Policy Institutes

With a presidential administration that is disliked for myriad reasons openly pushing school choice, what had been kind of a cold war over choice for years has exploded into a hot one. And the tip of the anti-choice spear seems to be the New York Times. Last week it ran a piece by New America education director Kevin Carey suggesting that choice has been “dismal,” and doubled down on that yesterday with an attack on choice as an academic “failure.”

Is it a failure? First, the vast majority of random-assignment studies of private school voucher programs—the “gold-standard” research method that even controls for unobserved factors like parental motivation—have found choice producing equivalent or superior academic results, usually for a fraction of what is spent on public schools. Pointing at three, as we shall see, very limited studies, does not substantially change that track record.

Let’s look at the studies Carey highlighted: one on Louisiana’s voucher program, one on Ohio, and one on Indiana. Make that two studies: Carey cited Indiana findings without providing a link to, or title of, the research, and he did not identify the researchers. The Times did the same in their editorial. Why? Because the Indiana research has not been published. What Carey perhaps drew on was a piece by Mark Dynarski at the Brookings Institution. And what was that based on? Apparently, a 2015 academic conference presentation by R. Joseph Waddington and Mark Berends, who at the time were in the midst of analyzing Indiana’s program and who have not yet published their findings.

Next there is Ohio’s voucher program. The good news is that the research has been published, indeed by the choice-favoring Thomas B. Fordham Institute. And it does indicate that what the researchers were able to study revealed a negative effect on standardized tests. But Carey omitted two important aspects of the study. One, it found that choice had a modestly positive effect on public schools, spurring them to improve. Perhaps more important, because the research design was something called “regression discontinuity” it was limited in what it was able to reliably determine. Basically, that design looks at performance clustered around some eligibility cut-off—in this case, public schools that just made or missed the performance level below which students became eligible for vouchers—so the analysis could not tell us about a whole lot of kids. Wrote the researchers: “We can only identify with relative confidence the estimated effects…for those students who had been attending the highest-performing EdChoice-eligible public schools and not those who would have been attending lower-performing public schools.”

That is a big limit.

Finally, we come to the Louisiana study, which was random-assignment. Frankly, its negative findings are not new information. The report came out over a year ago, and we at Cato have written and talked about it extensively. And there are huge caveats to the findings, including that the program’s heavy regulations—e.g., participating schools must give state tests to voucher recipients and become part of a state accountability system—likely encouraged many of the better private schools to stay out. There are also competing private choice programs in the Pelican State. In addition, the rules requiring participating private schools to administer state tests are new, and there is a good chance that participating institutions were still transitioning. Indeed, as Carey noted, the study showed private school outcomes improving from the first year to the second. That could well indicate that the schools are adjusting to the change. And as in Ohio, there was evidence that the program spurred some improvements in public schools.

Choice advocates should not cheer about the latest research, but in totality, the evidence does not come close to showing choice a “failure.” Indeed, the evidence is still very favorable to choice. And the primary value of choice is not necessarily reflected in test scores: it is freeing families and educators to choose for themselves what education is best.

Monetarism is often misunderstood, overlooked, forgotten, or even derided. Yet its basic logic, resting on the quantity theory of money, is evident and remains important in a world of pure fiat monies.

Most major central banks have abandoned monetary targeting in favor of setting interest rates to achieve long-run price stability and full employment. China is an exception. Since 1998, the People’s Bank of China (PBC) has used money growth targets to guide monetary policy aimed at maintaining stable nominal income growth and preventing excess inflation (see Figure 1).

Figure 1: PBC Monetary Framework[1]

That said, the PBC’s use of monetary targeting is embedded within China’s centrally planned and largely nationalized financial system. The PBC is subject to oversight by the State Council; the financial system is dominated by state-owned banks; capital markets are highly regulated; and interest rates and exchange rates are distorted. Just as the Chinese government refers to its unique mix of markets, statism, and communist ideology as “Socialism with Chinese Characteristics,” we can call the PBC’s monetary targeting “monetarism with Chinese characteristics.”

Use of Monetary Targets in China

UBS economist Tao Wang and her team describe the PBC’s use of monetary targets:

Unlike some developed central banks that directly target certain policy interest rates or inflation, the PBC has targeted broad monetary aggregates such as M2 since 1998 to achieve its key macroeconomic objectives. The M2 growth target is usually set by adding together the GDP growth and CPI inflation targets plus a few percentage points for “financial deepening.” Although the PBC has tried to increase the use of price-based policy instruments, to date it still relies mainly on managing the quantity of base money supply and directly controlling credit growth to help achieve its desired broad money growth [Wang et al. 2017: 2].

The PBC is not an independent central bank. It is governed by, and reports to, the State Council. Policymakers set targets for the growth of monetary aggregates based on plans for CPI inflation and real GDP growth—the sum of which is equal to the growth of nominal income. The simple quantity theory of money, which lies behind monetarist logic, specifies that to achieve nominal income growth of x percent per year, the quantity of money should grow at a similar rate, with some adjustment made for changes in the income velocity of money:

(1)        ΔM/M = ΔP/P + Δy/y – ΔV/V.

The PBC does not directly control the money supply, which can be expressed as

(2)        M = mB,

where m is the money multiplier and  B is base money (i.e., currency held by the public plus bank reserves).

To achieve its target for money growth, the PBC relies on controlling the monetary base and uses various instruments to regulate the flow of credit (see Figure 1).[2] The state-run banking system in China means that newly created base money can be multiplied into a much larger stock of bank money (Figure 2). When state-owned commercial banks have excess reserves, they lend them out to meet the credit plans handed down to them, creating a multiple expansion of demand deposits. The increase in M will then flow into the economy, first impacting output and employment, and later the price level.

 Figure 2. The M1 Money Multiplier in China Is Working

Adherence to a monetary rule with Chinese characteristics since 1998 prevented nominal GDP growth from dipping below 10 percent from 2000–13, even during the 2008 global financial crisis (Figure 3).[3]  However, with the slowdown in real GDP growth during the last several years, NGDP growth has slowed as well.

 Figure 3. Real and Nominal GDP Growth, China 

Financial Repression in China

On the surface, it may seem that PBC has been reasonably successful in using monetary targeting to maintain steady nominal income growth and prevent excessive inflation. But any assessment ought to consider that Chinese monetary policy is implemented in the context of China’s illiberal and inefficient financial system.

The Chinese financial system is characterized by financial repression—in the form of low or negative real interest rates on deposits at state-owned commercial banks, capital controls, and credit rationing. State-owned banks favor lending to state-owned enterprises (SOEs), rather than more efficient private enterprises, resulting in a misallocation of capital. Deposit rates are purposefully kept below lending rates to keep state-owned banks profitable and generate tax revenue. Inflation can turn real deposit rates negative, adversely affecting savers. Finally, below-market lending rates at state-owned banks create an excess demand for loanable funds and result in the use of quotas to ration credit.

China has allowed more flexibility in setting interest rates but still uses benchmark rates to maintain a positive net interest margin at state-owned banks. Private enterprises that find it difficult to obtain low-interest loans in the state sector move to the shadow banking system where they must pay a much higher interest rate. The lack of investment alternatives, and strict control of capital outflows, has resulted in more than 50 percent of national income being saved. Financial deepening and liberalization have reduced the scope of financial repression, but the financial sector is still under strong state control.

While it is true that China has intervened to lower the foreign exchange value of the yuan, more recently the PBC has tried to stem capital outflows by defending the yuan against the U.S. dollar, and in so doing is using up scarce foreign exchange reserves. That is, the PBC is propping up the yuan-dollar rate by buying yuan in the foreign exchange market and selling dollars. To offset the decrease in base money—and prevent deflation—the PBC must sterilize the foreign exchange intervention by buying securities (central bank bills, etc.) from state-owned banks, adding reserves to the banking system. But this is a tricky business because the larger the capital outflows, which put downward pressure on the yuan, the higher the probability of further downward pressure on the yuan-dollar exchange rate. This reality makes it increasingly difficult to defend the peg and manage the money supply.

Monetarism with Chinese characteristics— in which the PBC targets M2 in line with planned NGDP growth— is therefore compromised by inconsistent, competing policy goals (see “Policy Objectives” in Figure 1), and hindered by heavy state intervention in capital markets. The dominance of state-owned banks in China’s financial system, which  lend to SOEs and take their marching orders from the PBC under the visible hand of the State Council, means constant fine-tuning of monetary and credit policy.


In a fiat money world, central banks need an anchor in the form of a monetary rule. The quantity theory of money predicts a close relationship between money growth and NGDP growth over the longer-run. By targeting monetary aggregates since 1998, China has helped prevent severe inflation and recession. Nevertheless, the lack of PBC independence, the existence of multiple objectives for monetary policy, and financial repression weaken the implementation of monetarism in the form of either a Friedman-style constant money growth rule or a McCallum rule targeting NGDP.

The Fed and other central banks could learn from China’s experience with money supply targeting while recognizing the dangers of credit allocation. China pays interest on both required and excess reserves, but the rate on excess reserves is far below lending rates.[4] Unlike the United States, the money multiplier has not collapsed in China: increases in base money have increased the money supply and nominal income.

If the Fed adopted a simple monetary rule, abolished interest on excess reserves,  reduced the size of its balance sheet, ended credit allocation, and lessened onerous  macro-prudential regulation, there would be a much higher probability that the money multiplier would return to normal and another financial crisis avoided.


This blogpost is drawn from a recent Cato Institute working paper, James A. Dorn, “Monetarism with Chinese Characteristics,” [Cato Institute Working Paper No. 42, February 14, 2017]. Please see this paper for more detail on Chinese monetary targeting and more thorough recommendations for American and Chinese policymakers.

[1] Notes: RRR is required reserve ratio; OMO is open market operations; MLF is medium-term lending facility; PSL is pledged supplementary lending; SLO is short-term liquidity operations; SLF is standing lending facility; LDR is the loan-to-deposit ratio. Source: Wang et al. (2017: 2).

