Economy

Argentina President Cristina Kirchner

Argentina President Cristina Kirchner

Can a country seeking to welsh on its debts invoke sovereign immunity to evade not just court orders to pay those debts, but also post-judgment discovery aimed at collecting on those judgments? Can it do so to prevent not just discovery directed at it, but also at third-party banks? Most importantly, perhaps, can it do so even though it contractually waived sovereign immunity? The answer is yes, according to Argentina, which is seeking to stiff many of its bondholders. Thankfully, the U.S. Court of Appeals for the Second Circuit disagreed with this attack on property and contract rights in a 2012 decision.

But amazingly enough, the Obama administration has taken Argentina’s side at the Supreme Court. It is joined by the government of France, which has experienced downgrades in its credit rating due to stubbornly-high government spending under Socialist Francois Hollande that consumes well over half of France’s economy. The willingness of the Obama administration to take Argentina’s extreme position is disturbing given that the Second Circuit’s ruling was unanimous.

CEI and several former State Department officials have filed an amicus brief asking the Supreme Court to uphold the appeals court’s ruling, and reaffirm the availability of the post-judgment discovery needed to protect property and contractual rights. The former State Department officials include counsel of record John Norton Moore, former Counselor on International Law to the Department of State; Robert F. Turner, former Deputy Assistant Secretary of State for Legislative Affairs; Abraham D. Sofaer, a former federal judge and former Legal Adviser to the Department of State; Professor Malvina Halberstam, former Counselor on International Law to the State Department; and Davis R. Robinson, former Legal Adviser to the State Department. John Norton Moore, who teaches international law and national-security law at the University of Virginia, was extensively involved in drafting the Foreign Sovereign Immunities Act (FSIA) involved in the case. Judge Sofaer was appointed by President Carter to the federal bench in 1979.

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Have a listen here.

Iain Murray, CEI’s Vice President for Strategy, along with Freedom Association Director Rory Broomfield, won second place in the Institute for Economic Affairs’ Brexit Competition. The goal of the competition is to devise a strategy for Britain’s exit from the European Union.

NLRB Ambush Election HearingOn three separate panels, I testified last week against the flaws inherent in the National Labor Relations Board’s (NLRB) latest proposed rule.

The NLRB benignly purports to re-examine “Representation Case Procedures.” The rulemaking is commonly known as the ambush elections rule, as a result of a key component that could require elections in as few as ten days.

FIRST PANEL

On the first panel, I addressed the election date at the heart of the proposal. Approvingly quoting a letter from eighteen United States Senators who commented against the proposed rule, I noted that, “then-Senator John F. Kennedy stated that it was essential to allow ‘at least a 30-day interval between the request for an election and the hold of an election’ in order to ‘safeguard against rushing employees into an election where they are unfamiliar with the issues.’”

The crux of then-Senator Kennedy’s statement is a focus on safeguarding employees and on ensuring that effectively educating employees remains the Board’s focus.

ANALOGY TO STUDENTS’ STUDIES

Pointing out that the median times for elections are on the order of 40 days and that the proposal could call for elections in as few as ten days, I asked, “Would your students benefit from a 75-percent reduction in study time?”

I pointed out that workers, who already have a job and many of whom have families and hobbies, are challenged with essentially learning a crash course in labor law and labor economics—two arcane and intricate areas normally pursued by highly trained specialists with advanced degrees.

An absolute minimum of 30 days and really a routine minimum of sixty days are appropriate to learn such material.

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Post image for First Ever Constitutional Ruling against Dodd-Frank Voids Destructive “Conflict Minerals” Section

Today’s ruling of the D.C. Circuit Court of Appeals that Dodd-Frank’s “conflict minerals” disclosure mandate violates the First Amendment is the first time ever a court has ruled that a provision of Dodd-Frank violates the Constitution. Regulations issued under Dodd-Frank have been struck down for reasons such as inadequate cost-benefit analysis and other procedural violations, but this is first time a provision has been found to be unconstitutional.

