Policy Institutes

In both his March New York Times interview and his more recent foreign policy speech at the Mayflower Hotel, presidential candidate Donald J. Trump has created tremors within America’s stodgy, utterly complacent foreign policy elite.  He has alarmed those self-anointed Mandarins regarding several issues, including his comments that under certain circumstances he would not object to Japan and South Korea acquiring independent nuclear deterrents.

But his comments about NATO have probably caused the most consternation.  Trump’s own preference appears to be for greater burden-sharing within the alliance—a unicorn that American politicians, policymakers, and pundits have been chasing for more than six decades.  But there is a much sharper edge to his demands than there are to the calls from most proponents of burden-sharing.  “Our allies are not paying their fair share,” Trump thundered in his speech at the Mayflower Hotel.  “The countries we are defending must pay for the cost of this defense, and if not, the U.S. must be prepared to let these countries defend themselves.” [Emphasis added]

One must go back to the mid-1950s to find a warning that stark.  Probably the most significant and best known example was the threat that Secretary of State John Foster Dulles issued to conduct an “agonizing reappraisal” of America’s defense commitment to Europe if the NATO allies could not develop a united policy regarding West Germany and make a more serious effort at collective defense.  Yet even that effort at brass knuckles diplomacy ultimately failed.  European leaders never took the warning seriously, believing that their American counterparts regarded Europe as far too important to America’s own security and prosperity to ever consider abandoning the continent to possible Soviet domination.  They called the Eisenhower administration’s bluff and quickly confirmed that it was a bluff.  There was no reappraisal of Washington’s defense commitment to Europe, agonizing or otherwise.

A Trump administration would likely find intense institutional resistance even to more limited cutbacks.  Senate Majority Leader Mike Mansfield (D-MT) discovered the power of the bipartisan pro-NATO lobby in the 1970s when he merely sought to reduce the number of U.S. troops stationed in Europe. The push to expand the alliance and desperate search to find alternative missions for the organization, even though the Soviet Union (the principal reason for NATO’s creation) dissolved at the end of 1991, is ample testimony to the extent of those entrenched, vested interests on both sides of the Atlantic.

But the vastly changed economic and security environment - a fiscally stressed America, a populous and relatively prosperous democratic Europe, and a weak, declining Russia, gives Trump’s threat of a U.S. withdrawal unprecedented credibility.  The nations of the European Union now have both a larger population and a larger collective economy than does the United States.  They also have a population three times larger than Russia’s and an economy nearly ten times larger.  They can afford to build whatever military forces they deem necessary to defend their region.

With regard to the other troubling security problem facing the alliance, Islamic extremism, several of the European powers are the old colonial rulers in the Middle East.  Trump and other Americans could be excused if they concluded that perhaps the Europeans should step up to take care of a security headache in their neighborhood instead of always expecting their NATO ally to ride in from several thousand miles away to resolve the problem.  We have tried that strategy for decades without much success. 

Mr.  Trump, your complaints about NATO just identify the symptoms of the underlying problem.  The real problem is Europe’s unnatural and unhealthy continued security dependence on the United States.  We don’t need greater NATO burden sharing.  We need to shed our obsolete NATO burden entirely.   Being prepared “to let these countries defend themselves” should not be a policy of last resort.  It should be our primary objective.

The current partisan divide on immigration is wide and growing according to a new Pew study.  This widening divide does not come from Republicans having a more anti-immigration position than in the past but from Democrats having a much more pro-immigration position than they used to. 

In 2006, 49 percent of Democrats agreed with the statement “immigrants today strengthen the country because of their hard work and talents.”  In 2016, 78 percent of Democrats agreed with that statement.  Over the same time period Republicans went from 34 percent in agreement to 35 percent.  Prior to 2006 the opinions of the two parties were nearly identical.

This partisan divide was not present during the vote over the Immigration and Nationality Act of 1965, the law that repealed the last vestiges of the eugenics-inspired 1920 immigration laws that ended America’s traditionally free immigration policy.

In the House of Representatives, Republican support for the 1965 Act actually exceeded Democratic support.  78 percent of Republicans voted for the 1965 Act (Chart 1) compared to 71 percent of Democrats (Chart 2).  18 percent of Republicans voted against the bill while 24 percent of Democrats did while both sides had a similar percentage of abstentions.  Both parties supported the 1965 Act by wide margins but House Republicans were more likely to vote for it. 

Chart 1

House Republican Votes


Source: govtrack.us

Chart 2

House Democratic Votes


Source: govtrack.us

In the Senate, 75 percent of Republicans (Chart 3) and 78 percent of Democrats voted for the Act (Chart 4).  However, only 9 percent of Republicans voted against it while 21 percent of Democrats did (many more Republicans abstained).       

Chart 3

Senate Republican Votes

Source: govtrack.us

Chart 4

Senate Democratic Votes


Source: govtrack.us

The Democrats had huge majorities in both Houses of Congress in 1965 but Republican support for the Immigration Act of 1965 exceeded that of the Democrats – at least as a percentage of Congressmen who supported the bill.  Democratic support in the Senate barely exceeded that of Republicans.    

A higher percentage of Republicans voted for the Civil Rights Act of 1964 – a fact conservatives have used for decades to ward off charges of racism.  Republicans and conservatives can use a similar line of argument to support a pivot in favor of immigration reform by using the 1965 Act as a reference.     

Tomorrow, Congress is scheduled to vote on the Scholarships for Opportunity and Results (SOAR) Act, which would reauthorize the D.C. Opportunity Scholarship Program (OSP). The OSP was scheduled to expire later this year. Back in December, I expressed skepticism about a standalone reauthorization bill because the Obama administration has repeatedly worked to undermine or eliminate the school choice program, even though the OSP has the support of local Democratic politicians such as D.C. Mayor Muriel Bowser and a majority of the D.C. City Council. Fortunately for the low-income children attending the schools of their choice through the OSP, the president has signaled that he does not intend to veto the legislation:

“While the administration continues to strongly oppose the private school vouchers program within this legislation, known as the D.C. Opportunity Scholarship Program, the administration will continue to use available SOAR Act funds to support students returning to the program until they complete school, so that their education is not disrupted,” the Office of Management and Budget said.

The White House stopped short of issuing a veto threat. But the administration made clear its distaste for the voucher program, which President Obama has tried to kill several times. The measure, a priority of former Republican Speaker John Boehner of Ohio, provides money for some students in D.C. to attend private school.

Predictably, the White House claimed that studies of the D.C. OSP show it has “not yielded statistically significant improvements in student achievement by scholarship recipients compared to other students not receiving vouchers,” ignoring that the OSP achieves those similar results at a fraction of the cost (less than $9,000 per voucher on average versus about $30,000 per district school student), and that the same random-assignment study found that OSP students were 21 percentage points more likely to graduate from high school than the control group. 

Low-income students shouldn’t be condemned to low-quality schools just because their parents cannot afford a home in a wealthy neighborhood. As the Washington Post wrote in a recent editorial, “The scholarships provide a lifeline to low-income and underserved families, giving them the school choice that more affluent families take as a given.” The D.C. OSP was an important step toward breaking the link between home prices and school quality, so it’s encouraging to see that D.C. is not likely to take a step backward. Ideally, though, Congress would take the next step from school choice to educational choice by enacting a universal education savings account program.

We can learn a lot of economic lessons from Europe.

Today, we’re going to focus on another lesson, which is that higher taxes lead to more red ink. And let’s hope Hillary Clinton is paying attention.

I’ve already made the argument, using European fiscal data to show that big increases in the tax burden over the past several decades have resulted in much higher levels of government debt.

But let’s now augment that argument by considering what’s happened in recent years.

There’s been a big fiscal crisis in Europe, which has forced governments to engage in austerity.

But the type of austerity matters. A lot.

Here’s some of what I wrote back in 2014.

