Policy Institutes

If you get into the weeds of tax policy and had a contest for parts of the internal revenue code that are “boring but important,” depreciation would be at the top of the list. After all, how many people want to learn about America’s Byzantine system that imposes a discriminatory tax penalty on new investment? Yes, it’s a self-destructive policy that imposes a lot of economic damage, but even I’ll admit it’s not a riveting topic (though I tried to link it to popular culture by using ABBA as an example).

In second place would be a policy called “deferral,” which deals with a part of the law that allows companies to delay an extra layer of tax that the IRS imposes on income that is earned - and already subject to tax - in other countries. It is “boring but important” because it has major implications on the ability of American-domiciled firms to compete for market share overseas.

Here’s a video that explains the issue, though feel free to skip it and continue reading if you already are familiar with how the law works.

The simple way to think of this eye-glazing topic is that “deferral” is a good policy that partially mitigates the impact of a bad policy known as “worldwide taxation.”

Unfortunately, good policy tends to be unpopular in Washington. This is why deferral (and related issues such as inversions, which occur for the simple reason that worldwide taxation creates a huge competitive disadvantage for U.S.-domiciled companies) is playing an unusually large role in the 2016 election and concomitant tax debates.

Consider the tax controversy involving Apple. The CEO does not want to surrender money that belongs to shareholders to the government.

Apple CEO Tim Cook struck back at critics of the iPhone maker’s strategy to avoid paying U.S. taxes, telling The Washington Post in a wide ranging interview that the company would not bring that money back from abroad unless there was a “fair rate.”

Since the discussion is about income that Apple has earned in other nations (and therefore about income that already has been subject to all applicable taxes in other nations), the only “fair rate” from the United States is zero.

That’s because good tax systems are based on “territorial taxation” rather than “worldwide taxation.”

Though a worldwide tax system might not impose that much damage if a nation had a low corporate tax rate.

Unfortunately, that’s not a good description of the U.S. system, which has a very high rate, thus creating a big incentive to hold money overseas to avoid having to pay a very hefty second layer of tax to the IRS on income that already has been subject to tax by foreign governments.

Along with other multinational companies, the tech giant has been subject to criticism over a tax strategy that allows them to shelter profits made abroad from the U.S. corporate tax rate, which at 35 percent is among the highest in the developed world.

“Among”? I don’t know if this is a sign of bias or ignorance on the part of CNBC, but the U.S. unquestionably has the highest corporate tax rate among developed nations.

Indeed, it might even be the highest in the entire world.

Anyhow, Mr. Cook points out that there’s nothing patriotic about needlessly paying extra tax to the IRS, especially when it would mean a very punitive tax rate.

…a few particularly strident critics have lambasted Apple as a tax dodger. …While some proponents of the higher U.S. tax rate say it’s unpatriotic for companies to practice inversions or shelter income, Cook hit back at the suggestion. “It is the current tax law. It’s not a matter of being patriotic or not patriotic,” Cook told The Post in a lengthy sit-down. “It doesn’t go that the more you pay, the more patriotic you are.” …Cook added that “when we bring it back, we will pay 35 percent federal tax and then a weighted average across the states that we’re in, which is about 5 percent, so think of it as 40 percent. We’ve said at 40 percent, we’re not going to bring it back until there’s a fair rate. There’s no debate about it.”

Cook may be right that there’s “no debate” about whether it’s sensible for a company to keep money overseas to guard against bad tax policy.

But there is a debate about whether politicians will make the law worse in a grab for more revenue.

Senator Ron Wyden (D-OR), for instance, doesn’t understand the issue. He wrote an editorial asserting that Apple is engaging in a “rip-off.”

…the heart of this mess is the big dog of tax rip-offs – tax deferral. This is the rule that encourages American multinational corporations to keep their profits overseas instead of investing them here at home, and it does so by granting them $80 billion a year in tax breaks. This policy…defies common sense. …some of the most profitable companies in the world can put off paying taxes indefinitely while hardworking Americans must pay their taxes every year. …that system creates a perverse incentive to keep corporate profits overseas instead of investing here at home.

I agree with the senator that the current system creates a perverse incentive to keep money abroad. But you don’t solve that problem by imposing unconstrained worldwide taxation, which would create a perverse incentive structure that discourages American-domiciled firms from competing for market share in other nations.

Amazingly, Senator Wyden actually claims that making the system more punitive would help make America a better place to do business.

…ending deferral is a necessary step in making sure…the U.S. maintains its position as the best place to do business.

Wow, this rivals some of the crazy things that Barack Obama and Hillary Clinton have said.

Though I guess we need to give Wyden credit for honesty. He admits that what he really wants is for Washington to have more money to spend.

Ending deferral will also generate money from existing deferred taxes to pay for rebuilding our country’s crumbling infrastructure. …This is a priority that almost all tax reform proposals have called for.

By the way, can you guess which presidential candidate agrees with Senator Wyden and wants to impose full and immediate worldwide taxation?

If you answered Hillary Clinton, you’re right. But if you answered Donald Trump, that also would be a correct answer.

This is a grim example of why I refer to them as the Tweedledee and Tweedledum of statism.

Though to be fair, Trump’s plan at least contains a big reduction in the corporate tax rate, which would substantially reduce the negative impact of a worldwide tax system.

The Wall Street Journal opines on the issue and is especially unimpressed by Hillary Clinton’s irresponsible approach on the issue.

Mrs. Clinton is targeting so-called inversions, where U.S.-based companies move their headquarters by buying an overseas competitor, as well as foreign takeovers of U.S. firms for tax considerations. These migrations are the result of a U.S. corporate-tax code that supplies incentives to migrate… The Democrat would impose what she calls an “exit tax” on businesses that relocate outside the U.S., which is the sort of thing banana republics impose when their economies sour. …Mrs. Clinton wants to build a tax wall to stop Americans from escaping. “If they want to go,” she threatened in Michigan, “they’re going to have to pay to go.”

Ugh, making companies “pay to go” is an unseemly sentiment. Sort of what you might expect from a place like Venezuela where politicians treat private firms as a source of loot for their cronies.

The WSJ correctly points out that the problem is America’s anti-competitive worldwide tax regime, combined with a punitive corporate tax rate.

…the U.S. taxes residents—businesses and individuals—on their world-wide income, not merely the income that they earned in the U.S. …the U.S. taxes companies headquartered in the U.S. far more than companies based in other countries. Thirty-one of the 34 OECD countries have cut corporate taxes since 2000, leaving the U.S. with the highest rate in the industrialized world. The U.S. system of world-wide taxation means that a company that moves from Dublin, Ohio, to Dublin, Ireland, will pay a rate that is less than a third of America’s. A dollar of profit earned on the Emerald Isle by an Irish-based company becomes 87.5 cents after taxes, which it can then invest in Ireland or the U.S. or somewhere else. But if the company stays in Ohio and makes the same buck in Ireland, the after-tax return drops to 65 cents or less if the money is invested in America.

In other words, the problem is obvious and the solution is obvious.

But there are too many Barack Obamas and Elizabeth Warrens in Washington, so it’s more likely that policy will move in the wrong direction.

The last NATO Secretary General, Anders Fogh Rasmussen, hailed from Denmark, which has 17,200 citizens under arms. That position did not allow him to deploy the American military, but it did give him unusual influence over U.S. policy.

Even as the American people tire of trying to solve other nations’ problems, Rasmussen wants the United States to continue its interventionist course. Politico recently interviewed Rasmussen, who promoted an “American-led world order”—at American expense, of course. Rasmussen’s greatest fear is the end of Washington’s unique global role: “What is at stake here is the American role as the global superpower.”

He agreed that Europeans should do more on behalf of their own defense, but offered no strategy to make serious and permanent increases a reality. Rasmussen was critical of Trump’s desire for better relations with Russia, even though in a conflict the Danes would do little to help defeat Moscow.

Rasmussen also complained that the GOP platform eliminated a pledge for military aid to Kiev. He worried: “The West risks losing a democratic Ukraine by undermining our support for the country.” But is the prospect of a “democratic Ukraine,” whatever that means in practice, worth war with Russia?

Of course, Rasmussen contended that it is “in America’s self-interest” to preserve “the international order.” But surely not only America’s interest. How about the interest of Europe, which today can’t be bothered to spend much on its own defense, let alone for operations elsewhere?

Rasmussen is prepared to be quite generous with U.S. lives. Washington has “a special obligation to maintain the world order and promote peace.” Indeed, it is America’s “destiny” to lead.

This sounds like the practiced cant of a con-man who relies on flattery. At the end of World War II, only the United States was able to bolster war-ravaged friends and former foes and confront the Soviet Union. But that world disappeared in 1989, if not before.

America’s populous and prosperous allies also benefit from today’s international system. Collectively they possess larger economies and populations than America. They can do much to maintain order and constrain regional trouble-makers.

Rasmussen tried another tack, common among American Neoconservatives. He argued: “it’s in the United States’ interest to actually prevent conflicts while they are still manageable and small, instead of waiting and seeing them grow bigger.” Again, why should only America keep “the lid on” such cases?

Moreover, Rasmussen presumes that Washington officials are capable of discerning potential disasters in advance, acting swiftly and smartly to defuse impending conflicts, showing uncommon understanding in developing solutions, and steadfastly imposing and enforcing settlements. But the results of U.S. interventions have been uniformly bad, often disastrous, leading to successive interventions to fix problems created by the previous effort.

Rasmussen charged President Barack Obama with being “too reluctant to use American force to prevent and solve conflicts around the world.” It is the president’s refusal to use the military that has resulted in “autocrats, terrorists and rogue states” being more influential.

Again, I ask in National Interest, “in what world does Rasmussen live? President Obama actively used the U.S. military, including drones, in Afghanistan, Libya, Pakistan, Yemen, Iraq, and Syria. Where else was there something useful to do, the U.S. knew what to do, the American people would support what must be done, and the end would be peace and stability rather than years more of conflict?”

Even more bizarre is his belief that China, Russia, and terrorists would go away if only America exercised “global leadership.” Unless Washington is prepared to go to war with nuclear-armed powers over stakes they consider vital, such challenges are inevitable. And intervention creates rather than eliminates terrorism.

Policing the globe is not America’s job. Washington should focus on the defense of the United States. What that requires will change over time as circumstances evolve. But America’s chief defense mandate is America.

For those celebrating Brexit as a way to push for freer markets, be aware that there is going to be a fight over this. This is from a Financial Times piece arguing that the UK must ensure that its agriculture industry continues to receive subsidies:

Some free market thinkers believe Britain’s departure from the CAP [the EU’s Common Agricultural Policy] is a golden opportunity to scale back — and even end — agricultural subsidies altogether. They believe the CAP has been hugely distortive because farmers are granted funds according to how much they produce. British farming businesses have therefore been unwilling to innovate, leaving agricultural productivity in the UK lagging well behind that of the US, for example.

Proponents of deep cuts in subsidy also believe they are a sine qua non if Britain is to forge new trade deals with non-EU states. The EU is so heavily committed to agricultural protectionism — imposing tariff barriers on outsiders while subsidising its own farmers — that its ability to sign trade agreements with developing nations has long been restricted. If the UK adopts a different approach, opening up its markets to food exports from, say, Commonwealth nations, it could gain significant new access for UK companies looking to sell services.

Politicians should tread carefully, however. It is in Britain’s interest to maintain a strong farming industry at home and no government should take risks on food security. Farming is an uncertain profession and one that is increasingly exposed to the challenges posed by climate change. That is why most developed countries, whether inside the EU or not, maintain public funding for farming communities.

The right course for Britain is to replace the CAP with a smarter and more innovative system of public support. Instead of subsiding food production, the UK should look to adopt a system of highly specific direct transfers. Future UK governments should, for example, put far more emphasis on paying farmers to tackle specific environmental problems; or to boost training and skills in the workplace; or to invest in research and development projects that boost productivity.

