Feeds:
Posts
Comments

Posts Tagged ‘Government intervention’

Back in January, I compared Reagan’s pro-trade views with Trump’s cramped protectionism.

Well, here’s another video of the Gipper talking about trade. I especially like how he used “destructionism” to describe protectionism.

And let’s consider exactly the kind of destruction that may occur.

ScotiaBank in Canada has crunched numbers on the possible consequences to North America in a world of Trump-style tariffs. The “good news” is that the United States suffers the least amount of damage.

The bad news (actually the worse news) is that the American people will suffer a significant and sustained loss of economic growth. And that has very negative implications for long-run prosperity.

But this isn’t just about macroeconomic aggregates.

Here’s an example from the Wall Street Journal of how protectionism backfires.

Lyon Group Holding…is struggling to survive as Donald Trump’s steel tariff gives his Chinese competitors an unfair advantage. Meet the law of unintended tariff consequences with arbitrary harm to the innocent. …Steel has long accounted for 45% of the cost of making lockers at Lyon and Republic, the single biggest expense. Mr. Trump’s 25% tariff has driven up the price of foreign steel and given domestic steel the chance to raise prices. American hot-rolled steel coil recently sold for $900 per short ton…up 38%, or $248 per ton, since the beginning of January. …Raising locker prices isn’t an option. Even before the tariffs, Lyon and Republic’s clients were paying a 10% premium for the convenience of buying American instead of Chinese, and they can’t afford to go any higher, Mr. Altstadt says. …foreign manufacturers are benefiting from Mr. Trump’s steel protectionism.

And here are some of the real-world costs.

If the tariffs remain in place, Mr. Altstadt says he’ll have no choice but to buy foreign-made locker components. Reluctantly, he’s visited factories in China to consider his options. But if Lyon and Republic outsource locker parts from abroad, Mr. Altstadt says he’ll have to lay off at least one-fourth of his American workforce and perhaps shutter and sell one of his metalworking factories. …he is haunted by “the devastating effect on real people.” Two-thirds of his workforce is unskilled.

I feel sorry for Mr. Altstadt, but I won’t lose sleep about his plight. I assume he’s at least in the top-5 percent for income and wealth.

The real victims of Trump’s protectionism are the ordinary workers at the company. These people may not have high skills, but they are playing by the rules and doing the right thing instead of living off the government. Yet now many of them may lose their jobs because the President doesn’t like America’s system of free enterprise.

Disgusting. Protectionism isn’t just bad economics. It’s immoral as well.

P.S. Reagan’s rhetoric on trade was perfect, but not his policy. As I explained last year, his generally strong economic record was marred by some protectionist initiatives.

Read Full Post »

During the Obama years, I criticized the President for various green-energy scams that squandered money and produced scandals such as Solyndra.

And I also noted that many Republicans were happy to support corrupt subsidies to inefficient sources of energy so long as their voters got a slice of the loot.

Sadly, the same thing is happening with Trump in the White House. All that’s changed is that there are different groups sucking at the federal teat.

Catherine Rampell’s column points out how Trump wants the government to pick winners and losers in energy markets.

The GOP…definition of free markets turns out to be pretty confusing… It apparently includes allowing the president to personally dictate what companies must buy, from whom, and at what price; what products they should sell; which employees they should hire and fire; where they should locate… The Trump administration has taken action or raised questions in all these areas… And President Trump’s supposedly laissez-faire co-partisans in Congress have barely said boo. …If that doesn’t count as “picking winners and losers,” it’s hard to say what would. Efforts to prop up inefficient coal-fired plants are…a terrible idea from an economic perspective. The reason these plants are struggling, after all, is that they can’t compete with cheaper natural gas and renewables. Trump is wielding the power of the state to keep uncompetitive companies in business, and costing taxpayers and consumers lots of money in the process.

And remember that this intervention will destroy more jobs than it saves, just as was the case with Obama’s interventions.

This sordid story also is a perfect example of why politicians should never be granted open-ended power.

Trump is now defiantly claiming that “national security” requires bailing out his political allies in the coal industry. It’s the same absurd rationale he has lately invoked for other unfree-market interventions — including, ironically, our military-alliance-straining steel and aluminum tariffs and, perhaps soon, automobile tariffs. …Leave it to Trump to try to strong-arm the invisible hand.

The Wall Street Journal has a hard-hitting editorial castigating the Trump Administration for considering back-door bailouts and special subsidies.