…austerity is a catch-all phrase that includes bad policy (higher taxes) and good policy (spending restraint). But with a few notable exceptions, European nations have been choosing the wrong kind of austerity (even though Paul Krugman doesn’t seem to know the difference).

And when I claim politicians in Europe have chosen the wrong kind of austerity, that’s not hyperbole.

As of 2012, there were €9 of tax hikes for every €1 of supposed spending cuts according to one estimate. That’s even worse than some of the terrible budget deals we’ve seen in Washington.

At this point, a clever statist will accuse me of sour grapes and state that I’m simply unhappy that politicians opted for policies I don’t like.

I’ll admit to being unhappy, but my real complaint is that higher tax burdens don’t work.

And you don’t have to believe me. We have some new evidence from an international bureaucracy based in Europe.

In a working paper for the European Central Bank, Maria Grazia Attinasi and Luca Metelli crunch the numbers to determine if and when “austerity” works in Europe.

…many Euro area countries have adopted fiscal consolidation measures in an attempt to reduce fiscal imbalances…in most cases, fiscal consolidation did not result, at least in the short run, in a reduction in the debt-to-GDP ratio…calls for a more temperate approach to fiscal consolidation have increased on the ground that the drag of fiscal restraint on economic growth could lead to an increase rather than a decrease in the debt-to-GDP ratio, as such fiscal consolidation may turn out to be self-defeating. …The aim of this paper is to investigate the effects of fiscal consolidation on the general government debt-to-GDP ratio in order to assess whether and under which conditions self defeating effects are likely to materialise and whether they tend to be short-lived or more persistent over time.

Now let’s look at the results of their research.

It turns out that austerity does work, but only if it’s the right kind. The authors find that spending cuts are successful and higher tax burdens backfire.

The main finding of our analysis is that…In the case of revenue-based consolidations the increase in the debt-to-GDP ratio tends to be larger and to last longer than in the case of spending-based consolidations. The composition also matters for the long term effects of fiscal consolidations. Spending-based consolidations tend to generate a durable reduction of the debt-to-GDP ratio compared to the pre-shock level, whereas revenue-based consolidations do not produce any lasting improvement in the sustainability prospects as the debt-to-GDP ratio tends to revert to the pre-shock level. …strategy is more likely to succeed when the consolidation strategy relies on a durable reduction of spending, whereas revenue-based consolidations do not appear to bring about a durable improvement in debt sustainability.

Unfortunately, European politicians generally have chosen the wrong approach.

This is an important policy lesson also in view of the fact that revenue-based consolidations tend to be the preferred form of austerity, at least in the short run, given also the political costs that a durable reduction in government spending entail.

Here are a few important observations from the study’s conclusion.

…the findings of our analysis are in line with those of the literature on successful consolidation, namely that the composition of fiscal consolidation matters and that a durable reduction in the debt-to-GDP ratio is more likely to be achieved if consolidation is implemented on the expenditure side, rather than on the revenue side. In particular, when fiscal consolidation is implemented via an increase in taxation, the debt-to-GDP ratio reverts back to its pre-shock level only in the long run, thus failing to generate an improvement in the debt ratio, and producing what we call a self-defeating fiscal consolidation. …fiscally stressed countries benefit from an immediate reduction in the level of debt when reducing spending.

In other words, restraining the growth of spending is the best way to reduce red ink. Heck, it’s the only way.

When debating my leftists friends, I frequently share this table showing nations that have obtained very good results with multi-year periods of spending restraint.

My examples are from all over the world and cover all sorts of economic conditions. And the results repetitively show that when you deal with the underlying problem of too much government, you automatically improve the symptom of red ink.

I then ask my statist pals to show me a similar table of data for countries that have achieved good results with higher taxes.

I’m still waiting for an answer.

Which is why the only good austerity is spending restraint.

P.S. Paul Krugman is remarkably sloppy and inaccurate when writing about austerity. Check out his errors when commenting on the United Kingdom, Germany, and Estonia.

Despite recently expressing doubts about America’s relationship with Saudi Arabia, President Barack Obama again flew to Riyadh and sought to “reassure” the Saudi royals about U.S. support.

The Kingdom of Saudi Arabia should raise the question: what are allies for? The president should have started moving Washington and Riyadh toward a more normal relationship.

Most important, the U.S. should drop any security guarantee, whether explicit or implicit. If the KSA is worth defending, its own people should do so. At the same time, the U.S. should take a more even-handed approach in the Iranian-Saudi cold war, looking for opportunities to draw Tehran away from Islamic extremism.

America’s relationship with the KSA was always based on oil. But supplies are expanding; even the U.S. is going from net consumer to exporter. Anyway, a successor regime would sell to the highest bidder.

Saudi Arabia is supposed to promote regional stability, but intervened in Bahrain to block reforms by the Sunni monarchy for the Shia majority, funded radical insurgents in an attempt to oust Syrian President Bashar al-Assad, and is seeking to destabilize Lebanon’s fragile confessional political system.

Worse, Riyadh has turned Yemen’s long-running domestic conflict into a destructive sectarian battle with Iran. Since the 1979 overthrow of the Shah Washington has seen the KSA as a significant barrier to expansion by Tehran. However, the nuclear agreement creates important new opportunities.

Change will not come easily or quickly, given determined resistance in Tehran, but Iran is far more likely to evolve in a more liberal and democratic direction than Saudi Arabia. Security concerns will remain, but monarchy has more to fear domestically than internationally.

The KSA is nominally a leader in the war on terrorism. Yet Riyadh’s attack on Yemen has empowered that nation’s al-Qaeda affiliate. Moreover, domestic “anti-terrorism” efforts are directed at suppressing dissent more than violence.

Riyadh also has underwritten Islamic radicalism around the world. While the royal regime apparently has not directly supported terrorism, individual Saudis have, both funding and joining al-Qaeda. The George W. Bush administration refused to release a 28-page section of the 9/11 report detailing apparent Saudi support for terrorism. Wikileaks disclosures discussed the continuing flow of Saudi money to terrorists.

Finally, the kingdom does not share values with America, democratic or other. Saudi Arabia is at best a slightly more civilized variant of the Islamic State.

The latest Freedom House rated the KSA as “Not Free.” The group said simply: “Political dissent is criminalized.” Reported Human Rights Watch: “Saudi authorities continued arbitrary arrests, trials, and convictions of peaceful dissidents. Dozens of human rights defenders and activists continued to serve long prison sentences for criticizing authorities or advocating political and rights reforms.”

Religious freedom also doesn’t exist. The U.S. Commission on International Religious Freedom noted that “Saudi Arabia remains unique in the extent to which it restricts public expression of any religion other than Islam.”

As I point out on Forbes online, “in practice, Saudi Arabia differs little than the Soviet Union. Both were totalitarian states animated by transcendent worldviews. Both regimes suppressed human liberty in service to those visions, one secular, and the other religious. The main difference is that the second posed a direct security threat to America, while the first sometimes interferes with U.S. interests indirectly.”

None of this prevents Washington and Riyadh from cooperating. However, the U.S. should stop acting as supplicant.

The royals’ continued rule is not vital to America. The greatest danger for Washington may be the moral hazard from defending such a regime, encouraging it to resist needed reforms.

Would the U.S. “lose leverage” by disengaging? America has spent decades attempting to micro-manage and geopolitically engineer the region, with disastrous results. Let Saudi Arabia spend its money and lives for a change.

President Obama wasted his final trip to the KSA pursuing politics as normal. Washington needs to put distance between America and its counterproductive partners.

America’s major alliances date back decades. Washington has been protecting Europe, Japan, and South Korea for longer than most Americans have been alive.

The original justification for this expensive global role was the Evil Empire, as President Ronald Reagan called the Soviet Union. Aggressive communism had to be contained, and America’s allies were in various degrees of prostration at the end of World War II and the Korean War.