It’s amazing how much effort goes into finding new and “innovative” ways for governments to take taxpayer money and give it to the agriculture industry. No doubt there are better and worse ways to provide that money, and the EU Common Agricultural Policy could be improved, but Brexit offers an opportunity to go beyond the incremental changes suggested above for farm subsidies. That’s why the next few months and years are such an important time for the future of UK policy: There’s a chance to move strongly in the direction of free markets, in agriculture and other sectors. But this article makes clear that there will be people pushing back, and making questionable arguments about “food security,” so it’s important to engage now, while policies are still being decided.

“The president’s presence is already late to this crisis”: that weird phrase comes from yesterday’s widely shared editorial in the Baton Rouge Advocate“Vacation or not, a hurting Louisiana needs you now, President Obama.” It’s not just the man himself who’s missing: it’s his “presence.” “A disaster this big begs for the personal presence of the president at ground zero,” the editorialist insists.

But why? Well, “it’s what chief executives sign up for when they take the oath of office.” Does it help? The Advocate acknowledges that “sometimes, presidential visits can get in the way of emergency response, doing more harm than good,” but that won’t happen in this case. OK, even if it won’t do more harm than good, what good would it do? “In coming here, the president can decisively demonstrate that Louisiana’s recovery is a priority for his administration–and the United States of America.” Or he could demonstrate that by declaring the affected region a disaster area, freeing federal funds for assistance and recovery under the Stafford Act, like he’s already done. Still, “the optics of Obama golfing while Louisiana residents languished in flood waters was striking.”

Perhaps it’s harsh to point out that there’s not a single line of rational argument in the piece—after all, the editorialist is understandably upset about the suffering friends and neighbors have endured over the last week. But for most of the people sharing it, like Governor Scott Walker (R-WI), it’s content-free partisanship, as complaints about presidents golfing invariably are. Here’s the Washington Times grousing: “Obama puts vacation above American people amid deadly Louisiana flooding,” and Howie Carr snarling that while: “In Eastman, Georgia, a cop, a father of three, is murdered in cold blood by a gunman identified as Royheem Delshawn Deeds, who is later arrested in Florida…. Obama golfs at the Farm Neck Golf Club.” I confess I don’t see the connection.

The Drudge Report regularly intersperses an obsession with the president’s golfing habit with various crackpot theories about his real agenda, cheerlessly oblivious to the inconsistency: “He’s a Kenyalinskyite anti-colonialist crypto-Muslim Brotherhood agent with a plan to destroy America. Wait, the SOB is playing golf again? Get to work, damnit!”

But there’s also something going on here that transcends partisanship. Not long ago, the Washington Post pointed to “A growing role for the president: America’s consoler in chief.” It’s the Veep’s job to show up at funerals, and, it’s become the president’s job to manifest himself at disaster areas and other tragic scenes. The first Lexis reference I can find to the president as “consoler-in-chief” comes from an AP story from 1993, “Clinton’s Hugs: Therapy for the Nation,” exploring whether the 41st president’s touchy-feely approach would lead to questions about his toughness. In the years since, those sorts of concerns have vanished, as the “Consoler” role has taken on an increasingly mystical and totemic aspect: “the president’s presence.” As former George W. Bush aide Karen Hughes put it in the Post piece, “the presence of the president has become a visible symbol of the presence of the American people, of their love and their concern and their prayers.”

This is an utterly batty way for people to talk about elected officials, and easy to laugh off: will Donald Trump or Hillary Clinton acquire this numinous aura come January 2017, incarnating our “love and concern and our prayers,” our very presence? That’d be weird.

But there’s something atavistic, and distinctly unsettling, about investing quasi-religious aspirations in a civil officer and fallible human being. And our insatiable demands for executive compassion drive the growth of executive power. When presidents are too slow out of the gate showing that they feel our pain, they often make up for it by seizing more power, as Obama did with the BP oil spill, and Bush did after Katrina. Sending the message: I care doesn’t always stop with photo-ops and FEMA grants.  

The Equation Group was like something out of a Hollywood film: A hacking team of unparalleled sophistication and skill who cracked open computer systems around the world like pistachio shells, yet escaped detection for 14 years until being noticed by the security researchers at Kaspersky Lab last year. They were also widely believed to be affiliated with the National Security Agency—most likely working with or from the NSA’s elite Tailored Access Operations unit.  Last weekend, the world learned that these hackers nonpareil had themselves apparently been hacked, when a group calling themselves the Shadow Brokers (likely a reference to the popular Mass Effect video game series) posted a cache of what they claimed were some of Equation Group’s “cyberweapons,” or computer exploitation tools, on the Web for all to see—along with an offer to sell even more valuable intrusion software they’d obtained to the highest bidder.

While the government hasn’t acknowledged the authenticity of the supposedly hacked files, security experts, including former NSA hackers who’ve spoken to press, agree that the files are the real deal. In fact, they included an exploit that attacks a critical “zero day” (i.e. previously unknown) vulnerability in network routers manufactured by the hardware giant Cisco. That’s particularly disturbing given that the files released this weekend all appear to date from 2013—which means that the “Shadow Brokers,” along with anyone they’d shared the code with—may have had up to three years to run wild on sensitive corporate networks.  Moreover, most experts believe that the offer to “auction off” additional Equation Group tools (pitched in comically broken English) is a smokescreen: The most popular current theories are that the “Shadow Broker” files come from either an NSA insider or a foreign intelligence agency (Russia’s is the leading candidate) that managed to breach a “staging server” used to launch Equation Group attacks. Former NSA contractor Edward Snowden has publicly said that this is not the first time an NSA attack server has been similarly compromised by a foreign adversary—only the first time the hackers have chosen to publicize it.

Whatever the true identity and motives of the Shadow Brokers, there are some clear policy lessons to take away from this.  The first concerns the “Vulnerability Equities Process“—which is how the American intelligence community decides whether and how long to hang on to software vulnerabilities they discover before notifying developers so that these cybersecurity holes can be patched. Back in 2014, federal cybersecurity coordinator Michael Daniel insisted in a post on the White House blog that the process is strongly weighted in favor of disclosure. The government, he assured the public, understands that “[b]uilding up a huge stockpile of undisclosed vulnerabilities while leaving the Internet vulnerable and the American people unprotected would not be in our national security interest.” 

Yet surely by every criterion of evaluation Daniel himself lays out, the Cisco vulnerability—key to an exploit tool codenamed ExtraBacon—was a prime candidate for disclosure.  It’s a high-severity vulnerability that would allow an attacker to effectively monitor all traffic on a compromised network, affecting the leading manufacturer of network routing equipment, and thus leaving a vast number of both American and foreign companies subject to attack. For precisely those reasons, of course, the ExtraBacon exploit would have been of great value to the NSA, and the temptation to at least temporarily make use of it must have been equally strong.  The decision to do so may well have been correct initially.  Yet failing to notify Cisco of such a grave security hole for three full years is simply indefensible—and as we now know, left users and firms alike at the mercy of the malicious actors who had obtained the code. (The past tense is actually inappropriate here: As of this writing Cisco has not yet released a full patch, and many networks will doubtless remain vulnerable for some time even after a fix is available.)  Almost by definition, a process that led to this outcome is dysfunctional.

This hack also ought to give pause to anyone swayed by the government’s assurances that we can mandate government backdoors in encryption software and services, allowing the “good guys” (law enforcement and intelligence agencies) to access the communications of criminals and terrorists without compromising the security of millions of innocent users. If even the NSA’s most closely guarded hacking tools cannot be secured, why would any reasonable person believe that keys to cryptographic backdoors could be adequately protected by far less sophisticated law enforcement agencies? The Equation Group hack is a disturbingly concrete demonstration of what network security experts have been saying all along: Once you create a backdoor, there is no realistic way to guarantee that only the good guys will be able to walk through it.

Twenty-five years ago today I was driving back to Boston from Cape Cod. Two stories dominated the radio news that morning. Hurricane Bob was headed straight for New England, putting my return to Washington in doubt. And Russian hard-liners had staged a coup against Mikhail Gorbachev, who was being held incommunicado in his dacha in Crimea. Eventually I got back to Washington, by a very slow train rather than by plane. The other story had more lasting consequences.

On that morning of August 19, 1991, as the coup plotters issued a declaration of a new Soviet president and seized control of Russian media, supporters of democracy gathered at the Russian parliament. And Boris Yeltsin, the new president of the Russian Soviet Socialist Federal Republic, decided to go out and speak to the soldiers and people outside the parliament building. He climbed up on a tank and rallied opposition to the coup. Two days later it collapsed, and Yeltsin was a national hero. As I wrote when Yeltsin died in 2007:

More than any other man, Boris Yeltsin moved the Russian people from tyranny to a rough approximation of freedom. For that he is one of the authentic heroes of the 20th century.

In a way he personalizes Mikhail Gorbachev’s accidental liberation of the Russian and Soviet people. Gorbachev intended to reform and reinvigorate communism. He brought Yeltsin from the rural region of Sverdlovsk in 1985 to shake up the stagnant party as the Moscow party boss. But Gorbachev set in motion forces that he couldn’t contain. Once people were allowed to criticize the communist system and glimpse an alternative, things moved rapidly–partly because of Yeltsin’s unexpectedly radical leadership.

Two years later Gorbachev and the party hierarchy pushed him out of the Politburo. But he turned around and ran for the Congress of People’s Deputies, won, and then was elected to the Supreme Soviet. He created Russia’s first parliamentary opposition (in the Supreme Soviet) and then won election to the new Russian parliament. Against the continuing opposition of Gorbachev, he was elected to the chairmanship of that body, thus becoming president of the Russian Soviet Federative Socialist Republic.  He stunned politicos by resigning from the Communist Party.

And then in 1991, less than four years after being pushed out of politics by Gorbachev, Boris Yeltsin became the first elected leader in a thousand years of Russian history, winning a popular election for president. Six weeks later he hit his high point. When hard-line communists tried to stage a coup, Yeltsin courageously raced to parliament to rally opposition.  He jumped on a tank to address the crowd, creating one of the iconic images of the collapse of communism.

He went on to effectively dismantle the Soviet Union and to let 14 of the Soviet republics go their own way. He set about freeing prices and privatizing state property, the largest privatization in the history of the world. It was far from an ideal privatization process. But there weren’t many models for wholesale transformation of a communist economy into a market economy. As I wrote in 2007,

Yeltsin wasn’t perfect. He was often boorish and apparently had an excessive taste for alcohol. Despite letting the other Soviet republics go, he launched the devastating war in Chechnya. He unconstitutionally dissolved parliament in 1993; when communist lawmakers defied him, he sent tanks to shell parliament.  But it should be noted that Yeltsin at that time was seeking to defend liberal democracy against a return to communism. Imagine if Nazi legislators had stayed in the German parliament into 1949, resisting Adenauer’s policies and threatening to bring back National Socialism. Would it be undemocratic to call out the military to counter them? Fareed Zakaria’s worry in 1997 that Yeltsin’s creation of a “Russian super-presidency” might be abused by his successors looks all too prescient now. But a reversion to communism would have been worse.

And finally, after becoming the first elected leader in Russia’s history, he became something even more important–the first Russian leader to voluntarily give up power. True, he turned Russia over to Vladimir Putin, making him more like Ronald Reagan, who delivered the United States to the Bushes, than George Washington, who left us in the capable hands of John Adams and Thomas Jefferson.

Still, the words that President Reagan addressed the American soldiers who invaded Normandy could also be applied to Boris Yeltsin: “These are the champions who helped free a continent. These are the heroes who helped end a war.”

For all his mistakes, Yeltsin helped to free a continent and end the Cold War. And 25 years ago today was his finest hour.


Washington long has told the rest of the world what to do. But the world usually pays little attention. When ignored, U.S. officials typically talk tougher and louder, with no better result.

That describes American policy toward North Korea. It would be better for Washington to say less than frantically denounce every provocation. The U.S. and its allies typically respond with angry complaints and empty threats, which only encourages the Democratic People’s Republic of Korea to provoke again.

North Korea recently launched two missiles. It was more of the same, barely worth a second thought.

However, UN Secretary-General Ban Ki-moon declared that he was “deeply troubled” by the North’s action. The United Nations Security Council met, at which there were “strong condemnations across the board,” according to U.S. ambassador Samantha Power. Pentagon spokesman Gary Ross said Pyongyang should “focus instead on taking concrete steps toward fulfilling its commitments and international obligations.”

