My letter from the Editorial Board of the Cayman Financial Review addresses the above and other American Government over reaches in the use of U.S. dollars abroad: Financial Review, April, 2016
I hope that you enjoy it.
My letter from the Editorial Board of the Cayman Financial Review addresses the above and other American Government over reaches in the use of U.S. dollars abroad: Financial Review, April, 2016
I hope that you enjoy it.
It is in our natures to serve our personal interests first and those of others second. The interests of others include not only those around us in need but also our children and future generations in general, which are served by far sighted policies that might entail short-run and immediate sacrifices. Communities and societies that have instilled in each generation the values that promote and serve such longer-run interests will flourish relative to those with more narrowly “selfish” values.
Adam Smith famously explained in The Wealth of Nations how an individual’s pursuit of his personal gain benefits society at large. In the marketplace the fruits of our labors enjoy the greatest profit the better they meet the desires and needs of our customers at the lowest possible cost. While we might like to cut corners and raise our prices if we could get away with it, competition in the market prevents us from doing so.
Free trade and the international agreements that promote it is an example of the trade off between personal and community or national interests that I am raising. The Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) will further extend the freedom to trade among the countries signing up to them while raising the standards for working conditions, intellectual property protection, and conflict resolution.
I began an article on free trade written a year and a half ago with: “World per capita income didn’t change much from the time of Christ to the founding of the United States ($444 to $650 in 1990 dollars), a period of 1,790 years. But in the following 320 years it jumped to $8,080. And about half of that jump came over the last 50 years. What explains this fairly recent explosion of well being? Many things, of course, but central to this explosion of wealth was trade.” free-markets-uber-alles As the most disheartening and distressing U.S. presidential campaign in my lifetime has made clear, the huge gains from freer trade as with the huge gains from technical advances have not been evenly shared thus highlighting the trade off between personal and community interests I am exploring.
We have long accepted that economic progress should not be stopped because it would make a particular set of skills or tools less valuable. When someone developed cheaper and better ways of providing us with music than the old 78 inch vinyl record—itself an amazing technological feat in its time—those producing the old records were forced to learn new skills. We should debate whether society (family, church, community governments, etc.) should help those adversely affected by technological progress and how best to do it, but few would want to prevent such progress from which almost everyone in the world has eventually benefited enormously.
Government, which represents an exercise of our collective will, is meant in part to give primacy to our concerns for the interests of others and/or the long run over our individual, immediate personal well being. The American constitution was all about trying to do that without the government becoming captive of the self-interest of those running it. Our natures, whether we operate as private individuals constrained by the market place or as public officials constrained by the law and a broadly agreed public purpose, remain a mix of self-interest and public interest. The fundamental difference between our behavior as private citizens or public servants is in the external constraints that impact our behavior. Our natures otherwise remain the same.
The power of government can be exploited to thwart the discipline of competitive markets on the dominance of self-interest over the common interest. Preventing government from being captured by the self-interest of those running it or those who seek special privileges from it is no easy task. To that end our constitution strictly limited what government could do (the enumerated powers) and encumbered it with checks and balances. The dangers of such capture posed by the military industrial complex of which President Eisenhower warned, is well known and real (e.g. $400 billion F-35 Joint Strike Fighter that few believe we need), but the same is true of most other intrusions of government into private affairs, such as all of our many wars (on drugs, terror, poverty, etc.) as well.
Sadly our government has expanded well beyond its necessary functions into every nook and cranny of our personal lives with increasingly pernicious and alarming results. The abuses of its ever-expanding powers for personal and partisan benefits are exemplified by the scandal of asset forfeiture,the-abuse-of-civil-forfeiture/, which alarmingly continues, the long and bipartisan history of political abuse of the IRS, irs-tea-party-political, and most recently the legal attack on companies questioning the climate change forecasts of the Intergovernmental Panel on Climate Change (IPCC) by the AGs United for Clean Power using the Racketeer Influenced and Corrupt Organizations (RICO) Act in an effort to silence criticisms of UN climate studies. prosecuting-climate-chaos-skeptics-with-rico. Such a blatant government attack on free speech is truly shocking. These are but a few examples of growing government tyranny and corruption.
The most effective defenses against such corruption are to limit the scope of government as much as possible (i.e. subject individual actions to the discipline of the market as much as possible) and to strengthen public insistence on adherence to the rule of generally applicable law. As trade has moved beyond the village and nation, so must the rule of law.
