Policy Institutes

As Republicans press ahead with major tax reforms, politicians and pundits are debating the effects of tax cuts on economic growth. This 2012 study by the former Tax Foundation chief economist took a detailed look at the academic literature on the issue.

Here is what Will McBride found:

So what does the academic literature say about the empirical relationship between taxes and economic growth? While there are a variety of methods and data sources, the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy.

In this review of the literature, I find twenty-six such studies going back to 1983, and all but three of those studies, and every study in the last fifteen years, find a negative effect of taxes on growth. Of those studies that distinguish between types of taxes, corporate income taxes are found to be most harmful, followed by personal income taxes, consumption taxes and property taxes.”

These results support the neo-classical view that income and wealth must first be produced and then consumed, meaning that taxes on the factors of production, i.e., capital and labor, are particularly disruptive of wealth creation. Corporate and shareholder taxes reduce the incentive to invest and to build capital. Less investment means fewer productive workers and correspondingly lower wages. Taxes on income and wages reduce the incentive to work. Progressive income taxes, where higher income is taxed at higher rates, reduce the returns to education, since high incomes are associated with high levels of education, and so reduce the incentive to build human capital. Progressive taxation also reduces investment, risk taking, and entrepreneurial activity since a disproportionately large share of these activities is done by high income earners.”

This review of empirical studies also establishes some standards by which a tax system may be judged. If we apply these standards to our national tax system, the U.S. has probably the most inefficient tax mix in the developed world. We have the highest corporate tax rate in the industrialized world. If it came down 10 points—still higher than most of our trading partners—it would add 1 to 2 points to GDP growth and likely not lose tax revenue, because the tax base would expand from in-flows of foreign capital as well increased domestic investment, hiring, and work effort.

McBride’s study, with a nice summary table, is here.

On Halloween, Uzbek-born Sayfullo Habibullaevic Saipov allegedly murdered eight people and injured 12 with a rented truck in New York City.  The details of the attack, the number of victims, and Saipov’s personal information could change over the next few days.  However, based on the information that we have so far, Saipov entered the United States in 2010 as a lawful permanent resident with a green card.  He obtained his green card through the Diversity Immigrant Visa Program, which awards 50,000 green cards annually to those who enter the running from select countries. 

Uzbekistan has not been a major source of terrorists.  From 1975 through the end of 2016, three terrorists born in Uzbekistan attempted attacks on U.S. soil.  They killed or injured zero people in their attempted or threatened attacks.  Ulugbek Kodirov was convicted in 2012 of threatening to assassinate President Obama after entering on a student visa.  Abdurasul Hasanovich Juraboev entered on a green card that he won in a diversity lottery and also threatened to kill President Obama.  Fazliddin Kurbanov entered as a refugee and was convicted of possessing an unregistered explosive device.  Threats to assassinate the president are farfetched, but we count assassinations of politicians as terrorism just as the Global Terrorism Database does. 

If the death toll from the New York attack doesn’t rise, a total of 3,037 people have been murdered on U.S. soil by 182 foreign-born terrorists from 1975 through October 31, 2017.  Of those 182 foreign-born terrorists, 63 initially entered with green cards.  Including Tuesday’s attack, those who entered on a green card killed 16 people, or about 0.53 percent of all people murdered in terror attacks on U.S. soil committed by a foreigner.  If the number of injuries stays at 12, terrorists who entered on green cards have injured about 203 people during this period in attacks.  

The annual chance of being murdered in a terror attack on U.S. soil committed by a foreign-born person stands at 1 in 3,808,094 per year from 1975 through October 31, 2017. 

Saipov’s alleged attack stands apart from other Uzbek terrorists in terms of its brutal effectiveness and the tragedy of so many innocent lives murdered.  The 50 foreign-born terrorists who murdered somebody in a terrorist attack on U.S. soil from 1975 through October 31, 2017, including the 9/11 attackers, killed an average of 61 people each.  Excluding the 9/11 hijackers and their victims, 54 people were murdered in attacks for an average of about 1.7 murders per attacker.  Tuesday’s vehicular attack killed more people than the 1993 World Trade Center bombing that used a 1,336 pound bomb

Vehicle attacks are not the norm in the United States where firearms are more readily available, but they are rising in frequency, as we saw in Charlottesville earlier this year.  ISIS recently encouraged its followers to use trucks in lone wolf terrorist attacks and Saipov allegedly left a note declaring allegiance to that wannabe-Caliphate. 

RAND Corporation terrorism expert Brian Michael Jenkins remarked that airplane hijackings were the norm for 1970s terrorist attacks while suicide bombers were the norm for the 1980s.  Today, vehicle attacks are increasingly common around the world.  Jenkins identified approximately 40 vehicle attacks around the world from 2000 through 2016 that resulted in 167 deaths, approximately four per attack.  That total also includes the terrorists who died carrying them out. 

Automobiles are ubiquitous in a modern society and our lives would be unrecognizable without them.  Vehicle barriers can defend against vehicular attacks in crowded areas, but they’d more commonly be used to prevent accidents.  Simply put, there are too many roads, sidewalks, pedestrians, and automobiles to make defenses against these types of terror attacks feasible or cost effective.  Furthermore, the foreign-born terrorist threat is difficult to predict, largely because there are so few of them who successfully attack U.S. soil. 

More details will unfold surrounding this terrible attack in coming days.    

 

If you have followed the tax debate, you know that the United States has one of the highest corporate tax rates in the world. Most other nations have slashed their rates to attract investment, while U.S. policymakers have been in denial about global tax competition until recently.

You may be less familiar with the cuts to top individual income tax rates around the world since the 1980s. Those reforms have been driven by international competition for skilled workers, and by growing recognition of the damage caused by penalizing the highly productive people who are top earners.

How much have top individual tax rates been cut? The Economic Freedom of the World report publishes tax rate data for more than 100 countries as far back as the 1970s, but with numerous data points missing. I found 80 countries that had data back to 1985, and below I chart the average top individual income tax rate for that group. For countries with subnational income taxation, the EFW report includes a range of rates reflecting the varying taxes in states and provinces. For the chart, I chose the highest subnational rates for those countries. For the United States, the U.S. rate for 2015 is the federal rate plus California.

The average top individual tax rate for 80 nations plunged from 60 percent in 1985 to 35 percent by 2010, and then edged up to 36 percent in 2015. The U.S. federal-state rate was slashed sharply in the 1980s, falling from 59 percent in 1985 to 42 percent in 1990.

Our top rate went back up in the 1990s, then down in the 2000s, then up again in recent years reaching 51 percent by 2015, as both the federal and California rates increased. Meanwhile, rates continued to fall around the world in the 1990s and 2000s until the tax-cutting trend tapered off in recent years.      

 

 

Note: The EFW dataset has 159 countries with individual income tax data for 2015. The overall average top rate was just 30 percent for those countries. For the subset of 80 countries, I took out countries with zero rates, such as Bahamas, and countries that did not have data for 1985.

There is no more powerful person in the federal legal system than the federal prosecutor. Charging decisions and plea bargains effectively remove judges and juries from decisionmaking in most cases, and electing to fight a prosecutor rather than take the plea bargain most often results in dramatically longer sentences. This is how our system operates, and even if all the prosecutors are acting lawfully, defendants are at a massive disadvantage.

But what if the prosecutor cheats a system that’s already rigged in his favor?

This is not a hypothetical question. The U.S. Department of Justice (DOJ) has proven itself incapable of holding prosecutors accountable for misconduct. Regardless of which party is in power, the DOJ has let prosecutors get away with inexcusable behavior that costs people their livelihoods, their reputations, and their freedom. Next week, we’re holding an event to look at several high-profile cases in which the DOJ ran roughshod over individual rights, violated legal obligations and ethical norms, and ultimately held no one to account for their misdeeds.

Join us Tuesday, November 7 at 4 p.m. for Prosecutor Fallibility and Accountability, featuring Rob Cary, author of Not Guilty: The Unlawful Prosecution of U.S. Senator Ted Stevens; Howard Root, author of Cardiac Arrest: Five Heart-Stopping Years as a CEO on the Feds’ Hit-List; and Michael J. Daugherty, author of The Devil Inside the Beltway: The Shocking Exposé of the U.S. Government’s Surveillance and Overreach into Cybersecurity, Medicine and Small Business. The event will be hosted by my colleague Clark Neily.

You can sign up for the event here. You can also stream it online at cato.org/live and join the conversation on Twitter with #CatoCJ

Last week, President Trump issued a new executive order (EO) that restarts the refugee system with new “enhanced” vetting procedures.  The new procedures will subject the follow-on family members of refugees to about the same level of vetting as the original refugee sponsors who have already been settled in the United States.  This extension of the current refugee vetting system will cover about 2,500 additional follow-on refugees per year.  The EO also forward-deploys specially trained Fraud Detection and National Security officers at refugee processing locations to help identify potential fraud, national security, and public safety issues earlier in the screening process.  Additional actions of the EO are enhanced questions to identify fraud and other inadmissible characteristics as well as upgrades to databases to detect potential fraud or changes in refugee information at different interview stages.  The EO also directs the Secretary of the Department of Homeland Security, in consultation with the Secretary of State and the Director of National Intelligence, to review and reform refugee vetting procedures on an annual basis. 

The EO justifies these new measures by stating that, “It is the policy of the United States to protect its people from terrorist attacks and other public-safety threats … Those procedures enhance our ability to detect foreign nationals who might commit, aid, or support acts of terrorism, or otherwise pose a threat to the national security or public safety of the United States, and they bolster our efforts to prevent such individuals from entering the country.”  

All in all, these new vetting procedures are modest additions to the already intensive refugee screening that occurs.  If these new enhanced screening procedures are supposed to be the “extreme vetting” that President Trump proposed then they show just how extreme and secure the refugee program already was.  Furthermore, they are unnecessary.

Terrorists by Refugee-Restricted Countries

The EO also places additional scrutiny on refugees from Egypt, Iran, Iraq, Libya, Mali, North Korea, Somalia, South Sudan, Sudan, Syria, and Yemen.  Those eleven nations represent supposed security threats identified on the Security Advisory Opinion (SAO) – a government list of nations established in the 1990s whose nationals are supposed to be more closely scrutinized for particular national security threats.  The government has updated and expanded the SAO criteria as well as the nations on the list multiple times since 9/11.    

The government may have an excellent rationale for designating nationals from these eleven countries as serious threats that require more refugee vetting but those reasons and the evidence supporting them are not available for the public to examine.  Publicly available information points to a small refugee threat from refugees from these nations that does not justify additional screening.  Since 1975, zero Americans have been murdered on U.S. soil in a terror attack committed by refugees from any of the eleven countries.    

In a departure from previous EOs, nationals from one of these countries have killed people on U.S. soil in terrorist attacks but none of the attackers have been refugees.  Four terrorists from Egypt did manage to kill a total of 162 people in attacks on U.S. soil (Table 1).  They were Mohammad Atta who participated in the 9/11 attacks, Hesham Mohamed Hadayet who murdered two in a shooting at LAX in 2002, and El Sayyid Nosair and Mahmud Abouhalima who both were involved in the 1993 World Trade Center bombing.  All four Egyptians entered on tourist visas.  Only six Iranians (four of them in the 1970s), six Sudanese (all six in 1993 or before), two Iraqis, two Somalis, and one Yemeni carried out attacks on U.S. soil or were convicted of doing so (Table 1).  The two Iraqis did enter as refugees although one might not be a terrorist and the other was arrested in a sting operation.  The rest entered on student visas, tourist visas, green cards, or under the visa waiver program as they had dual Canadian-Iranian citizenship.

Table 1

Murders and Number of Terrorists by Country of Origin, 1975-2015

Country Terrorists Murders Percent of All Terrorists Percent of All Murders in Terror Attacks Egypt

11

162

7.1%

5.4%

Iran

6

0

3.9%

0.0%

Iraq

2

0

1.3%

0.0%

Libya

0

0

0.0%

0.0%

Mali

0

0

0.0%

0.0%

North Korea

0

0

0.0%

0.0%

Somalia

2

0

1.3%

0.0%

South Sudan

0

0

0.0%

0.0%

Sudan

6

0

3.9%

0.0%

Syria

0

0

0.0%

0.0%

Yemen

1

0

0.6%

0.0%

All

28

162

18.2%

5.4%

John Mueller, ed., Terrorism Since 9/11: The American Cases; RAND Database of Worldwide Terrorism Incidents; National Consortium for the Study of Terrorism and Responses to Terrorism Global Terrorism Database; Center on National Security; Charles Kurzman, “Spreadsheet of Muslim-American Terrorism Cases from 9/11 through the End of 2015,” University of North Carolina–Chapel Hill; Department of Justice; Federal Bureau of Investigation; New America Foundation; Mother Jones; Senator Jeff Sessions; Various news sources; Court documents.

De Facto Restrictions on Muslim Refugees

From January 1, 2002 through October 20, 2017, a total of 921,760 refugees entered the United States.  A total of 338,831 of them, or 37 percent, came from the 11 countries that are the subject of the new restrictions.  However, 76 percent of all Muslim refugees who entered the United States during that time came from those 11 countries that will have new restrictions placed on them.  President Trump said on at least a dozen occasions that his proposed travel bans and restrictions were Muslim bans but his defenders always correctly pointed out that not all Muslim-majority countries made the list.  It looks like those nations that sent more than three-quarters of all Muslim refugees did make the list for extra scrutiny though.   

Crime by Country of Origin

The administration has broadened its justification for these EOs from just terrorist attacks to include “other public-safety threats.”  As far as we can tell, that specifically refers to crime rates.  One common way to measure the criminality of a particular population is that population’s incarceration rates relative to other groups.  Although not perfect, this is one of a handful of measures available given the low-quality of American crime data.  The incarceration rates for immigrants from the eleven countries on the new list are all below that of native-born Americans except for Somalis who are within the statistical margin of error (which means that Somalis and natives have about the same incarceration rate).  Syrian-born immigrants, the most feared in this debate over immigrant vetting, have the lowest incarceration rate of any national group (Figure 1).  The rate for all 11 countries is 0.37 percent, about one-fourth that of the native-born rate of 1.54 percent. 

 

Figure 1

Incarceration Rates by Country of Birth, Ages 18-54

 

Source: Author’s analysis of the 2015 1-year American Community Survey data. Special thanks to Michelangelo Landgrave for assembling these numbers.

Note: The numbers are too small to show for Libya, Mali, and North Korea.  South Sudan is not separated in the American Community Survey data.