Japan’s UN representative, Koro Bessho, called the North’s actions “totally unacceptable.” Japanese Prime Minister Shinzo Abe termed the test “is an unforgivable act of violence toward Japan’s security.”

South Korea’s UN representative, Oh Joon, denounced Pyongyang, contending that the latter’s missile program “poses a clear and present danger to the security of all countries in the region.” The South Korean military warned that the North “directly and blatantly demonstrated its provocative ambition to target seaports and airfields across South Korea.”

Even NATO Secretary-General Jens Stoltenberg joined the chorus, taking the “North Atlantic” Treaty Organization way out of area. He declared that North Korea should “immediately cease and abandon all its existing nuclear and ballistic missile activities” and “refrain from any further provocative actions.”

Imagine, Stoltenberg thought his words would shame into repentance the North’s communist emperor Kim Jong-un. North Koreans seem far more likely to enjoy than regret Japanese ululations over the horrid threat posed by Tokyo’s former colony.

Just what do the allies believe they are achieving? Over the last five years the DPRK has shot off 31 missiles. Every one violated a Security Council resolution. And every one was denounced in equally florid language.

Without the slightest impact on the North’s behavior.

Western whining plays to Kim’s worst instincts. After all, the DPRK ably fills the role of a “shrimp among whales,” far smaller, poorer, and less powerful than South Korea, let alone Japan, China, and Russia. Yet the Kim dynasty has gained the world’s attention, causing wailing and gnashing of teeth in capitals across the world—and now even in the headquarters of NATO, the world’s greatest military alliance.

From the regime’s standpoint, it obviously is doing something right. In fact, observers predict that the North is preparing a fifth nuclear test. Last month Foreign Minister Ri Yong-ho criticized the U.S. for its “never ending nuclear blackmails.” As a result, America “will have to pay dearly a terrifying price.”

Washington cannot count on the PRC to “solve” the North Korea problem. After the latest DPRK provocations, Beijing’s ambassador to the UN, Liu Jieyi, chose not to focus on the North, but instead said “the situation is tense and we need to do everything to de-escalate the situation.” He implied that the U.S. and its allies had provoked the North to arm, noting that “the factors contributing to the tension in the Korean peninsula” are “self-evident.”

As I note in the National Interest: “No one outside of Pyongyang wants the DPRK to develop missiles or nuclear weapons. However, if the allies lack a means to disarm the North, they should stop complaining after every weapons test. Doing so reinforces North Korea’s inflated sense of importance and perception of allied weakness.”

Better would be to greet such tests with silence. Any policy response, such as tightened sanctions, should be adopted with little rhetorical fanfare.

This wouldn’t make the North Korea problem go away. But it might at least stop encouraging the DPRK to do more. The U.S. and its allies should give the North the attention that it truly deserves.

A number of outspoken hawks have praised Hillary Clinton’s approach to foreign policy over the past few months, with at least one stepping up to raise funds for her campaign. This might be surprising if one assumes that hawks tend to support Republicans. It also doesn’t make sense if one believes Donald Trump’s contention that Clinton’s approach to the world is identical to Barack Obama’s, and that Obama is a naïve and foolish dove.

It is not surprising that hawks prefer Clinton over Trump, however, if you realize that Hillary Clinton supported every one of the last seven U.S. military interventions abroad, plus two others we ended up not fighting. Given this, it seems that the members of America’s interventionist class doubt that she would be as reluctant to initiate new wars, or expand the current ones, as her campaign rhetoric has suggested.

For much of her career, Hillary Clinton has been one of the most hawkish Democrats in Washington, and one of the more hawkish American politicians, period (my Cato colleague Caroline Dorminey helped compile an early report card here). Clinton has supported the use of the U.S. military for a range of issues, not simply or primarily to advance U.S. national interests, but also to defend the security of other countries and pursue humanitarian objectives.

As Micah Zenko of the Council on Foreign Relations wrote, “It’s impossible to know which national security crises she [Hillary] would be forced to confront, of course. But those who vote for her should know that she will approach such crises with a long track record of being generally supportive of initiating U.S. military interventions and expanding them.”

As First Lady, Hillary Clinton encouraged her husband to intervene in Bosnia in 1995–1996, and then again in Kosovo in 1999. Two years later, Senator Hillary Clinton voted for the Authorization for Use of Military Force (AUMF) following the September 11th attacks, and then for the Iraq war AUMF in September 2002, a vote she now claims to regret. Notably, she also regrets voting against the Bush administration’s Iraq “surge” in January of 2007.

Perhaps chastened by the Iraq surge vote, Clinton as Secretary of State supported a similar troop increase in Afghanistan in 2009. She initially argued for 10,000 more boots on the ground than the President and Secretary of Defense were prepared to send, before eventually falling in line with Obama’s request. It seems that, if given a choice between more troops or fewer, more is better.

Clinton also pushed to send lethal arms to anti-Assad rebels in Syria, and later for establishing a no-fly zone in Syria, an idea that could have brought U.S. pilots into direct contact with Russian aircraft in contested airspace. And when it came to balancing against Russia directly, she supported the controversial expansion of NATO to include countries like Georgia and Ukraine, and also called for providing financial and military assistance to Ukraine in 2015.

Her support for Obama’s drone wars is by far the hardest to tally in this count because it covers interventions already mentioned (e.g, Iraq and Afghanistan), but also includes at least five other countries in which America is not officially at war; Pakistan, Syria, Libya, Somalia, and Yemen have all been subject to U.S. drone strikes at various times. The evidence during her time as Secretary of State suggests that she is strongly supportive of the use of drones, including sometimes over the objections of American diplomats.

All told, the United States is, and has been, involved in many military operations simultaneously, and Hillary Clinton has supported them, as well as the ones we didn’t undertake. No wonder the hawks like her.

Clinton comes by her instincts partly from the people she trusts on the topic. Secretary of State Madeleine Albright was an influential voice during Bill Clinton’s second term, and she and Hillary Clinton appear to have developed an enduring relationship. More recently, Jack Keane, one of the architects of the Iraq surge, is, according to the New York Times’ Mark Landler, “perhaps the greatest single influence on the way Hillary Clinton thinks about military issues.”

Clinton and her very large circle of like-minded advisors worry that if America takes a step back from trying to solve every local dispute another country might take the reins. After 20 years of war, many thousands of U.S. servicemen and women killed, and trillions of dollars spent, many Americans hope that they will.

And yet, despite such firm public opposition to greater U.S. involvement abroad, Clinton seems loathe to let others take the lead. “We will be left behind,” she fretted, when it appeared that France and Britain might take action against forces loyal to Libyan leader Muammar el-Qaddafi in March 2011. In the end, she prevailed on President Obama to take the lead, and later boasted with a laugh, “We came, we saw, he died.” Given the chaos that has ensued since Qaddafi’s overthrow, and the blame that has fallen so heavily on her shoulders, she might now wish that we had sat out that particular civil war.

More generally, it is possible that Clinton has had a genuine change of heart about the wisdom and necessity of frequent U.S. wars. Perhaps her stated opposition to sending U.S. ground troops to fight ISIS, for example – “that is off the table, as far as I’m concerned” she said on Monday – is driven by more than pure political calculation. Perhaps once she enters the office that she has aspired to occupy for so long, she will be true to the less-than-completely-hawkish stances that she has adopted during this campaign season.

I mostly worry, however, that once Hillary Clinton is freed from the obligation of actually having to campaign for the presidency, she will revert to the foreign policy approach that she has favored most of her public life, and surround herself with advisors equally enamored of the U.S. military’s supposedly magical powers for solving all manner of problems.

Having spent the last month or so pouring over writings on last-resort lending,* and especially writings dealing with the recent crisis and its aftermath, with the particular aim of discovering the best means for supplying last-resort credit when it’s called for, and for not supplying it when it isn’t, I’ve reached a number of tentative conclusions that seem worth reporting. I report them despite their tentative nature so that I might be convinced sooner rather than later that I’m barking up the wrong tree, and also because, if I’m actually on to something, I might get others to help me flesh-out my ideas.

I hasten to add that I regard any need for last-resort lending as reflecting, not the inherent shortcomings of private financial markets, but the debilitating effects of misguided regulatory interference with the free development of those markets. Some of the least regulated banking systems of the past, including systems that lacked central banks, were also famously crisis-free, or close to it.

Modern banking systems are, sadly, a far cry from those ideal arrangements. It’s quite impossible, for that reason, to suppose that we might safely dispense altogether with central bank last-resort lending, without first undertaking other, major reforms. In the meantime, we can strive to  reform last-resort lending arrangements, so that they might lower the risk of future crises, instead of making them more likely by contributing to moral hazard, or by otherwise misallocating credit.

A False Dichotomy

Conventional wisdom has it that contemporary central banks must perform two fundamentally distinct duties. According to it, they are, first of all, responsible for implementing monetary policy, meaning that they must manage the aggregate supply of liquid reserves so as to reach various short- and long-term macroeconomic targets. But they must also serve as sources of “last-resort” credit when doing so serves to prevent or contain financial crises.

This established dichotomy of central bank duties has in turn informed a corresponding division of central bank facilities, with one facility or set of facilities serving for the implementation of “ordinary” monetary policy, and the rest devoted to supplying last-resort credit. In the United States, until the recent crisis, ordinary monetary policy was implemented by means of open-market operations conducted with a limited set of counterparties, known as primary dealers, and administered by the New York Fed. Last-resort credit, in contrast, took the form of discount-window loans, administered by each of the twelve Federal Reserve Banks, for which most depository institutions were eligible. Separate ordinary and last-resort liquidity-provision facilities were also standard in other systems.

Although the recent crisis witnessed extraordinary modifications of central bank liquidity-provision facilities, both in the U.S. and elsewhere, and although some of these modifications have become permanent, the conventional dichotomy of duties and facilities has survived, if indeed it has not been reinforced. The most obvious consequence of the crisis consisted of the creation of various new, though mostly temporary, last-resort lending facilities, aimed at supplying emergency credit to institutions that could not or would not get it from established facilities. The new facilities were sometimes open to counterparties to which established facilities were closed; or they were prepared to accept collateral that those facilities would not.  In some instances, such as the Fed’s Term Auction Facility (TAF), the new facilities dealt with the usual counterparties and collateral, but did so in a manner calculated to avoid the “stigma” attached to ordinary last-resort borrowing.

But for all the ingenuity that went into these novel lending facilities, and all the good they may (or may not) have accomplished, I fear that their establishment may cause the wrong conclusion to be drawn from the crisis, namely,  that more or perhaps broader but nonetheless specialized last-resort lending facilities are needed if future crises are to be avoided. The proper lessons to be drawn, IMHO, are dramatically different. They are, first and most fundamentally, that the conventional dichotomy of central bank duties is a false dichotomy ; and,  second, that the problem with traditional central banking arrangements is, not that they lack adequate facilities for emergency lending, but that they rely on such facilities at all, instead of having properly designed facilities for the implementation of “ordinary” monetary policy.

To be more specific, the conventional dichotomy, though it may have had some merit in the now-distant past, when implementing “ordinary monetary policy” meant little more than maintaining the gold standard, while last-resort lending was a largely independent matter, is false when applied to modern fiat-money arrangements. A fiat-money issuing central bank has but one fundamental duty to fulfill. That duty consists of supplying cash, meaning currency and bank reserves, in amounts sufficient to meet macroeconomic targets, and doing so efficiently, that is, so that newly created cash is assigned to those parties that are willing to pay the most for it.