…all of a sudden the Administration wants to do a Barack Obama imitation and play energy favorites. …The supposed problem is that the U.S. is producing an abundance of cheap natural gas thanks to the shale fracking revolution. As a result, national electric wholesale prices for natural gas have plunged by half since 2008… Meanwhile, government subsidies such as the 30% federal investment tax credit have boosted solar and wind production while driving down the wholesale cost. Many nuclear and coal plants unable to compete with renewables and natural gas may have to shut down over the next few years. …Thus, the rescue plan—er, regulatory bailout. According to the Trump memo, Section 202 of the 1920 Federal Power Act lets the Energy Secretary mandate the delivery or generation of electricity during an emergency. It also suggests that the President could use his authority under the 1950 Defense Production Act to “construct or maintain energy facilities” to protect national defense. …Mandating that grid operators buy more expensive coal and nuclear power would raise consumer prices and could reduce natural gas production that has been a boon to many states. And note to Mr. Trump: Energy is one of the biggest costs for steel and aluminum manufacturers. The government rescue for coal and nuclear is as politically abusive as Mr. Obama’s lawless policy to punish fossil fuels. A better way to make coal and nuclear more competitive is to keep chipping away at renewable subsidies and cutting regulation.

The editorial concludes with a very appropriate observation.

As Governor of Texas, Mr. Perry often visited our offices to explain why the U.S. government shouldn’t pick energy winners and losers. He’s still right even if he has moved to Washington.

Amen. Intervention in energy markets is bad when “green” groups get the handouts, and intervention also is bad when coal gets the goodies. That’s true in America and it’s true in other nations.

The Washington Post also correctly opined against this heavy-handed government intervention.

President Trump is preparing what could be the most astonishing and counterproductive instance of central planning the nation has seen in decades.

Mr. Trump last Friday ordered Energy Secretary Rick Perry to recommend ways to prop up struggling coal and nuclear power plants. …One option would require the purchase of electricity from coal and nuclear plants under a law meant to keep power flowing during emergencies, such as hurricanes. Another scheme would hijack the 1950 Defense Production Act, which allows presidential intervention to secure critical goods when national security is at stake. …Americans could pay hundreds of millions, and perhaps billions, more every year for energy. Wholesale electricity markets could collapse as efficient power plants failed to compete with subsidized dinosaurs.

The editorial wisely notes that Trump’s intervention will create a bad precedent that will be abused by a future Democrat president (actually, he’s building on Obama’s bad precedent, but it doesn’t help that Trump is making intervention a pattern).

If Mr. Trump proceeds and the courts somehow allow such a perversion of the law, it would be hard to stop the next Democratic president from, say, using emergency powers to force the purchase of renewables at the expense of coal, oil and natural gas. The president’s latest turn toward economic statism should be no surprise; it has been an animating principle of his presidency. …Mr. Trump is in the midst of picking unnecessary and increasingly costly trade fights with once-close allies, while assuring U.S. farmers that he will use state power — and, presumably, everyone else’s tax dollars — to preserve their margins. Now he is on the verge of asserting dictatorial control over energy markets, using powers meant to be reserved for real emergencies.

Call me crazy, but I want consumers to have the power. And that means allowing competitive markets to allocate resources and determine profitability.

Trump, by contrast, doesn’t seem to have any guiding principles. Yes, he sometimes supports good policy, but he’s also just as likely to favor intervention.

By the way, the Washington Post picked the wrong word in the title of its editorial. At least in theory, socialism means government ownership of the “means of production.” Trump doesn’t want the government to own energy companies. Instead, he wants to control them.

As Thomas Sowell observed when writing about Obama-era intervention, that’s technically fascism.

But since that term is now associated with other nasty attributes, let’s call Trump’s policy statism, corporatism, or cronyism. Or, if you like oxymorons, call it state-led capitalism.

Read Full Post »

When I wrote about “crazy Bernie Sanders” in 2016, I wasn’t just engaging in literary hyperbole. The Vermont Senator is basically an unreconstructed leftist with a disturbing affinity for crackpot ideas and totalitarian regimes.

His campaign agenda that year was an orgy of new taxes and higher spending.

Though it’s worth noting that he’s at least crafty enough to steer clear of pure socialism. He wants massive increases in taxes, spending, and regulation, but even he doesn’t openly advocate government ownership of factories.

Then again, there probably wouldn’t be any factories to nationalize if Sanders was ever successful in saddling the nation with a Greek-sized public sector.

He’s already advocated a “Medicare-for-All” scheme with a 10-year price tag of $15 trillion, for instance. And now he has a new multi-trillion dollar proposal for guaranteed jobs.

In a column for the Washington Post, Robert Samuelson dissects Bernie’s latest vote-buying scheme. Here’s a description of what Senator Sanders apparently wants.

Sen. Bernie Sanders (I-Vt.) wants the federal government to guarantee a job for every American willing and able to work. The proposal sounds compassionate and enlightened, but in practice, it would almost certainly be a disaster. …Just precisely how Sanders’s scheme would work is unclear, because he hasn’t yet submitted detailed legislation. However, …a job-guarantee plan devised by economists at Bard College’s Levy Economics Institute…suggests how a job guarantee might function. …anyone needing a job could get one at a uniform wage of $15 an hour, plus health insurance (probably Medicare) and other benefits (importantly: child care). When fully deployed, the program would create 15 million public-service jobs, estimate the economists. …the federal government would pay the costs, the program would be administered by states, localities and nonprofit organizations.

As you might expect, the fiscal costs would be staggering (and, like most government programs, would wind up being even more expensive than advertised).

