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Patrick G. Eddington

I’ve been in Washington over 30 years, but sometimes even I can be stunned by the short memories and shortsightedness of members of the Fourth Estate. Today’s example is the editorial board of the venerable (and usually pretty sane) Wall Street Journal.

The ostensible topic of their latest pronouncement (paywall) was the recent terrorist attack in Moscow, which appears to have been the work of violent Salafist terrorists. After offering some fairly standard pre‐​Trump era Establishment fare on the need for still more US military action in the Islamic world, the WSJ ed board ended its piece by stating,

The ISIS comeback also argues for the House to overcome its disagreements and reauthorize Section 702 authority to surveil foreign communications even if it accidentally catches some Americans in the sweep. The House Intelligence bill contains enough safeguards without adding bureaucratic and political obstacles to rapid surveillance of real threats. Americans don’t want another attack on U.S. soil like last week’s horror show in Moscow.

Item 1: The Foreign Intelligence Surveillance Act (FISA) Section 702 telecommunications intercept program does not “accidentally” sweep up the communications of US persons with no connection to criminal activity. The very structure and operational characteristics of both the 702 program and the global telecommunications system guarantee that the emails, text messages, and the like of innocent Americans are inevitably captured and stored in a vast database for years. It is a database that agents of the Federal Bureau of Investigation (FBI) have repeatedly been found to have used to conduct warrantless digital fishing expeditions on Americans not wanted for any crime.

That means that the communications of Journal reporters (especially those traveling to or reporting from overseas) are very likely getting swept up via the 702 program. The same thing is almost certainly happening to the digital letters to the editor or op‐​eds submitted to the Journal by Americans overseas or who visit the Journal’s website to read its news coverage, etc. All of that, and literally millions of communications of other Americans are available for perusal by FBI agents with access to the 702 database. To be a cheerleader for a surveillance program that’s likely collecting the communications of its reporters and readers is probably not what those reporters or readers view as a legitimate government function or use of their taxpayer dollars.

Item 2: Multiple bills have been introduced to impose an actual warrant requirement for any federal law enforcement access to that stored data, but the most recent one introduced is a bipartisan Senate bill that, while not going as far as many privacy and civil liberties advocates would like, would be a vast improvement over where we are now with the 702 program. The House Intelligence Committee bill championed by the WSJ ed board would, if enacted, largely be another classic example of the old Capitol Hill game of “Let’s not but say we did” when it comes to surveillance reform. The Journal ed board seems not to recognize that the House and Senate Intelligence Committees have long been “organizationally captured” by the various intelligence and law enforcement entities they were created to oversee in 1978. Both committees are cheerleaders for mass surveillance, not our protectors from it.

Item 3: The Journal ed board is engaged in a form of magical thinking with respect to mass surveillance. No mass surveillance program has ever stopped a terrorist attack on America. That was the case with the 702 program’s progenitor, the infamous STELLAR WIND program. It was also the case with the PATRIOT Act’s Section 215 telephone metadata mass surveillance program. And while the FBI and the Office of the Director of National Intelligence (ODNI) continue to make incredible claims about the program’s effectiveness, the actual FBI internal audits of the 702 program have never been released. Cato is trying to remedy that information deficit via a Freedom of Information Act (FOIA) lawsuit currently before D.C. Circuit Judge Tanya Chutkan.

The WSJ ed board could’ve enlightened its readers with all of these publicly available, sourced facts. Instead, it chose to fearmonger in favor of a program that is not and never has been Fourth Amendment compliant in the way the Founders intended, a program that almost certainly sweeps up the communications of its own reporters, editors, and readers. How the mighty have fallen.

Neal McCluskey

In our latest national survey of private school enrollment—released today—46 percent of schools reported enrollment increases between the 2022–23 and current school year, 30 percent reported no change, and 25 percent reported decreases. The average change was a gain of five students. It is the continuation of an enrollment boom likely touched off by long‐​term public school closures during the COVID-19 pandemic—a boom that appears to be winding down.

Before looking at the signs of dwindling, there are a couple more findings of growth. First, 50 percent of schools reported application increases between the 2022–23 school year and 2023–24, versus 35 percent reporting no change and only 15 percent saying they saw decreases. Also, 42 percent of respondents said applications exceeded available seats, so enrollment numbers could have been larger had seats been available.

This is good news for private schooling, but the longer trend is of slowing growth.

Cato’s Center for Educational Freedom initially surveyed private schools at the beginning of the first school year following the March 2020 arrival of COVID-19. We feared that private schooling, which relies on tuition and other voluntary funding, was taking a major hit, especially with the closures of schools and churches to slow COVID-19’s spread. We were aware of no survey with current, national data on private school enrollment, so we undertook our own.

Our first survey substantiated our fears. Most respondents saw enrollment losses, and, as seen in the chart below, the average drops were in the double digits. By the second full school year, in contrast, private school enrollment appeared to have rebounded. These surveys had large margins of error because we had small samples, but our findings were broadly consistent with, first, reports of many private schools collapsing, and then of private schools reopening to in‐​person education and gaining students while public schools tended to remain closed. Our latter two surveys indicate continued enrollment growth, but it has gotten progressively smaller since the peak between the 2020–21 and 2021–22 school years.

Our results are roughly consistent with other data sources. Going from 2019 to 2021, the federal government found a 1.7 percent increase in private K‑12 enrollment, but a 0.2 percent loss if pre‑K is included. This is consistent with a big loss and then a big gain, which we found. The federal government has published no more recent data.

