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The 2015 Medicaid actuarial report came out last week, and with it another entry in the series of upward revisions to how much Medicaid would spend on the adults made newly eligible by the ACA’s Medicaid expansion. In 2015, per enrollee costs for the adults made newly eligible by the ACA’s Medicaid expansion were estimated to be 49 percent higher than the previous projection. 

This is not the first upward revision. In last year’s report, In earlier estimates these newly eligible adults were projected to have average benefit costs one percent lower than adults that were already eligible, but in last year’s report this expansion population was instead estimated to have average expenditures 19 percent higher. So per enrollee costs, previously estimated to be $4,636 in 2014, were revised up to $5,517.

Even after that correction, last year’s report projected that per enrollee costs would fall significantly in the second year of the expansion because they estimated that the effects of pent-up demand and adverse selection would be much less of a factor. In that report, actuaries estimated that per enrollee costs for this group would fall significantly, from $5,571 in 2014 to $4,281 in 2015. Instead, the new report estimates that per enrollee costs actually climbed to $6,366 in 2015, as pointed out by Brian Blase at The Apothecary

Figure 1

Per Enrollee Costs for Newly Eligible Adults, by Year of Report

Source: 2013, 2014, and 2015 Medicaid Actuarial Reports.

The new report suggest that much of the discrepancy in estimates can be attributed to states putting more of these newly eligible enrollees in managed care which have capitation rates that were much higher anticipated. There is a high degree of uncertainty whenever actuaries have to project expenditures and costs for newly eligible groups like this, and it is possible that when more data for this newly eligible population and different adjustments for risk-sharing arrangements, the per enrollee expenditures for this group could be slightly lower. That said, that the estimates from 2014 report for the following year were so much lower should raise some concerns. Many states are in a tight fiscal position and have already had to make adjustments to other areas of their budgets. If the costs of this expansion population continue to be much higher than initial projections, it will place even more pressure on their already strained budgets.

Figure 2

Per Enrollee Costs for Newly Eligible Adults Through 2022, by Year of Projection

Source: 2013, 2014, and 2015 Medicaid Actuarial Reports.

This uncertainty, and the implications it could have for state and federal costs, is illustrated in Figure 2. By 2022, projected per enrollee costs for this newly eligible population is more than 40 percent higher in the 2015 report than it was in the previous two years. The outer years of this projection are most important from the state perspective because it is when they will begin to bear some of the costs of the Medicaid expansion population. States that have moved forward with the Medicaid expansion might be forced to pursue significant fiscal adjustments to other aspects of their Medicaid programs, or to other components of their budgets.

The actuaries now project Medicaid outlays to be almost $250 billion higher than last year’s estimate (over the nine years where they both have projections). This projected increase comes even as they ratcheted down their assumption about how many states would expand Medicaid in the future, from 60 percent of the potential expansion population to only 55 percent.  If the recent trend continues and this newly eligible population continues to be much more expensive than anticipated, the expansion could end up costing much more. 

In a Wall Street Journal oped today, Naomi Schaefer Riley discusses federal policies toward American Indians:

There are almost no private businesses or entrepreneurs on Indian reservations because there are no property rights. Reservation land is held in trust by the federal government and most is also owned communally by the tribe. It’s almost impossible for tribe members to get a mortgage, let alone borrow against their property to start a business. The Bureau of Indian Affairs regulates just about every aspect of commerce on reservations.

Instead of giving Indians more control over their own land—allowing them to develop natural resources or use land as collateral to start businesses—the federal government has offered them what you might call a loophole economy. Washington carves out a sector of the economy, giving tribes a regulatory or tax advantage over non-Indians. But within a few years the government takes it away, in many cases leaving Indian tribes as impoverished and more disheartened than they were before.

I explored the same themes in a 2012 essay at DownsizingGovernment. My essay traces the history of Indian policies back to our nation’s founding and concludes:

American Indians and Alaskan Natives have a unique history and a special relationship with the federal government. However, subsidies and regulatory preferences are not a good way to create broad-based and durable economic growth for these peoples. Subsidies are also inconsistent with the movement toward Indian self-determination. A better way to generate a lasting rise in Indian prosperity is to make institutional reforms to property rights and tribal governance on reservations.

The problem is that Washington is a massive screw-up these days in so many ways. There is so much to repeal and reform, but members of Congress don’t seem to have the time, patience, or incentive to fix the failures that they have created, including the failures of Indian policies.

It is true that the solutions to Indian poverty and related problems will not be easy to implement, but I do think that free markets and property rights is what Indians should aim for. I found that,

One of the historic reasons why the federal government variously exploited, coddled, and micromanaged Indians was because of the belief that they were primitive socialists with no understanding of market institutions such as property rights. But research has found that stereotype to be false. One recent study argues that “most if not all North American indigenous peoples had a strong belief in individual property rights and ownership.” Various tribes in North America developed systems of property rights in farm lands, garden plots, horses, fishing streams, fur-trapping territories, hunting grounds, and other resources. Research has also found that Indians were very entrepreneurial and had extensive trading networks.

Kudos to Ms. Riley for tackling this important subject that Congress is ignoring. Her new book is titled The New Trail of Tears: How Washington Is Destroying American Indians. But you can get a free introduction to the general issues by reading my “Indian Lands, Indian Subsidies, and the Bureau of Indian Affairs.”

This weekend Virginia and Maryland begin a sales tax holiday for the worthy-sounding goal of helping to reduce the cost for parents shopping for school clothes and supplies for their children. But a sales tax holiday makes for terrible tax policy.

The problem is that most of it is inevitably captured by the merchants, who anticipate increased demand for their goods during the holiday and respond by keeping prices higher than they otherwise would be. As a result it utterly fails to achieve its ostensible purpose. 

It’s easy to see that this is true if we considered doing the opposite and had a short term sales-tax spike. With a short-run sales tax spike people would do their best to evade the tax–either by delaying their shopping until the tax expired or shopping elsewhere. Stores would be forced to eat most of the tax if they wanted to keep their customers coming to the store during the spike. If the increase were permanent no such evasion would be possible and stores would fully pass the tax to the customer. In the long run such evasion would be difficult or impossible so prices would rise enough to pass the tax along to the customer.

A sales tax holiday, and the attendant publicity that comes with it, pushes shoppers to hit the stores during that period. Savvy store owners respond by holding more sales before and after the holiday, knowing that the holiday makes makes such sales unnecessary. Studies on tax holidays confirm this behavior. 

Sales tax holidays not only fail to save shoppers any money but they also allow politicians to pretend they are doing a tax favor for their constituents, and help convince a few voters that their state’s tax code isn’t all that bad after all. The reality is otherwise. 

When I criticize Donald Trump’s immigration policy proposals, the most common response is some variant of “Trump is against ILLEGAL immigration, not LEGAL immigration.  Get your facts straight.”  Although Trump makes contradictory statements on many topics, allowing virtually any supporter to find a quote in support of his or her preferred policy position, Trump has been mostly consistent on legal immigration: He wants to cut it.

