Should a state be allowed to set, as a condition for out of state firms to do business, that they consent to being sued there in disputes with no relation whatever to the state? Today in Mallory v. Norfolk Southern Railway Co. the Supreme Court said “sure.” That’s likely to set off a boom in forum-shopping lawsuits at the expense of both economic rationality and fairness — and yet it’s also a plausible reading of the Court’s precedents on personal jurisdiction. Hence the Court’s deep split today, which crossed ideological lines.

The Court’s previous development of sound rules for personal jurisdiction has been one of its great successes of recent years and has materially rolled back many excesses of the previous litigation explosion. On the other hand, consent matters — matters so much, in fact, that it can sometimes require swallowing doubts about fairness of outcomes. That’s a lesson of the Court’s successful jurisprudence on arbitration — though that same lesson is rejected by many of those cheering today’s outcome.

Justice Alito’s concurrence notes that the Dormant Commerce Clause, which itself has been shrinking in application lately, might offer a way to stanch the practical damage. We should look for other ways too.

Earlier this week, the Food and Drug Administration issued a draft of proposed guidelines for clinical researchers conducting trials on psychedelic drugs. Even though the Drug Enforcement Administration categorizes psychedelic drugs as Schedule I (meaning that the law enforcement agency has determined they have “no currently accepted medical use and a high potential for abuse”), clinical researchers have known for decades that psychedelic drugs can help treat a variety of mental health disorders.

Government-approved Phase 3 clinical trials of the psychedelic MDMA* (colloquially called “molly” or “ecstasy”) show the drug can be effective in treating post-traumatic stress disorder (PTSD). News reports claim the FDA is expected to approve the drug for PTSD treatment later this year. Regulators in Australia approved it last February. The FDA recently approved a clinical trial using MDMA to treat schizophrenia. Psilocybin, the psychedelic found in “magic mushrooms,” has been shown helpful in treating tobacco addiction, depression, and suicidal ideation, particularly in patients receiving palliative end-of-life care. Research dating back to the 1950s finds that LSD (lysergic acid diethylamide) shows promise in treating anxiety, depression, addiction, and psychosomatic diseases. Of course, none of this matters if the DEA doesn’t agree to reschedule these drugs and continues asserting they have “no currently accepted medical use.” Accepted by whom?

Generally, when the FDA approves a controlled substance for medical use the Secretary of Health and Human Services must next formally request the DEA reschedule the drug. The DEA then has 90 days to issue an interim final rule. But the DEA doesn’t have to follow the health care agencies’ recommendations.

In 1985 the DEA placed MDMA on Schedule I as an emergency action. Clinicians and clinical researchers challenged the decision and, in a 1986 hearing, provided mountains of scientific evidence that convinced administrative law judge Francis L. Young to conclude:

If the Administrator of DEA carefully considers the entire record now provided in this proceeding, there is no reason why he cannot come to the informed decision the law requires of him as the Agency head.
Needless to say, nothing in this opinion is to be taken as being in any way critical of the Agency’s emergency scheduling of MDMA which became effective on July 1, 1985. That action was taken pursuant to certain statutory authority with which this proceeding is not concerned. That action was wholly unilateral, reflecting a view based on evidence then available to the Agency but without opportunity for the presentation of countervailing evidence or argument. This proceeding, a wholly separate process, has provided that opportunity. A complete record, with input from different perspectives, has now been assembled for the benefit of the Administrator, the head of the Agency.
The record now assembled contains much more material about MDMA than the Agency was aware of when it initiated this proceeding by publishing a notice almost two years ago.

Based upon this record it is the recommended decision of the administrative law judge that the substance 3, 4‑methylenedioxymethamphetamine, also known as MDMA, should be placed in Schedule III.

Dated: MAY 22 1986
Francis L Young, Administrative Law Judge

Judge Young vacated the DEA’s decision to place MDMA on Schedule I, placing it on Schedule III (“moderate to low potential for physical and psychological dependence”). One month later, Acting DEA Administrator John Lawn overruled the administrative law judge and moved MDMA back to Schedule I, stating that, though expert clinical researchers presented over 200 cases of MDMA-assisted psychotherapy at the hearing, none of them had been published in medical journals.

