page cato policy report€¦ · november/december 2015 cato policy report • 3 l in cato journal ,...

A New Growth Agendahe good news is that thecoming years hold out realpromise for a new wave ofmarket-oriented regulatoryreforms here in the United

States. Momentum on this front crested inthe late 1970s and early ’80s and has been allbut defunct for the past couple of decades,but that may well be about to change. Thebad news is why: the reason we should begetting our political hopes up is that our eco-nomic hopes over the near to medium termare so likely to be dashed.

Let me spell out that bad news a bit. U.S.economic performance in the wake of theGreat Recession of 2008–09 has been nothingshort of dismal. More than three years passedbefore real output even returned to its pre-recession level, and a return to the pre-recessiongrowth trend remains nowhere in sight. Thestory with employment is even worse: yes,the unemployment rate has gradually subsided,but only because the percentage of Americansactually in the work force has sunk to its lowestlevel since the late 1970s.

Debate still rages over how much of theeconomy’s continuing sluggishness reflectsshort-term, cyclical factors—in particular, a

shortfall in aggregate demand or deleveragingin response to the financial crisis of 2008. Itis becoming increasingly clear, however, thatslower growth in output and a weak labormarket are now the “new normal.” In otherwords, the ongoing economic slump is notjust a matter of a temporary gap betweencurrent and “potential” output. Rather, theeconomy has suffered a decline in its potentialor full-employment growth rate.

Consider the long-term trends for each

of the four major components of economicgrowth: growth in labor participation, growthin labor skills, growth in investment, andgrowth in output-enhancing innovation. AsI explained in my 2013 Cato paper “WhyGrowth Is Getting Harder,” those trends arenow uniformly unfavorable. Average hoursworked per capita have fallen since 2000.Growth in so-called labor quality (as measuredby years of school completed) has slowed

BY BRINK LINDSEY

Continued on page 6

India’s economy is flourishing as never before—140 million people have raised themselvesout of poverty in just the last three years. Cato senior fellow JOHAN NORBERG’s new publictelevision documentary (pictured above), India Awakes, highlights the globalization, eco-nomic liberalization, and entrepreneurship that led to this renaissance. Purchase IndiaAwakes at www.freetochoosemedia.org.

T

BRINK LINDSEY is vice president for research atthe Cato Institute. This article was adapted from hisrecent Cato White Paper “Low-Hanging FruitGuarded by Dragons: Reforming Regressive Regulation to Boost U.S. Economic Growth.”

DAVID VITTER ANDELIZABETH WARRENReforming TBTF:Could Cato, Warren,and Vitter all agree?PAGE 9

HOLIDAYREADING Books to readand giftthis winterPAGE 12

Cato Policy ReportNOVEMBER/DECEMBER 2015 VOL. XXXVII NO. 6

2 • CATO POLICY REPORT November/December 2015

P R E S I D E N T ’ S M E S S A G E

BY PETER GOETTLER

“Governmentpower is

frightening, particularly

when it’s misused by

government officials for their own

political ends.

n the week I’m writing this, a new book is beingreleased by Bob Woodward based on hours of in-terviews with Alexander Butterfield and boxes offiles that Butterfield took with him when he left

the Nixon White House in 1973. Butterfield, you may re-call, was the deputy to Chief of Staff H. R. Haldeman,who, in testimony to the Senate Watergate Committee,divulged the existence of Nixon’s Oval Office taping sys-tem. Although Nixon would not resign for another 13months, the president’s fate was sealed.I’ll admit I can’t get enough of these Watergate

books. Part of it might be nostalgia for the events of mychildhood, along with the complexity and intrigue ofthe affair. But a big reason, of course, is the lesson itprovides about the abuse of government power.Whether it’s sending young Americans into harm’s waywithout compelling national security reasons, whole-sale spying on U.S. citizens, mass incarceration and po-lice misconduct, abrogation of property rights,burdensome regulation, or confiscatory taxation—gov-ernment power is frightening. And this power is of par-ticular concern when it’s misused by governmentofficials for their own political ends.One might think more than enough books have

been written about Watergate. But over the years, newones have brought fresh understanding of the deeplycorrupt nature of the Nixon administration and thescale of its abuse of power. I like to think that the blan-ket misuse of power or disregard for the rule of law elic-its condemnation from across the political spectrum,serving to strongly discourage such misconduct. Butthe vast proliferation of “—gates” in the decades sinceNixon tells us this is wishful thinking, as does the factthat censure of such misconduct is often heavilyskewed along partisan lines.The Internal Revenue Service scandal that came to

light in 2013 is a chilling example of abuse that shouldconcern everyone. Americans know the formidablepower of the IRS. We make jokes about how our ownbehavior or political and advocacy activity as individualsmight earn us investigations or audits. In fact this is gal-lows humor, reflecting our recognition of how suchpower might be abused and how outrageous it would beif it were. But the current scandal, along with the misuseof IRS audits under Nixon and other presidents, showsthat the temptation to turn this power against enemiesor opponents is difficult for politicians to resist.The IRS’s behavior here is audacious. First, it dis-

criminated in the approval of organizations’ tax-exempt

status based upon their ideology. Second, the agencyclaimed that subpoenaed emails were lost due to thecrash and subsequent destruction of key employee LoisLerner’s hard drive, followed by the revelation that fiveother IRS employees subject to congressional investi-gation also lost their emails in “computer crashes.”Third, it was subsequently revealed that backup tapescontaining 24,000 Lerner emails were destroyed—de-spite outstanding preservation orders and subpoenasfor the emails. And finally, many of us have been struckby the arrogance and high-handedness—and possiblyuntruthfulness—of IRS commissioner John Koskinen’stestimony on these matters.This scandal is contemptible and ought to enrage all

Americans. It appeared to get a lot of attention whenit initially broke. (Google the phrase “IRS scandal” andyou’ll get about 2.5 million hits. That’s a lot, althoughGoogling the words “Donald Trump hair” yielded me50 million hits.) But media interest seemed to wanequickly, particularly regarding the lost emails. GeorgeWill has recently called for the impeachment of Com-missioner Koskinen, primarily as a way to “test themainstream media’s ability to continue ignoring thisfive-year-old scandal.” And although I always fear theunintended consequences of such impulses, perhapsimpeachment of executive branch officials should beconsidered more widely as a tactic to help bring ourfourth branch of government—an out-of-control ad-ministrative state—to heel.One of our goals as libertarians—and a key objective

of Cato’s work—is to substantially reduce the power ofgovernment. There are many reasons for this, but im-portant among them is so that such power may not beturned on us in unjust ways. We thank all of you who,through your generosity, make this work possible. And,speaking of taxes, a byproduct of government’s cost isthe tax planning in which many of us engage in thesewaning months of the year. To the extent your own plan-ning includes charitable contributions, please let your fa-vorite pro-liberty think tank figure prominently in them.It has been a great year for me, personally, getting toknow Cato’s generous and passionate Sponsors. We areso grateful for your dedication to liberty and for the gen-erous sharing of your hard-earned resources that makesCato’s important role in the battle for freedom possible.

”

IThe More Things Change . . .

“DEEPBILLS” COMPLETED

A s of August, the Institute’s “Deepbills” project suc-ceeded in adding computer-readable code to every

version of all 10,637 bills in the 113th Congress. Cato’s XML-format codes reveal every reference to any federal agency orbureau or existing law, and automatically reveal budget au-thorities. This is a significant achievement for transparency,making it much easier to research and cross-reference thecontent of federal legislation. “If you’re not a data nerd, thisachievement may seem pretty arcane,” wrote senior fellowJim Harper, who spearheaded the project. “But if you are adata nerd, please join me in popping a magnum of MountainDew to celebrate.”

CURBING POLICE MILITARIZATION

October marked the deadline to implement newWhite House guidelines on the Excess Property

Program, or 1033 Program, by which the Pentagon regularlytransferred millions of dollars worth of surplus militaryweapons and equipment to local law enforcement agencies.In the wake of the Ferguson riots, where the sight of localpolice wielding militarized tanks and weapons alarmed on-lookers across the nation, the government will now ban thetransfer of certain items, including armored vehicles,grenade launchers, and bayonets, and require “detailed justi-fication” for police use of other “controlled” equipment, like“tactical vehicles” and explosives. Reform of 1033 is an issueCato’s Project on Criminal Justice has been advocating sinceat least 1999, with the publication of the study “WarriorCops: The Ominous Growth of Paramilitary Policing.”Radley Balko’s 2006 Cato White Paper, “Overkill: the Rise of Paramilitary Policing” and his 2013 book The Rise of theWarrior Copwere also instrumental in bringing police militarization to public attention.

ONE TO WATCH, IF YOU’RE WATCHINGTHE WATCHMEN

W irednamed Cato scholar Julian Sanchez’s Twitterfeed one of its “12 Must-Follow Feeds in the World

of Security.” “Policy analysts can be boring and wonkish,”they wrote, “but Julian Sanchez, a senior fellow at the CatoInstitute, has a lively passion for politics, privacy, and securitythat makes his informed feed a must-read.” Sanchez studies(and tweets about) the issues at the intersection of technol-ogy, privacy, and civil liberties, with a particular focus on na-tional security and intelligence surveillance. You can followhim @Normative.