Here are Trump’s anti-legal immigration positions, in bold, pulled from his position paper:

1.      Immigration moderation.  Trump calls for a “pause” on the issuance of any new green cards to workers abroad so that “employers will have to hire from the domestic pool of unemployed immigrant and native workers.”  Trump’s position paper is unclear on this point because immigrants on employment-based green cards are not the only green card holders who work in the United States – a majority of green card holders who enter through family categories work too.  In 2014, 61 percent of family-based immigrants came from abroad.  If Trump wanted to be sure that none of them would work in the United States then he would support cutting those 61 percent of family-based green cards, which are equal to 38.7 percent of all green cards issued in 2014. 

Trump’s policy statement could also mean that he only wants to restrict the issuance of employment-based green cards, a smaller numerical restriction but one that would cause more economic damage.  Of the 151,596 employment-based green cards issued in 2014, 86 percent went to folks already in the U.S. legally on other visas.  Those 14 percent of green cards that Trump would deny to workers abroad would likely just be reallocated to migrant workers already in the United States.  However, Trump’s proposed changes to the H-1B visa program (explained below) would greatly damage or destroy the feeder system that sends migrants to the employment-based green card. 

Thus, if Trump’s policy is adopted then the employment-based green cards may not decrease in number for a few years as those already on H-1Bs adjust their status.  After those years pass and as the number of H-1Bs fall and aren’t replaced by new ones because of the onerous restrictions, the number of new employment-based green cards will steadily drop and could hit zero.  If that happens then the total number of all green cards issued annually will drop by 14.9 percent. 

If employment-based green cards from abroad are cut off and those slots remain unfilled then this reform might only cut the number of all green cards by 2.2 percent.  If Trump’s plans produce the worst case scenario and exclude most family-based green cards and result in the end of the employment-based green card program, then it could end up cutting the number of all green cards issued annually by 53.7 percent – depending on how long he continues this policy.  Verdict: Anti-legal immigration.           

2.      Increase prevailing wage for H-1Bs.  This policy proposal will reduce the number of legal skilled temporary migrant workers.  Just over 124,000 H-1Bs were approved in 2014 for initial employment in the United States, 85,000 of them for employment in firms and the rest in non-profit research institutions, with an average salary of $75,000.  If the minimum salary for H-1B visas was bumped up to $100,000 then the number of H-1Bs hired by private firms would decrease while they’d also shrink for research institutions – if this new wage regulation would apply to them. 

For initial H-1B employment, the 75th percentile for compensation is $81,000.  Even including all of the petitions for high wage workers that are rejected each year, this reform would significantly shrink the number of H-1B visas issued at an enormous economic cost.  Combined with additional rules and regulations, this reform would reduce the H-1B program to a shadow of itself.  Verdict: Anti-legal immigration. 

3.      Requirement to hire American workers first.  This policy would increase the regulatory cost for American firms hiring skilled foreign workers in specialty occupations.  Congress considered just such a policy for the H-1B visa in 1990 and rejected it because the regulatory costs would be so high.  Higher regulatory costs mean fewer migrants.  Verdict: Anti-legal immigration.

4.      Refugee program for American children.  This policy would raise the standards for refugees and asylum seekers in order, according to Trump’s position paper, to cut down on abuse and fraud.  However, higher standards won’t reduce actual oppression by foreign governments so this proposal will likely just result in more fraud and many people who meet the criteria being sent back to oppressive regimes. 

Assuming the worst case scenario, Trump’s policy proposal would decrease humanitarian immigration by 70 percent according to the exaggerated fraud statistics peddled by nativist organizations.  That policy, if in place in 2014, would have cut humanitarian immigration by about 94,000 under the worst case scenario.  This section of Trump’s paper assumes that there will be fewer asylees and refugees, so he is definitely anticipating a cut in the legal numbers but it’s unclear to what extent.  Verdict: Anti-legal immigration.     

Assuming that all sections of Trump’s immigration position paper become law, the combined worst case scenarios from each of these sections of Trump’s position paper – the end of the employment-based green card program, the halting of new arrivals under the family-based immigration green card system, and a 70 percent reduction in humanitarian visas – would reduce the annual number of green cards issued by 62.9 percent or about 640,000. 

In the best case scenario whereby the “fraudulent” asylees and refugees are entirely replaced by legitimate ones and Trump doesn’t restrict family based immigrants who are also workers, the employment-based green card program would shrink to a fraction of itself and potentially end entirely.  This would decrease the total number of annual green cards issued by between 2 percent and 14 percent.      

To be clear, all of these immigration programs have problems and need reform.  Cato scholars have written about the problems with H-1B visas, refugees, and green cards in the past.  But the way to fix those systems is not to pile on more regulations on firms, restrictions on workers, prohibitions on immigrants, and higher costs for everybody.  The solution is to deregulate visas to lower costs for everybody involved, allow immigrants to switch jobs without gaining government permission and without legal consequences, and expand the number of green cards and other visas.  Refugee access to means-tested welfare should be curtailed and Americans should be able to sponsor them if they choose.  Trump’s proposals here do the opposite as he confirmed during his convention speech – and this doesn’t even touch on his proposed ban on Muslim immigrants.   

If a liberal Democrat proposed policies that would restrict legal gun ownership by up to 62.9 percent, conservatives and Republicans would rightly label that Democrat as anti-gun.  It is fair and reasonable to label somebody who proposes policies that could restrict immigration by up to 62.9 percent as anti-immigration or anti-legal immigration.  Those labels are thus appropriate to describe Donald Trump based on his policy proposals.  

Last night at the Democratic National Convention, many speakers made impassioned pleas for “common sense” gun reform. That might sound like a good idea but, like most public policy, gun policy is hard

As I wrote at the Washington Post website in December, using “common sense” to describe new gun policy is a “convenient piece of jargon that conveys level-headedness, non-partisanship, and empathy” without tackling the issues that drive gun crimes and gun deaths:

The United States contains an estimated 270 million to 310 million firearms. All gun crimes and gun deaths are overwhelmingly perpetrated with handguns, yet barely one quarter of Americans favor a handgun ban that would be required to lower that number significantly. So-called “assault weapons” and “high-capacity” magazines are easy political targets because they sound scary to people unfamiliar with firearms. However, restricting either or both would likely have no measurable effect on gun crime rates.

This week, the Washington Post published more information that should inform the push for more gun laws: less than 20 percent of all gun crimes are committed with legally owned firearms. This means that the overwhelming majority are committed with illegal weapons and/or by people who are not legally permitted to own guns. If lowering gun crime is the intended outcome of new legislation, most of the current proposals ignore 80 percent of the gun crime that happens in our country.

This is not to say there are no ways to improve our laws to reduce gun crime. But, with apologies to Burt Bacharach, what the policy world needs now are evidence-based solutions to our gun violence problem, not new laws that have no measurable effect on reducing gun crime.

Immigrants are commonly told to “get in line” if they want to stay in the United States. This call is disingenuous for many reasons. Many immigrants have no line to get into. And even they do, we are asking them to join lines when no one knows how long they are. In many cases, we could be asking many immigrants to join a line the end of which they will never live to see.

We don’t know much about who are in these lines, but here’s what we do: Thousands of immigrants come to the United States each year on temporary work visas. While working in temporary status, some of their employers petition on their behalf to obtain green cards for them to stay permanently. If the employer has jumped through all the appropriate hoops, the worker can then apply for a visa, if—and this is a big if—the limit on visas that year has not been reached.

