January 2012

Today, after hours of delay, Congress still couldn’t get  on the “Restoring American Financial Stability Act,” a bill that supporters sayis needed to prevent the next financial crisis and rein in Wall Street. For various reasons, members of Congress though the bill would either “get tough” on the wrong actors or not tackle the real problems  And many investors, entrepreneurs and consumers on Main Street are also pointing to the bill’s omissions and possible unintended consequences of regulation that’s rammed through. 

Here are areas where a wide variety of experts think the bill falls short:

Angel investors:

 One unintended consequence the Senate already fixed was a measure that would have been devastating to venture capital, angle investors, and numerous entrepreneurs. CEI and other free-market policy groups, as well as organizations representing the angel investors that put money innovative entrepreneurial startups, decried the rules that would have more than doubled the threshold for “accredited investor” from $1 million to $2.5 million in net worth — using the ridiculous rationale that “poor millionaires” needed to shielded from startup risk. According to the Angel Capital Association in Kansas City, these provisions would have reduced the number of eligible angel investors by more than two-thirds and made private placements of securities nearly as cumbersome as going public.

Democrats and Republicans in the Senate should be commended for fixing these provisions of the financial regulation bill  by voice vote on Monday. But it still leaves regulators with too much power to arbitrarily cut off investors for angel capital. And these provisions should serve as a warning about other pitfalls in the bill. Senate Banking Committee Chairman Chris Dodd said he never intended for these provisions to punish angel investors and startups. It is likely that when other provisions of this bill hit Main Street, we will also hear claims that this was not what was indended.

But whatever Senators’ intentions, they can’t say they weren’t warned. Here are other likely consequences of this bill’s problematic provisions.

1. Broad definition of “financial companies” and lack of judicial review to challenge seizures of firms

Various provisions broadly define a “financial company” as any business “substantially engaged” or “significantly engaged”  in manufacturing. And if your business happens to fall in such a category, it could be subject to a bailout “assessment” tax to bail out a high rolling financial firm, intrusive regulation by a banking agency or the new Bureau of Consumer Financial Protection, or even outright seizure if the troika of the Federal Reserve, Treasury Secretary, and Federal Deposit Insurance Corporation decide your firm is a threat to “financial stability.” And if a business meeting the definition of “financial company” is taken over by the “orderly liquidation authority,” the bill cuts off avenues of legal and constitutional review from the courts.

 

The amendment from David Vitter (R-La.) narrowing the definition of “financial company” would help remedy this flaw.

 

2. Debit card rewards may disappear because of interchange fee price controls.

 

The Durbin amendment — which passed with a mishmash of 10 nay from Democrats and 17 yays from Republicans — orders the Federal Reserve to set price controls for the debit cards that businesses pay to merchants. This will shift costs to consumers and experts say debit card rewards may disappear.

 

On Monday, the Supreme Court, citing “international opinion,” outlawed life imprisonment without parole for juveniles who commit rape, torture, and other non-homicide crimes.

Earlier, New Zealand was pressured to end life without parole for adults who commit “the worst” murders, based on a supposed rule of “customary international law” against life imprisonment without parole.

Citing Spanish law and supposed international human-rights norms, Spain now refuses to extradite terrorists who plot mass murder to the United States unless the U.S. agrees not to seek life imprisonment without parole.

Victims of torture, sexual mutilation, and attempted murder cannot have peace of mind unless their attacker is kept in jail for life without parole.  A scary example is “Milagro Cunningham, a 17-year-old who beat and raped an 8-year-old girl before leaving her to die under 197 pounds of rock.”  This evil, violent thug will apparently be eligible to seek release under the Supreme Court’s decision Monday in Graham v. Florida.  Why should that little girl, scarred for life, have to face the terrifying possibility of one day being attacked again by her would-be murderer?

The Supreme Court’s ruling sets a terrible precedent for civil liberties as well, since foreign legal systems and international lawyers are often hostile to free speech, religious freedom, and the right of homeowners to defend themselves against burglars and other intruders who may commit violence by wielding a knife or gun in self-defense.  The U.N. Human Rights Council says there is no human right to self-defense, and that, quite the contrary, international human rights norms require “very severe gun control.”