For a brief moment of history the U.S. had to take on a unique and oversize international role. But as the world moved into the 1980s, it was the lethargy and stinginess of America’s allies that prevented them from taking over most, if not full, responsibility for their own security.

Washington should stop allowing Asians and Europeans to continue cowering behind it. That they prefer not to do more is understandable. But that is no reason for America to do it for them.

The traditional argument for turning the Pentagon into an international welfare agency was security. That claim has grown threadbare given how the existential threats that once confronted, or at least plausibly affected, the U.S. have disappeared.

No peer competitor, no contending global power, no countervailing alliance, no cohesive coalition of adversaries, no credible threat to global commerce, no anything at all.

What remains is, well, paltry compared to threats of global and nuclear conflict. Genuine problems, such as terrorism, but ones requiring limited, nuanced responses, not big alliances, aggressive wars, foreign occupations, endless bombing, and more. The Pentagon could do and spend far less while still safeguarding Americans.

So then, what are the existing alliances for?

Anthony V. Rinna of the SinoNK group recently suggested protecting commerce: “Managing the threat posed by instability on the Korean Peninsula to the United States’ economic interest cannot be done only through a combination of diplomacy and nuclear deterrence. It also requires the continual presence of American conventional armed forces.”


First, the Republic of Korea vastly outranges its antagonist on virtually every measure of power: 40 times the GDP, twice the population, overwhelming international connections. Even if Washington had sufficient economic interests at stake to warrant a defense guarantee in theory, one would not be necessary in practice. Foreign policy should reflect international realities, which change over time.

Second, the age of mercantilism long passed. The military should not be used to promote normal economic interests. Washington would end up squandering the money and lives of all Americans to protect the profits of a few.

While economic survival might become an existential issue, that certainly is not at stake with Asian, let alone South Korean, trade. There’s also an interest in ensuring navigational freedom, including commercial traffic.

But neither of these justifies defending a mid-size ally with modest economic ties to America. At a fraction of today’s cost Washington could threaten retaliation against any strike on international shipping—a far more sensible step than entering someone else’s war.

While the U.S. would suffer more if commerce with China and Japan was disrupted, a renewed Korean war likely would have only limited impact on that. Pyongyang’s reach is modest and the DPRK would have no incentive to encourage other nations to become belligerents against it.

Third, Seoul’s neighbors have far more at stake and should act to limit the damage from any conflict. Indeed, a second Korean war would have a variety of humanitarian, economic, and military impacts on China and Japan.

Turning friendly states into long-term military dependents is bad enough. As I wrote for National Interest, “doing the same for China would be bizarre. Washington has been attempting to convince the PRC that North Korea harms Chinese as well as American interests. The best way to make that argument would be to step back and allow Beijing to confront its North Korean problem directly.”

Whatever past arguments for Washington’s role as global policeman, times have changed. America’s populous and prosperous friends should defend themselves, including their economic interests.

It’s quite rare that a counsel denies Cato (or anyone) consent to file an amicus brief. That just forces us to file a perfunctory motion, thereby drawing more court attention to our brief than it otherwise would’ve received. Experienced lawyers know that there’s really no point objecting to these briefs; the court will itself reject any bizarre or disrespectful ones, and judges are free to disregard (or not even read) amicus briefs anyway.

In the case of Harte v. Board of Commissioners, however, counsel representing some (but not all) of the defendants in a civil suit made just such an objection. As you’ll recallHarte is the case where police officers are accused of using excessive force and pursing an unreasonable search for their military-style raid of a private home in Johnson County, Kansas. The evidence that led to the raid was that the Hartes had visited a gardening store and thrown out wet tea leaves that were misidentified as marijuana.

Cato thus moved for permission to file before the U.S. Court of Appeals for the Tenth Circuit, arguing simply that the case implicates the constitutional safeguards that exist to preserve person and property from unnecessary harms. Our brief advances unique and helpful arguments about Fourth Amendment common law and the systemic use of military-style raids by police. Had law enforcement in this case done routine police work, an armed raid need not to have taken place.

Counsel for Johnson County, perhaps seeing an opportunity to bill his clients for more (taxpayer-funded) hours, disagreed. To Lawrence L. Ferree III, our brief is “simply a lame attempt to morph this case into Cato’s libertarian mantra” on a case of “narrow issues.” Credit is due to Mr. Ferree for his rhetorical flare, but his arguments fall flat. 

Ferree tried to argue that our brief would not be helpful to the court because the search of the Harte’s residence wasn’t a “raid,” our brief is “boilerplate,” and that the case does not implicate Fourth Amendment common law. Well, it takes a certain degree of mental gymnastics to argue that a seven-person team armed with AR-15s, trained dogs, and a battering ram isn’t a raid team. It’s also curious that Ferree’s legal argument against our filing contained some of the exact same language he used to oppose the Marijuana Policy Project’s brief – “boilerplate” arguments, indeed.

Cato’s arguments have never been made in this court before, let alone in the same case. It takes chutzpah to accuse another counsel for using boilerplate language – as if we file briefs by cutting and pasting tired tropes from previous briefs – by using boilerplate language.

The most unique part of Mr. Ferree’s arguments was that they actually boiled down to a reason for the court to grant Cato’s motion. He spends most of his time responding to Cato’s substantive Fourth Amendment arguments. Ferree is certainly free to tell the court why Cato is wrong – that would be good lawyering – but such arguments have no bearing on whether Cato’s arguments are helpful or useful or non-duplicative, the applicable legal standard that justifies amicus filings.

And that’s why a Tenth Circuit motions panel earlier this week granted Cato’s motion, subject to reconsideration by the panel that will hear the case (a formality). So that’s a win on the sort of nuts-and-bolts litigation that we rarely get to pursue.

We can only hope that the court sees our arguments on the merits in a similarly favorable light.

The Philadelphia school district is in a near-constant state of financial crisis. There are many factors contributing to this sorry state–particularly its governance structure–but it is compounded by fiscal mismanagement. One particularly egregious example is paying six-figure salaries to the tune of $1.5 million a year to “ghost teachers” that do not teach. Pennsylvania Watchdog explains:

As part of the contract with the School District of Philadelphia, the local teachers union is permitted to take up to 63 teachers out of the classroom to work full-time for the Philadelphia Federation of Teachers. The practice, known as “release time” or “official time,” allows public school teachers to leave the classroom and continue to earn a public salary, benefits, pension and seniority.

These so-called ghost teachers perform a variety of jobs for the PFT, serving as either information officers for other teachers or carrying out the union’s political agenda.

“Teachers should be paid to teach,” attorney Kara Sweigart, who is arguing ghost teacher lawsuits for the Fairness Center, a free legal service for employees who feel they’ve been wronged by their unions, told Watchdog.

“At a time when school districts are hurting financially, districts should be devoting every tax dollar to support students,” she said, “not to pay the salaries of employees of a private political organization.”

According to public salary data available through Philadelphia city agencies, the school district is paying 16 ghost teachers $1.5 million this year. All of them are making at least $81,000.

PFT Vice President Arlene Kempin, who has been on release time since 1983, is among the highest paid at $108,062. Union head Jerry Jordan, who has also been on release time for more than 30 years, is earning $81,245, according to district payroll logs. The 16 ghost teachers on the books this year are making an average salary of almost $98,000.

The “ghost teacher” phenomenon is far from unique to Philly or even the education sector. Such “release time” subsidies for ghost teachers, policemen, firefighters, and bureaucrats of all stripes are common features of public-sector union contracts nationwide. Last month, a Yankee Institute report found that Connecticut provided unions with $4.1 million to subsidize 121,000 hours union-related activities, “the equivalent of more than a year’s worth of work for 50 full-time employees.” Meanwhile, the Goldwater Institute in Arizona is in the midst of a lawsuit against the city of Phoenix for unconstitutionally providing millions of dollars in release-time subsidies.