The National Catholic Educational Association reported big losses between the onset year of COVID-19 and the next school year, but then a large increase, a smaller increase, and holding steady between the last school year and the current one. Catholic schooling has been in a decades‐​long decline while other private schooling has tended to grow, so Catholic education is not necessarily a national bellwether. It is, however, still a large part of the private education sector, and there is no compelling reason to believe it would have seen starkly different enrollment patterns over the last few years than private schooling overall.

Also consistent with our enrollment data are private school closure and opening announcements, which we have cataloged since early in the pandemic. April through August 2020 saw 118 confirmed private school closures due at least in part to the impacts of COVID-19, but closure numbers greatly declined thereafter. Over the 2021–22 school year we saw openings greatly exceed closings, but the net gain was smaller in 2022–23. So far this year, we have tracked 30 closures versus 25 openings—a net loss of private schools.

Reversion to the pre‐​COVID‐​19 norm would not be surprising. It is hard for parents to justify paying for private education when they have already paid taxes for “free” public schools. That so many appear to have eventually paid twice during the pandemic indicates that many families greatly desired in‐​person instruction, or perhaps other things they discovered private education provided.

While a return to public school normalcy has likely slowed private school enrollment growth, a potentially counterbalancing force has been rising: private school choice programs. Since the start of 2021, numerous states have created new private choice initiatives or expanded existing ones, including ten states implementing programs with universal, or near‐​universal, eligibility for funding. And momentum is continuing this year.

The question for private schools is whether these programs will grow quickly enough to keep enrollment rising. We plan to continue tracking.

Adam N. Michel

Biden administration estimates show that the US government could spend more than $1.8 trillion over ten years on energy tax subsidies, if they are made permanent. These costs could increase even further as new regulations, such as the recently finalized tailpipe emissions rule and proposed power plant rule, force greater adoption of tax credit‐​eligible technologies.

The Inflation Reduction Act (IRA) of 2022 marked a significant shift in US energy policy—to one that pairs costly and complicated regulatory requirements with open‐​ended tax subsidies to manipulate consumer and producer incentives toward politically popular energy sources. Since its passage, the estimated cost of the IRA’s new and expanded energy tax credits increased dramatically. Congressional scorekeepers originally estimated the tax provisions would cost $271 billion over ten years. In the months that followed, third‐​party estimates showed that due to higher projected uptake, the cost of the IRA tax credits could be two or three times larger than initially projected.

As part of recent budget estimates, congressional scorekeepers updated the costs of some of the provisions of the IRA. Using these revised estimates, the Committee for a Responsible Federal Budget estimates that the ten‐​year cost of the IRA credits increased by 170 percent, from $271 billion to $736 billion between 2022 and 2031. The IRA also included $132 billion in direct, non‐​tax code energy‐​related spending, in addition to many other changes.

Most of the IRA tax credits are functionally similar to uncapped automatic spending programs. The cost is determined by the credit formula and taxpayer uptake. For advocates of the law, the higher cost illustrates the law’s projected success at inducing investments in targeted energy sources.

Others are worried that the ballooning fiscal cost is unsustainable and could negatively distort national energy markets, investment, and consumer behavior. For example, the tax code has included subsidies for wind and solar energy technologies for more than four decades. Instead of being temporary support for nascent industries—as originally intended—the federal subsidies create sclerotic, subsidy‐​dependent industries that are more responsive to public money than consumer demands.

The IRA is not the entire universe of energy tax subsidies and the tax code included less costly versions of many of the IRA tax credits pre‐​2022. Updated tax expenditure estimates from the Treasury Department as part of President Biden’s fiscal year 2025 budget proposal show that following the passage of the IRA, tax credit subsidies for the energy sector increased 630 percent.

The FY 2024 budget, which did not incorporate the IRA, projected energy tax credits would cost $145 billion between 2023 and 2032. The FY 2025 budget projects a cost of almost $1.1 trillion over the same period, implying the IRA energy tax credits will cost $907 billion over that time.[1] Figure 1 shows the energy tax expenditure cost estimates by year from each budget.

The decreasing cost of the credits beyond 2030 is a product of major expiring provisions between 2027 and 2032. However, Congress often extends these types of tax policies and uses artificial end dates to obscure the true cost. Other tax credits, such as the energy production credit, which phases down based on an economy‐​wide greenhouse gas emission target could be uncapped indefinitely, if those targets are not met.

At peak cost, the energy credits cumulatively reduce revenue by $185 billion a year, implying a permanent ten‐​year cost of more than $1.8 trillion. Table 1 summarizes the major energy tax credits and their costs at various points in time.

Congress should repeal the IRA and the pre‐​IRA energy credits. As a whole, these tax credits are a highly inefficient and expensive system of subsidizing energy from some politically popular low greenhouse gas emitting sources. Energy markets would be better able to meet consumer demand if Congress repealed all of the IRA and pre‐​IRA energy credits. The additional revenues should offset other broad‐​based tax cuts that would benefit more Americans.

[1] This analysis only includes tax credits to avoid confusion with other tax policies, such as expensing, that are not tax subsidies when measured from a consumption tax base. For more on choosing the appropriate references tax base, see Chris Edwards, “Tax Expenditures and Tax Reform.”

Thomas A. Berry and Alexander Khoury

Over the past several decades, many small‐​boat, family‐​owned fishing operations along the Gulf Coast have shut down due to excessive regulation. Ironically, these fishing communities were regulated out of existence by the very rulemaking body meant to ensure their longevity.