Following World War II the United States led the establishment of international arrangements and laws governing trade (WTO) and financial (IMF and WB) and diplomatic (UN, NATO) relations among nations. The U.S. was the natural leader of this globalized world not only because it had the largest economy and the largest military, but because it was generally respected for its commitment to the rule of law. More than any other country the U.S. was seen as committed to the longer run prosperity of the world above short run tactical benefits for itself.
In an April 12, 2016 interview by Steve Clemons in The Atlantic, U.S. Treasury Secretary Jacob Lew observed that “In the 21st century, the world needs the United States to be a North Star. The world wants us to be the North Star. I really do believe that. I am amazed at how other countries want to hear our advice and what we think makes sense. Sometimes we may have the habit of lecturing too much. We have to be careful not to do that.”
In recent years American leadership has been slipping. Rather than draw China more tightly into the global rule based trading system, we have pushed them away. After the United States convinced the IMF’s European members to accept a reduction in their share of votes in the IMF in order to bring the voting shares of China, India, and some other emerging economies more in line with their economic size, it took the U.S. Congress more than five years before it approved the amendments to the IMF Articles of Agreement needed to implement this agreement. In the mean time China set up its own international lending organization. US-leadership-and-the-Asian-Infrastructure-Investment-Bank
Rather than strengthen cooperative, diplomacy based relationships the U.S. has launched a series of generally failed wars to promote “democracy,” (Gulf War 1990-91, Somalia 1992-5, Haiti 1994-5, Bosnia 1994-5, Kosovo 1998-99, Afghanistan 2001 – to date, Iraq 2003-11, Libya 2011). These have weakened respect for American leadership.
On the economic front the United States has imposed hugely costly anti-money laundering (AML) and global tax reporting (FACTA) requirements on the rest of the world without regard for their cost and despite the lack of any evidence of benefits. Operation Choke Point These are serious abuses of American leadership that will produce a growing backlash. But it is not just misguided arrogance that is undermining our role in the world, it is the growing perception that our leadership is increasingly motivated by the selfish personal interests of crony capitalists rather than the high principles that have serviced us and world so well in the past.
Consider the example of the FATCA (Foreign Account Tax Compliance Act). Badly designed corporate and income tax laws in the United States have pushed an increasing number of companies and wealthy people out of the U.S. Rather than clean up its tax laws, the U.S. attempts to tax the income of Americans where ever they earn it and where ever they might live. The only escape is to renounce U.S. citizenship. The Obama administration is now proposing an exit wealth tax for American’s giving up their citizenship. It reminds me of the measures the Soviet Union took to prevent its citizens from leaving. Have we really fallen so low?
The use of off shore, tax minimizing structures by American companies and individuals (i.e. legal tax planning measures) as well as illegal efforts to hide income have been met by increasingly intrusive efforts by the U.S. to find and tax such income. Quoting from the introduction of the Wikipedia article on FATCA: “The Foreign Account Tax Compliance Act (FATCA) is a 2010 United States federal law to enforce the requirement for United States persons including those living outside the U.S. to file yearly reports on their non-U.S. financial accounts to the Financial Crimes Enforcement Network (FINCEN). It requires all non-U.S. (foreign) financial institutions (FFI’s) to search their records for indicia indicating U.S. person-status and to report the assets and identities of such persons to the U.S. Department of the Treasury.”
As the world attempts to comply with American extra territorial demands, the United States itself is not. Such reporting requires knowledge of the beneficial owners of companies. Most companies established in the United States, such as those incorporated in Delaware, are not required to provide the identities of beneficial owners. The U.S. seems to have no intention of requiring its companies to comply with what it demands from other countries.
The decline and fall of the “American Empire” seems to be underway. It doesn’t need to be.
Former congressman Dennis Hastert has been charged with failing to tell his bank why he was withdrawing his money (up to $3.5 million withdrawn in smaller amounts over a few years). It appears that he was being blackmailed by someone threatening to expose a sexual relationship long ago that Mr. Hastert does not want disclosed. Blackmail is a crime that I understand, but I have yet to read that the blackmailer has been charged with any crime. I assume that that is coming.
Mr. Hastert is being charged with violating our Anti Money Laundering (AML) laws.
These laws allow arresting and convicting people for moving money (as Mr. Hastert was doing) that the government thinks was the proceeds of crime (not the case with Mr. Hastert, his crime was failing to report what he planned to with his money), when they are not able to prove that there was a crime in the first place. As far as I know, paying a blackmailer (which is what Mr. Hastert apparently did) is not a crime, though demanding and receiving such money is. The United States has pushed such legislation and the new bureaucracies needed to enforce it all over the world at the cost of billions and billions of dollars (that could have been used for poverty reduction or other more pressing things) with very little if any benefit to show for it. Charging Dennis Hastert with AML violations is a rare exception. Wow, what a benefit for such intrusions into our private lives. I consider AML laws more than a costly waste of money. They are another expansion of the arbitrary power of governments that can be used for good or ill with limited oversight. They lower the standards required for convictions of the real crime, what ever it was, and to that extend diminish the rule of law as we have always understood it.