 

The national security justifications for the choice of countries in the first, second, and third EOs rang hollow.  Those countries initially selected had not sent any deadly terrorists to the United States since 1975.  The government supposedly selected them based on a complex review of security and vetting vulnerabilities but the selection still makes no sense and is likely basic on executive whim.  Now, the government has widened its justification from terrorism and national security to the nebulous “public safety of the United States” – a justification that can only mean crime.  Just as the national security justification for additional vetting rang hollow, so does the “public-safety threat” justification. 

Conclusion

The enhanced vetting procedures for refugees are modest extensions of current vetting procedures.  Before President Trump took office, refugee vetting was already extreme and difficult to further enhance.  The eleven countries singled out for intensive new refugee scrutiny make little sense from a national security perspective and even less sense if the goal is to secure the public safety of Americans.  No refugee from any of those nations has murdered an American in a terrorist attack on U.S. soil and their incarceration rates, except for Somalis, are all well below those of native-born Americans. 

Two years ago at Yale, a controversy erupted over a series of emails about offensive Halloween costumes. A resident advisor and Yale lecturer pushed back against an email from college administrators advising students not to wear offensive Halloween costumes. The advisor emailed her students and expressed confidence in students’ capacity to discuss offensive Halloween costumes among themselves without administrators getting involved. Many students interpreted her email as an endorsement of offensive costumes, rather than of freedom of expression and the ability of people to discuss and resolve offense without oversight. What do Americans think?

The newly released Cato 2017 Free Speech and Tolerance Survey finds that nearly two-thirds (65%) of Americans agree that “college students should discuss offensive costumes among themselves without administrators getting involved.” A third (33%) say “college administrators have a responsibility to advise college students not to wear Halloween costumes that stereotype certain racial or ethnic groups at off-campus parties.”

Full survey results and report found here.

A significant racial divide emerges about how to handle offensive Halloween costumes. A majority (56%) of African Americans feel college administrators should intervene and advise students against offensive costumes. Conversely, a strong majority (71%) of white Americans and a majority of Latinos (56%) believe that college students should discuss offensive Halloween costumes among themselves without administrator intervention.

A majority (54%) of college and graduate students agree that students should discuss offensive costumes without intervention from school authorities. However, students (45%) are 12 points more supportive than Americans overall (33%) of administrators advising about offensive costumes.

You can learn more about public attitudes about free speech, campus speech, and tolerance of political expression from the full survey report found here.

Sign up here to receive forthcoming Cato Institute survey reports

The Cato Institute 2017 Free Speech and Tolerance Survey was designed and conducted by the Cato Institute in collaboration with YouGov. YouGov collected responses online August 15-23, 2017 from a national sample of 2,300 Americans 18 years of age and older. The margin of error for the survey is +/- 3.00 percentage points at the 95% level of confidence.

 

This primer is supposed to introduce readers to the workings of the present U.S. monetary system. So it’s only natural that it should take established monetary arrangements for granted, including an official, “fiat” dollar currency managed by the Federal Reserve System.

And while I haven’t hesitated to point out shortcomings in the Fed’s management of the dollar, and have even dared to suggest some ways in which that management might be improved upon, I haven’t questioned the fact that, whether it does so competently or not, the Fed is indeed ultimately “in charge” of the U.S. monetary system. That is, I’ve assumed, that the U.S. dollar is the only important domestic currency unit, and that the total quantity of dollar-denominated exchange media, the behavior of the general level of prices, U.S. dollar exchange rates, and the periodic flow of domestic dollar-denominated payments, remain under the discretionary control of the FOMC.

Monetary Policy, Broadly Understood

But while a monetary policy primer must generally deal with existing monetary arrangements, it doesn’t follow that it should overlook others altogether. “Policy,” according to Webster, is “a high-level overall plan embracing the general goals and acceptable procedures especially of a governmental body.” And though, within the set of possible plans, the most readily-implemented ones take existing institutional arrangements for granted, there are always other, more radical options that involve either replacing established arrangements or confronting them with rival ones with which they must compete.

Radical policy alternatives are, inevitably, controversial ones as well; so a primer is hardly the place for any detailed consideration, let alone a defense, of any of them. Instead, we must settle for a quick glance at several especially prominent or intriguing possibilities, all of which involve moving away from the present, discretionary system and towards a more-or-less “automatic” alternative.

Back to Gold?

Among various proposals for reforming the present U.S. dollar, none are more controversial than those for re-instating an official gold standard, meaning an arrangements in which official paper U.S. dollars are once again made fully convertible into a fixed quantity of gold, as they had been until 1933. The proposal is controversial in no small part because, so far as many economists are concerned, the historic gold standard was itself a disastrous failure, the passing of which calls, not for tears of regret, but for cries of “good riddance!”

How to account, then, for the gold standard’s enduring appeal, especially among conservatives and libertarians? Part of the answer is that, whatever its shortcomings, a gold standard has the indisputable merit of serving to automatically stabilize the long-run purchasing power of any money tied to it. That property, far from being mysterious, stems from the simple fact that under a gold standard the profitability of gold prospecting and mining increases, other things equal, as prices generally fall, and declines as prices generally rise. Consequently although the general level of prices can fluctuate, it tends to revert over time to a fixed mean.

Another part of the answer is that the gold standard’s critics often exaggerate its shortcomings, especially relative to those of actual (as opposed to idealized) fiat standards. On a blackboard, of course, a fiat standard can readily be shown to outperform a gold standard in the long-run perhaps, but certainly in the short-run. But that’s true only because, on a blackboard, a fiat standard can be made to do whatever the chalk-wielder likes. In practice, on the other hand, fiat standards can and often do behave very badly indeed. What self-respecting economist, right now, would relish the opportunity to lecture a roomful of Venezuelans on the theoretical advantages of irredeemable paper money?

Moreover, while the international gold “exchange” standard that was cobbled together after World War I was a  disaster waiting to happen, the prewar “classical” gold standard’s commerce-invigorating combination of generally fixed exchange rates and reasonable (if less than perfect) price-level stability has never been matched since.

But the most important reason why gold still commands such a following is, if you ask me, more prosaic: it’s simply that, for those who distrust bureaucratic control, whether of money alone or of economic activity more generally, the gold standard is simply the most salient alternative. Gold was the last, the most universally embraced, and the most successful of all commodity standards, as well as the one that coincided with a period of remarkable economic progress concerning which even John Maynard Keynes — that arch critic of the “barbarous” gold standard — waxed eloquent:

What an extraordinary episode in the economic progress of man that age was which came to an end in August, 1914! The greater part of the population, it is true, worked hard and lived at a low standard of comfort…  But escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with the least trouble, conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages. The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages… He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could dispatch his servant to the neighboring office of a bank or such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable.

Nostalgia versus Expediency

But however much one may regret the passing of the classical gold standard, it doesn’t follow that we can do no better than to try and restore it. “In commerce,” the great William Stanley Jevons famously said, “bygones are forever bygones”; and what Jevons says of commerce goes for money as well. Gold may have served as a relatively successful monetary standard in the past. But it doesn’t follow that there’s anything sacrosanct about gold today, or that a gold standard is still the best of all possible options for fundamental monetary reform.

On the contrary: an official attempt to once again make paper dollars convertible into gold today would be a step no less arbitrary or “constructivist” (in F.A. Hayek’s sense of the term), than an attempt to make them convertible into silver, palladium, or Japanese yen. To be sure, gold has a nostalgic appeal lacking in the rest. But allowing that consideration to be decisive would be like deciding to replace an aging fleet of jet aircraft, not with newer jets, but with as many propeller-driven biplanes. Don’t get me wrong: I’m not saying that gold convertibility couldn’t possibly be a good idea. I’m just saying that it wouldn’t qualify as a great idea simply by virtue of its historical preeminence. The only real test ought to be whether a revived gold standard would deliver better results than any equally practical (and not merely theoretical) alternative.

Finally, even if no new system could beat a restored classical gold standard, it doesn’t follow that such a restoration is possible. If getting one nation alone to return to gold is bound to be extremely difficult, getting a large number of advanced nations to do so simultaneously, so as to have a truly “classical” set-up like the one that existed before 1914, would be a truly Herculean challenge.

Furthermore, official gold standards can survive only if citizens trust their governments and central banks to generally keep promises to trade gold for paper. Such trust, having been dealt a severe blow by World War I, died a slow and painful death in the decades that followed it. A new gold standard commitment by the Fed, or by any other central bank, today, is bound to run afoul of this reality, especially by becoming the object of attacks by skeptical speculators. If history is any guide, sooner or later those attacks would force even the most well-meaning central bankers to break their gold-standard promises all over again, though perhaps not on time to avoid leaving their economies in shambles.

Self-Regulating Fiat Money

If trying to revive the classical gold standard, or something close to it, is like trying to piece Humpty-Dumpty back together, that doesn’t mean that we have no choice but to settle for a paper dollar managed by a committee of fallible (and occasionally fumbling) bureaucrats. In particular, the difficulties inherent in trying to tame the dollar by once again making it convertible into a scarce commodity can be avoided by relying instead on a quantity-based monetary rule. Because such a rule provides for automatic adjustments in the quantity of standard money without allowing people to convert that money into something else, it can’t fall victim to a speculative attack, and is that much more likely to endure.

As we’ve already reviewed some general arguments in favor of having a monetary rule, there’s no need to review those arguments again here. Instead, I’d like to consider a radical variation on the old theme, consisting of a quantity rule that’s enforced, not by a committee, either voluntarily or with the help of sanctions imposed whenever the rule is breached, but by means of some sort of automatic, fail-safe mechanism.

The general idea is one Milton Friedman entertained for many years. “We don’t need the Fed,” he said (in one of many similar interviews he gave in the 1990s). “I have, for many years, been in favor of replacing the Fed with a computer” programmed to “print out a specified number of paper dollars…month after month, week after week, year after year.”

Although the constant (“k-percent”) money growth rate rule that Friedman once favored has itself fallen out of fashion, his idea for a computer-driven money supply couldn’t be more à la mode. Computers are, for one thing, capable of doing a lot more than they were back in the 90s. And even in the 90s they might have been capable of managing the money supply so as to maintain, not a stable growth rate for B or M1 or M2 or some other monetary aggregate, but a stable level of nominal spending. The smooth growth of spending would in turn supply, for reasons we’ve considered previously, robust protection against severe economic fluctuations.

Indeed, while it’s easy to imagine a circumstance in which a constant money growth rule could turn out to be a recipe for macroeconomic chaos, it’s darn difficult to imagine a situation in which there’d be much to gain, and little to lose, by sacrificing a stable and customary overall growth rate of spending growth for some other monetary policy objective. A bout of exceptionally rapid spending? A fine way to boost asset prices, no doubt, until one considers the inevitable denouement!  Slower spending than usual? Tell it to your average businessman, or employee! Those (mainly Fed insiders) who rail against what they like to characterize as “inflexible” rules (as if a “rule” could be anything but inflexible!) forget — or pretend not to know — that while some rules would indeed prevent the Fed from having the flexibility to do the right thing, others would mainly serve to deny it the flexibility to do wrong things. A stable spending rule, including one that’s “rigidly” enforced by a computer, though it would rule out many bad monetary policy options, would also “rule in” the good ones.

NGDP Futures

Scott Sumner has come up with an alternative plan for targeting nominal spending, which relies not on a computer but on trading in futures to keep spending on target. The plan, called “NGDP Futures Targeting ,” starts with the Fed settling on an NGDP growth-rate target — say, 4 percent — and then offering to enter into NGDP futures contracts, with payoffs depending on the future level of NGDP, to anyone who expects it to either exceed or fall short of target. Traders who expect NGDP to come in above target will go long on the futures, while those expecting it to fall short will go short.

How, then, does the Fed manage to actually achieve its target? The answer becomes evident when one considers the link between the futures contracts it enters into for its monetary policy operations. When the Fed sells futures to investors who are betting on excessive NGDP growth, it is withdrawing base dollars from the economy, just as it might by engaging in open-market asset sales. In contrast, when it buys contracts from short sellers, it expands the monetary base. In other words, the very persons who are betting that the Fed will miss its target are also driving it to adjust its policy in a direction calculated to make them lose their bets! As a means for further reinforcing this built-in feedback mechanism, Sumner would also have the Fed engage in “parallel” open-market operations for each NGDP contract purchase or sale. In short, by offering to “peg” the price of its futures by engaging in as many contracts as it takes to keep the price on target, the Fed essentially stands ready to expand or contract the monetary base by whatever it takes to keep expected NGDP on target.

That, at least, must suffice for the barest of summaries of a plan that has since appeared in several, subtly-distinct versions, each of which has spawned its share of subtle (and not-so-subtle) controversy, with some critics claiming that Sumner’s scheme, or some versions of it, unworkable. Do those critics have a point? Perhaps they do, but that’s not our concern. We’re here neither to praise nor to bury, but only to have a gander at, this and other intriguing future possibilities for monetary policy.

Bitcoin and All That

Of these possibilities none are more intriguing than those held out by so-called cryptocurrencies, including Bitcoin and its various “altcoin” offshoots. As I observed some years ago (and as Tim Sablik explains in this Richmond Fed piece), when it was just starting to gain economists’ attention, Bitcoin has properties in common with both gold and other commodity monies on the one hand and deliberately managed fiat monies on the other. Like gold, Bitcoin is unalterably scarce: just as there is only so much gold on the planet, whether mined or as-yet unmined, there are only so many bitcoins to be had — 21 million, to be precise — of which not quite 17 million have been mined as of this writing. And like gold mining, bitcoin “mining,” which involves the use of computer-power to solve a mathematical puzzle, is costly. Since bitcoin “miners” compete for the privilege of being responsible for some share of any periods’ bitcoin output, the marginal resource costs of mining a batch (or “block”) of bitcoin tends to equal the market value of the coins produced.

Yet unlike gold, and like a fiat money, both the maximum possible output of bitcoin and the number of coins mined in any given period is controlled, not by mother nature, but by a protocol programmed into Bitcoin’s open-source software. The protocol adjusts the difficulty of the puzzle bitcoin miners must solve so as to keep total bitcoin output on a predetermined schedule, according to which bitcoin output gradually tapers off, asymptotically approaching, but never quite reaching, its 21 million coin limit. The decentralized nature of Bitcoin’s software means that no one is either “in charge” of the protocol or capable of altering it. A majority of miners can, however, agree to form themselves into a new branch network or “fork” that uses a modified copy of Bitcoin’s original protocol, as happened on August 1, 2017, when “Bitcoin Cash” split-off from what became known thereafter as “Bitcoin Core.” Although the fork created as many new “Bitcoin Cash” coins as there had been Bitcoin Core coins beforehand, it left the Bitcoin Core protocol itself unchanged.