Fishing regulations for the Gulf region are developed and proposed by the Gulf of Mexico Fisheries Management Council. The Gulf Council is composed of 22 voting members. Eleven of these members are nominated by governors of Gulf states in sets of three, from which the secretary of commerce must select one so long as the three nominees are statutorily qualified.

Because the members of the Council possess significant regulatory authority, they are officers of the United States who must be appointed pursuant to the Constitution’s Appointments Clause. The Appointments Clause sets out two modes of appointment: Principal officers must be appointed via nomination by the president and confirmation by the Senate, but Congress may choose to vest the appointment of inferior officers in the president alone, a department head, or a court of law.

In early 2023, multiple gulf fishing operations sued to challenge a rule that slashed their catch limits on a certain type of fish by 80 percent. They argued, among other claims, that the rule was void because the members of the Council were not appointed as the Constitution requires.

But the district court upheld the rule, concluding (among other things) that the eleven governor‐​nominated members were validly appointed as inferior officers. The court held that the members were appointed by the commerce secretary (a head of a department) and that Congress has more leeway to narrow down an appointer’s choices when the office being filled is inferior.

The fishers have now appealed to the Fifth Circuit, and Cato has filed an amicus brief supporting them. In our brief, we argue that the district court erred in two important ways.

First, the district court wrongly concluded that the Appointments Clause allows Congress to greatly restrict the freedom of choice for appointers of inferior officers. The Appointments Clause allows Congress to vest the appointment of inferior officers in one of three entities, and Congress has full discretion to choose which of those three is best. But the clause does not allow Congress to place limits on how appointers may exercise their appointment power, outside of Congress’s authority to create office qualifications. Limiting an appointer’s choice to only three options is unconstitutional, especially when that limitation comes via a nomination scheme rather than via office qualifications.

Second, our brief argues that the district court erred by approving a scheme in which state governors select nominees for Council members. As demonstrated by the Supreme Court’s decision in Buckley v. Valeo (1976), only constitutionally valid appointers may play a role in choosing officers of the United States. State governors are not mentioned in the Appointments Clause and thus are not valid participants in the process.

Finally, our brief argues that the Supreme Court’s decision in United States v. Hartwell (1868) does not change the outcome of this case. Hartwell concerned a unique officer structure that bears little resemblance to the Gulf Council’s appointment scheme.

The district court’s decision should be reversed and the appointments of the eleven council members discussed in our brief should be found unconstitutional, even if they may be appointed as inferior officers.

Michael Chapman

In testimony before the House Subcommittee on Higher Education and Workforce Development on March 7, Cato Institute research fellow Erec Smith said the diversity, equity, and inclusion program (DEI) “is built upon a foundation whose very mission is to perpetuate racism.”

In his prepared remarks for the hearing, “Divisive, Excessive, Ineffective: The Real Impact of DEI on College Campuses,” Smith told the committee that “Contemporary DEI is not an extension of the Civil Rights Movement. It is undergirded by a quasi‐​Marxist ideology called Critical Social Justice.”

“The salient tenet of Critical Social Justice is this: ‘The question is not ‘did racism take place’? but rather ‘how did racism manifest in the situation?’” he said. “So, according to Critical Social Justice, racism is always already taking place. There is no need to think for oneself; the narrative—one of perpetual oppression—does the thinking for you.”

“Questioning of this ideology is considered a form of racism,” said Smith.

He then told a story about how he had once received a mass email from a “prominent figure in my field,” who advised everyone in the email to boycott an academic group because it had engaged in racism “during a committee meeting.”

The email writer did not explain what apparently had occurred at that meeting. In response, Smith wrote back, “What happened?”

“For this I was vilified by my colleagues of all colors and accused of perpetuating white supremacy,” Smith told the subcommittee. “Merely asking the question—‘what happened?’—was considered a form of racism. You see here that an accusation of racism cannot be questioned; remember, ‘The question is not ‘did racism take place’? but rather ‘how did racism manifest in that situation?’”

Smith told another story about “two professors who always allow their black students to write in black vernacular (African American vernacular; some people say ‘ebonics’). However, the students’ refusal to do so, because they were there to learn standard English, was seen by the professors as a form of self‐​hatred and internalized racism.”

“A prominent figure in the field, one who is a self‐​proclaimed Marxist, went as far as to say these students were being ‘selfish’ and ‘immature’—his words—for wanting to write in standardized English because that would just perpetuate a status quo of whiteness,” testified Smith. “As black students who wanted to write in standard English, they shirked the attitudes and values these professors prescribed to them as black students. Their desire to write in standard English was treated like a kind of pathology.”

Concluding his prepared testimony, Smith said, “I don’t know if you’ve all noticed yet, but I’m black and I’m against this DEI. Why? Because I really like being black. And this ideology is infantilizing, it is anti‐​intellectual, and since I am a mature intellectual person, it doesn’t align with me. I am too good for contemporary DEI, and so are many others.”

Representative Burgess Owens (R‑UT), chairman of the subcommittee, was also critical of the divisive nature of DEI orthodoxy. “Marxist‐​centered DEI on the other hand has a jaded view of America and Americans,” said Owens in his opening remarks. “It views our nation as a pyramid comprised of race oppressors and race oppressed. It attributes all of America’s societal ills and flaws to whites, Judeo‐​Christians, and males. To remedy all past perceived racism and injustice perpetrated by this sector of Americans, DEI prescribes a healthy injection of black racism and black injustice.”