According to the most recent report from the federal Office of Personnel Management, the federal government paid more than $157 million in 2012 for federal employees to work for their unions for a total of 3,439,449 hours. And those are just the direct costs.

In his book, Understanding the Teacher Union Contract: A Citizen’s Handbook, former teacher union negotiator Myron Lieberman explained how difficult it is to account for the full amount of subsidies that taxpayers provide to the unions:

Most school board members are not aware of the magnitude of these subsidies. In school district budgets, the subsidies are never grouped together under the heading “Subsidies to the Union.” Instead, the subsidies are included in school district budgets under a variety of headings that may or may not refer to the union… School districts pay for these subsidies from a variety of line items in the district budget: payments to substitute teachers, teacher salaries, and pension contributions, among others. In most situations, the union subsidy is lumped together with other expenses paid for under the same line item; for example, the costs of hiring substitutes for teachers who are on released time for union business may be included in a budget line for substitutes that also covers substitutes for other reasons, such as replacing teachers on sick leave, personal leave, maternity/paternity leave, and so on.

Taxpayer dollars allocated for education should be spent on items and activities that assist student learning, not to promote the interests of private organizations (especially when their interests often collide with the interests of students). Union work should be paid out of funds the unions collect through dues and donations, not funds expropriated from unwilling and unwitting taxpayers. 

Although there’s no such thing as a straightforward measure of the quantity of money in an economy, monetary policy is nonetheless about managing that quantity.  How ought it to be managed?  The (misleadingly) simple-sounding answer is: so that it neither falls short of nor exceeds the quantity of money demanded by the public.

So much for a summary of Part 1.  Now for the hard part: dealing with the many questions this summary raises.  How can a central bank manage a quantity without being certain just how to define, let alone measure, that quantity?  How is it possible for the quantity of money supplied to differ from the quantity demanded?  When those things do differ, how can one tell?  Finally, just what does “the demand for money” mean?

The Demand for Money Isn’t Unlimited

The suggestion that there’s such a things as a “demand for money,” comparable to the demand for, say, heating oil, is one that many people find hard to accept.  But in truth the demand for money is a lot more like the demand for heating oil than many suppose.  Just as anyone with an oil furnace needs to keep some heating oil on hand in case the temperature drops, allowing the furnace to consume it gradually, while counting on regular deliveries to replenish the supply, people who can afford to keep some money — currency and bank deposits and checkable money funds and the like — on hand, drawing down the inventory to pay for other things, and replenishing it now and then out of their earnings, or perhaps by selling some non-monetary assets.  Notice that it’s by holding  on to money rather than by spending it that people evince a demand for the stuff.

Money’s role as a generally-accepted means of payment means that the real demand for it (that is, the average sum of monetary purchasing power people like to have on hand) tends to increase along with the amount of real purchasing to be done.  But just as the demand for heating oil in a city can increase independently of the total volume of inhabited interior space in that city (owing, say, to a decline in average temperature), so too can the demand for money vary independently of the total volume of an economy’s output, becoming more intense, for example, when interest rates on non-monetary assets are relatively low, and during times of greater economic uncertainty.

One difference between money and heating oil that tends to obscure the fact that people demand one no less than they do the other is that people actually purchase heating oil, whereas they seldom purchase money except when trading one sort of cash (say, dollars) for another (say, Euros).  The reason for this is simple: because an economy’s generally accepted means of payment is also what most people earn in exchange for their labor, or for goods they sell, no one has to “shop” for money.  Instead, they get paid in money, and then trade whatever they don’t wish to keep on hand for other things.  In other words, people contribute to the overall demand for goods and services, or “aggregate demand,” whenever they trade money for other stuff, whereas they contribute to the overall demand for money to the extent that they refrain from trading money for other things.

Receiving Money Isn’t the Same as Demanding It

The fact that the public’s demand for money consists of its willingness to hold on to monetary assets instead of spending them is important for several reasons.  First, it allows us to distinguish the demand for money from mere willingness to receive money in payments.  The fact that money is a generally accepted means of payment means that no one is likely to refuse to accept it in payments, let alone as a gift.  But this doesn’t mean that there’s no meaningful sense in which the public’s demand for money can be said to be limited or finite.  People may accept all the money they can get their hands on; but they “demand” money only to the extent that they refrain from spending it, and only for precisely as long as they refrain from spending it.

The insight also allows us to distinguish between the demand for money and the demand for credit, that is, the demand for various sorts of loans.  Here again, money’s role as a generally accepted means of payment can be confusing, because it means that a loan is likely to consist of a loan of money.  Yet most borrowers borrow, not to add to their money holdings, but to acquire other things, like cars and real estate, or (if they are business borrowers) to pay for labor, raw materials, or other inputs.  The fact that the demand for credit is distinct from the demand for money, and that the two things can change independently, means, among other things, that interest rates, which adjust to “clear” markets for various kinds of credit, cannot also be counted on to “clear” the market for money balances.  No matter what all too many textbooks say, interest can’t be the “price” of money, since it is busy being the price of credit, which is something else again; and perhaps no belief in the history of monetary economics has done more damage than the belief that monetary expansion is a reliable means for reducing interest rates.  In fact the relation between monetary changes on one hand and interest rate movements on the other is, as I’ll explain in a later segment, far more complicated than that.

Look, Ma: No Monetary Aggregates!

Finally, the fact that an increased demand for money manifests itself in peoples’ refraining from spending the stuff, while a decline in the demand for money translates into increased spending, means that one can get a handle on whether an economy has too much, too little, or just enough money without having to decide just what “money” consists of.  One need only keep track of overall spending or aggregate demand.  Whenever overall spending goes up, that’s a sign that the supply of money is growing faster than the demand for it.  When it shrinks, it’s a sign that demand for money is growing relative to the available supply.  In short, there’s no need to keep track of any particular monetary measure, or to estimate the public’s demand for the stuff that makes up that measure.  The behavior of spending supplies most of the information central bankers need to manage their nations’ money supplies responsibly.

We are still a long way, though, from being able to say anything — or anything compelling — about the proper conduct of monetary policy.  That changes in spending tend to imply that the demand for money is increasing or declining relative to some given supply doesn’t necessarily mean that a stable level of spending is ideal, much less that monetary policy should be conducted  with the aim of keeping spending stable. That’s so for two reasons.  First, a person’s demand for money is, strictly speaking, not a demand for any particular number of money units, such as dollars, but a demand for a certain amount of purchasing power.  If, at some given level of prices, I consider an average money balance of $1000 adequate for my needs, then, if prices fall to half that original level, $500 will serve me just as well as a $1000 did before.

It follows — and this is the second point — that there are, in principle, two different ways in which any shortage or surplus of dollars can be corrected.  One is to eliminate the shortage or surplus by means of an appropriate change in the available number of dollars of different sorts; the other is to eliminate it by means of an appropriate change in the general level of prices, and hence in every dollar’s purchasing power.  Other things equal, the higher the price level, the greater the quantity of money people will wish to hold; and the lower the price level, the smaller the quantity of money needed.  In principle, then, instead of attempting to prevent changes to the supply of or demand for money balances from leading to changes in the flow of spending, monetary authorities might be inclined to allow total spending to either rise or decline, perhaps at a rapid rate, or even to fluctuate willy-nilly, while relying on changes in the price level to keep the demand for money from veering for long, if ever, from the supply.  If they could get away with that, there would be no need to manage the supply of money after all.

