Policy Institutes

Inequality and the “one percent” have generated an inordinate amount of media coverage recently, despite the fact that these topics barely register when people are asked to name the country’s most important problem. The rhetoric often portrays the wealthy as a homogenous group that inherited its wealth, and those that do work operate almost exclusively in the financial sector. A recent study published in Intelligence this year that was highlighted by Tyler Cowen delved into the characteristics of wealthy individuals. The findings run contrary to the commonly held perception that this is a stagnant, homogeneous group. There is a significant amount of diversity when it comes to which industries these people work in, and a much higher share of the wealthy Americans in this sample are self-made compared to some European peers.

In their study, David Lincoln from Wealth-X and Jonathan Wai from Duke University use the Wealth-X database to analyze a sample of more than 18,000 ultra high net worth (UHNW) people, which they define as having a net worth greater than $30 million. Their findings help us get beyond the rhetoric to see how the wealthy got to that position.

Compared to some of the European countries most-often cited as models of equity, the United States has a significantly higher share of UHNW people whose wealth is primarily self-made: 75 percent in the United States compared to just 31.3 percent in Sweden, 42.5 percent in Norway, or 43.6 percent in Denmark.

In fact, only 12.6 of the American individuals analyzed derived most of their wealth from inheritance, a lower share than any European country in the sample besides Finland (9.1 percent, but with a much higher share with their primary source of wealth being a mix between inheritance and self-made) and the United Kingdom (12.5 percent).

Unlike the common portrayal, it is the European countries that has a more stagnant and stultified elite class, while the United States has one of the higher shares of self-made men and women in the study’s sample.

Ultra High Net Worth Individuals by Primary Source of Wealth, Select Countries

Source: Wai and Lincoln (2016), Appendix F. 

There is also a surprising amount of variation when it comes to the industries where UHNW people work. While the highest share is in finance and banking at just over 18 percent, a significant number of the people in the sample work in other industries like real estate, media, or IT services.

The composition of industries has changed over time and will continue to do so. This reflects another way that this group is ever-changing, especially in places like the United States, where there are more opportunities for founders, innovators, and entrepreneurs to reach the highest levels. 

Industries for Ultra High Net Worth Individuals 

Source: Wai and Lincoln (2016), Appendix G.

Note: Labels excluded for industries with smaller shares due to space constraints. A full list can be found in Appendix G of the paper.

The wealthy people in this sample are not a homogenous group, and there are significant variations when it comes to family composition, political affiliation, generosity, and religion, among other things. UHNW people take a number of different paths to attain their wealth, such as working in media, in manufacturing, or in tech companies. Compared to some of the European countries that are typically viewed as more egalitarian, more UHNW Americans acquired wealth that was self-made. In short, the issue is not as simple as the rhetoric often implies.

My colleague Michael Tanner recently released a paper looking at more of the common myths that surround the discussion of inequality, which can be found here.

An exchange in last night’s debate revealed the deep divide in this country over who should be allowed in the country. Audience member Gorbah Hamed posed a question to Donald Trump:

There are 3.3 million Muslims in the United States, and I’m one of them. You’ve mentioned working with Muslim nations, but with Islamophobia on the rise, how will you help people like me deal with the consequences of being labeled as a threat to the country after the election is over?

Trump responded:

Well, you’re right about Islamophobia, and that’s a shame. But one thing we have to do is we have to make sure that — because there is a problem. I mean, whether we like it or not, and we could be very politically correct, but whether we like it or not, there is a problem. And we have to be sure that Muslims come in and report when they see something going on. When they see hatred going on, they have to report it.


And [Clinton] won’t even mention [radical Islamic terrorists] and nor will President Obama. He won’t use the term “radical Islamic terrorism.” Now, to solve a problem, you have to be able to state what the problem is or at least say the name. She won’t say the name and President Obama won’t say the name. But the name is there. It’s radical Islamic terror. And before you solve it, you have to say the name.

Moderator Martha Raddatz asked Clinton to respond, and she launched into a predictable critique of the “divisive, dark things said about Muslims” during the campaign and concluding “we’re not at war with Islam.”

Raddatz then turned to Trump and asked him to explain whether his pledge in December to ban all Muslims from coming to the United States was still in effect. “Your running mate [Indiana Governor Mike Pence] said this week that the Muslim ban is no longer your position. Is that correct? And if it is, was it a mistake to have a religious test?”

Trump answered as follows:

The Muslim ban is something that in some form has morphed into a extreme vetting from certain areas of the world….We are going to areas like Syria where they’re coming in by the tens of thousands because of Barack Obama. And Hillary Clinton wants to allow a 550 percent increase over Obama. People are coming into our country like we have no idea who they are, where they are from, what their feelings about our country is, and she wants 550 percent more. This is going to be the great Trojan horse of all time.

We have enough problems in this country. I believe in building safe zones. I believe in having other people pay for them, as an example, the Gulf states, who are not carrying their weight, but they have nothing but money, and take care of people. But I don’t want to have, with all the problems this country has and all of the problems that you see going on, hundreds of thousands of people coming in from Syria when we know nothing about them. We know nothing about their values and we know nothing about their love for our country.

I predicted on Twitter that both campaigns would use Donald Trump’s answer to this question in advertisements. Trump’s response appeals to his hard-care supporters who were never troubled by the prospect of a Muslim ban, and who likely believe that “extreme vetting” is the same thing. Trump supporters, the latest polling clearly shows, believe that immigrants (including refugees) pose a “critical threat” to U.S. security. That this belief is utterly erroneous will not be rectified by facts. Some go so far as to wonder why there are any Muslims in the United States in the first place.

Though Hillary Clinton doesn’t revere the Constitution as much as Trump claims to – she notably didn’t mention respect for the Constitution as a key factor in judging potential Supreme Court nominees (h/t Matthew Feeney) – she presumably interprets Trump’s “extreme vetting” as synonymous with a religious test, which the Constitution explicitly forbids.

In a campaign marked by divisive rhetoric, Trump and Clinton’s answers mainly revealed the very deep chasm separating the people in this country, one that will not be healed after November.

Something striking happened last week: the Obama White House released its Housing Development Toolkit and Obama’s economic advisor, Jason Furman, wrote a follow-on op-ed about land use regulation’s negative consequences. While White House reports tend to be geared toward partisan political objectives, these two publications could have been written by non-partisan economists. Nevertheless, although the honest application of economic theory is welcome, libertarians will still find points of disagreement.

What’s good? The report highlights zoning policies’ influence on increasing housing prices, immobilizing workers in job deserts, creating costly uncertainty for developers, increasing inequality and racial segregation, and suppressing economic growth. These negative outcomes were attributed to “excessive barriers,” “unnecessarily slow permitting processes,” and “arbitrary or antiquated” zoning and land use regulations.

The White House even went so far as to say that “even well-intentioned land use policies” can have negative impacts. So far, so good.

What’s bad? The worst part of the report is the declaration that the President’s 2017 HUD budget includes a $300 million proposal for grants to help cities “modernize their housing regulatory approaches.” Since when does it cost $300 million to reduce regulation, which is all the “modernizing” that needs to be done?

The report also gets it wrong with some of its specific policy prescriptions. In order to increase housing supply, it not only suggests a range of deregulatory measures, but also various reregulations. For instance, the Toolkit recommends that vacant land be taxed at a higher rate, and that local governments require developers to build affordable units in exchange for development approvals.

In this way, the authors fall back into the original trap: they think that city officials know better than private citizens what should be built and where. But if the last century taught us anything, it should have taught us that officials are not more capable of guiding urban development than private citizens are. In fact, that brand of overconfidence is what got us into this housing supply crisis to begin with.

Finally, the authors seemingly approve of states dictating zoning and land use policies to their cities. This mentality overlooks the fact that cities often resort to zoning in order to protect their own interests when they feel threatened by intrusive state policies. Consequently, the worst thing state governments can do is squeeze their cities with more requirements, thereby providing more incentive for cities to assert local control through work-around policies.