DEI is “an industry that has successfully steered hundreds of thousands of our youth away from the vision of our Founding Fathers,” said Owens. “That vision was one of becoming a more perfect union. One in which the citizenry improves with each generation, to judge each other based on the content of character, not by race, creed, or color.”

Erec Smith, a research fellow at the Cato Institute, is the author of A Critique of Anti‐​Racism in Rhetoric and Composition: The Semblance of Empowerment (2020). He also is a co‐​founder of Free Black Thought, a nonprofit dedicated to highlighting viewpoint diversity within the black communities and is an associate professor of Rhetoric at York College of Pennsylvania. His prepared testimony is posted here.

David Inserra

Meta’s Oversight Board, an organization that has the authority to review Meta’s decisions and take down or leave up pieces of content, recently affirmed that Meta should leave up a post by a far‐​right French politician Éric Zemmour that condemns African immigration as it “colonizes Europe.”

While many might reject that sort of rhetoric as a dog whistle to more racist tropes and beliefs, it is also true that immigration is a major political issue of contention around the world. Indeed, Zemmour received 7 percent in the first round of voting for the French presidency.

While Zemmour’s views are abhorrent, the challenge in this case is whether strident anti‐​immigrant speech, even regarding potential conspiracy theories, causes enough harm on Meta’s platforms to justify the suppression of core political speech.

For those who care about free expression, the board’s decision to allow this content is worth celebrating. Removing offensive speech that is not closely linked to objective and imminent harm may be counterproductive because it fails to address the underlying problems. Europe already has aggressive and growing layers of hate speech laws—the politician in this case has previously been convicted for hate speech multiple times.

And yet, “hate speech” and those accused of being its greatest purveyors in Europe have only grown in popularity. Rather than stopping “hate speech” and protecting the vulnerable, Europe’s censorial policies are emboldening these speakers.

Suppressing speech, whether it is censorship by governments or social media companies removing content and thus exercising their editorial control over their platforms, does not actually help address the root causes of “hate speech.” Meta is a private company that can create its own standards, and if it wants to remove all speech that it finds objectionable, that is its right.

But through its Oversight Board, Meta hopes to find the right standards and norms for when it should remove content that is too harmful and when it should allow content that is offensive and objectionable.

In this case, though, while the board decided to allow the content, it did not uniformly assert the importance of societies having uncomfortable discussions about big political and social issues.

The board took a new step, which was to issue a substantial minority opinion that argued this content was too harmful and should have been removed. While the board, to date, has included minority views in its decisions, they have always been limited to a couple of paragraphs at most. In this decision, not only is a minority opinion given substantial space, but it is longer than the majority opinion. As a result, the decision reads more as a justification for removing speech about immigration that refers to colonizing, invading, or replacement.

On the one hand, it is worthwhile to see a more vigorous minority opinion and debate within Oversight Board decisions. Deliberative bodies benefit from a robust and public debate over key issues, including documenting disagreements within their decisions.

On the other hand, it is concerning to see that a strong minority of the board (strong enough to have large control over the drafting of the final decision) leaned into what is, in essence, a bad tendency test (i.e., a doctrine of speech abandoned decades ago by US courts that holds that speech can be suppressed if the tendency of a given piece of speech could be some harmful outcome). Such a standard was widely used to convict anti‐​war advocates in World War I as seditious under the Espionage Act of 1917 for questioning the rationale of joining the war. In a striking resemblance to this Oversight Board case, the bad tendency test was used to justify the conviction of Socialist Party leader Eugene Debs, who received 6 percent of the US presidential vote in 1912, for criticizing the draft during wartime.

In this case, the minority of the board felt that Zemmour’s content criticizing immigration or immigrants should be removed because the cumulative impact “contributes to the creation of an atmosphere of exclusion and intimidation.” Seeing as World War I activists’ peaceful speeches or pamphlets were viewed as contributing to an atmosphere of sedition with the “tendency of the article to weaken zeal and patriotism,” such a rationale is ripe for abuse and inconsistent application.

Take the similar use of the term “colonize” in the context of the Israel/​Palestine conflict. One of the key assertions of the Palestinian side is that the root cause of the ongoing conflict is Israel being a “colonial project.” But certainly the Board, as well as most fair‐​minded people, would not want to suppress such arguments. After all, it would significantly silence one side of a major geopolitical debate.

The inevitably inconsistent application of such rules interjects the bias of policymakers into whose speech is good and whose is bad. And while these pronouncements may seem fine when they target disfavored views, these same laws can, have, and will continue to be weaponized in profoundly unjust ways.

In the slaveholding South, for instance, the bad tendency test was used to outlaw abolitionist speech as “the unavoidable consequences of [abolitionist] sentiments is to stir up discontent, hatred, and sedition among the slaves.”

Today, the German Network Enforcement Act (commonly known as NetzDG) was supposed to stop online hate speech but has also been adopted by over a dozen other nations, many of which are authoritarian regimes like Russia, Belarus, Vietnam, and Venezuela. Such nations are happy to use this German law as a justification for silencing any “hateful” online dissent.

If we want to better tackle hate speech and protect minorities, we must not reflexively reach for the tools of suppression. In this case, merely silencing Zemmour will not defeat the ideas that animate him and many others. It is better for all to know the views of this person who wants to be a political leader and for civil society to address his assertions and beliefs with counter‐​speech. Only then can the fears, anger, and views that animate such beliefs be effectively addressed both online and offline.