[2] Burdekin and Siklos (2008a: 84–85) argue that interest-rate controls preclude the PBC from targeting interest rates. Thus, a better fit for China is to target monetary aggregates and use a McCallum-type monetary rule. See McCallum (1988).

[3] I chose 10 percent NGDP growth as a reasonable target based on planned real output growth of 7 percent per year and inflation of 3 percent per year.

[4] The PBC pays 1.62 percent on required reserves and 0.72 percent on excess reserves, which is substantially less than the prime lending rate of 4.35 percent.

[Cross-posted from Alt-M.org]

Support for the ACA’s community-rating provisions flips from 63%-33% support to 60%-31% opposed if it harms the quality of health care. 55% say more free-market competition not government management would best deliver high-quality affordable health care. FULL RESULTS (PDF)

Most polling of the Affordable Care Act finds popular support for many of its benefits when no costs are mentioned. However, a new Cato Institute/YouGov survey finds that support plummets, even among Democrats, if its popular provisions harm the quality of health care. The poll finds that risks of higher premiums, higher taxes, or subsidies to insurers are less concerning to Americans than harm to the quality of care. 

By a margin of 63% to 33%, Americans support the ACA’s community-rating provision that prevents health insurers from charging some customers higher rates based on their medical history. However, support flips with a majority opposed 60%-31% if the provision caused the quality of health care to get worse.

Majorities also come to oppose the ACA’s community-rating provision if it increased premiums (55% oppose, 39% favor), or raised taxes (53% oppose, 40% favor). However, threats to the to quality of care appear to be a pressure point for most Americans.

When respondents were asked follow-up questions about specific types of quality reductions, Americans turned against the ACA’s community-rating provision most if:

  • It limits access to medical tests and treatments (66% oppose, 27% favor)
  • People have to wait several months before seeing a specialist to receive medically necessary care (65% oppose, 25% favor)
  • It limits access to top rated medical facilities and treatment centers for serious illnesses (62% oppose, 31% favor).
  • If people received more surprise medical bills for services they thought were covered (64% oppose, 25% favor)

Democrats Turn Against ACA’s Popular Provisions When Quality at Risk

Democrats are key to the shift on quality. Majorities of Democrats (58%) would be willing to pay more in health insurance premiums or pay higher taxes (60%) to prevent insurers from charging higher rates to people with preexisting conditions. But a majority would oppose (55%) this rule if it meant the quality of health care would get worse. 

Several demographic groups are less sensitive to financial costs associated with the provision. But, threats to quality narrow the gap.

For instance, 48% of Americans under 35 say they would oppose the community-rating provision if it meant their taxes would increase compared to 57% of Americans 35-54. However, two-thirds of both groups would oppose if the provision resulted in limited access to medical tests and treatments.

Americans earning above $80,000 a year (47%) are more willing than Americans making less than $40,000 a year (37%) to pay higher premiums to prevent insurers from charging higher rates to people with pre-existing conditions. However, 60% and 62% respectively would turn against the provision if it meant they’d have less access to top-rated medical facilities and treatment centers.

Quality considerations bridge the gap across partisanship, income, and age.

Quality Concerns Move People Most on Guaranteed-Issue

We find the same pattern in the second Cato Institute/YouGov survey when asking about the ACA’s guaranteed-issue provision that requires health insurers cover anyone who applies for health insurance, including those with pre-existing conditions. Support for this provision flips from 77%-20% support, to 75%-20% opposed if it caused the quality of health care to get worse. Although majorities also come to oppose the provision if it raised premiums (60%) or taxes (55%), threats to quality result in the most dramatic shift.

By asking these questions on a separate survey, respondents were not impacted by the community-rating provision questions. Thus, we find that quality is a key pressure point for most Americans in two separate surveys.

Once again, Democrats are essential to the dramatic shift on quality. Although majorities of Democrats would be willing to pay higher taxes (60%) and higher premiums (51%), a majority would oppose (65%) the guaranteed-issue provision it caused the quality of health care to decline.

The survey also found that Americans might continue their support for the ACA’s guaranteed-issue (52%) and community-rating (47%) provisions if either required Congress to provide taxpayer subsidies to private insurance companies. This indicates that Americans distinguish between potential costs, are willing to accept some more than others, but are unwilling to sacrifice on quality.

Dependent-Coverage Mandate

At first glance, a strong majority (72%) of Americans support a provision in the ACA that allows young adults to stay on their parents’ insurance plans until age 26, while 25% oppose. However support plummets to 38% and a majority would instead oppose (58%) if the provision cost $1,200 a year to allow young adults to stay on their parents’ insurance plan. (This number comes from a NBER study of the costs of the dependent-coverage mandate.)

Americans Believe Free-Market Competition Offers Path Forward

A majority (55%) of Americans say that more free-market competition among health insurers, hospitals and doctors is the “better way” to sustainably provide high-quality affordable insurance to people. Thirty-nine percent (39%) say that more government management of health insurers, doctors and hospitals would be more effective.

These results are consistent with similar polling from the Kaiser Family Foundation, which found 51% believe market competition would better reduce prescription drug prices than government regulation (40%).

Unsurprisingly, respondents line up by partisanship. A majority (59%) of Democrats believe more government management of the health care system is what’s needed while 82% of Republicans and 59% of independents believe free-market competition would be more effective.

Quality Concerns in Historical Context

The pattern of quality concerns moving public opinion the most is consistent with polling data over the past 20 years. Back in 1994, Gallup asked a similar set of questions about universal health insurance coverage. Like these results, the poll first found strong support 80%-16% for universal coverage. When Gallup asked follow-up questions, as we have done here, support declined to 55% if universal coverage raised premiums. But the poll measured the most dramatic shift against universal coverage if it were to limit the availability of health services with 69%-26% opposed. 

Once again in 2012, the Reason-Rupe poll, which I directed at the time, asked a comparable set of questions about the ACA’s community rating provision and found the same pattern. At first, the poll found a majority (52%) who supported the provision. But 50% would oppose if it raised premiums, and 76% would oppose if it reduced health care quality.

A CBS/New York Times July 2009 survey used a similar wording construction to the questions used in the Cato Institute poll. First, it asked if it was the federal government’s responsibility to guarantee insurance for all Americans, finding 55% in agreement. However, “if that meant the cost of your own health insurance would go up,” support declined to 43%. This survey did not measure how support changed if health care quality was at risk.

These surveys demonstrate that polls presenting only the benefits of health care policies risk inflating support for such policies. Support for even the most popular provisions in the ACA drop when the public is asked to consider their likely costs in concert with the benefits. Furthermore, reductions in the quality of care, more so than premium increases, have the most significant impact on support.

Survey results and methodology can be found here. The Cato Institute in collaboration with YouGov conducted two health care surveys online February 22-23, 2017. The first survey interviewed 1,152 American adults with a margin of error of  ± 2.93 percentage points. The second survey interviewed 1,103 American adults with a margin of error of ± 2.85 percentage points. The margin of error for items used in half-samples is approximately ±  5.1 percentage points.

President Trump is reportedly planning to cut the Department of State’s budget by 37 percent. I’m not an expert on the department’s activities, but it would seem ripe for cuts given the large run-up in spending in recent years.

The chart shows Department of State outlays since 1970 in constant 2016 dollars. Real spending has more than tripled the past 16 years—from $9.5 billion in 2000 to $30.9 billion in 2016. The data comes from President Obama’s last budget. You can chart spending on federal departments and agencies here at DownsizingGovernment.org.

The Trump administration apparently wants to make budget room for Department of Defense spending increases, but the Pentagon is also bloated with inefficiency, as discussed here, here, and here.

The Supreme Court in the 1990s established that “a racially gerrymandered redistricting scheme… is constitutionally suspect” under the Equal Protection Clause. Today’s more-or-less-unanimous decision in Bethune-Hill v. Virginia Board of Elections confirms that the Court is not prepared to back off or cut corners on that principle.

In particular, the Court unanimously found that a district court had been too indulgent in reviewing Virginia officials’ race-conscious drawing of lines for legislative districts. While the Court permits some race-conscious line drawing in order to meet the requirements of the federal Voting Rights Act, this is not a blank check. “Racial gerrymandering, even for remedial purposes, may balkanize us into competing racial factions,” warned Justice Sandra Day O’Connor in the first case in this series, Shaw v. Reno (Shaw I, 1993).

In that 1993 case, O’Connor and her colleagues were reviewing a set of North Carolina districts so bizarre in shape that their tactical purpose could scarcely be denied with a straight face. Today’s ruling clarifies, though there had not been much doubt before, that when there is other evidence of racial motivation, the process does not escape Equal Protection scrutiny just because the shape of districts appears normal and they do not visibly violate other sound principles of districting. 

Justice Alito in a separate and Justice Thomas in a partial concurrence would have applied even tougher scrutiny. Overall, however, the Court spoke with much unity. And that is not something to take for granted on this subject. In both Shaw v. Reno (1993) and Miller v. Johnson (1995), four dissenting Justices from the liberal wing disapproved of Equal Protection scrutiny on varying rationales. In a notably vicious editorial after Shaw I, the New York Times assailed O’Connor personally over what it saw as “a full-scale assault on the Voting Rights Act” intended to “punish” blacks and “sustain all-white politics.” 

Today – despite some academic opinion that still yearns to go back to the days when racial gerrymandering was A-OK when done with suitably progressive motives – all eight sitting members of the Court, liberal wing included, appear content to apply at least the Shaw-Miller level of scrutiny. 

Justice Kennedy wrote today’s opinion, confirming once more that he stands at the center of gravity of today’s Court on redistricting issues. Much of the speculation these days is whether Kennedy is prepared to join the liberal wing in disapproving gerrymandering done for political (typically party- and incumbent-protective), as distinct from racial, motives. By coincidence, for those interested in these issues, I have a chapter in the new 8th edition of Cato’s Handbook for Policymakers on the topic of political gerrymandering, with advice on how best to reduce its prevalence at the state level. 

