President Obama is announcing today that despite the fact that the Senate is not in recess, he’s going to recess appoint Richard Cordray to be the head of the Consumer Financial Protection Bureau (CFPB), created under the Dodd-Frank Act.

Of course the President is actually claiming that the Senate isn’t in session and that its “pro forma” sessions are just a “gimmick”. Funny I don’t remember then Senator Obama complaining about gimmicks when the Senate used the sames tactics to block Bush recess appointments. But then again this is the guy who signs a bill allowing indefinite detention of American citizens after having campaigned on shutting down Guantanamo. Only a former constitutional law professor could be so creative with the Constitution.

More importantly the “recess” appointment of Cordray doesn’t solve the President’s problem. The Dodd-Frank Act is very clear, even a law professor can probably understand this section, that authorities under the Act remain with the Treasury Secretary until the Director is “confirmed by the Senate”. A recess appointment is not a Senate confirmation. Now don’t ask me why Dodd and Frank included such unusual language, they could have just given the Bureau the new authorities, but they didn’t. So even with this appointment, the CFPB won’t be able to go after all those non-banks, like the pay-day lenders and check-cashiers that caused the financial crisis (oh wait, those industries didn’t have anything to do with the crisis).

This appointment also guarantees that Obama, even if he gets a second term, is unlikely to ever get a CFPB Director past the Senate. Maybe not such a big deal for Cordray since the rumor has always been this is just a political stepping stone so he can go back to Ohio and run for office. The real harm is that Obama has decided to take a gamble with the Constitution, risk the further erosion of the Senate’s advise and consent powers, solely to have another campaign issue. So he can try to paint Republicans as captive to Wall Street, all despite the fact the new agency exempts Wall Street (who will continue under the ever effective oversight of the SEC). Maybe he can have Geithner and the various Goldman alum in the Administration stand next to him to help remind us how hard he is fighting for the middle class.

My Iowa caucus predictions from yesterday were hopelessly wrong, probably because I was picking with my heart rather than my head. As I noted a couple of weeks ago, Mitt Romney’s openness to a value-added tax makes him a dangerously flawed candidate, and I hoped Iowa voters shared my concern.

In a column for today’s Wall Street Journal, I elaborated on those concerns, explaining why a VAT is bad fiscal policy. I had three main points. First, I noted that the big spenders need a VAT in order to achieve a European-sized welfare state in America.

… the left needs a VAT. It is the only realistic way to collect the huge amount of revenue that will be necessary to finance the mountainous benefits promised by our entitlement programs. Which is exactly what happened in Europe, where welfare-state policies only became feasible after VATs were adopted, beginning in the late 1960s.

Second, I explained that the left favors this giant tax on the middle class because they want more money and soak-the-rich taxes don’t generate much revenue.

First, there aren’t enough wealthy people to finance big government. According to IRS data from before the recession, when we had the most rich people with the most income, there were about 321,000 households with income greater than $1 million, and they had aggregate taxable income of about $1 trillion. That’s a lot of money, but it wouldn’t balance the budget even if the government confiscated every penny—and if it did, how much income do you suppose would be available in year two? Second, higher tax rates don’t raise as much revenue as expected. Upper-income individuals are far more likely to rely on interest, dividends and capital gains—and it is much easier to control the timing, level and composition of capital income, so as to avoid exposing it to the tax man.

Third, I debunked the foolish notion that a VAT creates a “level playing field” for American exporters.

…some manufacturers are willing to overlook the VAT’s flaws because the tax is “border adjusted.” This means that there is no VAT on exports, while the tax is imposed on imports. For mercantilists worried about trade deficits, this is a positive feature that they claim will put America on a “level playing field.” But that misunderstands how a VAT works. Under our current tax system, American goods sold in America don’t pay a VAT—but neither do German-produced goods or Japanese-produced goods that are sold in America because their VAT tax is rebated on exports. Meanwhile, any American-produced goods sold in Germany or Japan are hit by a VAT, as are all other goods. In other words, there already is a level playing field. To be sure, there will also be a level playing field if America adopts a VAT. But it won’t make any difference to international trade. All that will happen is that the politicians in Washington will get more money whenever any products are sold.