Bitcoin’s odd blend of commodity- and fiat-money properties led me to dub it a “synthetic commodity money” some years ago. But the exciting thing about Bitcoin and its various spinoffs and rivals isn’t merely that they comprise a distinct sort of basic money, but that their combination of commodity- and fiat-money features is capable, in principle at least, of combining the best properties, while avoiding the worst, of each of those more traditional alternatives.

One of the more common complaints against a commodity standard is that it exposes the value of money to shocks stemming from either new commodity discoveries or from changes in the non-monetary demand for the standard commodity. Bitcoin and other such “synthetic” commodity monies are, on the other hand, not subject to similar shocks, because the amount miners can extract is strictly pre-programmed, and because they have no non-monetary (e.g. ornamental or industrial) value.

The big beef against fiat money, on the other hand, is that its quantity can be altered by the authorities placed in charge of it, not only for the sake of promoting economic stability, but for other reasons, if not arbitrarily.

It doesn’t follow, of course, that any old  cryptocurrency would be a hands-down winner in a race against any established fiat money. Despite its ultimate limit of 21 million coins and skyrocketing transactions fees, Bitcoin might still seem a safer gamble than, say, the Venezuelan Bolivar. But would it really supply a better or more durable monetary standard than the present U.S. dollar?

But the question isn’t whether Bitcoin can beat the present fiat dollar. It’s whether the basic technology pioneered by Bitcoin might allow some other self-regulating cryptocurrency to do so. Besides giving rise to its own “Cash” spinoff, Bitcoin has already spawned dozens of “altcoin” rivals, with others yet to come. It’s at least conceivable some one or more of these might harbor such properties as would make it a worthy opponent to the present dollar, if not something clearly superior. Consider, if you will, the immense variety of ordinary commodities that either have served as money in the past, or that might have done so, from cowrie shells and tobacco to silver, gold, and even (as more than one prominent economist once proposed) common bricks. Each had its merits and its drawbacks; and every one of them was imperfect. But now consider that the cryptocurrency revolution presents us with a whole new universe of new, albeit synthetic, options to draw upon, each of which has been deliberately endowed with properties calculated to make it an attractive medium of exchange. Call me an optimist, but it seems to me only natural to suppose that one of these innovative products might someday prove just the thing to give even the best discretion-wielding central bankers a run for their (that is, our) money.

Choice in Currencies

For an upstart currency to make inroads on an established fiat money requires, at very least, that established and would-be monies compete on a reasonably level playing field. That means having rules and regulations that make it relatively easy for persons to either partly or entirely “opt out” of an official currency network, and to “opt in” to one or more alternative networks. I say “relatively easy” because it’s inevitably costly to switch from one currency network to another, and especially so when the switch is from a bigger network to a smaller one. A level playing field therefore means, not one where rivals are necessarily well-matched, but one where the game isn’t rigged in the home team’s favor. In other words, the laws should not themselves favor official money over other alternatives.

It was with that intent in mind that F.A. Hayek, in making his now-famous 1976 case for “Choice in Currency,” called upon

all the members of the European Economic Community, or, better still, all the governments of the Atlantic Community, to bind themselves mutually not to place any restrictions on the free use within their territories of one another’s — or any other — currencies, including their purchase and sale at any price the parties decide upon, or on their use as accounting units in which to keep books.

“There is no reason whatever,” Hayek went on to argue,

why people should not be free to make contracts, including ordinary purchases and sales, in any kind of money they choose, or why they should be obliged to sell against any particular kind of money. There could be no more effective check against the abuse of money by the government than if people were free to refuse any money they distrusted and to prefer money in which they had confidence. Nor could there be a stronger inducement to governments to ensure the stability of their money than the knowledge that, so long as they kept the supply below the demand for it, that demand would tend to grow. Therefore, let us deprive governments (or their monetary authorities) of all power to protect their money against competition: if they can no longer conceal that their money is becoming bad, they will have to restrict the issue.

Although Hayek’s advice seems perfectly reasonable, putting it into practice turns out to be a lot harder than he seemed to think, and not just because governments’ would rather keep currency playing fields slanted their way. Consider the case of Bitcoin. In March 2014, the IRS classified it and other cryptocurrencies as capital assets (“intangible property”) rather than as currency, making any trade involving them the basis for either a short- or a long-term capital gains tax, depending on how long the coins were held before being disposed of. As the folks in the Coin Center (a non-profit cryptocurrency advocacy group) explain, this tax treatment puts cryptocurrencies at a disadvantage, not just relative to the U.S. dollar, but relative to official foreign currencies, which enjoy an exemption when it comes to relatively small transactions:

Say you buy 100 euros for 100 dollars because you’re spending the week in France. Before you get to France, the exchange rate of the Euro rises so that the €100 you bought are now worth $105. When you buy a baguette with your euros, you experience a gain, but the tax code has a de minimis exemption for personal foreign currency transactions, so you don’t have to report this gain on your taxes. As long as your gains per transaction are $200 or less, you’re good to go.

Such an exemption does not exist for non-currency property transactions. This means that every time you buy a cup of coffee, or an MP3 download, or anything else with bitcoin, it counts as a taxable event. If you’ve experienced a gain because the price of Bitcoin has appreciated between the time you acquired the bitcoin and the time you used it, you have to report it to the IRS at the end of the year, no matter how small the gain. Obviously this creates a lot of friction and discourages the use of Bitcoin or any cryptocurrency as an everyday payment method.

The obvious solution, the Coin Center goes on to suggest, is “to simply create a de minimis exemption for cryptocurrency the way it exists for foreign currency.” But hold on: to really achieve Hayek’s ideal, it won’t do to level the capital gains tax portion of the currency playing field for cryptocurrencies only, rather than for all potential, unofficial dollar substitutes. But then, just what shouldn’t count as such a potential substitute? Surely gold qualifies. But why not silver, or cigarettes, or… the point, as we know from experience, is that all sorts of things are “potential” exchange media, and therefore potential currencies. So, to really allow them all to compete on equal terms, one would at very least have to exempt all of them — from taxes to which official dollar trades aren’t subject.

In short, Hayek’s ideal is just that: something to have governments strive for, rather than something they can be expected to fully achieve in practice.

What’s more, Hayek was far too optimistic regarding the likely consequence of making it easier for people to choose among rival currencies. “Make it merely legal” for them to switch to something else, he wrote, “and people will be very quick indeed to refuse to use the national currency once it depreciates noticeably.” But would they? Unlike, say, shoes or soda water, money is a “network” good, meaning that one of the most important, if not the most important, determinant of the attractiveness of any particular money is the size of the network of persons prepared to accept it. You might think gold an ideal monetary commodity, and I might hold that Bitcoin is to the dollar what sliced bread is to bread of the old-fashioned sort. Yet when it comes to going shopping, what either of us must first consider is, not what sort of money we like, but what the shopkeepers are prepared to take in exchange for their goods.

It follows that, even if official and unofficial currencies really could have a level playing field to compete on, that field would still be one on which official money would generally enjoy a huge “home team” advantage. For this reason, the mere fact that an official currency is depreciating “noticeably” isn’t enough to incite people to abandon it in droves. Instead, it might take a very substantial rate of depreciation, or some like cataclysm, to bring about rapid change. Cataclysms aside, upstart currencies are more likely to have to start by clawing their way into established currency markets one painful inch at a time, though with each becoming easier than the last as their own, initially tiny networks begin to blossom.

Free Banking

The alternatives I’ve considered so far have all consisted either of potential replacements for the U.S. dollar or of novel means for regulating the stock of official (that is, Fed-created) U.S. dollars themselves. Emphasizing such alternatives makes sense, after all, in a primer concerned with “monetary policy,” where the most fundamental choices are those concerning what type or types of basic money to employ, and how best to regulate the supply of basic money, assuming that it doesn’t adequately regulate itself.

But what about alternatives consisting  of banks’ readily convertible IOUs, like most bank deposits today that, by virtue of their instant convertibility into official dollars, are very close substitutes for them? Because such bank-created substitutes necessarily “piggy back” on the basic monies into which they can be converted, their presence can’t generally make up for misbehavior or mismanagement of the quantity of basic money itself, and might even aggravate that misbehavior. A fiat money stock that’s allowed to grow so rapidly that it would result in a 20 percent annual rate of inflation in a pure fiat money system will, for example, produce the exact same rate of inflation in an economy in which payments are made exclusively by means of bank IOUs backed by a fixed fractional reserve of the same basic money.

Moreover there’s nothing at all radical about having banks supply such alternatives, at least to a limited extent. Today and for some time past bank deposits of various kinds have served, with the aid of checks and, more recently, debit cards, as close substitutes for official monies, to the point of being far more extensively employed in exchange than official monies themselves.

It would, nevertheless, be wrong to suppose that there’s no scope for a potential beneficial radical reform involving bank-supplied alternatives to basic money. On the contrary: plenty of scope exists for expanding the role of such alternatives, particularly by doing away with long-standing restrictions on commercial banks’ ability to challenge central banks’ monopoly of circulating (or hand-to-hand) payments media.

Once upon a time commercial banks routinely issued their own circulating paper notes; indeed, until the latter half of the 19th century bank notes were the most important liability on banks’ balance sheets, which were far more commonly employed in making payments than either checks or coins. Nor did central bank notes, which themselves started out as mere IOUs redeemable in gold or silver, only to be transformed into inconvertible fiat money later on, come to generally displace notes of commercial banks until the last decades of the 19th century, and the opening ones of the 20th, when the proliferation of central banks typically went hand-in-hand with laws forcing commercial banks out of the paper currency business.

Received opinion has it that commercial bank notes had to go because central bank currency was better. But now and then received opinion is nothing but hokum, and this happens to be one of those instances. Had central bank notes been better than their commercial counterparts, it shouldn’t have been necessary for governments to suppress the latter. Instead, the mere availability of official alternatives should have sounded the death knell of the commercial stuff. Yet instead of that having been the case, in every instance the commercial bank notes had to be snuffed-out, leaving people no choice but to employ official paper money. Nor did the commercial bank currency go down without a fight, in which prominent economists often took part, with many of the most prominent (and most better ones, if I may say so) challenging governments’ efforts to establish official currency monopolies, and championing the alternative of free trade in banking, or “free banking,” for short.

Strictly speaking, “free banking” means more than just allowing ordinary banks to issue paper currency. It also means leaving them free of other restrictions, including restrictions upon their ability to establish branch networks, lend to whomever they wish, charge whatever rates they wish, and hold whatever levels of cash reserves and capital they wish to. Freedom of note issue is only the most controversial of these many aspects of freedom in banking, in part because allowing it would make it possible for the public to rely exclusively on privately-supplied exchange media, with official dollars playing their part only behind the scenes, as bank reserves. Furthermore, in times past, when official money consisted, not of any central bank’s inconvertible “liabilities,” but of gold or silver coin, not having to rely on a central bank as a source of paper money meant not having to have a central bank at all !

Could a monetary system lacking a central bank possibly have been any good? Darn tootin’!

Of all relatively modern monetary systems, none have earned more kudos than the two that most closely approximated the free-banking ideal, namely, the systems of Scotland between the latter 18th century and 1845 and Canada from 1870 and 1914. In both of these, bank-supplied notes and deposits commanded such a high degree of confidence that gold and silver coin hardly circulated. The public’s disdain for precious metal money in turn allowed Scottish and Canadian banks to operate on reserve cushions that were slim even by today’s standards. That in turn made Scottish and Canadian banks highly efficient intermediaries, with almost all of their clients’ savings going to fund relatively productive bank loans and investments. Yet despite this high degree of efficiency, bank runs were extremely rare in both systems, while banking crises, involving simultaneous problems at many banks at once, were almost unheard of.

Why, in that case, does free banking, and especially the idea of letting banks issue their own currency, seem so far-fetched today?

Partly it’s because the Fed and other central banks, upon which we’re now all too inclined to turn to for information about monetary history, have underplayed such success stories as those of Scotland and Canada whilst sugarcoating their own records. But in the U.S. case it’s also due to confusion about the meaning of “free banking.” Whereas that phrase can refer to genuinely free banking systems like those of Scotland and Canada, it can also refer to any of the systems established through so-called “Free Banking” laws passed by eighteen states between 1837 and 1860. Despite their names the later laws didn’t come close to allowing genuine freedom in banking. Instead, they all imposed important restrictions upon the banks established under them, including the requirements that those banks refrain from establishing branches, and that they back their notes entirely with specific securities — usually consisting of state government bonds. In several instances such restrictions, far from guaranteeing the soundness of the banks that were forced to abide by them, led to notorious abuses and failures, including episodes of “wildcat” banking. All in all, the misnamed “Free Banking” era proved to be one of the most unfortunate chapters in U.S. monetary history, because of the direct damage done by bank failures, of course, but also because those failures gave freedom in banking a bad name it didn’t deserve.

But what relevance has free (that is, genuinely free) banking today? It’s relevant, first of all, because an understanding of its workings suggests that freedom in banking isn’t necessarily inimical to soundness in banking, and that the wrong sort of regulations can in fact be worse than no regulations at all. It also suggests that, even if we are determined to rely on a fiat-money issuing Fed as our ultimate source of monetary control, we need not rely upon them to supply hand-to-hand currency. Instead, we might let commercial banks back into that business, while limiting the Fed’s ordinary involvement in the market for money to the “wholesale” part of that market — that is, to supplying banks with reserves. Commercial banks that could issue their own notes would presumably also be free to experiment with other forms of non-deposit money, including “smart” stored value cards, that might eventually replace paper money altogether, except on rare occasions when people lost confidence in the private stuff. I dare say, indeed, that had commercial banks been left in charge of supplying currency all along, paper money would some time ago have gone the way of horses, buggies, spittoons, and slide-rules. What else save a bunch of government monopolists could have managed to keep such low-tech stuff as paper currency in play for so long?

Should We, Can We, “End the Fed”?

While in times past free banking was an alternative to central banking, that’s no longer so. Today’s commercial bank deposits are claims, not to gold or silver coin, but to central bank issued fiat money; and were commercial banks able to supply their own notes or stored value cards to take the place of central bank notes in payments that don’t involve drawing upon bank deposits, those notes and cards would also represent claims to central bank money.