Last night’s address to Congress by President Trump was devoid of detail on infrastructure investment. But in justifying his desire to harness $1 trillion of public and private funds for “new roads, bridges, tunnels, airports and railways”, the President used two lines of bad economic reasoning sadly all too prevalent in public debate on this issue.

First was to invoke the building of the interstate highway system. “The time has come,” Trump declared, “for a new program of national rebuilding.” The implication: the interstate highway system was good for the economy, so we should invest more in roads today - a common rhetorical technique, but one which confuses average with marginal.

Previous economic research has indeed found that the construction of the interstate highway system substantially boosted productivity for industries associated with road use. But the same research finds those benefits to be largely one-offs, meaning this analysis does nothing to inform us about new decisions. In fact, more recent work has found that too many new highways have been built between 1983 and 2003, and that marginal extensions to the highway system tend not to increase social welfare, because the cost savings of reducing travel times are small relative to incomes and prices.

In other words, building a highway system can boost growth. Building a second highway system? Not so much. Rather than appealing to grand projects based on historical experience, all new government projects should stand up on their own merits – ideally having high benefit to cost ratios and being things that would not be undertaken by the private sector.

The second mistake was to highlight “creating millions of new jobs” as an aim or positive of any infrastructure spending. When the government is investing to build something, it should aim to do so most efficiently. “Jobs” in this sense are a cost, not a benefit, and ones “created” only come through the diversion of resources and opportunities in other parts of the economy.

Upon visiting an Asian country in the 1960s, Milton Friedman is frequently quoted as reacting to the absence of heavy machinery in a canal build by asking why the project was being undertaken by men with shovels. Upon being told it was a “jobs program,” he is said to have remarked: “Oh, I see. I thought you were trying to build a canal. If you really want to create jobs, then by all means give these men spoons, not shovels.”

If one is concerned with improving the economic growth potential of the economy, then you would base both the selection of projects and the means of undertaking them according to that objective. Sadly, when governments are involved, other ambitions (be it stimulating particular regions, appeasing certain interests, obtaining political prestige or facilitating observable jobs) tend to interfere with the stated aim. The constant talk of the benefits of wise, productive investment is an ambition, rather than something we should expect.

During the presidential campaign Donald Trump’s son, Eric Trump, tweeted a picture of a bowl of Skittles candies along with the caption: “If I had a bowl of skittles and I told you just three would kill you. Would you take handful? That’s our Syrian refugee problem.”

Trump’s tweet generated backlash from many corners but the general logic of this vivid metaphor continues to resonate for many, despite research that demonstrates that the risk of an American dying in a terrorist attack carried out by refugees and immigrants in the United States is astonishingly low. For many Americans, the prospect of just one bad skittle overwhelms a more rational calculation embracing both immigration’s costs and benefits.

But perhaps a different vivid mental picture can help people see the immigration question in a new light.

The trolley problem is a famous thought experiment in ethics. The general form of the problem (quoted here from Wikipedia) is this:

There is a runaway trolley barreling down the railway tracks. Ahead, on the tracks, there are five people tied up and unable to move. The trolley is headed straight for them. You are standing some distance off in the train yard, next to a lever. If you pull this lever, the trolley will switch to a different set of tracks. However, you notice that there is one person on the sidetrack. You have two options:

  1. Do nothing, and the trolley kills the five people on the main track.
  2. Pull the lever, diverting the trolley onto the sidetrack where it will kill one person.

This is a tough scenario for sure. Do you believe that pulling the lever is the best option? What is your justification for that choice?

Surveys have shown that around 90% would make the difficult decision to pull the lever to save the five people. The justification for most people is straightforward: saving five lives is better than saving one life. But studies also show that it matters a great deal who that one person is. For example, if the person happens to be the respondent’s relative or loved one, a respondent is far less likely to indicate he or she would pull the lever.

When thinking about President Trump’s proposed crackdown on travel, immigration, and refugees, we might revise the standard version of the problem to read like this:

There is a runaway trolley barreling down the railway tracks. Ahead, on the tracks, there are five refugees and immigrants tied up and unable to move. The trolley is headed straight for them. You are standing some distance off in the train yard, next to a lever. If you pull this lever, the trolley will switch to a different set of tracks. However, you notice that there is one American citizen on the sidetrack. You have two options:

  1. Do nothing, and the trolley kills the five refugees and immigrants on the main track.
  1. Pull the lever, diverting the trolley onto the sidetrack where it will kill one American citizen.

Now how do you answer the trolley problem? Does your justification differ from the justification of your response to the original version of trolley problem?

This second version is, of course, very similar to the refugee and immigration policy problem confronting the United States today, except that in this case pulling the lever (i.e. allowing refugees and immigrations into the U.S.) will help or save millions of people, not just five, for every American that might get hurt. In fact, according to a Cato study, despite the United States welcoming a million immigrants each year and over three million refugees since 1975, refugees and immigrants combined to kill just eleven Americans in terrorist acts between 1975 and 2015. That’s about 41 million immigrants and 3 million refugees “saved” against eleven Americans who died. In other words, the real life trolley problem has 11 million refugees and immigrants on one track and a single American on the other track.

If you believe that the right answer in the first version is to pull the lever, then you either need to pull it in the second version or you need a new justification that privileges American lives over foreign lives in a very powerful way. Nationalists like President Trump do so by simply declaring “America First” and arguing that no Americans should die in order to save any number of foreign nationals.

But that perspective is troubling to many others. The majority of Americans support sending troops to help prevent genocide or major humanitarian disasters. And despite the risks most Americans support sending help in cases of natural disasters like the 2010 earthquake in Haiti. Thus for most, though the risk to American lives is certainly a critical consideration, so is the opportunity – even the obligation – to save other people’s lives when possible.

Few people are used to thinking about public policy in such blunt terms, but in the end Americans must decide whether or not they are willing to live with a very modest increase in risk to American lives in order to save and improve the lives of millions of refugees and immigrants. Most Americans, in the end, choose to save the lives of the five people when confronted with the trolley problem. Hopefully a majority will eventually apply the same thinking to the debate on refugees and immigration.

Nearly three years ago, Ukraine’s Kremlin-backed president fled the country’s capital amidst massive anti-government protests. The series of events to follow would alter the geopolitical landscape of post-Soviet Eurasia, destabilize security within the wider region and pose a major challenge for U.S.-Russia relations.

Following an unrecognized referendum in eastern Ukraine, Russia proceeded in its annexation of the Crimean peninsula in a brazen act transgressing the notion of Westphalian sovereignty. The United States and the European Union responded by imposing sanctions on Russia, with debatable efficacy, while two ceasefire agreements have failed to end a protracted and bloody conflict on the ground.

Against this backdrop, the Trump administration has indicated a willingness to lift Russian sanctions in order to improve bilateral relations—a move which would be unpopular in Congress. Simultaneously, there is continued insistence from the United States and Europe that Russia must return control of the Crimea to Ukraine—a stipulation which Russia refuses to consider. Where do U.S.-Russia relations go from here?

Prior to looking into the policy options, an upcoming Book Forum presenting the recently released book Everyone Loses: The Ukraine Crisis and the Ruinous Contest for Post-Soviet Eurasia (Routledge, January 2017) will first examine how U.S.-Russian relations arrived at such a precarious point in the first place.  

The book’s authors, Timothy J. Colton (Morris and Anna Feldberg Professor of Government and Russian Studies, Harvard University) and Samuel Charap (Senior Fellow for Russia and Eurasia, International Institute for Strategic Studies; Former Senior Advisor, U.S. Under Secretary of State for Arms Control and International Security), argue that a series of grave strategic miscalculations, resulting from years of zero-sum behavior on the parts of both Russia and the United States, have destabilized the post-Soviet Eurasian sphere to the detriment of the West, Russia and the countries caught in the midst. With regional and international security now deteriorated and all parties worse off, Colton and Charap conclude that all governments must commit to patient negotiation aimed at finding mutually acceptable alternatives, rather than policies aimed at securing one-sided advantages.

Please join us for what is sure to be an insightful and comprehensive foray into the roots of the Ukraine crisis during Cato’s Book Forum on March 10th, featuring co-author Samuel Charap with comments provided by Emma Ashford, Cato Institute Research Fellow. You are invited to register for the event here.

In today’s Wall Street Journal, I discuss new economic research showing ObamaCare is making health insurance worse for patients with high-cost medical conditions.

Republicans are nervous about repealing ObamaCare’s supposed ban on discrimination against patients with pre-existing conditions. But a new study by Harvard and the University of Texas-Austin finds those rules penalize high-quality coverage for the sick, reward insurers who slash coverage for the sick, and leave patients unable to obtain adequate insurance…

If anything, Republicans should fear not repealing ObamaCare’s pre-existing-conditions rules. The Congressional Budget Office predicts a partial repeal would wipe out the individual market and cause nine million to lose coverage unnecessarily. And contrary to conventional wisdom, the consequences of those rules are wildly unpopular. In a new Cato Institute/YouGov poll, 63% of respondents initially supported ObamaCare’s pre-existing-condition rules. That dropped to 31%—with 60% opposition—when they were told of the impact on quality.

Republicans can’t keep their promise to repeal ObamaCare and improve access for the sick without repealing the ACA’s penalties on high-quality coverage.

The lesson is clear. To repeal ObamaCare, opponents need to talk to voters about how the law is reducing the quality of health insurance and medical care for the sick.

Read the whole thing.

President Donald Trump will lay out some of his budget priorities in an address to Congress tonight. He wants to increase spending on defense, a border wall, and perhaps infrastructure. He also wants to cut taxes and balance the budget, yet does not favor reductions to Medicare or Social Security. His budget chief, Mick Mulvaney, faces a challenge in meshing all those priorities.