And it couldn’t happen to a more misguided and destructive provision of the law! As my Competitive Enterprise Institute colleague Hans Bader and I have written in blog posts, articles, and regulatory comments, the conflict disclosure mandate creates a compliance nightmare, hurts American miners and manufacturers, and does the greatest harm to those it was intended to help — the struggling worker in and nearby the Democratic Republic of Congo.

As explained by Mercatus Center scholars Hester Peirce and James Broughel in their book Dodd-Frank: What It Does and Why It’s Flawed, the “conflict minerals” mandate of Section 1502 is one the law’s many “miscellaneous provisions” that offer “a clear example of how a statute invoked as the answer to the financial crisis is, in reality, an odd conglomeration of responses to issues, many of which had nothing to do with the financial crisis.” Section 1502, championed by celebrities, including Ashley Judd and Ben Affleck, requires all types of firms to disclose their products’ use of five “conflict minerals” — including gold, tin, and tungsten — that can be sourced to war-torn regions of the Congo.

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“In this case the EEOC sued the defendants for using the same type of background check that the EEOC itself uses.” So began a 3-to-0 ruling Wednesday by the Sixth Circuit Court of Appeals in EEOC v. Kaplan Higher Education Corp. (Apr. 9, 2014). CEI joined the Pacific Legal Foundation’s amicus brief in support of the employer sued by the EEOC, the federal civil-rights agency. (EEOC stands for Equal Employment Opportunity Commission.) As former assistant attorney general Roger Clegg (now at the Center for Equal Opportunity) notes,

The Obama Administration sued Kaplan for running credit checks on employee applicants – similar, by the way, to the ones the EEOC itself uses. Kaplan had learned that some of its employees had misappropriated student payments and, to provide safeguards against this behavior, it began screening its applicants for major red flags in their credit history. The EEOC sued Kaplan, arguing that it cannot use credit checks, because use of credit checks has a disparate impact on black applicants.

Anyway, putting aside the inherent dubiousness of the whole lawsuit, there were also severe methodological problems with the Obama Administration’s evidence, which relied on “race raters” to determine, by scrutinizing driver’s license photos, the race of the applicants. So the trial judge threw out the case. Today, I’m happy to report, the court of appeals affirmed that decision – and in no uncertain terms, I might add, much I’m sure to the Obama administration’s chagrin.

At the Washington Post, UCLA Law Professor Eugene Volokh provides these excerpts from the court’s ruling:

The EEOC’s personnel handbook recites that “[o]verdue just debts increase temptation to commit illegal or unethical acts as a means of gaining funds to meet financial obligations.” Because of that concern, the EEOC runs credit checks on applicants for 84 of the agency’s 97 positions. The defendants (collectively, “Kaplan”) have the same concern; and thus Kaplan runs credit checks on applicants for positions that provide access to students’ financial-loan information, among other positions. For that practice, the EEOC sued Kaplan. Specifically, the EEOC alleges that Kaplan’s use of credit checks causes it to screen out more African-American applicants than white applicants, creating a disparate impact in violation of Title VII of the federal Civil Rights Act. See 42 U.S.C. § 2000e-2(a)(1), (a)(2), (k). Proof of disparate impact is usually statistical proof in the form of expert testimony; and here the EEOC relied solely on statistical data compiled by Kevin Murphy, who holds a doctorate in industrial and organizational psychology. For two reasons, however, the district court excluded Murphy’s testimony on grounds that it was unreliable. First, the EEOC presented “no evidence” that Murphy’s methodology satisfied any of the factors that courts typically consider in determining reliability under Federal Rule of Evidence 702; and second, as Murphy himself admitted, his sample was not representative of Kaplan’s applicant pool as a whole. The district court therefore granted summary judgment to Kaplan. The EEOC now argues that the district court “erred” — a telling, oft-repeated, and mistaken choice of word here — when it excluded Murphy’s testimony. We reject the EEOC’s arguments and affirm.

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The EEOC brought this case on the basis of a homemade methodology, crafted by a witness with no particular expertise to craft it, administered by persons with no particular expertise to administer it, tested by no one, and accepted only by the witness himself. The district court did not abuse its discretion in excluding Murphy’s testimony.