CATO NEWS NOTES

CATO PUBLISHES A NUMBER OF PERIODICALS, BOTH IN PRINTAND ONLINE, FEATURING EMINENT SCHOLARS ON MATTERSOF LAW AND PUBLIC POLICY. A FEW HIGHLIGHTS FROM OURFALL ISSUES:

Are you reading these Cato publications?

Cato Periodicals

November/December 2015 CATO POLICY REPORT • 3

l In Cato Journal, investment analysts Robert Arnott, William Bernstein,and Lillian Wu argue that Thomas Piketty is wrong: dynastic wealth is amyth. Cato adjunct scholar Kevin Dowd criticizes central bank stress testsas “mad, bad, and dangerous.”

l In Regulation magazine, Roderick M. Hills Jr. of New York UniversitySchool of Law and David Schleicher of Yale Law School make the case thaturban city planning could actually help deregulate land use. Pierre Lemieux,the author of Who Needs Jobs? Spreading Poverty or Increasing Welfare, warnsthat the public health movement is no longer concerned with public goods,but with paternalistic political crusades.

l In the annual Supreme Court Review, Jonathan Adler and Michael Can-non—both of whom were instrumental in bringing King v. Burwell beforethe Court—publish an in-depth critique of the majority ruling in the Oba-macare case. William Eskridge, who co-authored Cato’s amicus brief inObergefell v. Hodges, unpacks the marriage equality decision.

l In the October issue of the monthly Cato Unbound, Edward Peter String-ham, author of Private Governance: Creating Order in Economic and Social Life,argues that private governance plays a crucial and underappreciated role inmodern life, while responding essays question whether private governanceis truly possible and adequate. n


C A T O E V E N T S

M ARCSCRIBNER of the Competitive Enterprise Institute (left), Cato’s director of congressional affairs PETERRUSSO, andCato senior fellow JIMHARPER (at podium) participated in a Capitol Hill Briefing on the Transportation Security Admin-

istration’s invasive scans and searches—searches that failed to apprehend suspects in 95 percent of recent security tests, and whichhave in the past been found in violation of legally required administrative procedures.

F our U.S. senators spoke at Cato recently—Sen. DAVIDVITTER (R-LA) and Sen. ELIZABETHWARREN (D-MA) (left) advocated reforming the Federal Reserve’s rescue authority, while Sen. JEFF FLAKE (R-AZ) (second from right) delivered

an address on limiting runaway government at Cato University. On the first anniversary of the United States’ war against ISIS,Sen. TIMKAINE (D-VA) (far right) criticized both Congress’s failure to authorize the war as required by the Constitution and the president’s abuse of executive power.


A t a Capitol Hill Briefing on September 10, JESSIEHAHN, the labor and em-ployment policy attorney for the National Immigration Law Center, ex-

plained the perils of mandating E-Verify, the electronic employment eligibilityverification program. Hahn argued that E-Verify’s high error rate would have a dev-astating effect on workers, causing thousands of innocent people to lose their jobs.

OMRI BEN-SHAHAR, professor of law and director of the Coase-Sandor Institute for Law and Economics at the Univer-sity of Chicago Law School, and THAYA BROOKKNIGHT, Cato’s associate director of financial regulation studies, un-

furl the printed version of iTunes’ Terms & Conditions from 2010—over 10,000 words, stretching well beyond the length ofthe room. Ben-Shahar came to Cato to discuss his new book on the ineffectiveness of mandated disclosure,More Than YouWanted to Know: The Failure of Mandated Disclosure.

M ICHAELCANNON, Cato’s director ofhealth policy studies, discussed the

Supreme Court’s dangerous ruling in Kingv. Burwell at the annual Constitution Dayconference.


considerably. The net domestic investmentrate has been trending downward for decades.And total factor productivity (TFP) growth,our best measure of innovation, has slumpedagain in recent years after an Internet-fueledsurge between 1996 and 2004.

Consequently, there are strong reasonsfor believing that growth in the years aheadwill fall well short of the long-term historicalaverage. Between 1870 and 2010, growth inreal (i.e., inflation-adjusted) GDP per capitaaveraged just under 2 percent a year. By contrast,recent long-term growth projections by topacademic and government economists pointto an average annual per capita growth ratein the range of 1.0 to 1.5 percent—a fairly dra-matic decline from the historical trend line.

In a welcome bit of irony, such economicpessimism offers solid grounds for politicaloptimism. Here’s the basic logic: there is aninverse relationship between the externalconditions for growth, on the one hand, andthe incentives for good economic policy-makingon the other. When conditions forrobust growth are favorable, politicians canindulge in the characteristic vices of theirprofession—a time horizon bounded by thenext election cycle and an overriding focuson dividing the pie rather than making itbigger—and still preside over a thriving econ-omy. When, however, times get tougher,politicians must up their game or else eco-nomicperformance will suffer. In the latterevent, the poll numbers of incumbents startto drop, those of their challengers start torise, and thus opportunities for policy changeimprove.

Now, policy change could well proceedin the wrong direction and produce worseresults than the status quo. But over the pastseveral decades at least, the general patternaround the world—as documented in theannual Economic Freedom of the World reportsand similar sources—has been for economicpolicies to move toward less governmentcontrol and greater reliance on market com-petition. And usually, progress in liberalization

has been spurred by disappointing economicperformance.

If this general pattern holds in the presentcase, then a protracted period of sluggishgrowth should open a window of opportunityfor pro-market, pro-growth reforms here inthe United States. In sunnier times, manybad policies widely understood to createobstacles for growth are left undisturbedbecause the political price to be paid forchanging them doesn’t seem worth it: whyborrow trouble by attacking policies withpowerful defenders if things are going OKanyway? But when the economic climateworsens, politicians come under increasingpressure to do something.

OPPORTUNITY FOR REFORMHere then is the challenge for supporters

of free markets: how can we best take advantageof this window of opportunity? During goodtimes, we are forced to argue that, even if theoverall economy seems to be performingwell, it could be doing even better with appro-priate policy reforms. Now, by contrast, wecan reframe our case with a much more com-pelling sense of urgency: if we do not makedifficult but necessary reforms, the economywill perform much worse than in the past.Since people are typically loss averse (theyare more concerned about losing what theyhave than not getting what they want), thegrowth slowdown makes our case muchstronger and more persuasive. But once wereframe our argument, what policy agendabest fits the new frame?

There is no shortage of possible reformsto include. For evidence I refer you to RevivingEconomic Growth, a new Cato ebook that Iedited. The book is a collection of essays by51 prominent economists and policy experts,

all of whom were asked to offer suggestionsfor improving the U.S. economy’s long-termgrowth outlook. Although a number of reformideas come up repeatedly, what is strikingabout the collection is just how wide-rangingand varied the proposals are. Which shouldnot be at all surprising: fiscal and regulatorypolicies affect the allocation of resources andthe climate for innovation along countlessdifferent margins, and thus the potentiallevers for improving overall economic per-formance are similarly numerous and diverse.

In particular, the major economic policydebates that have dominated Washingtonand the nation’s attention in recent years—the trajectory and composition of federalspending, the level and structure of taxation,health care policy, regulation of the financialsector, what to do about illegal immigration,and climate change and environmental reg-ulation more generally—have important impli-cations for growth. Yet precisely because thesedebates have already found the spotlight, theyare unlikely to supply policy ideas that cantake advantage of the political opportunitythat the current growth slowdown affords.On all of these hard-fought fronts, battle linesare already clearly drawn and often reflect dif-ferences over goals and priorities other thangrowth. Moreover, opinions are highly polarizedalong partisan and ideological lines, which inthe current political environment is often arecipe for stalemate and gridlock.

What we should be looking for, then, arepolicy ideas that are not already the subjectof high-profile, politically polarized debate.America’s growth slowdown is a new problem,and policy responses that address that problemare more likely to gain traction if they are notrecycled ideas originally put forward to addressother problems. And if a policy idea is alreadyclearly associated with either the left or theright, in today’s highly contentious environ-ment it is all but guaranteed that the otherside will fight tooth and nail against it—whichmakes progress of any kind difficult in theabsence of large congressional majorities andunified partisan control of the White House

Growth in the years ahead will fall well short of thelong-term historical

average.

”Continued from page 1 “


and Congress.Meanwhile, of course, the items on this

new policy agenda need to be effective remediesfor slow growth. Since innovation is the ultimatesource of long-term growth in advanced coun-tries at the technological frontier, we shouldfocus especially on policy reforms that canfacilitate the introduction and spread of newideas. In other words, we should target policybarriers that inhibit entrepreneurship andthe reallocation of resources through com-petition and “creative destruction.”

REFORMING REGRESSIVE REGULATIONIn a new Cato White Paper with the curi-

ous title of “Low-Hanging Fruit Guardedby Dragons,” I take all these factors intoaccount and propose a pro-growth reformagenda that focuses on regulatory policieswhose primary effect is to inflate the incomesand wealth of the rich, the powerful, andthe well established by shielding them frommarket competition. To apply a convenientlabel, let’s call these policies “regressive reg-ulation”—regulatory barriers to entry andcompetition that work to redistribute incomeand wealth up the socioeconomic scale.

In the paper I identify four main areasof regressive regulation: excessive monopolyprivileges granted under copyright and patentlaw, restrictions on high-skilled immigration,protection of incumbent service providersunder occupational licensing, and artificialscarcity created by land-use regulation. Spaceconstraints prohibit an in-depth discussionof those policies here; for details I refer youto the paper. Here I will simply offer somegeneral observations about why targetingthese policies seems to me to be the mostpromising strategy for reversing the growthslowdown—and for taking advantage of thegrowth slowdown to revive political momen-tum for economic freedom.

