Monthly Archives: July 2013

The Difficulty of Having an Honest Debate About Surveillance Programs

Earlier this week, the Information Technology and Innovation Foundation hosted a forum on the impact of the PRISM program on digital trade policy. This particular event did not deal with the merits of PRISM but rather its secondary effects on the efforts of American negotiators and companies to convince other countries not to discriminate against U.S. providers of advanced technology services. Those efforts have been severely damaged by the sudden awareness by both foreign users and their governments that use of U.S. companies gives the U.S. government access to the resulting data. Furthermore, because the users are not American citizens, Constitutional protections do not apply.

While foreign governments may overlook such dangers in exchange of their own access, their citizens may be less forgiving. Public resistance to American providers could cost U.S. companies billions of dollars. The best way to ensure that American companies compete on an equal ground is to have an open and honest debate about 1) what data can be collected, 2) who, including the government, can have access to it and for what purposes and 3) what controls will exist to make sure that the data are not misused and how those controls will be enforced.

The problem is that it is impossible to have that discussion when the U.S. government takes the position that 1) the public has no right to learn of these programs and should not have learned of them, 2) the national security agencies have the right to actively mislead Congress and perhaps the FISA courts in order to protect their interpretation of national security, and 3) although this is less certain, the current Administration seems to take the position that even if U.S. statutes clearly prohibited the gathering and use of certain information, the President has the inherent power secretly to override those limitations in the interests of national security.

We have long since past the point where the self-imposed costs of limitations on American freedom outweigh any likely threat that our enemies could inflict. A similar overreaction has followed every other military threat in our history. This one is driven not by Americans who are afraid, but by politicians who like power and security firms that like business. It is about time we grew out of it.

The ironic thing is that an honest debate might produce a program very much like the one we  have, except more open. Government officials would probably face a few more limits on what they could collect, how long they could keep it, and what they could do with it. More searches would require prior judicial approval. Most importantly, there would be public safeguards to ensure that the agencies respected the law. But again, how can we ever reach such an agreement as long as the Administration takes the position that security interests trump the law? And until we do, why would you ever believe that U.S. companies are not being forced to give the government access to your information?

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Obama Avoids the Law Again

U.S. law generally prohibits foreign assistance to “the government of any country whose duly elected head of government is deposed by military coup or decree.” You might think that this is a problem for Egypt, whose military recently deposed the elected head of government and is now beginning to crack down on dissenters. President Obama is not so sure.

In a bizarre interpretation of the law, the Administration has apparently decided that it does not have to decide what happened in Egypt. As one official told the New York Times: “We will not say it was a coup, we will not say it was not a coup, we will just not say.” The Administration is not releasing the legal reasoning behind this novel position.

President Morsi was an incompetent leader. But some in Obama’s party have said the same about recent U.S. presidents. We did not depose them. As bad as Morsi was, the generals are likely to be far worse over the long-term. Their suffocation of Egypt’s civil society and economy will continue, but now there is unlikely to be any democratic check against it. While the mandatory cutoff of aid may have inconvenienced the administration, the law is supposed to be the law.

This Administration has made a travesty of U.S. policy in the Middle East. Faced with an historic chance to side with the economic and political dreams of the vast majority of Arabs, it has time and again been paralyzed by fear and indecision. When so many in these countries hope for a life like ours, we have focused on the threat posed by a few Islamic radicals rather than on the tremendous benefits of having these countries become full participants in the modern world. And we have probably missed a rare opportunity to cleave the anti-American bloc of Iran, Hezbollah, and Syria by ensuring the fall of the Assad regime. Indeed by not acting we have helped ensure what we most feared: a steady dissent into prolonged broader sectarian conflict that threatens the neighboring countries.

Even if one were to overlook incompetence, illegality is another matter. This Administration has a strong disregard for any legal constraints that hamper its ability to pursue its goals. This cute refuge in blindness is only the latest insult to plain language and common sense. A democracy is not supposed to work that way.


			

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Initial Thoughts on the Detroit Bankruptcy

Over the past four months I have been working on a report that reviews both the economics and law surrounding state bankruptcy. I intend to summarize some of my findings once the report comes out. What I have learned suggests several important points about Detroit’s recent filing for bankruptcy.

First, Detroit’s case is likely to reaffirm the precedent that pension benefits can be cut in bankruptcy, even for existing retirees. This had already been established by Central Falls, RI where pensions were cut by up to 50 percent (although the state agreed to make up half of the cut for the first five years) . The cuts in Michigan are also likely to be deep. This is despite the fact that the state constitution protects pensions. Federal bankruptcy law governs. Unions, which have been assuring their members for decades that the pensions will never be touched, regardless of the level of underfunding, are likely to face a growing level of concern among their members. We may see unions placing relatively more emphasis on pension funding and less on wages in future negotiations.

Second, unions are benefiting from a curious turnaround in the calculation of Detroit’s liabilities. For years Detroit followed the standards set by the Governmental Accounting Standards Board and discounted future pension benefits by the assumed rate of return on pension assets, currently 8 percent. Most economists believe these obligations should be discounted at a much lower rate. Unions have strongly resisted doing this because it increases the estimated underfunding. In calculating Detroit’s liabilities, the Emergency Manager lowered the discount rate to 7 percent. This apparently had the effect of giving the pension plan an additional $3.5 billion in unsecured claims, thus ensuring that workers get a larger share of the total recovery. Had he used a risk-free rate as most economists advocate, retirees would have had an even larger claim. It seems that using a lower discount rate actually benefits unions as a city or state approaches insolvency.