But I didn’t limit myself to economic analysis. I also warned that Mitt Romney might be an even greater threat on this issue than Barack Obama.

Unsurprisingly, President Obama is favorably inclined toward a VAT, having recently claimed that it is “something that has worked for other countries.” And yet it’s unlikely that the president would propose a VAT, in large part because he is fixated on class-warfare tax hikes. If he did, almost every Republican in Congress would be opposed, even if only for partisan reasons. But what if a VAT sympathizer like Mr. Romney wins next November and decides that his plan for a lower corporate tax rate is only possible if accompanied by a VAT? There will be quite a few Republicans who like that idea because they want to do something nice for their lobbyist friends in the business community. And there will be many Democrats drawn to the plan because they realize that they need this new source of revenue to enable bigger government. That’s a win-win deal for politicians and a terrible deal for taxpayers.

This point deserves some elaboration. Why is the VAT a do-or-die issue?

Simply stated, the United States is in grave danger of becoming a European-style welfare state. Indeed, that will automatically happen in the next few decades because of demographic changes and poorly designed entitlement programs.

This is why there is a desperate need to reform programs such as Medicare and Medicaid. But politicians almost certainly won’t adopt the needed reforms if they have the ability to instead confiscate more money from taxpayers — especially if they have a new tax like the VAT, which is a money machine for bigger government.

P.S. For a humorous – but accurate – perspective on the VAT, take a look at these clever cartoons (here, here, and here).

The federal Fair Housing Act makes it unlawful “[t]o refuse to sell or rent after the making of a bona fide offer … or otherwise make unavailable or deny, a dwelling to any person because of race, color, religion, sex, familial status, or national origin.” Magner v. Gallagher addresses the question of whether the FHA’s ban on racial discrimination can be violated by someone who does not actually engage in racial discrimination: Owners of rental properties in St. Paul, Minnesota brought this suit claiming that the city’s enforcement of its housing code — ensuring that rental units were safe and otherwise habitable — violated the FHA because the repairs and maintenance necessary to comply with the code would increase rents and price out many of their African-American tenants.

Unable to show that the housing code intentionally discriminated based on race, however, the owners argued — and the Eighth Circuit Court of Appeals accepted — a “disparate impact” theory under which a plaintiff need only show that an otherwise neutral practice has a disproportionate effect on some racial group. Cato has now joined the Pacific Legal Foundation, the Center for Equal Opportunity, and the Competitive Enterprise Institute on an amicus brief supporting the city’s request for Supreme Court review and arguing that the statutory language and congressional intent of the FHA preclude disparate impact claims.

We argue that extending such claims to the FHA “would deeply intrude on the authority of state and local governments, and render much of their housing policies illegal,” and “would inappropriately alter the federal-state balance in far-reaching ways.” Indeed, disparate impact claims would preclude all institutions subject to the FHA — public and private — from implementing many practical policies. For example, “because [the FHA] applies to financial institutions, banks and mortgage companies would be pressured to provide loans to unqualified applicants in order to avoid disparate impact liability. Similar actions played a key role in triggering the mortgage crisis of 2007–2008.”

Moreover, the disparate impact doctrine directly conflicts with the Fourteenth Amendment’s equal protection guarantees by forcing government agencies “to engage in unconstitutional race-conscious decision making” in order to avoid liability under the Act. In short, allowing disparate impact claims under the FHA would both lead to adverse economic consequences and create new constitutional tensions.

The Supreme Court will hear Magner v. Gallagher on Feb. 29.

Medicare and Medicaid are rife with fraud. We’re talking 10 percent or more of total spending, which is two orders of magnitude more than what credit card companies tolerate.