So if the state or federal government can’t impose their will on cities, what can be done? If federal and state governments step aside, local community advocacy groups will step in. For example, in San Francisco, one of the most expensive and constrained urban markets, GrowSF and other groups are educating voters, canvassing neighborhoods in support of pro-growth policy, building a political coalition between democrats, conservatives, and libertarians, and filing lawsuits against burdensome regulations. This grassroots approach is how civil society is built, how consensus is built, and where lasting policy change occurs.

Paradoxically, the Toolkit even acknowledges the preeminent role that local preferences should play: “regions are better able to compete in the modern economy when … housing development is allowed to meet local needs” it declares. Who better to determine local needs than property owners and concerned citizens themselves?

(For more on the Toolkit, please see my colleague’s work here.) 

The rapid rise of the U.S. trade deficit with China after 1995 is often blamed on China joining the World Trade Organization (WTO) in 2001.  But the WTO is a simply a forum for arbitrating trade disputes, not a trade agreement (which must be legislated among countries).  

Yet according to Peter Navarro, Trump’s trade adviser, “The defining moment in American economic history is when Bill Clinton lobbied to get China into the World Trade Organization. It was the worst political and economic mistake in American history in the last 100 years… .The problem, right off the bat, was that China had much higher tariffs than everywhere else, so the U.S. and Europe in particular got the short end of that stick.”

In reality, China joining the WTO had zero effect on U.S. tariffs against Chinese imports. But it forced China to lay off 36 million workers in state enterprises, then cut industrial and agricultural tariffs by at least half by 2005 and more by 2010.  

U.S. tariffs were unchanged by China’s entry into WTO, remaining 2-3% on a weighted average. Since 1980 the U.S. has extended “normal trade relations” or “Most Favored Nation” status to China – as it does for every other nation but two (Cuba and North Korea).  MFN status simply means exemption from the infamous 1930 Smoot-Hawley tariffs, not exemption from the 3670-page U.S. Tariff Schedule.

To be accepted by WTO members (now 164), China had to shut down state industries after 1995 and greatly reduce its tariffs.  This was difficult and painful.  

In the China Economic Review, Michigan economists John Giles and Albert Park, with Juwei Zhang of the Chinese Academy of Social Sciences, investigated China’s True Unemployment Rate.  They found, “China’s … aggressive restructuring led to the layoffs of 45 million workers from 1995 to 2002, including 36 million from the state sector.”  If that was about “stealing jobs,” it certainly got off to a bad start.

John Hopkins economists Robert Moffitt and Yingyao Hu, with Shuaizhang Feng of Shanghai University, used detailed regional employment surveys, recently estimated the unemployment rate in China “averaged 3.9% in 1988-1995, when the labor market was highly regulated and dominated by state-owned enterprises, but rose sharply during the period of mass layoff from 1995- 2002, reaching an average of 10.9% … from 2002 to 2009.” 

Mass layoffs of 36 million workers at state enterprises were essential, despite the 10.9% unemployment for 8 years after joining WTO.  Such bloated tax firms could not possibly survive after China slashed tariffs, letting foreign goods compete.  Weighted average Chinese tariffs fell from 32.2% in 1992 to 19.8% in 1996, according World Bank estimates, then to 13.8% in 2000 and 4.6% by 2014.  

Exposing socialist enterprises to capital competition eventually paid off in higher productivity, lower costs and rising quality.  China’s exports then began to soar in the late 1990s largely as a result of this arduous 1995-2002 preparation for WTO trade standards, rather than from WTO membership per se.

Before joining WTO, China’s exports to the U.S. jumped from $38.8 billion in 1994 to 81.8 billion in 1999 and China’s global exports (in dollars) increased 14.2% a year.

One frequently misquoted source of the mistaken impression that China’s industrial gains were due to WTO membership is “The China Shock” by MIT economist David Autor and his colleagues David Dorn and Gordon Hanson.  A Wall Street Journal feature about China Shock said, “Imports from China as a percentage of U.S. economic output doubled within four years of China joining the World Trade Organization in 2001… . By last year, imports from China equaled 2.7% of U.S. gross domestic product.” 

That quote may appear to suggest U.S. imports surged after 2001, but it was Chinese imports that exploded. U.S. imports did recover modestly from 13.1% of GDP in the recession of 2001 to 15.5% in 2005, but imports always rise after recessions.  Contrast the U.S. cyclical uptick with China’s imports, which jumped spectacularly from 18.3% to 29.2% of GDP in those same years. China’s imports from the U.S. doubled from $24.8 billion in 2001 to $50.6 billion in 2005, before reaching $167.2 billion in 2014.  

In 2015 U.S. imports were still 15.5% of GDP – the same as 2005.  The fact that China’s share of U.S. imports was up and Japan’s down did not mean the U.S. was importing more – just importing from different countries.

The previous Wall Street Journal quote about what happened “after joining the World Trade Organization” gives the wrong impression that Autor, Dorn and Hanson attribute China’s export growth to joining the WTO. On the contrary, they attribute China’s export growth to proliferation of Special Economic Zones with freer markets. Autor says his study “strongly confirmed” that China’s success was driven by “falling costs and rising quality”.

When talking excitedly about trade deficits and trade deals, both Presidential candidates have been marching voters down a dark dead-end street. Trump and Clinton both claim larger imports or trade deficits are associated with weaker economic growth, which is the opposite of our experience.  And both attribute U.S. trade deficits to bad “trade deals” with a few smaller countries (while remaining curiously silent about Germany). Yet the largest trade deficits are with countries with which the U.S. has not yet negotiated any trade agreements.  

Before peddling risky solutions to a misperceived trade problem – such as threatening huge tariffs on countries or U.S. companies – the candidates might first take more care to understand, define and explain what problem they are hoping to fix.

In the first Presidential debate, Hillary Clinton and Donald Trump managed to agree on one thing.  Unfortunately, they were both wrong.

What they agreed about is that trade deficits are due to “bad trade deals.”  Clinton said “we need to have smart, fair trade deals” and “hold people accountable.” Trump said, “We have to renegotiate our trade deals.”  Hillary voted against CAFTA, while Trump hates NAFTA.  Both dismissed the Trans-Pacific Partnership as just another foolish trade agreement.  

The trouble is our largest trade deficits are with countries with which the U.S. has no trade agreements – namely China ($334.1 billion in 2015) and the European Union ($102.9 billion).  We also have no trade deal with Japan, which is tied with Mexico for a poor third place ($55-58 billion) far behind Germany ($77.3 billion)

In other words, three of our four biggest trade deficits have nothing to do with trade agreements because such agreements don’t exist. Trump can’t “renegotiate” trade deals that were never negotiated.

The U.S. also has trade surpluses.  We ran a $31.7 billion trade surplus with Hong Kong last year, which is obviously part of China.  We ran a $6.1 billion surplus with Canada, $10.4 billion with Singapore, $12 billion with the U.K., $30.9 billion with OPEC countries, and $87 billion with South and Central America, plus $28.9 billion with various “other countries.”  Although a few trade surplus partners have Free Trade Agreements with the U.S. (Singapore, Canada and CAFTA), it would be incongruous if not ridiculous to attribute both surpluses and deficits to trade agreements.

In short, this entire bipartisan hullabaloo about some alleged link between trade deals and trade deficits is simply false – political fiction.           

In 2015, Nevada lawmakers passed the most ambitious educational choice law in the nation: a nearly universal education savings account (ESA) program. The program was scheduled to launch this year, but it immediately drew two separate lawsuits from opponents of educational choice. Last week, the Supreme Court of Nevada upheld the constitutionality of the ESAs, but ruled that the program was improperly funded. Choice opponents were quick to declare that the ESA program is dead, but as Tim Keller of the Institute for Justice noted, the program is only mostly dead, which means it is slightly alive.

Whether the program is fully revived depends entirely on the lawmakers who won plaudits for enacting it in the first place. On Monday, the legislature will meet in a special session to consider whether to subsidize the construction of a football stadium for the Raiders. Fixing the ESA funding would be a much more productive and beneficial use of their time. Sadly, Governor Brian Sandoval announced this week that ESAs would not be on the agenda:

Passage of Education Savings Accounts (ESAs) set a national precedent for school choice and symbolized a significant step toward education equality for every student. I recognize the magnitude of this sweeping policy measure and consider it a major component of the reform package ushered in during the last legislative session. Protecting this program is a top priority for me. There is simply not enough time to add it to next week’s Special Session with full confidence that a rushed outcome will pass constitutional muster.