Accordingly, CEI and the Cato Institute joined an amicus brief filed with the Supreme Court asking it not to rely on international norms in deciding the Graham case.

If America got rid of the death penalty tomorrow, the army of lawyers who today relentlessly delay and block executions would simply turn around and fight life without parole for violent criminals (liberal judges like Ninth Circuit Judge Harry Pregerson have argued that life without parole is unconstitutional even for serious adult crimes).  Opposing strict penalties for criminals sets liberal lawyers and judges apart from ordinary people who believe in “vengeance,” and thus helps them feel morally superior and holier-than-thou.  It makes them feel sophisticated and refined to argue that society should forgive violent criminals who have supposedly “rehabilitated” themselves by claiming to be sorry for their victims (even though many “model inmates” have gone on to commit horrible crimes after being released on parole–seldom against wealthy lawyers).   Many of those lawyers were trained at my alma mater, Harvard Law School, where moral vanity can be found in abundance.

These sanctimonious lawyers and judges have forgotten the wisdom of the great Athenian lawgiver Solon, who observed that true justice will not be achieved until those who have not been victimized by crime are just as indignant as those who were victimized.  As Midrash sagely notes, “He who is kind to the cruel is cruel to the kind.”

(Unlike what you may have gleaned from watching “L.A. Law,” when a death sentence is overturned by the courts, it is very seldom because of the convict’s alleged innocence; the reason is usually something like a failure to consider some obscure supposedly mitigating factor, or the fact that the defendant was sentenced to death by a judge rather than a jury.  Most innocent people in jail are there for drug, sex-crime, or regulatory offenses, not capital crimes that carry the death penalty.)

The Obama administration is busy packing the courts with people who will block the death penalty and strict sentences for violent crime at every turn, like the radical law professor Goodwin Liu, and a judge who tried to block the execution of the Roadside Strangler based on the unbelievable ground that his “sexual sadism” was a mitigating factor–even though the Roadside Strangler admitted his execution was appropriate.  Whether or not the death penalty is good public policy (admittedly, death is different because it is irrevocable), it is obviously not unconstitutional, and should not be judicially nullified, since it is expressly contemplated in the Constitution, such as in the language of the Fifth Amendment.

Rep. Ann Kirkpatrick is proposing a 5 percent pay cut for members of Congress.

“In the face of our ever-deepening federal debt, the federal government must follow their example by finding common-sense solutions to do more with less,” she told The Hill.

A noble sentiment. And one that would save $8700 per member. With 535 members of the House and Senate, the total savings are $4.65 million.

The federal government is on track to spend about $3.8 trillion this year. Trimming $4.65 million means that for every $816,502 the federal government spends, it would save one dollar.

Rep. Kirkpatrick is proposing a 0.00122 percent spending cut. That’s not even a rounding error.

I do not intend to mock Rep. Kirkpatrick. Her spending cut is better than nothing, and I am glad she is proposing it. But placed in proper context, it is very, very small. It is a largely symbolic proposal, and should be treated as such. A 5 percent pay cut for Congress is no austerity measure.

More fundamental solutions would involve fundamental entitlement reform paired with a deregulatory stimulus. Cato’s Chris Edwards has some other spending cut ideas that deserve a serious look. They total $380 billion, or ten percent of federal spending.

The idea that government can “perfect” an imperfect market (an artifact of economists’ “perfect competition” theory) has again become an item of faith among intellectuals. In a recent FT column, Samuel Brittan, a former market advocate, discusses three fallacies of U.S. style capitalism or what he not so endearingly calls “market fundamentalism”:

• He rejects the “efficient market” hypothesis. Based on the axioms of theorists such as A. C. Pigou, he characterizes this theory of the market as one of static equilibrium where if one sees a hundred dollar bill on the street, one wouldn’t pick it up because somebody already has. Why Brittan believes this constitutes a criticism of the dynamic entrepreneurial views of economic liberals is unclear.

