni coast in a misguided signal of solidarity with the Saudi cause. The Navy didn’t send just any guided missile destroyer-they sent the USS Cole. Al Qaeda targeted the Cole in an attack of the coast of Yemen in 2000 that killed 17 sailors. The Navy avoided deploying the ship to the Middle East ever since. Until now, that is, when they’ve parked it back on Yemen’s doorstep.

By taking such an assertive stance, Trump gave hope to the Gulf state coalition that he may increase American assistance in the coming months. According to the Washington Times, quoting “sources close to the government in Riyadh,” the Saudi Foreign Minister in particular is “very, very up” about the developments and the prospect of American support. It seems the foreign minister’s optimism is warranted, with the White House also possibly approving an arms shipment of precision-guided munitions that Obama blocked in December. The precision-guidance kits in question would upgrade the bombs that Saudi Arabia and its friends are using to target Yemeni schools and hospitals.

A Trump administration official told the Washington Times last week, “If they’re going to drop stuff, it should be precision-guided rather than dumb.” Sources close to the Saudi government say the Kingdom would also “appreciate an increased supply of precision munitions and much broader sharing of intelligence…” I’m sure they would. That doesn’t make it a good idea.

While other Western nations debate cutting Saudi Arabia off completely from their arms exports in an effort to mitigate wanton destruction, it seems that Washington is just happy they’re buying American.

With an inexperienced hot-head at the Resolute Desk relying on an aide who believes we’re overdue for another global war, it’s hard to be optimistic about their commitment to diplomacy. We can only hope that somehow Trump’s love of a good deal will steer his administration towards more diplomatic action and less of a “shoot first, spin later” mentality.

John Glaser is associate director of foreign policy studies at the Cato Institute.