Scott Lincicome and Alfredo Carrillo Obregon

The Federal Trade Commission last week released a report on the market factors that contributed to the infant formula shortage of 2022. Given our analysis of this topic last year, we were glad to see that the FTC identified most of the policy‐​related impediments that we identified as exacerbating the crisis. Notably absent from the report, however, is any mention of how highly restrictive US trade policies also contributed to one of the longest and deepest supply chain crises of the pandemic.

WIC

The first policy targeted by the FTC report is the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC). The agency concludes that WIC’s structure—in particular, the single supplier contracts that states offer to formula manufacturers—does lower program costs, but also risks 1) states becoming “overly reliant” on one formula brand, 2) creating barriers to entry for competitors, and 3) having “unintended spillover effects” on the non‐​WIC formula market.

Our 2023 report reached the same conclusion, explaining that these contracts have contributed to only three large producers—Abbott, Reckitt/​Mead‐​Johnson, and Nestlé—dominating the US infant formula market. That’s because only producers of that scale could afford to offer the discounts state WIC offices demanded, and because securing a state’s WIC contract leads to dominance in the non‐​WIC formula market. This concentration, we explained, prolonged and deepened the 2022 formula crisis by making the US market less able to adjust when a large Abbott factory went offline early that year.

Here’s how the FTC report put it:

While cost effective, the current single‐​supplier WIC contract mechanism may make the U.S. infant formula market more fragile. The single‐​supplier contract mechanism, combined with the size of WIC in the infant formula market and documented volume spillover effects, means that the manufacturer holding each state’s WIC contract dominates that states’ market with an average of 84% market share. By rendering each state dependent on a single manufacturer for the vast majority of its infant formula supply, single‐​supplier contracts can make it more likely that a lone contaminant outbreak or incident will have cascading and outsized effects leading to serious supply disruptions.

[…]

[S]ingle-supplier WIC contracts may also contribute to increased nationwide concentration by foreclosing smaller companies from competing for the entire WIC share of the market (in addition to any volume spillover sales). Smaller manufacturers generally lack sufficient scale to afford the same scale and rebates as the largest incumbent manufacturers. USDA data shows that between 2003 and 2013, only the three largest manufacturers (Abbott, Mead Johnson/​Reckitt Benckiser, and Gerber/​Nestlé, now Perrigo in North America) have ever bid on a single‐​supplier WIC contract. (Emphasis ours.)

The FTC report also notes that such WIC‐​enabled concentration, and the program’s bureaucracy, makes responding to a supply disruption more difficult:

Even if the overall national infant formula supply is held constant, each state’s reliance on a single manufacturer means that shifting products towards impacted states when disruptions arise can be a challenge. A disruption in a highly concentrated state market may require significantly modified supply chains, which may require new agreements between manufacturers, distributors, and retailers before alternate supply can physically enter the state. Additionally, all such alternate commercial arrangements must be made in compliance with state and federal WIC regulations for WIC families to ultimately access alternate brands at the retail point‐​of‐​sale.

Notably, the FTC also highlights that the WIC program’s dramatic expansion over the last few decades—another point our 2023 analysis made—could be increasing retail prices for formula purchased outside the program, thus making it harder for families to switch to purchasing non‐​WIC brands in the event of a crisis:

One theory as to how WIC contributes to formula price increases is that the expansion of the WIC Program to approximately 50% of the overall market transformed many of the most price‐​sensitive purchasers (low‐​income WIC‐​eligible families) into entirely non‐​price sensitive purchasers by eliminating their exposure to the ordinary retail price, since WIC covers 100% of the cost of formula at the point‐​of sale. One 2009 study funded by the USDA Economic Research Service examined estimated that the expansion of WIC coverage was a primary factor in the increase in the real wholesale price of infant formula from 1980 to 2002.

[…]

[R]oughly 50% of infant formula purchases in the United States are made by WIC participants whose purchases are subsidized by the program. This sizeable population with decreased price sensitivity may allow manufacturers to raise their wholesale prices above what they would be in the absence of the WIC Program. (Emphasis ours.)

To the extent that WIC subsidies end up making baby formula more expensive in the United States, the result would contradict the program’s stated nutritional objective (i.e., to increase American parents’ access to formula).

FDA Regulations

The second problematic policy identified by the FTC report is the relatively onerous US Food and Drug Administration (FDA) regulations for producing and selling formula in the United States. Here, the agency finds that the US formula regulations are stricter than both other countries’ formula regulations and US regulations governing other foods—including baby food and toddler formula. Complying with these regulations, the FTC finds, is extremely costly, thus hindering new entrants into the infant formula market and further exacerbating industry concentration:

Infant formula is categorized as a food by the FDA. Yet, aspects of its stricter regulatory oversight—specifically that of product research and development, including generating data and documentation—approach regulation for pharmaceuticals. Specialized pre‐​clinical protein assays and weeks‐​long human clinical growth studies are particularly costly in terms of time and capital, with some manufacturers spending more than $190 million and five years of time in an evaluation phase prior to beginning sales. Standard review timelines built into the regulations require over half a year for a formula’s research and development to undergo FDA review. (Emphasis ours.)

Once again, we agree with the FTC and wrote much the same thing last year:

FDA regulations increase the costs of entering the U.S. formula market, thus perpetuating a lack of competition and high concentration. Since the 1980s, federal regulations have tightly restricted the content and manufacture of infant formula, and today the United States regulates formula more strictly than any other food, including formulas consumed by American toddlers.