• He then critiques the view that “Government is not the answer, it is the problem.” And Brittan is certainly correct that this view is central to many market advocates. Brittan, however, presents a choice: either accept the entire welfare, regulatory state or anarchy. He seemingly rejects as politically impossible the constitutionally constrained state. Hayek and most classical liberals were well aware that culture and a rule of law (limited government focused on preventing force and fraud and maintaining a stable legal environment) was essential but they did not wish society to walk the Road to Serfdom.

• And finally he rejects Samuel Johnson’s statement: “There are few ways in which a man can be more innocently employed than in getting money.” Brittan sees self-interest as problematic because of the role of “private” parties in the current fiscal bubble. That such private error was encouraged by the moral hazards created by excessive government intervention is a point he neglects to discuss.

Brittan’s arguments are shallow. He attacks a straw man caricature of capitalism. His objections should be focused on the current “mixed economy” in which crony capitalists benefit from various Pigouvian interventionist rationales (wealth redistribution, correcting externalities, ensuring adequate production of “public goods” and so forth). As Larry Summers noted in his essay in the recent compilation, Creative Capitalism, he’s really criticizing market socialism, not capitalism. Fannie and Freddie are examples of the risks of the GSE-centric mixed economy. That – not “market fundamentalism” – should have been Brittan’s target.

Classical liberals and even some Chicago school economists such as Ronald Coase exposed the foolishness of equating a “market” to the “perfect competitive market” needed to “solve” mathematical equations. Stripping away the critical features of the market to allow this may have some pedagological value but is akin to relating the fall of a feather in a vacuum as having much to say about the same event in the real world. Brittan does, to his credit, recognize that intellectuals emphasize “market failures,” while giving little attention to the far more pervasive “government failures.”

He mentions but one- the tendency of political institutions to reward concentrated interests at the expense of the less well organized citizenry. Yet there are many others- for example, the tendency for government to “avoid risk” by slowing innovation (refusing to allow the creative destruction that another early free market economist, Joseph Schumpeter, saw as the keystone of capitalism). That the risks of stagnation are generally much greater than the risks of innovation is a massive government failure. (This issue, of course, does not arise in Pigou’s static economy – no possibility of innovation means no gains from innovation.) Brittan does caution us that the failure of “private” actors to be responsible owes much to the unholy alliance between regulators and market participants (the regulatory capture problem) but here he seems to echo Pigou, who was confident that “in the English speaking world, a new man was emerging trained in economics and imbued with civic responsibility that would avoid this trap”.

Yet, some 80 years later the U.S. still faces rampant rent-seeking and corruption under the guise of necessary bailouts, protectionism, and trust-busting. Ironically – and a credit to the FT editorial page oversight – the same page carries an article by David Rothkopf, a visiting scholar at the Carnegie Endowment and head of his eponymous international investment firm. Rothkopf repeats the concerns of Schumpeter and Robert Higgs (Crisis and Leviathan). Schumpeter’s famous phrase: “Rational as distinguished from vindictive regulation by public authority turns out to be an extremely delicate problem which not every government agency, particularly when in full cry against big business, can be trusted to solve.” This warning is particularly relevant when politicians face populist outcries about Wall Street and more recently BP over the oil spill.

Higgs noted that market crises become an impetus for governments to further their grip over industry, blurring the distinction between capitalism and crony capitalism. History has proved Pigou very wrong. His view of politics as a virtuous occupation somehow immune from the self-interest problems that are disciplined in a true capitalist system by competition and the profit and loss realities is the dominant intellectual religion. (Note today, Pigou’s chief acolyte seems to be Greg Mankiw.)

Richard Morrison and Jeremy Lott welcome Reason magazine Senior Editor Michael Moynihan to Episode 93 of the LibertyWeek podcast. We take on the high-profile congressional primaries, Chuck Schumer’s hypocritical stance on privacy, the fight for wine liberation in New York, passing the buck on debit card fees and we embark on a Tea Party Euro Trip.

The Supreme Court has just held that violent juveniles cannot be given a life sentence without the opportunity for parole, unless they succeed in killing their victim. Even torturers and rapists who attempt to commit murder cannot be denied the opportunity for release under the Court’s decision today in Graham v. Florida.