It is hard to grasp how far our government has evolved from the freedoms we were guaranteed in our constitution. Most of these incremental intrusions have been in the name of protecting us from ourselves and our neighbors. The unlawful (according to a recent court ruling) spying on its own citizens by the NSA exposed by Edward Snowden is now well known and tomorrow we will see what congress does about it. https://wcoats.wordpress.com/?s=snowden. In another example, The Washington Post and others have exposed the shocking abuse of civil forfeiture laws (modern highway robbery by the police). https://wcoats.wordpress.com/2014/09/10/the-abuse-of-civil-forfeiture/.
These are the tips of an alarming iceberg of regulations contained in tens of thousands of pages of laws and regulations from banking to buying cereal. Charles Murray, a very thoughtful and out of the box thinker and observer of our times, makes an intriguing proposal for fighting back. Like me, he is a student of the 60s when civil disobedience seemed the only weapon left to us against an abusive government: http://www.wsj.com/articles/regulation-run-amokand-how-to-fight-back-1431099256
Has our preference for security over freedom swung so far? What are some people smoking to think that government bureaucrats at homeland security, the IRS or the Veterans Administration can more efficiently meet our needs than we can arrange ourselves in the private sector? I have commented on these alarming developments many times before:
The rule of law is an essential foundation of modern market economies. It increases the prospect and expectation that our individual efforts will be rewarded on the basis of merit (i.e., the success with which we satisfy the public’s wants at prices the public is willing to pay) rather than on the basis of favoritism (i.e., who we know). It introduces an element of certainty (rules of the game) in an otherwise uncertain world upon which to build our entrepreneurial efforts. It is fundamental to our notion of fairness and a protector of our personal freedoms. It is a notion and practice that attracts wide admiration from ambitious and freedom-loving people around the world and to our great benefit brings many of them to our shores.
We have never enjoyed the rule of law fully or perfectly, but our belief in it and our relatively close adherence to it remains critical to our success and the world’s eroding respect. Departures from the rule of law in our dealings with each other at home or abroad, undermine the efficiency of our market economy and diminish our freedom, but more importantly undermine the respect of others and our moral authority, which is almost as important to our place in the world as our military strength. Thus any erosions of the rule of law should be exposed and resisted vigorously.
Two principles of the rule of law are that they must apply to everyone equally (ourselves as well as others) and that the rules can’t be changed retroactively.
Through the Foreign Account Tax Compliance Act (FATCA) and other tax and Anti Money Laundering measures the United States has been increasingly forcing its own laws on other countries and turning banks into policemen to the detriment of the banking system. According to The Economist magazine (6/28/14): “In a piece of extraterritoriality stunning even by Washington’s standards, the new law requires banks, funds and other financial institutions around the world to report assets held by American clients or face a ruinous 30% withholding tax. America is, in essence, using threats to outsource its financial policing. This is working: so far, more than 77,000 financial institutions have agreed to pass information to the IRS. The costs of complying with FATCA are likely to dwarf the extra revenue it raises” Many of the approximately 7 million Americans living abroad are finding it difficult to open bank accounts. “Many have been rejected by foreign providers of banking services, insurance and mortgages because, given the amount of paperwork needed to satisfy Uncle Sam, American clients are simply too much hassle. Foreign firms are less keen to hire Americans because of the extra tax complications. Not surprisingly, the number of Americans renouncing their citizenship has quadrupled since FATCA was hatched…. FATCA’s intrusiveness raises serious privacy issues…. The financial superpower looks ever more a regulatory bully, setting rules it ignores itself.” “America’s new law tax compliance heavy handed inequitable and hypocritical FATCAs-flaws?”