In a recent article, I explained a couple of ways such fraud occurs:

For providers, Medicare is like an ATM: So long as they punch in the right numbers, out comes the cash. To get an idea of the potential for fraud, imagine 1.2 million providers punching 1,000 codes each into their own personal ATMs. Now imagine trying to monitor all those ATMs.

For example, if a medical-equipment supplier punches in a code for a power wheelchair, how can the government be sure the company didn’t actually provide a manual wheelchair and pocket the difference? About $400 million of the…fines paid by Columbia/​HCA hospitals were for a similar practice, known as “upcoding.”…

Yet federal and state anti-fraud efforts remain uniformly lame. Medicare does almost nothing to detect or fight fraud until the fraudulent payments are already out the door, a strategy experts deride as “pay and chase.” Even then, Medicare reviews fewer than 5 percent of all claims filed.

I also explained why fraud is so rampant:

Efforts to prevent fraud typically fail because they impose costs on legitimate beneficiaries and providers, who, as voters and campaign donors respectively, have immense sway over politicians. At a recent congressional hearing, the Department of Health and Human Services’ deputy inspector general, Gerald T. Roy, recommended that Congress beef up efforts to prevent illegitimate providers and suppliers from enrolling in Medicare. But even if Congress took Roy’s advice, it would rescind the new requirements in a heartbeat when legitimate doctors — who are already threatening to leave Medicare over its low payment rates — threatened to bolt because of the additional administrative costs (paperwork, site visits, etc.)…

How could it be any other way? Anti-fraud efforts will always be inadequate when politicians spend other people’s money…[People] care less about health-care fraud, and have a lower tolerance for anti-fraud measures, than they would if they paid the fraud-laden premiums themselves.

In a word, government is stupid.

As if to prove the point, the Obama administration—despite its rhetoric about getting tough on fraud—is behaving pretty much as I predicted. In mid-November, the administration announced two anti-fraud efforts, one to prevent fraudulent claims for power wheelchairs and scooters, and another to eliminate “pay and chase” for some Medicare claims in some states. Not two months later, under “heavy provider opposition,” Medicare has delayed these demonstrations “until further notice.”

If you’re interested to see how this all turns out, follow @CMS.gov on Twitter and keep an eye out for #pmd_​demonstration (the wheelchairs and scooters demonstration project; there’s no hashtag for the project to curb “pay and chase”). HT: Peter Suderman.

The Iowa caucuses will gather tonight in the first electoral event for the Republican presidential nomination. It is anyone’s guess which way this contest will go.

But the most noteworthy development up to this point may be Ron Paul’s emergence as a legitimate candidate receiving serious media attention. Much of the coverage has been critical, and rightly so on some issues. Yet, despite attempts to dismiss him as a viable national candidate, Ron Paul matters.

Cato’s president Ed Crane explained why in Saturday’s Wall Street Journal and emphasized, among other things, Ron Paul’s appeal to limited-government Republicans and independent voters on foreign policy and military spending. The Republican establishment should rethink its positions and recognize that Ron Paul has been speaking truth to power on these issues.

In the 2000 presidential campaign, candidate George W. Bush argued against nation-building. Unfortunately, President George W. Bush chose arrogance over humility as his foreign policy. Since then virtually every Republican presidential candidates has embraced his philosophy of endless war: in effect, the GOP mantra is “we’re all neoconservatives now.”

Only Paul (and Gary Johnson, excluded from most of the debates) challenge America’s role as World Policeman. Paul observed that conservatives enjoyed spending money, only “on different things. They like embassies, and they like occupation. They like the empire. They like to be in 135 countries and 700 bases.”

All of Paul’s establishment GOP opponents support defending rich nations around the world. Rick Santorum warned: as commander-in-chief Ron Paul “can shut down our bases in Germany. He can shut down the bases in Japan. He can pull our fleets back.”

Why would this be bad? The European nations have a larger GDP and population than America. The U.S. faces fiscal crisis: after 66 years, it is time for the Europeans to defend themselves. Japan, long possessing the world’s second largest economy, also could take care of itself.