The chart shows federal spending in four categories as a percent of gross domestic product (GDP). No doubt, Mulvaney is pondering the CBO baseline projections to the right of the vertical line for 2018-2027. As a share of GDP, entitlement and interest spending are expected to soar, while defense and nondefense discretionary spending are expected to fall. Below the chart, I discuss the ups and downs of the four categories since 1970.

Here are some of the causes of the fluctuations seen in the chart:

1970s: Defense spending plunges as the Vietnam War subsides in the early 1970s. But the cost of new Lyndon Johnson/Richard Nixon entitlement and discretionary programs skyrockets.

1980s: Ronald Reagan boosts defense spending, and interest costs soar due to the rising debt. But Reagan cuts numerous discretionary and entitlement programs. For example, “income security” programs fall from 1.6 percent of GDP in 1981 to 1.1 percent by 1989.

1990s: The end of the Cold War prompts large defense cuts. But the recession and spendthrift approach of George H.W. Bush causes other spending to rise early in the decade. Bill Clinton lucks out as Social Security spending falls from 4.4 percent in 1992 to 4.0 percent by the end of the decade, while spending on Medicare and Medicaid remains fairly flat.

2000s: Medicare spending soars under George W. Bush, partly due to his Part D drug plan. Bush also pushes up spending on defense, homeland security, food stamps, education subsidies, and other programs. However, Bush benefits from the Fed’s policy of low interest rates, which moderates federal interest costs.

2010s: The recession of 2007 to 2009 causes spending on entitlements—such as unemployment insurance and food stamps—to soar. The Obama stimulus package includes big increases for many discretionary and entitlement programs in 2009 and subsequent years. The early Obama years also include high levels of Iraq and Afghanistan war spending. However, Obama also benefits from the Fed’s interest rate policies.

2018-2027: CBO projections show entitlement and interest costs rising rapidly, and deficits topping $1 trillion by 2023. To sustain economic growth and avert a fiscal disaster, Trump should push to terminate and privatize programs in every federal department. He talks a good game, but we will see whether he is interested in actual budget reforms in coming weeks as he rolls out specific proposals.

Notes: CBO data is here. I adjusted the entitlement line to take out TARP from 2009-2011 because it ended up costing taxpayers little or nothing.

For ways to cut federal spending, see this essay at DownsizingGovernment.org.

In Federalist 39, James Madison asks whether the 1787 Constitution

be strictly republican. It is evident that no other form would be reconcilable with the genius of the people of America; with the fundamental principles of the Revolution; or with that honorable determination which animates every votary of freedom, to rest all our political experiments on the capacity of mankind for self-government.

The political scientist John DiIulio, Jr. answers ten questions about big government. He shows that regulations and spending by the federal government have risen a lot over the past half century. At the same time, representatives of the people have less control over the people who implement big government. The feds delegate implementation to state and local governments and contractors. These “agents of the people” by and large, he argues, do a poor job.

DiIulio concludes that Americans “want big government benefits and programs, but they do not want to pay big government taxes and they prefer not to receive their goods and services directly from the hand of big government bureaucracies.” Add some lobbying by contractors and state and local officials, and you have big, incompetent government.

DiIulio recalls Alexander Hamilton’s claim that “the true test of good government is its aptitude and tendency to produce a good administration.” That’s a Hamiltonian thing to say!

Madisonian things ought also be said. The U.S. Constitution promised republican self-government, not efficient tax collection and a skilled civil service. The government DiIulio outlines involves so many people doing so much that elected representatives can hardly be expected to control this vast administrative state. The old hope for republican liberty too has been diminished by the rise of big government.

In a previous Cato blog post, I explained how the House Republican “Better Way” corporate tax plan, which replaces our current 35% corporate income tax with a 20% “destination-based cash flow tax” (DBCFT), could theoretically avoid litigation at the World Trade Organization (WTO) and member countries’ eventual, WTO-approved retaliation against billions of dollars worth of US exports. I concluded therein that, while there wasn’t yet enough concrete information about the DBCFT’s final form to determine its WTO-consistency, the conventional wisdom was wrong to assume that any US corporate tax plan would violate the United States’ international trade obligations. Today, on the other hand, I’ll explain the quickest way that the DBCFT could get into trouble at the WTO. 

Spoiler: it’s all about the deductions.

I won’t reiterate here how the DBCFT is intended to operate and again will acknowledge that we haven’t actually seen any legislative text yet. That said, there is a pretty clear consensus view among economists that the DBCFT would essentially operate as a modified “subtraction-method” value-added tax (VAT) on US corporations’ domestic sales revenue, minus taxable input purchases. This was helpfully summarized in a recent Paul Krugman blog post (emphasis mine):

[A] VAT is just a sales tax, with no competitive impact. But a DBCFT isn’t quite the same as a VAT. With a VAT, a firm pays tax on the value of its sales, minus the cost of intermediate inputs—the goods it buys from other companies. With a DBCFT, firms similarly get to deduct the cost of intermediate inputs. But they also get to deduct the cost of factors of production, mostly labor but also land. So one way to think of a DBCFT is as a VAT combined with a subsidy for employment of domestic factors of production. The VAT part has no competitive effect, but the subsidy part would lead to expanded domestic production if wages and exchange rates didn’t change.

Just so we’re clear that I’m not playing partisan favorites here, Krugman’s view was essentially echoed by Republican/conservative economist Greg Mankiw, who called the DBCFT “like a value-added tax” on corporations’ US sales with “a deduction for labor payments.”

While economists disagree about the economic and trade effects of the DBCFT, the aforementioned descriptions have generated significant (though certainly not consensus) concerns with respect the whether the new tax would be consistent with WTO rules—concerns that don’t arise with a VAT. As I discussed last time, the DBCFT would have to clear at least three hurdles at the WTO—two on the export subsidy side and one on the import side:

  • Export subsidy: The DBCFT would be found to confer prohibited export subsidies under the Article 3 of the WTO Subsidies Agreement where (1) the tax is found to be a “direct tax,” which the Agreement defines as “taxes on wages, profits, interests, rents, royalties, and all other forms of income, and taxes on the ownership of real property” (VATs are a type of “indirect tax”); and (2) the “border adjustment” (i.e., tax exemption or rebate) for a company’s export sales is greater than the actual amount of tax due or collected.
  • Import discrimination: The DBCFT would violate the “national treatment” principle of GATT Articles II and III (on internal taxes) where it imposes a higher tax burden on an imported good than that imposed on an identical domestically produced product.

The concern among us trade lawyers rests in the deductions for labor and (maybe) land that a VAT doesn’t have but the DBCFT does—deductions that could generate violations of one or more of the aforementioned disciplines. This can be pretty difficult to see in the abstract, but the problems—as well as their absence for a normal VAT—become clearer through a simple hypothetical assessment of the tax’s effect on two identical US companies selling and exporting the same product, with one company selling only imported final goods and the other selling identical products with 100% US content. So let’s do that now, starting with a classic example used by the US Government Accounting Office to show how a standard subtraction-method VAT, which taxes corporations’ domestic (not export) sales revenue and permits one deduction for domestic (and thus taxable) input purchases, works in practice.

Effect of Basic Subtraction-Method VAT (No Export Sales)

The table below illustrates the tax treatment under a standard, 10% subtraction-method VAT for two different value chain scenarios. In this example, we presume no export sales by any company involved to make it as simple as possible.

Scenario 1: US-Only Value Chain (VAT=10%)


US Lumber Company

US Baseball Bat Manufacturer

US Retailer



$20 $70 $80 $170

Taxable (US) Purchases

$0 $20 $70 $90

Net Receipts (i.e., Tax Base)

$20 $50 $10 $80

VAT Amount

$2 $5 $1 $8


Scenario 2: Import-Only Value Chain (VAT=10%)


US Retailer



Taxable (US) Purchases


Net Receipts (i.e., Tax Base)


VAT Amount


As shown above, the total effective tax paid on the final product (baseball bats) is the same in both value chain scenarios: $8. (This assumes, consistent with economic theory, that the full amount of the VAT in the US-only scenario is passed through in each stage to the final sale, so the retailer in this example is in effect paying the full $8 tax, even though he’s only paying $1 directly to the IRS. The tax is thus embedded in the “taxable purchases” value in each of the Scenario 1 tables shown throughout.) As a result, concerns that the VAT imposes a higher tax burden on the import-only retailer (Scenario 2)—thus raising a potential import discrimination problem under GATT Articles II and III—are minimal.

Effect of Basic Subtraction-Method VAT (Export Sales)

The next example shows the effects of a US corporation exempting 100% of its export sales value from its tax base (a “border adjustment”). For the sake of simplicity, only the retailer here exports—50% of total sales—in these scenarios.

Scenario 1A: US-Only Value Chain (VAT=10%)


US Lumber Company

US Baseball Bat Manufacturer

US Retailer











$20 $0 $70 $0 $40 $40 $130 $40

Taxable (US) Purchases

$0 $20 $70 $90

Net Receipts (i.e., Tax Base)

$20 $50 $-30 $40

VAT Amount

$2 $5 $-3 (credit) $4


Scenario 2A: Import-Only Value Chain (VAT=10%)


US Retailer





$40 $40

Taxable (US) Purchases


Net Receipts (i.e., Tax Base)


VAT Amount


Even with the border adjustment on export sales, the effective tax burden is the same in both value scenarios, thus obviating concerns regarding discriminatory tax treatment against imports under the GATT. Furthermore, this tax raises no concerns regarding prohibited export subsidies because (i) VATs aren’t a “direct tax” under the Subsidies Agreement and (ii) the amount of the tax exemption ($4) for export sales isn’t greater than the amount of the tax that the exporter (retailer) in each scenario would have owed if the baseball bats had just been sold in the United States instead of exported (also $4). As a result, the risk of a WTO challenge to this type of tax system is low.