Special Last-Resort Lending Facilities are Inherently Inefficient

Does it really matter whether we think of central banks’ fundamental responsibilities as consisting of two separate duties, or of a single duty performed efficiently? It matters a great deal, because supposing that central banks have not one but two duties to perform, and then encouraging them to employ separate facilities for each, actually makes the achievement of an efficient allocation of credit, including efficient last-resort lending, highly unlikely, if not impossible. This follows from the fact that, taking its “ordinary” monetary targets, and the amount of new reserve creation needed to achieve them, as given, a central bank operating multiple facilities, each catering to different sets of counterparties or dealing in different sorts of collateral, and offering credit on different terms, must allot specific portions of the credit to be created (some of which may be negative, as when last-resort loans are “sterilized” by open market sales) among the various facilities. Such allocations are bound to be somewhat arbitrary, if not flagrantly so. And even if the allocations were somehow correct, the facilities themselves, in so far as they offer credit on implicitly (if not explicitly) distinct terms, would likely favor certain eligible counterparties over others. Finally, because counterparties do not all compete with one another for the same pool of funds, the ultimate allocation of those funds may be inefficient even when all face similar terms.  Think of holding the Olympics at two facilities, with half the teams competing at one and half at the other, and you get the idea.

Instead of suggesting the need for multiple liquidity-provision facilities, the view that central banks have no responsibility save that of implementing “ordinary” monetary policy, but doing so efficiently, points to the desirability of assigning as large a role as possible to the price mechanism as the means for allocating newly-created cash among competing applicants. That goal is best accomplished by means of a single facility for auctioning credit, at which numerous eligible counterparties could compete for available central bank credit on equal terms. Under this arrangement, the central bank, once having set the terms of the auction, would have no other duty to perform save that of determining the aggregate amounts of credit to be auctioned. “Last-resort lending,” instead of being a distinct central bank duty, would become an incidental counterpart of ordinary monetary policy, consisting of that part of auctioned credits taken up by liquidity-strapped counterparties that chose to take part in auctions only as a last-resort. In short, there would be last-resort borrowers, but no last-resort lending operations as such.

Achieving “Flexible” Open-Market Operations

So much for the theory. Can the ideal I’ve sketched-out be achieved in practice?  I believe that it, or something very close, can be achieved, and without any great difficulty, both in the U.S. and elsewhere. As the present Federal Reserve System is in many respects among those furthest removed from the sort of system I think desirable, I’ll outline the basic steps required to move from the present system to what I’ll call a system of “flexible” open-market operations (or Flexible OMOs, for short). Some of the proposals are very similar to ones I originally suggested several years ago, so I encourage readers to consider the arguments I offered in defense of that earlier plan.

First, the Primary Dealer System — the system that confines the Fed’s ordinary open-market dealings to a small set of counterparties — should be abolished. Instead, all commercial banks presently eligible for discount window loans, and all Money Market Mutual Funds, should be able to take part along with existing Primary Dealers in the Fed’s ordinary credit auctions.

Second, while continuing its traditional practice of confining its outright or “permanent” open-market purchases to U.S. Treasury and agency securities, the Fed should stand ready to accept other sorts of collateral, including all collateral that is presently accepted as security for its discount-window loans, while assigning appropriate “haircuts” to riskier collateral, in its temporary open-market purchases or repos. (A “repo” or “repurchase agreement” is essentially a security purchase accompanied by a commitment of the seller to repurchase the security for an agreed-upon price after a specific  — and generally quite brief — period of time.)

Third, the Fed should offer “term” (30 or even 60-day) repos as well as the more usual overnight repos, as the former are more helpful in tiding-over liquidity strapped firms during financial emergencies.

Fourth, to allow counterparties to bid for credit using different sorts of collateral, the Fed should adopt a version of the “product mix” auction originally developed several years ago by Paul Klemperer, and  employed since by the Bank of England in its indexed long-term repo operations (ILTRs). Klemperer’s procedure allows bidders to submit multiple mutually-exclusive “sub” bids for a desired amount of credit, each offering different sorts and amounts of collateral. Then, as an article in The Economist explains,

Having received a set of bids for different goods, at various prices and quantities, the auctioneer in Mr Klemperer’s set-up then conducts a proxy auction on bidders’ behalf to see who should get what, and what the price should be. Because nothing is revealed to the bidders and they know they cannot influence this process, their best bet is to tell the truth. What is more, since the auctioneer has price information for a range of quantities, it is possible to see how prices change as supply does.

For details, including explanations of how the auction avoids adverse selection problems, readers should consult the linked sources. The bottom line, though, is (in The Economist’s words again) that the auction design serves to “provide accurate information on individual banks’ demand for liquidity and the prices they are willing to pay for it.” What’s more, the Bank of England has discovered that it can “use the pattern of bids in each auction to assess the extent of stress in the market,” and to thereby “inform its decisions on the size and maturity of future operations.” In other words, Flexible OMOs serve, not only to make last-resort lending redundant, but to help guide ordinary monetary policy, making it less likely that monetary authorities will err by incorrectly gauging the aggregate demand for liquidity, as Federal officials did, with tragic results, in 2008.

Finally, the Fed should permanently close its discount window, which will have become redundant once Flexible OMOs are provided for.

Flexible OMOs, and Central Bank Discretion

Superficially, the changes I’ve proposed may appear to award the Fed more powers than it has enjoyed in the past, by allowing more counterparties to engage in open-market operations with it, using previously unacceptable collateral. But the impression is mistaken, for a number of reasons.

First of all, as I’ve already noted, Flexible OMOs are meant to render all “emergency” lending operations and facilities, whether actual or potential, redundant. That means that they eliminate the rationale, not just for ordinary discount window lending, but also for lending targeted at specific banks deemed too “Systematically Important” to fail, as well as direct lending to non-banks under the Fed’s current 13(3) authority. By opening access to the Fed’s ordinary credit auctions to numerous counterparties, including all those institutions, whether banks or non-banks, that play a prominent role in the payments system, Flexible OMOs should make it possible for any of these counterparties that is for any reason unable to secure needed liquidity from private sources to apply directly to the Fed for it, and, by outbidding rival applicants, to get it. What’s more, by dealing with the Fed’s ordinary credit-creation facility, rather than with any facility explicitly devoted to last-resort or “emergency” credit provision, firms will avoid any risk of finding themselves stigmatized, and therefore worse off, than they might be if they refused central bank credit altogether.

Second, by having all counterparties compete for credit offered through a single facility, according to common terms, the reform eliminates opportunities for favoritism that arise when different counterparties must deal with different facilities operating under different rules.

Third, by eliminating distinct last resort lending operations, Flexible OMOs make it unnecessary for authorities responsible for such operations to coordinate their efforts with those of separate central bank authorities charged with conducting ordinary monetary policy operations. The elimination of multiple authorities also reduces the risk of shirking, by placing responsibility for adequate aggregate liquidity provision firmly on the shoulders of a single decision-making authority — here, the FOMC.

Fourth, Flexible OMOs should rule-out any future resort to ad-hoc emergency lending facilities, establishing instead a stable and predictable arrangement for central bank liquidity provision, meant to meet both ordinary and extraordinary liquidity needs. The existence of fixed arrangements for liquidity assistance, combined with the competitive pricing of such assistance, allows prospective borrowers to prepare themselves in advance for potential liquidity shocks, while ruling-out moral hazard.

Fifth and finally, Flexible OMOs simplify central bank decision making, by reducing it to two components, namely (1) the determination of aggregate credit amounts to be auctioned, and (2) the setting, and occasional re-adjustment, of various auction parameters, including collateral haircuts. Credit allocation, including its allocation to solvent firms faced with a liquidity shortage that have sought funding from the Fed only as a last resort, is otherwise automatic. There would be no practical distinction, indeed, between the Fed’s conduct during episodes of financial distress and its conduct on other occasions. The only changes would be in the unusual counterparties taking part in the Fed’s auctions, the wider range of collateral types offered, and the higher-than-usual interest rates implicit in winning bids.

The relatively automatic nature of last-resort credit provision under a system of Flexible OMOs makes such a system a natural counterpart to rule-based, if not fully-automatic, systems for determining the scale of central bank aggregate credit creation, such as the proposals of Scott Sumner, David Beckworth, and others for targeting nominal GDP.


Although my proposal may seem radical, its various elements are far from being without precedent.  As I’ve noted, the Bank of England already employs product-mix auctions to allocate funds among competing bids involving different sorts of collateral. The ECB, for its part, has always accepted a relatively wide range of collateral in its ordinary (short-term) open-market operations; it also conducts those operations with numerous counterparties. The ECB was, for both of these reasons, able to cope with the first year of the financial crisis without having had to make any changes to its operational framework. The Fed itself has, finally, occasionally and temporarily resorted to unorthodox open-market operations, involving a larger number of counterparties, a wider range of securities, and different repurchase terms. To supply liquidity in connection with Y2K, it extended the term of its its repurchase agreements, while also offering to purchase a wider range of securities. More recently, in September 2013, it established a special overnight reverse repo (ON-RRP) facility, through which it deals, not with its usual set of primary dealers, but with money market mutual funds, GSE’s, and a broader set of commercial banks. More recently still, it began undertaking sizable term (as opposed to overnight) reverse repos using that facility. During the late 1990s and early 2000s, when confronted with what was then a looming shortage of Treasury securities, the Fed also gave serious thought to the possibility of permanently expanding the list of securities it might purchase, both in its repo operations and outright.

What distinguishes my plan for Flexible OMOs from these precedents is that it envisions a single facility only, supplying both ordinary and last-resort credit, and doing so in a way that relies to the fullest extent possible upon market forces, rather than decisions by bureaucrats, to achieve an efficient allocation of liquidity among competing applicants. By allowing a broad set of potential applicants, using a wide range of eligible collateral, to compete for available funds, not only in private markets, but, when necessary, at a single Federal Reserve facility, Flexible OMOs actually serve to minimize the Federal Reserve’s credit footprint, and to thereby prevent it from taking part in deliberate credit-allocation exercises for which fiscal rather than monetary authorities ought to be responsible.

Back to Bagehot

At first blush, the reforms I’ve proposed may also seem inconsistent with received wisdom regarding the principles of last-resort lending. But they are actually far more faithful to that wisdom, particularly as formulated by Walter Bagehot, than existing arrangements. Consider Bagehot’s seminal statement of now conventional last-resort lending principles, as found in Lombard Street:

First. That [last-resort] loans should only be made at a very high rate of interest. This will operate as a heavy fine on unreasonable timidity, and will prevent the greatest number of applications by persons who do not require it. The rate should be raised early in the panic, so that the fine may be paid early; that no one may borrow out of idle precaution without paying well for it… .

Secondly. That at this rate these advances should be made on all good banking securities, and as largely as the public ask for them. The reason is plain. The object is to stay alarm, and nothing therefore should be done to cause alarm. But the way to cause alarm is to refuse some one who has good security to offer… No advances indeed need be made by which the Bank will ultimately lose. … If it is known that the Bank of England is freely advancing on what in ordinary times is reckoned a good security — on what is then commonly pledged and easily convertible — the alarm of the solvent merchants and bankers will be stayed. But if securities, really good and usually convertible, are refused by the Bank, the alarm will not abate, the other loans made will fail in obtaining their end, and the panic will become worse and worse.

Allowing that there is only a trivial difference between repos and securitized loans, there is after all little difference between what Bagehot recommends and what Flexible OMOs would provide for. Indeed, they make for a more certain commitment to the principle of making last-resort credit available both “largely” and at suitably “high” rates, for the auction procedure itself assures that, in times of extraordinary need, high rates are bound to prevail. If you ask me, it’s not my proposed reform, but the dizzying array of emergency lending facilities seen in the course of the recent crisis, with all the opportunities for inefficient credit allocation they entailed, that would have struck Bagehot as odd.


Such are my thoughts, so far, on reforming last-resort lending.  Like I said, I may be barking up the wrong tree. For that reason, I especially welcome critical comments pointing out how my proposed reform might go wrong. If those comments come with alternative suggestions for improving on what I’ve proposed, all the better.


*Apart, that is, from a portion spent pouring port in Porto, Portugal.

[Cross-posted from Alt-M.org]

More Cubans will flee their island to the United States this year than any year in decades, according to new data obtained by the Pew Research Center. But the flow should not be exaggerated. The United States has handled much larger influxes of Cubans in the past, and the large Cuban American community in the United States is fully capable of integrating the newcomers. Moreover, Cuban asylees are not attempting to sneak into the country, but rather presenting themselves for security checks to agents at ports of entry.