Instead, the governor is launching a working group to fix the funding issue at a later date and he pledges to include the ESAs in his final budget recommendations for the upcoming biennium. There’s only one problem with this plan: the new legislature next year might not be as supportive of educational choice as the present one. If Gov. Sandoval and legislative leaders fix the funding issue now while they have legislative support for the program, they will cement their legacies in the history of education reform. If they fail to do so and the next legislature blocks efforts to fix the funding issue, their legacy will be a massive squandered opportunity.

There’s no need to roll the dice. There are various constitutional ways the legislature could fix the funding issue through existing or new funding streams while still saving the state money. The state supreme court barred the legislature from diverting funds that it had already committed to meet the basic funding requirements of the district school system, but otherwise left the door open to various funding possibilities.

At the very least, the legislature could fund the accounts via tax credits. As Jonathan Butcher and I described in a report we published earlier this year, the state could offer tax credits to individuals and corporations who donate to nonprofit scholarships organizations that could manage the ESAs, similar to tax-credit scholarship programs already in effect in 17 states. Florida’s ESA program is already managed by the scholarship organizations that participate in the state’s tax-credit scholarship program, and Nevada has a similar tax-credit scholarship program that has been in effect for more than a year. 

If the Nevada legislature has the time to waste on subsidizing football stadiums for billionaires at taxpayer expense, then surely they can find the time to fund ESAs for children who want a better education while saving the taxpayers money.

If I asked you whether Americans were more likely to name immigrants and refugees a critical threat to the United States in 1998 or in 2016, which year would you guess? Most people, I think, would quickly choose 2016. Most people, however, would be wrong.

According to the Chicago Council on Global Affairs, in 1998 53% of Americans did so, compared to 43% in 2016. The error would be understandable, of course, given the homegrown terrorist attacks in Europe and the U.S. over the past year, Trump’s tough talk about Muslim immigrants, and the vigorous debate about Syrian refugees. Indeed, at first glance the numbers are puzzling.

When we break down the responses by political affiliation, however, we get our first clue about what is going on. As it turns out, in 1998 Republicans and Democrats were closely aligned in their assessments – 56% of Republicans and 58% of Democrats saw refugees and immigrants as a critical threat, a difference smaller than the margin of error in the survey. But by 2016 67% of Republicans did so compared to just 27% of Democrats.

The next piece of the puzzle is the timing of several major shifts in opinion. Republican and Democratic opinions remained closely aligned in 2002, with 62% of Republicans and 58% of Democrats naming refugees and immigrants as a critical threat. The first significant partisan gap emerged in 2004. At that point 62% of Republicans still identified refugees and immigrants as a critical threat but only 49% of Democrats did so. The second pivot point was 2010, when Democrats threat assessments began a steady drop: down to 41% in 2010, 30% in 2012, and just 21% in 2014. Over the same period Republican concerns waned somewhat as well, dropping from 62% to 55%. From 2014 to 2016 Republican concerns ramped sharply upward, to 67%, while Democrats grew somewhat more concerned, with 27% identifying refugees and immigrants as a critical threat.

The timing of these shifts in opinion is not coincidental. These threat perceptions reflect the fact that American foreign policy has become increasingly polarized since September 11, 2001. The emergence of the partisan gap on refugees and immigrants in 2004 followed the invasion of Iraq. The second shift appeared in 2010 in the first poll taken after the election of Barack Obama. Neither of these events, of course, have anything to do with the threat posed by refugees and immigrants. They both, however, produced massive levels of partisan rancor. By mid-2004, nearly 80% of Republicans still supported the war, but roughly 80% of Democrats opposed the war. Returning the favor, Republicans have blasted Obama’s approach to foreign policy at every turn. Republicans have blamed Obama for losing Iraq, for not standing up to China and Russia, and more generally for a failure of leadership on issues from the Syrian civil war to ISIS.

Since 9/11, in short, when pollsters call Americans to ask them how they feel about refugees and immigrants, their responses increasingly reflect the widening gap between Democrats and Republicans rather than a cold-eyed assessment of the actual threat they perceive.

Nor is this an isolated case. The same pattern can be seen if we look at how Americans assess the threat of Islamic fundamentalism. As the same Chicago Council report reveals, in 1998 there was a ten-point gap between parties, with 42% of Republicans and 32% of Democrats identifying it as a critical threat. After 9/11 those figures jumped to 70% for Republicans and 59% for Democrats. By 2016, however, the partisan gap had grown to 30 points, with just 49% of Democrats calling Islamic fundamentalism a critical threat to the United States compared to 75% of Republicans.

The upshot is that the next president, whether Trump or Clinton, will not be able to rely on the public for stable, majority support for foreign policy. Though Americans will coalesce around direct threats to the homeland, partisan lenses color their views of the rest of the world. There are few issues from immigration to intervention that will not quickly become polarized. Given that the platforms of both candidates have already engendered so much debate, the next four years of foreign policy promise to be heavily contested on all sides.

The release of a snippet of Donald Trump’s tax return from 1995 showing a net operating loss of nearly $1 billion, potentially allowing him to legally avoid paying taxes for an 18 year period, has given us another reason to condemn Donald Trump and the complicated provisions in the tax code pertaining to real estate that allow Trump and others like him to pay much less in taxes than the rest of us. One tax professional told me that there’s no reason for a big real estate concern to ever pay income taxes of any kind to the government if they have an accounting firm that knows what it’s doing.

A few people have expressed a hope that, should Trump lose, Congress would begin to look at some of the various real estate tax loopholes that allow such legal tax evasion. I would wholeheartedly agree with such sentiments, and humbly suggest that the purge begin with the most egregious and expensive real estate tax break of them all–the mortgage interest deduction. 

The MID costs the government $80 billion a year in lost revenue and is one of the most expensive tax breaks in the code. It may also be the least effective–because it’s a deduction (as opposed to a credit, or direct subsidy) that means that only the wealthiest homeowners (the top 30% or so) can actually take the deduction.

And a progressive tax code it means that the higher is a household’s income, the higher the rate they pay and the more they save from each dollar they deduct, so benefits go up disproportionately with income. Compounding the inequality of the MID is that tax savings also goes up when the mortgage size goes up. Taken together it means that a family in Moline making the median area income that buys an average-priced house will save about ten percent of what the median earner in San Francisco does when he uses a mortgage to buy the median house where he lives. 

But it gets worse. The reality is that the effects of the mortgage interest deduction are already priced into houses, so literally no one buying a home gets any benefit from it: they have already accrued to existing homeowners. In effect, it is a tax break that rewards existing homeowners and no one else. 

If we’re ever to achieve some modicum of tax reform–which I take to mean lowering rates and eliminating various deductions, credits and exclusions–the mortgage interest has to go. That’s implicit in some of the tax plans issued by the various candidates: Donald Trump’s plan would induce many more people to avail themselves of the standard deduction and eschew itemizing their returns, a necessary step to take deductions like the mortgage interest deduction. If the proportion of people who used the MID fell from 30% to 10%, it might become politically feasible to phase it out, a thought that strikes terror in the hearts of Big Housing–agglomeration of home builders, realtors, mortgage bankers and the like whose incomes go up with housing prices. 

A recent Morgan Stanley report released this week analyzed the impact of eliminating the deduction and it was illuminative: it sees only temporary housing price declines from such a step and even smaller short-term impacts on the broader economy. 

Brookings Scholar Richard Reeves suggested that liberal attempts to reduce income inequality always target the top one percent, and that this target is incorrect: The bigger problem in his estimation is the top twenty percent that are skating away from the rest of the hoi polloi, and he suggests we stop pretending that they aren’t rich. Taking away one of their biggest tax breaks–that does precisely nothing for the economy and goes almost entirely to the top quintile—is a necessary step if we’re ever to achieve any semblance of reform.