At first blush, these four policy areas seemcompletely unrelated. They cover highly dis-parate subject matters, they are administeredat different levels of government, and theyfeature widely varying forms of regulatory

apparatus. Notwithstanding all these obviousdifferences, there are also deep and importantsimilarities. All the policy areas feature reg-ulations that erect explicit barriers to entry—whether in the economist’s sense of barriersto market entry, or in the literal sense ofbarriers to geographic entry. Copyright andpatent laws and occupational licensing limitwho can engage in particular kinds of com-mercial activity; immigration laws and zoningregulations limit who can enter or do businesswithin a designated geographic area.

All of these entry barriers undermineeconomic growth by restricting vital inputsto innovation. Excessive copyright and patentprotections restrict the recombination ofideas that is the essence of innovation bymaking some ideas artificially inaccessible.Immigration laws restrict the inflow of highlyskilled individuals who are disproportionatelyentrepreneurial and innovative. Occupationallicensing restricts the formation of new busi-nesses, which are frequently the vessels fornew products or new production methods.And zoning restricts urban density, a vitalcatalyst for the innovative recombinationof ideas.

Finally, all these policy domains have similardistributional consequences: all of them redis-tribute income and wealth to the well-off andprivileged. Copyright and patent laws pinchconsumers for the benefit of huge corpo-rations. Immigration laws expose America’slowest-skilled workers to intensifying com-petition from foreign-born workers whileshielding high-skilled workers from equiva-lent competitive pressures. Occupationallicensing boosts the earnings of protectedincumbents by restricting supply, especiallyin higher-income professions. And zoninggives windfall gains to wealthy landowners.

LEFT-LIBERTARIAN SYNTHESISIn all likelihood because of these underlying

similarities, none of these policy areas havebecome zones of ideological or partisanconflict. To be sure, proper policy is vigorouslydebated in all these areas, but the contendingsides are not divided along left-right or Repub-lican-Democratic lines. In striking contrastto the polarization and gridlock that nowdominate most national policy debates, oppo-sition to regressive regulatory controls hasbrought together politicians and policy expertsfrom across the political spectrum.

Thus, in the field of intellectual property,Nancy Pelosi (D-CA) joined forces withDarrell Issa (R-CA) and Ron Paul (R-TX)to oppose the Stop Online Piracy Act, afailed legislative effort to toughen criminalpenalties for copyright violations. Amongpolicy experts, leading critics of copyrightand patent law excesses include progressivesLawrence Lessig and Dean Baker and lib-ertarians Tom Bell and Jerry Brito.

With regard to high-skilled immigration,a number of bipartisan reform bills have beenintroduced in recent years. To take a recentexample, in January 2015 a group of six senators,including Orrin Hatch (R-UT), Mark Warner(D-VA), and Marco Rubio (R-FL), introducedthe Immigration Innovation Act to boostthe numbers of both temporary and per-manent visas for highly skilled workers. Andamong policy experts, scholars from the lib-ertarian Cato Institute and the progressiveCenter for American Progress supported themost recent comprehensive immigrationlegislation passed by the Senate in 2013.

As to occupational licensing, the Obamaadministration’s latest budget contains aprovision to nudge states toward reform;furthermore, this past summer the admin-istration released an excellent report thatmakes the case for deregulation in this area.Meanwhile, in July 2014, Rep. Paul Ryan (R-WI) released a widely discussed plan forcombating poverty. And in the section onregulatory reform, Ryan singled out occu-pational licensing laws as prime examples

I propose a pro-growth reformagenda that focuses

on ‘regressive regulation.’

”“


of the “regressive regulations” that too oftenconstrict economic opportunity for the leastadvantaged. Among policy experts, AlanKrueger of Princeton University, who servedas chairman of the Council of EconomicAdvisers under President Obama, is a leadingcritic of these regulatory restrictions, whilethe libertarian Institute for Justice has a longtrack record of challenging and overturninglicensing rules in court.

Zoning is a local issue that has long beenthought to have only local consequences, soto date it has not attracted much attentionfrom Washington policymakers. Among policyexperts, though, the pattern of support forreform across ideological dividing lines holdshere as well. Edward Glaeser, who in additionto teaching at Harvard is affiliated with thelibertarian-leaning Manhattan Institute, isamong the nation’s leading critics of currentland-use regulation. Another prominent criticis Matthew Yglesias of Vox, who wrote hisbook The Rent Is Too Damn Highwhile he wasworking for the Center for American Progress.

PUBLIC INTEREST VERSUS VESTED INTERESTS

It’s not simply the case that one can findpolicy experts on both sides of the ideologicalspectrum who support reform of these regres-sive regulatory policies. More than that, it’svery difficult to find disinterested policyexperts anywhere on the spectrum whosupport the status quo. Certainly, there arestrong defenders of both intellectual propertyprotection and zoning, but even in their ranksyou will find recognition that current policiesare seriously flawed. Thus, the economistCarl Shapiro, a prominent supporter of patentsgenerally, has written, “[While] there is nodoubt that the patent system taken as a wholeplays an important role in spurring innovation,the general consensus is that the U.S. patentsystem is out of balance and can be substantiallyimproved.” In similar fashion, the economistWilliam Fischel, who has written sophisticateddefenses of zoning, acknowledges that itsexclusionary impact has increased since 1970

and that the “social and economic costs” ofcontemporary land use regulation are “nottrivial.” As far as high-skilled immigrationrestrictions and occupational licensing areconcerned, it is difficult to find any scholarwho has anything nice to say about the currentstate of either.

This combination of qualities—negativeimpact on entrepreneurship and innovation,absence of political polarization, and an intel-lectual consensus in favor of reform—makesregressive regulation an especially invitingtarget for any campaign to enact pro-growthpolicy reforms. For all who are interested inbetter long-term U.S. economic performance,this is the “low-hanging fruit.” Reformingthese policies is something that we know willmake a positive difference, and by “we” I meanthe vast bulk of disinterested experts. Yes, itis true that plucking this fruit won’t be easy,because the interest groups that benefit fromthe status quo are politically powerful, wellorganized, and highly motivated. This is the“guarded by dragons” part of the story. Butknowing clearly what needs to be done, how-ever difficult it might be, is an advantagethat should not be underestimated.

Pursuing an agenda of curbing regressiveregulation would allow us to open a new frontin the economic policy debate. Unlike the all-too-familiar policy disputes now ongoing, acampaign against regressive regulation wouldfeature issues new to the national policy spot-light—especially in the case of occupationallicensing and zoning, because they occur atthe state and local levels and thus are typicallyignored by Washington. Meanwhile, the organ-izing rubric of regressive regulation packagestogether disparate issues in a novel way andcan thereby impart new energy to reform

efforts in each of its constituent policy domains. This new front would look very different

from the other, ongoing policy debates.Instead of the opposing forces being arrayedalong the left-right axis, here the contest pitsan expert consensus across the political spec-trum against the interest groups who profitfrom existing policy. Instead of yet anotherleft-right fight, this time the contest couldbe framed as a choice between the publicinterest and vested interests.

The idea of a left-right coalition to pushderegulation may sound farfetched, but it isnot without precedent. Consider the country’slast major episode of pro-market regulatoryreform in the late 1970s and early 1980s. Duringthat brief period, price-and-entry regulationof airlines, trucking, and railroads was sys-tematically dismantled; price controls on oiland natural gas were lifted; interest-rate capsfor checking and savings accounts wereremoved; and the AT&T monopoly was ended,paving the way for competition in long-distancetelephony. Those too young to remember canbe forgiven for associating all of this withRonald Reagan, but in fact Democrats andprogressives played a major role. Jimmy Cartersigned the legislation that deregulated airlines,trucking, railroads, and natural gas. On CapitolHill, Edward Kennedy led the fight for airlinederegulation, ably assisted by his aide StephenBreyer. Yes, the rise of Chicago-school eco-nomics and especially the law-and-economicsmovement supplied momentum for thesesweeping policy changes, but so did the activismof Ralph Nader.

History never repeats itself, but sometimesit rhymes. As in the 1970s, the U.S. economytoday is delivering disappointing results. Backthen the problem was “stagflation”; today weworry about a “great stagnation.” And onceagain, the shifting currents of political debateare bringing together unlikely allies with acommon interest in reviving prosperity anda common hostility to the entrenched intereststhat stand in the way. With luck, contemporaryreformers can follow their predecessors’ goodexample. n

The idea of a left-right coalition

to push deregulationmay sound farfetched,

but it is not withoutprecedent.”

“

MARK CALABRIA:One of the things that re-ally shook me and shook much of the publicduring 2008, 2009, were all these things hap-pening that none of us really knew the Fedcould do. The reaction in Dodd-Frank’s Sec-tion 1101 was to say, “Let’s tighten this up, let’smake sure that this is targeted toward every-body, that it’s solvent, that we aren’t bailingout firms, we’re just helping those that havea little bump in the road.” And, of course,about 20 months ago, the Federal Reserveproposed a rule—which, in my opinion, waslargely just restating the statute. And so I’d

like to start the conversation with: Is thissomething that the Fed cando on their own?If the Fed were listening, what would you sayto them in terms of when we see a final rule,what it should look like?