The other Republican contenders, except Ambassador Jon Huntsman, have mostly defended Washington’s endless nation-building exercise in Afghanistan. Santorum demanded that we achieve “victory,” whatever that means. Romney said that he would listen to the counsel of the military commanders–as if that would relieve him of making an independent decision as president.

Most Americans agreed with the original objective of wrecking al Qaeda and ousting the Taliban but now want out. And rightly so. No “conservative” should sacrifice Americans’ lives and wealth in an attempt to create a strong, effective, and honest central government in Afghanistan, something which never before has existed.

But the most ardent criticism of Paul’s foreign policy is directed toward his position on Iran acquiring nuclear weapons. Paul is against a pre-emptive strike on Iran, an action that Romney and Rick Perry are willing to consider. There are good reasons to try to keep nuclear weapons out of Iran’s hands, but the costs of military action likely would be horrendous. Moreover, every additional threat to attack Iran only more clearly demonstrates to Tehran the necessity of developing nuclear weapons.

Paul’s willingness to rethink U.S. foreign policy means he is the only candidate to propose a realistic military budget, one that supports the “common defense” of America, not the rest of the world. The other GOP candidates decry nonexistent spending cuts. Military outlays under President Obama are higher than under President Bush. Only in Washington is slowing the rate of increased called a “cut.”

Most of the GOP contenders—again other than Paul and in this case Huntsman—endorse torture. For all of their talk about American exceptionalism, the Republicans see the U.S. as a beleaguered, virtually helpless giant, which must sacrifice its very being to survive. This depressing picture is unworthy of America. This may be why service members (at least who have contributed to candidates) have overwhelmingly backed Paul, one of only two veterans in the race.

The response to Ron Paul’s foreign policy views raises the question: Can the Republican Party any longer be taken seriously on national security issues? Over the last decade the GOP has needlessly sacrificed Americans’ lives, wasted Americans’ wealth, overextended America’s military, violated Americans’ liberties, and trashed America’s reputation. As a result, we are less prosperous, free, and secure. If the Republican Party refuses to learn from Rep. Paul, it does not deserve the public’s trust.

A version of this post originally appeared on the Huffington Post.

I’ve yet to encounter a technically clueful person who believes the Stop Online Piracy Act will actually do anything to meaningfully reduce—let alone “stop”—online piracy, and so I haven’t bothered writing much about the absurd numbers the bill’s supporters routinely bandy about in hopes of persuading lawmakers that SOPA will be an economic boon and create zillions of jobs. If the proposed solution just won’t work, after all, why bother quibbling about the magnitude of the problem? But then I saw the very astute David Carr’s otherwise excellent column on SOPA’s pitfalls, which took those inflated numbers more or less as gospel. If only because I’m offended to see bad data invoked so routinely and brazenly, on general principle, it’s important to try to set the record straight. The movie and music recording industry have gotten away with using statistics that don’t stand up to the most minimal scrutiny, over and over, for years, to hoodwink both Congress and the general public. Wherever you come down on any particular piece of legislation, this is not how policy should get made in a democracy, and it’s high time they were shamed into cutting it out.

The bogus numbers Carr cites—which I’ll get to in a moment—actually represent a substantial retreat from even more ludicrous statistics the copyright industries long peddled. In my previous life as the Washington editor for the technology news site Ars Technica, I became curious about two implausible sounding claims I kept seeing made over and over—and repeated by prominent U.S. Senators!—in support of more aggressive antipiracy efforts. Intellectual property infringement was supposedly costing the U.S. economy $200–250 billion per year, and had killed 750,000 American jobs. That certainly sounded dire, but those numbers looked suspiciously high, and I was having trouble figuring out exactly where they had originated. I did finally run them down, and wrote up the results of my investigation in a long piece for Ars. Read the whole thing for the full, farcical story, but here’s the upshot: The $200–250 billion number had originated in a 1991 sidebar in Forbes, but it was not a measurement of the cost of “piracy” to the U.S. economy. It was an unsourced estimate of the total size of the global market in counterfeit goods. Beyond the obvious fact that these numbers are decades old, counterfeiting of physical goods imported in bulk and sold by domestic retail distributors is, rather obviously, a totally different phenomenon with different policy implications from the problem of illicit individual consumer downloads of movies, music, and software. The 750,000 jobs number had originated in a 1986 speech (yes, 1986) by the secretary of commerce estimating that counterfeiting could cost the United States “anywhere from 130,000 to 750,000” jobs. Nobody in the Commerce Department was able to identify where those figures had come from.