By all means let’s fix the tax code and eliminate the complex tax breaks for real estate that allow the Donald Trumps of the world to evade paying taxes. But while we’re at it let’s get rid of the mortgage interest deduction as well—the most egregious real estate tax break of them all. 

In September, the UK government gave the green light for the construction of the Hinkley Point power plant through a French-Chinese consortium. The project—which has received wide international attention after being very nearly relegated to the protectionist dustbin—has been agreed to after much hemming and hawing. It has been mired in controversy mainly over security concerns related to foreign ownership, viewed by some as smacking of protectionism.

It is no secret that there has been a worrying trend toward protectionism in the global markets. The appetite for international trade agreements and foreign investment has been consistently listless. In the United States, and globally, some politicians have been banking on this by flaunting protectionist rhetoric in an effort to garner support. But while protectionism may win votes in the short-term, domestic economic growth will lose out in the long-term. Ultimately, politicizing the global economic rut will only make matters worse.

A Global Trade Alert by the independent London-based think-tank, the Centre for Economic Policy Research, shows that between January 1 and October 31 2015 a total of 539 governmental measures adopted worldwide “harmed foreign traders, investors, workers, or owners of intellectual property” followed by a sobering observation that “in no previous year have we found so many trade distortions so quickly.”

According to the study, the three countries subjected most often to foreign protectionism have been China, the European Union and the United States, in order of ranking. Settling in to this new protectionist normal, however, will have dire economic consequences for all countries and not just developed ones.

Protectionism and an over-reliance on quantitative easing (QE) measures are key contributing factors toward the “new mediocre” which has set hold of the global economy. In this “new mediocre”, global growth is stuck at barely 3 percent a year, with the United States, the European Union, and Japan as the poorest performers. Relying on QE as a long-term solution as opposed to a short-term “fix” following the Financial Crisis of 2008 has had a hampering effect, lengthening rather than stemming the impact of the Financial Crisis – especially for countries that combined QE with austerity measures. Likewise, governments are exacerbating the situation by raising roadblocks on trade and investment opportunities.

The global economic outlook and mood has been gloomy. However the passage of the Hinkley Point deal, once security concerns were addressed, offers a light at the end of this clogged-up tunnel. In the post-Brexit world, the UK government’s decisions on investment and trade will come up against the current popular sentiment towards protectionism. The Hinkley Point deal bucks this protectionist trend, possibly signaling a shift in attitudes towards trade and investment.

Prime Minister May has announced that she would like to turn Britain into a “global leader in free trade,” even though barriers against doing so are going up. In the United States, both presidential candidates seem to be putting up the barriers themselves, shunning trade and investment opportunities and riding the wave of popular protectionist rhetoric instead. President Obama, in a new piece penned for The Economist, instead argues that trade helped the U.S. economy much more than hurt it. There is a choice, he continues: “retreat into old, closed-off economies or press forward, acknowledging the inequality that can come with globalization while committing ourselves to making the global economy work better for all people.”

Regardless of who takes office in the White House come January 2017, economic growth should not be held up or held back by congressional impasse or politicized protectionism. Jump-starting the global economy will require less reliance on federally enacted economic measures and more restraint from protectionist and nationalist tendencies instead. Only then can domestic and global economies stand the best chance of awakening from this prolonged slumber of stagnation. 

The outcome of Sunday’s vote in Colombia—where a slim majority of voters rejected a peace agreement with the FARC guerrillas—was definitely a stunner. No one saw it coming, not even the most enthusiastic opponent of the deal. But a closer inspection of the peace negotiations reveals that the writing was on the wall.

The main reason why nobody expected the NO campaign to win was the entirely one-sided coverage of the peace deal by the local media, something that was largely echoed by their international peers. For many years, the most important domestic outlets in Colombia have been under the government’s sway, downplaying the hardline adopted by the FARC during the negotiations and portraying the opponents of the deal as “far-right” or “enemies of peace.” There was little coverage of the real grievances that a significant number of Colombians had with the concessions given to the FARC and the low popularity of President Juan Manuel Santos.

On top of the biased media coverage, the government spent millions of dollars in publicity and in what Colombians commonly call “mermelada” (the outright use of public funds to get votes through pork and political patronage)—a practice that Santos is very fond of. Moreover, the YES campaign had the strong support of international actors, from the Cuban and the U.S. governments to the United Nations. Even Pope Francis promised to visit Colombia if the deal was backed by voters.

Despite all the odds, when faced with the biased question “Do you support the final accord to end the conflict and to construct a stable and lasting peace?” 50.24% of those who went to the polls said NO. Why?

Since negotiations began in Havana in 2012, poll after poll showed that even though a majority of Colombians wanted a successful peace process, they weren’t willing to grant the FARC significant concessions. You can’t blame them. For over 50 years the Marxist guerrilla terrorized the Colombian people, engaging in crimes against humanity, as well as hideous acts that not only targeted the government, but also innocent civilians: from massacres of peasants, car bombings, kidnappings and extortion, child recruitment, forceful abortions performed on female soldiers, to prolonged imprisonment and inhumane treatment of hostages, some of whom were held for over a decade.

During the four years of the negotiations, the FARC leadership showed little remorse for its crimes. When its Commander in Chief “Timochenko” formally “apologized” to the Colombian people during the signing ceremony of the peace deal, he said that his organization was sorry for all the pain it “may have caused” to the victims of the conflict. The half-apology didn’t go unnoticed by many Colombians.

Colombians were also suspicious of President Santos. A poll in March showed that his popularity stood at only 13%, the lowest point of any president in the history of Colombia. Many believed that Santos was mostly driven by his vanity and desire to win a Nobel Peace Prize. Thus, he was willing to compromise beyond what was palatable to many of his countrymen. The FARC seemed to have realized this. What was supposedly going to be a negotiation “of months, not years,” dragged on in Havana for almost 4 years. The FARC leadership played its hand well, knowing that the clock was ticking for a president whose only legacy depended on signing a deal.

Sensing the fine line he had to walk, Santos repeatedly said that in order to reach a successful agreement with the FARC, the Colombian people would have to swallow several bitter pills. These bitter pills were seldom reported by the foreign media, but many Colombians were very aware of them:

  • Immunity: As José Miguel Vivanco of Human Rights Watch put it, “With the agreement as it stands, ‘Timochenko’ and the guerrilla fighters under his command could avoid spending a single day in prison if they confess their war crimes. Instead, they would be subject to modest and short restrictions on certain rights while being required to carry out community service projects.” Vivanco described the deal as “a facade of justice that guarantees impunity for atrocities in Colombia.”
  • Political power: The deal allowed the FARC to become a political party. There is nothing wrong with that. Other peace agreements also allowed former insurgencies to become political actors. The problem is that the Havana deal went beyond that: it guaranteed the political party that would come up from the FARC 10 seats in Congress (5 in the House of Deputies, 5 in the Senate) for two constitutional terms of 4 years. It also created 16 temporary “Special Districts for Peace” for the House of Deputies in territories formerly controlled by the FARC that could only be contested by social movements. Many believed that this was a way to guarantee the FARC 16 extra seats in disguise.
  • Compensation to victims: The deal stipulated the compensation to the victims would be paid by Colombian taxpayers (the victims themselves), and not by the FARC—whose assets are estimated to be worth around $10.5 billion. Santos signaled that once the agreement was ratified, he would push for a tax increase to pay for it.
  • Generous support for FARC politics: As my colleague Ian Vásquez pointed out in a previous post, “The agreement ensures that the government will finance the political party of the FARC and the dissemination of its ideas. In addition, the state will pay for a ‘center for thought and political education’ of the FARC, a TV channel and 31 radio stations.” Rafael Nieto Loaiza, a former vice minister of Justice, said that the new party formed by the FARC “will receive an annual contribution proportionately higher than that of the other parties.”