SEN. DAVID VITTER: Well first of all, let meback up a little bit and say that I think the factthat we’re here together working on this illus-trates how broad and legitimate the concernacross America is with “too big to fail,” and thefact that it is, unfortunately, alive and well. Andif another crisis happened, we’re convinced

we’d see it again, all over again. And I think theAmerican public is really concerned aboutthat—left, right, and middle. And the fact thatwe’re sort of the political “Odd Couple” work-ing on this, I think it proves how deep and le-gitimate and broad-based that concern is.

Secondly, could the Fed fix this on its own?Certainly. Have they? Absolutely not. And it’svery clear, as you suggested, that they want topreserve maximum flexibility, their ability todo whatever they want, particularly in a crisis.And look, I’m not going to say that’s evidenceof some evil hidden agenda. That’s sort of thenatural impulse for an agency, to have as manytools in the toolbox as possible, to not restrictthemselves. But it means that if it happensagain, we would be assured of same old, sameold: bailing out insolvent institutions, very fo-cused bailouts. And so that’s why Elizabethand I think our legislation, which would pre-clude that, is required.

SEN. ELIZABETH WARREN: Obviously Iagree with David on this. I think he’s exactlyright. This is about “too big to fail,” and whatit means to the American people. It’s aboutwhat it means to this economy. It was all cre-ated in 2008, 2009. We know about TARP—try Googling “$700 billion” and see howmany people were talking about TARP. But

P O L I C Y F O R U M

DURING THE FINANCIAL CRISIS,although the TARP program drewpublic attention, the bulk of the government’s assistance to financialfirms came through the Federal Reserve’s emergency lending pro-grams. The Dodd-Frank Act attempted to restrict this lending au-thority, but since its passage the Fed has failed to implement anyconcrete limitations. On September 16, Sens. David Vitter (R-LA)and Elizabeth Warren (D-MA), who had recently introduced a billproposing specific limits on the Fed’s discretion, came to the CatoInstitute to discuss the Fed’s authority and how best to curb it. MarkCalabria, director of financial regulation studies at the Cato Institute,moderated the event.

Warren and Vitter on “Too Big to Fail”


P O L I C Y F O R U M

what a lot fewer people were talking aboutwas how the Fed was shoveling money outthe back door, in a very quiet way, not to sup-port the financial system overall, but to sup-port very targeted financial institutions.Nine trillion dollars—your money, nine tril-lion tax dollars—went out the door to justthree financial institutions, and it stayedthere on average for about 22 months. And,yes, it was loan money, but at an interest ratethat I guarantee those three financial insti-tutions couldn’t get anywhere in the worldexcept from the Federal Reserve.

So our bill actually has a real history to itin a sense. The first part is “too big to fail,” thesecond part is the response in Dodd-Frank.In Dodd-Frank, Congress came together andthey said, look, if the Fed is going to lend anymoney in the future, in times of distress, wewant to know that it’s a system-wide prob-lem, not just that one or two financial insti-tutions have a specific problem, and that theproblem the financial institution has is not aproblem of insolvency—that is, they havemade some terrible bets in the market andthey’re now upside down—but that the prob-lem they’ve got is one of liquidity because themarket itself is freezing up.

And, so, Congress, I think quite reason-ably, in Dodd-Frank told the Fed to imple-ment those goals. The Fed said, “Ah,system-wide . . . okay, we probably can’t say‘one,’ Congress would get really angry aboutthat.” So they said, “Two. Two counts as sys-tem-wide!” That’s it. So that’s all they’ve gotto show, that you’ve got two financial institu-tions that are in here, asking for money at thesame time. Then the next question is “Is thisa financial institution that’s insolvent?” Nowhere, the Fed says, “Oh, we know how tomeasure if it’s insolvent—if they haven’t yetfiled for bankruptcy.”

I want you to just think about that for aminute. Because the way I read that is theysaid, “Well, we’re going to set up a little cartright in front of the bankruptcy courthouseand any large financial institution that has

prepared the papers and is headed into thecourthouse, we’ll just intercept and say‘Would you like a trillion dollars from us in-stead? Because you will qualify, because youhave not yet climbed the steps and droppeda piece of paper that files for bankruptcy.’”

Let’s face it. That is not what Congress in-tended in Dodd-Frank, but it is also not what

we need in order to try to beat back the “too bigto fail” problem. So, what Senator Vitter and Ihave proposed is just to go back over thosethree parts. And we talk about system-wide andwe say “We didn’t think we would have to dothis by statute, but come on, guys. Five insti-tutions. Let’s at least get the number up. Andyou guys have got to go out there and certifythat this is not an insolvent financial institu-tion that’s getting this money. At least you’regoing to have to put your name behind it.”

And the third part is that this should be ata penalty rate of interest. It should be fivepoints above what the Treasury bill is. Thepoint here is not to give you below-marketrates so that we can subsidize you. The pointis to say, if you’re having to turn to the Fed forhelp in a crisis, then the Fed should be likeother market lenders. They’ll be there aslender of last resort, but you’re going to haveto pay something extra for it, and your share-holders are going to have to pay extra for it.So we still give the Fed the capacity to movein, but we feel like we’ve tried to at least putsome curbs on this so that we can get “too bigto fail” under better control.

CALABRIA: I think that’s an incredibly im-portant aspect, reminding people that mar-kets don’t work without failure. Neither oneof you will be surprised that there’s been

some criticism, so let’s try to raise a couple ofthose. I won’t name them, but a recent fed-eral official testified before Congress andmade the argument that we really don’t knowat the time who’s insolvent. We can’t figurethis out at the time, and you have to just trustour judgment.

WARREN: Really?

CALABRIA: I’m trying to be generous to thecritics.

WARREN:But I’m serious. Really? These aresupposed to be the supervisors and regula-tors who are out there looking at the books,assessing the assets every single day. That’stheir job. And if we’re heading into crisis, it’snot like we all get up one morning and, withno warning at all, whoa! It’s 11:50 and sud-denly there’s a financial crisis upon us. Youknow that there’s trouble. That means theyshould be stepping up their scrutiny of theseinstitutions. The idea that they can’t tell—ifthat is a serious statement then I am gen-uinely terrified.

VITTER: I agree. I think they clearly have theability to ascertain that. Looking in the past,we can clearly say that most of these caseswe’re talking about were insolvencies and weknew it at the time. And our goal is not sim-ply to limit alternatives in a crisis. Our goal isto do this way ahead of time so that we doother things to head off a crisis. And I thinkhaving all of these opportunities and unlim-ited powers really is a reason for the feds andothers not to do things ahead of time to avoidthe crisis.

CALABRIA:I sometimes hear the “stuff hap-pens” argument: “Well, you’re going alongand everything’s fine and then, boom, someshock out of the blue and then we’ve got tobail these guys out, we didn’t see it coming.”And, so, I certainly worry—and I would becurious whether we share this concern—that

“‘Too big to fail’ is, unfortunately,

alive and well.”


by having the expectation of this facility wechange the behavior of the companies them-selves, their creditors, their counterparts.

WARREN: I think that goes right to theheart of it. If you advertise to the marketthat the Fed is here and there’s no need forany large financial institution ever to haveto go to the bankruptcy courthouse or de-clare itself insolvent, but, instead, there willbe trillions of dollars available to back upthese giant institutions, I think that funda-mentally changes the behavior of the bigbanks themselves, the behavior of thosewho lend them money, the behavior ofthose who invest in them. And I’ve got tosay in all three cases, not for the better, be-cause it encourages riskier behavior, know-ing that there is an option available.

VITTER: If “stuff happens,” a legitimatequestion is: Okay, does having this facilityavailable all over again encourage bad stuffto happen or discourage it from happening?I think it clearly encourages it. And that’sexactly the dynamics we’re trying tochange. There’s been study after study afterstudy that says: number one, “too big to fail”is alive and well; number two, it gives mega-banks a market advantage, a lower cost ofcapital, other market advantages that aresimply unfair and are onerous to competitorinstitutions.

CALABRIA: I think the evidence is prettyclear that these have resulted in higher lever-age than you would have otherwise. It’s im-portant to rely on the financial regulators butto me it’s also important that, let’s say I had abillion dollars to lend you. If I did lend it toyou, I’d probably care what you did with it. Ibelieve Lehman had at least three offers tobe bought, and every time, they said, “No,we’ve got this backup.”

WARREN:“We got a better deal somewhereelse.” And the thing is, you’ve got to think

about that in terms of the behavior that thatencourages from Lehman, from its credi-tors. But it’s also what it does to a marketoverall. So you’re a community bank, you’rea small bank, or a mid-sized bank, but you’renot going to be “too big to fail.” You’re outthere competing for capital, you’re compet-ing for investments, and you’re competing

against somebody that doesn’t just have agovernment guarantee, they’ve got a govern-ment guarantee for free, to back them up.And the more you keep that playing fieldtilted, over time the more we’ll see moreconcentration in the industry. You’re drivingone set of competitors out of business andadvantaging another set of competitors, aset of competitors that ultimately pose fargreater risk to the economy.

VITTER: To me, the ultimate irony is wecome out of the crisis, and I think mostlywhat we’ve done is create a greater disadvan-tage to the smaller players who essentiallyhad nothing to do with the crisis. So we’vetilted the playing field even further in favorof megabanks, against smaller communitybanks and credit unions.

CALABRIA: I agree that a lot of this has to beabout leveling the playing field. I want to goback to another criticism of your plan: that apenalty rate of 5 percent will scare away any-body from using this facility.