There’s no doubting that, when monetary authorities allow spending in their economies to rise or decline substantially, and even dramatically, the changes in spending eventually promote such price level adjustments as are required to return to a state of monetary equilibrium.  It’s also true that, were prices all “perfectly flexible,” so that they responded both immediately and adequately to any change in the overall flow of spending, there could be no such thing as shortages or surpluses of money.  In such a world, a money supply that responded to changes in the demand for money wouldn’t be much of an improvement, assuming that it would improve at all, upon a money stock that was absolutely constant, or one that varied arbitrarily.[1]

Then again, in a world of perfectly flexible prices, an accommodative monetary arrangement could hardly be worse than any other.  And our price system is not, in fact, one that can be expected to instantly accommodate every sort of change to the supply of or demand for money.  Why that is so, and why some monetary policies are in fact a lot better than others, will be the subjects of the next installment.

Next:  The Price Level.

1. In fact even perfectly flexible prices wouldn’t necessarily suffice to avoid troubles connected to changes in the flow of spending so long as those changes are not fully anticipated and contracts are not fully “indexed” so as to mimic contracts that would have been written in a world of perfect foresight.  Consider the case in which an unanticipated halving of the money stock results in an immediate halving of all prices. The halving of prices would suffice to keep the nominal quantity of money supplied equal to the quantity demanded.  But it could hardly serve to make up for losses connected to any fixed nominal contracts outstanding at the time of the monetary collapse.

The federal government funds hundreds of subsidy programs for state, local, and private activities, such as programs for housing and economic development. State and local governments, businesses, charities, and individuals could fund such local activities by themselves without federal aid. But America is increasingly kicking local activities up to the federal government, and so Uncle Sam the Middleman keeps growing.

How much does Uncle Sam the Middleman cost? As a rough estimate, the federal bureaucracy represents about 10 percent of the costs of the projects it gets involved in.

I described how U.S. Department of Agriculture (USDA) rural programs fund such activities as local broadband, clam fishing, energy projects, apartment construction, and street paving. USDA rural programs will cost federal taxpayers $6.5 billion in 2016. Most of the money will go to the people and businesses that are subsidized, but a portion will end up in the hands of federal bureaucrats.

The federal budget appendix shows that there are 5,000 workers in the USDA’s Rural Housing Service, Rural Utilities Services, and Rural Business Cooperative Service. Based on data in the appendix, they earn an average annual salary of about $73,000 and receive benefits of $25,000. They earn less than other federal workers, but still far more, on average, than private sector workers. Fun fact: these 50 rural program administrators earn an average annual salary of about $135,000.

All and all, workers in the three rural agencies impose an annual cost on taxpayers of about $490 million. But these folks need office space, telephones, travel expenses, and supplies to do their paperwork. Based on data in the appendix, that cost is roughly $38,000 per worker for the rural programs, or $190 million a year.

Thus, of the $6.5 billion taxpayer cost of the rural programs, roughly $680 million does not get to the broadband companies, the clam fisherman, and street paving contractors—it goes into the pockets of the federal middlemen.

Why is this important? Because politicians and federal program supporters often talk as if federal funding of local activities is a free boost to the economy. But it is not free for a lot of reasons. Most directly, federal programs are not free because Uncle Sam the Middleman carves off for itself about 10 percent of the money flowing through it.

The USDA rural programs spent $651,000 on an arts center in Bozeman. But about $65,000 would not have gotten to the arts center; it would have been consumed by the federal bureaucracy. Rather than raising the money locally, Bozeman citizens essentially filled in their 1040s, sent their income tax money to Washington, and then had to lobby federal officials to get some of it back for their arts center. Such roundabout financing of local projects makes no sense.

For more on the problems of America’s roundabout financing system, see here.

America’s political silly season will rush toward a close with the November presidential election. Both party conventions are likely to be lively.

But these spectacles will fall short of the pageantry expected at next month’s communist party congress in the Democratic People’s Republic of Korea. For the first time in 36 years, before current leader Kim Jong-un was born, the Korean Workers Party is gathering.

We still don’t know the exact date that delegates will convene. But North Koreans only just finished a 70-day campaign to prepare for the grand event. In the DPRK appearances are everything.

The masses reportedly are marching as one behind the “Young Marshall.” The regime says the campaign is to “defend the leadership authority” of the KWP and resist the “U.S. imperialists.” At least Kim Jong-un has emphasized economic development; his father, “Dear Leader” Kim Jong-il, pushed a “military-first” policy.

The question for the U.S. is why the congress? It is only the seventh in the DPRK’s 68-year-history.

At the last one “Great Leader” Kim Il-sung inaugurated a system of monarchical communism when he announced that his son would succeed him. The more than 3000 delegates also affirmed Kim’s philosophy of “Juche,” or self-reliance.

In succeeding years the party seemed to lose relevance. Kim instituted the rule of one. After Kim Jong-il took over he shifted power toward the military and away from the KWP. A party congress would have been almost superfluous.

No longer, however. Since Kim Jong-un took over after his father’s death in December 2011, Kim fils has been reshaping Pyongyang’s power structure. He turfed out most of the top officials appointed by and loyal to his father and ruthlessly eliminated any challenge to his power. Moreover, Kim moved decision-making back to the KWP.

The party congress will emphatically reestablish the authority of the party, with Kim at the helm. The gathering also will solidify the rise of Kim’s new generation of officials.

Although he looks secure from challenge, his promiscuous resort to execution suggests he feels otherwise. Indeed, this month his regime suffered embarrassment from a raft of defections.

Kim may use the congress to ratify his more reformist economic policies. The younger Kim appears committed to economic development, whether to improve the lot of his people or strengthen the nation which he rules.

The changes are dramatic enough—a proliferation of markets—as to require a more formal framework. Ruediger Frank of the University of Vienna observed: “all major reforms of state socialism—be it in China under Deng Xiaoping, the Soviet Union under Gorbachev or Vietnam under the slogan of doi moi—have been announced at such regular party congresses or related events.”

A more robust and systematic program of economic reform is the best hope for the North to escape from immiserating poverty. Economic reform also creates the possibility of political liberalization.

China has demonstrated that moving toward markets does not automatically deliver democracy. But the PRC today is far freer in every way than during the rule of Mao Zedong. This may be why Kim’s father, Kim Jong-il, resisted Chinese-style economic reforms.

Since nothing else yet has worked, Washington should greet the congress by expressing a willingness to talk to Pyongyang, and not only about nuclear weapons, which almost certainly is a dead-end with the Kim dynasty. With war the worst of all possibilities and sanctions able to hurt but not transform, the U.S. needs to explore other options.

America’s political conventions will be consequential since they will determine who takes over the helm in Washington. But the DPRK’s political meet-up will offer the ultimate in political choreography.

It also could ratify a change of direction in Pyongyang. As I pointed out in Forbes: “The U.S. should encourage such a possibility. While the chance of success might be small, that would be better than continuing today’s dead-end approach.”

Global Science Report is a feature from the Center for the Study of Science, where we highlight one or two important new items in the scientific literature or the popular media. For broader and more technical perspectives, consult our monthly “Current Wisdom.”

Long before “green” came to be associated with moral superiority with regard to climate change, it was a color. The color of vegetation. Healthy, vibrant, prosperous vegetation was green, while unhealthy, senescent, or dormant vegetation was brown. In this context, to say the world is “greening” is to mean that its vegetation—upon which virtually all life depends—is flourishing and expanding. This is a much preferable situation to say its “greening” in the former sense—an amalgam of smoke and mirrors with no demonstrable real-world implication, impact, or most importantly, benefit.

We’re happy to report here that a new scientific paper reports that the world is greening—in the best sense of the word.

Published this week in the scientific journal Nature Climate Change is a paper titled “Greening of the Earth and its drivers” by a collection of 32 authors representing a combination of research programs from around the world. The authors compiled a large collection satellite observations of parameters associated with vegetative health collected since 1982, sorted through it, analyzed it, and then reported:

We show a persistent and widespread increase of growing season integrated LAI (greening) over 25% to 50% of the global vegetated area, whereas less than 4% of the globe shows decreasing LAI (browning).

Figure 1 shows the spatial distribution and magnitude of the greening trends. This is about as good of a large-scale environmental result as one could ever hope for.