The day that the peace deal was signed in Cartagena, The Economist’s Michael Reid tweeted that in 2001, Alfonso Cano, back then one of the FARC top commanders, told him that the guerrilla wouldn’t give up arms in exchange for “houses, cars, scholarships and seats in Congress.” Reid added, “This is what they’re doing now.” However, in 2001 the FARC was a mighty military force with approximately 16.000 troops. It controlled large swathes of the country and surrounded Colombia’s main cities, Bogotá included. By 2012, when the peace process began, the FARC had been decimated and demoralized. Most of its historic leadership, Cano included, had been killed. The latest official tally of the number of FARC troops stood at less than 5,700. Many Colombians believed that the costly concessions given to the FARC in terms of impunity, political power and economic support didn’t reflect the relative strength of the guerrilla when it decided to enter peace negotiations.

Instead of blaming those who voted NO as war-mongers, foreign analysts should make an effort to understand the reasons why a majority of Colombians rejected this peace deal. It’s not that they don’t want to live in a peaceful country. They do. But they also aspire to live in a nation with justice and rule of law. 

Freedom House simply categorizes Uganda as “not free.” Transparency International ranks it among the 30 worst countries for perceived public sector corruption. And the American Federation of Teachers—the second largest teachers union in the United States—is outraged a for-profit company is daring to provide low-cost education to Ugandan children against the wishes of the government.

From the AFT press release hailing a new study attacking Bridge International Academies (BIA) by an outfit the AFT helps bankroll:

The report…documents in distressing detail BIA’s disregard for legal and educational standards established by the Ugandan government….

Randi Weingarten, president of the American Federation of Teachers, an EI member organization, said: “This report serves as a warning about what happens when private education providers put profits above people. BIA’s shameful abuses, cookie-cutter curriculum and cost cutting make for distressing reading but sadly aren’t in the least bit surprising.”

That’s right: The AFT will apparently side with even one of the world’s worst governments if, it seems, doing so could hobble for-profit schooling.

But what about those horrible abuses Weingarten bemoans? If you read the report, you’ll get the sense that the most egregious is that BIA schools use a scripted curriculum delivered electronically, which is apparently excruciating torture for teachers and children. How they have any employees, and over 100,000 students, is a mystery.

The schools also don’t seem to follow rules and regulations set forth by Uganda’s education ministry, such as building and curriculum standards. But if you have ever read James Tooley’s revelatory writing on education in countries like Uganda, you’d understand why people who want to get education to poor children don’t comply with rules and regs: complying would make delivering affordable education at scale extremely difficult, and the regulations often exist to protect the public sector, including government inspectors who expect to get paid in both salaries and bribes.

At the very least, though, we know that the “cookie-cutter curriculum” is awful because the free public schools are using something very different and are clearly succeeding at better educating huge swaths of Ugandan children. Right?

If they are, you wouldn’t know it from this report. Unlike Tooley’s work on for-profit schooling among the world’s poorest people, this report offers no concrete comparisons between BIA and public schools except when it comes to teacher salaries. There public schools clearly win: They pay more, which may reveal why the AFT finds this report so powerful. But do they get better educational outcomes? That’s apparently irrelevant; only how BIA schools stack up against progressive schooling ideals, and the dictates of the Ugandan government, seem to matter.

This report provides basically nothing to seriously assess how Bridge International Academies is doing in Uganda. But it sure says a lot about the AFT.

Since Germany first accepted more than a million asylees into its country, the successes and failures of the decision were bound to reverberate around the world. Yet despite this openness at the borders, Germany remained stubbornly closed inwardly, delaying the integration of the people it chose to accept. Most importantly, it retained employment restrictions that prevent asylum seekers from obtaining the jobs they need to survive. Fortunately, America has a much better system with much greater success.

In 2015, Germany waited the longest of any country in Europe to restrict the flow of asylum seekers from the Middle East. Yet once they arrived, the asylees who immediately sought work in Europe’s largest economy were greeted by bureaucracy. The law initially forbade asylees from seeking work for 9 months after their arrival, but was reduced to 3 months in November 2014. Then, inexplicably, at the height of the inflows, the German government banned working if the asylee was forced to stay a reception center, which could be up to 6 months.

After the initial waiting period, asylees did not receive unrestricted employment authorization. Instead, they would have to find a “concrete” job offer—i.e. a firm must promise to hire them if the permit is granted—then apply for authorization. Even then, companies can only hire them during the first 15 months if the jobs are offered first to EU residents, and the federal labor department agrees that no one was willing to take. They also set asylee wages, which can price out low-skilled workers.

The hoops don’t end there. Asylees still have to get the approval of the immigration office at the municipal level. Under the law, it would take four years before they could compete equally with EU citizens.

On top of all these refugee-specific regulations, skilled workers are then tasked with proving that they can work in certain occupations. In order to obtain an occupational license, documentary proof of training—proof that’s often buried under bombed-out homes in Syria—is required. Some states in Germany allow asylees to demonstrate their skills in order to receive licensing, but others do not. “I am a dentist and could work, but what am I supposed to do? I am not allowed to work here!” one asylee told DW News.

Low-skilled immigrants haven’t avoided being targeted either. Germany introduced its first ever minimum wage in 2015—which disproportionately hits lower skilled migrants—and a study by the German government in August 2016 found that it had already cost 60,000 jobs.

The Cologne Institute for Economic Research in Germany produced a report in September 2015, calling for loosening the labor regulations, but it wasn’t until July 2016 that Germany passed a new law that suspended for three years the requirement that firms must offer jobs to EU residents first. Yet even so, the suspension will only apply in areas with low unemployment, and states and localities can still require discrimination against the asylee job seekers. They can also tell asylees where they must live—which could prevent them from following economic demand.

It is no surprise that this system has produced extremely high unemployment among the asylees in Germany—now almost a year after the bulk of the arrivals. Refugees generally in Germany show very slow economic integration, with less than half working after 5 years. Naturally, Syrians face many hurdles beyond bureaucracy in finding work, especially language and skill acquisition. But it’s clear that the restrictions play an important role in preventing employment.

“I’ve been waiting one year and three months for permission to work, everything is slow here. I was expecting it to go a little bit faster,” one Syrian engineer told the Financial Times, saying that his problem was “red tape, not language.” Robert Barr, co-founder of Jobs4Refugees, agreed with this assessment, telling the paper that the bureaucracy was “definitely too complicated,” and that “the sheer amount of paper work and the complexity of it is even difficult for Germans to understand.”

By comparison, the United States rapidly incorporates refugees into the labor market. U.S.-bound refugees have no restraints on employment and can compete equally with U.S. citizens, except that certain states can limit occupational licenses for noncitizens and refugees for 1 year, although they may have difficulty getting recognition of their credentials even after that. They also face a crop of new state-level minimum wage laws that can make low-skilled employment scarcer.

Figure: Employment Rates in United States and Germany for Refugees (Ages 16+) By Years Since Arrival   


Sources: Office of Refugee Resettlement, Directorate General for Internal Policies European Parliament

Despite these restrictions, after just one year, the majority of U.S. refugees were participating in the labor force, and after just three years, a majority had has jobs. As Figure 1 demonstrates, they significantly outperform refugees in Germany in this regard. The employment rate after 5 years was much higher for male refugees than refugee women in both countries, which makes the overall better U.S. performance all the more surprising, given that Germany’s asylees are overwhelmingly young men while the United States flow is evenly divided.

In the long-term, the U.S. model proves successful. During the 2009 to 2011 period, all refugees in the United States were more likely to be employed than the overall population, according to a 2015 study by the Migration Policy Institute. Two-thirds of all refugee men were employed compared to only 60 percent for all U.S. men. Refugee women had the same employment rates as all U.S. women.

U.S. policymakers cannot base their estimates of how refugee flows will impact the labor market on the situation in Germany. Labor market institutions in the United States are better equipped to handle an influx of new workers. While Germany is attempting to improve its laws to better integrate asylees, much work remains. The United States can continue to accept and integrate refugees with the knowledge that we have the experience and markets to handle the flow.

The U.S. Department of Agriculture (USDA) runs an array of rural subsidy programs, which are aside from the farm subsidy programs that it also runs. USDA’s rural programs are grouped within three agencies: the Rural Housing Service (RHS), the Rural Utilities Service (RUS), and the Rural Business-Cooperative Service (RBS). The agencies will spend $6.5 billion in 2016.

