January 31, 2018 5:24PM

Our Review of the Draft Fourth “National Assessment” of Climate Change Impacts on the U.S.

Public comments on the draft fourth “National Assessment” of present and future climate change impacts on the U.S. are due at 11:59 PM tonight and will be embargoed from public release until after then. As soon as it is made public, we’ll link to our comments. Until then, just think about the previous three Assessments.

Reviewing the first one in 2000, myself and Chip Knappenberger discovered that the science team just happened to choose the two most extreme models (for temperature and precipitation) out of the 14 they considered. And then we discovered that they were worse than bad: when applied to a really simple record of temperature, they performed worse than a table of random numbers. Really, it was the same situation as if you took a multiple choice test with four possible answers, and somehow managed to get less than 25% right. That’s the highly sought after “negative knowledge,” something you might think impossible!

The second one (2009) was so bad that we covered it with a 211-page palimpsest, a document that looked exactly like the federal original in both design and content. Except that it contained all the missing science as well as correcting as many half-truths and incomplete statements as we could find. Like we said, that took 211 pages of beautiful typeset and illustrated prose.

The National Oceanic and Atmospheric Administration was instrumental in producing the third (2014) Assessment, and in their press release at its debut, gushed that “it is a key deliverable in President Obama’s Climate Action Plan.” That has been recently undelivered.

So what did we say in our review of the upcoming fourth one? Well, you'll have to wait until tomorrow. 

UPDATE: comments by Ryan Maue and myself are now available on the Cato website.

January 31, 2018 3:15PM

State of the Union Roundup on Trade Policy

Last night’s State of the Union address by President Trump was curiously light on the topic of trade policy despite the fact that it was continually brought up during his campaign and throughout 2017. In fact, there were a total of 6 sentences in the entire speech devoted to trade. The White House did, however, release a factsheet to fill the gaps. Below are excerpts from this factsheet, entitled “President Donald J. Trump Is Promoting Free, Fair, and Reciprocal Trade,” as well as links to commentary from my colleagues and me on the various issues listed. Though the address was a more reserved take on trade than the president’s past speeches, that doesn’t mean trade policy is now a safe space. Let’s keep a close eye on actions the administration might take in the future.

In outlining ways the administration intends to stand up for American interests, the factsheet begins with a focus on China:

  • In August 2017, the Administration initiated an investigation into Chinese practices related to forced technology transfer, unfair licensing, and intellectual property (IP) policies and practices.

    • These practices by the Chinese are estimated to cost the United States billions of dollars each year.
    • Conducted by the USTR, this is the first Section 301 probe since 1997, fulfilling the President’s campaign pledge to use all tools available under U.S. law to combat unfair trade.

As my colleague Scott Lincicome argues, any aggressive, broad-based unilateral tariffs on China through the use of Section 301 would likely be ineffective and harmful to both U.S. exporters and importers. Instead, he suggests the administration pursue concerns with Chinese IPR practices through a WTO dispute (joined by members with similar concerns) as well as a “targeted unilateral response” for those actions that fall outside the scope of the WTO Agreements.

Next, the document turns to address recent safeguard actions:

  • In January 2018, the President announced his decision to provide safeguard relief to U.S. manufacturers injured by surging imports of washing machines and solar products.

    • The President’s decision was based on a series of recommendations made by the independent and bipartisan International Trade Commission (ITC).
    • This is the first time Section 201 of the Trade Act has been used to impose tariffs in 16 years.
    • These actions respond to unfair trade practices by China and other countries, including attempts to avoid legally imposed antidumping and countervailing duties.>

These kinds of actions are part of the built-in system of protectionism that works on autopilot irrespective of which party is in power. In both the washers and solar products cases, the ITC made recommendations, and President Trump roughly followed these recommendations. Therefore, while the actions are likely to hurt U.S. consumers (LG just announced it would be raising prices of its washing machines), they are not out of the ordinary (though prior to these actions, a case hasn’t been initiated since 2001).