This would be huge: about five times the number of existing federal jobs (2.8 million) and triple the number of state government jobs (5 million). …The proposal would add to already swollen federal budget deficits. The Bard economists put the annual cost at about $400 billion. …overall spending is likely underestimated.

But the budgetary costs would just be the beginning.

Bernie’s scheme would basically destroy a big chunk of the job market since people in low-wage and entry-level jobs would seek to take advantage of the new government giveaway.

…uncovered workers might stage a political rebellion or switch from today’s low-paying private-sector jobs to the better-paid public-service jobs… The same logic applies to child-care subsidies.

And there are many other unanswered questions about how the plan would work.

Does the federal government have the managerial competence to oversee the creation of so many jobs? …Can the new workers be disciplined? …Finally, would state and local governments substitute federally funded jobs for existing jobs that are supported by local taxes?

If the plan ever got adopted, the only silver lining to the dark cloud is that it would provide additional evidence that government programs don’t work.

The irony is that, by assigning government tasks likely to fail, the advocates of activist government bring government into disrepute.

But that silver lining won’t matter much since a bigger chunk of the population will be hooked on the heroin of government dependency.

In other words, just as it’s now difficult to repeal Obamacare even though we know it doesn’t work, it also would be difficult to repeal make-work government jobs.

So we may have plenty of opportunity to mock Bernie Sanders, but he may wind up with the last laugh.

P.S. Regarding getting people into productive work, I figure the least destructive approach would be “job training” programs.

Beyond that, I’m not sure whether make-work government jobs are more harmful or basic income is more harmful.

Read Full Post »

The good news is that some honest leftists have thrown in the towel and now openly admit that capitalism generates more prosperity.

They still don’t want free markets, of course. For ideological reasons, they continue to push for a big welfare state. But at least they admit their redistributionist policies lead to weaker economic performance. Perversely, they are willing to reduce living standards for poor people so long as rich people suffer even bigger drops in their income (in other words, Thatcher was right).

Many statists, though, realize that this is not a compelling agenda.

So they try to claim – notwithstanding reams of evidence – that bigger government somehow enables more growth.

And they’re crafty. Most of them are clever enough that they don’t embrace full-scale socialism. Instead, they push for an ad hoc approach based on subsidies, bailouts, social engineering, price controls, and other forms of intervention.

If you want to get technical, they’re actually pushing a variant of fascism, with nominal private ownership but government direction and control.

But let’s avoid that loaded term and simply call it cronyism.

In a column for the Washington Post, Nicholas Borroz observes that this approach exists all over the world.

China’s consolidation of its state-owned enterprises (SOEs), Russia’s oligarch-led economy, the proliferation of sovereign wealth funds (SWFs) and growing government intervention in the West are clear indicators of state-led capitalism… Controlling market activity gives governments obvious advantages when it comes to advancing political agendas at home and foreign policy abroad. …SWFs are an important feature of today’s global economic landscape; governments also use them as agents of statecraft. …State-led capitalism is even finding support in the West. …President Trump has bragged that he personally influences firms’ decisions about where to place their factories. …we have entered an era when state-led capitalism is firmly entrenched.

Unfortunately, I think Mr. Borroz is correct.

Though “state-led capitalism” an oxymoronic phrase.

Borroz also notes that the shift to cronyism reverses some of the progress that occurred at the end of the 20th century.

This is a dramatic reversal of the trend from two decades ago. In the 1990s, there was a rush around the world to liberalize economies. Capitalism’s defeat of communism made it seem that unfettered market activity was the key to success.

If you look at the data from Economic Freedom of the World, the period of liberalization actually began in the 1980s, but I’m being a nit-picker.

So let’s shift to parts of his column where I have substantive disagreements.

First, my jaw hit the proverbial floor when I read the part about the International Monetary Fund supposedly being a beacon of free-market reform.

Developing countries signed up with the International Monetary Fund’s structural adjustment programs (SAPs), gaining access to loans in exchange for adopting neoliberal economic prescriptions.

Since I’ve referred to the IMF as the “dumpster fire” or “Dr. Kevorkian” of the global economy, I obviously have a different perspective.

Though, to be fair, the bureaucrats at the IMF generally do advocate for deregulation and free trade. But they are bad news on fiscal policy and oftentimes misguided on monetary policy as well.

But here’s the part of the column that is even more galling. Borroz defends cronyism because free markets allegedly failed.

…a number of factors led to skepticism about free markets. One was the underwhelming developmental effect of SAPs and liberalization. …A further blow to the neoliberal model was a series of financial disasters caused by unrestricted flows of capital, notably the 1997 Asian financial crisis and the 2008 global financial crisis. Perhaps the factor that has most undermined neoliberalism’s attractiveness, though, is…countries with state-led economies, such as China and Russia…remain relevant not despite state intervention but because of it.

This is remarkably wrong. Three big mistakes in a handful of sentences.