This is where the line—and the waiting—starts. For lawmakers trying to fix the immigration system, figuring out how many people are at this point in the process is critical. But even they don’t know.

We do have a good idea how many people are waiting overseas. The State Department keeps track of those numbers and publishes them annually, and we’re quickly approaching 5 million immigrants waiting abroad, which is an astounding number on its own. But for immigrants already in the United States, the Department of Homeland Security doesn’t keep track—or doesn’t publish—the number of applicants who are prevented from receiving a green card due to the limits.

The State Department publishes a monthly visa bulletin that tells people in either line—here or abroad—whether they can apply for a green card. It lists a date, as seen below, next to a visa category. (Essentially, 1st (EB-1) refers to workers with a PhD or its equivalent, 2nd (EB-2) to Master’s, 3rd (EB-3) to Bachelor’s, and “other” to non-college grads.) If your employer’s petition was filed after the date listed, you cannot apply for a green card yet:

Figure 1: Visa Bulletin—Application Final Action Dates for Employment-Based Preferences

Source: State Department

These dates can sometimes create the misleading impression that immigrants from India, for example, will have “only” twelve years to wait for a green card. But that’s not right. That’s just how long immigrants who are currently receiving their green cards today have been waiting. We simply don’t know how many people applied since October 2004, so we don’t know how long these immigrants will have to wait.

Apparently even the State Department  doesn’t know who is in the line. When the department moves ahead the filing date, it basically guesses how many people applied between the current date and the new date. When it moved the date up to 2010 and 2007 for EB-2 and EB-3 categories from India, the government was flooded with more applications than there were visa numbers available, and so it moved the dates back again to 2004. 

This mistake, however, gave us some small insight into who is waiting.

We cannot know for sure whether everyone who could apply submitted an application before the date moved back, but the Department of Homeland Security lists 46,098 Indians currently waiting at this stage. The State Department also lists almost 30,000 more waiting for employment-based green cards abroad, for a grand total of nearly 76,000 Indians. Because each country is limited to no more than 2,800 visas in each category, clearing just this backlog alone will take almost 10 years for EB-2 and more than 14 years for EB-3.

But that only gets us up to 2007 and 2010 for those categories. We simply have no idea how many people could be waiting beyond those dates. It would be nice to be able to estimate the number based on green card applications filed before those dates, but the list only gives us the number pending at any given time. It doesn’t show the total number submitted in a year. Some may have already been processed. Others may have been submitted later after other older applications passed through.

We know that in 2008, there were at least 19,512 green card applications under EB-2. For EB-3, the numbers haven’t gotten up to 2008 yet, but in 2006, there were at least 12,708 filed for that category. Simply carrying these numbers forward for each unknown year, there would be roughly 230,000 people in line, which would translate into an almost 50-year wait.

The situation is likely worse than that. We know that the number of Indian temporary workers has increased dramatically relative to the number of green cards issued to them in the past couple decades (Figure 2). We also know that roughly half of all employment-based labor certifications (the step employers complete prior to submitting most EB-2 and EB-3 green card petitions) are for Indian workers.

Figure 2: Total Cumulative Green Cards and L or H-1B Visas Issued to Indians Since 2007

Sources: H-1B/Ls: USCIS/State Department; Green cards: DHS

Since 2002, 450,000 Indians received a green card, while roughly 2.4 million high skilled immigrants from India and their families have entered under the H visa or L visa (for employees transferring to a U.S. branch of their company). Some portion of these workers could have been beneficiaries of an EB-3 green card petition after 2007, the last date on which we know anything about who is in line.

All we know is this: that somewhere between 230,000 and 2 million Indian workers are in the backlog, so they’ll be waiting somewhere between half a century and three and a half centuries. It is entirely possible that many of these workers will be dead before they receive their green cards. And that’s just one country. The backlogs for Chinese and the Philippines continue to grow as well.

America’s immigration system is broken worse than anyone can even know.

Last summer I contributed a post about the Liquidity Coverage Ratio (LCR), a new regulation that is part of the latest international Basel Accords (Basel III) and that is being imposed on U.S. banks and other financial institutions. As I explained in that post, the LCR requires banks to hold “high quality liquid assets” (HQLA) sufficient to cover potential net cash outflows over 30 days. Both George Selgin and I have pointed out that the LCR probably contributes to the continuing desire of banks to maintain such a high level of reserves.

Two economists who have severely criticized the LCR are Gary Gorton, noted for his work on bank panics, and his co-author, Tyler Muir. Earlier this year they published online a short version of a much longer unpublished paper that scrutinizes the potential impact of the LCR. Whereas my post, appropriately entitled “Reserve Requirements Basel Style,” compared the LCR to the traditional but now largely abandoned reserve requirements imposed on banks, Gorton and Muir compare it to the bond-collateral (or bond-deposit) requirement of the national banking era, prevailing from the Civil War until creation of the Federal Reserve. They conclude that the LCR will cause the same sorts of problems that, ironically, the Fed was supposed to solve.

For those unfamiliar with the bond-collateral requirement, it was a feature of the system of nationally chartered banks established by Congress. Congress imposed a tax that suppressed the banknotes of state-chartered banks, but national banks could still issue banknotes, with a requirement that tied their quantity to the banks’ holdings of Treasury securities. Although nominally national banknotes were the liability of the issuing bank, they were in fact fully guaranteed by the government. The system thus created what was referred to as an “inelastic currency,” in which widespread demands to convert bank deposits into more liquid banknotes led to financial stringency and bank panics. This problem became the justification for the creation of the Federal Reserve as a lender of last resort.

Today the LCR counts both reserves and Treasury securities as the most highly liquid assets. So thinking about the LCR as either a modern modified reserve requirement and thinking of it as a modern modified bond-collateral requirement are complementary, particularly since reserves now pay interest and therefore have become like Treasury securities that only banks can hold. Gorton and Muir recognize this similarity in their online article when they state that “the LCR then requires that government money (Treasuries) must be used to back bank money – i.e., short-term debt, a kind of narrow banking [emphasis mine].”

Gorton and Muir’s concerns about the LCR can be briefly summarized in two points. First, despite the growing U.S. national debt, the worldwide liquidity demand for Treasury securities will severely impinge on their general availability. As they put it, “the LCR may result in a shortage of safe debt because too much of the Treasuries is tied up.” Second, this “shortage of safe debt” may encourage “other forms of [privately issued] short-term debt to emerge, making the financial system riskier.” Here they are drawing an analogy to the way restrictions on banknotes during the national banking era not only encouraged the increasing use of bank deposits but also contributed to financial instability.

I am not convinced by all parts of Gorton and Muir’s argument. Indeed, their characterization of bank deposits as the “shadow money” of the national banking era, by implication, gets the causes of the inelastic currency exactly backwards. The panics and financial stringency of this period did not result from too little regulation of deposits but instead from too much regulation of banknotes. Moreover, Gorton and Muir’s fear of a new form of shadow money seems to cut against their enthusiasm for the widespread use, prior to the financial crisis of 2007-2008, of repurchase agreements and asset-backed commercial paper. Nonetheless, their overall point is sound. Given the universally conceded failure of the bond-collateral requirement during the national banking era, why in the world are regulators going back to the same kind of system with the LCR? It did not work then; why should it work now?