These subsidies are the focus of a new essay at DownsizingGovernment.org.

The USDA’s rural agencies have tentacles into a wide range of activities, as illustrated by the following projects funded in 2015:

  • $10 million to Exela Pharma Sciences in North Carolina.
  • $3.4 million for a sewer system in Geraldine, Alabama.
  • $8.5 million for a college expansion in Pocahontas, Arkansas.
  • $7,500 to an individual in Red Bluff, California, to fix his water well.
  • $200,000 to “one of the largest clam producers in Florida.”
  • $7.5 million to fix a dam in Idaho.
  • $1 million to an automotive shop and other businesses in Du Quoin, Illinois.
  • $63,000 to a biofuels company in Maine.
  • $200,000 for a farmers market in Michigan.
  • $651,000 for an arts center in Bozeman, Montana.
  • $373,000 to a paper company in Nevada.
  • $1.5 million to an apartment developer in Monticello, New York.
  • $2 million for a vet clinic in North Dakota.
  • $1.1 million for street improvements in Pittston, Pennsylvania.
  • $113,000 to fix up an old theatre in Rutland, Vermont.
  • $5.2 million for a fire station in Sweetwater County, Wyoming.

In the U.S. economy, these sorts of projects are usually funded by local governments and the private sector. So why should the USDA spend money on them? The assumption seems to be that the federal government has a magical source of cost-free funds. But all the money for federal aid programs ultimately comes from taxpayers who live in the 50 states. So the USDA’s aid programs are a zero-sum game for the nation as a whole.

Indeed, the programs are worse than zero-sum because taxpayers have to pay for the bureaucratic middlemen who run the programs. The USDA employs about 5,000 people to run its three rural agencies. The costs of wages, benefits, office space, travel, and supplies for these workers totaled $680 million in 2016. Thus about 10 percent of the $6.5 billion cost of USDA’s rural programs gets consumed by the federal bureaucracy.

Even if rural subsidy programs were administered efficiently, they represent an unfair redistribution of wealth. In many ways, rural Americans are better off than urban and suburban Americans. They enjoy cheaper housing, cleaner air, less congestion, and other advantages. So people who live in rural areas should not be a privileged class receiving special subsidies.

Rural subsidies should be ended, and the RHS, RUS, and RBS should be closed down.

Over at Cato’s Police Misconduct web site, we have selected the worst case for the month of September.  It was the Connecticut State Troopers who were caught on tape harassing a protester and fabricating charges against him.

According to news reports, Michael Picard was protesting near a DUI checkpoint.  He had his cell phone camera out and was recording the scene.  When a trooper noticed what he was doing, he angrily approached Picard and seized his phone saying it was illegal to record him.  This is when things got interesting.  Unbeknownst to the trooper, Picard’s cell phone was still recording as the trooper went back to his patrol car to confer with his colleagues.  The troopers were anxious to “hit” Picard with some kind of charge, but they became frustrated with their options.  Picard had a firearm, but a valid concealed carry permit.  Picard did record them with his cell phone, but that’s legal too.  What to do?  To “cover their ass,” they decide to fabricate a story that several citizens were complaining about Picard’s supposedly “disruptive actions,” but these “witnesses” did not want to stay on the scene, so the troopers just had to take action on their own.

The charges against Picard were quickly dismissed.  The ACLU has now filed a lawsuit on behalf of Picard.

The cell phone recording of the incident can be found here.  Because the phone is evidently sitting on the roof of the patrol car, the value is in what can be heard, not seen. Listen and decide for yourself.

You just never know what kind of government agents you may encounter.  Those who choose to film the police are especially vulnerable.  We must all remember to lawyer-up when necessary.


At the Mercatus / Cato CMFA conference a few weeks ago on “Monetary Rules for a Post-Crisis World,” David Laidler and David Glasner gave interesting and informative talks on the history (and history of economic thought) regarding the evolution of monetary rules during the first panel. Video of their talks, and that of co-panelist Mark Calabria, is available here. Ari Blask recaps the entire conference here.

I haven’t seen Glasner’s paper, but he has posted a summary of it on his blog. (All subsequent quotes are drawn from that source.) There he suggests that perhaps the earliest monetary rule, in the general sense of a binding pre-commitment for a money issuer, can be seen in the redemption obligations attached to banknotes. The obligation was contractual: A typical banknote pledged that the bank “will pay the bearer on demand” in specie. (Demand deposit contracts, which preceded banknotes historically, made the same pledge.) He rightly remarks that “convertibility was not originally undertaken as a policy rule; it was undertaken simply as a business expedient” without which the public would not have accepted demand deposits or banknotes.

I wouldn’t characterize the contract in quite the way Glasner does, however, as a “monetary rule to govern the operation of a monetary system.” In a system with many banks of issue, the redemption contract on any one bank’s notes was a commitment from that bank to the holders of those notes only, without anyone intending it as a device to govern the operation of the entire system. The commitment that governs a single bank ipso facto governs an entire monetary system only when that single bank is a central bank, the only bank allowed to issue currency and the repository of the gold reserves of ordinary commercial banks. Under a gold standard with competitive plural note-issuers (a free banking system) holding their own reserves, by contrast, the operation of the monetary system is governed by impersonal market forces rather than by any single agent. This is an important distinction between the properties of a gold standard with free banking and the properties of a gold standard managed by a central bank. The distinction is especially important when it comes to judging whether historical monetary crises and depressions can be accurately described as instances where “the gold standard failed” or instead where “central bank management of the monetary system failed.”

As the author of Free Banking and Monetary Reform, Glasner of course knows the distinction well. So I am not here telling him anything he doesn’t know. I am only alerting readers to keep the distinction in mind when they hear or read “the gold standard” being blamed for financial instability. I wish that Glasner had made it more explicit that he is talking about a system run by the Bank of England, not the more automatic type of gold standard with free banking.

Glasner highlights the British Parliament’s legislative decision “to restore the convertibility of banknotes issued by the Bank of England into a fixed weight of gold” after a decades-long suspension that began during the Napoleonic wars. He comments:

However, the widely held expectations that the restoration of convertibility of banknotes issued by the Bank of England into gold would produce a stable monetary regime and a stable economy were quickly disappointed, financial crises and depressions occurring in 1825 and again in 1836.

Left unexplained is why the expectations were disappointed, why the monetary regime remained unstable. A reader who hasn’t read Glasner’s other blog entries on the gold standard might think that he is blaming the gold standard as such.

My own view is that because the Bank of England’s monopoly was not broken up, even with convertibility acting as a long-run constraint, the Bank had the power to create cyclical monetary instability and occasionally did so by (unintentionally) over-issuing and then having to contract suddenly as gold flowed out of its vault — as happened in 1825 and again in 1836. Because the London note-issue was not decentralized, the Bank of England did not experience prompt loss of reserves to rival banks (adverse clearings) as soon as it over-issued. Regulation via the price-specie-flow mechanism (external drain) allowed over-issue to persist longer and grow larger. Correction came only with a delay, and came more harshly than continuous intra-London correction through adverse clearings would have. Bank of England mistakes boggled the entire financial system. It was central bank errors and not the gold standard that disrupted monetary stability after 1821.

This hypothesis about the source of England’s cyclical instability is far from original with me. It was offered during the 1821-1850 period by a number of writers. Some, like Robert Torrens, were members of the Currency School and offered the Currency Principle as a remedy. Others, like James William Gilbart, are better classified as members of the Free Banking School because they argued that competition and adverse clearings would effectively constrain the Bank of England once rival note issuers were allowed in London. Although they offered different remedies, these writers shared the judgment that the Bank of England had over-issued, stimulating an unsustainable boom, then was eventually forced by gold reserve losses to reverse course, instituting a credit crunch. Because Glasner elides the distinction between free banking and central banking in his talk and blog post, he naturally omits the third side in the Currency School-Banking School-Free Banking School debate.