In short, so long as we stick to the present fiat dollar standard, instead of replacing it with either a natural or a synthetic commodity standard, no amount of freedom in commercial banking will suffice to render the Fed entirely otiose. No wonder that, when former U.S. Representative Ron Paul and his many devotees campaign to “End the Fed,” they have in mind, not just letting bulldozers loose on the Eccles Building, but once again making official dollars claims to some fixed quantity of gold.

Whether one is a hard-core libertarian or not, it’s interesting to ponder the extent to which the Fed’s role might be reduced, with the help of various more-or-less radical reforms, without either abandoning the present, inconvertible U.S. dollar or sacrificing its integrity.

We’ve already considered how a carefully-programmed computer, or having the Fed peg the price of NGDP futures, could render the FOMC redundant — in so far at least as that body’s challenge can be boiled down to one of maintaining a stable level of overall spending. We’ve also seen how letting commercial banks issue circulating currency would make it unnecessary for the Fed to be in the currency business, though it would still require keeping plenty of Federal Reserve notes on hand in case a banking panic should break out. Finally, in an earlier chapter we’ve seen how allowing “flexible” open-market operations could make it unnecessary for the Fed to ever make any direct loans to troubled financial institutions.

Yet these are far from being the only possibilities for having a leaner, if not a meaner, Fed. The Fed’s reduced involvement in currency provision and last-resort lending would mean a corresponding decline in the importance of the regional Fed banks, apart from the New York Fed, which handles the system’s open-market operations. The Fed’s involvement in check clearing could also be reduced, by returning that activity to the private sector, which handled it perfectly well until the Fed muscled its way in after 1913. Finally, most of the vast army of economists and other staff personnel presently employed at the Fed, who even now are mainly busy performing tasks that have nothing much to do with fulfilling the Fed’s mandate, could be made to seek more productive employment elsewhere.

In short, sticking to a fiat dollar doesn’t rule out reforms that would dramatically reduce the Fed’s role in the monetary system. Instead of the present, Leviathan Fed, one might have what might be called a “Nightwatchman” Fed, capable of doing those things that any responsible fiat money issuing central bank ought to do, but incapable of doing many of the things that irresponsible central banks do all too often.

A Concluding Plea for Open-Mindedness

By surveying some more radical options for monetary reform, I don’t pretend to have made a compelling case for any of them. My only goal has been to suggest that all sorts of alternatives exist, and that each of them has its merits. Will any of them really help? Is one better than the rest? Are there others not mentioned that deserve our consideration? The correct answer to all these questions, and others like them, is “Maybe.” In other words, such alternatives are, or ought to be, worth thinking about, even if some might ultimately be judged unattractive. Allowing ourselves to think outside the established monetary policy box can never do us any harm. Nothing could be more dangerous, on the other hand, than for all of us to assume that, despite its obvious faults, ours happens to be the best of all possible monetary systems.

[Cross-posted from Alt-M.org]

The Cato 2017 Free Speech and Tolerance Survey, a new national poll of 2,300 U.S. adults, finds that 71% Americans believe that political correctness has silenced important discussions our society needs to have. The consequences are personal—58% of Americans believe the political climate prevents them from sharing their own political beliefs.

Democrats are unique, however, in that a slim majority (53%) do not feel the need to self-censor. Conversely, strong majorities of Republicans (73%) and independents (58%) say they keep some political beliefs to themselves.

Full survey results and report found here.

It follows that a solid majority (59%) of Americans think people should be allowed to express unpopular opinions in public, even those deeply offensive to others. On the other hand, 40% think government should prevent hate speech. Despite this, the survey also found Americans willing to censor, regulate, or punish a wide variety of speech and expression they personally find offensive:

  • 51% of staunch liberals say it’s “morally acceptable” to punch Nazis.
  • 53% of Republicans favor stripping U.S. citizenship from people who burn the American flag.
  • 51% of Democrats support a law that requires Americans use transgender people’s preferred gender pronouns.
  • 65% of Republicans say NFL players should be fired if they refuse to stand for the anthem.
  • 58% of Democrats say employers should punish employees for offensive Facebook posts.
  • 47% of Republicans favor bans on building new mosques.

Americans also can’t agree what speech is hateful, offensive, or simply a political opinion:

  • 59% of liberals say it’s hate speech to say transgender people have a mental disorder; only 17% of conservatives agree.
  • 39% of conservatives believe it’s hate speech to say the police are racist; only 17% of liberals agree.
  • 80% of liberals say it’s hateful or offensive to say illegal immigrants should be deported; only 36% of conservatives agree.
  • 87% of liberals say it’s hateful or offensive to say women shouldn’t fight in military combat roles, while 47% of conservatives agree.
  • 90% of liberals say it’s hateful or offensive to say homosexuality is a sin, while 47% of conservatives agree. 

Americans Oppose Hate Speech Bans, But Say Hate Speech is Morally Unacceptable

Although Americans oppose (59%) outright bans on public hate speech, that doesn’t mean they think hate speech is acceptable. An overwhelming majority (79%) say it’s “morally unacceptable” to say offensive things about racial or religious groups. 

Black, Hispanic, and White Americans Disagree about How Free Speech Operates

African Americans and Hispanics are more likely than white Americans to believe:

  • Free speech does more to protect majority opinions, not minority viewpoints (59%, 49%, 34%).
  • Supporting someone’s right to say racist things is as bad as holding racist views yourself (65%, 61%, 34%).
  • People who don’t respect others don’t deserve the right of free speech (59%, 62%, 36%).
  • Hate speech is an act of violence (75%, 72%, 46%).
  • Our society can prohibit hate speech and still protect free speech (69%, 71%, 49%).
  • People usually have bad intentions when they express offensive opinions (70%, 75%, 52%).

However, black, Hispanic, and white Americans agree that free speech ensures the truth will ultimately prevail (68%, 70%, 66%). Majorities also agree that it would be difficult to ban hate speech since people can’t agree what hate speech is (59%, 77%, 87%).

Two-Thirds Say Colleges Aren’t Doing Enough to Teach the Value of Free Speech

Two-thirds of Americans (66%) say colleges and universities aren’t doing enough to teach young Americans today about the value of free speech. When asked which is more important, 65% say colleges should expose students to “all types of viewpoints even if they are offensive or biased against certain groups.” About a third (34%) say colleges should “prohibit offensive speech that is biased against certain groups.” 

But Americans are conflicted. Despite their desire for viewpoint diversity, a slim majority (53%) also agree that “colleges have an obligation to protect students from offensive speech and ideas that could create a difficult learning environment.” This share rises to 66% among Democrats; 57% of Republicans disagree.

76% Say Students Shutting Down Offensive Speakers Reveals “Broader Pattern” of How Students Cope

More than three-fourths (76%) of Americans say that recent campus protests and cancellations of controversial speakers are part of a “broader pattern” of how college students deal with offensive ideas. About a quarter (22%) think these protests and shutdowns are simply isolated incidents.

However, when asked about specific speakers, about half of Americans with college experience think a wide variety should not be allowed to speak at their college:

  • A speaker who says that all white people are racist (51%)
  • A speaker who says Muslims shouldn’t be allowed to come to the U.S. (50%)
  • A speaker who says that transgender people have a mental disorder (50%)
  • A speaker who publicly criticizes and disrespects the police (49%)
  • A speaker who says all Christians are backwards and brainwashed (49%)
  • A speaker who says the average IQ of whites and Asians is higher than African Americans and Hispanics (48%)
  • A speaker who says the police are justified in stopping African Americans at higher rates than other groups (48%)
  • A speaker who says all illegal immigrants should be deported (41%)
  • A speaker who says men on average are better at math than women (40%)

Nevertheless, few endorse shutting down speakers by shouting loudly (4%) or forcing the speaker off the stage (3%). Current college and graduate students aren’t much different; only about 7% support forcibly shutting down offensive speakers.

65% Say Colleges Should Discipline Students Who Shut Down Invited Campus Speakers

Two-thirds (65%) say colleges need to discipline students who disrupt invited speakers and prevent them from speaking. However, the public is divided about how: 46% want to give students a warning, 31% want the incident noted on the student’s academic record, 22% want them to pay a fine, 20% want to suspend them, 19% favor arresting the students, 13% want to fully expel the students. Three-fourths (75%) of Republicans support some form of punishment for these students, compared to 42% of Democrats.

People of Color Don’t Find Most Microaggressions Offensive

The survey finds that many microaggressions colleges and universities advise faculty and students to avoid aren’t considered offensive by most people of color. The percentage of African Americans and Latinos who say these microaggressions are not offensive are as follows:

  • Telling a recent immigrant: “You speak good English” Black: 67% Latino: 77%
  • Telling a racial minority: “You are so articulate” Black: 56% Latino: 63%
  • Saying “I don’t notice people’s race” Black: 71% Latino: 80%
  • Saying “America is a melting pot” Black: 77% Latino: 70%
  • Saying “Everyone can succeed in this society if they work hard enough.” Black: 77% Latino: 89%
  • Saying “America is the land of opportunity” Black: 93% Latino: 89%

The one microaggression that African Americans (68%) agree is offensive is telling a racial minority “you are a credit to your race.”

Americans Don’t Think Colleges Need to Advise Students on Halloween Costumes

Nearly two-thirds (65%) say colleges shouldn’t advise students about offensive Halloween costumes and should instead let students work it out on their own. A third (33%) think it is the responsibility of the university to remind students not to wear costumes that stereotype racial or ethnic groups at off-campus parties.

20% of Current Students Say College Faculty Has Balanced Mix of Political Views

Only 20% of current college and graduate students believe their college or university faculty has a balanced mix of political views. A plurality (39%) say most college and university professors are liberal, 27% believe most are politically moderate, and 12% believe most are conservative.

Democratic and Republican students see their college campuses differently. A majority (59%) of Republican college students believe that most faculty members are liberal. In contrast, only 35% of Democratic college students agree most professors are liberal.

What Beliefs Should Get People Fired?

Americans tend to oppose firing people for their beliefs. Nevertheless, Democrats are more likely than Republicans to say a business executive should be fired if she or he believes transgender people have a mental disorder (44% vs 14%), that homosexuality is a sin (32% vs 10%), and that psychological differences help explain why there are more male than female engineers (34% vs. 14%). Conversely, Republicans are more likely than Democrats to say a business executive should be fired if they burned the American flag at a weekend political protest (54% vs. 38%).

Republicans Say Journalists Are an Enemy of the American People

A majority (63%) of Republicans agree with President Trump that journalists today are an “enemy of the American people.” Conversely, most Americans (64%), as well as 89% of Democrats and 61% of independents, do not view journalists as the enemy.

These results aren’t surprising given that most Americans believe many major news outlets have a liberal bias, including The New York Times (52%), CNN (50%), and MSNBC (59%).  Fox is the one news station in which a majority (56%) believe it has a conservative bias.

Democrats, however, believe most major news organizations are balanced in their reporting including The New York Times (55%), CNN (55%), and CBS (72%). A plurality (44%) also believe the Wall Street Journal is balanced. The two exceptions are that a plurality (47%) believe MSNBC has a liberal tilt and a strong majority (71%) say Fox has a conservative bias.

Republicans, on the other hand, see things differently. Overwhelming majorities believe liberal bias colors reporting at The New York Times (80%), CNN (81%), CBS (73%), and MSNBC (80%). A plurality also feel the Wall Street Journal (48%) has a liberal bias. One exception is that a plurality (44%) believe Fox News has a conservative bias, while 41% believe it provides unbiased reporting.

Despite perceptions of bias, only 29% of the public want the government to prevent media outlets from publishing a story that government officials say is biased or inaccurate. Instead, a strong majority (70%) say government should not have the power to stop such news stories.

Americans Say Wedding Businesses Should Be Required to Serve LGBT People, Not Weddings

The public distinguishes between a business serving people and servicing weddings:

  • A plurality (50%) of Americans say that businesses should be required to “provide services to gay and lesbian people,” even if doing so violates the business owners’ religious beliefs.
  • But, 68% say a baker should not be required to provide a special-order wedding cake for a same-sex wedding if doing so violates their religious convictions.

Few support punishing wedding businesses who refuse service to same-sex weddings. Two-thirds (66%) say nothing should happen to a bakery which refuses to bake a cake for a same-sex wedding. A fifth (20%) would boycott the bakery, another 22% think government should sanction the bakery in some way, such as fining the bakery (12%), requiring an apology (10%), issuing a warning (8%), taking away their business license (6%), or sending the baker to jail (1%).

Clinton Voters Can’t Be Friends with Trump Voters

Nearly two-thirds (61%) of Hillary Clinton’s voters agree that it’s “hard” to be friends with Donald Trump’s voters. However, only 34% of Trump’s voters feel the same way about Clinton’s. Instead, nearly two-thirds (64%) of Trump voters don’t think it’s hard to be friends with Clinton voters.

Sign up here to receive forthcoming Cato Institute survey reports

The Cato Institute 2017 Free Speech and Tolerance Survey was designed and conducted by the Cato Institute in collaboration with YouGov. YouGov collected responses online August 15-23, 2017 from a national sample of 2,300 Americans 18 years of age and older. The margin of error for the survey is +/- 3.00 percentage points at the 95% level of confidence.

Many Americans want immigrants to “get in line.” But they cannot do so on their own. They need to get a sponsor, either a U.S. citizen family member or a U.S. employer, to petition the government to grant them permanent residency (a “green card”). Even if immigrants do obtain sponsors, there isn’t just one line to get into. Rather, immigrants have separate lines based on the type of sponsorship and their country of origin, and these lines all move at different speeds. Even two immigrants working in essentially the same position whose employer petitions for them on the same day can end up receiving their green cards decades apart if they were born different places.

How America still discriminates based on nationality

This bizarre fact is a consequence of the racist history of U.S. immigration law. In 1921, Congress created the first quota on legal immigration (the “worldwide limit” ). Three years later, it created limits for individual nationalities (the “per-country limits”). The per-country limits give each nationality a share of the worldwide limit. If nationals of a certain country use up their share of the green cards, they have to wait, and immigrants from other countries get to skip ahead of them in line. (And no, Congress made sure that immigrants can’t evade the per-country quotas by getting citizenship somewhere else. Birthplace is all that matters.)

Initially, the per-country limits openly discriminated against “undesirable” immigrants, defined as Asians, Africans, and Eastern Europeans (mostly Jews). But in 1965, Congress made the per-country limits uniform across countries. Today, no country can receive more than 7 percent of the worldwide limit in any green card category. But this reform just shifted the discrimination toward nationalities with the highest demand for green cards. The goal here was not any less racist. The debates over the law abounded with “liberals” reassuring conservatives that America wouldn’t be flooded with Asians.