Most states have long authorized life sentences without parole for vicious 17-year-olds who commit rape and attempted murder. But the Court looked instead to “international opinion” to declare such sentences “cruel and unusual,” writing that “The United States adheres to a sentencing practice rejected the world over,” illustrating “the climate of international opinion” against life without parole.

The Court’s opinion was joined in by all the liberal Supreme Court justices–including Obama’s appointee, Sonia Sotomayor–and authored by swing vote Anthony Kennedy.  Conservative justices Alito, Thomas, and Scalia dissented.

Chief Justice Roberts agreed with the liberal majority only that the defendant in this particular case deserved a chance for parole.  But he disagreed with its sweeping ruling that all violent juveniles must be given a chance for parole unless they succeeded in killing their victim. He cited the examples of nightmarishly evil people who will now be given an opportunity for parole thanks to the Supreme Court:

“But what about Milagro Cunningham, a 17-year-old who beat and raped an 8-year-old girl before leaving her to die under 197 pounds of rock in a recycling bin in a remote landfill?” asked the Chief Justice. “Or Nathan Walker and Jakaris Taylor, the Florida juveniles who together with their friends gang-raped a woman and forced her to perform oral sex on her 12-year-old son?”  These vicious predators will now be free to seek parole.

The Court’s decision today illustrates that the Supreme Court is a liberal court, not a moderate or conservative court. The great majority of states–even “Blue States” like California–permit life without parole for violent juvenile torturers and rapists.  The Court ignored the wisdom of the sages, such as the ancient maxim that “he who is kind to the cruel is cruel to the kind.”

In relying on “international opinion” to decide the case, the Supreme Court ignored the pleas of civil libertarians and libertarian think tanks like the Cato Institute not to smuggle international standards into the interpretation of the American Constitution, since doing so is a dangerous precedent: international law and opinion are often hostile to important American civil liberties like free speech, freedom of the press, and freedom of religion; the right to self-defense against home intruders; and laws designed to secure those protections.

The libertarian Cato Institute, which frequently files amicus briefs in the Supreme Court seeking to promote civil liberties and privacy rights, filed an amicus brief in today’s case asking the court not to rely on “international norms,” since doing so would “undermine the democratic process and rule of law, casting considerable uncertainty over many U.S. laws.” (Disclosure: Competitive Enterprise Institute joined that brief.)  Sadly, the Court ignored that brief.

Courts should not rely on “international opinion” to decide cases, since it is vague and manipulable.  So-called international law is applied selectively by lawyers and judges, who cite real or imagined ”international law”  to push the ideological goals they support, while ignoring actual international court rulings they don’t like.

Left-wing lawyers take vague international treaties and interpret them as mandating liberals’ ideological wishlists, like restricting criticism of Islam and minority religions as “hate speech,” banning Mother’s Day as sexist, and mandating quota-based affirmative action. For example, the CEDAW equal-rights treaty has been construed by an international committee as requiring “redistribution of wealth,” “affirmative action,” “gender studies” in academia, government-sponsored “access to rapid and easy abortion,” “comparable worth,” and “the application of quotas and numerical goals and measurable targets aimed at increasing women’s political participation.” Never mind that most countries don’t even have affirmative action.

But they ignore foreign law and world opinion when it calls into question liberal policies in the United States. One classic example is the horror that most countries’ courts have for the American practice of letting virtually unguided juries award punitive damages. In most of the world, punitive damages are forbidden.  But you will never see a liberal Supreme Court justice talk about “international law” or “international opinion” when it comes to punitive damages, which are sacrosanct in the eyes of many liberal judges.

Ultimately, even liberals may come to regret the reliance on “international opinion” by today’s Supreme Court decision, which sets a dangerous precedent for civil liberties.

In USA Today, liberal law professor Jonathan Turley earlier criticized the Obama administration for foolishly endorsing a “blasphemy” exception to free speech at the UN, in an effort to curry favor with Muslim countries: “Around the world, free speech is being sacrificed on the altar of religion. Whether defined as hate speech, discrimination or simple blasphemy, governments are declaring unlimited free speech as the enemy of freedom of religion. This growing movement has reached the United Nations, where religiously conservative countries received a boost in their campaign to pass an international blasphemy law. It came from the most unlikely of places: the United States.”