As can be seen in Figure 1, net Cuban immigration was at its highest level in the 1960s following the communist takeover of the Island. From 1960 to 1970, the number of Cuban immigrants living in the United States grew more than fourfold—by nearly 360,000, according to the Census Bureau. No decade has seen such rapid growth in percentage or absolute terms. Since 1970, the U.S. Cuban-born population has grown more gradually to reach almost 1.2 million in 2014. 

Figure 1: Cuban Foreign-Born Population in the United States

Sources: Census (1960-2000); American Community Survey (2005-2014)

Figuring out the number of annual arrivals is much more difficult. The immigration service keeps the number of aliens obtaining lawful permanent residence (LPR) each year, so that gives an approximation of the number of newcomers. Because the Cuban Adjustment Act requires Cuban immigrants to wait a year to apply for LPR status, however, the numbers reflect arrivals that occurred earlier. This impacts the figures in the 1980s most significantly. More Cubans arrived in 1980 than any other year on record, 125,000 in six months alone, but the surge overwhelmed the service and it waited until 1985, 1986, and 1987 to process their LPR applications.

While imprecise, the LPR numbers give us some context. In terms of annual in-flow, the United States saw much greater influxes in 1968, 1977, and 1980. On a per-capita basis, this year will likely see less than half the rate of immigration in1968 and 1980.

Figure 2: Cubans Obtaining Legal Permanent Residency (FY1960-2014)


Sources: Immigration and Naturalization Service/DHS Statistical Yearbooks (1978-2014); Annual Reports of the Immigration and Naturalization Service (1960-1978)

The LPR figures also don’t indicate how the person came to the United States—whether they presented themselves at a port of entry, were apprehended crossing the border, or came with a visa. Over the last decade, roughly 60 percent of all Cubans identified by DHS presented themselves at a legal point of entry—such as an airport or border crossing station—without a visa, compared to just 14 percent who were apprehended without documentation away from a port. The other 26 percent came to the United States legally, either as refugees or immigrants.  

Figure 3: Mode of Identification of Cubans Arriving in the United States by Homeland Security

Sources: Congressional Research Service; DHS Statistical Yearbooks; State Department; Pew (2016 10-month total is annualized)

The reason that Cubans present themselves at ports of entry is that the vast majority receive legal permanent residency through the Cuban Adjustment Act (CAA) of 1966, which grants Cubans asylum automatically upon reaching land in the United States. The CAA obviates the need to avoid detection and immigrate illegally. After one year in asylee status, Cubans can adjust to permanent residency. Overall, roughly three quarters of all Cuban immigrants since 1960 have used this law to receive permanent residency in the country.

Figure 4: Cubans Obtaining Permanent Residency by Type of Immigration

Sources: DHS Statistical Yearbooks

Although the increases in Cuban arrivals in the past couple of years are dramatic, they are not unprecedented or alarming from the standpoint of how they are occurring. Americans should and will welcome them just like they have welcomed each wave of Cubans who escaped the communist island in the past.

So says I, in commenting on Amar Bhidé’s ill-informed opinion piece in yesterday’s FT.

Here, with some minor edits (which I failed to fix on time in the original), is what I wrote:

Were Mr. Bhidé’s own suggestions for monetary policy reforms sound, his swipe at fundamental criticisms of central banking as “libertarian fantasies” would be perfectly gratuitous, but no worse than that. In fact, the idea that we’d be better off starting with a clean slate than trying to fix central banks seems to me considerably less fantastic than Mr. Bhidé’s suggestion that the Fed might manage money responsibly simply by checking commercial banks’ imprudent lending. That the Fed has a miserable track record when it comes to detecting, much less discouraging, imprudent lending, is the least of it: Bhidé’s more fundamental error consists of not imagining that merely by keeping an eye on imprudent lending the Fed would also avoid gross mismanagement of the money supply, and the macroeconomic disturbances consequences thereof. If there’s a theory that supports this view, I’d like to see it!

Nor is it true, despite what Mr. Bhidé claims, that the Fed managed the money supply in its early years merely by discouraging imprudent bank lending. It isn’t true, first, because the Fed’s management of the U.S. money stock was in fact notoriously irresponsible in its first decades (consider the rampant post-WWI inflation, the depression of 1920-21, the boom of the late 1920s, and the Great Monetary Contraction of the early 1930s); second, because “checking imprudent lending” wasn’t the Fed’s mandate then (it was “providing an elastic currency” — an entirely different matter); and third, because the long-run behavior of the money stock was constrained by the working of the gold standard.

Mr. Bhidé is right in one respect: he is right to regard the Fed’s dual mandate as supplying an insufficient check against imprudent Fed actions. The fix, though, isn’t Mr. Bhidé’s even more unsound prescription. It consists of replacing the dual mandate with a single stable spending growth mandate. Unlike Mr. Bhidé’s proposal, such a mandate would place definite limits on inflation, though ones that would vary with the economy’s productivity. It would, to be sure, not suffice to rule out imprudent actions by commercial bankers. But then, no monetary policy mandate should be expected to serve that purpose.

On a separate note, I do wish that Mr. Bhidé and other persons inclined to dismiss arguments to the effect that we’d be better off without central banks as “libertarian fantasies,” or the equivalent (besides Mr. Bhidé, Paul Tucker comes to mind), would grapple with the actual arguments of central bank critics, instead of merely labeling them. As for economists calling things “fantasies” because they seem far from politically possible, it seems to me that by making such pronouncements they shirk their proper duty, which consists of altering the boundaries of the politically possible through their influence upon people’s beliefs. Where would we be today had Adam Smith chosen, not to elaborate upon the potential benefits of free trade, but to dismiss the idea as a “libertarian fantasy?”

[Cross-posted from Alt-M.org]

An interesting 80-second video by Johan Norberg, executive director of Free To Choose Media and senior fellow at the Cato Institute, makes the case that trade agreements have not led to the deindustrialization of America.  He notes that the share of U.S. workers employed in manufacturing has been falling at an average of 0.4 percent per year from 2000 to 2010, but it also fell at that same rate between 1960 and 2000.  Thus, NAFTA and other trade agreements don’t seem to have had a great deal of influence on the gradual evolution of the economy away from employment in manufacturing and toward employment in services.

Dead Wrong™ with Johan Norberg - Deindustrialization

If he had more time, Norberg also might have pointed out that the U.S. manufacturing sector has never been larger.  Value added by the U.S. factories reached an all-time high of $2.4 trillion in 2015.  Manufacturing accounts for about 13 percent of GDP.

Yes, it’s true – fewer people work in manufacturing today than in the past.  Peak U.S. manufacturing employment was 19.4 million workers in 1979, but has generally trended downward since then.  Today only around 12 million people work for manufacturers, a decline of roughly one third over the past 35 years.  Productivity has risen so much that many fewer workers now produce many more manufactured products.

A recent study by the Center for Business and Economic Research at Ball State University found that trade has had some effect on manufacturing employment.  Researchers estimate that approximately 13 percent of manufacturing job losses have been due to trade.  But the dominant factor has been productivity growth, which accounted for 85 percent of the employment decline.  (Robots and computers ate the jobs.)  So imports bear a relatively small degree of responsibility for the reduction in manufacturing employment, but take a large share of the blame from politicians.

There are a lot of good things that can be said about U.S. manufacturing.  Workers are better educated, better paid, use more sophisticated equipment, and produce more high-value goods.  Our country may produce fewer shirts and tennis shoes than before, but we produce more valuable items such as airplanes, motor vehicles, and industrial equipment.  So even though there is an abundance of good news for manufacturers, don’t expect to hear much about it in this particularly anti-trade political season.

(A more detailed review of the economic effects of trade agreements can be found in this study by the U.S. International Trade Commission.)

The 2016 election season continues to unfold in increasingly bizarre ways. Donald Trump’s latest attempt to construct a coherent foreign policy speech may have failed to impress, but his campaign’s use of the word ‘realism’ led once again to calls for realists to openly denounce the Republican candidate and his views. As Dan Drezner argues over at the Washington Post,

In the interest of political self-preservation, realists need to get out in front on this. Because the thing about Trump is that every foreign policy position he touches has become less popular over the past calendar year. If realism gets lumped together with Trumpism, that is very, very bad for realists.

There are a bunch of problems with this argument, starting with the fact that Trump really isn’t espousing a realist worldview. To be sure, the Republican candidate has said a couple of things that are more restrained than his party’s foreign policy has been in recent years. Skepticism of nation-building and the idea that American allies should contribute more to their own defense are relatively uncontroversial (and generally popular) ideas that would move U.S. foreign policy in a more restrained direction. Most of Trump’s other proposals, however, including his ill-defined strategy to combat ISIS, his determination to reverse the nuclear deal with Iran, his apparent and disturbing willingness to consider the use of nuclear weapons, and his eagerness for trade wars, are not.

As many have noted, Trump’s foreign policy is best defined as incoherent. Monday’s speech provides another case in point: though the campaign described it as a return to “foreign policy realism,” the approach outlined by the candidate sounded more like a form of nationalist imperialism – complete with the seizure of natural resources from distressed countries – than anything else. Frankly, the only major similarity between Trump’s policy proposals and realism is his willingness to view the world in a win/loss framework. As a theory, realism is more than cost-benefit analysis, but one can see why a simplistic understanding of it would appeal to the candidate.

Here’s another problem with the demand that realists should repudiate Trump: they already have, loudly and repeatedly. In Foreign Policy, Stephen Walt admonished Donald Trump to “keep your hands off the foreign policy ideas I believe in.” Cato’s own Trevor Thrall highlighted Trump’s know-nothing approach to foreign policy here. Many others have done likewise. As I wrote back in April, the primary defining characteristic of Trump’s foreign policy is not restraint, but inconsistency.   

And there is no evidence that realists (or restrainers) support Donald Trump. Reporters from Defense News recently tried to ascertain who a potential Trump administration might call on to staff key positions. It’s unlikely that John Bolton, recently suggested by Trump as a potential Secretary of State, will be mistaken for a realist any time soon. Not only did they find no realists willing to take such positions – one prominent advocate of restraint is mentioned in a purely speculative way – but they found few foreign policy experts willing to consider it, period.

Finally, the notion that realists can only repudiate Trump specifically by signing an open letter is unhelpful. The first open letter of the campaign season – signed by over 120 Republican foreign policy specialists – was valuable, signaling their broad disgust for their party’s nominee and his policies. But it was narrowly written, and since that time at least four other open letters have been published, each with a slightly different rationale, and slightly different signatory lists. Indeed, most have already been signed by prominent advocates of both restraint and realism. And there are a variety of reasons why some realists might not have signed the prior letters: they may not agree with everything proposed, they may be barred by professional or legal obligations from supporting or opposing political candidates, or perhaps they are simply not Republicans! Another open letter will not solve these problems.

Such criticism often comes with the implicit – or explicit – demand that realists endorse Hillary Clinton. Yet Clinton’s interventionist foreign policy approach is also problematic. Her support for the interventions in Iraq and Libya, and her continued support for unwise ideas like a no-fly zone in Syria remain concerning. Ultimately, those who call for realists to denounce Trump may be right about one thing: for realists, this election is a lose-lose proposition. 

In a post last week, I described how every administration since 1990 has misinterpreted immigration law, admitting far fewer legal immigrants than Congress authorized. Legal immigrants qualify for a visa either by having U.S. sponsors—employers or family members—or by winning a visa in the diversity visa lottery. Except for spouses and minor children of U.S. citizens, the law limits the number of immigrants with quotas, but it has no such cap for their spouses and children that come with them. Nevertheless the government still counts them against the limits.

Naturally, the folks at the Center for Immigration Studies (CIS)—the leading opponents of legal immigration—disagree. In a post responding to former congressman Bruce Morrison’s support of this view, CIS’s John Miano asserts that the coauthor of the relevant law (the Immigration Act of 1990) doesn’t understand the law that he helped write.