In order to apply for a green card, green cards must be available under both the worldwide limit and the per-country limit for the relevant category. After their sponsors petition for them to receive a green card, immigrants wait in line to apply for the green card themselves. The State Department releases a green card bulletin every month to inform immigrants of which ones can apply that month. Immigrants whose sponsor petitioned for them before a certain date—called the “priority date”—can apply. Everyone else must continue to wait.

Right now, for example, Filipinos can apply for a green card this month if their U.S. citizen siblings petitioned for them before June 8, 1994—23 years ago. But here’s the critical point: this “priority date” tells Filipinos nothing about how long they will have to wait if their sibling petitioned for them today. If a lot fewer U.S. citizens applied for Filipino siblings after June 8, 1994, they might be able to receive their green cards a decade or more sooner than those receiving them today. However, if the number of petitions increased, then the wait could be even longer—maybe decades longer.

For example, the priority date for Filipino siblings of U.S. citizens in June 1994—when those who are today receiving their green cards started the process—was June 1977. In other words, Filipino siblings filing green card applications in June 1994 had waited from 1977 to 1994. The U.S. citizen who filed an immigrant petition on June 8, 1994 may have looked at the green card bulletin and thought his Filipino sibling would have to wait “only” 17 years. In fact, he had to wait 23.

How green card time moves backwards

To know when an immigrant entering the process today will receive a visa, the government would need to know the number of petitions filed in each year under each green card category, the nationality of the beneficiary of each petition, and the nationalities of any spouses and children of the petition beneficiary.

A precise estimate is impossible because some applicants abandon their petitions, apply sometime after their priority date comes up, have additional children, get married, become ineligible, etc. But one would think that the government would attempt to track the basic information carefully, so it could give at least a decent estimate of the future wait times. But being the government, it naturally doesn’t, so whenever the State Department moves up the “priority date,” it essentially guesses how many people more will apply. If the State Department guesses wrong, it realizes its mistake and moves the priority date back in time. In other words, green card waiting time doesn’t move linearly like real time does. It stops, starts, and even runs in reverse. The government calls movement backward a “retrogression.” 

Figure 1 below highlights how priority dates move in the green card backlog for Indian college graduates sponsored by U.S. employers under the employment-based third preference category. When priority dates move ahead in time, the orange line goes up. When they move back in time, it goes down. When the priority date is the same as the current date for multiple months, it goes in a straight line at about a 45-degree angle, progressing steadily upward with each month. As Figure 1 shows, from October 2002 through December 2004, priority dates were current.

Immigrants who were the beneficiary of a green card in December 2004 would have thought, if they had looked only at the priority date, that they would receive their visa almost immediately. In fact, they had to wait more than a decade—until September 2015 to apply. Then, when they finally did apply, the priority immediately retrogressed again. When this happens, the government sets their applications aside until the date becomes current again. Since December 2004, there have been seven significant retrogressions and several other smaller ones.

Figure 1
Priority Dates for Employment-Based (EB-3) Immigrants from India, October 2002 to November 2017

Source: U.S. Department of State

The big retrogression in 2005—when the priority date moved back to 1998—isn’t quite as meaningful as it appears. The State Department moved the dates back that far just to prevent anyone from applying. It’s not that the wait really grew quite that much. (If you want to know why the big jump happened, skip to this endnote.[1]) In any case, starting from March 2006—right after the big dip where Figure 1 shows “1-Jan-01”—green card time moved about half as fast as actual time. Priority dates have advanced five years and ten months, while actual time moved forward 11 years in eight months. Figure 2 shows the wait for Indian immigrants to apply more than doubled from 5 years to 11 years, while waits for all other immigrants (excluding China, Philippines, and Mexico) have disappeared.

Figure 2
How Long Applicants Had to Wait to Apply for Green Cards from India and Elsewhere*, October 2002 to November 2017

Source: U.S. Department of State
*Excluding China, Philippines, and Mexico

Wait times are actually longer than Figure 2 shows. Figure 2 only shows the wait to apply, not to receive an approval. As I mentioned before, when the State Department moves the dates forward, and more applicants apply than there are slots available, their applications are held in abeyance until numbers are available again. This post-application waiting period still happens today. In fact, nearly 140,000 immigrants are waiting at this stage in the employment-based categories, and more than a third of them are Indians. It will take several years to clear just these cases from the backlog.

So how long will Indian immigrant workers have to wait going forward? Again, no one really knows for certain. In 2012, Stuart Anderson of the National Foundation for American Policy estimated 70 years. In 2014, the government estimated that 234,000 high skilled workers were waiting to apply for green cards. The family of the workers, however, use up a little more than half of the green card quotas, so there are probably now roughly half a million green card holders in line.

For the two employment-based categories with the longest waits, Indians can only receive 5,600 green cards (out of 80,000). We would need to know what share of those in line are Indian and what share are waiting in which of the employment-based categories to provide a good estimate of the wait for immigrants applying today. This information isn’t available. But if even half of these workers are Indians in the EB-3 category—which seems very likely given how much longer Indians in this category have already been waiting than other nationalities—then their wait would be about a century.

In other words, it’s possible that almost all of the Indian workers applying today will die before they receive permanent residency, while other immigrant workers will receive their green cards almost right away. This is the system that Congress refuses to reform.

[1] Two factors apparently combined to slam the breaks on Indian workers—and everyone else in the EB-3 green card category—in 2005. First, Congress passed a law at the start of FY 2001 that eliminated the backlog temporarily in 2003 and 2004. The law waived the per-country limits in situations where the worldwide limit for the category otherwise would not be filled, and it temporarily increased the number of green cards by recapturing visas that went unused in 1999 and 2000 (unused visas are a crazy topic for another post).

At the very same time, Congress created a new agency—U.S. Citizenship and Immigration Services (USCIS)—to adjudicate green card applications from temporary workers in the United States, and it was developing new procedures to adjudicate applications. Even though the State Department kept telling immigrants that they could apply, USCIS wasn’t processing them quickly enough. This led to a growing backlog in green card applications. Once USCIS instituted measures to catch up, the State Department realized that it let far too many applicants apply and slammed on the breaks. These applications are then held in abeyance.

“The FCC said in a notice it was removing ‘outmoded regulations’ on telegraphs effective in November.” And none too soon: “The last Western Union telegram in the United States was sent in 2006” and the “last major telegram service worldwide ended in India in 2013.” Reuters reports:

AT&T Inc, originally known as the American Telephone and Telegraph Company, in 2013 lamented the FCC’s failure to formally stop enforcing some telegraph rules.

“Regulations have a tendency to persist long after they outlived any usefulness and it takes real focus and effort to ultimately remove them from the books even when everyone agrees that it is the common sense thing to do,” the company said.

In 2011, I observed that Connecticut had yet to get around to repealing old state laws like those regulating the working conditions of telegraph messengers (cross-posted and adapted from Overlawyered).

Does the federal government enjoy plenary power to regulate every aspect of corporeal existence, down to the rodents living in your backyard? People for the Ethical Treatment of Property Owners (PETPO), an organization of concerned citizens from Utah, say no, and want the Supreme Court to hear them out.

Article I of the Constitution lists the federal legislative powers: Congress may only act pursuant to one of these enumerated powers. One of these powers is the regulation of commerce “among the several states.” Starting with the New Deal, however, Congress has increasingly looked upon that power as a license to do whatever it likes. And for decades, the courts rubber-stamped these increasingly expansive federal intrusions into areas traditionally reserved to the states.

But in a series of cases, starting with 1995’s United States v. Lopez, the Supreme Court began to push back, reaffirming that federal regulation under the Commerce Clause must be, well, commercial. Recall that while Chief Justice John Roberts ultimately saved Obamacare by transmogrifying the individual mandate into a tax, he and the Court majority rejected the government’s arguments regarding the Commerce and Necessary and Proper Clauses.

That brings us to the current case. The Utah prairie dog, which resides only within a small corner of southwest Utah, has no commercial value: there is no market for it—they make terrible pets—or any product made from it. Moreover, the current population is large and expanding. Yet it is listed as “threatened” under the federal Endangered Species Act.

Its legal status derives from the distribution of its population: the government deems the 70% residing on private land a nullity, counting only the federal-land population, on the theory that the citizens of Utah would declare open-hunting on privately domiciled prairie dogs if the species were delisted. And, according to the U.S. Court of Appeals for the 10th Circuit, it doesn’t matter that the varmint is commercially worthless; other unrelated animals have commercial value, so the federal government can stick its nose into whichever animal it likes. Under this theory, of course, all organic life in the United States is subject to congressional whim, because some conjectural private party might impose some vaguely defined harm at some hypothetical future date.

PETPO has filed a petition asking the Supreme Court to review the case. Cato, joined by the Reason Foundation and the Individual Rights Foundation, has filed an amicus brief urging the Court to review PETPO v. U.S. Fish & Wildlife Service. At stake is not simply the beleaguered citizenry of Utah who wish to live their lives unmolested by pests—neither those living underground nor in the District of Columbia—but also the very system of enumerated powers that has protected the liberty of all Americans since the Founding.

Eric Asimov at the New York Times has an excellent, detailed, and highly discouraging look at the reversal of one of the favorable trends for freedom of commerce in recent years, the greater ease of interstate wine shipment.  Excerpt: 

In the last year or so, carriers like United Parcel Service and FedEx have told retailers that they will no longer accept out-of-state shipments of alcoholic beverages unless they are bound for one of 14 states (along with Washington, D.C.) that explicitly permit such interstate commerce….

Strictly speaking, it was probably never entirely legal in New York or in many other states to have wine shipped in from out-of-state retailers. Yet, these laws requiring a license for interstate wine shipments seemed vague and were rarely enforced….

But now, states — urged on by wine and spirits wholesalers who oppose any sort of interstate alcohol commerce that bypasses them — have stepped up enforcement efforts. Retailers say that the carriers began sending out letters to them a year ago saying they would no longer handle their shipments.

Asimov notes that the cost of restraints on commerce falls most heavily on those who live far from high-end markets: 

For consumers who live in states stocked with fine-wine retailers, like New York, the restrictions are an inconvenience. For consumers in states with few retail options, they are disastrous. It’s hard enough outside major metropolitan areas to find wines from small producers. The crackdown makes it that much harder.

Unfortunately, alcohol wholesalers are among the most powerful of state-level lobbies, and intent on keeping a system that serves their interests. They invoke far-fetched health and safety rationales, claiming that restraints on interstate shipment are “all that protects the wine and spirits business from descending into chaos. The Supreme Court did not buy the argument in 2005, and to me, their economic interest seems a far more likely motivation than public health,” writes Asimov.

The Supreme Court’s constitutional pronouncements in this area, alas, provide only spotty and indirect protection for consumers’ rights to do business with willing providers, concentrating instead on improper protectionism directed by states against other states. Ilya Shapiro analyzed the case law in this 2011 post and related podcast. Brandon Arnold, then Cato’s director of government affairs, wrote about a 2010 attempt by wholesalers to get their way through federal legislation. And while state-by-state liberalization efforts are underway in many state capitals, they are routinely stymied by the well-entrenched wholesaler lobby. For more background reading, the California-centric Wine Institute has this FAQ.

The Bitcoin system has the great virtue of securely sending value directly from stranger to stranger. It is open to anyone, anywhere in the world. The sender does not need to trust the recipient, nor any bank or other institution, to accurately record the transfer. The Bitcoin “blockchain” provides a readily consulted online public ledger with immutable records. Transfers are indelibly captured, like flies in amber, and made tamperproof by massive duplication and reconciliation of the ledger over thousands of nodes.

Bitcoin also has well-known limitations as a currency, however. First, it doesn’t scale well. The Bitcoin blockchain can process about four transactions per second, whereas Paypal does hundreds, Visa or Mastercard thousands. The blockchain has become congested as the number of transactions has grown. (Reducing the congestion was the motivation for the proposals to enlarge the block size that recently roiled the bitcoin world.) Validation takes at least ten minutes, longer for more secure validation, and even longer when the system is congested.

Cryptocurrency pioneer Nick Szabo has clearly explained that this tradeoff — high security at the cost of slow transaction speed and low capacity for transaction validations per second — is built into Bitcoin’s massive-duplication design:

Bitcoin’s automated integrity comes at high costs in its performance and resource usage. Nobody has discovered any way to greatly increase the computational scalability of the Bitcoin blockchain, for example its transaction throughput, and demonstrated that this improvement does not compromise Bitcoin’s security. … Compared to existing financial IT, Satoshi [Bitcoin’s pseudonymous designer] made radical tradeoffs in favor of security and against performance.

Thus a blockchain system like Bitcoin is not itself capable of quickly processing large numbers of retail payments.

Second, there is the network property of a monetary standard: each of us prefers to be paid in the currency accepted by the largest number of our potential trading partners. This property favors the incumbent standard (the fiat dollar in the US) over both bitcoin and gold. It reinforces the volatility drawback: when your rent and utility bills are denominated in dollars, it is risky to hold a bitcoin balance for the purpose of paying them.

Third, bitcoin’s purchasing power is for now highly volatile.  Broader holding of bitcoin as a medium of exchange would reduce volatility, but all three problems impede that.

These drawbacks have inspired initiatives to combine the benefits of blockchain technology with the use of gold-denominated tokens in place of bitcoin. Gold as a potential medium of exchange arguably has lesser limitations than bitcoin on all three scores. First, its payment processes scale well. Second, its value (in dollars or in purchasing power) is somewhat less volatile over daily to monthly horizons, and is much less volatile over longer horizons. Third, its popularity as an asset in private hands is greater. As of 15 October, 2017, total bitcoin balances are worth $92 billion, whereas worldwide private investment holdings of gold coins, bullion, and ETFs are estimated at $1.7 trillion. Gold holdings are more than 18 times larger; bitcoin holdings are less than 6% of gold in private hands.

Initial popularity matters for gaining widespread use in the face of an incumbent currency. Popular dollarization in Latin America and elsewhere gives us a model of how a non-incumbent currency gains a toehold and then spreads. Popular dollarization typically begins with the dollarization of savings, when the local peso becomes a less reliable long-term store of value than the dollar. Dollarization of pricing and payments spread when the peso inflation rate rises to double digits, requiring more frequent revision of peso prices, and imposing a high cost of holding pesos even from paycheck to paycheck.

Several about-to-launch new projects, described below, hope to create gold-based payment systems, while using some form of blockchain technology to enhance the security of holdings and transfers. If gold-backed accounts or digital gold currency tokens with cryptographically secured transfers are successfully launched, users will be able to adopt a modern gold standard as easily as they can now adopt the bitcoin standard.