Think of all the research that has been stifled, and all the lives that could have been saved or improved, if Administrator Lawn had not made that fateful decision.

And it’s not just psychedelics. Who can state with a straight face that cannabis has “no accepted medical use?”

Thus, even if the FDA approves MDMA to treat PTSD and other mental health disorders, clinicians and patients will still have to wait for a law enforcement agency to sign off on the decision. And this is not just a federal law enforcement decision. Each state has its own controlled substance system patterned after the federal system. According to the Multidisciplinary Association for Psychedelic Studies (MAPS), 27 states have laws that require parity with the federal controlled substances schedule. In those cases, the states automatically reschedule controlled substances to conform with a DEA rescheduling. But the remaining 23 states require lawmakers or regulators to make their controlled substance schedules conform.

Recently Representatives Dan Crenshaw, Morgan Luttrell, and Jack Bergman–all military veterans– introduced the “Mike Day Psychedelic Therapy to Save Lives Act,” which would provide federal grants for research into using MDMA to treat PTSD and traumatic brain injury patients. It is gratifying to see lawmakers begin to appreciate the potential benefits of psychedelics.

But law enforcement is in command of the war on drugs. Unless Congress acts, we will continue to see cops practicing medicine. And the people—veterans and non-veterans— will continue to suffer.

*3,4‑methylenedioxymethamphetamine

State legislatures, like other actors in our system of government, are creatures of constitutional law. They are ordinarily subject not only to the federal Constitution but to the constitution, laws and legal decisions of their own states. That’s basic intuition, and six Supreme Court justices agreed today that the Elections Clause does not carve out an exception. That’s consistent with a long line of previous cases and practices from the early days of the Republic through the present day.

As the Court emphasized, state courts do not have free rein to impose their own caprices in this area; federal courts can rein them in if they “transgress the ordinary bounds of judicial review” on Elections Clause matters.

Three Justices would have held the case moot, of whom two (Thomas joined by Gorsuch) voiced some inclination toward a particular originalist reading that would have accorded state legislatures a broad swath of unreviewable power. Thomas also warns that the Court’s announced standard for reviewing state court action is likely to yield outcomes that are at best unpredictable.

Despite much angst from commentators, it was never likely that today’s Court would endorse a supercharged version of the so-called independent state legislature theory. One practical consequence worth noting: some thought the Court might be headed toward reversing its close 2015 decision upholding Arizona’s creation of an independent redistricting commission. That’s now highly unlikely.

Testifying before the Senate Banking Committee last week, Fed Chair Jay Powell acknowledged inflation has come down but suggested it hasn’t slowed because of monetary policy. Insisting that the Fed still has work to do to bring inflation down, he told the Committee:

I won’t say [food and energy are] not affected at all by monetary policy, but they’re principally affected by other things in the economy.

Really, where monetary policy takes effect is in the service sector, and that’s where we haven’t seen much progress. Inflation, broadly, is coming down, but as I said in my remarks, we still have a long way to go. Inflation’s still running between 4 and 5 percent.

Powell’s remarks bring up several interesting policy questions. For starters, the Fed does not have any particularly good price setting powers for different sectors of the economy, which is why all economists learn that monetary policy tries to stabilize the overall price level. Put differently, there is no reason to expect the Fed’s tightening to affect only the services sector. Given that service-based companies are generally less capital intensive than goods-producing companies, it makes sense that the service sector may be even less responsive – at least directly – to monetary policy changes.

Moreover, from February through April the average monthly change in the services category for Personal Consumption Expenditures is very close to its long-term average. The long-term average monthly change, measured from January 1959 to April 2023, is 0.32 percent, while the average change from February 2023 to April 2023 (the three most recent dates available) is 0.35 percent. So, price changes in the service sector have been trending down.