But it is Mr. Miano who is confused. He argues that because spouses and children (dependents) of immigrants are not included in the categories of immigrants who are admitted without being subject to annual quotas, “the plain reading of the section unambiguously states that some quota applies to dependent immigrants.” First of all, the statute doesn’t discuss dependents at all, so it doesn’t unambiguously say anything about them. But as I noted in my original post, the most obvious reading is that the quotas only apply to those who the law actually says they apply to. Here, for instance, is the quota for the first family-based category:

Aliens subject to the worldwide level specified in section 1151(c) of this title for family-sponsored immigrants shall be allotted visas as follows:
(1) Unmarried sons and daughters of citizens.—Qualified immigrants who are the unmarried sons or daughters of citizens of the United States shall be allocated visas in a number not to exceed 23,400.

The “plain reading” here is that the limitation applies only to “unmarried sons and daughters of citizens.” Mr. Miano has to read dependents into these provisions.

More to the point, Mr. Miano is wrong to conclude that spouses and children of immigrants should have naturally been included in the section for immigrants not subject to the quotas because, even if they are not counted against the immigration limits, they are still be subject to the limits in a very important way: through their relationships to the primary applicants. Because the primary applicants are counted, spouses and children who are not cannot simply come in automatically and immediately the way that spouses and minor children of U.S. citizens can. They have to wait in line with their spouse or parent. They are subject to the caps without being counted against them.

Under the correct interpretation, once a visa number is available for the primary applicant, the dependents should be able to enter at the same time without being counted. This is what Sen. Alan Simpson, one of the other co-authors of the law, said that he wanted at the time that the law was being debated. He envisioned a system where “as long as the spouse and children were in existence at the time the alien was issued the visa, they may enter when they wish, without restriction” (emphasis added). This meant that they would still have to wait in line, but they wouldn’t be restricted after they waited.

This interpretation—that dependents are only subject to the limitations through the primary applicant—is reinforced in the subsection that grants them visas:

(d) Treatment of family members.—A spouse or child…shall, if not otherwise entitled to an immigrant status and the immediate issuance of a visa under subsection (a) [for family], (b) [for workers], or (c) [for diversity], be entitled to the same status, and the same order of consideration provided in the respective subsection, if accompanying or following to join, the spouse or parent.

Mr. Miano argues that the phrase “same status” means that visas issued to dependents must have the same quota as the spouse or parent. But saying that someone has the same status as someone else tells us nothing about whether their limits on the number of people who can receive that status are the same. For example, minor children of U.S. citizens receive the exact same status—legal permanent residency—as adult children, but adult children have a quota whereas minor children do not.

What’s important is under what provision—one with quotas or one without—dependents are granted the “same status.” Reread the subsection and you will see that the order of consideration is “provided in the subsection” for the primary applicant, meaning that they have to wait in line together, but the status is not “provided in that subsection.” Note how the commas set the order of consideration phrase apart from the one granting status. The status—legal permanent residency—is the same, but its origin is different. It is this subsection that provides status to the spouses and children, while the subsection for primary applicants provides the “order of consideration.”

This is so significant because this subsection has no limits on how many people can receive status under it, while the other subsection—for the primary applicants—does have limits. Importantly, the law would be contradictory if this interpretation were not taken. If spouses and children were not exempt from the numerical limits, families could not be guaranteed the exact same “order.” They could be cut off from the primary applicant (as sometimes happens under the current system).

Lastly, Mr. Miano confuses the two types of visa limits—the worldwide limits and the per-country limits. Immigrants from no individual country can have more than 7 percent of the total number of visas issued in any year, and the law explicitly applies this limit to spouses and children of family- or employer-based immigrants. But immigrants can be counted against one limit, and not the other. Congress, for example, didn’t apply diversity visa applicants to the per-country limit but did to the worldwide limit.

Moreover, as I pointed out, Congress made efforts to prevent separation of dependents from the primary applicants due to the per-country limits. It made no similar effort for the family-, employer-, or diversity-based quotas because it knew that it didn’t need to: they were already guaranteed visas at the same time.

Perhaps Mr. Miano won’t believe my analysis. But fortunately, we know for a certainty that Congress did agree with this view. As I wrote before:

Here is the smoking gun of congressional intent: Congress set aside 12,000 visas for workers from Hong Kong, 1,000 for displaced Tibetans, and 40,000 for transitional diversity beneficiaries. Each time, it stated that spouses and children were “entitled to the same status and same order of consideration” without including them under the special new visa caps. But in early FY 1992, just after the 1990 act was implemented, Congress amended the law to apply those limits to their families, specifying that the visa numbers were for any alien admitted as, for example, a displaced Tibetan “or as the spouse or child of such an alien.” Congress understood that the plain reading of that language would have exempted the spouses and children from being counted, and so it amended the law specifically to include them.

This proves that Congress believed that the language would have exempted the spouses and children. It changed the law to prevent this from happening for those categories, but not for family-, employer-, or diversity-based immigrants, proving its intent to keep those open-ended. The president should start implementing this intent now or he could face a lawsuit later.

Commerce Secretary Penny Pritzker authored an Aug. 12, 2016, opinion piece in the on-line version of the Cleveland Plain Dealer that emphasizes her desire to protect the steel industry from import competition. She states, “We take seriously our ongoing responsibility to combat unfair trade that threatens the viability of this industry and the good people in our steel-making communities.” Pritzker notes that at the Department of Commerce, “Currently, we are enforcing 161 anti-dumping (AD) and countervailing duty (CVD) cases on steel products to combat the countries, like China, that are trying to dump steel on our market.”

There is no doubt that steel producers are being affected by global steel overcapacity, as I have noted here, here, and here. Much of the overcapacity is due to China’s use of various policy measures to stimulate steel industry expansion. In 1995, China produced 95 million metric tons (MMT) of steel, equal to the amount produced in the United States. Twenty years later in 2015, Chinese production had risen more than eight-fold to 803 MMT. U.S. production decreased 17 percent over that same period, amounting to 79 MMT in 2015. Global production more than doubled, rising from 753 MMT in 1995 to over 1600 MMT today. The boost in China’s output exceeded 700 MMT and accounted for more than 80 percent of the increase for the entire world. It is reasonable to conclude that China’s actions have been the most important factor in glutting the global steel market.

A world marketplace so strongly influenced by government policies can hardly be described as fair. The effects of the steel surplus are felt around the globe, including in the United States. U.S. steel producers have been dealing with relatively low-priced imports from a number of countries. They have responded by filing many AD/CVD petitions, which helps to explain Sec. Pritzker’s statement about her role in “enforcing 161 AD/CVD cases.” Those measures restrict the importation of a variety of steel products from numerous countries. They have succeeded in making the United States a somewhat high-priced island in a world awash with low-priced steel. The AD/CVD restrictions apparently haven’t been sufficient, though, to ensure the profitability of American steel producers. United States Steel Corporation reported a loss of $1.5 billion in 2015.

However, what Sec. Pritzker ignores is that efforts to restrict imports to the benefit of steel producers come at the expense of steel users. U.S. manufacturing firms that use steel as an input have to pay prices that are higher than those paid by competitors located in other countries. This makes steel-consuming manufacturers vulnerable to losing sales to lower-priced imported goods that compete with them in the U.S. marketplace. Economists long have understood that imposing trade restrictions lowers the economic welfare of the country that puts them in place. Since the steel-consuming sector is so much larger than the steel-producing sector, the welfare losses for the overall U.S. economy are magnified.

The Bureau of Economic Analysis (BEA) is part of Sec. Pritzker’s Department of Commerce. BEA data indicate that value added by “primary metal manufacturing” amounted to $59.7 billion in 2014. (Note: Primary metal manufacturing [NAICS 331] includes nonferrous metals, such as copper, aluminum, magnesium, lead, tin, silver, and gold, so is much broader than the steel industry.)  Downstream manufacturers that utilize steel as an input generate value added of $990 billion, more than 16 times larger than primary metal industries. The disparity in employment also is more than 16 times greater. Primary metal manufacturing employed 400,000 people in 2014. Downstream manufacturers employed 6.5 million. Employment by U.S. steel producers is somewhere in the range of 100,000 – 150,000.

The point is not that the U.S. steel industry is small and insignificant, because clearly it is not. Rather, the point is that the problems of the steel industry need to be kept in perspective. The bottom line is that it would be a poor policy choice to attempt to protect steel producers in ways that do much greater harm to steel users. Those who wish to provide policy support for the steel industry should look for approaches that do not involve restricting trade.

The big news from Donald Trump counterterrorism speech Monday is his proposal for an “ideological litmus test” to screen Muslim immigrants, which comes in lieu of his prior call to ban them outright. The focus here is the rest of Trump’s speech, which consists largely of shaky facts meant to exaggerate the terrorist threat to the United States, dubious arguments meant to blame President Obama and Hillary Clinton for that threat, self-congratulation for having taken smarter positions, which requires some invention, plus a touch of his special innuendo.

What’s lacking, unsurprisingly, are new policy proposals. After all his criticism of current U.S. counterterrorism policy, Trump offers a vague rehash of it, plus a desire to be tougher on Muslim immigrants.

The speech begins with a recitation of recent terrorism meant to convey a sense of rising menace, with the Islamic State (ISIS) leading the way. That doesn’t require dishonesty. One can exaggerate danger by selecting scary facts and failing to put them in context. For example, Trump doesn’t say that ISIS has been losing territory, which costs it cachet and recruits. Unsurprisingly, he mentions neither the miniscule odds that an American will be killed by terrorists nor the absence of a major attack organized by ISIS in the United States. The San Bernardino and Orlando shooters cited ISIS as an inspiration but, in its absence, might have acted in the name Qaeda or some other group.

Still, Trump can’t help molding the facts to his story. First, he claims that “this summer, there has been an ISIS attack launched outside the war zones of the Middle East every 84 hours.” That figure comes from a July 31 CNN article, which itself repeats a contractor’s non-public data covering a period—June 8 until late July—when attacks were unusually frequent. The count seems to include attacks, like the Orlando massacre, where the attacker had solely ideological links to ISIS. Using that broad definition and public lists of ISIS attacks for the period from June 8 until Trump spoke, attacks have come every 136 hours. Counting Orlando, the United States has gone 1560 hours without an ISIS attack.

Second, Trump contends that ISIS is “fully operational in 18 countries with aspiring branches in 6 more.” Trump doesn’t mention that he is directly quoting an NBC news report on a leaked White House briefing from the National Counterterrorism Center. The story doesn’t define “fully operational,” but it can’t mean much. To get 18 nations, one has to count just about every terrorist entity that has endorsed ISIS, though the main outfit in Syria only slightly controls a few of them. Mostly they’re splinter jihadist groups that embraced ISIS’s brand once it eclipsed al Qaeda’s.

Third, Trump argues that a new Congressional report shows that “the administration has downplayed the growth of ISIS, with 40 percent of analysts saying they had experienced efforts to manipulate their findings.” As Politico notes, the report was about analysts at Central Command, not all U.S. intelligence analysts, as Trump implies. Nor do we know that the pressure came from higher administration officials, rather than Centcom leaders, or that their take was entirely misguided, given ISIS’s recent decline.

Trump also cites one seven-year old murder to suggest honor killings are a growing problem in the United States. He exaggerates the number of U.S. immigrants annually arriving from the Middle-East (it’s 70,000, not 100,000). He misquotes President Obama to make him seem un-American.  

The speech next fixes the blame for ISIS’s rise on the Obama administration, especially Hillary Clinton. To show his superior judgement, Trump repeats his widely discredited claim that he opposed Iraq War “from the beginning.” As evidence, he quotes himself questioning the invasion’s timing in early 2003 and an August 2003 interview where he mocked the goal of democratizing Iraq and suggested that the war accomplished nothing.

Trump’s pretension that these quotes show that he initially opposed the war is strangely desperate. What’s more relevant is his basis for turning on the war—the impossibility of making Iraq into a nice, stable place. That stance and Trump’s opposition to “nation-building and regime change” contradict the speech’s criticism of Obama’s Iraq policy. Trump essentially blames the administration for giving up on nation-building there:

The failure to establish a new Status of Forces Agreement in Iraq, and the election-driven timetable for withdrawal, surrendered our gains in that country and led directly to the rise of ISIS.