The factsheet continues by praising the increase in antidumping and countervailing duty investigations in 2017:

  • During 2017, the Trump Administration conducted 82 major antidumping and countervailing duty investigations, a 58 percent increase over 2016.

    • This includes the first self-initiation of an antidumping investigation in 25 years.
    • Many of these investigations resulted in import duties to address dumping and subsidies, including one in response to Canada’s unfair trade in softwood lumber.
    • USTR and Commerce are working together to defend the right of the United States to continue treating China as a non-market economy in antidumping investigations until it makes the reforms it agreed to when it joined the WTO.

A few things to note here: first, some trade remedy 101—the use of these trade remedies is not really new, and is something U.S. companies have long utilized to shield themselves from competition from foreign companies. Boeing’s latest trade remedy initiation is a great example of the abuse of this law, which ended last week with the U.S. ITC unanimously agreeing that Boeing was not in fact injured by airplanes made by its Canadian competitor Bombardier, and thus no tariffs could be imposed. It is worth emphasizing here that regardless of the amount of saber rattling by the administration on this issue, the process by which these investigations take place is independent. The problem is not really an uptick in protectionism, but rather, U.S. trade remedy laws that don’t serve U.S. interests.

My colleagues have also written extensively on the issue of China’s nonmarket economy status with regard to the application of U.S. AD/CVD laws and have argued that China should not be treated differently than other countries.

The factsheet was surprisingly positive about the WTO, noting the successful use of the institution’s dispute settlement mechanism:

  • The Trump Administration has successfully litigated numerous WTO disputes, helping force countries to abandon unfair practices and preserving the U.S. right to enact fair laws.

    • In November 2017, the United States won a dispute on Indonesia’s unfair import licensing regime that was blocking the export of U.S. agricultural goods.
    • In October 2017, the WTO determined that the U.S. tuna labeling rules were consistent with WTO standards, helping the United States to inform consumers about safe fishing practices.
    • In September 2017, the WTO rejected the EU’s allegations that Boeing was receiving prohibited subsidies.

This is good news considering how critical USTR Lighthizer has been of the WTO, and signals that perhaps the U.S. has not abandoned the institution, but instead is actively using it. Later in the factsheet, reform of the WTO is referenced as follows: "The United States is committed to reforming the WTO to ensure that countries are held accountable for breaking the rules and that U.S. sovereignty is respected."

This is consistent with previous statements from the administration, but again sends the message of working to improve the WTO, not destroying it. As for “holding countries accountable” it is likely that the prime target here is China. China was the recent subject of criticism with regard to its WTO membership in a recent report on China’s WTO compliance, which stated that “the United States erred in supporting China’s entry into the WTO on terms that have proven to be ineffective in securing China’s embrace of an open, market oriented trade regime.” While it may be hyperbolic to suggest this means the U.S. regrets China’s membership entirely, it does point to concerns over the “terms” on which China entered. As my colleague Simon Lester noted, China’s membership to the WTO has been good for the United States, not least because it has prompted significant episodes of liberalization in China, even though there still is much work to be done on that front. Though it is true that China has developed significantly since it joined the WTO in 2001, working within the WTO to address an expansion of China’s obligations may be the best route forward, as opposed to any unilateral actions, particularly over China’s IP and technology transfer policies.

In a section entitled “Putting the American Worker First,” the administration highlights its priorities for undertaking renegotiations of existing trade agreements and the launch of new ones. It states:

  • The Trump Administration is renegotiating and modernizing the North American Free Trade Agreement (NAFTA) to ensure that it does not harm American workers and companies. This is the first renegotiation of a major free trade agreement in U.S. history.