HT: Bruce Tuckman

[Cross-posted from Alt-M.org]

In previous postings, we investigated the likelihood of a serious climate-related concern expressed by the United Nations Intergovernmental Panel on Climate Change (IPCC), that CO2-induced global warming will lead to a future increase in the number of heat related deaths worldwide (see, for example, On The Bright Side: Declining Deaths Due to Hot and Cold Temperatures in Hong Kong and Response to Heat Stress in the United States: Are More Dying or Are More Adapting?). In short, we found there is an absence of empirical data to support the IPCC’s claim.

The latest study to investigate this topic comes from Arbuthnott et al. (2016), who introduce their work by noting that “interest in understanding temperature related health effects is growing.” And as their contribution to the subject, they set out to examine “variations in temperature related mortality risks over the 20th and 21st centuries [in order to] determine whether population adaptation to heat and/or cold has occurred.”

A search of 9183 titles and abstracts dealing with the subject returned eleven studies examining the effects of ambient temperature over time (i.e., relative risk or RR) and six studies comparing the effect of different heatwaves at specific points in time. Out of the eleven RR studies, with respect to the hot end of the temperature spectrum, Arbuthnott et al. report “all except one found some evidence of decreasing susceptibility,” leading the team of four UK researchers to conclude that “susceptibility to heat [has] appeared to stabilize over the last part of the century.” Interestingly, however, at the cold end of the temperature spectrum, they say “there is little consistent evidence for decreasing cold related mortality, especially over the latter part of the last century.”

With respect to the impacts of specific heatwave events on human health, Arbuthnott et al. state that four of the six papers included in this portion of their analysis revealed “a decrease in expected mortality,” again signaling there has been a decrease in the vulnerability of the human populations studied over time. As for the cause(s) of the observed temperature-induced mortality declines, the authors acknowledge their methods are incapable of making that determination.  However, they opine that it may, in part, be related to physiological acclimatization (human adaptation) to temperature.

Whatever the cause, one thing is certain: despite current temperatures rising to levels characterized by the IPCC and others as unprecedented over the past two millennia or more, the relative risk of temperature-related human mortality events has not increased, which observation is just the opposite of climate alarmist projections.

 

Reference

Arbuthnott, K., Hajat, S., Heaviside, C. and Vardoulakis, S. 2016. Changes in population susceptibility to heat and cold over time: assessing adaptation to climate change. Environmental Health 15: 33, DOI 10.1186/s12940-016-0102-7.

Only 17 percent of Italy’s money supply (M3) is accounted for by State money produced by the European Central Bank (ECB). The remaining 87 percent is Bank money produced by commercial banks through deposit creation. So, Italy’s banks are an important contributor to the money supply and, ultimately, the economy.

In anticipation of poor results from the Italian banks’ stress tests (which will be reported on July 29th), Italy’s Prime Minister, Matteo Renzi, has indicated that his government will unilaterally pump billions of euros into Italy’s troubled banks to recapitalize them, so that they can continue to extend credit and contribute to the growth of Italy’s broad money supply. There is a problem with this approach: it is not allowed under new EU rules. These rules require that bank bondholders take losses (a bail-in) before government bailout money can be deployed. But, in Italy, a big chunk of bank debt (bonds) is held by retail investors. These retail investors vote in large numbers. So, the EU bail-in regulation, if invoked, will certainly put Renzi’s neck on the chopping block. And that will come sooner rather than later because the Prime Minister has called for a referendum on Italy’s constitution in October and stated that he’ll resign if the referendum is voted down.

It’s no surprise that Renzi has his eye on banks. It’s also easy to see why he is worried and ready to pull the trigger on a state-sponsored bank bailout. The accompanying chart on non-performing loans should be cause for concern.

To put the non-performing loans into perspective, there is nothing better than the Texas Ratio (TR). The TR is the book value of all non-performing assets divided by equity capital plus loan loss reserves. Only tangible equity capital is included in the denominator. Intangible capital — like goodwill — is excluded.

So, the denominator is the defense against bad loans wiping the bank out, forcing it into insolvency. A TR over 100 percent means that a bank is skating on thin ice. Indeed, if the non-performing loans were written off, a bank with a TR in excess of 100 percent would be wiped out. All of the five big Italian banks in the accompanying table — including the Banca Monte dei Paschi di Siena (BMPS), the world’s oldest bank — fall into this ignominious category.

They need to be recapitalized. This could be done by issuing new shares on the market. But, all these banks’ shares are trading well below their book values. BMPS’ price is only about 10 percent of its book value, and Intesa Sanpaolo (the best of the lot) is only about 66 percent. In consequence, any new shares issued on the market would dilute existing shareholders and be unattractive. This is why an Italian state rescue is the most attractive source for the recapitalization.

As the Financial Times reported on 12 July, Saudi Arabia’s oil-output reached record highs in June 2016. Increasing production 280,000 barrels/day to 10.6m b/d, Saudi Arabia has once again waved off OPEC’s request not to glut the market with oil. 

As it turns out, economic principles explain why the Saudis began, in late 2014, to pump crude as fast as they could – or close to as fast as possible. In fact, there is a good reason why the Saudi princes are panicked and pumping. 

Let’s take a look at the simple analytics of production. The economic production rate for oil is determined by the following equation: P – V = MC, where P is the current market price of a barrel of oil, V is the present value of a barrel of reserves, and MC is the marginal recovery cost of a barrel of oil.

To understand the economics that drive the Saudis to increase their production, we must understand the forces that tend to raise the Saudis’ discount rates. To determine the present value of a barrel of reserves (V in our production equation), we must forecast the price that would be received from liquidating a barrel of reserves at some future date and then discount this price to present value. In consequence, when the discount rate is raised, the value of reserves (V) falls, the gross value of current production (P – V) rises, and increased rates of current production are justified.

When it comes to the political instability in the Middle East, the popular view is that increased tensions in the region will reduce oil production. However, economic analysis suggests that political instability and tensions (read: less certain property rights) will work to increase oil production.

Let’s suppose that the real risk-adjusted rate of discount, without any prospect of property expropriation, is 20% for the Saudis. Now, consider what happens to the discount rate if there is a 50-50 chance that a belligerent will overthrow the House of Saud within the next 10 years. In this case, in any given year, there would be a 6.7% chance of an overthrow. This risk to the Saudis would cause them to compute a new real risk-adjusted rate of discount, with the prospect of having their oil reserves expropriated. In this example, the relevant discount rate would increase to 28.6% from 20% (see the accompanying table for alternative scenarios). This increase in the discount rate will cause the present value of reserves to decrease dramatically. For example, the present value of $1 in 10 years at 20% is $0.16, while it is worth only $0.08 at 28.6%. The reduction in the present value of reserves will make increased current production more attractive because the gross value of current production (P – V) will be higher.

 

So, the Saudi princes are panicked and pumping oil today – a take the money and run strategy – because they know the oil reserves might not be theirs tomorrow. As they say, the neighborhood is unstable. In consequence, property rights are problematic. This state of affairs results in the rapid exploitation of oil reserves.

Ah, tax credits. The answer to all of our environmental, social, and urban cares. Or so they say.