WARREN: You mean they’ll say instead, “I’mgoing bankrupt! I am not going to pay fiveextra points”? Please. It’s just an alternativeview of human behavior that I don’t buy. Theyborrowed from Warren Buffett at 10 points.

The idea that you won’t do it here just makesno sense to me.

CALABRIA:I would agree. Part of this shouldbe making the Fed actually a lender of last re-sort rather than being a rescuer of first resort.

VITTER: I’d love to see the Fed come up witha similar rule on its own. But quite frankly,even if they were to do that tomorrow, whichthey’re not going to, my concern would be thatthey can change that at a moment’s notice inthe middle of a crisis too. So I think, for allsorts of reasons, it’s better to have broad pa-rameters like we’re talking about in statute.

CALABRIA:This is an odd pairing, as you said,that’s worked, because last night the Senatepassed a bill on Government-Sponsored En-terprise compensation that you two authored.I’m curious what the interest is from the restof the Senate in this approach.

VITTER: I think this is sort of a competitionbetween two factors. Number one, the pub-lic’s legitimate concern with “too big to fail,”favoring megabanks, all of that broad-baseddiscussion. Number two, the insider game ofthese institutions, which are very powerfuland influential. And, so far, quite frankly, thepublic debate hasn’t been big enough, loudenough, to overcome the special interestgame, but I think it’s growing in that direction.

WARREN: I always think of it this way: thepublic interest here, there is no army of lob-byists representing them. There is no army oflawyers coming in every day to talk to everySenate staff, to make sure that their positionis well known. The question is: Will the insid-ers control the game? Those who’ve got thelobbyists, those who’ve got a lot of money onthe table but a very small insular group that,frankly, wants to enhance its profits at the ex-pense of the public? Or will we really be thereto represent the people who are affected by

“The question is: Will the insiders

control the game? ”

Continued on page 17

DAVID BOAZEXECUTIVEVICE PRESIDENT AND AUTHOR,THE LIBERTARIAN MIND

Eat the Rich andParliament of Whoresby P. J. O’Rourke

A s I’ve written before, these two bookswould make a better course in political

economy than you’re likely to get in mostcolleges. In Parliament of WhoresO’Rourkesets out to discover why government growsso large and intrusive and ends up blamingspecial interests, democracy, and “us.” This isthe book that gave us an insight so profoundthat Cato put it on a T-shirt (available atstore.cato.org). “Giving money and power togovernment is like giving whiskey and carkeys to teenage boys.”

In Eat the Rich, which I think is the singlebest introductory book on economics, hestarts with the right question: “Why dosome places prosper and thrive while othersjust suck?” Supply-and-demand curves areall well and good, but what we really want toknow is how not to be mired in poverty. Sohe headed off to Sweden, Hong Kong, Alba-nia, Cuba, Tanzania, Russia, China, and WallStreet to find out what works. P. J. O’Rourkeis one of the funniest writers around. Butwhat people often miss when they talkabout his humor is what a good reporter andwhat an insightful analyst he is.

ANDREW J. COULSONSENIOR FELLOW, CATO’SCENTER FOR

EDUCATIONAL FREEDOMANDAUTHOR, MARKET EDUCATION: THE UNKNOWN HISTORY

Carry on, Jeevesby P. G. Wodehouse

P.G. Wodehouse has been called “thegreatest musician of the English lan-

guage.” He certainly has a light, eleganttouch on the typewriter keys, especially in

C A T O P U B L I C A T I O N S

Holiday Book RecommendationsWith the holidays approaching,we asked a few colleagues to recommend books that might makegood gifts. We hope that you or your loved ones will find some of these ideas appealing.



his Jeeves and Wooster stories, about a bum-bling young gentleman (Bertie Wooster) andhis staggeringly brilliant valet (Jeeves). Butit’s difficult to recommend a particular bookor short story as the ideal entry-point intothe series, which is comprised of numerousshort stories. Many of the books will do thetrick nicely. Consider, for instance, the col-lection: Carry on, Jeeves, which includes thestory of the main characters’ first meeting(“Without the Option”).At a conference several decades ago, the

long-serving Institute of Economic Affairsdirector John Blundell was asked if he wasoptimistic that liberals (in the classicalsense) and libertarian policy could ultimate-ly gain ground versus the status quo statism.He emphatically declared that he wasopti-mistic, because if he were not he would beforced to stay at home in bed all day readingP. G. Wodehouse and drinking champagne,instead of just doing that for half the day, ashe claimed to already be doing. ReadingJeeves and Wooster stories is indeed arestorative, morale-boosting activity, and itteaches a great deal about writing in theprocess. That makes Wodehouse a goodprescription for libertarian readers.

Richard II by William Shakespeare

Another great, but far graver musician ofthe language gave us the play Richard

II, which is less widely read than it deserves.Not only is it one of the few written entirelyin verse, but it has some excellent characterdevelopment and soliloquies. Dark stuff,but great. Also, Henry IV is a vastly betterstory (and play, if you ask me) than the bet-ter-known Henry V.

Foucault’s Pendulum by Umberto Eco

A lso, I recommend a book that was notwritten in English but has been well

translated: Umberto Eco’s Foucault’s Pendu-lum. The man is incredibly erudite! Fluent inseveral languages—living and dead. Heseems to know every corner of Europe and

much of the world beyond. In this book heweaves a wonderful tale of conspiraciesinterleaved into world history so cleverlythat it is often hard to discern where realityends and fiction begins. Can be a bit slow toget into, but ultimately a rewarding read. Abook I’ve reread twice.

Cyrano de Bergerac by Edmond Rostand

F inally, consider Edmond Rostand’sCyrano de Bergerac if you read French. If

you don’t, this book alone is worth theeffort of learning it. The entire play is notonly in verse but in rhyme—something noteven Shakespeare gave us. Astonishingly,novelist Anthony Burgess managed to pro-duce a rhyming English translation thatpreserves the “alexandrine” poetic struc-ture. His translation is a work of poetry inits own right—he finds ways of tweaking thelines so that they not only rhyme and scan inEnglish but so that they capture the feelingsand ideas of the original. It is an amazingachievement.

WALTER OLSONSENIOR FELLOW AND AUTHOR, SCHOOLS FORMISRULE

Pelle’s New Suit by Elsa Beskow

In the picture book Pelle’s New Suitby ElsaBeskow (1910), little Pelle needs new

clothes and begins by shearing wool from thepet lamb he takes care of. He asks his grand-mother to card it and she agrees if he will weedher carrot patch. His other grandmother willspin the carded wool into yarn if he will lookafter her cows in the meantime. The paintersays that while paint is no good for coloringyarn, if Pelle will fetch him some turpentinehe happens to need from the general store,he can use the change to buy a packet of dye.So Pelle rows off to accomplish that task (yes,rows; this is Sweden, and they might all justlive in an archipelago). Amid delicate draw-ings of village life, this is first a lesson in doingchores with a willing hand, but also a gentle

parable in production, exchange, and thedivision of labor, which includes domesticlabor (one of his tasks is to babysit his littlesister). At the end, Pelle rejoices in a new suitmade by the labor of others—and which hehas fully earned.

JUSTIN LOGANDIRECTOR OF FOREIGN POLICY STUDIES

The Civilian and the Military by Arthur Ekirch, Jr.

E kirch, a libertarian historian bestknown for his book The Decline of

American Liberalism, reminds us of the vehe-ment anti-military (not just anti-militaris-tic) sentiments that suffused the foundingof the American republic and lived into the20th century. Ekirch explains that central-ism and militarism worked like a hammerand anvil to destroy the small-R Americanrepublican tradition. In an era where elitesfrom the party that calls itself “Republican”unanimously demand that the Americanmilitary police the world, Ekirch reminds usthat the Founders would have made CodePink sound like Dick Cheney.

ROGER PILONVICE PRESIDENT FOR LEGAL AFFAIRS

Saving Congress from Itself: Emancipatingthe States and Empowering Their Peopleby James L. Buckley

Former senator and federal appealscourt judge Jim Buckley looks system-

atically at Congress’s more than 1,100grants-in-aid programs—federal grants tostate and local governments that haveexploded in recent years, constituting 17percent of the federal budget. Not only dothey undermine federal and state budgets,they undermine constitutional federalismas well by chaining states to federal priori-ties. Buckley offers several steps to endthem.

Continued on page 17


C A T O E V E N T S

P ope Francis is one of the most popular popes in recent history—and, according to some, the most anti-capitalist. JOHNGARVEY, the president of the Catholic University of America (center), and JAY W. RICHARDS, a senior fellow at the Dis-

covery Institute’s Center on Wealth, Poverty and Morality (left), argued that Francis’s comments are consistent with those ofprevious popes, and may largely be critiques of “cronyism,” rather than a truly free market. MICHAEL SEAN WINTERS of theNational Catholic Reporter (right) countered that Francis’s comments do constitute a rebuke to free-market principles.

A t a Cato forum, AMIR A. NASR (left), the Sudanese-born author of My Isl@m: How Fundamentalism Stole My Mind—andDoubt Freed My Soul, explained how the liberal blogosphere turned him from his jihadist sympathies and opened his eyes

to concepts like human rights. SUAD AD. (right), a researcher for Morocco’s Arab Center for Scientific Research and HumaneStudies, predicted continuing social change in the Muslim world, as the younger generation is increasingly exposed to alterna-tive philosophies and turns from extremism.