That echoes the surge mythology, which sees the decline of violence as evidence that U.S. forces created a durable settlement between warring Iraqi factions—successful nation-building— rather than a temporary respite from a fight that was always likely to reignite once U.S. policing and bribes to sheiks ceased.

There’s a lot to say against that myth, but the point here is that it’s an odd stance for Trump. A true critic of nation-building in Iraq would argue that once U.S. forces overthrew the government, it became nearly impossible, at least at reasonable cost, to rebuild a stable government, not that the effort failed because U.S. forces left too hastily.

Trump also brags that he would have prevented ISIS’s rise by forcefully seizing Iraq’s oil facilities. Left unexplained is how he can be against the invasion and for plundering Iraq’s oil or how you permanently occupy oil-producing areas without some nation-building around them.

Trump is on more solid ground in criticizing the administration’s push for regime change in Libya and Syria. Gaddafi’s overthrow predictably produced political chaos, which allowed an ISIS affiliate to operate. Still, it’s possible that the rebels would have survived without U.S. intervention and that ISIS might have arrived without U.S. help.

Likewise, regime change efforts in Syria threaten to help ISIS. Assad’s forces are its main opponent. On the other hand, Syria’s civil war and ISIS’s participation in it preceded U.S. intervention. And rhetoric notwithstanding, U.S. efforts have done little to unseat Assad, though Clinton says she’ll change that. In other words, it’s sensible to criticize Obama’s Syria policy, but not to blame his administration for Syria’s collapse, as Trump does.

Trump speech reveals little about how he’d change U.S. counterterrorism policy, beyond immigration. He’d continue the drone wars, keep the Guantanamo Bay prison open, use financial and cyber tools to disrupt terrorists, convene an international conference to coordinate efforts, ask a blue-ribbon commission to study radical Islam, work with NATO and Russia against ISIS, and avoid nation-building. Nothing is new there, except maybe the effort made to engage Russia and the hope that another commission or summit will bring counterterrorism breakthroughs.

Trump claims to have something more up his sleeve. But great generals like MacArthur and Patton taught him not to “telegraph his plans,” so it’s secret, we’re told. Let’s pretend that’s true. Maybe Trump is just keeping ISIS on its heels by being for and against nation-building in Iraq in the same speech. But Trump isn’t campaigning for a fourth star. Presidents have to suffer democracy, which entails debate about policy. In any case, Trump is in no danger of offering plans specific enough to help his enemies, let alone analysts.

Recently, Donald Trump announced a team of economic advisers. One of them is Dan DiMicco of Nucor Steel. When DiMicco offered up a tweet about trade, I thought this might be an opportunity to engage him and try to learn more about Trump’s trade views, which are protectionist in tone but lack much detail. Here’s how the exchange went, minus a couple tweets that I left out to keep this post shorter.  (Spoiler: He didn’t seem to know much about the substance of trade law!) 

In response to his initial tweet, I asked for some specifics on how Trump’s trade deals would be different from existing trade deals: 

He referred me to the “7 point plan” Trump had previously announced:

So, I picked one of the points – Trump’s suggestion to renegotiate NAFTA – and followed up with a request for details:

DiMicco then said this:

I suspected he was confusing a couple different trade issues, and that he was actually referring to something outside of the NAFTA context, because “border adjustable taxes” is an issue broader than NAFTA. It is usually raised in the WTO context, in relation to the use of a territorial tax system in many countries (but not in the U.S.), although the impact of “border adjustable taxes” on trade is questionable. So I tried to help him along:

But he insisted I was wrong, and that he really had in mind something Mexico was doing:

Since he wanted to keep insisting on his point, I asked for some more specifics on Mexico’s actions:

In response, he tweeted this:

I couldn’t figure out what he was going for here, so I followed up:

He finally gave me some links:

But neither link offers any specifics on this issue in relation to NAFTA, and instead indicate that what he really had in mind was most likely the territorial tax issue I mentioned.

So I kept pressing a bit more. I asked several times for more details:




Finally, he ended the conversation with this:

A conversation like this leaves you very puzzled. Trump says he wants to renegotiate NAFTA. Yet neither he nor his advisers can explain what they want to change. It’s not a hard question. I can think of quite a few things I’d change about NAFTA! No trade agreement is perfect. My main take away is this: When Trump’s trade advisers are unable to explain the basic details of Trump’s trade policy, it’s no wonder that Trump sounds so uninformed and incoherent when he talks about trade.

The Thai people voted on the latest constitution pushed by the reigning military junta. By banning any opposition, General/Prime Minister Prayuth Chan-ocha won approval to continue his dictatorship from behind the scenes.

For decades military coups were frequent and the court, along with the military, bureaucracy, and business, long dominated democratic politics. Well-connected elites prospered while the rural poor languished, seemingly forgotten by their own government.

That came to a dramatic end in 2001 when flamboyant business mogul Shinawatra Thaksin (the latter his given name, by which he is known), ran a populist campaign and won the support of the long-suffering rural poor. The usual governing elites refused to accept their loss of control and an extended, often violent political struggle ensued, culminating in coups in 2006 and 2010.

In the latter Gen. Prayuth seized power. The junta banned public protests, prohibited political meetings, seized radio and televisions stations, censored print media, blocked websites, threatened dissidents, detained critics, and tried opponents in military courts.

The regime also targeted opponents with Thailand’s oppressive lese-majeste laws. Last month the government charged a 40-year-old mother in an apparent attempt to silence her son, a student activist who opposes military rule.

The brutality of generalissimo Prayuth’s rule cannot be disguised by his cartoonish nature. One of his first acts was to send service personnel out to play music and dance while proclaiming the return of happiness to Thailand. He penned a song on the subject and hosts a weekly television show in which he lectures the nation.

In its latest human rights report the State Department noted that the junta had imposed an interim constitution and decrees “severely limiting civil liberties, including restrictions on freedoms of speech, assembly, and the press.” People could not choose their government and security forces often abused human rights, while largely enjoying “official impunity.”

Moreover, added State, other “human rights problems included arbitrary arrests and detention; poor, overcrowded, and unsanitary prison and detention facilities; restrictions on freedom of expression, assembly, and association; corruption;” and limits on worker rights.

Yet last year the dictator-wannabe complained about that people were “harsh” towards him.

Under the new constitution, the military will continue to dominate the state, despite the promise of elections. While allowing a nominally free vote on its “roadmap to democracy,” the military did everything else possible to force the population to ratify its continued rule from the shadows.

Most important, anyone opposing the constitution faced up to ten years in prison. In his finest dictatorial form, generalissimo Prayuth declared that the Thai people “have no rights to say that they disagree” with him: “No one will be exempted, not even the media.”

At least 120 people, including former cabinet ministers and parliamentarians, were arrested for criticizing the document. The youngest defendant was an eight-year-old girl charged with obstruction for tearing down a poster because she liked its (pink) color. The generalissimo’s minions were not amused.

The main selling point was that enacting the constitution appeared to be the quickest, and perhaps only, way back to nominal civilian rule. General/Prime Minister Prayuth, with his Gilbert and Sullivan routine, will remain in power in the background. Unfortunately, refusing to allow people to freely choose their path, warned former cabinet minister Chaturon Chaisang, means “there will be conflict in the future.”

As I pointed out in Forbes: “Thailand’s contending factions need to accept the legitimacy of each other and work together. Thailand also needs a new constitution, but one which decentralizes government authority, allowing Thais to more easily live in relative political peace.”

The future of Thailand should be up to the Thai people, and not only those carrying guns. Only by pushing generalissimo Prayuth aside will they regain their liberty.

The Cato Institute and Heritage Foundation recently co-hosted a debate in which interns from both organizations debated whether conservatism or libertarianism is the better philosophy. At the conclusion of the debate, the Cato Institute conducted a post-debate survey of attendees finding important similarities between millennial conservative and libertarian attendees on skepticism toward government economic intervention and business regulation, but also striking differences in attitudes toward immigration, LGBT issues, national security, privacy, foreign policy, and perceptions of bias in the justice system.

Full LvCDebate Attendee Survey results found here.

What Are Their Priority Issues? 

The survey asked conservative and libertarian attendees to rate on a scale of 1 to 5 how concerned they were about nineteen different issues.  

Note: This chart displays the mean level of concern (on a scale of 1-5) across 19 different issues for both conservative and libertarian millennials who attended the Libertarianism v. Conservatism intern debate at the Cato Institute. Moving from the inner to the outer circles indicates an increasing level of concern for each respective issue. Results from statistical tests are shown which indicate if conservatives and libertarians significantly differed in their concern for the issue *** p<.001 ** p < .01 * p < .05.

Despite a multitude of differences, millennial libertarian and conservative attendees share almost the same top five political priorities: 

  • Size of government
  • Government spending and debt
  • Taxes
  • Economy/jobs  

Conservatives’ other top five priority is national security/terrorism and libertarians’ is government regulation of business. The groups diverge widely on non-economic issues. Libertarian attendees are statistically more concerned about (1) government domestic surveillance, (2) the criminal justice system, (3) drug prohibition, (4) racial inequality, and the (5) environment. On the other hand, conservatives are significantly more concerned about (1) national security/terrorism, (2) abortion, (3) morality in society, and (4) immigration. Both were similarly less concerned about income inequality and drug use, and similarly concerned about education and healthcare.

Nostalgic or Optimistic? 

Similar to national surveys of conservatives, 64% of millennial conservatives say American culture and way of life has mostly “changed for the worse” since the 1950s. But millennial libertarians disagree: 74% of libertarians say America is “getting better.” Of both groups, only one in ten (11% and 12%, respectively) thought that American culture has stayed the same.

No Man is an Island?

Fully 60% of conservative attendees “strongly agree” that “no man is an island” compared to just 14% of libertarian attendees. Once those who “strongly” and “somewhat” agree are combined together, 88% of conservatives and 68% of libertarians agree with the statement. Another 26% of libertarians flat out disagree that “no man is an island,” nearly 3x as likely as conservatives (9%). This underlying difference in perspective likely drives disagreement between the two groups on social policy.

Despite this, both libertarians (92%) and conservatives (94%) are equally likely to agree that “community service is an honorable thing to do.”  

Should we do more to make LGBT individuals feel welcome? 

A majority—66%—of libertarian attendees agrees that “each of us should do more to ensure that lesbians, gays, bisexual, and transgender people feel fully accepted in society, while 30% disagree. In reverse, 64% of conservatives disagree that we need to do more to ensure LGBT people feel fully accepted in society, while 32% agree.

Part of the reason why is that libertarians and conservatives have different views about what is morally acceptable. Fully 64% of conservative millennial attendees say that “identifying with a gender different from the gender assigned at birth” or being transgender is “morally wrong.” Libertarians disagree and instead 62% say that being transgender is “not a moral issue.”

Is pornography a public health crisis?

A slim majority (53%) of conservative millennial attendees agree that “pornography is a public health crisis,” comporting with the amendment to the 2016 Republican Party Platform that made the same claim, while 44% disagree. In contrast, 84% of libertarians say pornography is not a public health crisis, while 10% say it is.

Conservatives (48%) are twice as likely as libertarians (25%) to agree that the “government needs to do more to combat the prescription painkiller addiction epidemic” in this country. Instead, a majority (70%) of millennial libertarians say this isn’t government’s job, as do 49% of conservatives.

Despite these differences, majorities of both millennial conservative (56%) and libertarian (94%) attendees still agree “we should be more tolerant of people who choose to live according to their own moral standards even if they are different from our own.” Nevertheless libertarians are far more likely to fervently agree with 67% who “strongly agree” compared to 21% of conservatives.

Nevertheless, a strong majority (68%) of conservatives say that government “should promote traditional values in society” in contrast to 84% of libertarians who disagree and instead say “government should not favor any particular set of values.”

Freedom of Conscience 

Conservatives care more about religion that libertarians do; however, both strongly support religious liberty.

Fully 88% of conservative attendees agree that it “is important for children to be brought up in a religion so they can learn good values” while in contrast 61% of libertarians instead disagree that religion is important for learning good values. While nearly all (96%) of conservatives identify a religious preference, 40% of libertarians identify as “non-religious.” A slim majority (53%) of conservative attendees said they attend religious services once a week or more compared to 15% of libertarians. Twenty-eight (28%) of libertarians said they never attend compared to 4% of conservatives.