This spring, Senator Maria Cantwell (D-WA) and Senator Orrin Hatch (R-UT) cheerfully joined forces to expand the Low Income Housing Tax Credit (LIHTC) program. Their bill was subsequently referred to the Senate Finance Committee, which Hatch chairs. LIHTC provides select developers with tax credits for building affordable housing units, and the newly minted Affordable Housing Credit Improvement Act of 2016 would enlarge the LIHTC program by 50%, which puts the program at about $11 billion annually. If it’s anything like previous expansions of the program, it will surely draw broad bi-partisan support.

This brings us to a rather heartwarming aspect of tax credit programs more generally: tax credits appeal to democrats and republicans alike. In an age of acute political polarization, such collaboration seems to be the essence of civility and fraternization that the American public so longs for. Or is it?

Enter the alternative hypothesis: tax credits get a free pass because people think that tax credits are free. Unfortunately, as Milton Friedman said, TANSTAAFL, or “there ain’t no such thing as a free lunch,” and someone, somewhere paid for that hotdog and chips. So the question is who’s paying for tax credits?

The answer – if you’re not utilizing the credits – is probably you. That is because although select businesses or individuals are writing off taxes owed, the total U.S. tax burden is consistent or growing. Unlike across-the-board cuts that reduce taxes for everyone and are designed to support economic growth, LIHTC and other tax credit programs choose special businesses or individuals to reduce taxes for. So in the absence of reductions in spending, you’re just moving the money around, akin to any other direct subsidy (e.g. ethanol). When Uncle Sam needs to collect, the American tax payer is still on the hook.

Of course indirectly, we all “pay” for tax credits due to the slower economic growth caused by the misallocation of capital.

What’s more, tax credits operate outside of the annual Congressional appropriations process, and do not appear as an expenditure on the federal budget. In other words, a tax credit program may be completely ineffective at accomplishing program goals and never warrant so much as a side-eye come budget season.

This is particularly problematic for LIHTC, which National Bureau of Economic Research, Journal of Housing Economics, and Journal of Public Economics studies all found subsidize affordable units by displacing affordable units that would otherwise be provided by the private market. Economist Ed Glaeser agrees: “current research finds that LIHTC is not very effective along any important dimension—other than to benefit developers and their investors.” In other words, rather than improving welfare, LIHTC may actually just improve corporate welfare.

In the case of LIHTC and other tax credit programs, regular budgetary oversight would provide an opportunity to determine whether there is a better use for our collective resources, whether the program is achieving its objectives, and whether the country has the political will to continue supporting the program. Yet tax credit programs are protected from these basic questions by their very design.

And that is why tax credits are a problem. But out of sight on the federal budget outlay, out of mind. In the meantime, Congress will continue to play a cute little bipartisan game until American taxpayers get suspicious about all of that celebrated bipartisan collaboration happening in Washington. 

“We are going to have an immigration system that works, but one that works for the American people,” Donald Trump told the Republican National Convention last week. “Decades of record immigration have produced lower wages and higher unemployment for our citizens.” But the candidate is wrong in two respects. First, the United States has not seen “record” immigration in recent years, and second, higher immigration is not associated with higher unemployment. Immigrants are heralds of growth, not portents of economic disaster. 

Recent immigration is no record

The amount of immigration to the United States can be measured in two ways. The most obvious is the absolute number of people receiving permanent residency in the United States. By this measure, the peak year was 1991 with 1.8 million. Even by this measure, Trump is wrong. Rather than “decades of record immigration,” out of the top ten highest levels of all time, five occurred since 1990 and five before 1915.

But measuring immigration in terms of the absolute number of permanent residents is narrow and misleading. The biggest problem is that it implies that a million immigrants entering China, with a population of 1.4 billion, would have the same effect on employment as a million entering Estonia with a population of 1.2 million. Clearly, to understand the impact of immigration, you need to control for the size of the destination country.

Table 1: Top Ten Immigration Rates and Immigration Levels 1820 to 2014

  Year Rate   Year Number 1 1854 1.61% 1 1991 1,826,595 2 1850 1.59% 2 1990 1,535,872 3 1851 1.58% 3 1907 1,285,349 4 1882 1.50% 4 2006 1,266,129 5 1852 1.49% 5 1914 1,218,480 6 1907 1.48% 6 1913 1,197,892 7 1853 1.43% 7 2009 1,130,818 8 1849 1.31% 8 2005 1,122,257 9 1881 1.30% 9 2008 1,107,126 10 1906 1.29% 10 1906 1,100,735 Present 2014 0.32% Present 2014 1,016,518

Source: Department of Homeland Security. “2014 Yearbook of Immigration Statistics.”  

By this measure, that “record year” of 1990 comes in 52nd overall. Rather than decades of record immigration, we see decades of below average immigration. Indeed, per capita immigration during the current decade is almost 30 percent lower than the historical average, and five times less than the record rates in the 19th and 20th centuries.

Figure 1: Immigration Rates (1820 to 2014) and Unemployment Rates (1890 to 2014)

Sources: Immigration: Department of Homeland Security. “2014 Yearbook of Immigration Statistics.” Unemployment: Census Bureau. “Bicentennial Edition: Historical Statistics of the United States, Colonial Times to 1970.” p. 135 and Bureau of Labor Statistics via Federal Reserve Bank of St. Louis. “Fred Economic Data: Civil Unemployment Rate.” 

Higher immigration is not associated with higher unemployment

The other obvious aspect of the above visual is that the years with higher immigration do not coincide with the years with highest unemployment.* In fact, the reverse is true. Unemployment is highest when immigration is lowest. During years when immigration was above the historical average, unemployment was 5.7 percent. During all other years, it was 7.2 percent, a difference of 1.5 percent. If you exclude years where unemployment dropped solely because of the draft, during the World Wars, the difference rises to 1.8 percent.

Figure 2: Unemployment During Years with Immigration Rates Above and Below the Average (1890-2014)

Sources: See figure 1.

This relationship is statistically significant, but its magnitude is obscured by non-market phenomena, such as the draft as well as immigration quotas that interfere with market forces. If we confine our focus to the pre-World War I period, we can see a much higher degree of coincidence between low unemployment and high immigration.

Figure 3: Immigration and Unemployment Rates (1890 to 1915)

Sources: See figure 1.

The years in which the immigration rate exceeded the average for the period had an unemployment rate 5.5 percent lower than those below the average. The magnitude of the relationship is also quite large: roughly 20 percent of the variability in the immigration rate can be explained by the unemployment rate alone over this period.

The relationship becomes much stronger when you focus on economic migrants only. I’ve previously noted this phenomenon in H-1B temporary work visa applications. When unemployment is high in the top H-1B fields, employers submit dramatically fewer applications. Companies hire foreign workers when they are making general increases in employment, not when they are laying off workers.

To be clear, immigrants are not causing the unemployment rate to move up or down. The economic literature on this point is quite unambiguous: immigrants cause essentially no effect on the unemployment rate one way or another. Rather, the causation is the other direction. Immigrants come during periods of economic growth when companies are hiring new workers, both immigrants and natives.

Trump is mistaken to associate unemployment with immigrants. They are a sign of good times, not bad.