  1. When IMF structural adjustment programs fail, that’s an unsurprising consequence of big tax increases, not the fault of capitalism.
  2. Government monetary policy deserves the bulk of the blame for financial crises with Fannie and Freddie also playing a role in the case of America.
  3. China and Russia are relevant from a geopolitical perspective, but their economies could be far more prosperous if government played a smaller role.

Heck, per-capita output in both China and Russia is far below U.S. levels, so the notion that they are role models is amazingly oblivious to reality.

Now let’s review some evidence about the downside of “state-led” economic policy.

The Economist notes that cronyism does not have a very successful track record.

Some argue it makes no sense for a government to place VC bets, directly or otherwise. …Massimo Colombo, an academic who studies government VC in Europe at the Polytechnic University of Milan, …admits that, when results are measured by jobs created or productivity boosted, the private sector is far better at deploying capital. Studying 25,000 government VC investments in 28 countries, between 2000 and 2014, he and colleagues concluded that they worked only when they did not compete directly with the private sector.

And research from three economists at Italy’s central bank specifically measured the loss of economic efficiency when governments operate and control businesses.

In OECD countries public services, especially at local level, are often provided by public enterprises (Saussier and Klien, 2014). Therefore, the efficiency of LPEs is important for the overall efficiency of the economy and the sustainability of public finances. …we are able to build a very detailed dataset that allows us to compare firms that are observationally equivalent, apart from the ownership indicator, thus making possible the definition of the appropriate set of comparison firms. …Although we focus on Italy, which represents a particularly interesting case to analyze for several reasons, the approach we have followed in this paper may be easily adapted to other countries. We find that the performance of Italian LPEs, measured in terms of total factor productivity, is on average lower than that of private enterprises by about 8%… our results show that the ownership structure is more important than the market structure in explaining the performance of LPEs with respect to their private sector counterparts. …Our results imply that policy measures aimed at privatizing LPEs (totally or, at least, partially) can improve their performance, by reducing the level of public control and promoting cost-benefit analysis for investments.

In other words, the type of statism doesn’t really matter.

The inevitable result is less growth and prosperity.

Which is why I advocate “separation of business and state.”

Simply stated, I want to reverse the data in this chart because I understand the data in this video and this chart.

P.S. If my statist friends disagree, accept my challenge and please show me a cronyist nation that is outperforming a market-oriented nation.

Read Full Post »

As a policy wonk, I mostly care about the overall impact of government on prosperity. So when I think about the effect of red tape, I’m drawn to big-pictures assessments of the regulatory burden.

Here are a few relevant numbers that get my juices flowing.

  • Americans spend 8.8 billion hours every year filling out government forms.
  • The economy-wide cost of regulation reached $1.75 trillion in 2010.
  • For every bureaucrat at a regulatory agency, 100 jobs are lost in the economy’s productive sector.
  • A World Bank study determined that moving from heavy regulation to light regulation “can increase a country’s average annual GDP per capita growth by 2.3 percentage points.”
  • Regulatory increases since 1980 have reduced economic output by $4 trillion.
  • The European Central Bank estimated that product market and employment regulation has led to costly “misallocation of labour and capital in eight macro-sectors,” and also found that reform could boost national income by more than six percent.

But one thing I’ve learned over the years is that I’m not normal.

Most people don’t get excited about these macro-type calculations.

Instead they’re far more likely to get agitated by regulations that make their daily lives a hassle. Such as:

I certainly can sympathize. It’s galling that the clowns in Washington have made our existence less pleasant.

Most people also are quite responsive to anecdotes about red tape. Simply stated, big-picture numbers are like a skeleton, while real-world examples put meat on the bones.

Today, let’s look at some absurd examples of the regulatory state in action.

We’ll start with bone-headed pizza regulation, as explained by the Wall Street Journal.

FDA released guidance for posting calorie disclosures at restaurants with more than 20 locations, and the ostensible point is to help folks choose healthier foods. The regulations…are an outgrowth of the 2010 Affordable Care Act… The reason some restaurants have spent years fighting these rules is not because executives lay awake at night plotting how to make Americans obese. It’s because the rules are loco. …Take pizza companies, which have to display per slice ranges or the number for the entire pie. Calories vary based on what you order—the barbarians who put pineapple on pizza are consuming fewer calories than someone who chooses pepperoni and extra cheese. But the number of pepperonis on a pizza depends on the pie’s size and whether someone also adds onions and sausage. ..The rules are so vague that companies could face a crush of lawsuits, which will be abetted by this “nonbinding” FDA guidance.

By the way, you won’t be surprised to learn that academic researchers have found these types of rules have no effect on consumer choices.

A systematic review and meta-analysis determined the effect of restaurant menu labeling on calories and nutrients…were collected in 2015, analyzed in 2016, and used to evaluate the effect of nutrition labeling on calories and nutrients ordered or consumed. Before and after menu labeling outcomes were used to determine weighted mean differences in calories, saturated fat, total fat, carbohydrate, and sodium ordered/consumed… Menu labeling resulted in no significant change in reported calories ordered/consumed… Menu labeling away-from-home did not result in change in quantity or quality, specifically for carbohydrates, total fat, saturated fat, or sodium, of calories consumed among U.S. adults.