Figure 1. Observed trends in leaf area index (LAI)—a measure of the quantity, density and health of vegetation during the growing season from 1982-2009. Positive trends indicate “greening,” negative trends indicate “browning.” The world is bathed in shades of green and blue. Source: Zhu et al., 2016.

What is the driver of this overwhelmingly positive outcome? Again from the authors:

Factorial simulations with multiple global ecosystem models suggest that CO2 fertilization effects explain 70% of the observed greening trend, followed by nitrogen deposition (9%), climate change (8%) and land cover change (LCC) (4%).

“CO2 fertilization” is a result of increasing atmospheric concentrations of carbon dioxide—an important plant fertilizer—primarily caused by carbon dioxide released from the chemical processes associated with the burning of fossil fuels to produce energy. And to think that some folks want to try to dial back this benefit!

While it may be hard to monetize a healthier and productive earth, there have been some attempts to place a value on some aspects of a greener world—primarily those which result from our increasingly productive agricultural systems. After all, the crops we eat are largely the seeds and fruits of plants, and they do better when carbon dioxide levels are higher.

Our Dr. Craig Idso calculated that rising atmospheric levels of carbon dioxide have added about $3.2trillion to the global economy since 1961 as a result of crop production increases and goes on to project nearly $10 trillion more by 2050. That’s a huge positive externality from carbon dioxide emissions.

It is interesting to note that most of the “integrated assessment models” (IAMs) that have been developed and designed to try to determine the “social cost of carbon”—that is, the monetary impact of the emission of each additional ton of carbon dioxide summed over the next 300 years—do not incorporate the positive effects of carbon dioxide fertilization. The primary exception to this situation is the FUND model developed by Dr. Richard Tol. Unsurprisingly, Tol’s model produces a much lower social cost of carbon than the other IAMs. Given that carbon dioxide fertilization and the positive impacts it has of the planet’s plant life is a firmly established scientific reality (as further evidenced by the new findings reported here) you’d think that any IAM that didn’t include it would be summarily rejected. Instead, such models are embraced by the Obama Administration and used to justify all manner of federal regulations.

And before we leave this new greening paper, we want to point out the comparison made by the authors of the patterns of observed trends with those projected to have occurred from a leading climate/vegetation model (Figure 2). We draw your attention to the western half of the United States. Here, the climate/vegetation model produced large (in area and magnitude) browning trends, driven by a general drying trend over the period of record. The observations on the other hand, show little, if any, trends towards browning, and instead show a general, mild, greening over the region.

Figure 2. Modeled (left) and observed (right) changes in leaf area index (LAI) for North America, 1982-2009. Source: Zhu et al., 2016.

The authors explain:

Such pronounced negative trends were not captured by any of the three satellite products. Our analysis indicated that models may be over-sensitive to trends in precipitation as soil water holding capacities maybe under-estimated in models, and deep rooting, ecosystem composition changes (e.g. shrubification) are not modeled, which is consistent with previous studies.

In other words, the models don’t have their, er, stuff, together. And as a consequence, they project negative outcomes that don’t materialize. 


Zhu, Z., t al., 2016. Greening of the Earth and its drivers. Nature Climate Change, published on-line April 25, 2016, doi:10.1038/nclimate3004


What do you do after you brought your party’s control of government to a dramatic end? You become an international scold, blaming the world’s problems on everyone else.

Former British Prime Minister Gordon Brown is the UN Special Envoy for Global Education. He recently declared that we all are responsible for the depredations of Nigeria’s murderous Boko Haram. “The World Should Be Ashamed of the Failure to #BringBackOurGirls,” he titled his article.

It’s been two years since the group kidnapped 276 girls from the town of Chibok. The militants kill moderate Muslims but typically target Christians, as in Chibok. Despite promises from the Nigerian government, proffers of Western assistance, and a twitter campaign led by First Lady Michelle Obama, none of the girls have been rescued.

Two years on Brown offered his opinion: “we have all done far too little to secure their release.” Indeed, those enslaved “are now a symbol of our apparent weakness to protect young lives.”

I didn’t realize that I should have spent the last two years attempting to “secure” the girls’ release.

It’s an awful tragedy committed by moral monsters, but “we” should not gloss over the ugly realities of Boko Haram’s activities. The mass kidnapping was a conscious attack by armed insurgents/terrorists. It succeeded because the security forces that should have been guarding the school and students failed to fulfill their responsibility.

Brown offered the sort of answer one would expect from a “UN special envoy” with little connection to the real world. He insisted that “emergency aid funding” for education should be increased, which would have done nothing to help the Chibok girls.

Moreover, he opined that “the United Nations Security Council could intervene and encourage the Nigerians—with the support of the Americans, the French, the Chinese and the British—to undertake enhanced air surveillance and potential action on the ground to secure the release of the girls.” Actually, the U.S. government, among others, encouraged Abouja to do more to confront Boko Haram.

Certainly the Nigerian people desire more effective action—which is one reason they ousted incumbent Goodluck Jonathan in favor of former dictator Muhammadu Buhari in last year’s election. Unfortunately, the Nigerian government is part of the problem.

Brown then asserted: “we could and should do far more to protect children from attacks and abductions when in school.” Who is “we”? Should I pick up an AK-47 at the local flea market in northern Virginia, hop on a plane for Chibok and head to a local school to take up picket duty? Moreover, how do “we” prevent “attacks and abductions” at, presumably, not just Nigerian schools, but schools in every nation around the world?

Brown also suggested: “To show the kidnappers will be punished, the Security Council should adopt a resolution that holds the perpetrators of future child abductions accountable so that the full weight of international pressure is brought to bear.” Who will enforce this resolution if the Nigerian government is incapable of governing fairly and applying effective military force?

Finally, said Brown, “All governments should now support a ‘Safe Schools Declaration,’ stating that attacks on schools, colleges and universities are crimes against humanity. And the international community should ensure the funds for guards, for cameras and simple gates to protect schools in conflict zones.”

Does Brown really believe that Boko Haram would have stopped if confronted by cameras, gates, and guards, let alone an international declaration? The group has prospered by defeating Nigeria’s security forces in combat.

What’s going on in Nigeria and in so many other war-ravaged states is tragic. Instead of blaming the rest of us for problems well beyond anyone’s control, however, Brown and others like him should bring their ambitions back to earth.

As I pointed out on Forbes: “millions of kids around the world currently denied the chance to prepare for a better future need practical help in their local communities, not UN resolutions, international declarations, and pompous proclamations from special envoys.”

The New York Times reports that yogurt giant Dannon plans to change its milk supply structure to accommodate new consumer demands for sustainable agriculture and GMO-free food. In the United States, most milk used for yogurt is produced by rural dairy cooperatives that aggregate milk from many sources and ship it to central processing centers where it then goes through the production process. Milk buyers typically have little say in the standards dairy farmers use for feed, animal treatment, and other aspects of raising cows. The company, responding to consumer demand, is looking to change this production process so it has more say on such issues.

Calls for regulation of the agricultural production process to make similar changes are common. Activists have successfully persuaded many Americans to care about the way animals are treated on the farm. Some have proposed regulations to force farmers to change their practices. The question is whether regulation is the proper method of enacting the changes activists seek.

The private sector has shown it can successfully respond to consumer demands for products produced without socially undesirable processes or ingredients. Last year, I  noted here how chicken giant Perdue shifted to antibiotic-free products. Dannon is responding to similar incentives and is undertaking a similarly costly change.  

All of this comes without the need for government regulation to force the company to comply with a particular set of standards. Dannon’s shake-up of its milk supply chain is yet another example of how private companies react to consumer demands for changes in the way food is produced.