    • The Administration is working with Korea to ensure that trade under the U.S.-Korea Free Trade Agreement (KORUS) is more equitable and reciprocal.
    • President Trump withdrew the United States from the Trans-Pacific Partnership (TPP), because the deal negotiated by the past Administration did not sufficiently prioritize the needs of the American workforce.
    • The United States is seeking to enter into new trade agreements with countries that commit to fair and reciprocal trade.

The 6th round of NAFTA talks concluded this week, and negotiations do seem to be progressing, albeit at a slower pace than the administration might like. It is true that NAFTA would benefit from modernization, in part because it was negotiated at a time when the internet was just taking off, and also because over the course of 20 years, we have learned a lot about things that may not work or could be improved. For instance, eliminating investor-state dispute settlement (Chapter 11) and binational panels that review the administration of domestic AD/CVD laws (Chapter 19) would be a step in the right direction. Not only would this address the controversy surrounding ISDS (which essentially subsidizes foreign investments) but also end a possibly unconstitutional system of adjudication (Chapter 19) that is unnecessary given that foreign companies have access to domestic U.S. courts to address these concerns.

The administration has put forward some controversial “poison pills” in the NAFTA negotiations, such as more stringent rules of origin and government procurement provisions, as well as non-binding state-to-state dispute settlement and a 5 year sunset clause that would automatically terminate the deal unless all parties agree to continue it, but this is really not the type of reform that would be helpful. For instance, state-to-state dispute settlement should be strengthened, not weakened, as NAFTA Chapter 20 has barely functioned in its 20-plus year history. Also, the government procurement market should be open to foreign competition, and the administration should be wary of how it abuses the term “reciprocity” in calls for dollar-for-dollar procurement access. There is also much that can still be done to eliminate unnecessary regulatory obstacles to trade by including a chapter on regulatory cooperation in the new NAFTA.

Aside from renegotiating old deals, the administration has also promised to launch new ones. However, very little progress has been made on this front in 2017, and it is unclear what countries we would be sitting down at the table with.

The Trans Pacific Partnership, which the president withdrew from early last year, is moving along without the U.S. and is a major lost opportunity to expand access to Asian markets and to contribute to the new rules of modern trade agreements. (Even though Trump just raised the possibility of rejoining the TPP, this sudden change of heart should be approached with caution.)

Overall, while the tone of both the president’s address and the content of the factsheet on trade appear subdued, we should remain vigilant about possible trade actions and continue to make the case for more trade liberalization. Sometimes what is more important is not what is said, but rather what goes unsaid. President Trump’s state of the union was striking for one major omission--an acknowledgment of the benefits of free exchange and U.S. leadership in the international economy. This is particularly notable due to fact that increasing skepticism towards international trade is coming from the Republican Party, which used to stand more vociferously for freedom over protectionism. The history of U.S. trade policy reveals that protectionism has consistently failed to promote U.S. interests, and it would be unfortunate if past mistakes are repeated. Let’s hope that the president’s more cautious tone towards trade indicates a softening stance.

January 31, 2018 2:07PM

Actually Senator Warren, Outsourcing Is Great

Writing in the pages of USA Today last week, Senator Elizabeth Warren (D-Massachusetts) criticized President Trump for taking insufficient action to arrest the flow of jobs from U.S. factories to foreign countries such as Mexico. Labeling Trump the “King of Offshoring,” Sen. Warren called for U.S. negotiators participating in the renegotiation of the North American Free Trade Agreement to take “bold actions that will stop the offshoring of American jobs.”

That would be a mistake. In fact, outsourcing helps to boost productivity—the art of doing more with less—which is the sine qua non of improvements in living standards.

Although it is perhaps understandable when casual observers are seduced by the notion that the outsourcing of jobs to overseas locales is a sign of weakness, more should be expected of a sitting United States senator. In fact, both theory and experience teach us that foreign outsourcing helps promote economic vitality in a variety of ways.

Cheaper goods: By shifting production overseas companies can reduce the cost of production, which—assuming a competitive marketplace—will translate into lower prices for consumers. This is a particular boon to the working families Sen. Warren repeatedly invokes in her op-ed, who tend to spend a greater percentage of their income on imported non-durable items such as clothing.