This regulatory problem, we note, is consistent with “empirical evidence show[ing] that high degrees of regulation can contribute to market concentration.” It’s good to see the FTC acknowledge it too.

Nothing on Trade?

Unsurprisingly, we welcome the FTC’s examination of how the WIC program and FDA regulations helped fuel the 2022 formula shortages, as well as the agency’s suggestion that these policies be reevaluated with an eye toward avoiding future crises. However, it’s disappointing that the FTC report omitted any and all mention of the other federal policy that clearly played (and continues to play) a role in the 2022 formula crisis: US trade restrictions.

As we explained in our paper, the United States maintains high tariffs on imported infant formula from most countries and even sets limits on formula exported from free trade agreement partner countries, such as Mexico and Canada. The Congressional Research Service estimates that less than 20 percent of formula imports between 2012 and 2021 entered the United States duty‐​free, while the remainder faced an average effective calculated duty rate of 25.1 percent.

Adding insult to injury are the non‐​tariff barriers. In particular, the FDA imposes strict nutritional labeling and other rules on imported formula and requires foreign manufacturers to undergo lengthy evaluations prior to being authorized to export products to the US market. The FDA also maintains a “red list” of noncompliant products that are immediately subject to detention upon entry into the United States. These onerous regulations apply to imports from all countries, including those with highly competent regulatory regimes, such as the European Union, the United Kingdom, Australia, and New Zealand.

As a result of these tariff and non‐​tariff barriers, imports accounted for less than 2 percent of total US formula consumption in 2021 (Figure 1).

Tellingly, one of the most significant moves the US government made in 2022 to alleviate the formula crisis was to liberalize these trade restrictions—suspending the tariffs until January 2023 and exercising “enforcement discretion” with respect to the regulatory restrictions. Unfortunately, this and broader liberalization were never made permanent, so the same US trade policies that contributed to the market’s fragility in 2022 remain in place today, thus putting the market’s future stability at risk (much to American parents’ chagrin).

It’s a shame the FTC didn’t notice that too.

Eric Gomez

In 2024, the Cato Institute will host its seventh annual Junior Scholars Symposium (JSS), a paper workshop for graduate students on policy‐​relevant topics related to international security and national security policy.

The Cato Institute works to promote a US foreign policy of restraint. Accordingly, the most promising papers will clearly identify flaws in US approaches to international relations and offer recommendations for improving US foreign policy.

The JSS provides participants a unique opportunity to receive feedback on research in progress from their peers and Cato scholars. Papers should be of journal‐​article length; the workshop will focus on providing substantive criticism and strategies for getting the work published.

Paper topics may include, but are not limited to, US foreign policy, grand strategy, civil‐​military relations, alliances and security institutions, and diplomatic history. Candidates should have a background in political science, history, or a related field, and must have completed at least one year of study in a PhD program by the time of the workshop.

The 2024 workshop will be held at the Cato Institute building in Washington, DC. Participants will receive a $500 stipend and Cato will pay for travel to and from Washington, hotel accommodations, and a working dinner.

The symposium will take place on November 1 and 2. To apply, submit an abstract of no more than 500 words and a CV to juniorscholars@​cato.​org by May 31. All candidates will be notified of the status of their application by June 28, and finalists must submit their paper by October 4.

David Kemp

A Washington Post article this week observes that oil industry executives celebrated huge profits in the wake of an international agreement to transition away from fossil fuels to reach net‐​zero greenhouse gas emissions by 2050. At the United Nations Climate Change Conference (COP28) held in Dubai at the end of last year, nations agreed to “transition away from fossil fuels.” The Post notes that, “three months later, it appears that some of the world’s biggest oil and gas companies did not get the memo. At an energy conference [in Houston] their leaders struck a much different tone, predicting that fossil fuels will continue to power the global economy well into the future.”

The article goes on to quote oil industry leaders who praised the Dubai agreement but still predict that oil and gas will play an important role in any energy transition and notes that US oil production is hitting record highs while global oil demand continues to increase.

Meanwhile, on the same day the Washington Post also reported that the Environmental Protection Agency (EPA) finalized a rule setting limits on greenhouse gas emissions from passenger vehicles. The rules are the most stringent tailpipe emissions standards ever set, but are less stringent than initially proposed last year. The EPA estimated that the original rule would require 67 percent of new vehicles to be electric vehicles (EVs) by 2032, compared to only 5.8 percent in 2022.

The United Auto Workers (UAW) opposed the rule. A shift to EVs was one of the UAW’s complaints during their strike last year. As the Post reported, “The union has been wary of EVs because they generally require fewer workers to assemble than gasoline‐​powered vehicles, and because many EV plants are being built in Southern states less friendly to unions.” The UAW actually withheld their endorsement of President Biden over their worries about the EPA’s proposed rule. So the EPA decided to slow down the reduction in emissions and therefore the adoption of EVs.

Delaying the requirements is a marginally positive result. The goals of the tailpipe rule are overly ambitious and the cost‐​benefit analysis likely overstates the benefits.