AUGUST 6: The Fight with ISIS: One Year (and Counting) of Unauthorized War

AUGUST 14: India Awakes

SEPTEMBER 2: Race, Housing, and Education

SEPTEMBER 9: Magna Carta and Mod-ern Controversies from Multiculturalismto Political Correctness

SEPTEMBER 10: E-Verify: The Impact of National Employment Verification on Work, Privacy, and Liberty

SEPTEMBER 15: Blessing or Scourge?Capitalism through the Eyes of PopeFrancis

SEPTEMBER 16: Reforming the FederalReserve’s Rescue Authority

SEPTEMBER 17: 14th Annual Constitution Day

SEPTEMBER 24: Welcome to Washington: Policy Players and CreativeNetworking

SEPTEMBER 24–27: Cato Club 200 Retreat (The Cloister, Sea Island, GA)

SEPTEMBER 25: Will the TransportationSecurity Administration Follow the Law?

SEPTEMBER 29 : Islam, Identity, and theFuture of Liberty in Muslim Countries

SEPTEMBER 29: More Than You Wantedto Know: The Failure of Mandated Disclosure

AUDIO AND VIDEO FOR ALL CATO EVENTS DATING BACK TO1999, AND MANY EVENTS BEFORE THAT, CAN BE FOUND ONTHE CATO INSTITUTE WEBSITE AT WWW.CATO.ORG/EVENTS.YOU CAN ALSO FIND WRITE-UPS OF CATO EVENTS IN PETERGOETTLER’S BIMONTHLY MEMO FOR CATO SPONSORS.

CatoCalendar


M arking the 800th anniversary of Magna Carta, British historian DAVIDSTARKEY (left) underscored the importance of the charter’s many revisions

during a forum for his book Magna Carta: The Medieval Roots of Modern Politics.JONAH GOLDBERG, a senior editor at National Review, praised Starkey’s book andoffered his thoughts on how political principles emerge and evolve throughout history.

POLICING IN AMERICAWASHINGTON lCATO INSTITUTEDECEMBER 1, 2015Speakers include Jerry Ratcliffe, Samuel Walker, Peter Kraska, David A. Klinger, and William Jelani Cobb.

CATO INSTITUTE POLICY PERSPECTIVES 2015CHICAGO l DRAKE HOTEL DECEMBER 2, 2015

CATO INSTITUTE POLICY PERSPECTIVES 2016NAPLES, FLRITZ CARLTON BEACH RESORT JANUARY 27, 2016

28THANNUAL BENEFACTOR SUMMITLAS VEGAS l FOUR SEASONS HOTELFEBRUARY 25–28, 2016Speakers include Randy Barnett.

CATO INSTITUTE POLICY PERSPECTIVES 2016PAOLO ALTO l FOUR SEASONS APRIL 8, 2016

MILTON FRIEDMAN PRIZE PRESENTATION DINNERNEW YORK l WALDORF-ASTORIA MAY 25, 2016

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CATO CLUB 200RETREATLAGUNA BEACH, CAMONTAGE LAGUNA BEACHOCTOBER 5–8, 2017


T he most recent Supreme Courtterm was not lacking for con-tentious subject matter: Oba-macare in King v. Burwell, same-

sex marriage in Obergefell v. Hodges, and envi-ronmental regulation in Michigan v. EPA, justto name a few. And unlike the previous term,which saw record-breaking unanimity in theCourt, this year saw a return to split decisionson topics like constitutional rights and civilliberties. In September the Cato Institutepublished its 14th annual edition of the CatoSupreme Court Review, which, as always, wasaccompanied by a Constitution Day confer-ence, analyzing the legal victories and losses ofthe last year and previewing the term ahead.

The day opened with Cato’s director ofhealth policy studies, Michael Cannon, dis-cussing King v. Burwell, in which the plaintiffsalleged that the IRS had illegally issued a ruleauthorizing tax credits for health insurancethrough federally established exchanges,when the Affordable Care Act (ACA) hadexpressly ordered that only states couldestablish exchanges. As Cannon explained,“The IRS effectively rewrote and expandedthe ACA, claiming the power to tax nearly100 million people, despite clear statutorylanguage saying it could not.” The Courtacknowledged that this was the “natural read-ing” of the statute, but nevertheless ruledagainst the plaintiffs, in order to preserve “thecontext and structure of the Act.” This, Can-non argued, will effectively “transfer the pow-er of the purse and the power of the tax fromthe people’s elected representatives tounelected judges and unelected governmentbureaucrats.”

In a later panel, William N. Eskridge Jr., aprofessor at Yale Law School who co-authored Cato’s amicus brief in the same-sexmarriage case, expressed disappointmentthat Obergefell had “lost an opportunity toground this landmark holding on originalmeaning” of the Fourteenth Amendment.

Instead, Justice Anthony Kennedy rested hismajority opinion on the fundamental right tomarry. This, Eskridge said, leaves the decisionopen to objections that marriage is not a “lib-ertarian” institution, insofar as one gives upsome liberties to join into it.

Cato senior fellow Walter Olson dis-cussed the “hijab case,” EEOC v. Abercrombie& Fitch Stores, which centered around reli-gious accommodation in the workforce. TheCourt ruled in favor of 24-year-old SamanthaElauf, who was turned down from a job atAbercrombie over her head covering, whichviolates their “look policy.” Abercrombie hadcountered that Elauf never requested a reli-gious accommodation, thereby placing theburden on them to assume her clothing was areligious choice, while employers are actuallydiscouraged from bringing up religion duringan interview. Normally a case like this wouldgenerate great public controversy—yet,Olson observed, it was “surprisingly uncon-troversial,” with both conservatives and liber-als rallying behind Elauf. In fact, the CatoInstitute was the only private group to file abrief in support of Abercrombie, arguing thatElauf’s case “puts the employer in the unten-able position of having to inquire into certainsensitive personal information even as suchqueries themselves are legally disfavored.”

The conference concluded with the annu-al B. Kenneth Simon Lecture, at which a legal

scholar presents a paper to be included in thefollowing year’s Supreme Court Review. StevenG. Calabresi, a professor at NorthwesternUniversity School of Law, made the case thatthe original meaning of the American consti-tutional documents is “much more libertari-an than Justice Scalia, for example, believes.”Calabresi first argued that the “ancient con-stitution,” the rights and liberties which SirEdward Coke believed had been given toEngland by Edward the Confessor, wasessential to how the Founders understoodtheir rights as Englishmen, and informed theearly state constitutions. “Fifty-nine percentof the American population in 1791, when theBill of Rights was ratified, lived in states thathad Lockean natural rights guarantees intheir state constitutions,” he said. He went onto propose that these Lockean clauses areincorporated into Section I of the Four-teenth Amendment, and are the rights“retained by the people” in the NinthAmendment. “An original public meaning ofthe Constitution and of its amendmentsleads inexorably to many, although maybe notall, libertarian outcomes,” he concluded. n

EACH OF THE PRESENTATIONS FROM THISCONFERENCE CAN BE VIEWED ONLINE ATWWW.CATO.ORG/EVENTS/ARCHIVES. THE2014 –2015 CATO SUPREME COURT REVIEW IS AVAILABLE FOR DOWNLOAD ATWWW.CATO.ORG/PUBLICATIONS.

Divisive judgments, from marriage equality to Obamacare

A Tumultuous Term at the Supreme Court

WILLIAMESKRIDGE JR., a professor at Yale Law school (left), and STEVENG. CALABRESI, a pro-fessor at Northwestern University School of Law, spoke at Cato’s Constitution Day conference.


Overruled: The Long War for Control of the U.S. Supreme Court by Damon Root

R eason senior editor Damon Root tracesthe libertarian legal movement from

its pre-Civil War origins to its emergence,beginning in the 1970s, from the strugglebetween liberals and conservatives over theproper role of the courts in interpreting theConstitution. This book is a must-read forthose who want to understand the threemain judicial theories that are in competi-tion today.

JASON KUZNICKIRESEARCH FELLOW AND EDITOR, CATOUNBOUND

Private Governance: Creating Order in Economic and Social Life by Edward Peter Stringham

E dward Peter Stringham’s Private Gover-nance: Creating Order in Economic and

Social Life (Oxford University Press, 2015) isa startling look at just how little we need thestate—and how little the state actuallydoes—in the areas of securing property andcontractual rights. The book takes on added

significance when we consider that even forlibertarians, this is one of the state’s corefunctions. We may not be able to do withoutthe state, but we can do a lot more than weprobably imagine.

Systems of Survival by Jane Jacobs

J ane Jacobs is best known for her excel-lent work on urban planning and the

role played within it by what we might termspontaneous order. But a lesser-known workof hers is also worth a read. Systems of Survival(Vintage, 1994) is a philosophical dialoguethat offers deep insight into conflicts ofmoral values and why they seem so hard toresolve. Along the way, she explains why sci-ence does well in commercial societies, whygovernments love tampering with agricul-ture, and whether organized crime is morelike a business or like a government, amongmany other fascinating topics.