It’s also clear the annual rates of PCE services price increases are elevated at least partly due to the below average changes experienced prior to the COVID crisis. The average monthly change from January 2010 to February 2022, for instance, was just 0.2 percent, while the average from March 2022 to April 2023 was 0.45 percent.

Beyond these simple comparisons of percentages, more sophisticated research suggests that there is little reason to expect monetary policy to have much of an effect on prices in the services industry. As a Cato study using a VAR technique finds, Fed policy has hardly mattered in explaining inflation (services or otherwise). Figure 1 below reproduces the breakdown of inflation into its demand, supply, and monetary policy components from 1960 onwards. As the graph shows, supply factors dominate – they account for over 80% of the variation in service-sector inflation, both in the short-term and long-term. In the near term, monetary policy explains less than 2% of inflation. In the longer term, the effects increase but never account for more than 5% of service-sector inflation.

If, as some suggest, the Fed tries to rapidly tighten credit conditions now, it would be doing so primarily because the month-to-month change in service sector prices remains above its long-term average. For the last three months, this average change was just 0.027 percentage points higher than its long-term average. For the previous 12 months, it was only 0.13 percentage points higher.

As we’ve argued before, it seems perfectly reasonable that the members of the Federal Open Market Committee would pause their tightening campaign. As a larger issue, it is unclear why people would want any government agency to have the ability to constrain credit for arbitrary reasons such as those discussed above.

For a detailed analysis, please see this Cato working paper.

Over the last year, news media have run numerous stories of offices, shopping malls, and other commercial properties going into foreclosure or being sold at substantial discounts. Given local government’s reliance on property tax revenues, a collapse in commercial property values might appear to have disastrous consequences for city and county finances. But circumstances differ widely from one region to another (and even between local governments within a region), so the impact of the commercial real estate decline will vary greatly.

Among the factors we must consider when evaluating the revenue impact of lower commercial real estate valuations are, first, what proportion of revenue comes from property taxes on commercial real estate, next, how closely assessed values tracked market values before the collapse, and finally, whether and when properties will be reassessed to conform with reduced market prices more closely.

San Francisco—a city at the epicenter of the commercial property collapse—provides an example of how to evaluate these three factors. (For more about why San Francisco finds itself at the epicenter please see my recent post on the city’s policy failures.)

Commercial Property Tax Dependency

Local government is heavily reliant on property taxes generally, but many entities diversify their revenue sources with income taxes, sales and excise taxes, and other levies, as well as non-tax revenues.

San Francisco anticipates $6.4 billion in revenue in fiscal year 2023–24. Of this total, $4.4 billion is expected to come from tax revenues. The combined city/​county government levies a variety of taxes aside from the property tax, including sales tax, hotel room tax, utility user tax, parking tax, real property transfer tax, sugar sweetened beverage tax, and a unique tax on executive pay. Property taxes are expected to contribute $2.5 billion of the $4.4 billion of anticipated tax revenue.

Since the current real estate valuation slump is only affecting certain categories of properties, it is also essential to understand how assessed value breaks down by category. According to San Francisco Assessor’s latest annual report, three major commercial property categories (office, retail and hotel) accounted for 27% of total assessments in 2021. This proportion slightly understates the share of property tax revenue derived from commercial property, because only residential property is eligible for a homeowners’ exemption. In California, this exemption is only $7,000 per owner occupied property and thus not as significant a factor as in Texas.

Overall, San Francisco’s commercial property valuation decline places at risk about $700 million of annual revenue or about 11% of total general fund collections. It is easy to see how this proportion might vary across cities and counties. Suburban communities that are primarily residential are likely to have very little exposure to commercial valuations, while cities hosting large malls and office clusters should be at greater risk.

Assessed Versus Market Values

Due to Proposition 13, the relationship between properties assessed and market value is complex. The 1978 measure limited assessment increases to 2% annually if a property does not change hands and is not subject to major construction. For properties that have not been reassessed since Proposition 13’s implementation, their market values have risen about ten-fold on average, but their assessed value have increased by a factor of only about 2.4.