Gold holding is already widespread as an investment (a saving and tail-risk-hedging) vehicle, as noted, but convenient gold payment mechanisms have been lacking. The enterprise called E-gold was a prototype — a service for individuals to buy, hold, and easily transfer gold account balances — until it was shut down by US authorities in 2005 for nonconformity with US Treasury “anti-money-laundering” and “know your customer” rules. The upcoming new enterprises all promise to comply with AML and KYC requirements for money service businesses.

A gold-denominated digital payment system will have to operate very differently from bitcoin (or any other cryptocurrency). For this reason it is highly misleading to call it “Cryptocurrency backed by gold” as one promotional article has.

A gold-backed account or digital token rests on a commitment to redemption at par, or a price commitment, by contrast to bitcoin’s commitment to the quantity in circulation. The payment processing system will also be different. It cannot be purely peer-to-peer because it requires a gold vault-keeper or equivalent trusted intermediary to maintain the price commitment. But the use of a single trusted limited-access ledger, rather than Bitcoin’s distributed trustless open ledger with its massive duplication in record-keeping, brings a large advantage in the speed and cheapness of payment processing.

Investment Platforms

The first three projects I will describe do not aim at providing a payment system so much as a low-cost platform for investing in gold. Think of them as would-be competitors to gold ETFs or to bullion warehousing services with easy conversions from and into US dollars, like GoldMoney. I will then turn to projects with more potential to generate a sizable payment system.

1. Royal Mint Gold

On its website, Royal Mint Gold (RMG®) calls itself “The New Digital Gold Standard.” This is misleading because, unlike a gold standard in the usual sense, it isn’t a payment system. It elsewhere more accurately calls itself “an investment product” and “a new, cost-effective, convenient and secure way to trade physical gold” with online access and distributed-ledger transparency.

RMG, which promises to come online before the end of 2017, offers much to interest gold investors. It partners The Royal Mint (hereafter TRM), owned by the UK government, with the Chicago Mercantile Exchange (CME). Both are venerable and credible. (There was talk about privatizing TRM in 2011, but it didn’t happen. As a state-owned enterprise, does TRM enjoy sovereign immunity against lawsuits? I don’t know.) TRM will manage the gold vault, and the CME Group will provide the trading platform for electronic warehouse claims to allocated gold in the vault. The RMG system promises that “For every RMG that’s on the network, there’s one gram of gold that’s sitting in our vault.” A proprietary blockchain will be used to record and track whose gold is in the Royal Mint vault. There will be “live, transparent pricing” on the CME trading platform.

To attract gold investors, RMG promises zero “ongoing” management and storage costs. The RMG webpage compares how value grows with the price of gold under its 0% fees, “giving an investment in RMG a projected higher return than physical gold” held in “a traditional gold ETF [that] is assumed to charge an average 0.4% annual storage and management fee.” But where, you might cynically wonder, do the revenues come from to cover TRM’s vault costs?

Here: You buy in at a premium over the spot price of gold (how high is not yet revealed), so TRM gets some float. (They promise to maintain the premium by buying back unwanted RMG as necessary.) You sell out for a transaction fee. You can cash out, and take physical delivery of gold, only in the form of “physical gold bars and coins produced by The Royal Mint,” for which there is a “fabrication and delivery” fee that is presumably large (not yet specified, and it is not clear whether it will be contractually fixed in advance.)

A system that runs on transaction fees even for internal transfers among account-holders discourages using its accounts as checking accounts.

How big does RMG hope to be? “The initial amount of RMG at launch could be up to $1 billion worth of gold. It will be offered through investment providers. Further RMG will then be issued based on market demand.” For perspective, gold ETFs added $2.3 billion on net in the second quarter of 2017.

To summarize, RMG is not a payment system or a currency, much less a cryptocurrency. It is a warehouse claim to gold in a specific vault. It will be salable to the extent that there are many bidders for claims to gold in that vault, but you can’t transfer it to another RMG holder at a zero transaction fee, like writing a check, the way you could with E-gold.

Incidentally, there are two London wholesale payment systems marrying gold to blockchain. A Bloomberg Markets article explains the business case:

About $27 billion of gold changes hands every day in over-the-counter markets where settlements can sometimes take days, leaving price risk for buyers and sellers. Using blockchain promises more transparency, security and speedier deals.

One project to provide this service is called Tradewind, supposed to launch in early 2018. Another is Bankchain Precious Metals. Tradewind promises to provide “a distributed ledger that will handle trade settlement, account management and record-keeping.” Bankchain Precious Metals promises “the instantaneous transfer of payments and ownership of the bullion stored in various vaults in London.”

2. OneGram

Launched in Dubai, OneGram offers a gold-backed (and Sharia-compliant) cryptoasset with blockchain features. Investors in OneGram will be shareholders in a vault full of gold, and will profit as and when the vault accumulates more gold per share.

Its white paper explains:

OneGram aims [at] using blockchain technology to create a new kind of cryptocurrency, where each coin is backed by one gram of gold at launch. In addition, each transaction of OneGram Coin (OGC) generates a small transaction fee which is reinvested in more gold (net of admin costs), thus increasing the amount of gold that backs each OneGram. Therefore, each OGC increases in real value over time, making OneGram unique among cryptocurrencies.

The vault will be located in the Dubai Airport Free Zone. OneGram promises that it will be audited by PricewaterhouseCoopers.

OneGram promotes its cryptoasset as a payment medium, declaring that the “payment institution license is already in place.” But transfers of OGC will be subject to a transaction fee of 1%. The promoters call the fee “small,” but it is high enough compared to ordinary deposit transfer to discourage using OGC as a payment medium.

How the price of gold will be continuously transmitted to the OGC cryptocoin is unclear, because it isn’t clear how the cryptocoin can be converted into the quantity of gold that it is supposed to represent. OneGram promises to have a “payment gateway” for OGC in Dubai and Abu Dhabi, “with fiat conversion.” But how conversion to fiat will be priced is not specified.

OneGram’s ICO (initial coin offering) ran from May 21 through September 4, 2017. It offered 12,400,786 coins, priced at the spot price of one gram of gold (which averaged around $41 during the period) plus 10%, for total revenue of about $550 million if all the coins sold. A  September 6 press release, which announced that the initial coin sale had ended, curiously omitted mention of the quantity of coins actually sold. It also announced that launch of the cryptocoin has been pushed back from October 2017 to “the first quarter of 2018 to ensure that we launch a solid and secure technology solution.”

Critically limiting the potential of OGC to become an important medium of exchange is the feature that no more OGC will be created even if new adopters want in: “100% of total coin supply is pre-mined.” This means that the size of OneGram payment community in value terms will at most grow only slowly with transaction fees, assuming that the price of OGC remains tied to the value of the gold in the vault.

3. OzCoinGold

Much like OneGram, the Australian/American project OzCoinGold promises a limited issue (in this case 100,000 troy ounces maximum, giving a potential market cap of only $128 million at the recent gold price of $1280 per ounce). As with OneGram, the quantity limit prevents widespread use as a medium of exchange. Each cryptoasset token, labelled OzGLD, will be “100% backed” by gold, but with two catches: only one-third of the gold reserves will be above ground as bullion (the other two-thirds will be the proven reserves of a gold mining company), and the tokens can be redeemed for gold only after five years. Audit reports will be uploaded to a blockchain. Accordingly the main sales pitch is as an investment vehicle: it hopes to be “the easiest, most effective and cheapest way to own or invest in gold.”

Payments Platforms

Moving on to gold-blockchain combinations better designed to be payment services, I consider four, beginning with those farthest from launch.

1. Digix Gold Tokens

Although its software is not yet fully coded, the developers of Digix gold tokens have at least spelled out their concept in detail. Digix is headquartered in London. As explained in a press release on Medium, Digix aims at “tokenizing valuable real-world assets” on the Ethereum blockchain. It “intends to be the first to launch a fully trackable and auditable crypto gold token.” A DGX 1 token “contains the right to 1 gram of gold that is stored in an audited vault.” As a claim to gold, like a transferable warehouse receipt, the token “can be easily traded or pledged against a loan without moving the physical gold” from its vault. Validity of ownership is certified through a “Proof of Asset protocol.”

What exactly does it mean to “tokenize” gold? Consider a universal open shared ledger, running on top of the Ethereum blockchain, that records ownership, and transfers of ownership, of a numbered 10g gold bar stored in a known vault. The gold bar has been “tokenized.” As with a unit of bitcoin, once I record a transfer of ownership to you on the blockchain, you can now further pass on the token, or redeem it, and I no longer can.

In other words, DGX is a spendable digital warehouse claim for gold, with ownership validation on the Ethereum blockchain. Of course, payment by transferring claims to vault gold without moving the gold is pretty old hat. Italian banks were doing it around 1200 AD. What’s new is that these claims are warehouse rather than debt claims, and transfers take place in currency-like fashion on the blockchain rather than by use of named account balances on the books of the depository.

The Digix sales pitch is both to gold investors, and to transactors who want to hold purchasing power in spendable cryptoasset form at least temporarily. Unlike unbacked IOU-nothing cryptocurrencies, DGX tokens are claims to physical gold expected to trade at a price tied to the price of physical gold. Gold exhibits less purchasing power volatility than BTC or ETH.

But if reduced volatility of purchasing power is what you want, why not hold the cryptoasset Tether, the price of which has been held fairly steady (so far) at $1? Some people don’t trust Tether. Tether claims to have 100% dollar reserves parked in audited accounts in licensed banks, but it lacks full transparency and there has been controversy over its terms of service. Digix promises greater transparency: warehousing of gold in vaults that are certified members of LMBA, the London Metal Bullion Association, with “Realtime Transparency; immutable on-chain auditing records for your viewing from Inspectorate and PWC; accessible at anytime, anywhere.”

To warehouse your gold, whether purely for storage or (combined with a transfer mechanism) for use as a payment medium, requires you to pay a fee to cover the cost of storage. A typical arrangement is for the warehouse to deduct a percentage storage fee periodically from each account. Gold ETFs typically charge around 0.4% per year. If there is a transfer mechanism, the warehouse may also charge a transaction fee when fulfilling a transfer request. The planned Digix fees appear to be similar to ETF fees. Storage fees will be 0.4% per year to the vault owner. In addition, an Administration fee of 0.2% per year will be charged by the Digix organization, making total annual fees 0.6%. Transaction fees will be 0.1% of transacted amount.

The medieval Italian banks already mentioned introduced the option of accounts with lower fees for customers who wanted not pure storage but rather transaction services, a way to pay people without lugging gold coins around. Such customers brought in loose rather than bagged coins, and consented to fractional reserves, allowing the bank to cover its (reduced) storage costs by interest earned in lending out most of the gold. The advantage for the bank was of course the interest income on the coins lent out. The advantage to the customer was lower storage and transaction fees. Competition among fractional-reserve banks soon reduced storage fees to zero, and even led banks to pay interest on transaction accounts.

Digix promises to tie the price of DGX to the price of gold the old-fashioned way, by redeemability: “Physical Gold Redeemable at any time at our partnering custodial vaults.” The holder of DGX can “Redeem 100 DGX tokens for 100g of physical gold” in person or by mail. However it has not yet specified whether redemption will be at a zero or a positive price. In traditional banking the redemption fee is zero, but it can be zero in this warehousing system only if storage fees are high enough.

The most impressive evidence that Digix intends to promote DGX as a widely used medium of exchange is that they have partnered with a payment card provider (Monolith Studio, whose platform is called TokenCard) to provide an “Ethereum powered” gold-backed debit card. The announced aim is “to ensure gold tokens can be spent efficiently at minimal cost.”

The intriguing vision of Digix and TokenCard is that people will put themselves on a new digital gold standard. A news account quotes Monolith’s co-founder as saying: “Together with Digix, we will be able to offer one of the only true commodity backed debit cards, and bring back the gold standard in a meaningful way.”

2. Glint

The Glint webpage describes its project as a “new global currency, account and app.” Although it says that the project is “Launching in Q4 2017,” no specific roll-out date is offered. Headquartered in London, Glint Pay Services Ltd claims “permission to issue electronic money and provide payment services” from the Financial Conduct Authority under the Bank of England. Its co-founder is CEO of GoldMadeSimple.com, an online bullion dealer.

The project has curiously little press coverage online, only a single article which reads like a paid press-release placement. It is very sketchy on details. “Glint is a stealthy London fintech startup that promises to turn gold into a ‘new global currency’. … Glint will offer a frictionless way to both store and spend your money in gold, including at the point of sale, just like a regular local currency. The bigger picture is that gold historically has been a better storage of value than any government-created currency, and therefore — with the aid of technology — is (arguably) a good candidate for an alternative global currency.”

Obviously more details are needed.

3. DinarCoin (DNC)

Despite “dinar” being the Arabic name for a gold coin (derived from the Roman denarius), DinarCoin (DNC) is not linked to Islamic finance. The parent firm DinarDirham is registered in Hong Kong, with offices in Singapore and Kuala Lumpur. It describes the DNC as a “unique digital currency created … on the Ethereum blockchain. The value of each DNC is based on the worldwide gold spot price. DNC can be used for trading, investment and also to make payments.”

Here’s the sales pitch:

If you’re a person that’s interested in precious metals, but are concerned with storage, security, and actually being able to use your metals as cash for purchases, then DinarDirham is for you. You can actually store, secure, and use your gold on the blockchain, and have the ease and convenience of not needing to have it on your person, and accessing it worldwide in minutes.

It will be

a simpler way to transfer gold, as akin to PayPal with dollars. The aim of the DinarDirham is not only to provide additional value and stability to the coin but also to perpetuate the use of bullion as an accepted form of digital currency.

Of course, physical gold isn’t stored on the blockchain. But the record of a contractual claim to gold can be. The promoters promise that “For the lifetime of a DNC a corresponding value of XAU [physical gold] will be held in escrow.  … [W]hen DNC is created it is registered on the Ethereum Blockchain and the Bitcoin Blockchain. The total amount of DNC in circulation can be verified on either Blockchain, and audited against the total XAU held in escrow … by DinarDirham.” Of course, the accuracy of such a comparison is only as great as the accuracy of the reports of the “total XAU held in escrow.” Unlike consensus-validated bitcoin ledger changes, the accuracy of unilaterally altered ledger entries relating to external facts, like the volume of vaulted gold held by DinarDirham, is not ensured by the blockchain.