These are the numbers that were driving U.S. copyright policy as recently as 2008—and I’m still seeing them repeated in “fact sheets” circulated by SOPA boosters. Finally, in 2010, the Government Accountability Office released a report noting that these figures “cannot be substantiated or traced back to an underlying data source or methodology.” Now, if a single journalist could discover as much with a few days work, minimal due diligence should have enabled highly paid lobbyists to arrive at the same conclusion. The only way to explain the longevity of these figures, if we charitably rule out deliberate deception, is to infer that the people repeating them simply did not care whether what they were saying was true. If I were a legislator, I would find this more than a little insulting

As Carr’s piece suggests, SOPA’s corporate backers have fallen back on new numbers, but they’re still entirely bogus:

The Motion Picture Association of America cites figures saying that piracy costs the United States $58 billion annually. Mark Elliot, an executive from the U.S. Chamber of Commerce, said in a letter to The New York Times that such piracy threatened 19 million American jobs

Only $58 billion! We’re making progress! So where does that figure come from? The source here is a paper released by the Institute for Policy Innovation, and authored by one Stephen Siwek, an MBA and principal of a consulting firm called Economists Incorporated that produces economic analysis for hire on behalf of (among others) businesses seeking to influence policy makers. That does not, in itself, invalidate the research, but we should at least begin with the recognition that we are not dealing here with impartial academic studies produced by a university or government research agency.

What does invalidate the “research” is the inappropriate use of “multiplier” effects to double—and triple—count loss estimates that were dubious to begin with. As the GAO report notes in its typically understated fashion:

Most of the experts we interviewed were reluctant to use economic multipliers to calculate losses from counterfeiting because this methodology was developed to look at a one-time change in output and employment.

In other words, Siwek is taking a method that’s useful for analyzing where in the economy we will likely see the effects of demand shifts, and pretending that it somehow reflects aggregate economic losses. As my colleague Tim Lee has pointed out, this is Bastiat’s Broken Window Fallacy on steroids:

[I]n IPI-land, when a movie studio makes $10 selling a DVD to a Canadian, and then gives $7 to the company that manufactured the DVD and $2 to the guy who shipped it to Canada, society has benefited by $10+$7+$2=$19. Yet some simple math shows that this is nonsense: the studio is $1 richer, the trucker is $2, and the manufacturer is $7. Shockingly enough, that adds up to $10. What each participant cares about is his profits, not his revenues.

So, to stay focused on movies, Siwek takes an estimate of $6.1 billion in piracy losses to the U.S. movie industry, and through the magic of multipliers gets us to a more impressive sounding $20.5 billion. That original $6.1 billion figure, by the way, was produced by a study commissioned from LEK Consulting by the Motion Picture Association of America. Since even the GAO was unable to get at the underlying research or evaluate its methodology, it’s impossible to know how reliable that figure is, but given that MPAA has already had to admit significant errors in the numbers LEK generated, I’d take it with a grain of salt.

Believe it or not, though, it’s actually even worse than that. SOPA, recall, does not actually shut down foreign sites. It only requires (ineffective) blocking of foreign “rogue sites” for U.S. Internet users. It doesn’t do anything to prevent users in (say) China from downloading illicit content on a Chinese site. If we’re interested in the magnitude of the piracy harm that SOPA is aimed at addressing, then, the only relevant number is the loss attributable specifically to Internet piracy by U.S. users.