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Post image for Professional Licensing: A Risk to the Free Markets and Freedom of Speech

From physicians to dentists to lawyers, the licensing requirements of many professions are well known—but for bloggers? A recent case in North Carolina demonstrates the dangers that mandatory occupational licensing poses to liberty and how established interests use such requirements to protect their bottom line.

North Carolina resident Steve Cooksey was ill, obese, and struggling with type 2 diabetes. In 2009, after being rushed to the hospital, nearly in a coma, he decided to do everything in his power to get healthy. By following a low-carbohydrate diet, Cooksey claims he was able to drop 45 pounds and get off insulin and drugs. He documented his story on his personal blog, where he provided advice to others practicing the “paleo” diet that he believes saved his life.

That sounds like a win-win situation, but not according to the North Carolina Board of Dietetics and Nutrition (NCBDN), which decided to go after Cooksey for the “crime” of offering nutritional advice without a dietitian’s license. In 2011, it sent Cooksey a letter, claiming that his blog, by giving readers “unlicensed dietetic advice,” even for free, violated North Carolina law. The NCBDN included a 19-page copy of his online writings with comments in red ink pointing out what he could and could not say.

Even more surprising, the notice asserted that Cooksey’s private conversations with readers and friends via email and telephone also constituted a violation of the state’s dietitian licensing law!

Unfortunately, Cooksey’s case is far from an isolated incident. In just about every state, there is a dizzyingly long list of jobs that require would-be workers to go through a long, expensive, and sometimes arduous process to earn the privilege of entering into a given profession. While the stated reason for requiring occupational licenses is public safety, established players operating under existing licensing schemes usually fight tooth and nail to maintain occupational license requirement in place, to make it harder for potential competitors to enter the market.

Today, roughly 30 percent of jobs in the U.S. require some form of license (a sharp increase from a low back in 1950, when the share was only 5 percent). Fortunately, some workers are fighting these licensing regime—and many are winning.

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On 60 Minutes, Michael Lewis accused high-frequency traders of front-running. Apparently it’s become necessary to remind critics of high-frequency trading of the definition of “front-running.”

Front-running  - n. “The practice by market makers of dealing on advance information provided by their brokers and investment analysts, before their clients have been given the information.”  — Oxford English Dictionary

There is room for reasonable debate about the merits of HFT. And there is room for multiple exchanges catering to multiple types of investors.  But one thing critics should be wary of is distorting the terms of debate. Many, if not most, HFT firms are ”prop shops.” That is, they are proprietary traders, trading on behalf of their own accounts, not clients. There are no clients for these particular high-frequency traders to “front-run.”

Front-running is already illegal under current law. If firms that do take in outside capital are front-running, then they should be prosecuted. But indiscriminate use of that term detracts from the HFT debate.

Everyone seems to be jumping into the debate about high-frequency trading, now that Michael Lewis is peddling his new book, Flash Boys.

Lewis contends that the stock market is rigged, and that the culprit is high-frequency traders. But not everyone agrees that they are to blame, or that the stock market is even rigged to begin with.

Cliff Asness, founder of AQR capital, suggests that high-frequency traders have in fact made trading cheaper for hedge funds. And this, in turn, benefits clients, such as pension funds or university endowments:

What is good for us is lower trading costs because it translates into better investment performance and happier clients, which makes our business slightly more valuable. How do we feel about high-frequency trading? We think it helps us … we devote a lot of effort to understanding our trading costs, and our opinion, derived through quantitative and qualitative analysis, is that on the whole high-frequency traders have lowered costs.

So the hedge funds that benefit from these lower transaction costs are able to pass those savings along to their investors. And their investors are made up largely of pension funds and university endowments.

In short, the savings that high-frequency traders generate get passed on to a very broad base of consumers, including those who only participate in the market indirectly — via a pension plan or as the beneficiary of a university endowment.

There is undoubtedly lots of room for innovation in market microstructures. And new exchanges may be one solution to what some people perceive as a problem. But competition among market participants and exchanges is the way to bring about that innovation — not increased regulatory scrutiny.