 

*Unemployment did not begin in 1890, but that is the first year in which comparable numbers are available. Note that pre-1948 numbers refer to individuals over the age of 14, all others over 16

On June 23, Britain voted by a margin of 52 to 48 percent to leave the European Union (EU). Much ink has already been spilled on the policy implications of that vote and, indeed, its long-run consequences may prove quite profound. When it comes to financial regulation, however, it is difficult to see any significant changes emerging in the short- to medium-term. There are a couple of fundamental reasons for this.

The first stems from the fact that the British financial sector is desperate to maintain its current access to the European Economic Area (EEA), also known as the “single market.” As things stand, a process known as “passporting” allows British financial firms to do business throughout the single market, whether on a cross-border basis or by establishing branches, without having to get separate regulatory approval in every jurisdiction. This arrangement is important to the industry and — given that financial services produce 8 percent of the UK’s output — the British government is likely to make its continuation after Brexit a priority.

But how can they bring that about? The most straightforward path is for Britain to leave the EU, but remain a member of the EEA. This approach, often referred to as the “Norway option,” would see Britain exit the EU’s centralized political institutions, while still participating fully in its “four freedoms” — that is, the free movement of goods, services, capital, and people. There is much to commend such a settlement, as I’ve written before. But if it did come to pass, Britain’s financial sector would clearly be subject to EU rules in much the same way as it is now.

There’s also a political problem with EEA membership: namely, it wouldn’t allow the British government to pursue its stated aim of controlling immigration from the EU. That suggests that the obvious alternative — a bilateral, post-Brexit trade treaty — might be the more likely outcome of Britain’s eventual withdrawal. Such a treaty could, theoretically, protect the British financial sector’s passporting rights. However, the quid pro quo for market access of that sort would undoubtedly be regulatory equivalence — that is, the European Commission would have to deem British regulation equivalent to EU rules before any passporting could take place. The handful of existing EU directives that provide “third country” financial firms access to the single market work in precisely this way. Ultimately, then, there are unlikely to be any major reforms to British financial regulation so long as the British financial services industry maintains access to the single market.

What if the Brexit negotiations do not result in single market access for British financial firms? This is by no means an improbable outcome: the UK will have to give something up if it wants to restrict EU immigration, and EU negotiators may consider financial services trade the best area in which to extract their pound of flesh (not least because Paris, Amsterdam, and Frankfurt are ready to capture any business that Britain loses). In those circumstances, the British government might just consider a program of regulatory reform, designed to make the City of London more competitive against light-touch financial centers like Hong Kong and Singapore.

But I wouldn’t count on that, because it’s not just the desire for continued single market access that suggests British financial regulation is unlikely to change much after Brexit. In fact, one of the most important — and perhaps least remarked upon — developments in post-crisis financial regulation is that it increasingly starts at the global level. Take the EU’s Capital Requirements Directive IV (CRD IV), which sets out prudential rules for banks, building societies, and investment firms: prima facie, that’s EU legislation, which the UK might no longer be bound by after Brexit; in reality, though, CRD IV mostly implements the Basel III agreement, which means the essence of that directive would continue to apply to Britain whatever happens at the EU level. And CRD IV is just the tip of the iceberg: from insurance to accounting standards, more and more financial regulation is coming from global institutions.*

Britain, moreover, has been an enthusiastic participant in the globalization of financial regulation—so much so that Mark Carney, the governor of the Bank of England (and Britain’s de facto chief financial regulator), is also the chairman of the G20’s Financial Stability Board, which coordinates the regulatory work of national authorities and international standard-setting bodies. As a House of Lords report on the post-crisis EU financial regulatory framework put it, “it is likely that the UK would have implemented the vast bulk of the financial sector regulatory framework had it acted unilaterally, not least because it was closely engaged in the development of the international standards from which much EU legislation derives.” None of this bodes well for those hoping Brexit will lead to liberalization.

There is, however, a larger point to be made here, and that’s that it isn’t at all clear globalized financial regulation is a good thing. There’s nothing wrong with regulators sharing best practices, of course, and still less to object to in efforts to eliminate regulatory barriers to trade. Nevertheless, the global harmonization of financial regulation may actually pose a threat to financial stability, since it tends to impose a single view of risk on financial firms around the world, and therefore encourages herding around particular investments and business strategies. If the regulators’ view of risk turns out to be wrong (let’s imagine that globally-agreed rules encourage banks to invest in, say, mortgage-backed derivatives, or Greek sovereign debt), you may end up with a systemic, global crisis on your hands—precisely the opposite of what regulatory harmonizers set out to achieve. Financial regulators would do better, I think, to let a thousand flowers bloom — both domestically, and internationally.

Sadly, I wouldn’t bank on Brexit doing anything to advance that point of view.

_______________

*Chapter 16 of “Flexcit: A plan for leaving the European Union” offers a helpful analysis of the extent to which EU financial regulation has international origins. This report, originally authored by Richard A. E. North, is also where I discovered the quote from the House of Lords European Union Committee that I have reproduced and linked to above.

[Cross-posted from Alt-M.org]

Cato adjunct scholar Flemming Rose who recently won the 2016 Friedman Prize for Advancing Liberty has been disinvited from speaking at the University of Cape Town in South Africa. The academic freedom committee of the university had asked Rose to give the annual TB Davie Academic Freedom Lecture. The Vice Chancellor of the university rescinded the invitation. He argued that Rose’s lecture might divide the campus leading to protests and even violence. He also said having Rose “might retard rather than advance academic freedom on campus”. The last statement will remind many people of Doublespeak.

Fortunately, this injustice has prompted several principled defenses of free speech.

Kenan Malik, an English writer and broadcaster, who gave the TB Davie lecture last year, makes the case for open debate and defends Rose.

Nadine Strossen, a former ACLU president and current law professor at New York University, quickly provided a comprehensive critique of the decision. Professor Strossen adds her comments about Flemming Rose that she gave at the Friedman Prize dinner.

Ronald K.L. Collins, a law professor at the University of Washington who runs the First Amendment News blog, has challenged an administrator at the University of Cape Town to reply to these critiques. Collins has done the right thing: a bad decision has led to critical speech which now invites a response.

Finally, Flemming Rose himself has replied, citing his recent defense of free speech for radical imams: “A more diverse society needs more free speech, not less.” He continues:

It’s really a sign of poor judgment and bad academic standards to disinvite me on the basis of what other people say about me, when I have published a book that covers my own story, which tells how my views on politics were formed and analyses the history of tolerance and free speech. The book is not only focusing on Islam. I write about the Russian Orthodox’ Church silencing of criticism, Hindu-nationalists attacks on an Indian Muslim artist and so on and so forth. Why use second-hand sources when you can read the primary source in English and make up your mind?

Why not indeed? Rose’s book, The Tyranny of Silence: How One Cartoon Ignited a Global Debate on the Future of Free Speech published by Cato in 2014 may be found here or at your local bookseller.

 

Last year, a company called Flytenow was poised to revolutionize air travel by allowing private pilots already going to a destination to share their costs with would-be travelers—kind of like a college rideshare bulletin board, but on the Internet. The service would pair pilots with potential passengers, for a small fee no greater than the cost of fuel. It’s been called “Uber in the sky.” But in December, Flytenow shut down after the U.S. Court of Appeals for the D.C. Circuit upheld the Federal Aviation Administration’s determination that the service must obtain the highest levels of licensing, akin to what major airlines and their pilots secure.