Third, any final plan to emerge from bankruptcy is likely to include significant asset sales, possibly including the estimated $2 billion worth of art owned by the city. The law is not clear on whether Detroit’s creditors can force the city to sell these assets against its wishes. But the fact that they account for approximately ten percent of the losses that bondholders and pensioners are being asked to take and that many retirees will press for their sale in exchange for smaller cuts may influence the city’s position.

Fourth, it is interesting that retiree health benefits have been included in the list of claims against the city. Unions and governments have long argued that retirees do not have a legal right to these benefits. Since they can be withdrawn at any time, cities should not have to prefund them. But if this is true, then they should also not be listed as an unsecured asset in a bankruptcy proceeding. The fact that they have been indicates that governments should begin to set aside money to pay for future claims. This will add a new strain to city budgets.

Fifth, I expect this filing to move relatively quickly. Although a state judge issued an injunction ordering the city to withdraw its petition, federal law governs. If higher state courts do not remove the injunction, federal courts will. I do not think creditors will succeed in challenging the petition, since the city is clearly insolvent and has tried to negotiate a deal. The real test is how quickly the Emergency Manager can put together a plan for emerging from bankruptcy. I expect him to act quickly and to present a plan that is fair to all creditors, given the financial circumstances. If he does this, there are not many grounds for the court to refuse approving it, even if a majority of creditors object. This area of the law is still undefined, however.

Last, there should be no bailout. Steven Rattner, has recently argued to the contrary. His reasoning seems to hinge on the assertion that “the 700,000 remaining residents of the Motor City are no more responsible for Detroit’s problems than were the victims of Hurricane Sandy for theirs, and eventually Congress decided to help them.” This is false. The victims of Hurricane Sandy were hit by a natural disaster whose damage was largely beyond their control. Detroit’s failures are largely the result of decades of mismanagement and corruption by both elected leaders and union officials. If the residents of Detroit are not responsible for the quality of its elected officials, who is? And if city workers are not responsible for the positions taken by union leaders, who is? Democracy only works if people accept responsibility for the leaders they elect. Bailing out Detroit would dramatically reduce the pressure on other cities and states to reform their finances. The bailout of Wall Street is still preventing regulators from dealing with banks that are too big to fail. And the government’s interference in the auto bankruptcies set bad precedents that we may still someday regret, despite the strong rebound of the companies involved.

Finally, debt reform of one type or another was inevitable. The money simply is not there. The first rule of getting out of a downward spiral is to hit bottom as quickly as possible. Only then does the future become brighter than the past. Although bankruptcy can eliminate Detroit’s debt overhang, its real future will depend on a willingness to create an environment that is welcoming to all people and businesses. That has been a relatively foreign concept.

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Belated thoughts on the Fourth of July

Early this month I spent a week in Minnesota visiting family and seeing medical specialists. While there my wife and I contacted a couple who run a website devoted to Dravet’s Syndrome. They spontaneously invited us to come to their house in Afton, Minnesota to talk. They also encouraged us to stay for the town’s Fourth of July parade and then boat with them on the St. Croix (we did not have time to do the second). The day has stuck with me for several reasons.

Here is a normal husband and wife who happened to have a son with a serious illness. Rather than passively accept the advice of doctors and hope for the best, they began an national organization and sponsored a website, dravet.org, that provides detailed information about the disease. They put themselves in touch with the best doctors and researchers in the world. And they wrapped themselves in a community of other families with the same diagnosis. Some of the parents in their organization know more about the disease and current research than the average neurologist and they are willing to meet on call with any other family and share what they know. People and organizations like this belie the common statement that patients cannot be trusted to choose among providers and treatments. These parents are currently fighting the government for access to drugs that have been effective in other countries.

The parade was another experience. It was not very long and almost all the floats were from local businesses or organizations. Very hoaky. And yet, when you look deeper it is not too hard to see the real strength of America. On float after float you saw small businessmen who had risked their own capital to start a barbershop, dance studio, or restaurant and were now celebrating with the community that supported them. You saw people clapping and waving, usually not at the specific float or person, but at the idea of a life lived in freedom and comfort. These are not people who aspire to leadership or fame. If offered it, most would probably decline because it takes too much away from what is important: time with family, fishing, watching the ball game on TV. These are not people who need to be led by the nose. They are the strength of our country. The source of everything that makes us prosperous and great. They do not need a government that erodes their civil rights for their own protection, that spies on them, or that hides what it is doing in secrecy. They do not need to be protected from themselves.

The more I think about that day, the more convinced I am that Americans deserve much better from those who currently have money and power. They deserve parties that are willing to put forth sensible plans to deal with today’s problems. They need a President that will lead, not dictate. They need executives who refrain from using government to protect themselves from competition. They need business and political leaders with a strong sense of morality and the common decency to go away when they are caught in scandals. And most of all they need politicians and executives who realize that they are the beneficiaries, not the source, of the power that makes this country great.

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