This risk increases significantly, however, once you add other deductions—such as the wage/salary deduction mentioned by Krugman and Mankiw above—to the corporate tax. This is shown in the next examples.

Effect of a “Modified” Subtraction-Method VAT with Wage/Salary Deduction (No Export Sales)

A provision that permits US corporations to deduct from the tax base both taxable input purchases and domestic wages and salaries would reduce the tax base for all upstream participants in the “US-only” value chain (Scenario 1), thus lowering the total tax paid on the product(s) at issue. However, because a retailer/importer (Scenario 2) would only be able to deduct its own wages/salaries, the imported baseball bats would face higher total tax burden than the 100% American-made baseball bats

Scenario 1B: US-Only Value Chain (VAT=10%)


US Lumber Company

US Baseball Bat Manufacturer

US Retailer



$20 $70 $80 $170

Taxable (US) Purchases

$0 $20 $70 $90


$10 $10 $5 $25

Net Receipts (i.e., Tax Base)

$10 $40 $5 $55

VAT Amount

$1 $4 $0.50 $5.50


Scenario 2B: Import-Only Value Chain (VAT=10%)


US Retailer



Taxable (US) Purchases




Net Receipts (i.e., Tax Base)


VAT Amount


In the example above, the total VAT paid on the imported good (baseball bats) is now greater ($7.50) than the VAT paid on the American baseball bats ($5.50), thus creating an apparent disincentive to sell the imported bats. In other words, if given the choice between selling an imported bat and an identical American-made bat, the US retailer operating under this “modified” VAT would have a financial incentive to buy American because he’d be paying higher total tax on the import. This same incentive would apply to other companies in the United States, and not just at the retail level. As such, the additional wage/salary deduction—very similar to the one described by Krugman and Mankiw above for the DBCFT—raises serious concerns that the DBCFT would be found to impermissibly discriminate against imports in violation of the United States’ national treatment obligations for internal taxes under GATT Articles II and III. 

One could try to argue that this discrimination is not a WTO violation because (i) it’s equivalent to a labor/wage deduction provided through a separate tax measure like the payroll tax (which raises no WTO concerns); or (ii) its discriminatory effects are eliminated through currency adjustments or through an examination of the actual economic effects of US tax reform as a whole. However, there’s little indication that a WTO panel would undertake such a comprehensive analysis, instead of simply examining the basic, superficial impact of the DBCFT measure itself in a manner similar to what I just did above. Indeed, I doubt WTO Members—including the United States!—would want the WTO to undertake such a speculative economic and legal analysis (and panels have in the past shied away from examining actual trade effects).

The border adjustment for export sales provides one final concern, as shown next.

Effect of a “Modified” Subtraction-Method VAT with Wage/Salary Deduction (Export Sales)

If the “modified” VAT included a border adjustment on exports, while still permitting corporations to deduct 100% of wages/salaries (instead of proportional to export sales), the system could create a higher effective tax on an import-only value chain and a possible subsidy for exports due to the over-exemption of tax otherwise due on export sales. Again, in this scenario only the retailer exports (50% of its sales).

Scenario 1C: US-Only Value Chain (VAT=10%)


US Lumber Company

US Baseball Bat Manufacturer

US Retailer











$20 $0 $70 $0 $40 $40 $130 $40

Taxable (US) Purchases

$0 $20 $70 $90


$10 $10 $5 $25

Net Receipts (i.e., Tax Base)

$10 $40 $-35 $15

VAT Amount

$1 $4 $-3.50 (credit) $1.50


Scenario 2C: Import-Only Value Chain (VAT=10%)


US Retailer





$40 $40

Taxable (US) Purchases




Net Receipts (i.e., Tax Base)


VAT Amount


In this case, the same import discrimination issue arises as the one noted in the previous example, but the exported baseball bats in the US-only value chain also receive an extra $2.50 tax benefit ($4 in Scenario 1A versus $1.50 in Scenario 1C) due to the labor deductions taken at all stages of the US value chain. It would be difficult to argue, however, that the full value of that labor benefit was due on those exports where only a portion of the labor was used to produce taxable goods (i.e., domestic sales). Put another way, the export sales should not benefit from any tax deduction for labor because they did not generate any tax owed in the first place, and providing this benefit could be considered an export subsidy. Thus, there is a legitimate argument to be made that the DBCFT would generate prohibited export subsidies under Article 3 of the SCM Agreement (over-exemption/rebate of internal taxes owed/due) where it permitted a 100% deduction for a firm’s wages/salaries plus a 100% exemption for that firm’s export sales. That appears to be the case with the DBCFT, though we’ll have to wait for the final legislative text to be sure.

Finally, there is a risk—not shown in the charts above—that the DBCFT would be found to constitute a “direct tax” where it permits so many additional deductions that it more closely resembles a corporate income tax than a VAT or sales tax. In short, the more deductions, the more likely it’s a direct tax (and thus confers prohibited export subsidies, regardless of the over-exemption/rebate of taxes on exports). This question is far murkier, however, that the other two issues above.

Maybe the final DBCFT will resolve these WTO problems by eliminating the extra deductions, or maybe Congress just simply ignores them and takes its chances at the WTO (risking billions in US exports in the process). But that doesn’t mean the problems don’t exist, no matter what some DBCFT cheerleaders might have you believe.

It is well known that the Federal Reserve System expanded its assets more than four-fold during and after the 2007-09 financial crisis by making massive purchases of mortgage-backed securities and Treasuries. The balance sheet has not returned to normal since. Total Fed assets stand today at $4.45 trillion, up from less than $1 trillion before the crisis. Whether, when, and how to normalize the size of the Fed’s balance sheet have been under discussion for years.

Economist-blogger David Andolfatto — not speaking for his employer the Federal Reserve Bank of St. Louis — now offers “a public finance argument” for “keeping the Fed’s balance sheet large.” Viewing the Fed as a financial intermediary, he observes that “The Fed transforms high-interest government debt into low-interest Fed liabilities (money),” and that this is a profitable business.

Curiously, Andolfatto omits to mention two important details: the Fed enjoys such a spread only because it is — for the first times in its history — (a) borrowing short and lending very long, also known as practicing “duration transformation” or “playing the yield curve,” and (b) heavily invested in mortgage-backed securities. The Fed is borrowing short by currently paying 0.75% (not 0.50% as Andolfatto reports) on zero-maturity bank reserves. It lends long by holding 10-year and longer Treasuries (paying 2.42% and up as of 17 Feb. 2017) and long-term mortgage-backed securities.

Andolfatto writes that the Fed’s “rate of return has generally followed the path of market interest rates downward.” While that was true in 2007-08, it should be noted that the Fed’s rate of return largely stopped following the downward path of market interest after 2008. As market rates on five-year Treasuries fell closer to the administered interest rate on reserves after 2008, the Fed shifted from a portfolio maturity of 5 years to one of around 12 years, as if determined to keep its interest income large. This is shown in the following two figures from a 2016 Cato Journal article of mine.

Here is Andolfatto’s closing pitch for embracing the status quo: “Reducing the Fed’s balance sheet at this point in time seems like a needless loss for the U.S. taxpayer. … if the Fed holds the debt, the carry cost is generally much lower. This cost-saving constitutes a net gain for the government. So why not take advantage of it?” The Fed faces an “arbitrage opportunity.” Having the Fed hold Treasury debt, in place of the public holding it, yields a pure arbitrage profit, because the Fed can borrow to carry the debt at a rate lower than the rate at which the Treasury borrows.

Characterizing the situation this way, however, neglects the simple difference between borrowing short and borrowing long. When the Fed borrows short from the banks to lend long to the Treasury, it does not do so costlessly. Duration transformation carries a risk of capital loss, also known as duration risk. Suppose the yield curve shifts up, both short and long interest rates rising together. The Fed will experience a decline in present value of its assets that will swamp the smaller decline in the present value of its liabilities. Such an event is not unknown: in 1979-81 it rendered insolvent about two-thirds of US thrift institutions, who were financing 30-year fixed-rate mortgages with 1- and 2-year deposits. In cash-flow terms, such an event would mean that the Fed would quickly have to start paying higher interest rates to borrow, while its asset portfolio continues to pay low yields and roll over much more slowly. The Fed’s annual net transfer to the Treasury might even go negative. Smaller or negative transfers from the Fed to the Treasury would mean a sudden jump in the present value of the public’s ordinary tax liabilities. Net interest income from playing the yield curve is not a free lunch.

The Fed has also been carrying significant default risk by holding $1.7 trillion of its portfolio not in Treasuries but in mortgage-backed securities. It was not so many years ago that MBS were trading well below par because of their default risk. Indeed it was to push their prices back towards par that the Fed purchased so many.

Responding to a commentator on his blog who pointed out the Fed’s duration risk, Andolfatto remarks: “the duration risk … could be mitigated considerably if the Fed restricted itself to short-duration assets.” He proposes that “If a one-year UST is yielding anything significantly higher than the interest on Fed liabilities, then the Fed can make a profit for the government.” But when we look at the actual numbers, we find that the yield on one-year UST is not significantly higher. The Fed could not in fact continue to make a profit for the government. One-year Treasuries are currently yielding just 82 basis points (0.82%), only 7 basis points more than the 75 basis points that the Fed pays on reserves. Multiplying 7 basis points by the Fed’s $4.45 trillion asset portfolio yields only $3.1 billion in net interest income, less than the Fed’s 2016 budget of $4.5 billion or its ex-post 2015 operating expenses of $4.2 billion. Mitigating the duration risk by going to a portfolio of one-year Treasuries would thus eliminate the Fed’s profit from borrowing from banks and relending to the Treasury.

The principal cases for normalizing the Fed’s balance sheet are (1) the Fed should not distort the allocation of credit by holding trillions in MBS, and (2) normalizing the size of the balance sheet would allow the Fed to normalize the conduct of monetary policy by making bank reserves scarce again. There is no fiscal-free-lunch case for holding off on normalization.