The FAA decided that these pilots were not simple private individuals sharing cost, but were “common carriers,” subject to heightened liability and expensive professional licensing. Common carriers—like buses, trains, and commercial airlines—have been treated specially in the law since medieval times, and they differ from Flytenow’s online bulletin board.

As Flytenow seeks review in the Supreme Court, Cato Institute, joined by TechFreedom, has filed an amicus brief in support.

First, “common carriage” is a term defined by common law, stretching back to way before the founding of the FAA—indeed hundreds of years before the Wright Brothers—and the FAA’s interpretation here directly contravenes that established meaning. One glaring consistency across the last 600 years of common law is that the carrier must hold itself out for indiscriminate public hire. Flytenow pilots, as a matter of right, can turn down any passenger for any reason (or no reason) and thus are by definition not common carriers. This alone is reason enough to reverse the court’s decision and overturn the FAA ruling.

But second, and more basically, the D.C. Circuit granted very broad deference to the FAA’s interpretation of what constitutes common carriage, despite that being a term defined at common law. Courts often defer to an agency’s expertise in a particular subject matter—which essentially means that the agency’s decision is usually upheld under some “deference” framework. But according to the Supreme Court’s ruling in Texas Gas Transmission Corp. v. Shell Oil Co. (1960), when an agency interprets the common law, a reviewing court shouldn’t simply defer to the agency’s interpretation.

That makes perfect sense: there is no greater expert in the common law than the courts, and the FAA lacks the expertise to engage in judicial decisionmaking. But instead of applying any existing law on the negligible deference that is due to agencies interpreting common-law terms, the D.C. Circuit went off on a doctrinal frolic entirely of its own invention. The lower court thereby not only contravened Texas Gas, but also went far beyond what little latitude any other circuit court had given agencies interpreting common-law terms.

By doing so, the court plainly delegates to the FAA what is “the province and duty of the judicial department,” which is to “interpret” the common law and “say what the law is.” Marbury v. Madison (1803). Such a delegation offends constitutional order and the separation of powers. Because the D.C. Circuit has neatly packed an abdication of the judicial role into a decision that contravenes 600 years of established law, we urge the Supreme Court to take up the case.

The justices will decide early in the new term this fall whether to review Flytenow, Inc. v. FAA.

 

The recent abortive military coup in Turkey has led not to a restoration of democracy and the rule of law in that country, but to an acceleration of already worrisome trends toward a dictatorship with Islamist overtones.  When the would-be junta made its play for power, the Obama administration quickly expressed support for President Recep Tayyip Erdogan’s beleaguered government, as did most of Turkey’s NATO partners.  When the coup attempt collapsed, leaders of those governments breathed a sigh of relief that the Alliance did not have to confront the embarrassment (or worse) of a member state governed by a military dictatorship.

That sense of relief was short lived.  In a matter of days, Erdogan purged not only hundreds of high-ranking military officers, (a step for which there was at least reasonable justification), he went after other institutions that had long impeded his attempts at increasingly autocratic rule.  Nearly 3,000 judges were removed and arrested.  He even fired 21,000 teachers from the country’s school system.  The extent and speed of the systematic purge confirms that Erdogan simply used the attempted coup as a pretext for a plan long in place.  The United States now confronts the problem of a NATO ally that is a dictatorship in all but name.

The frustrations with Turkey should have been building for years, if not decades.  After all, U.S. officials were under pressure to look the other way as Turkey invaded Cyprus in 1974 and continued to illegally occupy the northern portion of that country ever since.  Washington offered no more than feeble protests when Ankara established the puppet Turkish Republic of Northern Cyprus in the occupied territories and moved in tens of thousands of settlers from the Turkish mainland.  Such indifference makes U.S. expressions of outrage over Russia’s annexation of Crimea seem more than a little hypocritical.

More recently, Erdogan has systematically eroded the foundations of not only Turkey’s democratic institutions, but even the secular orientation put in place by modern Turkey’s founder, Mustafa Kemal Ataturk, after World War I.  The crackdown on a free press and the harassment of political opponents has grown steadily worse over the past two or three years.  Even before the post-coup purges, those authoritarian trends had reached alarming levels.  Today’s Turkey more closely resembles Putin’s Russia than it does a genuine Western democracy.

When the nation’s vital security interests are truly imperiled, it is sometimes necessary to make common cause with even sleazy allies.  Britain and the United States had to cooperate with Josef Stalin’s murderous Soviet Union to counter Adolf Hitler.  But such moral compromises need to be extraordinary exceptions, not done casually.  As Turkey sinks into blatantly authoritarian rule, the primary justification for retaining a close security relationship is Ankara’s relevance in sustaining Washington’s hyper-interventionist policy in the Middle East.  Since the evidence is overwhelming that that policy is a disaster and should be rescinded, U.S. officials also ought to reconsider its ties to Turkey. 

As part of that process, Washington should, as it applies to Turkey, immediately repudiate the provision in article 5 of the North Atlantic Treaty that considers an attack on one member as an attack on all and obligates the United States to render assistance.  It is bad enough for U.S. leaders to risk the lives of the American people to defend a liberal democratic ally that is not essential to the security of the republic.  It is much worse to incur such a risk to defend a thinly disguised dictatorship that is not essential to America’s security.  Yet that is the situation we now face with Turkey.  We need to adopt a much more cautious relationship with an increasingly unsavory regime. 

In an act of extreme tangent tying, former New Mexico governor Bill Richardson just penned an op-ed linking Donald Trump’s wall-building immigration stance to his attacks on the Common Core national curriculum standards. The message Richardson may be trying to send: bigots don’t want Hispanics in the country, or able to access “high academic standards” when they’re here.

I’ll let others debate Trump’s motives, but I can speak for myself—and probably the vast majority of Core opponents—that none of my opposition to the Core is based on anti-Hispanic sentiment or a desire to keep anyone down. It is rooted only in the concerns I have constantly expressed: having a single, federally driven set of standards would stifle innovation; makes little sense considering that all children are unique individuals; and has no meaningful research backing. Others believe that the Core simply is not a good enough set of standards.

Richardson offers no evidence to refute any of the highly substantive objections that have been made for years and have helped render the Core a largely bipartisan pariah. He just pronounces that the standards “equip students with the critical thinking and problem-solving skills that are essential to success in the 21st-century economy.” Then he attacks Trump again.

Far too often Core defenders have ignored powerful, important objections—and dodged serious debate—in favor of caricaturing Core opponents. Awkwardly tying Core opposition to anti-Hispanic animus seems to be more of the same.

The Pentagon awaits authority from Congress to repurpose military bases. Fears of the potentially harmfully economic effects on local communities when bases close largely explain Congress’s intransigence. The Base Realignment and Closure (BRAC) process was created in the late 1980s to allow closures to occur without forcing individual members to vote for them. It was a dodge, to be sure, but it worked: in five successive rounds, the military was able to eliminate some of its excess infrastructure and overhead.

But the problem hasn’t gone away. The Pentagon estimates that its physical footprint will exceed its needs by more than 20 percent by 2019.

A few Democrats in Congress are trying to help.