Despite differences in religiosity, 88% of conservatives and 69% of libertarians say they support a law in their state that would allow businesses to refuse service to customers for religious reasons.  

Furthermore, strong majorities of both conservative attendees (79%) and libertarian attendees (92%) agree that “if a Muslim clergyman wanted to make a speech in your community preaching hatred of the United States” that he “should be allowed” to speak.  Both are far more likely than Americans nationally (42%) to support allowing such speech. 

Criminal Justice, the Police, and #BlackLivesMatter 

Both conservative and libertarian millennial attendees tend to support criminal justice reforms. However, libertarian millennial attendees tend to be more sympathetic of charges of racial bias in the criminal justice system.

A resounding majority of libertarian millennial attendees (84%) and a slim majority of conservative attendees (52%) believe that blacks and other minorities do not receive equal treatment as whites in the criminal justice system.

However, they diverge considerably in whether or not they support “the goals of the #BlackLivesMatter movement.” A strong majority—64%—of libertarian attendees say they support the goals of BLM; in contrast, 76% of conservative attendees say they oppose. Different perceptions about what the BlackLivesMatter movement’s goals are likely drives these disparate views. 

Majorities of both conservative attendees (55%) but far more libertarians (89%) say that “local police departments using drones, military weapons, and armored vehicles” are not “necessary for law enforcement purposes” but rather are “going too far.” Another 43% of conservatives say that military weapons are necessary for law enforcement, compared to 8% of libertarians. Similarly, majorities of both support eliminating mandatory minimum prison sentences for people convicted of selling or possessing drugs (59% and 76% respectively). 

Build the Wall?  

Majorities of both conservatives (57%) but far more libertarians (94%) say we should make it “easier” for people to immigrate to the United States. Forty-percent (40%) of conservatives oppose easing immigration restrictions and 40% also say it bothers them when they come into contact with people who speak little or no English, compared to 5% and 19% of libertarians respectively.   

However, conservative and libertarian attendees diverge in how to handle illegal immigration. A majority—56%—of conservatives favor building a large wall along the border with Mexico compared to 11% of libertarians. Majorities of both conservatives (54%) and libertarians (90%) support offering some sort of legal status to illegal immigrants, however, 74% of libertarians favor offering a pathway to citizenship compared to 25% of conservatives. Forty-three (43%) of conservatives say illegal immigrants should be required to leave the country as do 8% of libertarians. 

Last December, Republican nominee Donald Trump called for a temporary ban on Muslims entering the US from other countries. However, majorities of both millennial conservative and libertarian attendees oppose such a proposal, but libertarians are far more opposed by a margin of 93% to 59%.  In fact, 70% of libertarians “strong oppose” the proposal compared to 37% of conservatives. 

Foreign Policy 

Conservatives and libertarian attendees have disparate visions about what role the U.S. military should have in the world. While 82% of libertarian millennials want to decrease U.S. military presence around the world, only 24% of conservatives agree. Instead, 25% of conservative attendees think the United States ought to increase its global military presence and 48% would keep it at present levels.

When it comes to dealing with ISIS, conservatives want the US to take a more proactive approach. Three-fourths (77%) of conservative attendees favor sending ground troops to participate in a campaign against ISIS while instead 70% of libertarian millennial elites oppose this action. However, these positions are not rock solid. Thirty-seven percent (37%) of conservatives say they “somewhat” support sending ground troops and 36% of libertarians “somewhat” oppose doing so. 

Different visions of the US’s role in the world likely explains why 88% of libertarians also favor cutting defense spending, while only 33% of conservatives agree. Instead 64% millennial conservatives oppose cutting defense spending. 

While 96% of conservative attendees and 90% of libertarian attendees agree that “military service is an honorable thing to do” libertarians are about half as likely (49%) to “strongly agree” compared to conservatives (87%).

National Security and Surveillance  

An overwhelming majority (85%) of libertarian attendees oppose government’s “collection of telephone and internet data as part of anti-terrorism efforts,”—including 60% who strongly oppose. However, a slim majority (53%) of conservative attendees instead support such collection, while 44% oppose. Conservative is support is tenuous, with only 13% who strongly support the program.

Conservative and libertarian attendees make the trade-off between freedom and security differently, explaining some of these results. While 80% of conservative millennials would “give up some personal freedom and privacy for the sake of national security” 70% of libertarian attendees would not.

Don’t Tread on the Economy 

While libertarians take more “liberal” positions than conservatives on a variety of issues, they are similar to conservatives on government intervention in the economy.

Both libertarians and conservatives overwhelmingly endorse the idea that government regulation of business too often does more harm than good (97% and 96%). Furthermore, 96-98% of both groups prefer a “smaller government” that offers fewer services and low taxes over a “larger government” that offers more services with high taxes.

While national polls find that about 6 in 10 Americans favor raising taxes on households making over $250,000 a year, fully 9 in 10 libertarian (89%) and conservative (91%) attendees oppose such an action, including 6 in 10 who “strongly oppose.”

Free Traders?

Despite vocal criticism of free trade from major presidential candidates this election cycle, overwhelming majorities of both conservative (79%) and libertarian (97%) attendees agree that free trade must be allowed, even if domestic industries are hurt by foreign competition. Nineteen percent (19%) of conservatives and 2% of libertarians say that trade restrictions are necessary to protect domestic companies. 

Should Every Kid Get a Trophy? 

Belief in free market competition is underscored by the overwhelming majority of libertarians and conservatives who think that not all kids who play sports should receive trophies but only the winning players (91% and 95%, respectively). While a majority of Americans nationally agree that only the winners should get trophies, libertarian and conservative attendees are about 30 points more likely to think so. 

Republican, Democrat, or neither? 

At first glance, conservative millennial attendees appear much more Republican than the libertarian millennial attendees. When first asked, 80% of conservatives identify with the Republican Party, compared to 11% of libertarians. However, once independents were probed, 64% of libertarians revealed they lean Republican, while 9% are Democrats, and 95% of conservatives are Republican, while 1% are Democrats. Nevertheless, a quarter of libertarian attendees (26%) say they are completely independent of either party, compared to 4% of conservatives.

For Trump or #NeverTrump?

Although the conservative attendees are overwhelmingly Republican, less than half (47%) say they plan to vote for the Republican presidential candidate Donald Trump in November. Instead, nearly a quarter (21%) of conservatives say they’d vote for Libertarian presidential candidate Gary Johnson, 3% say they’ll vote for Clinton, and 14% will vote for some either candidate or 15% won’t vote. Libertarian attendees are far more keen on Johnson with 84% who say they’ll vote for him, while only 7% plan to vote for Trump and 3% say they’ll vote for Clinton, and 5% who will vote for someone else or won’t vote. 


Since these attendees are politically engaged and tend to lean Republican, their agreements and conflicts may portend future debates the GOP may have to confront in the future. 

If these results have any external validity for party insiders in the future, the GOP will find itself largely in agreement around limiting government intervention in the economy. However, the GOP will have to contend with significant disagreements over the future of American foreign policy, balancing freedom and national security, the influence of religion on politics, its approach toward immigration and immigrants—legal or not, whether it will make concerted efforts to include LGBT people and understand the experiences of minorities in the country.

Who Won the Debate Depends on Whom You Ask

  • Among libertarian millennial attendees, 80% said the libertarian team won and 18% said the conservative team won.
  • Among conservative millennial attendees, 88% said the conservative team won and 11% said the libertarian team won.
  • If you combine the libertarian and conservative attendees 50% said the libertarian team won, and 47% said the conservative team won.
  • Among the remaining moderate, liberal, and progressive attendees, 60% said the libertarian team won and 32% said the conservative team won.

Sam Henick contributed to this report.

Full LvCDebate Attendee Survey results found here

More About the Post-Debate Survey of Attendees

The Cato Institute conducted a post-debate survey of attendees of the Libertarianism v Conservatism intern debate hosted by the Cato Institute and Heritage Foundation in which interns at both organizations debated whether conservatism or libertarianism is a better political philosophy on August 4, 2016.

At the conclusion of the debate, an email was sent to every person who registered or walked-in with a link to a Qualtrics survey. Emails were sent to 565 people. In total, we collected 203 surveys from debate attendees, producing a response rate of 36%. Of respondents, 75 identified as conservative, 88 as libertarian, 40 as either moderate, liberal, progressive, or something else.

While the survey is not a representative sample of all millennial conservatives and libertarians, this survey offers a snapshot of engaged conservative and libertarian millennial “elites” who are politically engaged, have more education and political information, and who chose to come to this event. To date, little information exists on young conservative and libertarian elites. Since these attendees are politically engaged millennials, their responses may provide some indication of the direction they may take both movements in the future.

Last month, a scandal erupted in Chile. The media discovered that the former director of the Chilean gendarmerie, the country’s penitentiary service, was receiving a pension of about $8,000 per month. Chile privatized its pension system in 1980. Instead of sending retirement money to the government, workers there put their money in private accounts that invest and accumulate savings to be used in old age. When Chile approved the reform, the military and some law enforcement agencies (such as the gendarmerie) remained in the old public system.

Although the abuse occurred within the old public pension system, which benefits a minority of Chileans, and the beneficiary in this case was a socialist political activist and ex-wife of the head of the lower house of Congress (also a socialist), the episode was used to attack the private system to which almost every Chilean worker belongs. The left declared that the private accounts managed by the private pension fund companies (known by their Spanish acronym AFP) provide low pensions, something that incensed many Chileans who saw that the AFPs do not pay the same level of pension evident in this particular case.

Before long, protests involving hundreds of thousands of people took place throughout the country under the slogan “No + AFP,” and demanded a return to the old pension system. Last week, President Michelle Bachelet announced a series of reforms that would give the state a larger role in peoples’ retirement.

The extent to which the campaign against the private pension system relies on deception, falsehoods, and distortions is impressive. The Chilean case matters because it is the model that has inspired reforms in dozens of countries around the world, from Sweden to Hong Kong, and from Peru to Poland. To avoid falling victim to demagoguery, it is important to contrast facts with ill-founded criticisms, something that neither the Chilean AFPs nor many others in the region do well.

Critics in Chile assert that the average pension provided by the private pension fund companies is around $340 per month, which is not better than the public pension system. But as the Chile-based Liberty and Development institute (LyD) has shown, that is like comparing apples to oranges. To calculate the private system’s figures, all those affiliated with it are taken into account, even if they have only contributed to their accounts once in their lifetime. The corresponding figure for the public pension system, however, only takes into account the pensions of those who have contributed for a minimum of 10 to 15 years, something that leaves out half of the people affiliated with that system. In addition, pensions under the private system are obtained through contributions that amount to 10 percent of wages, while in the public system the contribution is 20 percent. Correcting for those distortions shows that the value of the pensions the AFPs provide is three times higher than that of the public system.

To properly evaluate the private system, one has to consider its performance with respect to those who have contributed to it regularly. According to data from AFP Habitat, a pension fund company, the average monthly pension for those who have contributed for more than 30 years is almost $1,000 for men and $500 for women. And while it’s true that many Chileans do not contribute regularly to their retirement accounts because too many work outside the formal sector and getting work is still too precarious for many, that is a problem that affects any pension system, whether public or private, and can only be solved with labor reforms.

Nor is it true that the state has no role in providing pensions or that the AFPs steal from their clients, as is regularly asserted. As LyD Institute reminds us, the state has provided a pension for those who could not save a minimum amount from the beginning. And the fees charged by the AFPs are equivalent to 0.6 percent of funds managed, below the average of OECD countries.

Chile’s private pension system can certainly be improved, but the reality is that it has been extremely successful. Over the course of 35 years, private accounts have produced an average real return of 8 percent annually, and old-age pensions no longer represent a burden on the treasury. Pension savings have reached $168 billion, about 70 percent of GDP, which has stimulated high growth and domestic investment, and has put Chile on the verge of becoming a developed country—a remarkable achievement.