Turley says Western blasphemy cases have included the arrest of a Dutch cartoonist for depicting Christian and Muslim fundamentalists as zombies; the investigation of an Italian comedian for joking that in 20 years, the Pope will be in hell; the exclusion of a Dutch politician from Britain because he made a movie describing Islam’s holy book as “fascist”; and the prosecution of writers for calling Mohammed a “pedophile” because of his marriage to 6-year-old Aisha (which was consummated when she was 9).

Earlier, conservatives and civil libertarians criticized the Obama administration for endorsing restrictions on so-called “hate speech” at the United Nations in an effort to ingratiate itself with other countries. The Administration is backing proposals to classify hate speech as a violation of international human rights law.  Some left-wing lawyers are now likely to argue that these proposals constitute “customary international law” binding on the U.S., as a consensus interpretation of treaties the U.S. has already signed, like the CEDAW equal rights treaty. The U.S. courts are unlikely to accept such arguments in the near future, although if Obama manages to appoint enough left-wing judges, the chances of such arguments prevailing will increase.

In Canada, hate speech laws have been used to punish ministers for anti-gay sermons. In the U.S., college hate-speech codes have been used to discipline students for criticizing affirmative action, writing about the racial implications of the death penalty, and calling homosexuality immoral. Ironically, hate speech laws have often been used against minorities in the Third World, with prosecutors arguing that advocating the rights of minorities is an inflammatory form of racial separatism.

Congress has long used its control of the federal government’s purse strings as a club with which to force states to change laws that fall under state governments’ traditional police powers, such as speed limits and legal drinking ages, by threatening to cut federal highway funds. Given the current trend in government growth, I expect the categories of funds so manipulated to expand.

The two most notorious policies so crammed down states’ throats — the 55-mph speed limit and the 21 legal drinking age — constituted nanny-state social engineering of the worst kind: government forcing behavior on certain citizens for their own good.

However, when it is the money of the nation’s taxpayers, rather than behavior politicians don’t like, that is at stake, pulling such funding may be called for. In his Washington Examiner column today, Hugh Hewitt proposes such a solution to prevent a federal bailout of underfunded state public employee pensions.

Federal spending power was used to oblige states to lower their speed limits to 55 miles per hour a few years back. The same authority could be employed to oblige states to curtail public employee pensions. A new federal statute, stating simply that the Treasury will not be sending assistance to any state awarding any new six-figure pensions under any circumstances, would be approved by overwhelming margins.

The federal government discouraging state government profligacy is very different from its manipulating federal funds to enact state-level policies over which it should have no authority. For that reason, comparing the two is troubling, even when accomplished by similar means. Still, if the federal government is ever to withdraw funding for any reason, it should be to rein in its own, and other governments’, power.

For more on public sector unions, see here and here.

Here’s a letter I sent recently to The New York Times:

May 14, 2010

Editor, The New York Times
620 Eighth Avenue
New York, NY 10018

To the Editor:

Your May 12 article “With Obama, Regulations Are Back in Fashion” (page A15) asserts that the Bush administration had a “deregulatory agenda.” If that is true, then President Bush failed miserably in executing it.

His administration added 31,634 new regulations to the books, and repealed hardly any. The cost of complying with federal regulations exceeded $1 trillion for the first time on Bush’s watch. 587,321 new pages were added to Federal Register during the Bush years.*

Even the regulation-intensive Obama administration is passing new regulations at a pace nearly ten percent slower than President Bush.

Contrary to the article, the Bush administration was the best friend regulators have had in a generation or more.

Ryan Young
Warren T. Brookes Journalism Fellow
Competitive Enterprise Institute
Washington, DC

*All data from Wayne Crews, Ten Thousand Commandments.