Improved competitiveness: Beyond benefits to consumers, cost reductions also help improve the competitive position of U.S. companies and ensure they will survive and thrive versus rival firms.

New jobs: While the jobs lost via outsourcing understandably receive considerable attention, an all too often unseen aspect of this process is that the money saved both by firms and consumers frees up resources to be either spent or invested, supporting yet other types of jobs.

Better jobs: By finding ways to lower costs and sell the goods they produce more cheaply, companies can boost sales and firm growth. This, along with money saved through outsourcing that is reinvested in the firm, leads to more jobs in areas such as design, research, marketing, finance, and management which typically feature better compensation than those found on the factory floor.

Increased exports: Overseas job creation helps provide much-needed growth in relatively poorer countries such as Mexico. This, in turn, leads to increased demand for higher-end goods produced in the United States which range from Hollywood movies to financial products to Boeing aircraft. In addition, supply chain linkages resulting from outsourcing help drive exports. The largest truck factory of U.S.-headquartered firm Navistar, for example, is in Mexico, but the engines—which by themselves can account for up to 45 percent of the truck’s cost—are made in Alabama. Wrangler jeans, meanwhile, has shifted its production away from the United States but over 70 percent of the material in its Mexico-made products comes from American companies.

Representing Massachusetts, Sen. Warren should be well-versed in the benefits of foreign outsourcing. The state, after all, is the former home of a vibrant textile industry which has long since decamped in search of cheaper labor and other costs, first to the American South and then later on to places such as Central America, China, and Southeast Asia. While this no doubt resulted in some painful adjustments, Massachusetts has long since adapted and today features a vibrant economy with an unemployment rate well under 4 percent and numerous companies in such sectors as technology, medical devices, and financial services. Indeed, some of the state’s former textile mills have been converted into high-end condominiums which house some of the workers now employed in these industries. 

It should also be noted, however, that while public policy should not seek to halt outsourcing, neither should it be actively encouraged through unreasonable taxation or regulations which unnecessarily drive away companies from U.S. shores. Indeed, to the extent outsourcing requires a legislative solution it is through the adoption of market-friendly policies which both encourage investment in the United States and ensure a dynamic job market so that the losers from outsourcing can more easily find new sources of employment.

Even the most ideal policy environment, however, will not prevent all jobs from being outsourced. Nor should we want them to. Instead of swimming against this tide Sen. Warren and her fellow legislators should focus their energies on creating a policy environment in which commerce can thrive and create the jobs of tomorrow instead of a misguided effort to preserve those of yesterday.

January 31, 2018 12:51PM

President Trump’s Policies Did Not Suppress Border Crossings in 2017

In his State of the Union speech, President Trump failed to mention one important phenomenon that occurred under his watch last year. Except for one other year, 2017 saw the fewest illegal border crossings since World War II. While he has often bragged about this in other settings, it is possible that his advisors left it out of his speech because it clearly downplays any urgency to build a massive wall or send in reinforcements for Border Patrol. 

In any case, he was right not to brag about it: 98.8 percent of the decline in illegal entries from 1986 to 2017 occurred entirely before Trump's inauguration. While his year in office has continued a preexisting downward trend, his campaign rhetoric appears to have caused a pre-inauguration surge in arrivals. His overall effect is essentially zero.

Illegal crossings are naturally difficult to count, but researchers use Border Patrol apprehensions as an indirect measure of the number of attempts to cross. All else equal, more crossers results in more apprehensions. While apprehensions could also rise due to increased agents rather than increased crossers, researchers control for this effect by looking at the number of apprehensions per agent.