Later in his blog post, Glasner fairly summarizes how a gold standard works when a central bank does not subvert or over-ride its automatic operation:

Given the convertibility commitment, the actual quantity of the monetary instrument that is issued is whatever quantity the public wishes to hold.

But he then immediately remarks:

That, at any rate, was the theory of the gold standard. There were — and are – at least two basic problems with that theory. First, making the value of money equal to the value of gold does not imply that the value of money will be stable unless the value of gold is stable, and there is no necessary reason why the value of gold should be stable. Second, the behavior of a banking system may be such that the banking system will itself destabilize the value of gold, e.g., in periods of distress when the public loses confidence in the solvency of banks and banks simultaneously increase their demands for gold. The resulting increase in the monetary demand for gold drives up the value of gold, triggering a vicious cycle in which the attempt by each to increase his own liquidity impairs the solvency of all.

These two purported “basic problems” prompt me to make two sets of comments:

  1. While it is true that the purchasing power of gold was not perfectly stable under the classical gold standard, perfection is not the relevant benchmark. The purchasing power of money was more stable under the classical gold standard than it has been under fiat money standards since the Second World War. Average inflation rates were closer to zero, and the price level was more predictable at medium to long horizons. Whatever Glasner may have meant by “necessary reason,” there certainly is a theoretical reason for this performance: the economics of gold mining make the purchasing power of gold (ppg) mean-reverting in the face of monetary demand and supply shocks. An unusually high ppg encourages additional gold mining, until the ppg declines to the normal long-run value determined by the flow supply and demand for gold. An unusually low ppg discourages mining, until the normal long-run ppg is restored. It is true that permanent changes in the gold mining cost conditions can have a permanent impact on the long-run level of the ppg, but empirically such shocks were smaller than the money supply variations that central banks have produced.
  2. The behavior of the banking system is indeed critically important for short-run stability. Instability wasn’t a problem in all countries, so we need to ask why some banking systems were unstable or panic-prone, while others were stable. The US banking system was panic prone in the late 19th century while the Canadian system was not. The English system was panic-prone while the Scottish system was not. The behavioral differences were not random or mere facts of nature, but grew directly from differences in the legal restrictions constraining the banks. The Canadian and Scottish systems, unlike the US and English systems, allowed their banks to adequately diversify, and to respond to peak currency demands, thus allowed banks to be more solvent and more liquid, and thus avoided loss of confidence in the banks. The problem in the US and England was not the gold standard, or a flaw in “the theory of the gold standard,” but ill-conceived legal restrictions that weakened the banking systems.

[Cross-posted from Alt-M.org]

The distinguished Stanford University economist Robert Hall, co-architect of the famed Hall-Rabushka flat tax, once described himself to me as a [Bill] Clinton Democrat. Bob Hall wrote one of the most serious studies trying to figure out why the U.S. economy has remained so weak for so long. He concluded that much of the explanation lies in the ways in which recent marginal tax and transfer incentives discourage work.

In an analysis similar to that of Casey Mulligan of the University of Chicago, Hall attributes much of the startling drop in labor force participation to the expansion of federal transfer payments. Disability benefits and food stamps, in particular, are quickly phased-out if nonworkers take a job, or part-time workers switch to full-time work, or single-earner families become two-earner families. In other words, higher tax rates on work and more generous subsidies to leisure leave the economy with fewer people seeking work and therefore less production, lower tax revenue and greater federal spending on transfers from those who earn income to those who instead rely on government.

As Hall put it,

Labor-force participation fell substantially after the crisis, contributing 2.5 percentage points to the shortfall in output. The decline showed no sign of reverting as of 2013. Part is demographic and will stabilize, and part reflects low job-finding rates, which should return to normal slowly. But an important part may be related to the large growth in beneficiaries of disability and food-stamp programs. Bulges in their enrollments appear to be highly persistent. Both programs place high taxes on earnings [emphasis added] and so discourage labor-force participation among beneficiaries. The bulge in program dependence …  may impede output and employment growth for some years into the future.

What does it take to make a state-level Republican policymaker work to grow the power of the Obama Administration? Not much! Washington Secretary of State Kim Wyman is a case in point.

In the wake of a shooting at a Macy’s in Mount Vernon, Washington, late last month, Secretary Wyman called for Washington State to comply with the national ID program run by the U.S. Department of Homeland Security under the REAL ID Act.

Secretary Wyman’s rationale for joining the national ID is that state authorities (including, for some reason, election officials) were unable to immediately identify the citizenship status of the shooter (who turned out to be a naturalized American citizen).

Washington State has hitherto declined to embrace REAL ID, and has been one of the states most actively pushing back against the federal program. Secretary Wyman argues that adopting REAL ID would allow the state to more quickly access federal databases and records and help prevent voter fraud in Washington State elections.

Whatever a state’s need for securing their vote, that’s no reason to join the national ID system. And REAL ID is a bloated, costly, and opaque federal program. Compliance would require Washington State to share its drivers’ personal data and copies of their digitally scanned documents with departments of motor vehicles across the country through a nationwide data sharing system. This database sharing is a two way street: Secretary Wyman might be able to access other jurisdiction’s databases, but any bad actor in a DMV from California to Connecticut could access Washington State’s.

In the wake of recent DMV hacking scandals in Louisiana and elsewhere, this concern is not overblown. Because of the hacking and identity fraud risks, and the lack of any real national security benefit, adoption of REAL ID would only make Washingtonians less safe.

Reuters dropped a bombshell story Tuesday afternoon, reporting that in 2015 Yahoo agreed to scan all their users’ incoming e-mails on behalf of a U.S. intelligence agency, hunting for a particular “character string” and turning over messages where it found a match to the government. Yet the vagueness of the story—which appears to be based on sources with limited access to the details of the surveillance—leaves a maddening number of unanswered questions.  Yahoo did not greatly help matters with a meticulously worded non-denial, calling the story “misleading” without calling it substantively false, and asserting that the “scanning described in the article does not exist on our systems.” (Obvious follow-up questions: Did it exist in 2015? Does it now exist on some other systems?)  Then, on Wednesday, Charlie Savage and Nicole Perlroth of The New York Times published a follow-up article fleshing out some of the details: The bulk scan was conducted pursuant to an order from the secretive Foreign Intelligence Surveillance Court, and hunted for a “digital signature” associated with a foreign state-sponsored terror group.

What’s troubling here is that it suggests Yahoo was asked to scan the contents of all messages for as a string of characters indicating that the message was produced using a particular software tool—such as, for instance, the Mujahideen Secrets encryption software used by Al Qaeda. There is, of course, nothing inherently wrong with targeting tools associated with known adversaries, but this does represent a dramatic inversion of the traditional way surveillance is conducted.  Normally, we expect that the government will identify a “communications facility” being used by a particular target, then proceed to scrutinizing their communications.  Here, the government has scrutinized an entire stream of communications in bulk, searching for something in the contents that would allow them to identify the target! 

It is not hard to see why intelligence agencies would find such scans useful, but it would be a serious mistake to normalize the bulk scanning of communications content—an indiscriminate “search” of people not known to be foreign intelligence targets—even if one is not overly dismayed by a particular application of that approach.  Surveillance architectures create their own institutional momentum, and a software tool designed to scan for digital fingerprints can just as easily scan for words or phrases in messages written by humans, or for cryptographic tools used by many innocent people seeking to protect their privacy as well as a few bad actors—a possibility that becomes far more tempting once the necessary technical infrastructure is in place.

That the government would employ this approach, however, should not exactly come as a great surprise. The National Security Agency’s targeting procedures for §702 of the FISA Amendments Act of 2008, disclosed three years ago by Edward Snowden, seem to contemplate keying surveillance to such signatures. One of the criteria mentioned for verifying the “foreignness” of a surveillance target is: 

Information indicates that  Internet Protocol ranges  and/or specific  electronic  identifiers or signatures  (e.g., specific types  of cryptology  or steganography)  are  used  almost  exclusively by individuals  associated with  a foreign power  or foreign territory,  or are extensively  used  by individuals  associated  with a foreign power  or foreign territory.