Unlike OneGram, the volume of DNC payments has the capacity to grow should it catch on as a medium of exchange. If demand growth begins to push the bid price of DNC slightly above the spot price of gold, either the parent firm or one of its “liquidity providers” stands to make an arbitrage profit by buying physical gold, putting it in an escrow vault, and selling additional DNC into the market, until the premium subsides. The vaults are associated with Associated Bullion Exchange, an electronic exchange for allocated precious metals in storage.

The “redemption” mechanism is not straightforward. DNC “can be redeemed for physical gold,” the website says, via a DinarDirham blockchain-recorded digital asset called a Gold Smart Contract (GSC). Unless 1 DNC can always procure 1 GSC, however, “used to purchase” would be more accurate than “redeemed for.” Another account does say that a DNC holder can “purchase” a GSC and then use it “to collect gold from one of many available vaults.” If in fact 1 DNC trades at a variable price for 1 GSC, which is redeemable for 1 gram of gold, it isn’t clear how the price of DNC is supposed to be pegged to the price of gold.

The announced payment-system plans are ambitious. The CEO says:

We are building an entire ecosystem around DinarCoin — exchange, DinarCoin ATM, merchant gateway and debit cards to allow our users to use their digital assets anywhere in the world. Also, physical Dinar Gold Coin (4.25 grams) is already available to order in South East Asia.

How far along is the project right now? Unclear. It hasn’t posted much lately. DNC isn’t listed on CoinMarketCap. I could not find any report on the value of DNC coins currently in circulation.

4. GoldMint

GoldMint is based in Russia. Surf to its webpage from a US location, and you are immediately confronted by a black drop-down box that declares that you may not invest in its ICO if you are domiciled in the US, Canada, China, or Singapore. Its first phase is an ICO ending this month (hoped-for sales, $49 million) for a token called MNTP. A “prelaunch” coin running on the Ethereum blockchain, MNTP will migrate in Q2 2018 to become MNT — the “stake” in the proof-of-stake GoldMint blockchain — which will process transactions in a gold-backed cryptoasset confusingly named GOLD (all caps).

What is most novel and remarkable about GoldMint is that the parent firm claims to be developing hardware called “Custody Bot automated storage facilities,” which it plans to deploy at pawn shops and shopping centers worldwide. Custody Bots will be “programmed to automatically identify and store gold jewelry, small ingots (up to 100 grams) and coins, without human intervention,” taking escrow custody of them for people who want to take out loans collateralized by the gold. (Loans collateralized by gold jewelry are already popular in India, by the way.) Through the spread of Custody Bot automated storage facilities, according to the GoldMint white paper, the firm hopes eventually to handle the storage of gold reserves worth, in US dollars, tens of billions.

More importantly for currency purposes, Bot-stored gold can alternatively be tokenized and traded as the cryptoasset GOLD, which “will become the trading unit for these operations.” GoldMint promises that units of GOLD will always be “100% backed by physical gold and ETF” that the firm holds.

Because the price of gold is less volatile than the price of bitcoin, the firm’s pitch goes, “Crypto traders and enthusiasts can hedge the risks of storing their assets in [a] highly volatile crypto market environment by transferring their savings to cryptoassets GOLD. [Also:] Low volatile GOLD cryptoassets can be used as a payment unit both for companies and individuals.”

GoldMint will not redeem GOLD for gold at par, but it promises to sell you 1 GOLD cryptoasset for a 5% premium over the London spot price of one ounce of gold, and to buy it back at a 3% premium. Thus the total fee for making the round-trip fiat-GOLD-fiat will be 2%. In addition it will assess an “On-Chain transaction fee” of 0.3%, three-fourths of which will go to the miners on the GoldMint blockchain. These seem like fairly competitive fees.

The most important questions about the potential of GoldMint as an important gold-backed currency are about the trustworthiness of its buyback promise, and the reliability of its blockchain for payment validation.

Conclusion

I am not endorsing or recommending investment in any of these projects. Caveat emptor. But I think the last three listed warrant our attention as attempts, in the spirit of E-gold, to provide modern gold-based payment systems with online access. All three explicitly promise not to hold fractional reserves, and say that you can track the volume of cryptoasset on their ledger to see that it matches the number of gold grams or ounces held in their vaults. But if one of them becomes popular as a one-hundred-percent-reserved  gold payment system, perhaps a subsequent innovator will offer zero storage fees and interest on account balances by re-introducing gold-denominated fractional reserve banking. Such a bank, supposing that it surmounts legal obstacles but lacks government deposit insurance, would have to provide as much transparency as potential clients demand to show that it has enough gold and other liquid assets available to redeem promptly all claims that are likely to be presented.

Stay tuned.

[Cross-posted from Alt-M.org]

A recent paper by David Autor of MIT, Lawrence Katz of Harvard and others, “The Fall of the Labor Share and the Rise of Superstar Firms,” begins by posing a mystery: “The fall of labor’s share of GDP in the United States and many other countries in recent decades is well documented but its causes remain uncertain.”  They construct a model to blame it on U.S. businesses that are too successful with consumers.  

Five broad industries, they found, became more dominated by fewer firms between 1982 and 2012: retailing, finance, wholesaling, manufacturing and services. But those aren’t industries at all, much less relevant markets: they’re gigantic, diverse sectors. Is all manufacturing becoming monopolized? Really? Census data ignores imports, but why ruin this bad story with good facts.

Noah Smith at Bloomberg ran an audacious headline about this tenuous paper: “Monopolies drive down labor’s share of GDP.” Smith writes that, “The division of the economy into labor and capital is one place where Karl Marx has left an enduring legacy on the economics profession.” He goes on to claim that “at least since 2000 – and possibly since the 1970s – capital has been taking steadily more of the pie.” Yet, Jason Furman and Peter Orszag found “the decline in the labor share of income is not due to an increase in the share of income going to productive capital—which has largely been stable—but instead is due to the increased share of income going to housing capital.” Depreciation and government, they noted, also gained an increased share (i.e., grew faster than labor income.) 

President Obama’s Council of Economic Advisers, under Jason Furman, nonetheless worried that the 50 [!] largest firms in just 10 “industries” (if you can imagine retailing and real estate to be industries) had a larger share of sales in 2012 than in 1997 (using Census data that excludes imports). They concluded that, “many industries may be becoming more concentrated.” Noah Smith, Paul Krugman and many others have suggested that this nebulous “concentration” allowed monopoly profits to rise at the expense of the working class, supposedly explaining labor’s falling share of GDP during the high-tech boom. A quixotic search for even one actual example of monopoly soon morphed into advice about using unconstrained antitrust to constrain Amazon, which is apparently feared to have monopoly profits invisible to the rest of us.  

Research that starts with such a meaningless question as “labor’s share of GDP” was never likely to lead us to any profound answers. Workers do not receive shares of GDP – they receive shares of personal or household income.   

Contrary to popular confusion, dividing employee compensation (wages and benefits) by GDP does not measure how a capitalist private economy (e.g., “superstar firms”) divides income between labor and capital. Most obviously, the government makes up a huge share of GDP, including nonmarket goods like defense and public schools. Nonprofits also account for a lot of GDP, with no obvious payout to labor or capital. Less obviously, depreciation makes up another huge share of GDP, including wear and tear on public highways and bridges as well as private equipment, homes, and buildings. The “imputed rent on owner-occupied homes” is another large piece of GDP. Asking if labor is getting a fair share of defense, depreciation and imputed rent is a truly foolish question. Net private factor income would be a better gauge than GDP, for the purpose at hand, but still flawed.  

The ratio of compensation to GDP uses the wrong numerator as well as an untenable denominator. Labor income must add the labor of self-employed proprietors.

When people say “labor’s share is falling,” they surely mean income people receive from work has not kept up with income people (often the same people) receive from property: dividends, interest, and rent. But, that crude Piketty-Marx labor/capital dichotomy ignores another increasingly important source of personal income: namely, government transfer payments from taxpayers to those entitled to cash and in-kind benefits.  

The first graph shows shares of income from labor, property, and transfers. The property share peaked at 21.1% in 1984-85, as the Fed kept interest rates very high, but averaged 19.3% and was 19.4% in 2016 (after dropping to 17.8% in 2009).  The labor share averaged 66.5% but was 63.3% in 2016 even though property owners’ share was virtually flat. What went up? Transfer payments. Transfers rose from 11.7% of personal income in 1988 to 17.4% in 2016. Personal income that has been growing persistently faster than income from work has not been income from property (since the 1980s), but income from Social Security, Disability, Medicare, Medicaid, EITC, TANF, SNAP, SSI, UI, and so on.

Some might object that personal income leaves out retained corporate profits. But profits not paid out as dividends add to people’s income only if they are reinvested wisely enough to lift the value of the firm and thus generate capital gains. Personal income excludes capital gains because national income statistics measure flows of income from current production, not asset sales. That is also true of GDP, adding another reason to discard GDP as the basis of comparison.

However, Congressional Budget Office reports on the distribution of income do include realized capital gains when assets are sold (turning wealth into income). 

The second graph shows that labor’s share of household income is highest in deep recessions (77.5% in 1982, 76.2% in 2009) and lowest at cyclical peaks (70.6% in 2000, 68.3% in 2007). The higher labor share in recessions does not mean recessions are good for workers, of course, but that they are even worse for business and investors. Those who equate a higher labor share of income (e.g., during recessions) with higher real income for workers are making a basic and very large mistake. 

Capital income was highest in the early 1980s because the Federal Reserve kept interest rates very high, and capital income (dividends, interest, and rent) has shown no upward trend since then. Dividends and rent are up, but interest income is down.

Capital gains rose at specific times, but there has been no upward trend. There was a spike in capital gains in 1986 because the tax on gains jumped to 28% the following year. Realized gains also rose for four years after the capital gains tax was brought back down to 20% in 1997, and again after the capital gains tax was cut to 15% in mid-2003.

The white space at the top is important because it increases by four percentage points from 1990 (15.3%) to 2016 (20.3%) while labor’s share fell by 2.5 percentage points (from 75% to 72.5%). That white space is transfer payments: income from neither labor or capital. As the first graph showed, labor’s somewhat smaller share of income is not because of any sustained rise of capital income or capital gains. It is because of a sustained rise in the share of income from transfer payments and a sustained fall in the labor force participation rate.

Meanwhile, household income from owning a closely-held private business doubled since 1986: from 4% of household income in 1986 to 8% in 2013. That reflects the well-known shift of income from corporate to “pass-through” entities after 1986 as the top individual tax rate became even lower than the corporate tax rate (1988-92) or about the same dropped to the same as the corporate rate (35% 2003-2012)) or lower. That did not mean that “business” grabbed a bigger share at the expense of “labor,” but that a larger share of business income shifted from corporate to personal data.

The frequently repeated angst about “the fall of labor’s share of GDP in the United States” is based on a serious yet elementary misunderstanding of both labor income and GDP. “Labor’s share of GDP” is fundamentally nonsensical, because so much of GDP (depreciation, defense, etc.) could not possibly be paid to workers, and because the measure of labor income is too narrow (excluding the self-employed). 

Labor’s share of the CBO’s broadly-defined household income also fell (unevenly) because the share devoted to transfers rose, but also because the share moved from corporate to household accounts (and individual tax returns) also rose. Business income counted within CBO’s household income has increased its share of such income since the Tax Reform Act of 1986, but that just reflects a change in organizational form from C-Corporation to pass-through status.

Labor’s share of personal income fell mainly because the share devoted to government transfer payments rose. Labor’s share of GDP fell for other reasons (rising shares going to housing, government, and depreciation), but it is a fundamentally misconstrued statistic used to rationalize irresponsible remedies to an illusory problem of “monopolies.”

 

 

Because the Second Amendment protects the right to bear all arms in common lawful use, any law that limits that right has to pass certain standards to be constitutionally permissible. The courts haven’t yet ironed out exactly what kind of scrutiny laws implicating the Second Amendment must pass, but such laws must have an important government objective and not be so broad as to burden protected activities unrelated to the harm they’re designed to address.

California requires most firearm purchasers to wait 10 days before they can bring their gun home, regardless of whether they already own one, or how long it takes to pass a background check. Several California residents who already own firearms challenged the 10-day waiting period and prevailed in federal district court because the state could only assert a general interest in a “cooling off” period.

The U.S. Court of Appeals for the Ninth Circuit ignored that the burden was on California to prove its case—and the state could show no evidence that the wait would have any public-safety effect when the purchaser already owns other arms. Instead, the court speculated as to what kind of harms the law might conceivably prevent, not any important interest it does actually serve. In the face of a decision that would allow California to arbitrarily infringe their Second Amendment rights, the challengers now seek Supreme Court review.

Cato has filed a brief supporting their petition. Silvester v. Becerra is an important case that the Court should not let slip by, because it presents an opportunity to provide much needed guidance in an area where lower courts have failed to reach a consensus on anything from what is protected by the right to keep and bear arms to the appropriate level of scrutiny judges should apply when considering lawsuits involving Second Amendment rights.

The morass of case law that has developed since District of Columbia v. Heller (2008) and McDonald v. City of Chicago (2010) is so divergent that the opinions of individual circuits read as though there was no precedent in this area whatsoever. From the Fourth Circuit’s holding that common semi-automatic weapons are “beyond the scope” of constitutional protection, to the Second Circuit’s deciding that only “severe” restrictions of the right to bear arms warrant any form of heightened scrutiny, all that’s clear is that the Supreme Court needs to clarify what hurdles the government must cross to justify violating what it itself held in Heller is a fundamental right.

The case here is quite narrow, covering only the application of an arbitrary waiting period to people who already own guns. The Court’s input, then, would not upset the diverse tapestry of gun laws that have developed across the country. Instead, it could help enable lower courts to competently move forward in developing Second Amendment jurisprudence. Because the case is small, the facts straightforward, the error below so clear, and the issue so constitutionally significant, the Supreme Court should step in and remind the Ninth Circuit what was said in McDonald, that the Second Amendment is not a “second-class” right for the circuit courts to “single out for special—and specially unfavorable—treatment.”

The Washington Post sums up the situation:

It was a party scarred by the madness, cruelty and famine that one man had prompted through disastrous policies….

Senior officials lined up, one after the other, to laud what they described as [the leader’s] profound, courageous, thrilling, insightful masterpiece of a speech….

And the drumbeat of propaganda about loyalty to his leadership — combined with the constant threat of an unforgiving … campaign that has taken down several powerful rivals — makes it more difficult for anyone who dares challenge him….