Research assistant Nick Zaiac contributed to this piece

The House Judiciary Committee recently held a hearing to discuss potential reforms to Section 337 of the Tariff Act of 1930—a law that is used by U.S. patent holders to ban the importation of infringing products. It was very encouraging to hear from many members of Congress who were concerned that Section 337 was redundant in a world where global companies can easily sue each other in U.S. federal court.

Under Section 337, the U.S. International Trade Commission (ITC) has the power to exclude products from entering the U.S. market in order to prevent “unfair methods of competition and unfair acts in the importation of articles.”  The potential scope of that authority is staggeringly broad, but the vast majority of cases are about patent infringement.  In practice, Section 337 has been used to turn the ITC into a specialized patent court for imports.

I wrote a Cato Policy Analysis in 2012 pointing to the numerous problems caused by having a dual-track patent litigation system that singles out imports.  Section 337’s broad language attracts abuse by enterprising lawyers (examples here and here) and that the law violates U.S. trade obligations.

But Section 337 also impedes the proper functioning of the U.S. patent system.  In today’s globalized economy, lots of high-tech products are imported.  Plaintiffs, therefore, often have a choice whether to bring their patent case in district court or at the ITC, and they choose the ITC when Section 337 offers advantages over traditional litigation.  This is true regardless of the nationality of the plaintiff or the defendant.  For example, because iPhones are assembled in China, Korea-based Samsung was able to take California-based Apple to the ITC.  Both companies were also suing each other in federal district court.

What makes the ITC such an attractive litigation venue is that Section 337 provides only one sort of remedy—exclusion of the infringing product from the U.S. market.  In district court, successful plaintiffs are likely to be awarded only money damages unless the can show special cause to justify an injunction.  In the ITC, every successful plaintiff wins an injunction. 

But there are reasons why courts of law don’t always award injunctive relief to every successful plaintiff.  Courts are especially reluctant to grant injunctions in cases involving standard-essential patents or when the plaintiff’s sole interest in the patent is the collection of royalties or (in the case of “patent trolls”) litigation settlements.  The ITC can be a much more attractive venue for plaintiffs in those cases.

At the hearing, Representative Darrell Issa (R-CA) and others were concerned that companies were using Section 337 to bypass the federal courts.  Issa made the case that if two companies could be litigating their dispute in a court of law then they should be.  He bemoaned the increasingly prominent role of administrative agencies in settling private disputes, saying, “It is our responsibility to preserve the constitutional right of an American entity to have their claim, whether plaintiff or defendant, adjudicated within the court.”

It’s encouraging to see members of Congress recognize that Section 337 provides excessively broad patent jurisdiction to a trade agency.  Momentum seems to be building toward real reform that would reduce the harmful influence of trade protectionism in the U.S. patent system.

This morning I read an op-ed by Douglas Holtz-Eakin tackling the chasm between what it takes to enroll in college and how ready for college students actually are. It is a yawning gap, and Holtz-Eakin rightly laments it. But then he pulls the ol’, “Common Core is a high standard,” and suggests that it will bridge the college prep divide. He even writes that the Core has been “shown” to be “effective.”  

Not only has there been no meaningful evidence of the Core’s effectiveness, but right after I read Holtz-Eakins’ piece I saw that the latest National Assessment of Educational Progress scores had come out – indeed, for the very 12th grade students on the verge of college – and they had dropped in both reading and math between 2013 and 2015, and some dropped going back to 2009. This was, of course, as Common Core was being implemented nationwide. And not only did aggregate scores drop, but also scores for numerous racial and ethnic groups.

Do these results prove that Common Core is either impotent, or worse, a negative force? Certainly not. For one thing, as presented we can’t even break the 12th grade scores out by state as we were able to do with the 4th and 8th grade scores released several months ago. And even that was only able to furnish slightly more nuanced evidence than looking at aggregate national scores. But all these scores do undermine any proclamations of proven Core effectiveness.

Of course, lots of things affect test scores – federal policies, state policies, local policies, economics, demographic changes, etc. – and we can’t ignore all those things and just declare whatever policy we happen to dislike the undisputed villain. But one thing is clear, no matter how you feel about Common Core or anything else: NAEP tests continue to produce awful results for the students who are about to finish K-12 education, whether it is stagnant 17-year-olds’ scores on Long-Term Trend NAEP exams, or these scores for 12th graders on the “Main NAEP.” And this, as I tackle in a new, big update to the Downsizing the Federal Government K-12 page, despite huge increases in spending over the decades, as well as heavily centralized control.

Do the latest NAEP results prove that the Common Core, or centralization more broadly, are bad for American education? No. But they sure don’t help the narrative that centralization, including the federally driven Core, has helped it.

It may be “cyber incidents” like the US $81 million hack on the Bank of Bangladesh that has SWIFT, the Society for Worldwide Interbank Financial Telecommunication, investigating “Distributed Ledger Technology.” Asked to comment on SWIFT’s program for a CoinDesk reaction piece, I was most interested by the euphemistic language. It reveals something about the state of the Bitcoin ecosystem.

Yes, the folks at SWIFT capitalize the phrase “Distributed Ledger Technology.” It seems meant to create distance from “blockchain.” Of course, talking about “blockchains” was meant to create distance from “Bitcoin,” assumedly for a financial services community that found Bitcoin too uncouth or disruptive.

But Bitcoin is the lodestar. There are contenders, but most everything else is some denigrated system, lacking network effects, that ultimately fails to unite unrelated parties from across the globe in the project of recording transactions on an immutable public ledger. The question is how long it will take for the financial services industry to adopt Bitcoin or for Bitcoin to surpass the financial services industry. Regulator-friendly blockchains are at best a weigh-station on that road.

Enough with the Bitcoin triumphalism, though. The existence of a genius protocol does not guarantee its adoption. For Bitcoin to thrive, there still needs to be a great deal of social and economic change.

Bitcoin’s social capital needs are manifold. To deliver on its promises of global financial inclusion, user-defined privacy, enhanced liberty, and a stable money supply for all the world’s people, the Bitcoin ecosystem needs: a larger and more sophisticated community of software and protocol developers; greater assurance against mining centralization; and a thriving community of node operators. The embrace of the financial services community would speed things along. Bitcoin needs the reality and perception of low volatility; protocols and practices that assure privacy; flourishing, successful marketplaces; a congenial regulatory environment; and a positive reputation. (This list of social capital needs is drawn from my 2014 study of impediments to Bitcoin’s success.)

I’ve saluted the Open Bitcoin Privacy Project for its work on the privacy piece. A lot of effort in a lot of places is going into other dimensions, but the dominant theme in Bitcoin-land remains the “blocksize debate,” which will determine how Bitcoin will add capacity, as it must. I’ve written about the debate a couple of times, framing it as politics in a ‘non-political’ money system and as governance by competition.

In a podcast last August (which holds up adequately well), I said that everyone is going to settle down before too long. It’s taking longer than I thought. That does nothing to undermine Bitcoin’s essential genius. It just means that community members are burning a lot of energy on one dimension of the Bitcoin ecosystem, energy which is not available for developing Bitcoin’s other dimensions. Bitcoin will fail to achieve both its social potential and its potential value while community members use their energies this way.

The problem is particularly acute, though, when the blocksize debate undercuts progress in other dimensions of the Bitcoin ecosystem. When debaters exhibit personal animosity toward others, make churlish comments, and foment derision for the other side among their supporters, they are signaling to observers of Bitcoin in many important segments of society that Bitcoin is not an attractive thing to be involved in. Pursuing victory for themselves (or vanity, or attention), they undercut Bitcoin acceptance among important observers.

A winnowing process is underway to determine who are the good businesspeople, technologists, pool operators, and other ecosystem participants. The needed social capital will develop. But it’s a slow, human process, and the longer it takes, the slower Bitcoin’s promises of global development, liberty, progress, and profit will take to deliver.

When SWIFT uses the phrase “Distributed Ledger Technology” to distance itself from “blockchain” and “Bitcoin,” it might just be a semantic quirk. But it might tell us something about the Bitcoin ecosystem. Bitcoin has a maturity problem.