Figure 1 shows the number of apprehension per Border Patrol agent from the 1920s through the end of Fiscal Year 2017 (September 2017). As it shows, illegal entries were a significant issue in the early 1950s and again from 1970 to 2000, but since 2001, and particularly since 2009, illegal immigration has slowed to trickle. In 1986, each Border Patrol agent apprehended nearly 530 people—44 people per month. By the end of 2017, that number had dropped to just 16, barely more than one arrest for each per month.

Figure 1: Annual Apprehensions Per Border Patrol Agent, FY 1925 to 2017

Media Name: apprehensionsperborderagent.png

Sources: Agents: INS; TRAC; CBP; Apprehensions: CBP

Zooming in on just the last 17 years of monthly apprehension data shows that illegal immigration is currently slightly above the downward exponential trend line (the trend is the dotted red line in Figure 2). President Trump can only claim at most the trend continued during his time in office.

Figure 2: Monthly Southwest Apprehensions Per Border Patrol Agent From October 1999 to December 2017

Media Name: apprehensionsperborderagent2.png

Sources: Apprehensions FY 2000-16: Border Patrol; Apprehensions FY 2017-18: Border Patrol; Border Patrol Staffing: Border Patrol

Focusing on only the Obama and Trump months in office does reveal some interesting anomalies (Figure 3). Every year prior to FY 2016 going back to at least 2000, flows peaked in the spring and fell through the fall and winter. In the fall of 2015, however, as Trump rose to the top spot among Republican presidential contenders, the flow continued and peaked in December. In 2016, the flow had its usual spring surge, but then after the GOP officially nominated him, border crossers responded with an uncharacteristic winter rush.

Figure 3: Monthly Southwest Apprehensions Per Border Patrol Agent From January 2009 to December 2017

Media Name: apprehensionsperborderagent3.png

Sources: Apprehensions FY 2000-16: Border Patrol; Apprehensions FY 2017-18: Border Patrol; Border Patrol Staffing: Border Patrol

Clearly, the fear that the Trump administration would make changes incentivized a pre-inauguration increase in illegal immigration. Immigrants moved up their travel plans and left before he assumed office. This resulted in a post-inauguration decrease in illegal immigration. Back in August when I first proposed this theory with data only through June 2017, I hypothesized that if it were true, the apprehensions would return to trend by the end of the year. As Figure 3 shows, they have.

In other words, President Trump has had zero effect on net illegal immigration. His campaign rhetoric caused a pre-inauguration boom and post-inauguration bust, but his overall impact has not affected the trend at all. The decades-long downward movement in apprehensions has continued, but President Trump’s policies have had nothing to do with it.

Even if his current policies did matter, however, it would demonstrate that Border Patrol can effectively manage illegal immigration without an unnecessary, wasteful monstrosity spanning 2,000 miles of the U.S.-Mexico border. 

January 31, 2018 12:37PM

CFPB Neither Protects Consumers Nor Is a Constitutional Board

The en banc D.C. Circuit ruling was disappointing but not unexpected given the government-sympathetic lean of the court. The director of the CFPB reports to no one but himself, and, under the terms of Dodd-Frank, can be removed by the president only for cause. (Judge Griffith in concurrence understands that provision to include firing based on policy disagreement, but there’s no way that this view could command a majority of the court if that eventuality ever happened.) 

As Cato argued in our brief, this structure violates core principles of separation of powers and allows the agency to exist unfettered by any accountability to the people. These constitutional problems would be reason enough to fear the CFPB, but they’re not merely academic. The way Director Richard Cordray wielded his considerable authority demonstrates just how important these checks are, but the fact that he’s been by replaced Mick Mulvaney—whose actions thus far are more to my policy liking—doesn’t change the constitutional calculus. 

The Supreme Court should now take up PHH v. CFPB, as it has the structural challenge to the SEC’s administrative law judges in the Lucia case, and find that the Constitution cannot countenance this fifth branch of government (or is it sixth or seventh? I’ve lost count).