Shocking, just shocking. Next thing you know, somehow will tell us that Obamacare didn’t lower premiums for health insurance!

For our second example, we have a surreal story out of California.

A farmer faces trial in federal court this summer and a $2.8 million fine for failing to get a permit to plow his field and plant wheat in Tehama County. A lawyer for Duarte Nursery said the case is important because it could set a precedent requiring other farmers to obtain costly, time-consuming permits just to plow their fields. “The case is the first time that we’re aware of that says you need to get a (U.S. Army Corps of Engineers) permit to plow to grow crops,” said Anthony Francois, an attorney for the Pacific Legal Foundation. “We’re not going to produce much food under those kinds of regulations,” he said. …The Army did not claim Duarte violated the Endangered Species Act by destroying fairy shrimp or their habitat, Francois said. …Farmers plowing their fields are specifically exempt from the Clean Water Act rules forbidding discharging material into U.S. waters, Francois said.

Wow, sort of reminds me of the guy who was hassled by the feds for building a pond on his own property. Or the family persecuted for building a house on their own property.

Last but not least, our third example contains some jaw-dropping tidbits about red tape in a New York Times story.

Indian Ladder Farms, a fifth-generation family operation near Albany, …sells homemade apple pies, fresh cider and warm doughnuts. …This fall, amid the rush of commerce — the apple harvest season accounts for about half of Indian Ladder’s annual revenue — federal investigators showed up. They wanted to check the farm’s compliance… Suddenly, the small office staff turned its focus away from making money to placating a government regulator. …The investigators hand delivered a notice and said they would be back the following week, when they asked to have 22 types of records available. The request included vehicle registrations, insurance documents and time sheets — reams of paper in all. …the Ten Eyck family, which owns the farm, along with the staff devoted about 40 hours to serving the investigators, who visited three times before closing the books. …This is life on the farm — and at businesses of all sorts. With thick rule books laying out food safety procedures, compliance costs in the tens of thousands of dollars and ever-changing standards from the government…, local produce growers are a textbook example of what many business owners describe as regulatory fatigue. …The New York Times identified at least 17 federal regulations with about 5,000 restrictions and rules that were relevant to orchards. …Mr. Ten Eyck…fluently speaks the language of government compliance, rattling off acronyms that consume his time and resources, including E.P.A. (Environmental Protection Agency), OSHA (Occupational Safety and Health Administration), U.S.D.A. (United States Department of Agriculture) and state and local offices, too, like A.C.D.O.H. (Albany County Department of Health).

And here’s an info-graphic that accompanied the article.

Wow. No wonder a depressingly large share of the population prefers to simply get a job as a bureaucrat.

Needless to say, this is not a system that encourages and enables entrepreneurship.

Which is why deregulation is a good idea (and Trump deserves credit for making a bit of progress in this area). We need some sensible cost-benefit analysis so that bureaucracies are focused on public health rather than mindless rules.

And it also would be a good idea in many cases to rely more on mutually reinforcing forms of private regulation.

Since I’m a self-confessed wonk, I’ll close by sharing this measure of the ever-growing burden of red tape. I realize it’s not as attention-grabbing as anecdotes and horror stories, but it is very relevant if we care about long-run growth and competitiveness.

P.S. On the topic of regulation, I admit that this example of left-wing humor about laissez-faire dystopia is very clever and amusing.

P.P.S. I’ve used an apple orchard as an example when explaining why a tax bias against saving and investment makes no sense. I’ll now have to mention that the beleaguered orchard owner also has to deal with 5,000 regulatory restrictions.

Read Full Post »

I’m not a fan of conspiracy theories. When people ask me whether there is some sinister, behind-the-scenes cabal running Washington, I tell them that petty corruption, self interest, and “public choiceare much better explanations for the nonsensical policies being imposed on the country.

So you won’t be surprised that rhetoric about the “deep state” rubs me the wrong way. If the term simply was used to describe D.C.’s bloated, self-interested, and left-leaning bureaucracies, that would be okay. But is seems that the phase also implies some sort of secret master plan on the part of shadowy insiders.

To be blunt, the people in Washington don’t have the competence to design, implement, and enforce any type of master plan. Yes, we have a Leviathan state, but it’s much more accurate to think of Uncle Sam as a covetous, obese, and blundering oaf (as illustrated by my collection of cartoons).

That being said, that oaf is not a friend of liberty, as explained in an article published by the Federalist.

…to make a government job more like the ones the rest of us have will require the president and Congress to undo more than a century of misguided, anti-democratic, and unconstitutional laws governing the civil service. …the bulk of the civil service—2.8 million bureaucrats—has become a permanent class of powerbrokers, totally unaccountable to the winds of democratic change. …incompetence and corruption are the least of the problems with the modern civil service. With 95-99 percent of political donations from government employees going to Hillary Clinton in the last election, it looks less like a system of apolitical administrators and more like an arm of the Democratic Party. …Civil service protections…have created a system that grows government and advances left-wing causes regardless of who the people elect.