[Cross-posted from Alt-M.org]

How can unelected judges limit the power of an elected official like the president? Two political scientists offer some answers in The Washington Post.

First, the public should broadly agree “about the basic legitimacy of the procedures used to review the powerful.” Second, the public needs “accurate information about the behavior of public officials.”

The authors say a free press should and does provide that information in various ways. That’s a good answer as far as it goes, but it does not go nearly far enough. Many other parts of our polity have the power and responsibility to provide information about government. To name a few: interest groups, bloggers, think tanks, professors, leakers, labor unions, trade associations, grassroots groups, and many others who might spring to mind with more reflection.

The media does not have a monopoly on informing the public. “The freedom of speech and of the press” belongs to all Americans. This diffusion of power seems especially valuable at a moment when the media lack credibility for so many Americans.

A few nightmare scenarios haunt the dreams of civil libertarians—scenes drawn from our long and ignominious history of intelligence abuses.   One—call it the Nixon scenario—is that the machinery of the security state will fall into the hands of an autocratic executive, disdainful of the rule of law, who equates “national security” with the security of his own grip on political authority, who is all too willing to turn powers meant to protect us from foreign adversaries against his domestic political opponents, and who lacks any qualms about quashing inquiries into his own illegal conduct or that of his allies.  Another—call it the Hoover scenario—is that the intelligence agencies anxious to protect their own powers and prerogatives will themselves slip the leash, using their command of embarrassing secrets to intimidate (and in extreme cases perhaps even select) their own nominal masters.  As the American surveillance state has ballooned over the past 15 years, we’ve often invoked those scenarios to argue out that the slippery slope from a reasonable-sounding security measure a tool of anti-democratic repression is disquietingly short and well-oiled. You may trust that some new authority will only be used to monitor terrorists today, but under a more authoritarian administration, might it be used to suppress dissent—as when civil rights and anti-war activists became the targets of the FBI’s notorious COINTELPRO?  You may be reassured by all the rigid rules and layers of oversight designed to keep the Intelligence Community accountable, but will those mechanisms function if the intelligence agencies decide to use their broad powers to cow their own overseers?

We are now, it seems, watching both scenarios play out simultaneously.  Perhaps surprisingly, however, they’re playing out in opposition to each other—for the moment. Whatever the outcome of that conflict, it seems unlikely to bode well for American liberal democracy.

On the one hand we have Donald Trump, whose thin-skinned vindictiveness and contempt for judicial checks on his whims are on daily display, and who during his presidential campaign revealed a disturbing instinct for lashing out at political opponents with threats to disclose embarrassing personal information. (Recall his tweets promising to “spill the beans” on Heidi Cruz, wife of primary opponent Ted, or his warning that the Ricketts family, which funded ads opposing him, had “better be careful” because they “have a lot to hide”.) As a private citizen, Trump treated the legal system as a tool to harass people who wrote unflattering things about him; as a candidate, he thought nothing of offhandedly suggesting he could use the power of the Justice Department to jail his opponent. Even before taking the Oval Office, then, Trump had provided civil libertarians and intelligence community insiders with a rare point of consensus: Both feared that with control of both the intelligence agencies and the institutional checks on those agencies within the executive branch, Trump would fuse a disposition to abuse power with an institutionally unique ability to get away with it.  On the flip side, Trump’s dismissive attitude toward the intelligence consensus that Russia had intervened to aid him in the election; his frankly bizarre, fawning posture toward Russia’s strongman leader; and his insistence on defying decades of political norms to shield his finances from public scrutiny signaled that inquiries into illicit conduct by himself or his allies and associates would be likely to wither on the vine once Trump loyalists had been installed at the heads of law enforcement agencies. As Nixon scenarios go, to steal a turn of phrase from my colleague Gene Healy, Trump is a civil libertarian’s grimmest thought experiment come to life.

And yet.  

For all that, it’s difficult not to be a bit uneasy about the way the way the national security establishment, or factions with in it, appear to be pushing back—at least, assuming the leaks that have dominated headlines in recent weeks are originating within the IC. We have witnessed the torpedoing of the president’s appointed national security adviser—by means of a decision to illegally leak the contents (or, more precisely, sources’ characterizations of the contents) of foreign intelligence intercepts of his phone conversations with the Russian ambassador. That was followed almost immediately by the explosive, albeit vague, news that—contra the administration’s denials—senior Trump associates and campaign aides had regular contact with Russian intelligence officials over the past year, though this time without any description of what those conversations concerned.  

The public interest in knowing these facts is clear enough, and under the circumstances, it is not hard to reconstruct why officials within the intelligence community might regard the drastic step of going directly to the press as necessary under extraordinary circumstances.  We can infer that the ongoing investigation into the Trump campaigns Russian ties hasn’t turned up any smoking gun evidence of collusion yet, or that would likely have leaked already as well.  Yet there’s presumably enough smoke that investigators are anxious to either render it politically impossible for the new administration to kill any ongoing inquiry, or—failing that—ensure that Congress feels constrained to pick up the baton after the agents working the case are reassigned to Juneau.  Critically, however, this is not traditional “whistleblowing” about misconduct that a leaker has observed within their own agency, but rather disclosure of information gleaned from intelligence collection on Americans. 

That ought to raise disturbing echoes of J. Edgar Hoover’s notorious “Official and Confidential” and “Personal and Confidential” archives—troves of salacious dirt on public figures that made the FBI director a dangerous man to cross.  As Hoover’s aura of omniscience grew over his three decade tenure, policymakers and even presidents were cowed by the prospect of finding their dirty laundry aired in the tabloids should they earn Hoover’s ire.  Whether or not the leakers intend it, the perception that the IC is waging war on Trump is likely to resurrect that toxic chilling effect.  The lesson many commentators are now drawing—some apprehensively, a few with gloating enthusiasm—is “getting on the wrong side of the Deep State can be hazardous to your political health,” which is an unhealthy notion for officials in a liberal democracy to have lodged in their heads.    

Moreover, the tension between these two scenarios is inherently unstable.  “If you come at the king,” as one great political thinker has observed, “you’d best not miss,” and doubly so when the king is your employer.  The New York Times recently reported that the Trump would be tapping an old business associate—who notably lacks any intelligence background—to conduct an overarching review of the intelligence community, perhaps as a prelude to a future leadership role. That has reportedly created a fair amount of anxiety in intelligence circles.  Trump allies like Rep. Steve King (R-Iowa) have already ominously suggested that “people there need to be rooted out,” and the narrative of a disloyal or hostile intelligence community could help give Trump cover to launch a purge within the agencies and install his own loyalists.

That might be the truly worst-case scenario. The career bureaucracy of the intelligence agencies, whatever its own biases and pathologies, constitutes in practice one of the few real bulwarks against the twin threats of politicized intelligence and abuse of surveillance powers.  Congress, the secret FISA Court, and the IC’s Inspectors General conduct largely reactive oversight over the intelligence agencies, typically relying on internal reports of problems or some public scandal to spur them to action. Day-to-day, the primary guarantor we have that intelligence powers are being used lawfully—and that intelligence products reflect a sincere attempt to assess the truth rather than provide cover for an administration’s agenda—is the culture within the intelligence agencies, maintained largely by the middle-tier of career professionals who normally serve across multiple administrations.  In what I’ve somewhat crudely called the Hoover Scenario, the intelligence establishment can become a kind of unaccountable “double government” free to serve its own interests and agendas. But that may be the lesser evil when compared with an intelligence bureaucracy that is too completely the tool of the political branches—more loyal to the president to whom they owe their careers than to the norms and mission of their agencies, and more concerned with keeping him satisfied than telling uncomfortable truths. 

Judge Jeffrey Sutton, writing for a Sixth Circuit panel, has reversed a Tax Court ruling in an opinion [Summa Holdings v. Commissioner of Internal Revenue] beginning thus:

Caligula posted the tax laws in such fine print and so high that his subjects could not read them. Suetonius, The Twelve Caesars, bk. 4, para. 41 (Robert Graves, trans., 1957). That’s not a good idea, we can all agree. How can citizens comply with what they can’t see? And how can anyone assess the tax collector’s exercise of power in that setting? The Internal Revenue Code improves matters in one sense, as it is accessible to everyone with the time and patience to pore over its provisions.

In today’s case, however, the Commissioner of the Internal Revenue Service denied relief to a set of taxpayers who complied in full with the printed and accessible words of the tax laws. The Benenson family, to its good fortune, had the time and patience (and money) to understand how a complex set of tax provisions could lower its taxes.

And taking issue with the IRS Commissioner’s decision to disallow the combined use of two Congressionally approved devices, the Roth IRA and DISC (domestic international sales corporation), in a way said to trigger the so-called substance-over-form doctrine:

Each word of the “substance-over-form doctrine,” at least as the Commissioner has used it here, should give pause. If the government can undo transactions that the terms of the Code expressly authorize, it’s fair to ask what the point of making these terms accessible to the taxpayer and binding on the tax collector is. “Form” is “substance” when it comes to law. The words of law (its form) determine content (its substance). How odd, then, to permit the tax collector to reverse the sequence—to allow him to determine the substance of a law and to make it govern “over” the written form of the law—and to call it a “doctrine” no less.

[cross-posted from Overlawyered]

If you’re a regular Alt-M reader (and may the frost never afflict your spuds if you are), I needn’t tell you that I’m the last person to exalt the pre-2008 Federal Reserve System. Among other things, I blame that system for fueling the 2003-2006 boom, and for creating a credit famine afterwards. I also blame it for contributing to the dot.com boom of the 90s, for the rise of Too Big to Fail in the 80s, for the  inflation of the 70s, and for the disintermediation crisis of 1966, to look no further back than that.

Yet for all its flaws that old-time Fed set-up was a veritable monetary Shangri-La compared to the one now in place. For while the newfangled Federal Reserve System is no less capable of mischief than the old one was, it also has the Fed playing a far larger role than before in commandeering and allocating scarce credit.