Note that “exclusively”—which may sound reassuring—is quickly followed by “extensively,” which would no doubt encompass a great deal of privacy protecting technology used by many law-abiding Americans as well as foreign criminals or terrorists. 

It also seems at least plausible that searches of this sort have been carried out domestically for far longer than a year.  Under the FISA Amendments Act’s §702, the government can designate foreign targets for intelligence collection—including electronic surveillance carried out domestically—under broad targeting procedures approved by the FISA Court, without any specific judicial approval of individual targets.   At last count, there were 94,368 such “targets” being monitored under the a single blanket authorization. As we know thanks to the Snowden disclosures, one way they conduct §702 surveillance is known as PRISM collection, and carried out with the cooperation of communications providers like Yahoo or Google.  The other main mechanism is known as “Upstream” collection and involves scanning of traffic on the Internet backbone—including not just message headers, but also the contents of messages—for “selectors” associated with approved targets. This has sometimes been dubbed “about collection”—because it means that the NSA would intercept not only messages to or from the e-mail address used as a selector, but also messages mentioning or “about” that selector.  It is at least possible that the government has been routinely using digital fingerprints—the text that says, in effect, “the following message is encrypted with a certain type of software”—along with more conventional selectors like e-mail or IP addresses to scan Internet traffic in bulk.

Why, then, would the government ask Yahoo to start doing such scannig for them in 2015?  One possibility is that ever since the Snowden revelations began, more and more companies have been encrypting their traffic by default, using a protocol known as Transport Layer Security, or TLS (the e-mail specific version of which is called STARTTLS).  The wider adoption of such encryption means data that would have been visible to an NSA sniffer sitting on the Internet backbone is now scrambled and unintelligible, making Upstream increasingly useless.  Even for NSA, breaking the encryption on traffic wholesale is likely infeasible—but aside from any message content separately encrypted by individual users, that traffic would be readable once it had arrived at Yahoo and been decrypted with the company’s private keys. Yahoo began making such encryption the default in 2014.

One obvious question is whether Yahoo is the only company to be served with such an order, or whether it reflects a more widespread practice.  Sam Biddle of The Intercept queried some major providers and got relatively straightforward denials from Google, Facebook, Twitter, and Apple—though it remains possible that this is a byproduct of the Reuters story having gotten some details of the story wrong. Microsoft said they had “never engaged in the secret scanning of e-mail traffic like what has been reported” but “would not comment on the record as to whether the company has ever received such a request,” which could reflect simple legal caution—intelligence surveillance requests are invariably covered by broad gag orders, and it gets awkward quickly if you deny getting some types but “no comment” others—or could be an indication that the company received a similar demand, but successfully fought it. 

A second, perhaps less obvious question, is why the scanning would be limited to incoming messages (rather than messages either sent or received by Yahoo users) and only to realtime scanning (rather than encompassing older messages stored in the company’s servers).  One possibility has to do with affecting the “facility” at which the surveillance was “directed.”  In NSA jargon, there is the “target” of surveillance (the person or entity about or from whom information is sought); the “selector” (the specific term used to filter out the information to be collected); and the “facility” at which surveillance is directed (the physical or virtual communications channel from which the information is obtained).  In the simplest type of case, these could all be the same:  There is a target known only as the user of a particular e-mail address, which serves as both the “selector” and—when communications are obtained from the provider who hosts that account—the “facility” at which surveillance is directed.  But they might also all be different.  An individual target might have several associated “selectors” (different e-mail accounts or other digital identifiers), and as the case of Upstream “about collection” shows, the “facility” might be an Internet routing switch rather than a particular repository of stored messages associated with that account.  My (possibly incomplete) understanding from discussions with intelligence officials is that a scan of the content of message sitting in a particular user’s inbox would be considered surveillance “directed at the facility” of the individual user’s account, even if the scan was based on some different selector.  Such a scan would likely require that the person whose inbox it was be considered a “target.”  Conceivably, however, intelligence community lawyers have decided the situation is different if the scans are conducted before messages are routed to specific inboxes—at which stage they’re treated analogously to Upstream traffic.  Before arriving in the recipient’s inbox, in other words, there might be no “particular, known U.S. person” who could be considered a “target” of the scan, triggering a laxer set of rules constraining searches.     

Whatever the reality, the government should now release an appropriately redacted version of the FISA Court opinion authorizing this bulk e-mail scanning—which appears to have come just months before the passage of the USA Freedom Act, under which they would be obligated to prepare an unclassified legal opinion for public release.  If the government is going to be compelling companies to scan everyone’s communications in its hunt for terrorists, the public is entitled to understand the legal framework within which it plans to do so—and to modify or reject that framework if it fails to meet Fourth Amendment standards.

Budget experts worried about the growth of federal spending and deficits have proposed various statutory and constitutional restraints to get the budget under control. I favor a simple cap on the percentage growth in annual total outlays.

Many state governments have spending, deficit, and debt restraints on the books, both statutory and constitutional. The restraints do help to tame state fiscal policy, but there is lots of cheating by the politicians.

Researching Cato’s new Governors Report Card, I came across an illuminating story about Connecticut’s spending restraint mechanism. I quote here at length:

The 1991 General Assembly tried to temper outrage over enactment of the state income tax by drafting a statutory spending cap. Voters would add the cap requirement to the state Constitution one year later by adopting the 28th Amendment.

The cap is supposed to keep spending increases in line with the annual growth in personal income or inflation, whichever is larger. For most of the cap’s history, the legislature has relied on personal income.

The cap system uses an average of personal income growth over the previous five years. That means that the sluggish growth years immediately following the last recession — which ended in 2010 — will continue to limit spending growth under the current cap system.

That makes sense to me—citizen income is stagnant in slow-growth Connecticut, so government growth should be limited so that it doesn’t squeeze people more when they can least afford it.

But that’s not how Connecticut politicians see it:

Both political parties have looked for ways around the cap over the past decade. The governor and legislature can exceed the cap legally if they agree and take special steps.

That happened in 2005 when Gov. M. Jodi Rell, a Republican, signed a declaration of fiscal exigency — declaring a budget emergency. More than 60 percent of the Democrat-controlled House and Senate voted to approve the plan.

Two years later, Rell and lawmakers used the same approach, this time approving a biennial budget that shattered the cap by a record-setting $690 million in the first year.

Since in 2011, Malloy has refused to declare a budget emergency. But that doesn’t mean he hasn’t bent to the cap’s weight.

The governor has proposed or approved moving spending outside of the cap – in large quantities …

The Democrat-controlled Appropriations Committee stunned the Capitol in April 2015 when it proposed a budget that moved billions of dollars in spending for pensions and other retirement benefit costs out from under the cap — for the first time since the spending control was established in 1991.

Both Rell and Malloy have been awarded “F” grades from Cato for their fiscal irresponsibility. It’s a shame that politicians of both parties in Connecticut aren’t abiding by a sensible constitutional restraint passed with the support of 80 percent of voters

Earlier this afternoon in the Rose Garden, President Obama celebrated the ratification of the Paris Agreement. I had this to say in response:

President Obama was a bit less than candid in his speech about the adoption of the U.N.’s Paris Agreement. Using realistic assumptions about role of carbon dioxide in climate change, the Agreement will prevent 0.1 to 0.2°C of global warming by the year 2100, not the inflated figure the U.N. gets by assuming all warming since the Industrial Revolution is caused by human emissions of carbon dioxide. Few, if any, climate scientists would defend that. It also assumes that emissions will—without the Paris Agreement—increase much faster than the average increase used in climate simulations. In reality, the UN’s own Climate Panel states only that carbon dioxide is causing more than 50% of the warming observed since 1950, not 1800. Further, the switch from coal to natural gas for electrical generation has already invalidated the UN’s assumptions about the growth of atmospheric carbon dioxide.

He is also a bit optimistic about China, which has said it will stop increasing carbon dioxide emissions “around” 2030. This is exactly the time that researchers in Obama’s own Department of Energy said, in 2011, that their emissions would level off due to their maturing economy, and without any explicit policy to reduce greenhouse gas emissions, best known as “business as usual.”