Moreover, there is a structural feature of the Washington bureaucracy that gives it dangerous powers.

John Tierney’s column in the Wall Street Journal explains the problem of the “administrative state.”

What’s the greatest threat to liberty in America? …the enormous rogue beast known as the administrative state. Sometimes called the regulatory state or the deep state, it is a government within the government… Unelected bureaucrats not only write their own laws, they also interpret these laws and enforce them in their own courts with their own judges. All this is in blatant violation of the Constitution… Mr. Hamburger, 60, a constitutional scholar…says, sitting in his office at Columbia Law School… “The government can choose to…use an administrative proceeding where you don’t have the right to be heard by a real judge or a jury and you don’t have the full due process of law…” In volume and complexity, the edicts from federal agencies exceed the laws passed by Congress by orders of magnitude. “The administrative state has become the government’s predominant mode of contact with citizens,” Mr. Hamburger says. …“The framers of the Constitution were very clear about this,” Mr. Hamburger says…”Congress cannot delegate the legislative powers to an agency, just as judges cannot delegate their power to an agency.”

George Will elaborates, noting that “administrative law” is an affront to the Constitution’s principle of “rival branches.”

…the administrative state distorts the United States’ constitutional architecture…Clarence Thomas…is urging the judicial branch to limit the legislative branch’s practice of delegating its power to the executive branch. …This subject is central to today’s argument between constitutionalists and progressives. …Today, if Congress provides “a minimal degree of specificity” in the instructions it gives to the executive, the court, Thomas says, abandons “all pretense of enforcing a qualitative distinction between legislative and executive power.” …the principles Thomas has articulated “attack the very existence of the modern administrative state.” This state, so inimical to conservatism’s aspiration for government limited by a constitutional structure of rival branches… Woodrow Wilson…became the first president to criticize America’s founding, regretted the separation of powers because he thought modern government required a clerisy of unfettered administrators. …Today we are governed by Wilson’s clerisy, but it does not deliver what is supposed to justify the overthrow of James Madison’s constitutional system — efficient, admirable government.

Peter Wallison of the American Enterprise Institute adds some cogent analysis.

Although the Constitution places the federal legislative power in Congress, it is now increasingly — and alarmingly — flowing to administrative agencies that, unlike Congress, are not directly accountable to the public affected by their decisions. Unless we can find a solution to this problem—a way to curb and cabin the discretionary power of administrative agencies —decentralization and individual self-determination will eventually be brought to an end. …The framers believed that the tripartite structure of the federal government would be enough to prevent any one of the three branches from consolidating the power of government and becoming a danger to liberty. But with the growth of the administrative state, we may now be seeing exactly the consolidation of powers that Madison feared. …the judicial branch is supposed to be the final interpreter of the Constitution and thus the objective protector of the framework the Constitution ordains. But unfortunately, modern courts have generally failed to perform this role… America is an exceptional country in part because its constitutional framework has, until relatively recently, limited the government’s ability to centralize its control and restrain the nation’s diversity. If we are to avoid a dramatic over-centralization of power, the growth of the administrative state must be restrained.

In an article for National Review, Stanley Kurtz delves into the topic.

the gist of the growing conservative critique of the administrative state…focuses on a runaway bureaucracy’s threat to constitutional government. Congress has improperly delegated much of its law-making power to bureaucrats, who in turn have abusively expanded this authority. The courts, for their part, have turned a blind eye to the administrative power-grab. Meanwhile, agencies staffed by unelected bureaucrats now operate de facto courts. In effect, these agencies negate the separation of powers by simultaneously exercising legislative, executive, and judicial functions, the very definition of authoritarian rule. …governors and state legislators can be unaware of policy end-runs imposed by federal agreements with a state’s own bureaucrats. At both the state and federal levels, then, bureaucracy has broken loose and effectively turned into a national fourth branch of government. …The Founders designed our federalist system to secure liberty by dividing and disbursing power, and by ensuring that local and state governments would remain more accountable to citizens than a distant federal government ever could. In fundamental ways, however, the modern practice of conditioning federal grants on state acceptance of federal dictates undermines the Founders’ intent. …

Robert Gebelhoff of the Washington Post points out that this fight has major implications.

One of the legal issues that’s less often discussed is the role that the next Supreme Court justice will play in conservatives’ long-running legal fight to limit the size of the federal government. For decades, conservatives on the bench have been losing that war, giving way to a system of administrative law that is written, for the most part, by bureaucratic agencies. …it’s a really big deal. Over the past half century, agencies have exploded in size and power, so this debate really is about how much power the federal government should have. …Conservatives, fearful that bureaucracies are becoming an unchecked “fourth branch of government,” have decried agency deference. Just last month, Justice Clarence Thomas argued that the doctrine “has metastasized,” as if it were a cancer. And back in 2013, Chief Justice John Roberts warned of the “danger posed by the growing power of the administrative state…” Both Roberts and Thomas frame the issue as a threat to the separation of powers: We’re letting agencies in the executive branch dip into the powers reserved for the judicial and legislative branches. …And by allowing bureaucrats the ability to define the scope of their own jurisdiction, we let them answer questions meant to be left up to the courts. This, they argue, is at odds with the Constitution. …Conservatives fearing a powerful bureaucratic state have few legal weapons to fight it. The future of a small-government Supreme Court is bleak, and the march toward greater agency control of the law will probably continue forward.