When contracts can’t be honored because a company is not earning enough money, bankruptcy laws provide for a well-defined process for transferring ownership from shareholders to creditors, which includes the priority of creditor claims against the inadequate assets of the failed company. Bank bondholders and other creditors price their credit in light of their place in the cue. It violates the principles of the rule of law to changes these priorities after the fact, but this is exactly what the Obama administration did when it put General Motors into bankruptcy by favoring the United Auto Workers pension fund: “A bedrock principle of bankruptcy law is that creditors with similar claims priority receive equal treatment. In the auto bankruptcies, however, the administration gave the unsecured claims of VEBA [union pension] much higher priority than those of other unsecured creditors, such as suppliers and unsecured bondholders.” “Obama’s UAW Bailout”
The government’s inconsistent and unpredictable treatment of distressed financial institutions in 2007-8, some were bailed out and some were allowed to fail, and the resulting uncertainty about future treatment, has surely contributed to the reluctance of banks to lend and of firms to invest thus slowing the pace of our economic recovery. “The Financial Crisis: Act II”
Sadly the examples of political hypocrisy with regard to the rules of the game are growing. Fortunately there are some signs of push back. The Supreme Court just unanimously overturned as illegal the President’s so called recess appointments of members to the National Labor Relations Board. “Supreme court strikes blow-Obama exceeded authority with recess appointments” The Speaker of the House of Representatives is suing “the Obama administration for its use of executive actions to change laws.” “Boehner confirms lawsuit against Obama executive actions”
The hypocrisy has been non-partisan. Though fully justified, the hypocrisy of the outcry over the IRS’s missing emails related to targeting conservative organizations was exposed fully in Sunday’s Washington Post. Government departments and agencies are required by law to maintain copies of official correspondence (all office emails included). This law has been regularly violated. Examples are “the Bush White House’s destruction of millions of e-mail messages [including those of John Yoo, the Department of Justice lawyer who justified torture] as well as the destruction of pre-investigative files by the Securities and Exchange Commission, including files pertaining to Bernie Madoff and Goldman Sachs.” How has this happened? “Congress has neither appropriated sufficient funds for agencies to implement electronic record-keeping nor added oversight and penalties to the Federal Records Act that would ensure compliance.” “The IRS isn’t the only agency with an e-mail-problem”
Hypocrisy is rendered impotent, hopefully, from exposure. Thus hopefully George Wills’ latest column on the Redskins will be widely read. “The government decided that redskins bothers you” It begins: “Amanda Blackhorse, a Navajo who successfully moved a federal agency to withdraw trademark protections from the Washington Redskins because it considers the team’s name derogatory, lives on a reservation where Navajos root for the Red Mesa High School Redskins.” And the hypocrisy gets worse from there.
For more examples see my “Big brother is getting bigger”
Americans are forever debating the best boundary between the domain of government authority and our personal authority. It is an important discussion, which should continue forever. Many but not all of the issues discussed have to do with the balance between security (protecting us from attack, disease, hunger, etc.) and liberty (leaving us free to hold our own religious and political beliefs, and set our own personal goals, make our own decisions, etc.). Many of the considerations in these discussions revolve around the relative advantage and efficiency of the government, or entrepreneurs, or ourselves —which can do something better (set standards, build bridges, build rockets, develop and implement more efficient sources of energy, cure cancer, develop better telephones, put on a play, etc). An important class of considerations concerns the risks of granting the government powers that can potentially be abused. Edward Snowden has certainly made us think about some of these risks. I urge you to reread my earlier blog on this subject: https://wcoats.wordpress.com/2013/03/08/protecting-our-civil-liberties/.
Four recent examples of the government’s abuse of power suggest that it is sliding into increasingly dangerous habits. I optimistically count on the good sense of you all to push the pendulum in the other direction.
The Common Core. The effectiveness of any undertaking should be measured by its output – its result. In the critically important area of education, data on what we spend on education tells us nothing about whether the money was well spent. Expenditures measure inputs not outputs. In order to determine whether children have learned what we think they should have learned, we test them. Some tests are better than others, of course, but there is value (at the very least to parents trying to decide where to live) in being able to measure the quality of teaching in one area with that in another, and common, standard tests are one of the ways of doing so. Different localities may have different ideas about what they want their kids to learn, but otherwise it is helpful to be able to compare how much kids learn on average in different schools, communities, and states. It would also be of concern if the skills and knowledge one area aims for are very different from those sought in another area of the same country, as there are a core of values and shared knowledge necessary to preserving a peaceful, flourishing society within a nation, to preserving a shared sense of nationhood. For an immigrant nation like the United States, this is especially important.
These are the considerations that led Bill Gates to finance the development of the common core of knowledge expected for each grade level and the standard examinations to test their achievement. I strongly support the desirability and value of this goal. But what is the role and scope for experimentation in approaches to effectively teaching what we think our kids need to learn? Though it is a little disturbing to use our kids as guinea pigs, it is better to do so one school or school district at a time rather than experiment with the entire nation (which eliminates the possibility of comparisons between approaches). Many educational fads have proven to be misguided and have done great damage (look-see reading methods, the elimination of groups of different ability within one class, etc.) More over, it is essential that parents have a choice of what school and approach to send their kids to. Such School Choice and the variety of approaches offered allow limited experimentation while preserving social peace (each family is free to make their own choices) at the same time. Still, there is a minimum standard core of values and knowledge we rightly expect every child (our future citizens and voters) to have if we are to preserve the values on which the country was founded and has so successfully operated for over two hundred years.