Again, we don’t have the full LEK study, but one of Siwek’s early papers does conveniently reproduce some of LEK’s PowerPoint slides, which attempt to break the data down a bit. Of the total $6.1 billion in annual losses LEK estimated to MPAA studios, the amount attributable to online piracy by users in the United States was $446 million—which, by coincidence, is roughly the amount grossed globally by Alvin and the Chipmunks: The Squeakquel.

So in a fantasy world where U.S. movie pirates don’t just circumvent blockage with a browser plugin, and SOPA actually stops all online movie piracy by American users, we get a $446 million economic benefit to the United States in the form of movie revenues, and presumably comparable benefits in music and software revenues? Well, no. Remember our old friend the Broken Window Fallacy. It’s true that some illicit U.S. downloads displace sales of legal products. But what happens to the money the pirates would have otherwise spent on those legal copies? They don’t eat it! As that same GAO report helpfully points out:

(1) in the case that the counterfeit good has similar quality to the original, consumers have extra disposable income from purchasing a less expensive good, and (2) the extra disposable income goes back to the U.S. economy, as consumers can spend it on other goods and services.

As one expert consulted by GAO put it, “effects of piracy within the United States are mainly redistributions within the economy for other purposes and that they should not be considered as a loss to the overall economy.” In many cases—I’ve seen research suggesting it’s about 80 percent for music—a U.S. consumer would not have otherwise purchased an illicitly downloaded song or movie if piracy were not an option. Here, the result is actually pure consumer surplus: The downloader enjoys the benefit, and the producer loses nothing. In the other 20 percent of cases, the result is a loss to the content industry, but not a let loss to the economy, since the money just ends up being spent elsewhere. If you’re concerned about the overall jobs picture, as opposed to the fortunes of a specific industry, there is no good reason to think eliminating piracy by U.S. users would yield any jobs on net, though it might help boost employment in copyright-intensive sectors. (Oh, and that business about 19 million jobs? Also bogus.)

Does that mean online piracy is harmless? Of course not. But the harm is a dynamic loss in allocative efficiency, which is much harder to quantify. That is, in the cases where a consumer would have been willing to buy an illicitly downloaded movie, album, or software program, we want the market to be accurately signalling demand for the products people value, rather than whatever less-valued use that money gets spent on instead. This is, in fact, very important! It’s a good reason to look for appropriately tailored ways to reduce piracy, so that the market devotes resources to production of new creativity and innovation valued by consumers, rather than to other, less efficient purposes. Indeed, it’s a good reason to look for ways of doing this that, unlike SOPA, might actually work.

It is not, however, a good reason to spend $47 million in taxpayer dollars—plus untold millions more in ISP compliance costs—turning the Justice Department into a pro bono litigation service for Hollywood in hopes of generating a jobs and a revenue bonanza for the U.S. economy. Any “research” suggesting we can expect that kind of result from Internet censorship is a fiction more fanciful than singing chipmunks.

Perhaps the most significant difference between my own views and those of my progressive friends is on the relationship between business and government, especially “big business”. I’ve on more than one occasion heard that government needs to be there to off-set the power of big business. That without government, corporations would just continue to grow. Well to me that sounds like an empirical question.

Thanks to the Economic Freedom of the World report, we have some good indicators of just how free-market oriented a country is. What we need are measures of concentration. Unfortunately, these are a little harder to come by. Fortunately, the Office of the Comptroller of the Currency (OCC) did a survey about a decade ago (1999), the data for which are reported in Barth, Caprio, and Levine’s Rethinking Bank Regulation. The measure of concentration is the percent of deposits accounted for by the five largest banks. One could argue for a better measure, but it’s all we have.

The results? It would appear that the freer an economy, the less concentrated its banking system. The chart below offers a scatter diagram, along with a regression line. The vertical Y axis measures concentration and the X axis economic freedom (the higher the number, the freer the economy). Admittedly, the relationship is not a strong one, with a correlation of only ‑0.11, but it is negative. If anyone knows of comparable measures for other industries, I would encourage them to either send me the data or reproduce this analysis for other industries.