“We need to provide the Department of Defense flexibility to find savings and efficiencies wherever it can in order to support our warfighters,” explained Rep. Adam Smith (D-Wash.), top Democrat on the House Armed Services Committee. “That is especially true now, as Congress continues to strain the military by funding it through short-term budget agreements. We should not be making the military cut training and supplies while at the same time refusing to let DOD save money that we know is not being used productively.”

Smith has a point. But base reuse is about much more than allowing the military to allocate its resources wisely. Transitioning bases to non-military uses allows local communities to do so, too.

While the Democrats are in Philadelphia this week for their nominating convention, they should take a trip to visit one of the bases closed during the BRAC process – now known as The Navy Yard. POLITICO has a great profile of the place here. I wrote about it in this new book.

As I explain over at The Skeptics:

the C in BRAC is misleading. Bases aren’t closed. Properly managed, and with a little bit of luck, most former military facilities are repurposed for other chiefly nonmilitary pursuits. And some make the transition quite quickly.

Of the fifteen instances of defense conversion that I’ve studied so far, Philadelphia’s Navy Yard is one of the most impressive….

[…]

Philadelphia has a lot of things going for it, but I hope city officials make a point of bragging to visitors from the nation’s capital this week about what has happened to their former military base. They might even give them a tour. If they do, it could weaken opposition in Congress to another round of base closures, which is so desperately needed. Indeed, the opponents might come around to the view that the opening of a nearby base is precisely the boost that a flagging local economy needs.

Here’s an idea. Six other Democrats co-sponsored Rep. Smith’s latest bill that would allow a new BRAC: Reps. Sam Farr (Calif.), Susan Davis (Calif.), Jim Cooper (Tenn.), Madeleine Bordallo (Guam), Jackie Speier (Calif.) and Beto O’Rourke (Texas). I’ll bet that a few of them will be in Philly.

Last month, Rep. O’Rourke tried to attach an amendment to the National Defense Authorization Act that would have lifted the ban on base closures, but it was soundly defeated, 263-157. 53 Democrats, listed below, voted no. I’m guessing that they’ll be at the convention, too.

Perhaps Smith and his six co-sponsors could escort a few of them down to the Navy Yard? I think they’ll all like the trip.

Does the American Dream exist? Are poor but highly skilled individuals able to achieve their full potential? These questions are at the heart of recent episodes of Malcom Gladwell’s new podcast, Revisionist History.

In “Carlos Doesn’t Remember,” Gladwell examines the idea of “capitalization,” or how well America makes use of its human potential. Americans typically believe people are able to climb the ladder to success through hard work and determination, but Gladwell uses the story of one smart, low-income student to express doubts about American meritocracy.

“Carlos” is a bright but low-income student in Los Angeles, who secured a spot at an elite private school thanks to entertainment lawyer Eric Eisner’s YES program. The episode is a stark reminder that low-income students—even the most talented ones—face large barriers to success. Gladwell calls Carlos’ journey a “one in a million shot.” He identifies two large obstacles that smart, low-income students must overcome, but fails to discuss the best solution to these problems: school choice. The public education system traps students like Carlos in underperforming schools that Gladwell likens to concentration camps, but choice policies could help more poor students like Carlos access good schools.

The first barrier to success is a lack of advocates for talented, low-income students. But must it take an Eric Eisner to discover such kids and help them capitalize on their potential? The underlying assumption is that advocates will not be parents or teachers, but only rare, outside forces.

Really? Most parents want the best for their children, and work hard to give them opportunities for success. The problem may well be that wealthier families can access private institutions or choose expensive homes zoned for high-quality public schools, while low-income families are relegated to cheap addresses assigning them to subpar schools. Low-income parents, as Gladwell and others imply, are not necessarily uninformed or uncaring. They just lack the resources of wealthier families.

School choice policies help to give parents those resources. In The School Choice Journey, Thomas Stewart and Patrick Wolf show that given choices, low-income parents transition from passive clients to active consumers, seeking out information on options for their children.

Carlos’ situation is different: his parents were not in a position to advocate for him, and he spent time in foster care. But choice also benefits students like him by spurring quality improvements in public schools. Thirty-one of 33 studies found that the competition from school choice had positive effects on neighboring public school performance. Moreover, as more talented students take advantage of choice programs, there remain fewer students for the Eric Eisners of the world to discover. Gladwell’s narrative suggests the capitalization issue is predominantly about students like Carlos, but Carlos’ case is extreme, and school choice has the potential to greatly improve capitalization for the majority of low-income students.

Teachers can also serve as advocates for low-income students, but underperforming public schools are less likely to staff and retain good quality teachers. In a study of in-school inputs and educational achievement, Eric Hanushek identified teacher quality as the most important factor to student success and upward mobility. By empowering low-income students to access schools with superior teachers, school choice would position students to capitalize on their potential.

The second barrier to success that Gladwell identifies is geographic location. Carlos had to travel long distances to find the best school. This anecdote squares with research suggesting a negative relationship between urban sprawl and upward mobility. The odds of economic success vary by neighborhood, with the best opportunities for success largely in relatively wealthy neighborhoods. However, residential income segregation is at least partially a result of assigning schools based on home address, with well-to-do families choosing districts with good schools. School choice policies have the potential to sever this link, enabling economic integration in urban areas. Thomas Nechyba sums it up: “To the extent that a voucher causes someone who previously chose public schools to switch to private schools, the same price incentive to settle in the poor rather than the rich district applies.”

Gladwell ends by saying, “Don’t call this story inspirational, because it’s not. It’s depressing.” Carlos was lucky, but Gladwell cites a disheartening study estimating that there are 35,000 smart, poor students every year who don’t apply to top colleges. They don’t have the resources and information to access top schools, and there aren’t enough Eric Eisners to help them all. School choice policies could set such kids on a successful track from an earlier age, giving them the tools to capitalize on their talent.

The story Gladwell tells is depressing, but school choice could make it inspirational.

Why is government so often dysfunctional? Why is it, in contrast to the voluntary sector of society, so often slow, inefficient, wasteful, and counterproductive? Peter Schuck explored the question at length recently in his book Why Government Fails So Often. Chris Edwards offers a shorter and more libertarian analysis in a recent Cato policy study. But maybe these two new stories from the past few days shed some light on the question, first from Washington, D.C.:

Metro officials fired a senior mechanic just weeks after the L’Enfant Plaza smoke incident last year, alleging that he failed to properly inspect a tunnel fan, falsified an inspection report, and later lied about it to investigators.

But now, the largest union representing Metro workers is fighting the transit agency to have the mechanic reinstated.

Seyoum Haile, a 13-year Metro veteran, was terminated one month after the January 2015 incident that resulted in the death of a passenger — but arbitrators said he should be suspended instead, and now the Amalgamated Transit Union Local 689 is suing to get him back on the job.

Meanwhile, in Miami:

National condemnation has been swift today after video showed Charles Kinsey, an unarmed black behavioral tech trying to help an autistic patient, holding his arms in the air before a North Miami Police officer shoots him. But Miami’s two most prominent police union chiefs have now leaped to the officer’s defense. 

John Rivera, who leads the Dade County Police Benevolent Association, says the officer was actually trying to protect Kinsey because he believed the autistic man, who was holding a toy truck, had a gun — but then he accidentally shot Kinsey instead. 

For more on the consequences of government employee unions, see here and here.

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