January 31, 2018 12:33PM

State of the Union’s Infrastructure

Remember America's crumbling infrastructure that supposedly needs trillions of dollars for maintenance and rehabilitation? President Trump doesn't. Instead, the seven sentences in his State of the Union speech that focused on infrastructure talked about building "gleaming new" projects rather than fixing existing systems. 

The only news is that he is upping the ante from $1.0 trillion to "at least $1.5 trillion." More disturbingly, other than mentioning an "infrastructure deficit" -- which could just as easily be interpreted to mean a shortage of new infrastructure as a deficit in maintenance -- Trump said nothing about fixing existing infrastructure. Instead, he wants to "build gleaming new roads, bridges, highways, railways, and waterways."

Why? We have plenty of railways. Though the railroads have trimmed the nation's rail mileage by 45 percent since 1916, they move more freight than ever and seem to be quite capable of adding capacity where they need it without government help. High-speed trains, meanwhile, are pointless when we have planes that can go twice as fast and don't require hundreds of billions of dollars of supporting infrastructure.

Nor do we need more interior waterways. The ones we have are government subsidized and paralleled by railroads that could easily replace them if subsidies ended tomorrow (as they should). Fixing the Jones Act to allow low-cost shipping to Alaska, Hawaii, and Puerto Rico is more important than adding new waterways in the contiguous 48 states.

Our state and interstate highways and bridges are actually in better shape than ever. City and county roads aren't doing as well and many urban roads are heavily congested, but these are local problems, not federal ones. They are best handled by fixing the system of user fees that should pay for them, such as by Oregon's experiment with mileage-based user fees (in which I am a participant). More federal funding would only allow the states to delay making those changes.

Finally, our transit systems -- especially the most important ones in New York, Chicago, Washington, Boston, and the San Francisco Bay Area -- are suffering from overspending on gleaming new transit lines and neglect of the existing ones. More new lines will only make that problem worse.

In short, President Trump has fallen for the politician's fallacy of preferring ribbons over brooms -- that is, building new infrastructure rather than maintaining the old. This is underscored by a leaked infrastructure plan that outlines seven different initiatives and programs, none of which is focused on repairing or rehabilitating America's existing infrastructure.

This country may need some new infrastructure, but mainly it needs to better utilize and take care of the infrastructure it already has. Since politicians seem to be incapable of doing that, and since user-fee-funded infrastructure tends to be far better managed and maintained than politically funded infrastructure, Congress should focus on returning as much infrastructure as possible to funding systems that rely on user fees, not taxes.

January 31, 2018 12:00PM

When Environmental Regulation Harms the Poor

Zoning regulations and occupational licensing aren’t the only regulations with regressive impacts. A new study circulated by National Bureau of Economic Research (NBER) suggests building energy codes hurt the poor, too. The NBER report focuses on California, but most states adopted statewide building energy codes decades ago. As a result, regressive impacts may be widespread.

Building energy codes regulate a home’s energy footprint, and they are often justified by concerns about energy-related environmental externalities. But well-intentioned objectives don’t insulate the public from trade-offs.

The NBER study looks at impacts on home characteristics, energy use, and housing prices. In all three categories, the impact of residential energy codes is negative for those in the lowest income quintiles.

For example, stricter energy codes were associated with a decline in home values for low-income households of 8-12 percent. Stricter codes reduced the number of bedrooms and square footage of homes in the lowest income households by 4-6 percent. On the other hand, home values increased and changes to square footage and number of bedrooms were minimal for wealthier households.

For some environmental advocates, the distributional consequences may still be justified if energy codes reduced energy use. But the authors state there is “debate about the extent to which building energy codes reduce energy use at all.” The study finds no signficiant reduction in energy use per square foot, although it does find energy reduction on a per-dwelling basis but only in the second lowest-income quintile. 

This suggests energy codes do not meet even their own stated objectives. Energy codes provide another example of how various political objectives -- including protecting the environment -- unavoidably require trade-offs. Often the costs of regulation are borne by the poor.