I wonder if the same Luddites who whine about HFT would have complained to Thomas Edison that his Universal Stock Ticker gave some investors an unfair advantage over those who relied on newspapers to get their price information.

Post image for Taxable Bitcoins: Property or Money?

Is Bitcoin currency or property? It depends on which parts of the federal government you ask. Last week the Internal Revenue Service (IRS) announced that bitcoins are taxable and how it would implement such taxation. While the rule could have been much worse, the manner in which the IRS went about doing so brings up many more legal questions.

In context, the fluctuating exchange rate between bitcoins and dollars does cause the cryptocurrency to behave more like property in terms of valuation. The IRS merely took its explanation on “virtual currencies” from the current definition of taxable bartering:

Bartering is an exchange of property or services. You must include in your income, at the time received, the fair market value of property or services you receive in bartering. If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as fair market value unless the value can be shown to be otherwise.

This is clearer when seeing the IRS’s answer to how Bitcoin values must be calculated for tax purposes:

…A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.

This classification of Bitcoin as non-currency for tax purposes isn’t that new. Back in January 2014, Sweden’s Tax Agency moved to classify bitcoins as assets rather than currency itself. In Australia, this month, the tax authority announced Bitcoin transactions person-to-person would be subject to a “goods and services” tax, similar to the IRS classification, as well as a capital gains tax for profits made through Bitcoin. It is not unusual for bitcoins to be treated as non-currency for tax purposes.

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Post image for Why Is Obama’s Report to Congress on the Benefits and Costs of Federal Regulation Delayed?

In April 2013, the White House Office of Management and Budget (OMB) issued its Draft 2013 Report to Congress on the Benefits and Costs of Federal Regulations, which covered rules and regs issued in fiscal year 2012. The final 2013 edition never appeared; now, the Draft 2014 edition is due. I’m not holding my breath.

President Obama claimed again as recently as February 2013 that “this is the most transparent administration in history.”

But getting this important document, as well as the oft-delayed Unified Agenda of Federal Regulatory and Deregulatory Actions, is like pulling teeth. Part of the recent House-passed ALERRT Act addressed the Agenda’s tardiness; it’s naturally stuck in the Senate. (The Agenda is an obscure but important document wherein federal departments and agencies reveal their priorities along with disclosing recently completed rules.)

The 2013 Draft Report revealed that costs of major rules jumped under Obama; The 14 rules added during the fiscal year ended September 2012 imposed costs of from $14.8 billion to $19.5 billion (that’s in the 2001 dollars OMB uses, which look better than 2012 dollars).

The OMB breakdown incorporates only benefits and costs of a handful of major rules which the OMB or agencies have expressed in quantitative and monetary terms. It omits numerous categories and cost levels of rules altogether, and rules from independent agencies are entirely absent.

OK, that’s worrisome, but normally, final reports look fairly identical to draft reports, so the reluctance to release it is unclear. We presumably already have the “bad news.” In any event, normally by April OMB has issued the year’s Draft Report, as can be seen in the list below. There were two big exceptions: one during Obama’s first year, one during George W. Bush’s last.

April is upon us, and without the final 2013 report, it’s not looking likely that the Draft 2014 we need to see is imminent. Regarding final reports, they always appeared by year-end up through 2005. Since then, apart from 2010 and 2011, a given year’s report hasn’t appeared until the following year. But they have only been this late twice (in 2012 under Obama, and in 2007 under Bush). Even when final reports were delayed into the subsequent year, we usually had them by January.

It should be adequate that regulation is allowed to grow without much restraint; the lack of timely disclosure of the relative handful of rules that get scrutiny in the only formal report on regulatory costs is too much.

Here is a list of Draft and Final reports’ dates of appearance since 2002.

Date Draft Final
2014 Due Now n/a
2013 April Overdue
2012 March April 2013
2011 March June
2010 April July
2009 September January 2010
2008 September January 2009
2007 March June 2008
2006 April January 2007
2005 March December
2004 February December
2003 February September
2002 March December