While it is unlikely that many high-value commercial properties have avoided reassessment through the entire life of Proposition 13, significant gaps between assessed and market value have emerged over shorter periods: between 2012 and 2022 alone, California property prices more than doubled (it should be noted that I am using a residential price index for these value increases; the changes in commercial property valuations are likely to be different).

To reasonably estimate the potential impact of underassessments, it would be necessary to review a sample of local properties. San Francisco’s City Controller is performing such an analysis but the results have yet to be published.

While no other state has Proposition 13, there can still be variances between assessed and market valuations outside of California. For example, a Georgia property assessor reviewed a sample of ten commercial properties and found that, on average, they were assessed at 40% below market value (his findings were published in a paywalled edition of Fair & Equitable, the magazine of the International Association of Assessing Officers).

Reassessment Timing

Just as assessments may not reflect market values on the way up, they may also lag declining resale values. But this is less affect is less likely to persist given the incentive that property owners have to minimize their property tax liabilities.

In California, property owners can ask their assessor for a reduction, and, if not satisfied, they can appeal the assessor’s decision to a county board. San Francisco’s Assessment Appeals Board has an active docket of appeals cases at the moment, with some filers requesting assessment reductions of more than 50%. In one extreme case, the owner of the Westin St. Francis Hotel in San Francisco’s Union Square is seeking a 90% reduction in its assessed valuation.

Owners of commercial real estate may hesitate to seek downward reassessments if they are marketing their properties since potential buyers might use the lower assessment as a basis for negotiating a sales price. And, in California, at least, retroactive reassessments are not possible. So, in some cases, a commercial property may be assessed above market value at least during the current tax year.

Conclusion

Although San Francisco may be considered ground zero for the commercial property collapse, the budgetary impact has been limited this far. The city’s FY 2022–23 revenues are running just 1% below prior year levels and the city is forecasting small increases for the next five fiscal years. That said, these are nominal amounts, and it is fair to conclude that San Francisco’s projected revenues are expected to grow at or below the rate of inflation and are significantly underperforming recent growth rates.

San Francisco is receiving some protection from undervaluation before the pandemic and revenue source diversification. That said, the city’s unique challenges may also impact its sales tax and hotel room tax collections as well as its property tax revenues.

For other jurisdictions, results can be expected to vary. Blanket nationwide assessments may well prove to be a poor substitute for an in-depth look at each city’s and county’s unique characteristics.

Last month, the U.S. House of Representatives passed the Secure the Border Act of 2023. Among other things, the bill would mandate that all employers use the E‑Verify program to prove that their new hires have federal authorization to work. A coalition of conservative advocacy organizations praised this provision because it would “turn off the ‘jobs magnet’ for illegal immigration.”

But is this good? Should the U.S. government really have the power to “turn off jobs”? The answer for people who believe in limited government is clearly no. The government in a free society should not have the power to decide who can work; free people shouldn’t have to request permission to work; and the founders of this country could not possibly have imagined a scenario where the federal government held a kill switch for everyone’s right to earn a living.

E‑Verify attempts to be a form of electronic national identification. Currently, it just runs a person’s name and Social Security Number against government databases. But the government is already incorporating photo IDs into the program, and it is only a matter of time before that becomes mandatory as well. The Secure the Border Act of 2023 mandates the Secretary of the Department of Homeland Security (DHS) to pilot additional, possibly biometric, verification mechanisms as well.

Mandatory E‑Verify would create a centralized electronic record of all your employment activity, and the inevitable expansion to other economic and social activities would locate within DHS a comprehensive surveillance tool unlike any in the history of the United States. Unlike passive surveillance systems, E‑Verify could quickly be used to “turn off” the rights of people targeted by the government.

