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5 questions for James Capretta on Medicare, Social Security, and the national debt - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Wed, 10/31/2018 - 20:30

“The entitlement crisis is real, and it is worse than you think.” So argue James Capretta and Yuval Levin in a recent cover story in The Weekly Standard. The CBO projects that the government’s cumulative debt will grow from 78 percent of GDP this year to 148 percent in 2038 and to 210 percent of GDP in 2048. To discuss how deleterious this debt load will be for the United States, and what steps can be taken to prevent it, I was joined by my AEI colleague James Capretta.

James is a resident fellow and holds the Milton Friedman Chair at AEI, where he studies health care, entitlements, and US budgetary policy. What follows is an abbreviated transcript of our conversation (read our entire conversation here). You can download the episode by clicking the link above, and don’t forget to subscribe to my podcast on iTunes or Stitcher. Tell your friends, leave a review.

Let me start with a line from the essay: “The United States is likely to have more room for borrowing without facing the most dire consequences, but no one can know for sure just when its luck will run out. Once that invisible line is crossed interest rates can spike, raising borrowing costs even more, which can quickly spark a serious crisis.”

Where is that tipping point? Are we close, or do we have a ways to go? 

(more…)

The Outstate Midwest is the key to the battle for the House - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Wed, 10/31/2018 - 18:39

The Midwest (plus Pennsylvania) proved to be the key electoral battleground in the 2016 presidential election, and it may turn out to be the key once again in the struggle for the House majority this year. Of the 100 electoral votes that Barack Obama won in 2012 and Hillary Clinton lost in 2016, 70 were in the Midwest and Pennsylvania and another 29 were in Florida with its many former Midwesterners (and Pennsylvanians). This year, according to the FiveThirtyEight website, there are more seats in play in the Midwest (and Pennsylvania) than in any of the other regions — Northeast, South, West.

A Make America Great Again Rally in Washington, Michigan April 28, 2018. REUTERS/Joshua Roberts

“Why are the Democrats looking so strong in the Midwest?” is the headline on a story by FiveThirtyEight’s Perry Bacon. He picks up on something I noticed and wrote soon after the 2016 election — in this November 30, 2016, Washington Examiner column and this December 15, 2016, American Enterprise Institute paper — that the big shift in the Midwest was, demographically, among white non-college graduates and, geographically, in what I call the Outstate regions beyond the million-plus metropolitan areas which contain about half of the Midwest’s residents and voters. Bacon noted that Democrats have been running well in Senate races in states Trump carried. Examples include Senators Bob Casey of Pennsylvania, Sherrod Brown of Ohio, Debbie Stabenow of Michigan, and Tammy Baldwin of Wisconsin, and to the list you could add Amy Klobuchar of Minnesota (which Trump lost by just 2 points).

In addition, multiple Democrats have been competitive in Midwestern House races in districts either traditionally Republican or carried by Trump, as well as multiple House races in Pennsylvania where a recently elected Democratic Supreme Court redistricted the state to help their party win more districts.

But is the Democratic surge in the Midwest holding up? Two years ago at this point in the campaign, few observers gave Trump a serious chance of carrying Michigan, Wisconsin, or Minnesota, and analysts considered him likely, though not certain, to lose heavily contested Pennsylvania. It was a surprise on election night when he carried all of these states except Minnesota, which the Republican lost by the narrowest margin since native Minnesotan Walter Mondale carried it over Ronald Reagan in 1984 by 3,761 votes, 0.18 percent of the total vote that year.

Are similar Midwestern surprises in store this year? You might think so if you’re a Republican with an optimistic (or overoptimistic) temperament.

  • In Michigan, for example, three of four public polls conducted since October 18 show Republican John James cutting Stabenow’s margin to single-digits, and holding her barely over or slightly under 50 percent.
  • Similarly, in Michigan’s governor race, two of those polls show Republican Bill Schuette holding Democrat Gretchen Whitmer’s lead to 5 percent.
  • In sparingly polled Wisconsin, an early Marquette poll shows two-term incumbent Governor Scott Walker leading Democrat Troy Evers by 1 point. That’s the first survey showing Walker leading since June. Is that meaningful? Well, in Wisconsin’s 2016 Senate race, every poll but one (i.e., 30 of 31 polls) from February to November showed Republican Senator Ron Johnson behind the man he beat in 2010, Democrat Russ Feingold. But Johnson won 50 to 47 percent.
  • And from Ohio comes news of a poll showing Republican challenger Jim Renacci trailing Democratic Senator Sherrod Brown by only 6 percent. Renacci has been behind by at least 13 percent in the six earlier public polls.

Or consider some recent House polls in the Outstate Midwest (some districts include parts of million-plus metropolitan areas).

  • Kansas 2 (Emerson): Watkins (R) 48, Davis (D) 41.
  • Pennsylvania 10 (NYT/Siena): Perry (R) 49, Scott (D) 46.
  • Pennsylvania 7 (Morning Call): Wild (D) 48, Nothstein (R) 41
  • Iowa 3: Axne (NYT/Siena) (D) 43, Young (R) 41.
  • Illinois 13 (NYT/Siena): Davis (R) 46, Londergan (D) 41.
  • Minnesota 1 (NYT/Siena): Feehan (D) 47, Hagedorn (R) 45.
  • Pennsylvania 8 (NYT/Siena): Cartwright (D) 52, Chrin (R) 40.
  • Minnesota 8 (NYT/Siena): Stauber (R) 49, Radinovich (D) 34.
  • Pennsylvania 16 (NYT/Siena): Kelly (R) 50, DiNicola (D) 42.
  • Michigan 8 (Target): Bishop (R) 48, Slotkin (D) 45.
  • Michigan 8 (NYT/Siena): Bishop (R) 47, Slotkin (D) 44.
  • Nebraska 2 (NYT/Siena): Bacon (R) 51, Eastman (D) 42.
  • Iowa 1 (NYT/Siena): Finkenauer (D) 52, Blum (R) 37.
  • Wisconsin 1 (NYT/Siena): Steil (R) 50, Bryce (D) 44.

Am I cherry-picking? Yes, on the senator and governor races; aggregates of recent polls show Republicans doing worse than the numbers I cited.

On the House races, I’ve included all those in the Outstate Midwest reported by RealClearPolitics.com over the last nine days. Of the 13 congressional districts polled (two polls were in one district, Michigan 8), three are in districts currently held by Democrats (Minnesota 1, Minnesota 8, Pennsylvania 8). Republicans currently lead, sometimes by statistically insignificant margins, in nine of these polls, Democrats in five. That suggests a net gain of three seats for Democrats, which is consistent with their either winning or failing to win a House majority.