But the juxtaposition of the two articles still highlights the hypocrisy of environmental advocates and politicians. Both the goals of transitioning away from fossil fuels by 2050 and increasing EV usage are potential examples of what Peter Van Doren notes is a consistent feature of environmental legislation and regulations: “policy beyond capability.” As he described in a blog post about the original version of the tailpipe emissions regulations,

The history of environmental regulation consists of ambitious unrealistic goals followed by missed deadlines and lack of enforcement. The most ambitious unrealistic goal was the California legislative proposal in 1970 to ban the internal combustion engine by 1975. The California State Senate approved the bill while floor consideration in the Assembly failed by one vote. The 1970 national Clean Air Act required ambient air quality standards be achieved by 1975. The deadlines were extended many times. By 2005, of the 338 deadlines set by the Clean Air Act Amendments of 1990 only 37 had been met by the deadline specified in the statute.

These two cases also show how unrealistic policies are not applied consistently. Concessions to labor unions over electric vehicles are considered an acceptable political sacrifice, even though President Biden characterized the “climate crisis” as an “existential threat” in his recent State of the Union address, whereas the oil industry’s assertion that fossil fuels will remain important in the future and continuing high profits are seen as undermining the COP28 goal of achieving net‐​zero by phasing out fossil fuels.

Whether climate change is a catastrophe or, more realistically, a potential problem that requires a rational and sober response, policies to reduce emissions should be realistic and applied uniformly. When concessions are given to one party’s constituents, other groups, such as oil companies, workers in oil and gas fields, and consumers worried about high prices on their favorite cars, will wonder where their concessions are.

Scott Lincicome

The Economic Report of the President (ERP), released annually by the Council of Economic Advisers, is always full of useful and interesting data, and the just‐​published 2024 edition is certainly no exception. The new ERP’s international trade chapter is particularly noteworthy, given the increasing hostility to open trade and investment in Washington and the often‐​erroneous protectionist narratives used to support it. In a welcome development, the ERP thoroughly punctures several of these narratives by summarizing what the actual economics literature says about international trade and investment in the United States today, mostly in line with (and in one case even citing) the essays we’ve published over the last year as part of Cato’s ongoing Defending Globalization project.

Below are ERP excerpts supporting six important trade and investment facts, with sources in parentheses and bolded emphasis mine.

Fact 1: Tariffs and trade agreements don’t drive the US trade deficit.

U.S. Trade Deficits Are Driven by Aggregate Saving and Investment Patterns

Trade deficits can elicit negative attention if the presumption is that the GDP accounting identity (where negative net exports—exports minus imports—are subtracted from GDP) describes the totality of the relationship between trade and growth. Trade deficits are also sometimes associated with import competition, which has historically generated concentrated employment losses for certain groups of workers. However, the connections between trade deficits, economic growth, and employment are closely tied to broader macroeconomic conditions.  For example, when an economy is operating at full employment, a rising trade deficit can be a pressure‐​release valve, providing needed supplies of imported goods and services that help prevent overheating (Baker 2014). Moreover, imports complement domestic spending on American goods and services, so that their negative accounting impact on GDP is partially offset by the domestic value added generated, along with downward pressure on inflation. Trade, including via higher imports, can also boost the productivity of importing firms and the broader economy by supporting higher growth (CEA 2015a). Data support this view; the U.S. trade deficit tends to be countercyclical and is largest during periods of strong GDP growth because the same drivers of increased domestic demand (including savings and investment rates) also tend to fuel increased import demand (CEA 2015b).…

Overall trade balances. The fundamental drivers of a country’s overall trade balance are its relative saving and investment rates—both public and private (Ghosh and Ramakrishnan 2024). Countries with lower domestic saving than domestic investment (likely as a result of low domestic saving rates, high domestic investment rates due to attractive economic opportunities, or a combination of the two) tend to run trade deficits and accompanying current account deficits (where the current account balance is defined as the trade balance plus net foreign investment income plus net transfer payments from foreign income sources like worker remittances and foreign aid). The trade balance typically accounts for the bulk of the current account balance and is highly correlated with it, so, for expositional simplicity, we focus on the trade balance. Trade deficits are necessarily matched by capital and financial account surpluses (the net inflows of foreign lending necessary to finance the trade deficit)—as is the case with the United States. 

Fact 2: Foreign direct investment (FDI) is good; the United States is the world’s FDI leader; and there’s been no “giant sucking sound” of capital leaving the country.

The United States Leads in Global FDI Flows

The United States is the largest source of and destination for FDI flows globally. Over 20 percent of both U.S. FDI inflows and outflows in 2022 were targeted at cross‐​border manufacturing investments (OECD 2023b; BEA 2023b). In addition to providing another source of financing for domestic investments, FDI tends to increase wages and productivity in target firms (Hale and Xu 2016) and can also generate positive spillovers across U.S. firms within an industry (Keller and Yeaple 2009). Reflecting long‐​standing trends, the large majority of U.S. FDI flows are either destined for or originate from the country’s closest trading partners. For example, in 2022, Canada and countries in Europe accounted for 79 percent of inward U.S. FDI flows and 65 percent of outward U.S. FDI flows (BEA 2023c).

Fact 3: Imports (and exports) benefit U.S. manufacturers, especially multinationals.

Multinational firms—themselves fueled by the information and communications revolution—have been particularly adept at taking advantage of cross‐​border input cost differentials. By establishing foreign affiliates through FDI, these firms can mediate trade with both foreign subsidiaries (within‐​firm trade) and unaffiliated firms (arm’s‑length trade) within [global value chains] (OECD 2018). Multinational firms accounted for, respectively, 65 percent and 60 percent of U.S. goods exports and imports on average between 1997 and 2017 (Kamal, McCloskey, and Ouyang 2022). And within‐​firm trade accounts for a large share of multinationals’ total trade flows: In 2022, one third (33.7 percent) of U.S. exports and almost half (46.6 percent) of U.S. imports by value were between multinational parent firms and their affiliates or related parties (U.S. Census Bureau 2022). The growth of trade within multinational firms (i.e., flows between parents and affiliates) underscores the highly fragmented nature of production.