MARIA SANTOSSTAFF WRITER

Gunnar’s Daughter by Sigrid Undset

In the early 20th century, Norway was inthe midst of a nationalist movement toromanticize its Viking heritage. Sigrid

Undset, a young Norwegian author whohad meticulously studied Old Norse histo-ries and sagas, considered this movementdeeply incorrect and disturbing. She want-ed to portray the Viking society as it reallywas: dark, violent, and barbarous. Theresult is Gunnar’s Daughter, a brief and grip-ping historical novel about an 11th-centurywoman who is raped by a suitor, and herstruggle for survival and vengeance. Undsetis much better known for her later trilogy,Kristin Lavransdatter, for which she won aNobel Prize. But Gunnar’s Daughter is justas engrossing—and much more carry-onfriendly for holiday travels.

SALLIE JAMESDIRECTOR OF DEVELOPMENT

All the Trouble in the World by P. J. O’Rourke

T his is the book that made me into alibertarian. P. J. covers the “big

issues”—famine, war, the environment—with humor, compassion, and a sense ofadventure. He shows why good inten-tions don’t always lead to good policy. Agreat choice for the “bleeding heart” inyour life.n

Continued from page 13

this? Both in the overall financial system and,God forbid, when we hit the next crisis.

VITTER:I’ll give you an example. Months ago,one of the early things I did with others wasto have language mandating a study of thecosts of “too big to fail” and quantifying that.A pure study, by objective analysts. The mega-bank lobbyists came out of the woodwork inenormous force. I knew they were there. Icertainly understood they would oppose it.Still, it stunned me that they would come outin full force over doing a study and puttingsome numbers on it. That’s the insider gameI was trying to describe. We need to over-come that with broad-based public debate.

CALABRIA:I used to often say there’s no nar-rowly defined constituency for financial sta-bility, unfortunately. And of course one of thereasons we’re here today is to try to createthat. It’s one of the reasons that Cato is work-ing with Americans for Financial Reform totry to build broader understanding of this. I think we can have a stronger and simpler

regulatory system. Of course, my little petpeeve is the capital standards and every timethey tell us they’re going to do these riskweightings and it’s going to be ever morecomplicated and it’s just more and moreopaque. We’ve seen the various rounds of theBasel accords end up with lower capital,rather than more, and that’s why I’m verysympathetic to a flat, simple leverage ratio

that everybody can kind of read and know.So I do think that that, to me, is where theleft/right deal is. Simpler, stronger, moretransparent.

WARREN:The issue around “too big to fail”is too big for politics. We can’t just leave thisto business as usual, that a group of insiderswill influence those with power, and as a re-sult we’ll end up with a set of rules that worksfor the very largest financial institutions butdoesn’t work for other financial institutions,doesn’t work for the American economy, anddoesn’t work for the American people.n

THE FULL EVENT EXCERPTED HERE CAN BE VIEWED ONLINE ATWWW.CATO.ORG/EVENTS/ARCHIVES.

Continued from page 11


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CATO POLICY REPORTDavid Boaz............................................................................EditorDavid Lampo.......................................................Managing EditorMaria Santos........................................................Assistant EditorJon Meyers.................................................................Art DirectorBrendan O’Hara...................................................... PhotographerClaudiaRingel............................................................. CopyeditorMai Makled.......................................................Graphic Designer

CATO INSTITUTEPeter Goettler..................................................President and CEORobert A. Levy................................................................ChairmanDavid Boaz.............................................Executive Vice PresidentLinda Ah-Sue..................................V.P., Events and ConferencesKhristine Brookes......................................V.P., CommunicationsJames A. Dorn ..........................................V.P., Monetary StudiesGene Healy............................................................. Vice PresidentJon Heimerman...................... V.P./ Chief Administrative Officer David Kirby....................................................... V.P., DevelopmentBrink Lindsey................................... Vice President for ResearchRoger Pilon.........................................................V.P., Legal AffairsChristopher Preble..........V.P.,Defense & Foreign Policy StudiesJohn Samples...................................................V.P. and PublisherEdward H. Crane............................................President Emeritus

Swaminathan Aiyar..........................................Research FellowEmma Ashford ......................................Visiting Research FellowDoug Bandow..........................................................Senior FellowAdam Bates................................Policy Analyst, Criminal JusticeJason Bedrick.......................................Education Policy AnalystTrevor Burrus.......................................................Research FellowMark Calabria...................Director,Financial Regulation StudiesMichael F. Cannon........................Director, Health Policy Studies

Ted Galen Carpenter..............................................Senior FellowAndrew Coulson.....................................................Senior FellowPatrick Eddington..................................................Policy AnalystChris Edwards...................................Director, Tax Policy StudiesEmily Ekins...........................................................Research FellowMatthew Feeney....................................................Policy AnalystThomas Firey............................................................Senior Fellow Benjamin H. Friedman......................................Research Fellow Robert Garber.................................................Director, MarketingKaren Garvin.................................................................CopyeditorJim Harper...............................................................Senior FellowNat Hentoff...............................................................Senior FellowJuan Carlos Hidalgo................Policy Analyst on Latin AmericaDaniel J. Ikenson.......................... Director, Trade Policy StudiesAndrei Illarionov.....................................................Senior FellowNicole Kaeding.....................................................Budget AnalystThaya Knight.........Assoc. Director, Financial Regulation StudiesJason Kuznicki...................................................Research FellowDavid Lampo.................................................Publications DirectorSimon Lester.................................................Trade Policy AnalystTimothy Lynch......................................Director, Criminal JusticeNeal McCluskey...............Director, Center for Educational FreedomJon Meyers..................................................................Art DirectorPatrick J. Michaels...Director, Center for the Study of ScienceJeffrey Miron..................................Director of Economic StudiesDaniel J. Mitchell...................................................Senior FellowJohn Mueller...........................................................Senior FellowJohan Norberg........................................................Senior FellowAlex Nowrasteh................................Immigration Policy AnalystWalter Olson............................................................Senior FellowRandal O’Toole........................................................Senior FellowTom G. Palmer.........................................................Senior FellowDaniel R. Pearson...............Senior Fellow, Trade Policy StudiesAlan Peterson.......................................................Director of MISAaron Ross Powell..............................Editor, Libertarianism.orgAlan Reynolds..........................................................Senior FellowClaudiaRingel.................................. Manager, Editorial ServicesNicholas Quinn Rosenkranz................................Senior Fellow

Julian Sanchez.......................................................Senior FellowGeorge Selgin..........Director, Center for Monetary AlternativesIlya Shapiro..............................................................Senior FellowBrad Stapleton.................. .....................Visiting Research FellowMichael Tanner.................. .....................................Senior FellowMarian Tupy.................................................Senior Policy AnalystValerie Usher.............................................Chief Financial OfficerPeter Van Doren................................................Editor, RegulationIan Vásquez......Director, Ctr. for Global Liberty and ProsperityK. William Watson.......................................Trade Policy AnalystXia Yeliang.................. ............................................Visiting Fellow

Richard Lindzen................................Distinguished Senior FellowJosé Piñera......................................Distinguished Senior Fellow

Radley Balko............................................................Media FellowRandy E. Barnett......................................................Senior FellowVladimir Bukovsky..................................................Senior FellowTucker Carlson.........................................................Senior FellowLawrence Gasman.............Senior Fellow in TelecommunicationsSteve H. Hanke........................................................Senior FellowJohn Hasnas............................................................ Senior FellowPenn Jillette........................................Mencken Research FellowDavid B. Kopel.......................................Associate Policy AnalystDeepak Lal................................................................Senior FellowChristopher Layne...........Research Fellow, Foreign Policy StudiesGerald P. O’Driscoll Jr............................................SeniorFellowP. J. O’Rourke .....................................Mencken Research FellowWilliam Poole...........................................................SeniorFellowJim Powell...............................................................Senior FellowRichard W. Rahn..................................................... Senior FellowVernon L. Smith.......................................................Senior FellowTeller.....................................................Mencken Research FellowCathy Young....................................................Research Associate

James M. Buchanan (1919–2013).Distinguished Senior FellowF. A. Hayek (1899–1992)..................Distinguished Senior FellowWilliam A. Niskanen (1933–2011) ..............Chairman Emeritus

M any European countriesare known for their gener-ous welfare programs—inDenmark in 2013, the New

York Times discovered a 36-year-old singlemother who had been on welfare since the

age of 16, and was col-lecting about $2,769in benefits everymonth. “In far toomany countries, wel-fare remains an eco-nomically rationalalternative to work,”write Cato senior fel-

low Michael Tanner and research associ-ate Charles Hughes in “The Work versusWelfare Trade-Off: Europe” (PolicyAnalysis no. 779). This dependency harmsboth welfare recipients and the economy

at large. Tanner and Hughes analyzewhether this bad incentive system is a nat-ural consequence of the modern welfarestate, and how the U.S. system measuresup against other countries.

IGNORANCE OF INEQUALITY Various theories associate a country’s lev-els of economic inequality with its politi-cal outcomes, claiming that inequalitydetermines how likely a society is to breakout into civil war, for example, or howmuch its citizens will favor redistribution.But, as Vladimir Gimpelson of the HigherSchool of Economics and Daniel Treismanof the University of California–Los Ange-les argue in “Misperceiving Inequality”(Research Briefs in Economic Policy no.32), none of these theories seem to hold upunder scrutiny—perhaps, they propose,

because in most cases, people simply don’tknow how high inequality actually is.