I’ll close with some recent polling data about the “deep state” from Monmouth University.

Here’s a question asking whether there’s a conspiratorial version of the “deep state.”

I’m not sure what to think of the answers.

I like people to be suspicious of the federal government. But I’d much prefer them to be concerned because they’re reading my daily columns, not because they think there’s a sinister plot.

I prefer the answers to this next question. Most people presumably have never heard of “administrative law” or the “administrative state,” but they do have a healthy skepticism of bureaucratic rule.

Most of the authors cited today correctly want federal judges to fix the problem by limiting the power of bureaucrats to make and enforce law.

That would be desirable, but I’d go much further. We should eliminate almost all of the agencies, programs, and departments that clutter Washington. Then the problem of the administrative state automatically disappears.

Read Full Post »

Beginning in the 1980s, money-laundering laws were enacted in hopes of discouraging criminal activity by making it harder for crooks to use the banking system. Unfortunately, this approach has been an expensive failure.

Amazingly, some politicians actually want to make these laws even worse. I wrote last year about some intrusive, expensive, and pointless legislation proposed by Senators Grassley, Feinstein, Cornyn, and Whitehouse.

Now there’s another equally misguided set of proposals from Senators Rubio and Wyden, along with Representatives Pearce, Luetkemeyer, and Maloney. They want to require complicated and needless ownership data from millions of small businesses and organizations.

David Burton of the Heritage Foundation has a comprehensive report on the legislation. Here’s some of what he wrote.

Congress is seriously considering imposing a beneficial ownership reporting regime on American businesses and other entities, including charities and churches. …the House and Senate bills…share three salient characteristics. First, they would impose a large compliance burden on the private sector, primarily on small businesses, charities, and religious organizations. Second, they create hundreds of thousands—potentially more than one million—inadvertent felons out of otherwise law-abiding citizens. Third, they do virtually nothing to achieve their stated aim of protecting society from terrorism or other forms of illicit finance. …Furthermore, the creation of this expensive and socially damaging reporting edifice is unnecessary. The vast majority of the information that the proposed beneficial ownership reporting regime would obtain is already provided to the Internal Revenue Service.

Richard Rahn criticizes this new proposal in his weekly column.

…what would you think of a member of Congress who proposes to put a new regulation on the smallest of businesses that does not meet a cost-benefit test, denies basic privacy protections and, because of its vagueness and ambiguity, is likely to cause very high numbers of otherwise law-abiding Americans to be felons? …Some bureaucrats and elected officials argue that the government needs to know who the “beneficial owners” are of even the tiniest of businesses in order to combat “money-laundering,” tax evasion or terrorism. …Should the church ladies who run the local non-profit food bank be put in jail for their failure to submit the form to the Feds that would give them the exemption from the beneficial ownership requirement? …Given how few people are actually convicted of money-laundering, the overwhelming evidence is that 99 percent of the people being forced to submit to these costly and time-consuming proposed regulations will not be guilty of money-laundering, terrorism or whatever, and thus should not be harassed by government.

Writing for the Hill, J.W. Verret, an expert in business law from George Mason University Law School, highlights some of the serious problems with this new regulatory scheme.

Legislation under consideration in Congress, the Counter Terrorism and Illicit Finance Act, risks tying entrepreneurs’ hands with even more red tape. In fact, it could destroy any benefit some small businesses stand to gain from the tax reform legislation passed last year. It would require corporations and limited liability companies with fewer than 20 employees to file a form with the Treasury Department at the time of formation, and update it annually, listing the names of all beneficial owners and individuals exercising control. …Given the substantial penalties, this will impose a massive regulatory tax on small businesses as they spend money on lawyers that should go toward workers’ pay. …It is unlikely someone on a terrorist watch list would provide their real name on the required form, and Treasury will probably never have sufficient resources to audit names in real time.

Professor Verret explains some of the practical problems and tradeoffs with these proposals.

…some individual money laundering investigations would be easier with a small business registry available. But IRS tax fraud investigations would be much easier with access to taxpayers’ bank account login information — would we tolerate the associated costs and privacy violations? …How is the term “beneficial owner” defined? How is “control” defined? As a professor of corporate law, I have given multiple lectures on those very questions. What if your company is owned, in part, by another company? Or there is a chain of ownership through multiple intermediary companies? What if a creditor of the company, though not currently a shareholder or beneficial owner, obtains the contractual right to convert their debt contract into ownership equity at some point in the future? …for the average small business owner, navigating those complexities against the backdrop of a potential three year prison sentence will often require legal counsel. Companies affected by this legislation should conservatively expect to spend at least $5,000 on a corporate lawyer to help navigate the complexities of the new filing requirements.