Right now, the “banned list” only includes people ineligible to work in the United States (which includes many people here legally but not eligible to work). But the immigration logic behind E‑Verify obviously extends to absolutely anything a person might want to do in the United States while here illegally. Laws already ban or surveil their use of transit, driver’s licenses, bank accounts, apartments, gun sales, and access to certain federal buildings. Will conservatives oppose “turning off the bank account magnet” or allow illegal immigrants to buy guns? I doubt it.

Conservatives who zealously promote this massive expansion of government power in the name of cleansing the labor market of unwanted foreign workers should think twice about whom a left-leaning DHS would want to target years from now. One of the few members of Congress who understands the threat is Thomas Massie (R‑KY) who told the House Judiciary Committee, “Why are we making another list? These always get turned against us and they’re never used for the purpose that they were intended.”

E‑Verify actually has broad bipartisan support. Democrats only oppose it because it is not in a bill with a legalization of illegal immigrants. Under those circumstances, Democrats will gladly hand over federal power over employment to DHS. But once the illegal immigrants are all legal, would E‑Verify keep to its original purpose? I doubt it.

Who could have predicted that Social Security Numbers—which were created solely for the purpose of giving Americans a taxpayer check—would morph into our national ID number attached to health care, banking, and so much else? Of course, many did predict this, and the government assured them that Social Security cards and numbers were not for identification purposes. But that changed very quickly, and an E‑Verify system would evolve along the same lines.

Once the system is nationwide and mandatory for all, every politician will argue, “We already do it for illegal immigrants. Are illegal immigrants any worse than… ‘deadbeat dads,’ ‘tax cheats,’ ‘criminals,’ ‘anti-vaxxers,’ ‘gun dealers,’ ‘racists,’ ‘insurrectionists,’ etc.?” Do conservatives trust DHS to define these terms?

The government should not have the power to “shut off jobs,” or shut off housing, or shut off the Internet, or anything else—especially not in a way that allows for targeting of specific, disfavored groups. E‑Verify should not exist. Congress should stop putting hundreds of millions of U.S. taxpayer dollars into it. Since freedom depends on the powers of government being limited, every patriotic American should oppose E‑Verify.

The Menace of Fiscal QE

By George Selgin

The Cato Institute, 2020, $14.95, 126 pages

George Selgin’s book The Menace of Fiscal QE, published by the Cato Institute in 2020, is particularly relevant today following debt limit negotiations that demonstrated how reluctant U.S. politicians are to grapple with unsustainable federal spending. The book is about the potential dangers of using quantitative easing (QE) as a tool for financing government spending.

The dangers are manifold. Selgin warns against engaging in fiscal QE because it would undermine the Fed’s independence and credibility, erode democratic oversight and transparency of fiscal policy, and could open the floodgates to backdoor spending. It might also relieve, at least temporarily, the pressure to deal with unsustainable entitlement programs – all while still resulting in higher inflation. The dangers of fiscal QE are great, the harms would be widespread, and the political temptation to use it will grow.

Selgin highlights dangerous precedents in U.S. history when policymaker used QE for non-monetary ends and details growing interest in fiscal QE among certain economists and politicians today who are looking for a “free lunch” government funding mechanism.

QE is the practice of the central bank buying large amounts of assets, such as government bonds or mortgage-backed securities, to inject money into the financial system. QE can help stimulate economic activity and prevent deflation in times of crisis when interest rates are at their zero lower bound and ordinary monetary policy tools can no longer be relied upon. However, QE also has costs and risks. It distorts asset prices and creates moral hazard, where investors take excessive risks to chase higher yields. Fiscal QE is when the Federal Reserve buys assets and expands the Fed’s balance sheet when there is no compelling macroeconomic reason for doing so, primarily, or solely to support government spending objectives.