These somewhat conflicting objectives cannot be resolved easily. There is a balance between individual choices and the minimum common values needed to live peacefully together. The search for the best balance is facilitated by keeping most education decisions local and close to the families for which it is most important. We are suffering from Ronald Reagan’s failure to deliver on his promise to abolish the Department of Education (a department of the federal government, which has no constitutional role in education). I think that a Common Core of educational achievements is desirable but that they must be voluntarily adopted by each school district and state. The process of discussion between districts and states will improve the standards that most choose to adopt.
If you think that the federal government leaves this choice to the states (where it has constitutionally been placed), think again. The federal government both penalizes and rewards (subsidizes) states in order to pressure them into adopting the standards promoted by the federal government. It should not.
Lois Lerner’s missing emails
It is not surprising that government officials and bureaucrats sometimes let their own political, religious, or cultural views influence their performance of their official duties. After all, they are human like the rest of us. Thus where we have given a responsibility to government, and collecting taxes is a proper and necessary function of government, it is important to impose strong checks and balances against the abuse of such powers. The misuse of the IRS to punish political enemies is a disturbing abuse of government power, reminiscent of Richard Nixon’s enemies list. But such things happen from time to time under every administration. What is much more disturbing is the failure of this administration to take all reasonable measures to punish those responsible. The missing IRS emails subpoenaed by Congress (like all government agencies, the IRS had contracted a company to back up its emails) are reminiscent of the missing 18 minutes of Nixon’s White House tapes. Ms. Lerner and others involved should be in jail.
The Redskin’s name
I am not a Native American and thus have no idea why some of them consider the name of our football team, “The Washington Redskins”, offensive. Negro’s (aka African-Americans) are regularly referred to as “blacks” without apparent offense. In my opinion, ethnic groups should be free to inform the rest of us what they prefer to be called, and out of respect I am happy to oblige (though it is a bit annoying when they change their preferred designation every decade or so). But this should be none of the government’s business. Social conventions of good manners should be communicated to the government, not the other way around. But our government seems to be imposing its views on such private matters more and more these days. Upon visiting ground zero (the monuments constructed where the Twin Towers used to stand in New York City) a few weeks ago, I was very offended by a sign with a details list of how to behave while in the area. I didn’t object to the substance of the behavior demanded, but to the presumption of the government of the need to do so.
Last week the U.S. Patent and Trademark Office canceled the Washington Redskins’ trademark on the grounds that federal trademark law does not permit registration of trademarks that “may disparage” individuals or groups. In its announcement the Office stated: “that these registrations must be canceled because they were disparaging to Native Americans.” We will need to pay more attention in the future to the social/religious views of those we elect to office in the expectation that they will be increasingly imposing those views on society. This is not where we should want to go. “The-patent-office-goes-out-of-bounds-in-redskins-trademark-case”
Operation Choke Point
Imposing the government’s views on how we should behave takes a frightening leap forward with Operation Choke Point. As reported in The Economist: “a scathing report released on May 29th by a congressional committee… claims the operation was designed to strangle legitimate businesses that the government objects to for ideological reasons, such as payday lenders or gun dealers. The method is to deny them access to banks and payment systems, by prosecuting payment firms that abet suspect transactions…. The congressional report raises an even more vexing question: whether Operation Choke Point ‘inappropriately demands that bankers act as the moral arbiters and policemen of the commercial world’. The banks’ own legal travails suggest they are not obvious candidates for the job.” “Anti-fraud push accused of turning bankers into unaccountable cops”
I find this totally unjustified intrusion into private affairs deeply disturbing. We should push back hard. I would not be surprised, and would be quite pleased to see the rest of the world push back against similar U.S. bullying of foreign banks via its Foreign Account Tax Compliance Act (FATCA) and long running Anti Money Laundering (AML) campaign. Via FATCA and in total disregard for the laws of other countries, the U.S. is extorting foreign banks to share private depositor information and undertake costly vetting not only of their customers but of their customers’ customers. “Big-banks-are-cutting-customers-and-retreating-markets” This is imposing large costs on banks, which are increasingly refusing to deal with American customers rather than incur those costs. To the extent this concerns compliance with tax obligations, the United States needs to fix its impossible and dysfunctional income tax codes (individual and corporate) rather than bully the rest of the world. “The principles of tax reform” This is not a promising trend.