Monetary Control, Then and Now

You see, back in those (relatively) halcyon days, the Fed got by with what now seems like a modest-sized balance sheet, the liabilities of which consisted mainly of circulating Federal Reserve notes, supplemented by Treasury and GSE deposit balances and by bank reserve balances only slightly greater than the small amounts needed to meet banks’ legal reserve requirements. Because banks held few excess reserves, it took only modest adjustments to the size of the Fed’s balance sheet, achieved by means of open-market purchases or sales of short-term Treasury securities, to make credit more or less scarce, and thereby achieve the Fed’s immediate policy objectives. Specifically, by altering the supply of bank reserves, the Fed could  influence the federal funds rate — the rate banks paid other banks to borrow reserves overnight — and so keep that rate on target.

Today, in contrast, the Fed presides over a vast portfolio, with assets consisting mainly of long-term Treasury securities and mortgage-backed securities, instead of the short-term Treasuries it once held; and that portfolio is funded more by banks’ holdings of substantial excess reserves than by circulating Federal Reserve notes. Yet instead of enhancing the Fed’s conventional powers of monetary control, the ballooning of the Fed’s balance sheet has sapped those powers by making it unnecessary for banks to routinely borrow from one another in the federal funds market to meet their legal reserve requirements. Consequently, the Fed can no longer target the effective federal funds rate, and influence other short-term interest rates, just by making modest changes to the stock of bank reserves.

So how does the Fed control credit now? Instead of increasing or reducing the availability of credit by adding to or subtracting from the supply of Fed deposit balances, the Fed now loosens or tightens credit by controlling financial institutions’ demand for such balances using a pair of new monetary control devices. By paying interest on excess reserves (IOER), the Fed rewards banks for keeping  balances beyond what they need to meet their legal requirements; and by making overnight reverse repurchase agreements (ON-RRP) with various GSEs and money-market funds, it gets those institutions to lend funds to it.

Between them the IOER rate and the implicit ON-RRP rate define the upper and lower limits, respectively, of an effective federal funds rate target “range,” because most of the limited trading  that now goes on in the federal funds market consists of overnight lending by GSEs (and the Federal Home Loan Banks especially), which are not eligible for IOER, to ordinary banks, which are. By raising its administered rates, the Fed encourages other financial institutions to maintain larger balances with it, instead of trading those balances for other interest-earning assets. Monetary tightening thus takes the form of a reduced money multiplier, rather than a reduced monetary base. The counterpart of that reduced multiplier is an increase in the Fed’s overall command of the public’s savings, for it’s the public that ultimately supplies the funds that financial institutions in turn hand over to the Fed, by holding those institutions’ IOUs.

Confiscatory Credit Control

As no one has yet come up with a catchy or at least convenient name for this new arrangement for credit control, allow me to propose one: “confiscatory credit control.”  Why “confiscatory”? Because instead of limiting the overall availability of credit like it did in the past, the Fed now limits the credit available to other prospective borrowers by grabbing more for itself, which it then passes on to the U.S. Treasury and to housing agencies whose securities it purchases. When the central banks of other, and especially poorer, nations do this sort of thing, economists (including some who work for the Fed) refer to their policies, not as examples of enlightened monetary management, but as instances of financial repression. So it seems only fair to characterize our own central bank’s similar policies in a like manner. Although it’s true that financial repression has traditionally been practiced using the stick of high mandatory reserve requirements, whereas the Fed has instead been employing carrots in the shape of ON-RRP and IOER interest incentives, the ultimate result — more credit for the government, and less for everyone else — is the same. And though banks and bank depositors are better compensated for the governments’ takings, that compensation comes at taxpayers’ expense, because it translates either into an immediate reduction in Fed remittances to the Treasury or (as has been the case in fact) in an enhanced risk of reduced remittances in the future.

Whatever you call it, the Fed’s new monetary control framework involves a dramatic increase in the Fed’s credit footprint. To grasp the extent of the increase, have a gander at the chart below, showing the value of the Fed’s assets expressed as a percentage of total commercial bank assets. Whereas in the months prior to June 2008, Fed assets amounted to less than 8 percent of those held by U.S. commercial banks, its relative size has since increased five-fold. Of this overall increase, $2.5 trillion has gone into Treasury notes and bonds, while $1.75 trillion has been invested in MBS and housing-agency debt securities.

Thanks to the combined effects of LSAP’s, IOER, and ON-RRP, among other Fed programs and policies, the Fed now lords over a far greater share of the public’s savings than it has at any time since World War II, when it resolved “to use its powers to assure at all times an ample supply of funds for financing the war effort.” Even allowing, as many authorities do, that the Great Recession was a national crisis warranting a similar expansion of the Fed’s role, that fact alone can hardly continue to justify the Fed’s vast expansion now that the recovery is well-nigh complete.

Why should we mind a permanently enlarged Fed footprint? We should mind it because the Fed’s mandate doesn’t include commandeering a huge chunk of the public’s savings; and we should mind it because the Fed isn’t designed to employ our savings efficiently. Its business, like that of all modern central banks (but unlike that of, say, the Gosbank), is that of keeping the overall scale of credit creation within bounds consistent with macroeconomic stability, while leaving private financial institutions as free as is consistent with preserving that stability to decide how best to employ scarce credit.

The bigger the Fed’s credit footprint, the more it interferes with the efficient employment and pricing of credit. By directing a large share of savings to purchases of longer-term MBS and Treasury securities, for example, the Fed has artificially raised both the prices of those securities, and the importance of the housing market and the federal government relative to the rest of the U.S. economy. It has also dramatically increased its portfolio’s duration gap and, by so doing, the risk that it will suffer losses should it sell assets before they mature. In other words, the Fed has undermined its own flexibility, by increasing the likely cost, directly to the U.S. Treasury and indirectly to itself, of using open-market sales to tighten credit. Finally, by flattening the yield curve, the Fed’s purchases have harmed commercial banks, the profits of which come mainly from borrowing short, lending long, and pocketing the difference.

Promises, Promises

The presumption that the Fed’s credit footprint should be as small as possible was once shared by most experts, including Fed officials. For that reason, when QE was just getting started, and for some time afterwards, those officials were anxious to assure everyone that the Fed ‘s growth was only temporary.

In speaking at the LSE back in January 2009, for example, Ben Bernanke promised that

As lending programs are scaled back, the size of the Federal Reserve’s balance sheet will decline, implying a reduction in excess reserves and the monetary base. …  As the size of the balance sheet and the quantity of excess reserves in the system decline, the Federal Reserve will be able to return to its traditional means of making monetary policy — namely, by setting a target for the federal funds rate.

Later that same year Fed Vice President Donald Kohn, speaking at a Shadow Open Market Committee meeting held here at the Cato Institute, complained that “the large volume of reserves is contributing to the loose relationship of our deposit rate and market rates,” while assuring those present that the Fed would eventually “drain the banking system of excess reserves for that reason.” [1]  In their April 2010 meeting, most FOMC members hoped that the Fed would dispose of all its QE1 assets within 5 years of its first post-crisis rate hike, while a few wanted it to start selling assets before its first rate increase. A year later the FOMC was still committed  to having the Fed dispose of its agency securities rapidly, so as “to minimize the extent to which the Federal Reserve portfolio might affect the allocation of credit across sectors of the economy.”

Finally, when, in 2014, the Fed began to increase the magnitude of its ON-RRP operations, some FOMC members worried about that facility’s influence on credit allocation. Nor were their concerns unwarranted. According to a study prepared by a group of Fed economists some months later, an enlarged ON-RRP program “would expand the Federal Reserve’s footprint in short-term funding markets and could alter the structure and functioning of those markets in ways that may be difficult to anticipate.” Among other things, Fed experts feared that, by substantially increasing the Federal Reserve’s role in financial intermediation, the new facility “might magnify strains in short-term funding markets during periods of financial stress.”

Alas, despite such concerns, and the progress of the recovery, the Fed has yet to take steps to shrink its balance sheet. Instead, it continues to reinvest both the proceeds from maturing Treasuries and  principal payments from its agency debt and MBS. More disturbingly still, arguments to the effect that the Fed should make its gigantic footprint permanent, or even increase it, seem to be gaining ground both within and beyond the Fed. (An early convert to the new view was Ben Bernanke himself, who, at a May 2014 conference in which yours truly also took part, declared that “There is absolutely no need or requirement for the balance sheet to go back to normal as monetary policy normalizes. The balance sheet could be kept where it is for a very long time if necessary.”)

On the other hand, some other Fed officials, including St. Louis Fed President James Bullard, still hope to get the Fed to go on a diet. So, apparently, does Kentucky representative Andy Barr, who favors legislation that would give the Fed no choice but to shrink. Writing recently in Investor’s Business Daily, Barr observed that the Fed’s “enormous balance sheet puts taxpayers at risk, especially if interest rates rise, and distorts the free flow of capital that has sorely gone missing from our low-productivity recovery.”

The Demand Side of Fed Shrinkage

Barr hopes that pending legislation “will include an effective strategy to shrink the Federal Reserve’s balance sheet and limit its holdings to U.S. Treasuries.” If that’s what it’s going to take to cut the Fed back down to size, I’m for it as well. But Barr’s proposal begs the question, just what is an “effective strategy” for shrinking the Fed?

Most discussions treat such a strategy as being entirely a matter of setting a schedule, like those the FOMC has toyed with since 2010, for ending or limiting Fed re-investments of maturing securities and dividends, and (in more aggressive plans) for outright MBS sales. But there’s more to it than that, because the size of the Fed’s footprint is ultimately determined, not by the dollar-value of the Fed’s assets, but by the real demand for its liabilities. The greater the latter demand, the larger the Fed is bound to be in real (that is, inflation-adjusted) terms.