Congress’s adoption of the Fiscal Responsibility Act (FRA), which raises the debt limit through 2024 in exchange for weak discretionary spending limits, unintentionally shows how politically tempting fiscal QE is. As the Congressional Budget Office pointed out, debt will still rise substantially, even assuming full implementation of the FRA’s deficit reduction, to 115 percent of gross domestic product (GDP) by 2033. Had members of Congress been serious about controlling the growth in the debt before increasing the debt limit again, they would have adopted meaningful fiscal targets and a pathway to reforming federal health care and Social Security – the key drivers of federal spending growth. Instead, they will have an even bigger fiscal challenge on their hands next time the debt limit comes around, sometime in spring or summer of 2025. Political obstacles to reforming old age entitlement programs create a temptation to find unorthodox ways out of the fiscal mess for some politicians and big government advocates. It’s no wonder some are considering resorting to fiscal QE.

Selgin shares examples of politicians and economists advocating for fiscal QE, including to finance student loan debt forgiveness and the Green New Deal. Selgin also identifies past examples of fiscal QE, including the Fed’s purchase of mortgage-backed securities during and after the Great Recession, “not only to stimulate aggregate investment…but also to support the housing market,’ and Congress raiding the Fed’s surplus account to finance infrastructure as authorized in the 2015 Fixing America’s Surface Transportation (FAST) Act. Selgin is not opposed to QE per se, recognizing that there are valid macroeconomic rationales for using it when interest rates are at their zero lower bound. Rather, Selgin only argues against using QE to pursue fiscal policy.

Fiscal QE proponents claim that it can provide a free lunch for the government, by allowing it to spend more without raising taxes or borrowing from the public. They also argue that fiscal QE can boost aggregate demand and economic growth more effectively than conventional monetary or fiscal policy. Selgin debunks both arguments, pointing out that fiscal QE would have inflationary consequences, shift risks from bondholders to taxpayers, and impair central bank independence. He also demonstrates that fiscal QE would not stimulate the economy more than conventional policy, but rather create distortions and inefficiencies in resource allocation and income distribution, including generating financial instability by encouraging excessive risk taking among investors. Selgin concedes that despite fiscal QEs downsides, it has great appeal largely due to fiscal illusion. He writes:

“[M]yopic politicians have long been tempted to exploit a central bank’s lending powers even when doing so ultimately sponsors unwanted inflation. “Printing money” can be much easier than raising taxes, and less costly in the short run than competing with private sector borrowers for credit. Also, the public may not grasp the connection between fiscal QE and any inflation that follows.”

While this author is squarely in the camp of those who believe that current government spending is unsustainable and threatens America’s prosperity, Selgin’s arguments should appeal to a broader audience. By enabling “backdoor” spending, that is, spending that bypasses congressional appropriations, resort to fiscal QE should also concern those who believe that the federal government isn’t spending enough. Anyone who cares about democratic, transparent government, regardless of their views on the proper size and scope of federal spending, should find a Fed that blurs the lines between fiscal and monetary policy unacceptable.

Selgin urges the Fed to restore its pre-crisis operating procedures to limit the dangers of resorting to fiscal QE. Specifically, the Fed should return to a corridor system, where it sets a target range for the overnight interest rate and adjusts its supply of reserves accordingly. “A corridor system reform would guard against fiscal QE by constraining the size of the Fed’s balance sheet,” explains Selgin.

It wasn’t until 2008 when the Fed began paying interest on reserves that the central bank inadvertently severed the link between the size of its balance sheet and inflation. Under the current floor system, the Fed can use QE without losing control of inflation by adjusting the rate of interest it pays on bank reserves. In the same vein that the Fed might be pressured by Congress to fund government spending via QE, it could be pressured to not raise rates when inflation takes hold to avoid an economic downturn.

Given congressional reluctance to reform entitlement programs that are the major drivers of increased spending and debt, it would be wise for the Federal Reserve to close off an avenue for fiscal QE before it’s too late. The temptation to use the central bank balance sheet to fund federal government spending without having to resort to taxation or borrowing will only rise as the federal debt grows ever larger. Fed officials and others directly involved in Fed policy should heed Selgin’s warning.

This piece previously stated that the Fed began paying interest on reserves in 2009. It was corrected to reflect this policy began in October of 2008