I continue to be fascinated by the way that votes in the Outstate Midwest turned out to be more favorable to Donald Trump and Republicans in 2016 than in other recent elections — or than the 2016 polling indicated (or was taken to be indicating). Current polling of course focuses on individual states and districts with seriously contested elections. But I would like to see, presumably after the election, an in-depth survey of opinion, across state lines, in the Outstate Midwest (with or without Pennsylvania).

It’s easy to ignore poll results for half a state, like Outstate Michigan or Wisconsin beyond metro Milwaukee and Madison, particularly because the margin of error for regions is so high. But if the Trump campaign, the Clinton campaign, and the major media organizations had conducted polls of the Outstate Midwest in 2016, they might have seen what was coming, and tried to hurry it along (the Trump campaign), slow it down (the Clinton campaign), or understand it better (those of us in the media). Particularly since there are signs the same factors are still in play (see this article on how canvassers in Michigan report that voters are still fixated on Trump).

Join the AEI Election Watch team on November 8 for lunch to discuss what happened and what it means. Click here for details.

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AEI Events Podcast: The new Italian government’s challenge to Europe - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Wed, 10/31/2018 - 17:52

On this episode of the AEI Events Podcast, experts gather at AEI to examine the challenges that the new Italian government poses for Europe and the eurozone’s future.

In June 2018, a self-proclaimed populist and antiestablishment government took office in Italy with the primary objective of renegotiating Italy’s relationship with Europe to put the country on a more rapid economic path. Join Alex Pollack, Carlo Bastasin, Desmond Lachman, Silvia Merler, Ashoka Mody, and Luigi Zingales as they review how consistent this new government’s policies are with the objectives of promoting economic growth, restoring public debt sustainability, and addressing the country’s banking sector weaknesses.

This event took place on October 3, 2018. 

Watch the full event here. 

Subscribe to the AEI Events Podcast on Apple Podcasts.

Oxycontin spreads in the UK - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Wed, 10/31/2018 - 17:26

Growing up in London I heard of folks, and then met some, who went to New York to shop, mainly for electronics and clothes. I was told that what cost a pound in the UK often cost a dollar in the US. As I started visiting the US I found this to be true for many goods. And remarkably it holds true when buying drugs from the street.

So far fentanyl is not as big a problem in the UK as it is in the US, but time will tell if the UK follows our lethal path too. Image via Twenty20

Many OECD countries are seeing a spike in ill-advised opioid use. The UK is no exception. But the illicit market may be growing indirectly because of sensible US policies. As the legal market in the US has started to dry up for prescription opioids like oxycontin, those selling these products are naturally looking for other outlets. And the UK is also a main conduit to the US from China for fentanyl and other opioid products. It seems as though more of the product is now staying in the UK.

Following my work on illegal sales through web pharmacies of non-analgesic medicines, I’m looking into the availability of opioids as well. The average price on the illegal market is about one pound per milligram oxycodone (it’s roughly $1/mg in US). The UK price is therefore higher at $1.4/mg of oxycontin.

So far fentanyl is not as big a problem in the UK as it is in the US, but time will tell if the UK follows this lethal path too.

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Why the Trump boomlet may soon fade - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Wed, 10/31/2018 - 16:00

“Why aren’t the Trump tax cuts working?”

That question might seem ridiculous to Republicans. After all, President Trump promised the 2017 Tax Cuts and Jobs Act would be “rocket fuel” for the American economy — and in a way, that’s what appears to have happened. U.S. economic growth has accelerated since the tax cut passed last December. And the past two quarters have shown the strongest half year of growth in four years despite rising interest rates, Trump’s trade tariffs, and an economic expansion that’s pretty old by historical standards.

I mean, #winning, amirite?

REUTERS/Joshua Roberts

Here’s the problem: The tax cuts aren’t working the way Republicans promised they would. And that means the Trump boomlet may soon fade, as many economists on Wall Street and in Washington expect.

The president’s biggest policy victory looks a lot like what Republicans in the past would have derided as “Keynesian stimulus.” More money in people’s pockets from the personal tax cuts has meant more disposable income, more consumer spending, and faster economic growth. Which is nice. But that splurge doesn’t change the underlying “supply-side” fundamentals of labor supply and productivity.

And anyway, all that is just supposed to be icing on the cake. The real and lasting benefit from the tax cuts — the one that really gets GOP hearts racing — is meant to come from the business side of the law. The new tax law slashed the federal corporate tax rate to 21 percent from 35 percent and temporarily allows companies to fully and immediately deduct the cost of some kinds of capital investment. The expected result: a business investment boom eventually leading to higher productivity growth and wages as workers are equipped with more and better capital equipment. (This is not a controversial theory.) If the economic upturn is going to be more than passing — and expensive, given much higher budget deficits — this mechanism has to kick in.

So far it hasn’t. The third-quarter GDP report out last Friday showed business investment decelerating, not strengthening. “Capital expenditures, the component of spending most purposefully targeted by policy, softened notably last quarter,” noted JPMorgan Chase. Barclays said, “the weak spot in today’s report was business fixed investment,” which “suggests that the corporate tax cuts have not induced much capital accumulation.” So, like, the opposite of what the GOP promised would be happening.

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Now Republicans should have a reasonable comeback at the ready: We never said the tax cuts would immediately alter the growth path of the $21 trillion economy. We never said corporate America would immediately start massively investing. Let’s give the tax cuts time to work, please.

Except Republicans pretty much promised the business tax cuts would have a sudden impact because the new tax law would encourage companies to bring back and invest trillions in foreign earnings held overseas to avoid the formerly sky-high U.S. corporate tax rate. “Over $4 [trillion], but close to $5 trillion, will be brought back into our country,” Trump said last August. (The actual amount of overseas cash was closer to $3 trillion, and even that overstated what could realistically return, but, you know, Trump.)

Instead, as many Democrats have been pointing out, companies have been mostly using that dough for stock buybacks or dividends rather than fresh investment. But the repatriation argument was always a politician’s argument, not an economist’s. Despite what many GOP pols and pundits predicted, moving money from a foreign subsidiary’s bank account to a parent company’s bank account was never going to be how the tax cut eventually boosted growth. Again, the lower tax rate and the expensing provision were supposed to be the real juice.

Of course, we could still see an investment boom. Totally possible. But Trump’s other big economic policy “achievement” — trade wars both threatened and actualized — may be working against it. A new survey of business economists found that nearly 80 percent of economists surveyed cut their growth forecasts because of trade concerns. In a September report, Goldman Sachs warned that in the short term, the main impact of the U.S.-China trade conflict would be “increased uncertainty … potentially causing firms to defer investment in manufacturing capacity.”

And don’t forget about those higher budget deficits from the tax cut, which economists on the left and right alike worry will drive up interest rates and crowd out private investment. If the tax cuts are perceived to be failing both politically and economically, Republicans have only themselves to blame.

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Trump may end up missing Merkel more than he realizes - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Wed, 10/31/2018 - 13:00

If ever the European and global economies needed strong and steady leadership, it has to be today. This makes Angela Merkel’s decision, following her party’s humiliating defeat in regional elections last Sunday, not to seek re-election as German chancellor in 2021 all the more regrettable.

Her pre-announced departure from the European political stage is not only bad news for Germany and Europe; it also constitutes an important setback for the global economy.

History is likely to look favorably on Merkel’s stewardship of the European economy. Under her careful leadership, the German economic recovery from the Great Recession of 2008-2009 has matched that of the United States.

Meanwhile, during the peak of the European sovereign debt crisis in 2012, she almost single-handedly kept the eurozone together.

She did so by getting Greece, Ireland, Portugal and Spain to all agree to adopt meaningful economic reforms while also convincing a reluctant German electorate of the need to provide financial support to the European economic periphery.

More recently, as the Trump administration has embraced an “American First” policy to international economic issues, Merkel has provided a strong and welcome voice for the maintenance of an open international economic order.

She has also got cooler heads to prevail in Europe’s ongoing difficult negotiations with the United Kingdom on its exit terms from the European Union.

The last thing that the global economy now needs is for Germany, the world’s third-largest economy, to stumble. This would seem to be especially the case at a time that global financial markets are wobbling, the world central banks are beginning to normalize their monetary policies, and China, the world’s second-largest economy, is slowing.

Sadly, it is difficult to see how, in the months ahead, Germany will avoid a prolonged period of political instability that might undermine investor confidence at home.

Indeed, it would seem that following the collapse in support for both the Christian Democratic Union and the Social Democrats at the recent regional election, the days of Germany’s Grand Coalition government are numbered.

Meanwhile, it would seem to be only a matter of time before the long knives are drawn and a bitter battle is engaged for the replacement of Merkel as chancellor.

It would also seem likely that with the rise of the far-right Alternative for Germany Party, Germany will become much more inward looking. As such, the country would be very much less likely to provide the leadership for an open international economic order that the world economy so desperately needs in the age of Trump.

Where Merkel’s strong and confident leadership is likely to be missed the most is in the handling of two existential threats that now face the European Union. The more immediate of these threats is Brexit, while the more serious of these threats is the simmering Italian budget crisis.

It’s regrettable that Merkel’s political star is waning just as the Brexit negotiations are approaching their March 2019 deadline. A weakened Merkel at this critical stage in the negotiations has to raise the chance that the United Kingdom will crash out of Europe without a deal. Should that occur, it would have serious consequences for both the United Kingdom and European economies.

More serious yet for both the European and global economies is the deepening Italian crisis. If the Greek sovereign debt crisis between 2010 and 2012 shook the European economy to its core, how much more so would a full-blown Italian debt crisis?

After all, Italy’s economy is around 10 times the size of Greece’s and, with a public debt of more than $2.5 trillion, it has the world’s third-largest sovereign debt market.

While the euro could survive if Greece were to leave, the same cannot be said of Italy, the eurozone’s third-largest economy. This has to raise the crucial question as to whether Merkel’s successor will have the political skill to defuse an Italian debt crisis.

President Trump has not hidden his dislike for Merkel and will no doubt be pleased to see her leave the international stage. However, he should be careful what he wishes for.

If the European economy were to become unstuck and suffer a banking crisis as it lost its steady hand at the helm, the U.S. economy could get hit hard. It could do so in much the same way as the European economy was shocked by the 2008 Lehman bankruptcy in the United States.

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.

Halloween: John Locke vs the zombie apocalypse | In 60 Seconds - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Wed, 10/31/2018 - 12:00

It happens all the time in zombie fiction: The heroes kill the zombies even when the zombies aren’t an immediate threat. So is it okay to preemptively kill a zombie? AEI’s Jonah Goldberg turns to philosopher John Locke for the answer to the question that has surely plagued the consciences of generations of zombie hunters.

The Pittsburgh massacre wasn’t Trump’s fault, but he’s not helping - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Wed, 10/31/2018 - 10:30

The debate over whether or not President Trump encouraged the man who set out to slaughter Jews at the Tree of Life Synagogue in Pittsburgh really isn’t a debate at all. It’s a shouting match.

“Yes, he did!”

“No, he didn’t!”

And it will likely only make things worse, as each side grows increasingly deaf to its own heated rhetoric and ever more furious at the other’s.

Here’s a better question: Is Trump helping?

The answer is obviously no — and that’s bad enough.

Let us stipulate that the pro-Israel father of Ivanka Trump, who converted to Judaism when she married Jared Kushner, is not “literally Hitler.” But let’s also stipulate that there’s something about Trump and his MAGA nationalism that’s been, and remains, very attractive to bigots. This doesn’t mean that everyone who jumped aboard the Trump train is a bigot. Far from it. But it is simply true that some who did are bigots, and Trump and his team have been dismayingly unconcerned about this fact.

President Donald Trump and first lady Melania Trump stand with Rabbi Jeffrey Myers as they place stones on a Star of David at a makeshift memorial outside the Tree of Life synagogue in the wake of the shooting at the synagogue where 11 people were killed and six people were wounded in Pittsburgh, Pennsylvania, October 30, 2018. Reuters

I have some personal experience here. When the alt-right rallied to Trump starting in 2015, I was one of their targets. I was besieged with anti-Semitic filth. I ranked sixth on the Anti-Defamation League’s list of targeted Jewish journalists. Once, when I mentioned that my brother had died, I was pelted with “jokes” asking if he’d been turned into soap or a lampshade.

While the attacks shocked me, I was more dismayed by how little many fellow conservatives seemed to care about the entire phenomenon. This was back when Steve Bannon — later the Trump campaign’s CEO and eventually the president’s senior adviser — still wanted Breitbart.com to be a “platform” for the alt-right.

The best defense of Trump at the time was ignorance and, ironically, bigotry — toward Republicans. A lifelong New York Democrat, Trump had no real understanding of what traditional conservatives and Republicans believed. In 2000, when he vied for the Reform party’s presidential nomination, he said he was trying to keep bigots from taking over the party. “He’s obviously been having a love affair with Adolf Hitler,” Trump said of opponent Patrick Buchanan. Trump’s dream running mate: Oprah.

In 2016, after years of cultivating support for his birtherism, Trump still believed many of the liberal stereotypes of the GOP as a hothouse of bigotry. That’s why he struggled to repudiate David Duke and let Putin’s and the alt-right’s racist troll armies fight in his name. Trump thought he needed them.

Trump is even more ignorant about how to be presidential. He’s the first president who doesn’t even know how to pretend to be a unifying figure, at least for longer than it takes to read a statement. Instead, he’s enraptured by the rapture of his base, feeding them red meat, dog whistles, and cultural wedge issues — anything to keep all of the attention, negative or positive, on him. He often says it would be “so easy to be presidential” but, as he said at a Pennsylvania rally in March, “You’d all be out of here right now, you’d be so bored.” Why try to unify the country if the price is a little less applause and attention?

This dynamic has had a transformative effect on Trump, his base — and his opponents. Trump long resisted calling himself a “nationalist,” fearing it was kooky Bannon stuff. Now he embraces it, heedless of its implications to others not already on his team. The media has gone from being biased (it is), to being “fake” (it’s not), to being the “enemy of the people” and tantamount to a fifth column.

Many in the Trumpified right-wing media amplify and reinforce all of this because they, too, are addicted to the same base.

Amid the mail-bomb scare last week Trump tweeted about how unfair it is that CNN can criticize him “yet when I criticize them they go wild and scream, ‘It’s just not Presidential!’” The false equivalence is lost on him and on his biggest defenders. CNN isn’t the president. It’s in a different lane. And while some of its coverage is worthy of criticism, it isn’t — or shouldn’t be — a warrant for Trump to leave his lane.

I don’t think Trump deliberately encouraged the slaughter in Pittsburgh. But every day he fuels a sense of chaos, a feeling that none of the norms or rules apply anymore. And that is bad enough. It certainly isn’t helping. The president is supposed to at least try.

Overcoming Lifeline’s paternalism to empower low-income consumers - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Wed, 10/31/2018 - 10:00

Over the past several years, the Federal Communications Commission has brought sweeping changes to Lifeline, the telecommunications aid program for low-income households. These changes are designed to shift the program’s focus from telephone service to broadband service. Although few would question the need to narrow the digital divide, many (including me) have criticized the way the commission has chosen to do so. This blog post focuses on one oft-overlooked aspect of the Lifeline transition: the paternalism inherent in the decision to phase out voice-only service as an option for Lifeline recipients.

via Twenty20.

Lifeline and voice service: A complicated, messy breakup

Traditionally, Lifeline offered a $9.25 monthly subsidy toward the telephone bills of eligible households. This subsidy can be used toward landline or, since 2008, wireless voice service. Recognizing that “the internet has become a prerequisite to full and meaningful participation in society,” a 2016 order allowed Lifeline recipients to use their subsidy toward a purchase of broadband instead of voice service. It also established a gradual phase out of the voice subsidy:  Beginning in December 2019, recipients on voice-only plans will receive only $7.25 monthly, and that figure will fall to $5.25 per month in December 2020. On December 1, 2021, the program will no longer support voice-only service: Lifeline-eligible plans can include voice service only if they also include broadband service as well.

The commission’s decision to expand low-income aid to broadband access makes sense. As more of our daily activities move online, an increasing number of low-income households are at risk of being left on the wrong side of the digital divide. While I’ve questioned whether $9.25 monthly is enough to help these families get online, expanding into broadband is unquestionably a pro-consumer move, as it increases the number of options available for Lifeline-eligible households to meet their telecommunications needs.

Unfortunately, the phaseout of voice-only plans has the opposite effect: It decreases consumer choice and may ultimately reduce the effectiveness of the Lifeline program. The existing Lifeline support for voice service is incredibly popular among Lifeline families, in part because wireless companies (who receive up to 85 percent of Lifeline disbursements) have figured out how to offer Lifeline-eligible voice plans at little or no out-of-pocket cost to eligible households. Replacing this stand-alone voice service with a presumably more expensive bundled voice/broadband offering, while holding the amount of the subsidy constant, is likely to increase consumers’ out-of-pocket costs and may reduce Lifeline participation rates.

The phaseout of voice-only service reflects the commission’s view that low-income households should look forward to broadband networks, rather than backward to telephone networks, to meet their telecommunications needs. While the agency is free to decide which platforms are worth subsidizing, this paternalism does a disservice to low-income consumers.

A recent Pew Research Center study on broadband adoption found that a majority of households that have never purchased broadband access say they are unlikely to do so at any price. One can imagine a variety of potential consumer profiles within this group — for example, impoverished senior citizens who lack interest in internet access but who value basic mobile telephone service to communicate easily with family and friends, or families with little disposable income that cannot afford to pay the out-of-pocket component for a discounted broadband plan but appreciate Lifeline’s offer of a free wireless voice plan for basic communication and emergencies. The imposition of one-size-fits-all broadband standards on Lifeline recipients fails to meet the needs of these niche populations within the Lifeline community.

Empowering low-income consumers

The overarching goal of the low-income subsidy should be consumer empowerment. The primary difficulty facing low-income consumers is lack of purchasing power. The subsidy should narrow the purchasing power gap while preserving, as much as possible, the ability to choose among a variety of options in the telecommunications marketplace. To achieve this goal, any subsidy should be competitively neutral, direct, and portable. Indeed, the Obama administration recommended that Lifeline adopt these principles to “ensure that low-income Americans can seize the opportunities of the Digital Age.” A more market-based approach would improve competition by increasing the base of consumers for whom companies compete while avoiding the paternalism of the current reform’s one-size-fits-all approach.

I have suggested that one solution could be a voucher issued directly to eligible households, set at an amount sufficient to make a basic broadband plan affordable, but which the household could use toward a subsidized basic broadband plan, or to cover all or nearly all of the cost of a (presumably less expensive) voice-only plan, or as a credit toward a larger package of telecommunications services. TracFone, a leading Lifeline service provider, made a similar proposal to the commission last month, suggesting that Lifeline offer a certain number of “units” that Lifeline recipients can use to purchase voice minutes, broadband data, or a combination of the two. Both proposals get at the same purpose: to give low-income consumers options and allow them to choose a plan that best fits their needs — needs that may differ from household to household.

The 2016 order slowly squeezes Lifeline households into a small subset of plans that the agency has deemed appropriate. As the commission has noted in other contexts, this effort to pick winners and losers can distort competition. It also risks squeezing households whose needs are not well met by the set of options the commission has chosen out of the program. The commission should instead recognize that the best way to serve low-income households is to give them the means to participate fully in the telecommunications marketplace and trust them to choose which options best suit their needs.

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Ep. 117: Adrian Wooldrige on ‘Capitalism in America: A History’ — Political Economy with James Pethokoukis - Ep. 117: Adrian Wooldrige on 'Capitalism in America: A History' - Political Economy with James Pethokoukis - AEI

Tue, 10/30/2018 - 20:30

Imagine the elites of China, Turkey, Britain, and all the other great powers of the day meeting in Davos in 1600 to discuss who among them would emerge as the world’s greatest economic power over the next few centuries. None would have even considered North America, and yet it is the United States that today produces the plurality of world GDP with less than 5 percent of the world’s population. How did that happen? In the excellent new book “Capitalism in America: A History” Alan Greenspan and Adrian Wooldridge provide the answer.

Adrian recently joined me on the show to discuss his book, American and world economic history more broadly, and the lessons voters and policymakers should draw today. Adrian Wooldridge is the political editor and Bagehot columnist at The Economist and the author of “Measuring the Mind: Education and Psychology in England, 1860–1990.” You can follow him on Twitter @adwooldridge.

You can download the episode by clicking the link above, and don’t forget to subscribe to my podcast on iTunes or Stitcher. Tell your friends, leave a review

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The most high-stakes midterm election in recent memory - Ep. 117: Adrian Wooldrige on 'Capitalism in America: A History' - Political Economy with James Pethokoukis - AEI

Tue, 10/30/2018 - 18:36

One week out and the uncertainties in the election are many, although the fundamentals are still, well, fundamental. Tops on the uncertainty front? The horrible series of events of the past week, which could mean more unforeseen events in the coming week. And those could cut either way.

We do know Donald Trump is trying desperately to dominate and change the frame of the election to his go-to issue, immigration. The jarring PR stunt of sending thousands of American troops to the Mexican border to block a caravan that is almost 1,000 miles away, consisting largely of women and children fleeing gun violence in Honduras and seeking asylum in the United States (something protected under international law), is the major sign; the declaration that he will flout the 14th Amendment of the Constitution and ban birthright citizenship is another. No doubt there will be more. His efforts have been reinforced by House Republican leaders like Kevin McCarthy and Paul Ryan (via his SuperPac) and by many candidates.

US House Minority Leader Nancy Pelosi (D-CA) leads Democratic members of Congress, including Senate Minority Leader Chuck Schumer (D-NY) (L), during their “Better Deal” platform rally at the US Capitol in Washington, US May 21, 2018. REUTERS/Jonathan Ernst

Those efforts, amplified by Fox and talk radio warnings of pestilence and crime by the caravan, could make a difference in turnout in red states and districts. But the Democrats’ substantial funding, and continued focus on health care and pre-existing conditions, along with the evidence in approval ratings that Trump’s response to the Florida bomb scares has hurt him, leave Democrats in a strong position to win a majority in the House. David Wasserman of the Cook Political Report, perhaps the best analyst of House elections at both micro and macro levels, notes that there are a stunning 99 House seats in some level of play, far more than there were in 2014, the last wave midterm. And at the micro level, if Democrats simply split the seats that are in the tossup category — which, given past waves, would be a deeply disappointing outcome for them — they would still have a majority.

The Senate, of course, is a different matter. Here, the Trump and Republican efforts to gin up turnout could make a difference in several red states where Democratic incumbents are trying to hold on — places like North Dakota, Montana, Indiana, and Missouri, and in a state like Tennessee where Democrat Phil Bredesen is trying to take Republican Bob Corker’s open seat. Democrats still have chances to pick up red Senate seats in Nevada, Arizona, and Texas, where Ted Cruz’s lead appears to be shrinking some. And the hurricane on the Florida Panhandle, a Republican area, followed by another FEMA debacle, could add to Bill Nelson’s chances of retaining his seat. But the map suggests that Democrats are more likely to lose a seat or two net than to pick up a net gain.

Just as interesting and also quite important are the state races, both for governor and offices like secretary of state. Here, the map and numbers favor Democrats and the net gains could be substantial. The two gubernatorial contests being watched most closely, of course, are Florida and Georgia: African-American Tallahassee mayor Andrew Gillum and African-American longtime state legislative leader Stacey Abrams would make history if elected. In Georgia, the big question is whether Republican nominee Brian Kemp, the top election official in the state, can get away with blatant voter suppression aimed at African-Americans. The same question actually faced Kansas, where Republican Kris Kobach, the veteran Secretary of State chastised by the courts for voter suppression, has been repudiated by prominent Republicans like longtime Senator Nancy Landon Kassebaum. There, a tossup race has been muddied by election chicanery from Kobach allies.

Add in the substantial number of state legislative chambers either up for grabs, or where veto-proof majorities could be erased, and Election Day next Tuesday will have more interesting and important races at stake than any I can remember.

Join the AEI Election Watch team on November 8 for lunch to discuss what happened and what it means. Click here for details.

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A Space Force on the launch pad? - Ep. 117: Adrian Wooldrige on 'Capitalism in America: A History' - Political Economy with James Pethokoukis - AEI

Tue, 10/30/2018 - 18:04

Last week, Vice President Mike Pence addressed the fourth meeting of the National Space Council, a White House advisory group charged with making recommendations about America’s activities in space. This summer, President Trump called for the establishment of a new branch of the military, a US Space Force, to protect American interests there. Thus far, only a few pollsters have explored the public’s awareness of the plan and support for it.

To understand current attitudes, it helps to look at how Americans have viewed space exploration over time. In 1955, when Gallup asked Americans whether “men in rockets will be able to reach the moon” in the next 50 years, 38% said they would, but 51% said they would not. A few years later in 1961, 65% approved of the country’s attempt to send a man into space, while 20% disapproved.

Former astronaut Buzz Aldrin laughs at a joke told by President Donald Trump as President Trump addresses a meeting of the National Space Council in the East Room of the White House in Washington, June 18, 2018. Reuters

On the 40th anniversary of the moon landing in 2009, 58% of Americans told Gallup that the space program had “brought enough benefits to this country to justify its costs,” while 38% disagreed. In the poll, support for increasing or keeping space program spending at its present level was 60%, one of the lower readings on this question which Gallup asked for the first time in 1984. NASA got high marks from those Gallup surveyed; 58% said the agency was doing an excellent or good job.

Pew Research Center survey from 2018 found that 65% thought it was essential for NASA to continue to be involved in space exploration while a third felt private companies could ensure progress. Seventy-two percent also said it was essential for the US to continue to be a world leader in space exploration.

Except for momentous events such as the moon landing, the explosion of the Space Shuttle Challenger, or landing a robotic explorer on Mars, most Americans have been inattentive to news from NASA, and generally more supportive of space exploration than space expenditures.

This summary provides some context for a handful of new questions about President Trump’s proposal to create a Space Force. The Space Force would not be a part of NASA, but a sixth branch of the military. In a speech about it, Vice President Pence described space as “once peaceful and uncontested . . .  now crowded and adversarial.”

It isn’t clear how much attention Americans have paid to the activities or capabilities of our adversaries in space but at this point they don’t see them as an imminent threat. When asked how much of a threat a potential conflict in space was to our national security, 23% of registered voters in an early August online Morning Consult/Politico poll described it as major, 28% minor, and 23% not a threat. In an online Economist/YouGov poll, 10% said foreign countries’ space programs pose an immediate and serious threat to our space-based assets and 29% a somewhat serious threat. Twenty-three percent described their programs as a minor threat and 16% not a threat.

People aren’t very knowledgeable about the Space Force yet. In the Morning Consult poll, 30% of registered voters said they had seen, read, or heard nothing at all about it in the past two weeks and other 23% had heard not too much. Only 13% had heard a lot about it. In an Economist/YouGov poll, 26% had heard nothing about the administration’s plan to create a new branch of the armed forces called a Space Force.

Most polls thus far show more skepticism than support, with many people without an opinion at this time. In the Economist/YouGov poll, 38% agreed that the US needs a new branch of the military solely dedicated to protecting American space-based assets, while 42% disagreed. Thirty-six percent approved of a new Space Force and 42% disapproved. In an August CNN question, when people were told that the US assets in space are currently protected by the Air Force, 37% said the US should establish a new branch of the military designated to protect US space assets, but 55% said we should not. Another online survey of registered voters from the Hill TV and HarrisX that emphasized protecting US interests in space produced a different result: 57% approved of “creating a sixth branch of the military, the Space Force, which would be designed to protect U.S. interests and assets in space.”

Americans haven’t focused on President Trump’s proposal to create a Space Force, and different question wording pulls them in different directions. It is premature to know how their opinions will solidify.

Central American migrant caravan | In 60 Seconds - Ep. 117: Adrian Wooldrige on 'Capitalism in America: A History' - Political Economy with James Pethokoukis - AEI

Tue, 10/30/2018 - 17:55

AEI Visiting Fellow Roger Noriega argues that the Central American migrant caravan exploits desperate people and undermines US programs that help build a more secure and stable region.

The Italian economy is on a short fuse - Ep. 117: Adrian Wooldrige on 'Capitalism in America: A History' - Political Economy with James Pethokoukis - AEI

Tue, 10/30/2018 - 15:55

This morning’s dismal Italian GDP numbers are bound to complicate efforts to strike a compromise between Italy and the European Commission on that country’s difficult budget issue. This does not bode well for either the Italian or the global economies in the months immediately ahead.

According to data released for the third quarter of 2018, the Italian economy has again stagnated. This is a far cry from the 1.5 percent economic growth for 2019 on which the Italian draft budget has been premised. It is also an indication of how political uncertainty and rising interest rates are damaging the Italian economy. That in turn raises the real risk that Italy could experience its fourth economic recession in a decade.

Brussels is bound to take the weak Italian GDP numbers as a confirmation of its view that the Italian budget has been premised on highly unrealistic economic growth assumptions and that the country’s budget deficit is more likely to exceed 3 percent of GDP than turn out to be the 2.4 percent of GDP being projected by the Italian government. That in turn is bound to strengthen Brussels’ resolve not to approve the Italian budget. Rather Brussels is more than likely to insist that Italy must adopt additional austerity measures to keep its budget deficit and public debt under control.

For its part the Italian government is all too likely to view the weak GDP numbers as a validation of its view that the Italian economy is in urgent need of a fiscal stimulus. This makes it highly improbable that the Italian government will accede to Brussels’ demand that it revise its budget.  Rather, the Italian government will stick to its refrain that it was elected not to meet the demands from Brussels but to respond to the needs of its electorate.

Needless to add, a protracted standoff between Brussels and Rome over the budget issue is the last thing that a stagnating Italian economy now needs. This is especially the case considering the very high level of the country’s public debt to GDP ratio and the shaky condition of its banks which make faster economic growth of the essence.

Sadly, there is the all-too-real risk that renewed political uncertainty will cause Italian interest rates to rise further and its economy to slow. That in turn risks tipping the Italian economy into a downward spiral as more questions begin to be raised about the sustainability of Italy’s public debt, the soundness of the Italian banks, and the Italian government’s long-run commitment to the Euro. For which reason, for the sake of Italy and the global economy, one has to hope that somehow a compromise is found soon between Brussels and Rome on the Italian budget issue.

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Voters care less about education this year than reports suggest - Ep. 117: Adrian Wooldrige on 'Capitalism in America: A History' - Political Economy with James Pethokoukis - AEI

Tue, 10/30/2018 - 14:15

On the cusp of next week’s midterms, a slew of media outlets have suggested that education will play an outsized role in determining the results. “Education is a top issue in midterms,” an NPR headline announced recently. The Washington Post’s Valerie Strauss noted that while education has never been voters’ top priority, “things seem different this year.” A Time magazine article asserted that “All across America, public anger over education funding has scrambled the political map for November” and that education issues have “changed the face of the midterm elections.”

Thousands of teachers rally to demand higher pay and increased education spending in Raleigh, North Carolina, US, May 16, 2018. REUTERS/Marti Maguire

This hype is understandable, given the attention generated by this spring’s teacher strikes. The only problem? There’s little, other than journalists’ understandable enthusiasm for a fresh angle, to suggest that education will drive voter decisions — especially in a polarized election cycle dominated by anti-Trump sentiment, a humming economy, and the Kavanaugh aftermath. Indeed, the October 2018 Gallup poll found that voters ranked education as their 12th-most important issue, with just 2 percent naming education as the most important problem facing the country today.

Those numbers ought not to surprise; they’re par for the course. In the lead-up to the 2016 election, no more than 5 percent of voters identified education as the most important issue. In 2012, the figure was 4 percent, in 2008, 1 percent, and in 2004, 2 percent. Similarly, education’s ranking during that time period remained reasonably constant, hovering between the ninth and 15th most important issues to voters. If anything, in 2018, interest in education looks to be on the average-to-low side.

Look, these numbers make sense. People care deeply about their schools, but when choosing statewide officeholders or thinking about national issues, it turns out their votes are shaped more by debates over jobs, health care, and social value questions than by school spending levels. Now, it’s a safe bet that education will play a significant role in some gubernatorial and local races, but that’s a long ways from it “chang[ing] the face of the midterm elections.”

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The Femsplainers Podcast: Moms to the rescue - Ep. 117: Adrian Wooldrige on 'Capitalism in America: A History' - Political Economy with James Pethokoukis - AEI

Tue, 10/30/2018 - 14:10

The majority of Americans agree on gun control measures that will prevent massacres and respect the 2nd Amendment. Shannon Watts tells us why it will be mothers who will turn the tide in this deadly debate. Guest Femsplainer Meghan Cox Gurdon joins Danielle in this timely pre-election interview.

Trump’s defense buildup is as real as the wall - Ep. 117: Adrian Wooldrige on 'Capitalism in America: A History' - Political Economy with James Pethokoukis - AEI

Tue, 10/30/2018 - 13:04

It’s often reported that President Trump does not have the longest attention span. Apparently, that now applies to his pledge to a “great rebuilding of the Armed Forces” as well. After a goodly increase in defense spending this past year and another increase this coming year, the Pentagon has announced that at the instruction of Mick Mulvaney, the head of the Office of Management and Budget, that the White House wants the Defense Department budget now being prepared for Fiscal Year 2020 to be cut from the planned $733 billion to $700 billion.

US sailors maneuver a rigid-hull inflatable boat alongside the Arleigh Burke-class guided-missile destroyer USS Carney (DDG 64) while participating in visit, board, search and seizure (VBSS) training during Exercise Bright Star 2018 in the Mediterranean Sea 9/10/18. Department of Defense | Flickr

Now $700 billion sounds like a lot, and is a lot—until you start putting that number in context.

To start, as I wrote here just a few months ago, while the increase in defense spending was certainly welcome and needed—especially to address the crisis in readiness that was crippling the services—in inflation-adjusted dollars, the two-year increase left defense spending at just about what it had been in 2011. And it was that defense budget, and the forces it could support, that finally moved the Pentagon to admit in its January 2012 Defense Policy Guidance that the American military could no longer handle more than one major conflict at a time. In short, it could be dominant in one theater but not in two, a strategic step-back from what had been a constant in American military planning since World War II.

The Obama national security team was satisfied with this situation because it told itself that there were no threats on the European front, and that the plan was to wind down the U.S. military’s combat role in the Middle East and Afghanistan. Obviously, neither of those things still holds true—except that the American military remains basically the same size and, with a few exceptions, is still fielding the same equipment. Only now it’s even older.

It’s difficult, if not impossible, to see how this budget is consonant with the administration’s own national security and defense strategies that call for competing with revisionist powers China and Russia, maintaining the fight against Islamist terrorists, and dealing with the rogue regimes of Iran and North Korea. Needless to say, candidate Trump’s pledge to build a navy of 350 ships, field fighter fleet of 1,200 advanced fighters, and add tens of thousands to the Army and Marine Corps is now out of the question.

Of course, the Trump White House was never really serious about rebuilding the American military or, if they were, they were clueless about what it would require in resources. The president’s first attempt at a budget saw defense spending increase by a scant 3 percent. And while defense discretionary spending has been bumped up by $82 billion since 2017, the president’s own projections for subsequent budgets were to remain largely flat or, with inflation, slightly decline. This was even before the latest mandated reduction in planned spending.

At $700 billion, the Pentagon will be able, over the short term, to address some obvious readiness problems. But the answer to the question of how long it will be able to sustain that fix given operational rates and aging equipment is: not long at all. Moreover, this level of spending won’t allow the Pentagon to adequately address the problem of recapitalizing the military’s conventional and strategic forces.

Since the early 1990s, administration after administration has failed to replace planes, ships, vehicles, and strategic weapons at a pace necessary to keep the military’s forces equipped with effective, modern platforms and systems. First, it was the Cold War “peace dividend” and the “procurement holiday” of the 1990s; then it was the costs of the post-9/11 wars in Afghanistan and Iraq that drove spending toward operations and away from updating forces; and finally, it was the bipartisan suicide pact of the Budget Control Act that mandated such severe cuts to government discretionary spending that buying new equipment on the scale necessary was out of the question. And, now, with the current spending levels being put forward by the administration, it will be impossible to carry out what new procurement plans the individual services have just begun to put in place. Add in the costs of creating a new Space Force, putting missile defense programs on a more robust path, and the continuing need to bolster cyber and satellite defenses and one can’t imagine how this strategic circle is to be squared.

Many of the things that members of Congress complain about are tied to things that the president alone does. However, proposing and then authorizing budgets to fund the military is a product of the two political branches. Trump can only succeed in hollowing out the military’s capabilities if Congress agrees.

The country has been lucky that we’ve faced no near-peer military competitor in decades. For their reputation in the history books, both administration officials and members of the House and Senate better hope that this remains the case for years to come because the U.S. military is short of what it needs to confidently win a conflict today and appears headed toward an even riskier state in the decade ahead.

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More changes to Patent Office procedures will benefit patent owners further - Ep. 117: Adrian Wooldrige on 'Capitalism in America: A History' - Political Economy with James Pethokoukis - AEI

Tue, 10/30/2018 - 10:00

Andrei Iancu, the director of the US Patent and Trademark Office (USPTO), continues to make waves in the intellectual property world, most recently with last week’s announcement regarding claim amendments that will make life a bit easier for patent owners.

via Twenty20.

As explained in this space, the 2011 America Invents Act (AIA) established proceedings within the Patent Office enabling easier, cheaper, and faster challenges to patent validity before a newly constituted Patent Trial and Appeals Board (PTAB). Since those PTAB trials came into effect, tens of thousands of patent claims have been wiped out, prompting a backlash from the life sciences industry, universities and research institutions, and other sectors that rely heavily on patents.

One result of this backlash was Director Iancu’s decision to tighten Patent Office proceedings standards for “claim construction,” or the manner of translating patent claim language into plain English. As reported two weeks ago, those new tighter standards will take effect next month.

On the heels of this change, which Director Iancu discussed during his keynote address at AEI back in June, the Patent Office last week announced a new proposal to make it easier to amend claims during PTAB proceedings to avoid having them invalidated.

Currently, according to Iancu, only 10 percent of patent owners whose claims are challenged in Patent Office trials elect to amend their claims, and only 10 percent of those amendment motions are granted by the PTAB.

In remarks at the annual American Intellectual Property Law Association (AIPLA) meeting, Director Iancu noted that the “current amendment process in AIA proceedings is not working as intended,” citing a recent Federal Circuit Court of Appeals case declaring that “patent owners largely have been prevented from amending claims in the context of” PTAB trials. Iancu even entertained the possibility that “parties have simply stopped even trying to amend the claims because they see the effort as largely futile.”

Thus, he said, “in order to ensure balance, consistency and transparency, in order to increase confidence in the proceedings, and in order to make the patent system as a whole more effective, more efficient and more reliable,” the Patent Office will propose new rules to help “find a way to make this amendment process feasible and meaningful,” including by “allow[ing] the patent owner a meaningful opportunity to draft narrower claims.”

The specific proposal Iancu outlined would give patent owners six weeks to propose an amendment, after which the patent challenger would have another six weeks to oppose the amendment. The Patent Office would then issue a preliminary opinion on the proposed amendment within one month of the challenger’s opposition, thereby providing the patent owner one more opportunity to further revise the claims in a manner satisfactory to the USPTO (and a corresponding further opportunity for the challenger to oppose the further revisions).

Iancu believes that this new procedure will yield “more narrowly-tailored and focused claim amendments, and potential earlier resolution of the issues.” The proposal seems sensible, but a definitive assessment will have to await publication of the actual draft language.

Still, hailing “a new day at the PTAB!” (exclamation mark in the original prepared remarks), the director told the AIPLA conferees that “I firmly believe that this combination brings more balance to the proceedings, and better aligns them with the original intent of the AIA legislation.” Whether this proves true remains to be decided, but the new director deserves plaudits for his strenuous efforts to improve the process.

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Politicized law enforcement and the ExxonMobil white whale - Ep. 117: Adrian Wooldrige on 'Capitalism in America: A History' - Political Economy with James Pethokoukis - AEI

Mon, 10/29/2018 - 22:30

The latest lawsuit against ExxonMobil (EM), filed by Acting New York State Attorney General Barbara Underwood, is straightforward:

  • EM uses one general “proxy cost” for the costs of prospective greenhouse gas (GHG) policies averaged over the entire firm’s worldwide operations.
  • EM uses different GHG proxy costs for specific projects in particular locales.
  • Therefore, EM is misleading investors by maintaining, figuratively, two (or perhaps multiple) sets of books.

Got that? Underwood actually is arguing that EM should not concern itself — or its investors — with (1) the aggregate effect of GHG policies on prospective worldwide demand conditions for its energy products, and (2) the costs of the specific GHG policies applicable in given locations as it evaluates the business-case analytics of projects in particular nations. And by doing both, EM is engaged in “fraud.” This literally is like saying that a delivery company is engaged in fraud if it uses an average fuel cost for evaluation of its worldwide operations but a specific fuel price for evaluation of its costs in a specific nation with, say, high taxes on motor fuels.

A sign is seen at the entrance of the Exxonmobil Port Allen Lubricants Plant in Port Allen, Louisiana, November 6, 2015. Reuters

Underwood has made this “fraud” allegation in the context of New York’s Martin Act, which is aimed at material misrepresentations. Nowhere in her complaint does she point to an actual purported misrepresentation. Instead, the complaint continually offers arguments about appropriate accounting standards, without claiming that EM violated the actual accounting standards that now govern corporate bookkeeping.

Even if we assume solely for discussion purposes that those existing standards are inadequate or in need of reform: Is litigation the proper vehicle for that? Or would it not be better if a board charged with establishing such standards were to undertake that task in the context of public testimony by experts?

In a larger context, Underwood’s “fraud” stance is irrelevant in the context of investor behavior. Does she believe that investors as a class are stupid? The cost of GHG policies, whether as an international average or as estimated for given projects in specific locales, are useful for planning and for decisions on specific investments, but they are likely to be largely irrelevant for investors because there is no reason that marginal investors cannot see beyond them. Suppose that EM assumed a future GHG policy cost of $1 million per ton; would the market believe that? That is why EM’s choices among a high figure, a low figure, a single figure, or multiple ones in different contexts are irrelevant. No one is being “defrauded.”

Let us take a step back: Virtually every state attorney general sees in the mirror a future governor or senator or — even a president. Accordingly, Underwood is hardly the first state attorney general to perceive political benefits from pursuing EM. Before Underwood there was then-New York state Attorney General Eric Schneiderman, who for almost three years pursued EM, the great white whale of political pole climbing.

First, there was his argument that the firm had misled investors by downplaying the risks of anthropogenic climate change in order to prop up the value of its shares. In a nutshell, Schneiderman asserted that EM knew back in the 1970s that anthropogenic climate change was destined to create a future crisis. (That was unknown then and remains unknown today.)

Accordingly, Schneiderman argued, EM knew that the world will turn away from fossil fuels (nope) and therefore that it knowingly was overestimating the value of its fossil-fuel reserves. Schneiderman’s argument actually was worse than just summarized: Under clear regulations from the Securities and Exchange Commission, the value of reserves must be estimated using average oil prices for the previous year.

Schneiderman then tried to make the opposite argument. EM in its planning analyses used two different figures for the future cost of climate regulations: a public figure of $60 per ton of GHG for projects in the advanced economies, but only $40 in its internal analyses. In other words, EM, instead of trying to prop up its share value as asserted earlier, tried this time to put downward pressure on it. Well, which was it?

Note also that EM, like other private entities with large capital investments, is a long-lived entity with powerful incentives to protect its credibility. Underwood has not explained how EM benefits over the longer term by publishing false or multiple estimates of hypothetical future GHG costs. Even in the extreme case in which EM “knows” what future GHG policies will be, but has misled others, it would not be long before market participants understood that reality. Because those observers’ beliefs about future GHG policies would vary, there would be a statistical distribution of such beliefs. Market participants would know that EM might not be telling the truth, so the effect would be to shift the entire distribution of beliefs about EM’s value to the left. The market in effect would hedge against the possibility of being misled.

Future GHG policies and their costs are far less obvious than Underwood pretends. What is obvious is that she, like Schneiderman before, has decided to attack a firm that is not popular politically. That is not the way law enforcement is supposed to work in a constitutional republic governed by the rule of law. Instead of picking an unpopular target and then trying to find a way to convict it of something, prosecutors are supposed to wait until evidence emerges of an actual crime, after which sufficient evidence to demonstrate probable cause must be marshalled against a specific suspect, who then is afforded a legal presumption of innocence until convicted in a court of law governed by the rules of due process. That is how freedom is preserved, however unpopular the target. Down Underwood’s path lies a land called autocracy.

Benjamin Zycher is a resident scholar at the American Enterprise Institute

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