Here’s an excerpt from an early 1980s Office of Management and Budget report:

An agency subject to the provisions of the Federal Reports Act may enter into an arrangement with an organization not subject to the Act whereby the organization not subject to the Act collects information on behalf of the agency subject to the Act. The reverse also occurs.

Radical law professor Goodwin Liu was approved to sit on the federal appeals court for the Ninth Circuit in a party-line, 12-to-7 vote, by the Senate Judiciary Committee.  His nomination now heads to the full Senate, which will confirm him unless there is a successful filibuster by Republicans.

Liu, a left-wing ideologue, is now poised to sit on the nation’s largest federal appeals court, the Ninth Circuit.  Many Ninth Circuit rulings are decided by narrow majorities, like the recent 6-to-5 ruling against Wal-Mart in a multi-billion dollar lawsuit.

Liu has been suggested by left-wing racial lobbies as a possible Supreme Court nominee, because he believes that racial preferences are not merely permitted by the Constitution (as liberal justices argued in the Bakke case), but required by it.   Liu believes that race-based busing should be required not merely within school districts, but across school district lines to create what are effectively region-wide racial quotas, a radical claim rejected by the Supreme Court long ago (the Supreme Court rejects busing across district lines even in desegregation cases).  (The slippery Liu claims to oppose racial quotas, but he supports mandating fixed racial percentages and ratios, which is exactly what racial quotas are, under a dictionary definition of “quota.”)  Racial quotas are often implemented at the urging of left-wing academics who harbor divisive and offensive racial stereotypes, such as “diversity” trainers who claim that whites are coldly “impersonal” and “intellectual” and thus need to be racially balanced with minorities who are “emotional” and “personal.”

Liu is hostile to “’free enterprise, private ownership of property, and limited government.’ According to Liu, these are ‘code words for an ideological agenda hostile to environmental, workplace, and consumer protections.’”

Liu also believes in “a constitutional right to welfare.“   Liu is also a big user of politically-correct psychobabble designed to hide judicial activism, writing that a judge is supposed to be a “culturally situated interpreter of social meaning” rather than an impartial umpire who interprets the law in accord with its plain meaning or its framers’ intent.

Bar association standards say lawyers are supposed to have practiced law for at least 12 years before being nominated to a judgeship, and should also have “substantial courtroom and trial experience.“  Liu has no trial experience, and had not even been out of law school for 12 years when he was nominated, meaning he was by definition unqualified under ABA standards.  But a liberal ABA committee, showing ideological bias, quickly rubberstamped his nomination anyway, ignoring his lack of the required qualifications, since the committee members shared his extreme political views.

The Ninth Circuit, to which Liu was nominated, already contained a lot of leftist judges.  The Wall Street Journal criticized a recent 6-to-5 ruling by the Ninth Circuit allowing six employees to bring a  multibillion dollar class action lawsuit against Wal-Mart in the name of 1.5 million other Wal-Mart employees they had little in common with.  As the dissenting opinion, written by Judge Sandra Ikuta, noted, the lawsuit was based on junk science that violated the Supreme Court’s Daubert decision, and let a few employees whose situation was anything but typical sue in the name of countless employees they shared nothing with but gender.  The plaintiffs’ lawyers sought at least $450 billion!  The intellectually dishonest ruling in Dukes v. Wal-Mart allowed just six employees to bring a national class-action even though Wal-Mart’s hiring and promotions are decentralized and not done on a company-wide basis, and Federal Rules of Procedure say that national class-actions are supposed to challenge a company-wide practice.  The Ninth Circuit’s earlier ruling against Wal-Mart was likewise an abuse of basic legal principles.

Although the lawsuit will affect employees and managers across the country (and probably reduce the value of your retirement plan, since the mutual funds in your 401(k) probably own Wal-Mart stock), a verdict will be rendered solely by a left-leaning jury drawn from the San Francisco Bay Area, since the plaintiffs sued Wal-Mart in one of the most anti-employer judicial districts in America, the Northern District of California.

In the ruling against Wal-Mart, the Ninth Circuit was split along ideological lines, with only hard-core liberal judges in the majority, and a dissent joined in by all the moderate and conservative judges (as well as a mainstream liberal Democrat Barry Silverman).