Just before the crisis, the demand for Fed liabilities consisted mainly of the public’s demand for paper dollars, about $800 billion of which were outstanding. The demand for Fed deposit balances, including banks’ demand for reserves, was, in contrast, quite limited. The Treasury and the GSEs kept modest balances amounting in all to about $100 billion, while banks held even less, in reserves  barely exceeding minimum legal requirements. Today, thanks to IOER, ON-RRP, and other Federal Reserve programs and powers put into effect during the crisis, the demand for Fed balances has dramatically increased. Unless these special sources of demand are themselves dealt with, shrinking the Fed’s balance sheet alone won’t suffice to reduce the Fed’s size, either in real terms or relative to the credit system as a whole. Instead, Fed asset sales will, other things equal, cause private financial institutions to reduce their holdings of assets other than balances at the Fed, so as to retain the same ratio of Fed balances to other assets.

The good news is that reducing the demand for Fed balances to pre-crisis levels is relatively easy. Today’s exceptional demand is mainly the result of heightened bank liquidity needs combined with the Fed’s practice of setting the IOER rate above the yield on Treasury securities, and on short-term securities especially. Banks’ heightened liquidity needs initially stemmed from the crisis itself, but have since been sustained by the Fed’s liquidity stress testing and, more recently, by the U.S. implementation of Basel’s Liquidity Coverage Ratio.[2] But these needs alone don’t account for banks’ extraordinary demand for excess reserves, because Treasury securities are themselves high-quality liquid assets, which banks would normally favor over excess reserves for their higher yields. It’s only because the Fed has been paying IOER at rates exceeding those on many Treasury securities, and on short-term Treasury securities especially, that banks (especially large domestic and foreign banks) have chosen to hoard reserves. Even today, despite rate increases, the IOER rate of 75 basis points exceeds yields on most Treasury bills.  Were  it not for this difference, banks would trade their excess reserves for Treasury securities, causing unwanted Fed balances to be passed around like so many hot-potatoes, and creating new bank deposits in the process. Because more deposits means more required reserves, banks would eventually have no excess reserves to dispose of.

Phasing out ON-RRP, on the other hand, would eliminate the artificial boost that program has been giving to non-bank financial institutions’ demand for Fed balances.

Because phasing out ON-RRP makes more reserves available to banks, while reducing IOER rates reduces banks’ own demand for such reserves, both policies are expansionary. They don’t alter the total supply of Fed balances. Instead they serve to raise the money multiplier by adding to banks’ capacity and willingness to expand their own balance sheets by acquiring non-reserve assets. But this expansionary result is a feature, not a bug: as former Fed Vice Chairman Alan Blinder observed in December 2013, the greater the money multiplier, the more the Fed can shrink its balance sheet without over-tightening. In principle, so long as it sells enough securities, the Fed can reduce its ON-RRP and IOER rates, relative to prevailing market rates, without missing its ultimate policy targets.

In practice, the Fed may prefer (if it isn’t forced) to shrink its portfolio according to a preset schedule, rather than at whatever rate it takes to compensate for a declining demand for Fed balances. In that case, it has another tool it can use to keep a lid on credit: its Term Deposit Facility. As the Federal Reserve Board’s own description of that facility  explains, by inducing banks to keep term (rather than demand) deposits with it, the Fed drains as many reserve balances from the banking system. So, to the extent that the Fed’s gradual asset sales fail to adequately compensate for a multiplier revival brought about by its scaling-back of ON-RRP and IOER, the Fed can take up the slack by sufficiently raising the return on its Term Deposits.

And the Fed’s federal funds rate target? What happens to that? In the first place, as the Fed scales back on ON-RRP and IOER, by allowing the rates paid through these arrangements to decline relative to short-term Treasury rates, its administered rates will become increasingly irrelevant. The same changes, together with concurrent assets sales, will make the effective federal funds rate more relevant, by reducing banks’ excess reserves and increasing overnight borrowing. While the changes are ongoing, the Fed would continue to post administered rates; but it could also revive its pre-crisis practice of announcing a single-valued effective funds rate target. In time, the latter target could once again be more-or-less precisely met, making it unnecessary for the Fed to continue referring to any target range.


[1] Kohn also observed, by the way, that “the high volume of reserves evidently has not increased bank lending or reduced spreads of rates on bank loans or other assets relative to, say, Treasury rates,” while acknowledging that “an increase in lending and narrowing of spreads on bank loans is a necessary and desirable aspect of the return to better-functioning markets and intermediation to promote economic growth.” That sounds to me rather like an admission that QE was, up to that point at least, a flop.

[2] The Liquidity Coverage Ratio (LCR) calls for banks to have enough unencumbered “high quality liquid assets” (HQLA) to meet a 30-day stressed liquidity outflow scenario. Banks that rely heavily on wholesale funding are subject to a higher required LCR than those funded chiefly by retail deposits. The different requirements accounts for the fact that larger U.S. banks hold a disproportionate share of total excess reserves. Although the U.S. first began enforcing Basel-based LCR requirements in January 2015, it appears that U.S. banks that were to be subject to those requirements started accumulating qualifying liquid assets in 2013.

[Cross-posted from Alt-M.org]

A new study at Downsizing Government looks at low-income housing aid. Howard Husock of the Manhattan Institute examines the history of federal aid and discusses problems with current policies, particularly rental subsidies and public housing.

One problem is that housing aid is costly to taxpayers. The federal government spent $30 billion on rental subsidies (Section 8 vouchers) and almost $6 billion on public housing in 2016.

Another problem is that housing aid and related rules are costly to urban communities. Howard argues that federal interventions undermine neighborhoods, encourage dependency, and create disincentives for long-term maintenance and improvements in housing.

In urban politics, there are frequent calls for “affordable housing.” But Howard says that it is a myth that markets cannot provide decent housing for people at all income levels. He discusses the vast private housing investment in the decades prior to the 1930s, which was a time of rapid growth in America’s big cities.

The problem today is that government rules and regulations inflate housing costs, which is the topic of an upcoming study by Cato’s housing expert, Vanessa Calder.

What should Ben Carson do? The new Secretary of Housing and Urban Development should heed Howard’s advice and work to cut federal subsidies. Carson should also follow through on his conviction that HUD imposes too many “social engineering” rules on local governments.

Vanessa provides further policy guidance for Carson here, and she discusses an example of the sort of top-down HUD mandate that should be on the chopping block here.

Howard’s vast scholarship on housing policy is here.

More information on HUD is here. I would particularly recommend HUD Scandals. My god, Ronald Reagan’s HUD was appalling.

In recent House testimony, I said that energy subsidies should be repealed because they distort business decision making. They induce firms to invest in activities that do not make sense in the marketplace.

That appears to be the case with Southern Company’s “clean coal” plant in Kemper County, Mississippi. The plant is far behind schedule and massively over budget—a first-class boondoggle. The Wall Street Journal reports that the estimated cost has soared from $3 billion to $7.1 billion. (This says the original estimate was $2.2 billion). The utility’s customers could be in for a $4 billion rate hike.

What the WSJ leaves out is that the Kemper plant received federal subsidies and Obama administration support, which may have tilted company executives in favor of the wasteful project instead of a far cheaper natural gas plant. The project had been scheduled to receive hundreds of millions of dollars in grants and tax credits, although I understand that some of the bounty was later rescinded.

Federal subsidies covered only part of the original estimated cost, but they were likely the tail that wagged the dog. When subsidies induce private businesses to invest in dubious projects, the damage comes not just from wasting taxpayer dollars, but also from misallocating private investment funds.

More on energy subsidies, here, here, and here. More on Kemper, here, here, and here.

President Trump’s administration has rescinded the Obama administration’s “Dear Colleague” letter requiring that public schools let transgender students use the bathrooms and locker rooms of their choice. It was probably the right thing do, and there was nothing “shameful” about the decision: equally decent people can, and do, have competing views of what is good.

There is no reason, of course, to believe anything other than that the Obama administration’s initial guidance was well-intended, driven by a desire to see transgender students empowered to make decisions for themselves about who they are. It is also absolutely a legitimate worry that school districts might discriminate against transgender students.

But equally decent people could feel very uncomfortable sharing a bathroom or changing room with someone of the opposite biological sex — sex-based privacy has been a time-honored norm — and could also have religious objections to such mixing. What about their rights? There were also legitimate worries about the legality of the order, delivered as a sudden reinterpretation of long-standing regulations.

Finally, societal evolution takes time. It may well be better to let smaller units (states, communities, families) grapple with and adjust to social change than suddenly impose one vision of the good on everyone.

Of course, there may be no solution in a diverse school or district that equally respects the values and desires of all. This is a major reason that school choice is so crucial: it enables families and educators to freely choose the values they want taught and respected, rather than government choosing one side to win and the other to lose.

Alas, some high-profile defenders of the Obama guidance immediately sprang into moral condemnation or hysteria mode, continuing to poison the national debate that has been degenerating for decades, but has seemingly collapsed in the era of Trump. Sen. Patty Murray, D-Wash., condemned the administration’s action as “shameful,” as if it were impossible that any morally-upright person could have a position against federally-forced transgender bathroom access. American Federation of Teachers president Randi Weingarten declared, “Reversing this guidance tells trans kids that it’s OK with the Trump administration and the Department of Education for them to be abused and harassed at school for being trans.”

No, the new guidance does not say that. Indeed, the letter announcing it says that “all schools must ensure that all students, including LGBT students, are able to learn and thrive in a safe environment.” There is not a shred of meaningful evidence that anyone in the Trump administration is trying to essentially declare open season on transgender kids.

There are fine reasons to oppose what the Trump administration has done on bathroom and locker room access in public schools. But there are also perfectly decent reasons to support it — indeed, I think more compelling. Perhaps just as important, it is long past time that we cease with unfair, incendiary, cohesion-shredding rhetoric, and accept that good people can have different opinions than we do.

What better place to start than with the education of our children?

This piece originally appeared in the Washington Examiner.