Volkswagen did a very bad thing: it installed software in hundreds of thousands of cars sold in the United States designed to defeat pollution tests, and then obfuscated when confronted with the evidence.

Last Thursday a U.S. federal court said that the company would either have to fix or buy back some 500,000 cars. The judge also indicated that Volkswagen would have to make a substantial payment to the car owners, regardless of how the problem is finally resolved, to make them whole.

I am all for applying a severe punishment to the company–fraudulently manipulating its equipment to evade a test result is an outrageous act that the government must punish to ensure companies don’t feel emboldened to emulate them. However, the judge lost me when he asserted that the recipients of this essentially tortious payment should be the injured car owners. From my perspective, I’m not that sure that they are victims here.

The drivers undoubtedly saw the resale value of their cars fall owing to the scandal, but that should be something that the car buybacks can account for without too much trouble. However, the higher emissions from the cars didn’t hurt the owners–it damaged the environment, which means it affected all of us, regardless of whether we own a Volkswagen.

The emissions cheating didn’t hurt car performance either–boosting the cars’ performance is why they did this to begin with. In fact, because of the defeat devices the Volkswagen owners got an automobile that performed better than had they bought a comparable vehicle from another company, one that hewed to the emissions standards. They actually benefited from the cheating–at the expense of degrading the environment that we all live in, both VW owners and the rest of us.

Compensating Volkswagen owners illustrates a fundamental chasm between lawyers and economists when it comes to punishing bad behavior. Lawyers tend to argue that tort law serves to provide adequate compensation to a victim, while economists see it as a way to tilt a company’s cost-benefit calculus so that it doesn’t make tradeoffs in risk (or pollution) that society deems unpalatable. The design of the Pinto exposed the gas tank to rupture in a crash because doing so was cheaper than doing a better job of protecting the gas tank. The fines paid by Ford when they were found guilty more than wiped out its cost savings from the engineering choice.

I completely agree with making Volkswagen buy the high-emission cars as well as imposing a fine on the company that goes above and beyond the estimated environmental damage. However, no additional money should not go to the people who bought VW cars, because they’ve not been materially injured, and there’s no societal gain by directing the fine into their pockets.

While simply directing the money to the government’s coffers may be a prescription makes libertarians a bit uncomfortable, in the absence of any real victim there’s no better solution.

Nearly two and a half centuries after Adam Smith vanquished the mercantilists, mercantilism is the beacon of U.S. trade policy.  In descending order of priority, U.S. trade policy is oriented toward three objectives: (1) Accelerating export growth; (2) Limiting import growth; (3) Effectuating a trade enforcement regime that maximally supports the first two objectives. The coexistence of the “exports good, imports bad” philosophy with 41 straight years of trade deficits explains why trade is so often maligned and demagogued (i.e., “We’re getting crushed in trade!”), and why trade liberalization is such a tough slog politically. 

Anyone who reads the press releases from the U.S. Trade Representative’s office, the House Ways and Means Committee, the Senate Finance Committee, or the big business trade associations is familiar with the statistic that 95 percent of the world’s consumers live outside the United States.  That mantra is deployed to promote the importance of exports – to suggest that removing foreign trade barriers is essential to U.S. export growth, which is essential to U.S. economic growth.  But rarely does anyone in official Washington make the valid point that if 95 percent of the world’s potential customers live abroad, so do 95 percent of the world’s suppliers, 95 percent of the world’s supply chain partners, 95 percent of the world’s workers, and 95 percent of the world’s investors.

The fact that the United States accounts for only 5 percent of the world’s population means there are numerous channels through which engagement with the world increases U.S. wealth and living standards, and that U.S. barriers to imports, investment, and immigration are at least as important to surmount as are foreign barriers to U.S. exports. But official Washington considers dismantling foreign market barriers, while fortifying U.S. import barriers, to be its remit.

A brief refresher on business accounting is in order.

Lesson 1:

Profits equal revenues minus costs.

In simple arithmetic terms: P = R – C.

Lesson 2:

With reference to the simple equation above, a business can realize higher profits by increasing R or decreasing C.  To be more precise, higher profits require revenues to increase faster than costs increase or for costs to decrease faster than revenues decrease.

Lesson 3:

For any given firm, revenues equal the value of its domestic sales plus the value of its export sales, and costs equal the materials, labor, and overhead used in production, as well as transportation expenses, selling expenses, taxes, and other expenses incurred in the process of delivering the good or service to the customer.

Lesson 4:

By increasing overall supply and reducing the average price of manufacturing inputs and final end-user products, imports help reduce the cost of production for businesses and the cost of living for American households. For businesses, those lower costs generate greater profits to reinvest or distribute to shareholders or they enable lower prices to help them compete.  For households, those lower costs mean lower prices and more resources to save or spend elsewhere in the economy.

Lesson 5:

The goal of trade policy should not be to maximize business revenues.  The goal of trade policy should be to maximize profits (or put in economic terms: to maximize value-added, i.e. GDP). The equation in Lesson 1, above, shows that reducing costs contributes to profit growth just like increasing revenues contributes to profit growth.

Congress demonstrates occasional, attenuated appreciation of these lessons.  Every few years (8 times since 1982), Congress has passed a Miscellaneous Tariff Bill, which temporarily suspend duties on certain, “noncontroversial” products—usually intermediate goods, such as chemicals, electronic components, and mechanical parts—that are not manufactured domestically but are needed by U.S. producers to generate their own output. Although limited in impact by its temporary nature, by the “no domestic production” requirement, and by the caveat that the suspended duty must not reduce tariff revenues by more than $500,000, the MTB does provide some cost savings to U.S. producers. The last MTB provided an estimated $748 million of import tax relief.

As described in this new paper – released ahead of a House vote tomorrow on legislation to resuscitate the MTB process – Congress should recognize that tariffs are always costs that reduce GDP and act with greater resolve to eliminate all import tariffs permanently.

Bloomberg reports that the Port of Los Angeles is increasing automation with the installation of self-driving cranes and other equipment. The automation is being partly driven by the need to minimize the use of high cost and troublesome unionized labor.

The West Coast longshoremen and their unions have long caused disruptions and slowdowns at the seaports. This is one reason why U.S. seaports have fallen behind the efficiency levels of the best facilities in the world, such as the Port of Rotterdam.

A new incentive for seaport managers to automate is the need to minimize the environmental impact of shipping. The new machines are faster and cleaner than the old human-operated equipment, and so they cut air pollution. For this reason, California’s government is behind the push to automate.

Jon Slangerup, head of the Port of Long Beach, concluded: “Efficiency and the environment go hand in hand … They’re two sides of the same coin.’’

In an upcoming Cato study on privatization, I describe how this theme applies to business activities of the federal government. In government-owned businesses, inefficiencies imposed by Congress and the bureaucracies harm the environment. To cut waste and pollution, we should privatize:

  • A privatized Amtrak would save energy as it ended low-volume and inefficient routes.
  • A privatized U.S. Postal Service would save energy by closing thousands of little-used locations and cutting its fleet of more than 200,000 trucks.
  • A privatized air traffic control system would adopt technologies to reduce flight times and cut fuel use.
  • A privatized Tennessee Valley Authority would likely be a better environmental steward than this mismanaged government utility has been.

While liberals often assume that the environment and profit-hungry businesses are enemies, the opposite is true. Profit-seeking is a friend to the environment because it generates incentives to minimize waste, to recycle, and to discover better ways of producing products with fewer resource inputs.

While private profit-driven recycling is efficient, government recycling tends to be wasteful. And some federal agencies, such as the Department of Energy, have had terrible environmental records. The problem is that governments have incentives to maximize costs, not minimize them.

Politicians talk a good game about saving the environment, but it is markets and private businesses that actually deliver.