DEFENDING NOMINAL GDP TARGETING Many policy experts believe that nominalGDP targeting would be the best and sim-plest rule for central banks to adopt. But,despite the idea’s popularity, it has receivedlittle study within the context of the quanti-tative frameworks used by central banks. In“On the Desirability of Nominal GDPTargeting” (Working Paper no. 32), JulioGarín of the University of Georgia, RobertLester of Colby College, and Eric Sims ofthe University of Notre Dame set out totest nominal GDP targeting within the con-text of a New Keynesian model with bothprice and wage rigidity. “Overall,” they con-clude, “our analysis suggests that nominal

Work and Welfare in Europe

MICHAEL TANNER


GDP targeting is a policy alternative thatcentral banks ought to take seriously.”

REFUTING THE CARBON TAX Some scholars within conservative and liber-tarian circles claim that a federal carbon taxwould both benefit the environment andboost the economy. But, according toRobert P. Murphy of the Institute forEnergy Research, Center for the Study ofScience director Patrick J. Michaels, andassistant directorPaul C. “Chip” Knappen-berger in “The Case against a CarbonTax” (Working Paper no. 33), “Both in the-ory and practice, economic analysis showsthat the case for a U.S. carbon tax is weakerthan its most vocal supporters have led thepublic to believe.”

PATENT INFRINGEMENT AND IMPORTED GOODS Some of the most difficult questions ofpatent infringement come from overseasmanufacturers of imported goods. To dealwith these cases, Congress created Section337 of the Tariff Act of 1930, administered bythe U.S. International Trade Commission(USITC). Some experts consider this aninadequate statute, and call for its replace-ment. In “Patent Rights and ImportedGoods” (Policy Analysis no. 780), Daniel R.Pearson, a senior fellow at Cato’s Herbert A.

Stiefel Center forTrade Policy Studiesand a former chair-man of the U.S. Inter-national Trade Com-mission, explores thedifficulties involvedin patent infringe-ment, and defends

section 337 as “a reasonable and effectivemeans to protect U.S. intellectual propertyrights from infringing imports.”

ISLAM AND HUMAN RIGHTS Morocco presents a curious study in free-dom in the Arab world. Freedom House

calls it a “partly free” country: a constitu-tional monarchy with a freely elected gov-ernment. Its king holds a divine right tothe monarchy, while Islam is the officialstate religion. But, as U.S.-based Moroccan

journalist and humanrights activist AhmedBenchemsi observesin “Islam and theSpread of IndividualFreedoms: The Caseof Morocco” (PolicyAnalysis no. 778), thecountry is embroiled

in a vigorous debate over individual free-doms, including freedom of conscienceand even gay rights. Benchemsi sees hopefor the future, but concludes that reformadvocates must first band together and“adopt a unified agenda and strategy.”

THE IMPACT OF LABOR REGULATIONS Cross-border acquisitions account for agrowing proportion of all acquisitions. In“Cross-Border Acquisitions and LaborRegulations” (Research Briefs in Eco-nomic Policy no. 33), Ross Levine of theUniversity of California–Berkeley, ChenLin of the University of Hong Kong, andBeibei Shen of the Chinese University ofHong Kong provide the first-ever assess-ment of the relationship between cross-country differences in labor regulationsand cross-border mergers and acquisitions.They discover, among other things, that“firms find targets in countries with weakerlabor regulations more appealing than sim-ilar targets in countries with comparativelystrong labor regulations.”

THE HASTY ASSUMPTIONS BEHINDELECTRIC CAR SUBSIDIES State and federal policies subsidize the useof electric vehicles under the presumptionthat they are beneficial to the environ-ment. But as Stephen P. Holland of theUniversity of North Carolina at Greens-

boro, Erin T. Mansur of Dartmouth Col-lege, Nicholas Z. Muller of MiddleburyCollege, and Andrew J. Yates of the Uni-versity of North Carolina at Chapel Hillargue in “Public Policy Evaluation inthe Face of Strong Prior Beliefs: TheCase of Electric Cars” (Research Briefsin Economic Policy no. 34), the sciencebehind these alleged benefits is not quiteas clear as is generally assumed.

DERIVATIVES: FINANCIAL FRIEND OR FOE? People like Warren Buffett have popular-ized the notion that derivatives are “finan-cial weapons of mass destruction.” But in“In Defense of Derivatives: From Beerto the Financial Crisis,” (Policy Analysisno. 781) Bruce Tuckman of the New YorkUniversity Stern School of Business rejectsthese claims as “misleading and false,” argu-ing that many businesses successfully usederivatives to manage risk. He offers theexample of a beer brewery, which uses deriv-atives to hedge against possible increases inthe prices of wheat and aluminum.

TAX ENFORCEMENT AND THE LIMITS OF THIRD-PARTY REPORTING When it comes to tackling tax evasion,rather than tax enforcement through audit-ing, recent literature recommends verifyingtaxpayer reports against third-partysources—employer’s salary reports, forexample. But in “Dodging the Taxman:Firm Misreporting and Limits to TaxEnforcement” (Research Briefs in Eco-nomic Policy no. 35), Paul Carrillo of GeorgeWashington University, Dina Pomeranz ofHarvard University, and Monica Singhal ofHarvard University reveal the limits to thisstrategy, particularly in developing coun-tries. They discover that, when notifiedabout discrepancies between their declaredrevenues and third-party reports, firms sim-ply offset the adjustment by increasing theirreported costs. n

WE’RE FROM THE GOVERNMENT,AND WE’RE HERE TO HELP YOUThe four investigators holding clipboardsand clad in navy New York State jerseys de-scended on Lyn’s Nail Salon I on Thursdaymorning. The owner, Andy No Tran,scrambled to show his papers, and stam-mered when explaining just how many em-ployees he had.

This was a sweep.But this was not a guns-blazing drama

unfolding off Steinway Street in Astoria,Queens. This was a meticulous fact-findingmission through an empty salon that leftMr. Tran with a list of health and safety vi-olations to fix in his tired-looking shop.

“We might come back, and if we seethese issues, it’s on you,” said AnthonyHoldorf, an official from the Departmentof State.

Another investigator warned him thatif he did not get workers’ compensation in-surance for his employees in 48 hours, thestate would close him down . . . .

At Cupid Nails & Spa . . . the most seri-ous citation was against Qiu Yanzhu, a re-cent immigrant from China. She said shewas paying Mr. Lu $350 a week to rentspace to be an independent manicurist. Butshe had no renter’s license, and when theinvestigators handed her a cease-and-desistorder, requiring a Sept. 2 hearing, shestarted to cry. . . .

Jeong Lee, the leader of Team 6, and aLabor Department standards investigatorwho speaks Korean, said she gave workersher number if they wanted to talk awayfrom their boss.

“One of my stops in Brooklyn, the em-ployees ran away and refused to talk to us,”Ms. Lee said. “Even if we’re there to helpthem.”—NEW YORK TIMES, 08/20/15

LIBERTY: AS EASY AS RIDING ABIKELibertarianism, however, is not just a set ofpolicy prescriptions, but an ideology. It is,moreover, a total ideology, one that addressesevery aspect of how people live. There is alibertarian way of riding a bicycle, of takingyour medicine, finding a spouse, givingblood, and even calling a cab (can you say,“Uber?”).—ALAN WOLFE IN COMMONWEAL, 08/15/15

CRONYISM AND CELEBRITYWORSHIP?We’ve come a long way from my days goingdoor to door for the Children’s DefenseFund and earning $16,450 as a young lawprofessor in Arkansas—and we owe it tothe opportunities America provides.—HILLARY CLINTON, 09/01/15

SOPHIA LOREN: SELF-OWNERMy favorite makeup artist is: me. I alwaysdid my own makeup since I own myself,and I want to be what I want to be.—WALL STREET JOURNAL, 09/18/15

VENEZUELA BECOMES “ATLASSHRUGGED”Venezuelan supermarkets are increasinglybeing targeted by looters as lines and pro-longed food shortages spark frustration in thenation struggling with an economic crisis.

Shoppers routinely spend hours in linesto buy consumer staples ranging from cornflour to laundry soap, turning lines intovenues for shoving matches and frequentattempts to plunder shops. . . .

Last Friday one man was killed and 60were arrested in Ciudad Guayana in south-ern Venezuela after shops were looted.—REUTERS, 09/07/15

HEY, WE’VE ALL BEEN THEREA high-ranking official at the CommerceDepartment took at least seven govern-ment computers home, an IT smorgasbordfrom iPads to Dell desktops that she rarelyused for work. And if that wasn’t enough, sheallowed her kids to download pornographyand “racially offensive materials,” an investi-gation found.

When investigators started asking ques-tions, they said, she tampered with evidenceby erasing the offending material on someof the computers.—WASHINGTON POST, 09/02/15

WELCOME TO THE (LIBERTAR-IAN) JUNGLEUber’s strident brand of Silicon Valley ex-ceptionalism is clashing with an en-trenched French business culture thatgrants the government and incumbentfirms great sway. . . .

Nicolas Rousselet, [who owns] morethan half the taxis in Paris, says. . .

“Do we want to live in a libertarian fan-tasy, where all we have is the law of the jun-gle?” he says. “That is barbarism.”—WALL STREET JOURNAL, 09/18/15

IF D.C. DEFIES ANOTHER FEDERAL COURT, SOMEBODY’SGOING TO JOIN KIM DAVIS INJAILA federal appeals court on Friday struckdown the District’s one-gun-per-monthlaw as unconstitutional. . . .

The lawsuit is one of many challenges toDistrict regulations that were written afterthe Supreme Court in 2008 used a D.C.case to declare a Second Amendment guar-antee to own a firearm for self-defense.—WASHINGTON POST, 09/18/15

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