Needless to say, squandering $5,000 or more for some useless paperwork is not a recipe for more entrepreneurship.

So how do advocates for this type of legislation respond?

Clay Fuller of the American Enterprise Institute wants us to have faith that bad people will freely divulge their real identities and that bureaucrats will make effective use of the information.

It is time to weed out illicit financing and unfair competition from criminals and bad actors. …Passing the House Financial Services Committee’s Counter Terrorism and Illicit Finance Act should be a priority for the 115th Congress. …Dictators, terrorists and criminals have been freeriding on the prosperity and liberty of the American economy for too long. Officials at FinCEN are sure that beneficial ownership legislation will exponentially increase conviction rates. We should give law enforcement what they need to do their jobs.

Gee, all that sounds persuasive. I’m also against dictators, terrorists, and criminals.

But if you read his entire column, you’ll notice that he offers zero evidence that this costly new legislation actually would catch more bad guys.

And since we already know that anti-money laundering laws impose heavy costs and catch almost no bad guys, wouldn’t it be smart to figure out better ways of allocating law enforcement resources?

I don’t know if we should be distressed or comforted, but other parts of the world also are hamstringing their financial industries with similar policies.

Here’s some analysis from Europe.

…a new reportfrom Consult Hyperion, commissioned by Mitek, reveals that the average UK bank is currently wasting £5 million each year due to manual and inefficient Know Your Customer (KYC) processes, and this annual waste is expected to rise to £10 million in three years. …Key Findings…Inefficient KYC processes cost the average bank £47 million a year…Total costs for KYC processes range from £10 to £100 per check…In the UK, 25% of applications are abandoned due to KYC friction… The cost of KYC checks is much too high, placing too much reliance on inefficient and error-prone manual processes,” said Steve Pannifer, author of the report and COO at Consult Hyperion.

And here’s an update from Asia.

Anti-money laundering and know-your-customer compliance have become leading concerns at financial institutions in Asia today. … we estimate that AML compliance budgets across the six Asian markets in this study total an estimated US$1.5 billion annually for banks alone. …A majority of respondents (55%) indicated that AML compliance has a negative impact on their firms’ business productivity. …An additional 15% felt that AML compliance actually threatens their firms’ ability to do business. …Eighty-two per cent of survey respondents saw overall AML compliance costs increasing in 2016, with one third projecting that costs will rise by 20% or more.

The bottom line is that laws and regulations dealing with money laundering are introduced with high hopes of reducing crime.

And when there’s no effect on criminal activity, proponents urge ever-increasing levels of red tape. And when that doesn’t work, they propose new levels of regulation. And still nothing changes.

Lather, rinse, repeat.

Here’s the video I narrated on this topic. It’s now a bit dated, but everything I said is even more true today.

Let’s close with a surreal column in the Washington Post from Dana Milbank. He was victimized by silly anti-money laundering policies, but seems to approve.

I did not expect that my wife and I would be flagged as possible financiers of international terrorism. …The teller told me my account had been blocked. My wife went to an ATM to take out $200. Denied. Soon I discovered that checks I had written to the au pair and my daughter’s volleyball instructor had bounced. …I began making calls to the bank and eventually got an explanation: The bank was looking into whether my wife and I were laundering money, as they are required to by the Bank Secrecy Act as amended by the Patriot Act. …the bank seemed particularly suspicious that my wife was the terrorist… The bank needed answers. Did she work for the government? How much money does she make? Is she a government contractor? …a week later they came back with a new threat to freeze the account and a more peculiar question: Is my wife politically influential?

Sounds like an awful example of a bank being forced by bad laws to harass a customer.

Heck, it is an awful example of that happening.

But in a remarkable display of left-wing masochism, Milbank approves.

The people who flagged us were right to do so. …Citibank, though perhaps clumsy, was doing what it should be doing. “Know your customer” regulations are important because they prevent organized-crime networks, terrorists and assorted bad guys from moving money. Banking regulations generally are a hassle, and expensive. But they protect us — not just from terrorists such as my wife and me but from financial institutions that would otherwise exploit their customers and jeopardize economic stability the way they did before the 2008 crash.

I guess we know which way Milbank would have responded to this poll question from 2013.

But he would be wrong because money-laundering laws don’t stop terrorism.

We’re giving up freedom and imposing high costs on our economy, yet we’re not getting any additional security in exchange.

And I can’t resist commenting on his absurd assertion that money laundering played a role in the 2008 crash. Does he think that mafia kingpins somehow controlled the Federal Reserve and insisted on easy-money policies and artificially low interest rates? Does he think ISIS operatives were somehow responsible for reckless Fannie Mae and Freddie Mac subsidies?

Wow, I thought the people who blamed “tax havens” for the financial crisis deserved the prize for silliest fantasies. But Milbank gives them a run for their money.

P.S. You probably didn’t realize you could make a joke involving money laundering, but here’s one featuring former President Obama.

Read Full Post »

Older Posts »

%d bloggers like this: