Powered by Drupal

American Enterprise Institute

Subscribe to American Enterprise Institute feed
American Enterprise Institute: Freedom, Opportunity, Enterprise
Updated: 12 min 2 sec ago

Testimony: Examining the Importance of Paid Family Leave to American Working Families - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Wed, 07/11/2018 - 20:19

Chairman Cassidy, Ranking Member Brown, and Members of the Committee. Thank you for the opportunity to discuss the importance of paid parental leave and how it might be provided in an affordable way via the Social Security program.

Today I wish to make four main points:

  • Paid parental leave can provide important health and educational benefits to children while enabling mothers to remain attached to their prior jobs, which can increase earnings substantially once the mother returns to work.
  • However, proposals to provide paid parental leave financed by employers, workers or the government each have potential disadvantages.
  • An alternate approach would allow new parents to claim a temporary Social Security benefit. To offset the cost of these benefits, parental leave beneficiaries would agree to a reduction in the value of their future Social Security retirement benefits, such as via an increase in their normal retirement age.
  • While every proposal has pros and cons, the Social Security parental leave proposal survives a number of objections raised against it. This idea deserves consideration by Congress as a way to help new parents devote additional time to their newborn children at a crucial stage of their children’s lives.

Read the full PDF.



The terrorists’ war on education - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Wed, 07/11/2018 - 19:58

Terrorists understand the pivotal role that education plays in winning hearts and minds. That is why terrorist groups often attack schools and are increasingly turning to education as a way to spread their message. In response, foreign aid donors need to openly acknowledge that education is at the forefront of efforts to counter terrorism and prevent violent extremism and — where appropriate — should design programs with this in mind.

Nobel laureate Malala Yousafzai speaks during an exclusive interview with Reuters in Maiduguri, Nigeria July 18, 2017. Reuters/Afolabi Sotunde

Western-style education and schools have long been a target for terrorist groups. The worst school attack happened in 2004, when Chechen rebels (men and women) held a school in the Russian city of Beslan hostage on the first day of the school year. After days of negotiation, the Russian government stormed the building. 186 children were killed. Attacks on educational institutions have skyrocketed since the Beslan attack — peaking at roughly 400 attempted attacks in 2014 before falling to around 250 attacks in 2016, according to the Global Terrorism Database.

The Taliban, which recently killed at least 10 people in an attack on the education department of Afghanistan’s Nangarhar province, has a long history of attacking schools. Malala Yousafzai, the Nobel Prize-winning educational activist, survived a Taliban assassination attempt that involved an ambush of her school bus.

Boko Haram, the local name for the Nigeria-based Islamist militant group Jama’atu Ahlis Sunna Lidda’awati wal-Jihad, loosely means “Western education is a sin”. The group has kidnapped hundreds of girls from their schools, most notably the 276 Chibok girls who spawned the #BringBackOurGirls movement. Once under Boko Haram’s control, schoolgirls are sold as slaves, forcibly married to fighters, or forced to cook, gather firewood, and otherwise support the group. The Islamic State has also used schools as recruiting grounds. In one instance, 12 students from a prestigious Sudanese university crossed into Turkey on their way to join the Islamic State.

From education to indoctrination

These chilling incidents demonstrate what Americans increasingly understand — that schools and children are easy targets for violent actors. But even more worrisome is that terrorist groups are now using education for their own purposes: radicalization, indoctrination, and control.

Palestinian textbooks have long been accused of fostering anti-Jewish and anti-Israel sentiment. But the Islamic State’s curriculum perhaps goes the furthest in actively indoctrinating children into violent extremism. While the Islamic State destroyed many schools, it operated schools in Iraq and Syria that taught math using textbooks featuring guns and bullets. Children educated by the Islamic State must now be reintegrated into regular schools — not only in Iraq and Syria, but also across Europe, Asia, Africa, and the Middle East — raising a host of concerns, including peer radicalization.

The international community knows how important education is in preventing the spread of violent extremism, but it struggles with policies to actively counter terrorists’ war on education. In FY 2016, the US Department of State and the US Agency for International Development spent a combined $856 million on foreign education programs. But research suggests that current US government-funded education programs have contradictory effects on terrorism, and can even increase support for political violence in high-risk countries like Somalia.

Terrorism’s toll on education is profound. Despite America’s investment of more than $759 million in Afghanistan’s schools since 2001, student attendance remains poor. But we should be even more worried that the Taliban are now welcoming the opening of schools in areas under their control. Foreign aid may build the schools, but those who control the classrooms win the hearts and minds.

Learn more:

China’s Global Investment: Neither the US nor the Belt and Road Initiative - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Wed, 07/11/2018 - 18:47

Compiled by AEI economist Derek Scissors, who studies Chinese and Asian economies and the ensuing economic trends, the China Global Investment Tracker (CGIT) is the only public record of China’s outward investment and construction. In the latest CGIT update and corresponding report, Scissors — who is the originator, chief researcher, analyst, and developer of the CGIT — analyzes China’s worldwide investment during the first half of 2018.

Among his key points:

  • China is investing much less in the US than it did just a year ago. It has never invested much in the Belt and Road. Yet China’s global investment spending remains healthy, with impressive diversification across countries and the reemergence of private firms.
  • Construction and engineering is considerable but unlikely to expand much, as the projects drain China’s foreign reserves. Construction in the Belt and Road Initiative alone is rising because the number of countries is rising, not because China is more active.
  • The US is about to change its investment review framework with new legislation. This is a step forward, but problems remain. Implementing the new framework will be complex — a problem for foreign investment which thrives on certainty. The Committee on Foreign Investment in the United States must also have both more and highly capable staff or reform will prove meaningless.

Read the full report here.

In addition to this report, Scissors will testify today at 2pm before the House Committee on Foreign Affairs on China’s Predatory Trade and Investment Strategy. Watch his live testimony here.

To arrange an interview with Derek Scissors, please contact AEI Media Services at mediaservices@aei.org or 202.862.5829.

TESTIMONY: China’s Global Investment: Neither the US nor Belt and Road - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Wed, 07/11/2018 - 18:00

The following testimony was originally presented before the House Committee on Foreign Affairs Subcommittee on Terrorism, Nonproliferation, and Trade hearing on China’s Predatory Trade and Investment Strategy.

Download the full testimony. 



China’s Global Investment: Neither the US nor Belt and Road - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Wed, 07/11/2018 - 18:00

Key Points

  • China is investing much less in the US than it did just a year ago. It has never invested much in the Belt and Road. Yet China’s global investment spending remains healthy, with impressive diversification across countries and the reemergence of private firms.
  • Construction and engineering is considerable but unlikely to expand much, as the projects drain China’s foreign reserves. Construction in the Belt and Road alone is rising because the number of countries is rising, not because China is more active.
  • The US is about to change its investment review framework with new legislation. This is a step forward, but problems remain. The new framework appears complex while foreign investment thrives on certainty. The Committee on Foreign Investment in the United States must be properly resourced or reform will prove meaningless.

Read the full PDF.



Introduction

American headlines stress coming restrictions on Chinese activity in the US. Global headlines stress transformation wrought by the Belt and Road Initiative.1 Actual measurement shows China has not invested heavily in the US since early 2017 and never invested heavily in the Belt and Road (BRI).

Several large transactions have driven China’s 2018 outbound investment, featuring a $9 billion transport play in Germany, plus a series of health care acquisitions. The top five investment targets in 2018 to date sit on five different continents. China’s overseas spending habits are more diverse than many observers believe.

The China Global Investment Tracker (CGIT) from the American Enterprise Institute is the only fully public record of China’s outbound investment and construction.2 Rather than presenting only totals or a map, all 3,000 transactions are profiled in a public data set. The CGIT estimates the number of investments in the first half of 2018 dropped 15 percent from the first half of 2017. Based on the number of transactions and total amount spent, the first half of 2018 strongly resembles the first half of 2015, before the pace of capital exit first soared and then was curbed by Beijing.

There are encouraging signs. Transport, energy, and metals investment led in the first half but, contrary to Beijing’s insistence, entertainment and real estate are not dead. Perhaps the single best development is private Chinese firms are spending again this year. While the raw quantity is lower, the private share of investment is back to its 2016 level. If 2018 continues to follow the pattern of 2015, total investment volume will be in the $115–$130 billion range for the year. Another $1 trillion globally could be added by the end of 2024.

Investment by the People’s Republic of China (PRC) is often conflated with construction of rail lines, power plants, and so forth. Construction does not involve ownership, as investment does. Since 2005, there are more construction contracts worth $100 million or more than investments, though the average construction deal is smaller. In the first half of 2018, the PRC initiated at least one large construction contract in over 40 countries, chiefly in energy and transport.

Chinese engineering and construction is the core of the BRI. Using the latest, 76-member version of the BRI for the largest possible size,3 the BRI accounts for over 60 percent of Chinese overseas construction since its inauguration in the fall of 2013, with that pace holding in 2017–18. On this tally, in not quite five years, BRI construction has been worth more than $250 billion. In contrast, the current set of BRI countries accounts for less than 25 percent of the PRC’s outbound investment over the period, a bit more than $150 billion total.

BRI investment weakness is especially troubling for Beijing because the preferred location for Chinese companies is closing off. The PRC’s investment in the US exceeded $50 billion in 2016, fell by more than half in 2017, and was only $4.5 billion in the first half of 2018. Congress has been crafting legislation to tighten oversight of Chinese ventures since the 2016 surge,4 but there is less and less to oversee. Chinese enterprises exist at the sufferance of the Communist Party and must be treated accordingly. The American goal should be to do so yet still offer clear, stable policies to welcome investment when national security is not involved.

Read the full report.

Notes

  1. CNN, “China’s New World Order,” May 2017, http://www.cnn.com/interactive/2017/05/world/chinas-new-world-order/.
  2. American Enterprise Institute and Heritage Foundation, “China Global Investment Tracker,” https://www.aei.org/china-global-investment-tracker/.
  3. Belt and Road Portal, accessed July 8, 2018, https://eng.yidaiyilu.gov.cn/info/iList.jsp?cat_id=10076.
  4. Financial Services Committee, “House Passes Foreign Investment Reform Bill,” press release, June 26, 2018, https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=403695.

AEI’s Andrew Biggs examines the impact of paid family leave on American working families and the financing of the program - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Wed, 07/11/2018 - 17:00

In testimony today at 3:00pm before the Senate Finance Subcommittee on Social Security, Pensions, and Family Policy, AEI Resident Scholar Andrew Biggs, who was the former principal deputy commissioner of the Social Security Administration, will discuss the importance of paid parental leave and how it could be provided affordably through the Social Security program.

He makes four main points surrounding the paid parental leave debate:

  •  Paid parental leave can provide important health and educational benefits to children while enabling mothers to keep their prior jobs, which can increase earnings substantially once the mother returns to work.

  •  However, current proposals to provide paid parental leave financed by employers, workers, or the government have potential disadvantages.

  • An alternate approach would allow new parents to claim a temporary Social Security benefit. To offset the cost of these benefits, parental leave beneficiaries would agree to a reduction in the value of their future Social Security retirement benefits: for example, an increase in their normal retirement age.

  • While every proposal has pros and cons, the Social Security parental leave proposal survives a number of objections raised against it. This idea deserves consideration by Congress as a way to help new parents devote additional time to their newborn children at a crucial stage of their lives.

Read the full testimony here.

To arrange an interview, please contact AEI Media Services at mediaservices@aei.org or 202.862.5829.

Judge Brett Kavanuagh and Paul Gigot discuss the Supreme Court, power, policy, and self-government (2016) - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Wed, 07/11/2018 - 15:04

This episode of the AEI Events Podcast features a 2016 conversation between Wall Street Journal’s Paul Gigot and federal Judge Brett Kavanaugh on the role of judges and the Supreme Court in supporting the rule of law and preserving the separation of powers in the American system of government. Judge Kavanaugh maintains that the Court has a role to play in protecting Congress and the separation of powers: while it is Congress’ task to pass statutes and set boundaries for an agency’s action, the Court should police such boundaries when the agency seeks to work outside of them. This requires a careful balance to ensure that the Court does not interfere unduly with the proper operation of Congress or the executive branch.

The panelists comment that while Madison famously called the Court the “weakest branch,” today it often plays an outsized role in the political process. Activist judges who do not hold to the text of statutes or the Constitution can contribute to this phenomenon, but it also occurs when the other branches punt difficult political policy decisions to the Court for resolution.

This event took place on March 31, 2016.

Watch the full event here.

Subscribe to the AEI Events Podcast on Apple Podcasts.

How Congress can fix its trillion dollar accounting error - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Wed, 07/11/2018 - 14:22

Congress established the Joint Select Committee on Budget and Appropriations Process Reform in the Bipartisan Budget Act of 2018 to address the many flaws in current tax and spending procedures. Among the things that need fixing is the Federal Credit Reform Act (FCRA) of 1990, which artificially and systematically lowers the costs of the government’s credit assistance programs.

The federal government makes direct loans and issues loan guarantees to assist students, farmers, small businesses, and others. It also guarantees the mortgages of millions of homeowners directly through certain federal programs and indirectly through the backing of securities sold by Fannie Mae and Freddie Mac, which are now under full federal control. In providing this assistance, the government subsidizes loans through various mechanisms and takes on potential liabilities associated with loan defaults and other risks, while also receiving fees paid by banks and, in the case of direct loans, repayments from borrowers.

Twenty20.com

FCRA was enacted as part of the 1990 bipartisan budget agreement to improve the budgetary assessment of the government’s diverse and complex credit-related programs. Prior to 1990, Congress and the executive branch assigned costs and benefits to these programs using cash accounting, which provided a distorted view of their budgetary effects.

For instance, when the government issued guarantees for loans made by private sector banks, the federal budget would often show substantial initial savings from the issuance of the guarantees because the banks were required to pay up-front fees when loans were originated. The cost to the government of guaranteeing the loans was only recorded when payments were made to banks to cover losses associated with defaults. But these federal payments for loan defaults often took place many years after the loans originated and sometimes well beyond the five- or 10-year timeframe of the federal budget. Using cash accounting very often gave the misleading impression that issuing loan guarantees, even with lenient terms for the borrowers and the potential for large financial losses for the government, actually benefitted the federal budget.

By contrast, when the government lent money directly to borrowers, cash accounting made the transaction look artificially expensive. The government recorded the loan disbursement as an outlay and the repayments from borrowers as receipts, or negative outlays. For the many different types of loans with repayment periods beyond the timeframe of the budget, the initial outlay would far exceed the expected repayments occurring within the budget window, thus making the issuance of the direct loans look more expensive for the government than they really were.

FCRA was a major advance because it instituted accrual accounting for most credit programs. Under accrual accounting, the federal budget records the net subsidy cost of a direct loan or loan guarantee at the time the loan is originated based on the present value of all future financial flows from the transaction. Present value calculations use discount rates to assign a value in today’s terms to a receipt or a payment that is scheduled to occur in a future year. The purpose of accrual accounting is to capture the government’s all-in net exposure (or profit) after taking into account all of the disbursements and receipts. With accrual accounting, direct loan and loan guarantees get assessed using an identical methodology, which allows for a fairer comparison of the competing approaches. Further, using accrual accounting for credit programs allows for more useful comparisons with the budgetary costs of the government’s traditional spending programs.

The problem with FCRA is the requirement, written into the law, that the government use Treasury interest rates when discounting the value of future financial flows. The U.S. government pays very low interest rates on the money it borrows because investors view these debt instruments as essentially “risk free.” There is little prospect of default on U.S. government debt (despite the brinksmanship around debt ceilings) because the U.S. is the world’s richest country and the federal government has essentially unlimited capacity to tax U.S. citizens to pay back borrowed funds.

As the Congressional Budget Office (CBO) has explained on numerous occasions in recent years, a risk-free interest rate is the wrong one to use when discounting the financial flows of federal credit programs. When the federal government makes loans or issues loan guarantees, such as to students, it is taking on the risk associated with broad macroeconomic shifts that might affect the ability of borrowers to meet their payment obligations. Among other things, a prolonged recession and high unemployment would raise the number of loans in default. This risk — called market risk — is not included in the rates the government pays on the money it borrows in public markets. Rather, market rates are what private sector creditors demand when putting capital into investments that carry this risk.

Using Treasury rates instead of market rates to discount the payment flows of credit programs artificially lowers the costs of federal credit programs, which creates perverse results. Because students pay interest rates on direct loans that exceed the rates the Treasury pays on its bonds, the issuance of new direct loans and loan guarantees by the government appears to create profits rather than losses. Using the FCRA required methodology, CBO estimates that the student loan subsidy rate is -4.1 percent, which means the government records a $41 million negative outlay (or profit) when issuing $1 billion in new direct and guaranteed loans. If market rates were used instead of Treasury rates to discount the payment flows, the budget would record a cost of $161 million for every $1 billion in new direct and guaranteed loans.

Moving from Treasury to market rates to assess the government’s credit programs would substantially raise the government’s projected deficits over the coming decade. Using Treasury rates, CBO estimates that, in 2019, the government’s credit programs will make commitments that, in present value terms, will generate a profit of $37.4 billion. With market rates, the agency estimates that these same programs will generate a net loss for the government of $37.9 billion — a difference of $75.3 billion. Over the next decade, using market rates would likely add close to $1 trillion to the government’s projected budget deficit, which is already expected to exceed $12 trillion.

CBO is non-partisan and does not take positions on policy matters, but it does from time to time comment on technical questions related to the budget process. For several years, the agency has said FCRA should be amended to use market instead of Treasury rates as the basis for discounting the financial flows associated with credit programs. Academic experts in the field agree with CBO on this point.

Membership on the joint committee is split evenly between Republicans and Democrats, and the law stipulates that the committee can only advance recommendations that have majority support from both parties. Fixing this flaw in credit reform should be something both parties support. It is needed to ensure Congress is getting accurate information on the costs of programs that have the potential to create significant liabilities for future taxpayers.

Competition in tech (part 2): What is the nature of rivalry in tech? - Competition in tech (part 2): What is the nature of rivalry in tech?

Wed, 07/11/2018 - 10:00

Sometimes pundits and journalists worrying about tech companies’ supposed market power base their fretting on little more than bad analyses and name calling. Some just get their numbers wrong, and others fail to understand what the numbers mean. And the companies are called “cash-rich internet moguls” and “data barons,” as if the labels justify regulations or breakups.

Via Twenty20

In Part 1 of this series, I explained that understanding competition in tech requires answering three questions: Who really is in the tech space? Where do these companies experience competitive pressure? What is the nature of rivalry in digital markets? I addressed the first two questions in that blog. I now address the third question.

What is the standard method for assessing market competition?

The traditional view of competition is that it occurs in markets. For example, merger cases often hinge on identifying whether customers would be willing to change their buying practices to avoid a 5 to 10 percent price increase. If customers appear unwilling to shift purchases to another product, the product in question is considered to be in its own market. If customers are unwilling to go to a different physical location to obtain a substitute product, then these customers’ geographic area is also considered to be its own market. This is called the hypothetical monopolist test.

The hypothetical monopolist test is the state of the art in economics, but it has some problems. One is the cellophane fallacy, which derives its name from a mistake made a number of years ago: Economists and courts analyzing competition for food wrapping materials failed to understand that DuPont was a real functioning monopolist, so the test gave meaningless results.

How well does this standard approach work in tech?

The standard approach has numerous problems when applied to digital markets (using the term “markets” loosely). One is that companies have available to them a number of complex strategies in which price is only one of the moving parts. This was one of the snags in the Department of Justice’s case against AT&T-Time Warner: The argument against the merger relied upon a specific game theory model, and it was hard to prove that the industry participants actually behave according to it.

The rapidly changing nature of digital technologies also challenges the traditional approach. Constant change makes it hard, if not impossible, to gather enough valid data to measure product substitutability and other market features. Also, the winner-takes-(almost)-all nature of products with network effects means that static views of market shares are deceiving. Futhermore, in instances where companies believe that network effects and other synergies are intertemporal, rivalries don’t exist just over what customers do today but primarily over what customers will do tomorrow. And much of the competition is for consumers’ time and attention, meaning that services that appear very different — such as social media and internet search — are actually in direct competition.

How should rivalry be understood?

In addition to the standard product and geographic dimensions, rivalry should be examined along aspects of time, resources, and interrelations. Time matters because a company has no market power for the next generation of products — which are often emerging quickly and with great uncertainty — unless it controls an important resource that its rivals for the future will need. And the company has no power for today’s products if they are largely a prologue for tomorrow.

Related to the time issue is the rivalry in resources. Consumer time and attention are examples of sought-after resources. So are information, knowledge, and understanding, which today are being augmented with artificial intelligence. Companies accumulate these resources to launch what happens next. The companies that accumulate the most have an earned advantage over rivals. The advantage is earned and is beneficial to customers because the prospect of gaining the advantages gives companies a strong incentive to compete for the future.

Value chain is the traditional one-dimensional view of interrelations. Today’s firms in the tech space interrelate along threads that link with multiple companies and customer groups, and that evolve over time. Consider the multilateral competitive linkages illustrated in Figure 1 in Part 1 of this blog series, as well as the intertemporal rivalry that is occurring between network and edge providers, as illustrated in a previous blog.

How should governments react to this form of rivalry?

Given the complex nature of rivalry in the tech space, heavy burdens of proof should be placed on those proposing government fixes to perceived problems. It is unlikely that the advocates of intervention know enough about the rivalry system as it stands to clearly define an actual problem and possible solutions, and it is impossible to know the intertemporal aspects with any certainty.

The focus should be on unearned advantages. These generally take the form of government barriers to competition, such as favors done for particular companies or regulations that favor incumbents, including some of the emerging privacy regulations. The goal would be to undo the unearned advantages so that competition for today and tomorrow can flourish.

Learn more:

Why don’t teachers get fired for poor teaching? - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Tue, 07/10/2018 - 19:29

Last month, new research from Miami University’s Andrew Saultz found additional evidence that teachers are not usually dismissed for poor performance, but rather for not going through the mechanics of being a good employee. After analyzing 136 teacher dismissal cases in three large Atlanta-area districts — districts with tens of thousands of teachers — from 2011 to 2017, Saultz found that just four percent mentioned actual teaching practice as a primary reason for dismissal. Essentially, a very small fraction of teachers are dismissed in the first place, and of those who are, a small fraction are dismissed for poor teaching performance. Instead, Saultz found that teachers are more often terminated or non-renewed for issues of professionalism or illegal activity.

Via Twenty20

In Atlanta Public Schools, for example, just three of 92 cases directly mentioned teaching practice or evaluations. Meanwhile, more than three times as many teachers were dismissed for not having secured or maintained necessary training. Other cases mention teachers “fail[ing] to report to work during pre-planning days,” “us[ing] undue physical force with students (hitting, pinching, grabbing) with the intention of producing discomfort,” and “submi[tting] of questionable receipts and requests for reimbursement.” Even in cases that did mention teaching, ineffective teaching and poor evaluation ratings were mentioned after comments about outdated webpages, attendance at meetings, and untidy classrooms.

Of course, the idea that teachers are not fired for poor performance is not new. Back in 2009, The New Teacher Project’s “The Widget Effect” found that teachers were rated “Unsatisfactory” less than one percent of the time. In the wake of this, several states — including Georgia — adopted teacher-evaluation reforms aimed at obtaining a more accurate measurement of teacher effectiveness. However, recent research by Matt Kraft and Allison Gilmour found that despite these efforts, teachers still receive “Unsatisfactory” ratings less than one percent of the time.

To say that almost 100 percent of employees are effective at their jobs seems like wishful thinking — for any profession. In fact, teachers themselves freely acknowledge that many of their colleagues shouldn’t be teaching. As Public Agenda has pointed out, “Only 19% say there are no teachers in their building who ‘fail to do a good job and are simply going through the motions.’” We were both teachers, and would have been part of the 81 percent who could identify teachers like this. If teachers know that most schools retain teachers who fail to do a good job, how can these districts have so few dismissed for being ineffective?

Knowing that teachers are the most important school-level factor when it comes to student achievement, making sure good teachers are in classrooms — and bad teachers are not — is an especially important part of school leaders’ jobs. Saultz’s research reminds us that despite increased policy steps toward meaningful teacher evaluation, school systems still aren’t particularly effective at this. We can hope that they are actively counseling ineffective teachers out of the profession — using softer means than dismissal to remove them — but that hope is based in faith because there’s no data to reflect this.

Of course, removing teachers who don’t show up to work, physically abuse students, or don’t maintain required certification is important — but it’s not sufficient. Policymakers have to give school leaders the tools, and leaders need to use them, to identify and remove the teachers we know are out there failing to effectively perform the fundamental task they were hired to do.

Learn more:

President Trump heads to the NATO summit - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Tue, 07/10/2018 - 19:23

Tomorrow, world leaders will gather in Brussels for the 2018 NATO summit amidst increased uncertainty about the future of the alliance. President Trump has criticized fellow NATO members for not paying their fair share of defense spending, raising doubts about whether the US will remain loyal to the group. In a recent report, AEI Resident Scholar Gary J. Schmitt makes a case for NATO’s “unsung virtues,” arguing that the US does derive important benefits from the alliance.

Among Schmitt’s key points:

  • NATO has provided a public good that has assisted the democracies of Europe in advancing cooperative liberal efforts and institutions.
  • Security “free-riding” by allies is a perennial problem, but that irritant has to be set against the willingness of allies to offer diplomatic and military assistance when needed. It is a delicate balance that Washington and allied capitals must keep in mind but one that, in the past few years, is at risk of being forgotten.
  • NATO is an institution that has helped keep both sides of the Atlantic from backsliding into less-than-helpful, sometimes dangerous, historical patterns. But institutions and the norms they inculcate can and do break. And, once broken, like Humpty Dumpty, putting them back together can be nearly impossible.

To arrange an interview with a Gary J. Schmitt or another AEI scholar, please contact AEI Media Services at mediaservices@aei.org or 202.862.5829.

Judge Kavanaugh at AEI: his remarks and comments from AEI scholars - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Tue, 07/10/2018 - 18:00

Judge Brett Kavanaugh, US Circuit Judge of the United States Court of Appeals for the District of Columbia, who has been nominated to the Supreme Court by President Trump has spoken twice at AEI. On September 17, 2017 Kavanaugh delivered the Walter Berns Constitutional Day lecture on the constitutional statesmanship of Chief Justice Rehnquist – the video and transcript of the event can be found here. On March 31, 2016 he discussed the role of judges and the Supreme Court in preserving the rule of law and the separation of powers. The video of this event can be found here.

Sean Trende the Gerald F. Ford Visiting Fellow at AEI, has hailed Kavanaugh’s selection, predicting he could become the “intellectual leader” of conservatives on the bench.
His key points include:

  • [Kavanaugh’s] conservative credentials are nearly impeccable, and those concerned about his dissent in the Obamacare cases should remember Scalia joining Brennan’s opinion striking down flag-burning statutes. Additionally, he is, quite simply, one of the most brilliant individuals I have ever encountered.
  • I suspect that in two decades, constitutional law nerds would speak of the Kagan-Kavanaugh clashes with the same reverence my generation holds for the Brennan-Scalia battles.

AEI Resident Scholar Gary Schmitt also praised the selection:

  • “From a list of all-star judges, the President in picking Brett Kavanaugh for the Supreme Court has chosen the Mike Trout of jurisprudence. As his teaching and opinions have shown, he knows the law, case precedents, and the Constitution in all its original complexity.”

To arrange an interview with Sean Trende or Gary Schmitt, please contact AEI Media Services at mediaservices@aei.org or 202.862.5829.

Chart of the day: We’re not ‘losing’ $152B in trade with the EU, we’re benefiting from a $152B net inflow of goods - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Tue, 07/10/2018 - 17:58

According to foreign trade data from the Census Bureau, the US received $434.6 billion in goods produced by firms in the European Union (EU) countries last year, and the EU countries received $282.3 billion of goods produced by American firms. The result of those trade flows last year is that there was a net inflow of goods entering the US from the EU in the amount of $152.3 billion, or a net outflow of goods from the EU in that amount. We could also describe that outcome as a goods surplus of $152.3 billion for the US and a goods deficit of $152.3 billion for the EU. Measured in terms of who ended up with the greatest amount of goods on net, the US was clearly ahead of the EU with a $152.3 billion goods surplus.

But in the uninformed, upside-down world of the Protectionist-in-Chief Donald Trump, he describes America’s trade with the EU by claiming that “we lose $151 billion on trade with the European Union.” Seems like it should be the EU complaining that they “lose $152 billion worth of goods by trading with the US.” We enjoy a $152 billion net inflow of goods from the EU and Trump somehow thinks that is “losing” on trade? In the Deal Maker-in-Chief’s world, he apparently thinks it would be a better deal for the US to increase the volume of goods produced here that leave the country for the benefit and enjoyment of foreigners, and decrease the volume of goods produced overseas that enter the country for the benefit and enjoyment of Americans.

Here’s Milton Friedman schooling the Protectionist-in-Chief on the simple and basic economics of trade (bold added):

In the international trade area, the language is almost always about how we must export, and what’s really good is an industry that produces exports, and if we buy from abroad and import, that’s bad. But surely that’s upside-down. What we send abroad, we can’t eat, we can’t wear, we can’t use for our houses. The goods and services we send abroad, are goods and services not available to us. On the other hand, the goods and services we import, they provide us with TV sets we can watch, with automobiles we can drive, with all sorts of nice things for us to use.

The gain from foreign trade is what we import. What we export is a cost of getting those imports. And the proper objective for a nation as Adam Smith put it, is to arrange things so that we get as large a volume of imports as possible, for as small a volume of exports as possible.

This carries over to the terminology we use. When people talk about a favorable balance of trade, what is that term taken to mean? It’s taken to mean that we export more than we import. But from the point of our well-being, that’s an unfavorable balance. That means we’re sending out more goods and getting fewer in. Each of you in your private household would know better than that. You don’t regard it as a favorable balance, when you have to send out more goods to get fewer coming in. It’s favorable when you can get more by sending out less.

MP: As long as we have a protectionist president who has a fundamental misunderstanding of how trade works, we’ll continue to hear nonsensical rhetoric about how the US is “losing on trade with the EU and other countries,” when in fact it’s a basic economic principle that trade is win-win and not win-lose. And when you have such a protectionist “crafting” America’s trade policy, you can expect significant long-term economic damage to American workers and the US and world economies.

Kavanaugh resembles Roberts, but they’re hardly clones - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Tue, 07/10/2018 - 17:51

Judge Brett Kavanaugh’s confirmation hearings to be a Supreme Court justice will take place in the shadow of the nomination of John Roberts to be chief justice 13 years ago.

Roberts was confirmed on a 78-22 vote in 2005. That’s the most votes any justice has received for more than two decades. But some buyer’s remorse about Roberts has set in since then.

Supreme Court nominee Judge Brett Kavanaugh looks at President Donald Trump in the East Room of the White House in Washington, July 9, 2018. Reuters

His liberal critics think he hasn’t lived up to his promise to the Senate to “call balls and strikes” as a justice. They think that, with rare exceptions, he has instead been batting for the Republicans: voting to narrow affirmative action programs, weaken the Voting Rights Act, subject abortion to restrictions, deregulate campaign finance and so on.

The conservatives seize on a very big exception: Obamacare. In a 2012 case, all the court’s Democratic appointees voted to uphold the Affordable Care Act’s requirement that nearly everyone buy health insurance. All the court’s Republican appointees except for Roberts voted to strike down that requirement and with it the whole law. Roberts, as the fifth vote, split the difference.

The requirement, he ruled, was unconstitutional. But it could plausibly be reinterpreted as a tax on a person going without health insurance, and if it were so interpreted it was constitutional. If the court can plausibly interpret a law to make it constitutional, he explained further, it should. So Obamacare stayed.

The conventional wisdom on the right became that Roberts had lost his nerve, coming up with a clever rationalization to spare himself criticism from President Barack Obama and his allies. During the 2016 presidential campaign, both Republican Senator Ted Cruz of Texas and Donald Trump described Roberts as the kind of justice to avoid nominating.

Enter Judge Kavanaugh. He resembles Roberts in some respects. He is comfortably ensconced within the Republican establishment, specifically its Washington, D.C., division. The resemblance in affect was noted before, when Kavanaugh was up for confirmation to his current job. The Washington Post reported in 2006 that Kavanaugh “is widely described as brilliant, affable and disarming, attributes that prevented Democrats from successfully demonizing Roberts.”

After watching Roberts in action, though, Kavanaugh’s Republican-approved smoothness reads to the left like a stealthy way for a right-wing ideologue to get his way. And to portions of the right it seems like a sign that he won’t be a reliable ally when the chips are down.

While Trump was selecting a nominee to replace the retiring Anthony Kennedy and conservatives debated the possibilities, they scoured Kavanaugh’s records looking for evidence of this weakness. They found some rulings that concerned them — but they read them as critically as they did because they came to them with the fear of “another John Roberts.”

None of this is to say that Kavanaugh is going to have serious trouble getting confirmed. The concern about Kavanaugh on the right will not keep Republicans from closing ranks behind him now that he has been nominated. (It might make for subdued enthusiasm.) Senate Democratic leader Chuck Schumer says he will “oppose Judge Kavanaugh’s nomination with everything I have,” but he will find that he doesn’t have much as long as Republicans stay united.

Thus Kavanaugh seems likely to get on the Supreme Court — where, in a final irony, he could well be an obstacle to one of the chief justice’s major projects. When offered a choice between a narrow ruling with a broad majority and a broad ruling with a narrow majority, Roberts has tried to go for consensus and even unanimity. That hasn’t been Kavanaugh’s style as an appeals-court judge. He has written separate opinions more often than most judges, and sometimes has been chided by colleagues for reaching out to decide issues he didn’t have to decide.

Although Judge Kavanaugh has a lot in common with Chief Justice Roberts, in other words, he will have the chance to differentiate himself soon enough.

Surprise: There is no upside to Brexit - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Tue, 07/10/2018 - 16:08

The UK’s former foreign secretary Boris Johnson was right to note in his resignation letter that “the Brexit dream [was] dying.” But that is not Prime Minister Theresa May’s nor Brussels’ fault — nor is it a problem of “needless self-doubt,” as he put it. In reality, the dream of a great global future that supposedly waited just around the corner was always just that: a dream. The resignations of leading Brexiteers in the Cabinet, including the Secretary for Exiting the EU, David Davis, are acknowledgments that unlike referendum promises, the actual Brexit will be tedious and unrewarding.

Britain’s now former Foreign Secretary Boris Johnson and Secretary of State for Exiting the European Union David Davis attend the Conservative Party conference in Manchester, October 4, 2017. REUTERS/Hannah McKay

Shambolic as her leadership seems at times, Theresa May is an unsung Sisyphean hero of the story. Her job is to reconcile the irreconcilable: to give Westminster flexibility on trade and domestic regulation and ensure that new economic barriers are not erected between the UK and the EU; leave the single market to limit migration from the EU, yet somehow retain economic access to it; and to “retake control” of the UK’s border while preventing a hard border from emerging in Northern Ireland, which could compromise the peace process.

The “Chequers Agreement,” which Mrs. May’s Cabinet reached on Friday, (with Messrs. Johnson and Davis present) was as good an attempt to square the circle as any — even if it is hard to see in what ways its outcome would improve upon the status quo of the UK’s EU membership.

Neither is it clear with what reaction the proposal will be met in Brussels. The bloc’s negotiators, as well as governments of France and Germany, have been adamant, perhaps unreasonably so, about the indivisibility of the four freedoms of the single market: of movement of goods, services, capital, and labor. What makes the UK’s position so difficult is that it is trying to do the exact opposite and disentangle them. A realistic choice facing the UK over the next decade is between some form of membership in the single market, if not the EU, and a looser association provided by a deep and comprehensive free trade agreement, with the potential for economic disruption.

Mr. Johnson surely knew that his famous promise of having the cake and eating it was unworkable. Unsurprisingly, neither he nor any other hardline Leaver has proposed an alternative plan to the inherently unsatisfying Chequers Agreement. As Anne Applebaum notes in her excellent column, there just isn’t one:

Or, to be precise, there isn’t one that satisfies them, the Europeans, British business and British workers. There isn’t one that corresponds to the ludicrous promises they made. They cannot come up with something that, on the one hand, avoids any jurisdiction of European courts of any kind; avoids any payments into a European budget; avoids all membership in a European customs union and allows Britain to do trade deals with other countries; while, at the same time, keeps supply chains running smoothly; keeps the Irish border open; preserves tariff-free trade with Europe; and imposes no costs on anybody — and all of this by next October in order to leave the following March. It just cannot be done.

Of course, if the UK government decides to leave the EU without an agreement and sever all their ties to the continent, it can be done. But such an act of “retaking control” would come at a steep cost for the UK’s and the EU’s economies, for Western political unity, as well as for the UK’s clout in Europe and the world, not to speak of falling short of the lofty promises that British voters were given by Mr. Johnson and his ilk ahead of the referendum. One can only hope that such Brexiteers understand that their own political careers would not be served pushing the UK off that cliff in March next year and that they will instead let Mrs. May get on with her Sisyphean, unsatisfying task until a moment when the country is ready to move on.

Learn more:

Ignore emerging market economies at your peril - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Tue, 07/10/2018 - 14:24

Judging by U.S. policymakers’ seeming indifference to the emerging market economies in setting economic policy, one might be forgiven for thinking that those economies constitute a small part of the global economy. Yet, according to the International Monetary Fund, the emerging market economies now account for over half of the world economy. At the same time, their governments and their corporations are hugely indebted to the global financial system as they have never been before.

@LittleIvan via Twenty20

This has to make one think that the administration and the Federal Reserve are ignoring at their peril the adverse effect of monetary, fiscal and trade policies on the emerging market economies. This is particularly the case at a time when all too many of these larger economies like Argentina, Brazil, China, South Africa and Turkey face daunting economic challenges and considerable political uncertainty.

Should those economies falter as a result of U.S. policies, given their combined size, they could materially impact both the U.S. and the world’s economic and financial systems.

According to a Wall Street adage, when the winds are strong, even turkeys fly. By this is meant that when money is easily available in the global financial market, even borrowers with the weakest of economic fundamentals can borrow and thrive. However, once that liquidity dries up, the weakest borrowers come crashing down as they face difficulty in financing their deficits and in rolling over their debt.

This adage might have particular relevance for today’s emerging market economic outlook. This would seem to be particularly the case at a time when many years of ultra-easy global liquidity conditions are coming to an end and when those easy money conditions lulled emerging market policymakers to be very much less disciplined in their economic policies at home.

During the years when the world’s major central banks maintained extraordinarily low interest rates and expanded the combined size of their balance sheets by $10 trillion, the emerging market economies had little difficulty in tapping the international capital market.

Indeed, between 2008 and 2017, emerging market companies managed to increase their borrowing by $15 trillion. In the process, they more than doubled their overall indebtedness to a staggering $25 trillion. And they did so at very low interest rates that did not nearly compensate investors for the default risk associated with that borrowing.

Equally striking is the fact that last year, when global liquidity was still unusually ample, a country with as checkered a default record as Argentina could issue a 100-year bond on relatively favorable terms. Similarly, eyebrows might be raised by the fact that global investors eagerly snapped up sovereign bond issues by countries with as dubious economic and political fundamentals as Iraq, Kenya, Mongolia and Tajikistan.

Sadly, for the emerging market economies the strong winds of very easy global liquidity conditions are now rapidly dying. The Federal Reserve is now well on its way to normalizing interest rates and to reducing the size of its balance sheet. At the same time, the European Central Bank has announced that it will stop its quantitative easing program by year’s end.

Further clouding the emerging market outlook is the pursuit of an expansive fiscal policy by the Trump administration at this late stage in the U.S. economic cycle. By putting upward pressure on U.S. interest rates and the dollar, that fiscal policy reinforces the capital flow reversal from the emerging markets already being induced by the more attractive interest now on offer on U.S. Treasury issues.

The last thing that the emerging market economies now need is a slowing in the Chinese economy and a depreciation of its currency. Not only would that crimp demand for international commodities, which is the lifeblood of many emerging-market economies. It would also heighten the risk that China and the United States would drift further toward a full-scale trade and currency war that might derail the global economic recovery.

Yet, it is difficult to see how China can succeed in avoiding a slowing in its economy and a weakening in its currency as it tries to address its own domestic credit bubble of epic proportions. This would seem to be especially the case at a time when its economy is also being adversely affected by a very much more restrictive U.S. trade policy.

It is hoped the recent large movements in the currencies of Argentina, Brazil, China, South Africa and Turkey will alert policymakers to the fragility of the emerging market economies and to their importance for the U.S. economic outlook.

However, in light of the latest America First trade measures and of Chairman Jerome Powell’s recent pronouncements that the emerging market economies are not a factor in the Fed’s monetary policy decisions, I am not holding my breath for the emerging market economies to get any relief from U.S. economic policy decisions.

Judge Brett Kavanaugh on the constitutional statesmanship of Chief Justice William Rehnquist - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Tue, 07/10/2018 - 13:11

In this episode of the AEI Events Podcast, Judge Brett Kavanaugh of the US Court of Appeals, DC Circuit delivers the Walter Berns Annual Constitutional Day address at AEI. He argues that few justices in history have had as much impact as has William H. Rehnquist, the 16th chief justice of the Supreme Court. Serving the Supreme Court over 33 years, 15 as chief justice, Chief Justice Rehnquist was at the helm of major national events, presiding over the impeachment trial of President Bill Clinton and keeping the Court intact during perhaps the single-most controversial moment in Supreme Court history, Bush v. Gore.

This event took place on September 18, 2017.

Watch the full event here.

Subscribe to the AEI Events Podcast on Apple Podcasts.

Brexit disaster on the horizon - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Tue, 07/10/2018 - 13:10

With the resignations of Brexit Minister David Davis and Foreign Secretary Boris Johnson, Theresa May’s Prime Ministership is heading for the rocks. She has a more loyal cabinet now, but will it be able to discharge its duties?

Britain’s now former Foreign Secretary Boris Johnson and Secretary of State for Exiting the European Union David Davis attend the Conservative Party conference in Manchester, October 4, 2017. REUTERS/Hannah McKay

Brexit clouds everything in British politics and a tenable deal with the EU looks less and less likely. A divorce where one of the parties (the EU) doesn’t want the process to be smooth or the result to be fair, since it will simply encourage other members to leave, means failure was always likely.

I knew Davis when I lived in the UK. He was Science Minister and then Europe Minister in the John Major Government and would often pop by the Institute of Economic Affairs for chats with my IEA boss, John Blundell. They were best friends and their relationship gave me the opportunity to chat with him about science policy. Davis even wrote a foreword to one of my books on risk. He is a decent and pragmatic man, with strong opinions for sure, but a politician in the best sense.  He would have looked to compromise where possible while still keeping the point of Brexit alive. I felt while he was in the cabinet that there could be a successful Brexit if a deal could be done.

With no Brexiteers of any standing left in the cabinet, I doubt a positive deal is possible. If the Brexiteers put belief above party loyalty then we’re heading for a no confidence vote or a leadership contest soon. If they stay loyal to PM May then I expect a slow death of Brexit. Neither outcome is palatable.

Learn more:

Discussing the latest headlines: Brooks on Fox Business’ ‘Mornings With Maria Bartiromo’ - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Tue, 07/10/2018 - 12:38
AEI President and Beth and Ravenel Curry Chair in Free Enterprise Arthur Brooks discusses the latest headlines involving the NATO summit, Russia meeting, and the new Supreme Court nominee.

Is self-regulation an option for cryptocurrency exchanges? - Is self-regulation an option for cryptocurrency exchanges?

Tue, 07/10/2018 - 10:00

Amidst the ongoing volatility of cryptocurrency prices, questions have inevitably arisen about the extent to which users can trust that these currencies will constitute relatively stable stores for their valuable assets and that transactions will be comparatively free from malfeasant manipulation. With abundant evidence of price instability, and technical complexity obscuring understanding of how transactions take place for the vast majority of users, it is unsurprising that calls have been made for sovereign governments to regulate the operators and traders of cryptocurrencies, in the same manner that they regulate central banks, retail and investment banks, and stock exchanges.

Via REUTERS.

Fiat currencies are not perfect

It bears remembering that the institutional arrangements under which fiat currencies are created and traded are themselves far from perfect. “Regulations” seldom come with guarantees of improved performance. While “good” regulations are welcomed, “bad” regulations at best do no harm.

Furthermore, external regulations imposed by sovereign governments constitute only one of the forces disciplining these markets. As has been amply evidenced in studies of the emergence of early share markets in the eighteenth century and in the management of bank-issued currencies from the nineteenth, “self-governance” has frequently proved more effective at both identifying and correcting for imperfections than state intervention. Self-governance tools include internal rules applied by the market operators and the discipline exerted by those choosing (voluntarily) to trade on them.

Self-regulation as a credible first recourse

So long as alternatives exist, strong incentives are provided for those issuing currencies and operating the exchanges to address activities that decrease trust and therefore the attractiveness of their platforms to users, and for users to invest in information identifying those currencies and exchanges with stronger (more trustworthy) and weaker (less trustworthy) activities and governance arrangements. To the extent that there may be insufficient investment in the acquisition of this information, we have observed the emergence of specialist agencies (e.g. investment analysts) undertaking the requisite investigations, thereby contributing to both more informed actors and more efficient markets than would otherwise be the case. Indeed, the “public good” role of analyzing and publishing the results widely represents one of the most important — but largely unrecognized — activities of regulatory agencies.

It raises the question, in the world of cryptocurrencies, who is undertaking the essential analysis role?

Blockchain transparency aids self-regulation

Despite the newness of cryptocurrencies and their limited impact in world financial markets (the top 100 cryptocurrencies account for $265 billion by market capitalization, of which bitcoin accounts for nearly 43 percent), a body of analysis is already emerging from both financial analysis companies and academic institutions. A distinct advantage in analyzing cryptocurrencies over fiat currencies lies in the transparency of the transactions, which are contained in the widely distributed blockchain ledger. Consequently, it is feasible to trace all transactions into and out of publicly-identified addresses. In fiat currency, this would be the equivalent of being able to trace every transaction involving every coin or banknote issued and every dollar of debt raised under fractional reserve arrangements. While the identity of the transactors is unknown, the flows are all transparent to any observer, without the need for disclosure regulations.

For example, John Griffin and Amin Shams of the University of Texas have traced all transactions undertaken in bitcoin and Tether for the period March 1, 2017 to March 31, 2018. While it is not possible to ascertain the identity of individual transactors, the authors have used known addresses of major cryptocurrency exchanges to identify that the vast majority of transactions in this period have not been between individuals paying for goods and services but to and from currency exchanges. While flows of bitcoin are comparatively evenly distributed across a large number of exchanges, Tether flows are disproportionately directed via one exchange — Bitfinex, which appears to be itself dealing with a limited number of exchanges which also exhibit unusually large bilateral flows.  Furthermore, they find evidence of unusual trading between Tether and bitcoin that suggests the use of Tether to manipulate the price of bitcoin when its value relative to the US dollar is falling.

To the extent that such information has been both identified and made publicly available, then if it does indeed cause trust in specific cryptocurrencies and exchanges to fall, one could expect self-governance arrangements to respond to the information. Credible exchanges having every incentive to signal their activities to current and potential customers will seek to quarantine themselves from tainted exchanges and currencies. The tainted currencies and exchanges will lose support, and must either desist from the undesired activities or exit the market. If self-governance has been effective, then the same analysis run in a subsequent period will provide confirmation. Thus incentives exist for ongoing monitoring.

Implications for policy and regulation

Lessons from the history of regulation would suggest that rather than responding to populist calls to regulate cryptocurrencies and exchanges, policymakers and regulators might be better served by investing in more research into their operation and delaying intervention until evidence is provided of the failure of self-governance mechanisms to respond appropriately. Furthermore, it is beholden on those calling for action to acknowledge that the search for more information is indeed a responsible action within the wider processes of regulatory governance. There are far more subtle tools in a regulator’s toolkit than explicit intervention alone.

Learn more:

Pages