Global supply chains’ prevalence in U.S. production can also be observed in the high share of intermediate goods or imported input trade in the United States (figure 5–10). Industrial supplies (e.g., lumber and steelmaking materials) and capital goods (e.g., drilling equipment)—typically, inputs into final goods—are highly positively correlated with [global value chain] trade and accounted on average for over half of imports between 1992 and 2022 (Hummels, Ishii, and Yi 2001; Baldwin and López‐​González 2014). The import share of industrial materials grew more than that of any other product group between 1992 through the onset of the global financial crisis in 2008, showcasing how multinationals’ FDI and the establishment of GVC linkages can support greater trade flows.

Fact 4: Imports (including ones from China) also benefit American consumers, especially poorer ones.

Import competition from China was also accompanied by a substantial fall in U.S. consumer prices, with disproportionate benefits accruing to low‐ and middle‐​income households because they have higher shares of tradable goods like food and apparel in their consumption baskets (Fajgelbaum and Khandelwal 2016; Russ, Shambaugh, and Furman 2017). Causal estimates suggest that a 1‑percentage‐​point increase in Chinese import penetration led to a decline in consumer price inflation of 1 to 2 percentage points—largely reflecting indirect pro‐​competitive cost effects, where greater foreign competition induces domestic firms to lower markups and thus further drives down prices (Jaravel and Sager 2019). Considering the modeled impact of increased Chinese import penetration across U.S. geographic regions, Galle, Rodríguez‐​Clare, and Yi (2023) find that almost 90 percent of the U.S. population saw an increase in purchasing power, with those regions that saw purchasing power losses being spatially correlated with regions that also saw a loss in manufacturing employment from the China shock.

The results, showing that trade with China has benefited most Americans’ purchasing power, are consistent with a larger body of evidence on the benefits from trade with all countries—again, with disproportionate benefits accruing to lower‐​income households.35 For example, the average U.S. household has been shown to gain 8 percent in purchasing power from trade compared with a counterfactual autarky (Fajgelbaum and Khandelwal 2016).36 However, the lowest‐​income U.S. households gain the most, at 69 percent (figure 5–13).

fn. 35: There is also a literature documenting welfare increases due to greater access to varieties of goods through trade (e.g., Broda and Weinstein 2006; Melitz and Trefler 2012).

Fact 5: China—and Permanent Normal Trade Relations, in particular—didn’t cause most U.S. manufacturing job‐​losses, even during the “China Shock.”

Close to a fifth (16 percent) of the decline in manufacturing employment between 2000 and 2007 has been attributed to the rise in import competition from China (Caliendo, Dvorkin, and Parro 2019). Firms that reorganized activities away from the production of machinery, electronics, or transportation equipment and toward wholesale, professional services (including research and development), and management drove almost a third of the negative manufacturing employment decline between 1990 and 2015 (Bloom et al. 2019). Several factors have been analyzed to understand the surge in U.S. imports from China during this period, including the United States granting China permanent normal trade relations in 2000, China’s accession to the World Trade Organization in 2001, reduced trade and investment policy uncertainty associated with these policy actions, and China’s own trade and domestic reforms (e.g., tariff reductions and privatizations) (Lincicome and Anand 2023).

(For those interested, my Cato essay cited in the ERP excerpt above finds that, based on various economic studies, China’s own market‐​based reforms likely drove around two‐​thirds of the “China Shock,” with U.S. trade liberalization accounting for the rest.)

Fact 6: Today, U.S. companies engaged in trade are huge job creators.

[Global value chains] have created strong interconnections between exporting and importing—which are often performed by the same firms. Among goods traders, averaged over the period 1992–2021, firms that both export and import goods account for a plurality of total U.S. private sector employment (36 percent), followed by firms that only export goods (8 percent) and firms that only import goods (6 percent) (figure 5–16). The majority of employment at goods traders is by large firms (defined as those employing 500 or more workers); in contrast, the majority of employment at nontraders is by small firms (those employing fewer than 500 workers). Nevertheless, small firms directly engaged in the goods trade account for almost 10 percent of national employment.…

Goods traders’ contribution to net job creation has grown over recent years: During the 2001–7 period, goods traders accounted for only 10 percent of total net job creation; but between 2008 and 2019, that figure rose to 60 percent. Overall, goods traders were responsible for almost 40 percent of net job creation in the U.S. economy between 1992 and 2019 (Handley, Kamal, and Ouyang 2021).38 These statistics underscore the changing nature of the U.S. production landscape, where both exports and imports support domestic jobs.

fn. 38: Handley, Kamal, and Ouyang (2021) document that vast majority of goods‐​traders’ contribution to net job creation is driven by the opening of new establishments, particularly, in services‐​providing sectors like wholesale, retail, business and professional services. These patterns hint at the complementarity between manufacturing and services activities as well as the sectoral diversity in job creation tied to trade participation.

In Washington today, the unfortunate consensus among many politicians and pundits is that trade and globalization have been an unmitigated disaster for America and the working class, regardless of the actual facts. It’s good to see that White House economists aren’t buying into this new consensus, though it’d of course be even better if their views were more reflected in U.S. policy too.

For more trade and globalization facts, check out the Defending Globalization essays here.