[His] message promotes a nationalist, assertive [country] with a much stronger military — a country that he says will not threaten the world but will resolutely defend its interests.

If you are uncertain about which country and which leader, click here.

Campaign finance has captured Congress’s attention once again, which rarely bodes well for democracy. Senators Amy Klobuchar, Mark Warner, and (of course) John McCain have introduced the Honest Ads Act. The bill requires “those who purchase and publish [online political advertisements]to disclose information about the advertisements to the public…”

Specifically, the bill requires those who paid for an online ad to disclose their name and additional information in the ad itself or in another fashion that can be easily accessed. The bill takes several pages to specify exactly how these disclosures should look or sound. The bill also requires those who purchase $500 or more of ads to disclose substantial information about themselves; what must be disclosed takes up a page and a half of the bill.

The Federal Election Commission makes disclosed campaign contributions public. With this bill, large Internet companies (that is, platforms with 50 million unique visitors from the United States monthly) are given that task. They are supposed to maintain records about ads that concern “any political matter of national importance.” This category goes well beyond speech seeking to elect or defeat a candidate for office.

Why does the nation need this new law? The bill discusses Russian efforts to affect the 2016 election. It mentions the $100,000 spent by “Russian entities” to purchase 3,000 ads. The bill does not mention that Mark Penn, a former campaign advisor to Bill and Hillary Clinton, has estimated that only $6,500 of the $100,000 actually sought to elect or defeat a candidate for office. It also omits Penn’s sense of perspective:

Hillary Clinton’s total campaign budget, including associated committees, was $1.4 billion. Mr. Trump and his allies had about $1 billion. Even a full $100,000 of Russian ads would have erased just 0.025% of Hillary’s financial advantage. In the last week of the campaign alone, Mrs. Clinton’s super PAC dumped $6 million in ads into Florida, Pennsylvania and Wisconsin.

Still, Congress has criminalized foreign nationals trying to spend any money to influence American elections. You would think the “Russian intervention” would be a matter for the Department of Justice or other federal law enforcement agencies. Instead, everyone has to disclose their political activities, and tech companies have to make “reasonable efforts” to make sure foreign nationals do not buy political ads on any subject whatever. What will constitute “reasonable efforts”? Congress will presumably decide. Meanwhile tech companies will have to guess, and they can hardly be expected to err on the side of free speech. After all, ads that do not appear are hardly a cost to Congress. But unintentionally running an ad by a foreign national could severely damage a tech company. The companies have incentives to make Congress happy. Some protected speech will be excluded.

The bill is not just about Russia and an unexpected election outcome in 2016. It states that “the electorate bears the right to be fully informed” about “political advertisements made online.” What is the source of this right? The Constitution contains no explicit “right to be fully informed.” Perhaps it is a penumbra or emanation of the First Amendment or other parts of the Constitution? Or maybe one of the unenumerated rights alluded to in the Ninth Amendment? No, this is just Congress doing what it wants to do anyway and using the language of the Constitution. The putative “right to be fully informed” is really a sign of how far we have traveled from constitutional government.

Congress finds in this bill that the content of online speech justifies regulation:

Social media platforms…can target portions of the electorate with direct, ephemeral advertisements often on the basis of private information the platform has on individuals, enabling political advertisements that are contradictory, racially or socially inflammatory, or materially false [emphasis added].

Later, the bill laments that information on social media sites is often “uncurated,” “inaccurate,” or “more easily manipulable than in prior eras.”

Those familiar with the struggles over campaign finance in recent decades will recall that Congress often sees regulation of spending as way to improve speech. Unregulated spending supposedly contributed to “negative ads” which in turn harmed our democracy. In truth, negative ads attracted attention and increased voter turnout and knowledge.

The bill’s focus on allegedly “bad speech” raises two issues. First, mandating disclosure of who bought the ad may not improve the speech. Second, and more importantly, the content of speech is protected by the First Amendment. Congress does not have the power to “improve” speech by regulating ad financing or by any other means.

The larger picture here is more disturbing. Congress appears to be using a panic induced by Russian electoral meddling to impose itself on a largely unregulated Internet. Mandated disclosure of ad spending is the first but not the last step toward Facebook and Google becoming public utilities. Anyone who cares about free speech should be skeptical about such disclosure.

Last night, the Senate voted (51-50, with Vice President Pence breaking the tie) to repeal one of the most recent rules issued by the Consumer Financial Protection Bureau (CFPB). The rule would have prevented most financial companies from requiring that disputes between a company and its customers be determined through arbitration and without the use of class actions.

Those who support the rule have noted that the majority of contracts between customers and financial firms include clauses that require disputes to be resolved through arbitration, which means no class actions. This is true. Arbitration clauses are fairly standard in these contracts. But, as I said in an earlier post on the rule, the ubiquity of such clauses might just mean that customers are okay with them. If customers really cared about arbitration clauses, financial firms could distinguish themselves from competition by offering arbitration-free contracts. The lack of such options for customers seems to suggest that customers don’t really care.

The response to such an argument may be that these clauses are hidden in fine print and most customers don’t even know they exist. Okay, let’s say for the moment that’s true; that most customers didn’t know arbitration clauses existed. But that shouldn’t be the case now. Not now we’ve had national news about this rule, lots of debate, ample time for the rule’s supporters to educate the public, breaking news drama involving a late night vote in the Senate, and reports tracking the Vice President’s progress to the Hill to cast his deciding vote. My phone was flashing with news alerts all through the evening. If the public was unaware of arbitration clauses before, they have had plenty of opportunities now to become familiar with them.

So now, if the public really wants to be free of arbitration clauses, the next step is obvious, right? A company should emerge announcing that it is offering arbitration-free contracts for all of its customers. If arbitration harms consumers, as proponents of the rule have argued, consumers should clamor for contracts that allow them to go to court and to join together in class actions. Companies, including financial companies, make their money giving customers what they want. If arbitration-free contracts become popular, we will know that this was what consumers wanted. If they don’t become popular, well, we’ll have an answer then, too. But, either way, consumers will get what they want without a new regulation.

It was on the 16th anniversary of the 9-11 terrorist attack, as it happens, that the Government Accountability Office posted its reply to a request by six members of Congress to review the Transportation Security Commission’s aviation security measures.

The GAO was none too happy with what it found. In particular, it faulted the TSA for failing to set up a coherent system to analyze the cost and effectiveness of its various counterterrorism measures—many of them quite expensive. And it was specifically critical of TSA’s inability to evaluate the degree to which its layers of security deter attacks.

The following day, Elsevier published a book Mark Stewart and I have written, titled Are We Safe Enough? Measuring and Assessing Aviation Security. Among other things, the book tries (successfully, we think) to do exactly what the GAO asked for. A free Google preview of portions of the book is available at the publisher’s website, and further information about the book is posted here.

The TSA, says GAO, has put together a (secret) tool called RTSPA (you don’t want to know what that stands for) to analyze the effectiveness of its security layers. However, the tool only applies to a subset of the layers and is, according to GAO, “resource intensive.”

Ours, by contrast, has a full model of the security system mainly constructed by my co-author, a civil engineer and risk analyst at the University of Newcastle in Australia. It describes the effectiveness, risk reduction, and cost of each layer of security (including a few the TSA doesn’t include), from policing and intelligence, to checkpoint passenger screening, to armed pilots on the flight deck. It is also fully transparent and can be varied and sized-up with just a hand calculator.

Put into action, the model concludes that it is entirely possible to attain the same degree of safety at far lower cost by shifting expenditures from measures that provide little security at high cost to ones that provide more security at lower cost. One modest proposal, for example, would increase security while saving both the taxpayers and the airlines hundreds of millions of dollars every year.

In addition, the model strongly suggests that the PreCheck program not only generates a hundred million dollars a year in efficiency improvement, but billions of dollars of value in passenger satisfaction—all this while actually increasing security slightly.

And the model proves to be extremely robust: you can change the assumptions that make it up substantially without materially altering the conclusions it comes up with.

The book also tackles the deterrence issue—indeed, it is central to the model.

In general, the model is biased to favor the terrorist chances of success. For example, we do not include terrorist amateurishness and incompetence as a security layer—though we do discuss that issue extensively both in this book and in our previous one, Chasing Ghosts: The Policing of Terrorism. But even with that bias in place, a terrorist group’s chance of pulling off a successful on-board bombing is one in 50, while its chances of a successful hijacking are around one in 150.

That is likely to be an effective deterrent—pretty much taking airlines off the terrorists’ target list.

However, it is also important to consider whether there are actually many terrorists out there to deter. As both the GAO and the TSA recognize, terrorists deterred from attacking a hard target like an airliner can only too readily transfer their attention to any one of a nearly infinite number of other potential targets that are anything but secure—congregations of people in restaurants, in offices, at sporting events, or standing in security lines at the airport.

Yet terrorism, however tragic and newsworthy, remains a remarkably rare phenomenon in the United States and in the rest of the developed world—Islamist terrorists have killed a total of six people a year since 9/11 in the United States. If security measures were deterring large numbers of people from attacking airliners we would expect far more mayhem in other places.

Perhaps we are already safe enough.

In the latest edition of the Cato Journal, economist Bryan Roberts argues that immigration enforcement has significantly diminished the flow of illegal immigrants across the Southwest border. Contra Roberts, sociologist Doug Massey argues that border enforcement had virtually no impact on the flow of unlawful immigrants prior to 2010. This post takes a slightly different approach and uses additional sources of data to look at the causes behind the decline of illegal immigration in the aftermath of the Great Recession. This is especially relevant as the House Judiciary Committee is marking up the Agricultural Guest Worker Act (Ag Act) that would increase the flow of temporary visas for workers in farming and related sectors. An increase in visas like those supplied by the Ag Act will likely further diminish unauthorized border crossings. 

Model and Data

This blog is intended to reveal whether the quantity of Mexican legal immigrants (green cards issued overseas and temporary migrants) or border security is responsible for the decline of illegal immigrants from Mexico. Our dependent variable is the estimated gross annual flow of Mexican illegal immigrants. The American unemployment rate, the difference between Mexican and American GDP per capita (PPP), line-watch hours at the Southwest border, and legal Mexican immigration are our independent variables.

We chose a log-linear OLS model to compensate for non-linearity. OLS is a type of regression that helps identify the relationship between independent variables that we anticipate will explain how dependent variables behave. We then ran an autoregressive model (AR (1)) that will help us account for a particular empirical anomaly, the serial dependence between current and immediate past variables that could affect an OLS regression. We then ran a series of regressions with the yearly aggregates beginning in 1960 and ending in 2009. Data limitations prevented us from going beyond 2009 and prior to 1960.

Technical Note

We also ran numerous OLS, bi-weight, quantile, and AR(1) regressions that we excluded from Table 1 because they did not change the significance or signs of any of the coefficients. We tried sample-specific dummies for the combined datasets that did not change the significance of signs.

Data

Massey and Pren (2012) and Warren and Warren (2013) supply the estimates for the annual gross number of illegal Mexican entries.  Annual Immigration Yearbooks from the Department of Homeland Security and the old Immigration and Naturalization Service supply the number of temporary and permanent visas issued to Mexicans abroad. The Bureau of Labor Statistics supplied the American unemployment rate data and the World Bank supplied the relative U.S.-Mexican GDP per capita PPP.

Results

Table 1 reports results of the OLS regression (with robust standard errors in parentheses) and AR(1) for three datasets: the Massey and Pren (2012) data, the Warren and Warren (2013) data, and a combination of the two. When running AR(1), we included a lagged immigrant flow for the independent variable because immigrant flows tend to be dependent on the flows of the immediate past. We also included a lag of legal visas and GDP per capita PPP where we assume the decision to immigrate is based on the immediate past state of the economy and legal immigration trends. 

Our most robust finding is that more legal visas reduce the flow of illegal immigrants (Table 1). The variable is significant in five out of the six specifications. Line-watch hours are positively correlated with the flow of illegal immigrants in two specifications and negatively so in one. This isn’t surprising as Congress increases border security in response to greater unlawful immigrant flows. A higher unemployment rate is negatively related to illegal immigrant flows in three specifications while the difference between Mexican and U.S. GDP PPP is significant at the 5 percent level in only one.

Table 1

Effects of Legal Visas and Border Security on Gross Illegal Immigrant Flow for Mexicans

  Massey and Pren Combined M&P and Warren & Warren Warren & Warren   OLS AR (1) OLS AR (1) OLS AR (1) Legal visas   

 

-1.34   

(.16)***

-.16   

(.06)**

-1.20   

(.15)***

-.08   

(.04)*

-.40   

(.16)*

-.08   

(.13)

Line-watch hours .76   

(.14)***

-.09   

(.05)**

1.28   

(.13)***

-.03   

(.05)

.08   

(.12)

-.04   

(12)

Unemployment USA .15   

(.09)

.02   

(.01)

.06   

(0.8)

-.05   

(.01)***

-.17   

(.03)***

-.05   

(.02)**

USA-Mexico GDP (PPP) .28   

(.38)

-.25   

(.11)**

.24   

(.36)

-.02   

(.08)

-.25   

(.14)

-.01   

(.10)

Observations 49 48 49 48 28 27  RSQ .59 .98 .67 .95 .59 .88

* significant at 10%; ** significant at 5%; *** significant at 1%.

Standard errors in parentheses.

Figure 1 shows the statistically significant inverse relationship between the number of visas issued to Mexicans and the gross flow of illegal Mexican entries. The early period with a high number of legal entries shows the Bracero program. It is followed by a spike in gross Mexican illegal inflows that occurred when the number of legal entries is very low. The number of gross Mexican illegal entries declines most especially as the number of new entries increases in the 1990s and 2000s. We suspect that this relationship is causal – that more legal immigration reduces the flow of unlawful immigrants.

Figure 1

Annual Flows of Legal and Illegal Mexican Immigrants

Sources: Massey and Pren (2012), USCIS, and INS.

Conclusion

This simple OLS regression analysis shows an inverse relationship between flows of Mexican legal and illegal immigrants. These findings cry out for additional research to test how the number of visas affects illegal immigrant flows, especially by examining other measures of border security such as budgets, the number of agents, or apprehensions. The findings of this blog are broadly consistent with a small empirical literature on how border security affects immigration flows. Other researchers should use a more complicated model to account for the dynamics of illegal immigration, such as feedback effects that occur between border security and illegal flow. Time-series methods are one way to potentially address these effects. Regardless, this is some evidence that supports the theory that immigration liberalization will reduce illegal immigrant flows.

Special thanks to Jen Sidorova for her superb work on this blog post and the empirics that support it.

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