Policy Institutes

Last week, The National Interest (Online) published a critique of U.S. grand strategy in Asia by my friend and colleague John Glaser. Harry Kazianis, a former editor at TNI who now divides his time between the Potomac Foundation and the Center for the National Interest, posted a rejoinder and Glaser has since responded here.

Together, the pieces reveal a useful debate over primacy, writ large, and all three are worth a careful read.

Calling Glaser’s idea “Unthinkable,” Kazianis asked:

And what’s so bad about America’s so-called primacy in Asia in the first place? Glaser, at least in my view, makes it sound like the Asia-Pacific is some large American vassal state that it should relinquish control of. It should be clear for anyone to see that Washington is the provider of many important net public goods—like those all-important security alliances, nuclear umbrellas and protected sea lanes that allow trade to thrive.

His clinching argument, it seems, is that we should continue with our present grand strategy in Asia (and elsewhere, implicitly) because it’s the strategy that we have, and it’s worked fairly well. Why change now?

Kazianis quotes former Under Secretary of Defense for Policy Eric Edelman who, in 2010, offered up this fairly typical defense of U.S. grand strategy. “The concept of Primacy,” Edelman wrote, in a paper (.pdf) for the Center for Strategic and Budgetary Assessments:

has underpinned U.S. grand strategy since the end of the Cold War because no other nation was able to provide the collective public goods that have upheld the security of the international system and enabled a period of dramatically increased global economic activity and prosperity. Both the United States and the global system have benefitted from that circumstance.

I would take issue with two of Edelman’s claims, and, by extension, those of Kazianis and other of primacy’s defenders:

1) Correlation is not causation. While it is true that the long peace has coincided with U.S. primacy, that does not prove that U.S. primacy was the sole (or even main) cause of it. Some attempt should be made to account for the other possible explanations for the absence of great power war since 1945, e.g. nuclear weapons, economic interdependence, and the end of formal empires.

2) Circumstances change. Even if it were true that U.S. primacy was the main factor explaining the security of the international system during the last quarter century, to describe what we have done for the roughly 25 years since the end of the Cold War does not, by itself, justify what we should do for the next 25 years, or more. The U.S. share of global economic output has fallen sharply since the end of the Cold War. When looking at GDP by Purchasing Power Parity in the IMF’s most recent data set, for example, the U.S. share stood at 22.5 percent in 1989; the estimate for 2015 is 15.9 percent. Whatever statistic one chooses to use, it is clear that the burden is growing heavier on a single country. And those trends are unlikely to reverse themselves. The U.S. share is expected to dip below 15 percent by 2020.

I will stipulate that no single country could have done what the United States did in terms of providing global public goods in 1995 – or 1975 or 1955, for that matter. I doubt that a single country – including the United States – can do it forever. Forever is a long time.

It may be true that some number of countries – be it 5 or 10 or 50 – might be able to collectively muster comparable capabilities in the future to ensure that the burdens of global governance don’t fall exclusively on the shoulders of American troops and American taxpayers.

We are unlikely to reach that possible alternative future of greater burden sharing, however, if the United States clings to its present grand strategy and continues to discourage other countries from defending themselves and their core interests.

Nearly 40 years ago, the Supreme Court held in Wooley v. Maynard (1977)—the famous “Live Free or Die” case from New Hampshire—that the First Amendment protects against being compelled to convey a message displayed on a state-issued license plate. Nevertheless, the Denver-based U.S. Court of Appeals for the Tenth Circuit recently held that someone could not object to an image on Oklahoma’s license plate of the Scared Rain Arrow statue, which depicts a young Apache warrior shooting an arrow into the sky as a prayer for rain.

The court’s decision turned on drawing a line between speech in the form of words and other kinds of expression. Keith Cressman had objected to the Oklahoma tag because of the history and origin of the Sacred Rain Arrow statue. The Tenth Circuit held that Cressman’s objection was not entitled to full First Amendment protection because images are not “pure speech” and must be analyzed under the less rigorous “symbolic speech” test.

The term “symbolic speech” may be an unfortunate misnomer—it doesn’t mean speech via symbols—but the Supreme Court has only ever used the phrase to refer to “expressive conduct.” That is, “symbolic speech” is conduct that conveys a message, such as burning one’s draft card in protest of war.

The Supreme Court has always regarded non-conduct forms of expression as “pure speech.” And that’s exactly as it should be: Government has no more ability to ban bumper stickers displaying a cross than ones referencing “John 3:16,” and the same must be true for ones depicting Da Vinci’s painting “The Last Supper.” Despite the Court’s consistency on this point, lower courts are split. While the Ninth Circuit has extended full First Amendment protection to tattoos and even the process of making them and the business of tattooing, other circuits have suggested that “pure speech” is limited to words. And of course the Tenth Circuit has now said that the First Amendment protects as symbolic speech at best.

But the Tenth Circuit’s ruling did even more harm to the First Amendment than that, because the court also held that, regardless of what kind of speech the image was, the First Amendment didn’t support Cressman because he didn’t object to the actual message Oklahoma was sending; his understanding of the image didn’t align with the state’s. That holding is particularly problematic when the speech at issue is visual art, which is inherently open to interpretation and has no authoritative interpretation.

Consider, for example, Cloud Gate—better known as the Chicago Bean—whose sculptor sought to convey themes of immateriality, spirituality, and the tension between the masculine and the feminine. But most people who take selfies in front of the Bean have no idea what it’s meant to convey, or might think it has to do with distorted reflection and the like. The freedom of speech—even the freedom to think—would be threatened if compelled-speech cases hinged on whether plaintiffs “really” disagreed with the “actual” message the government was sending and thus could be compelled to speak because they opposed it for their own “wrong” reasons.

In the quintessential compelled-speech case, West Virginia State Board of Education v. Barnette (1943), the Supreme Court held that the First Amendment protected Jehovah’s Witnesses having to salute the American flag and recite the Pledge of Allegiance. Surely the Constitution would have likewise protected an atheist who opposed the flag salute because the stars represent the heavens and man’s divine goal—even though most people today don’t know that history.

But the Tenth Circuit’s decision said otherwise: The First Amendment would have protected Cressman if he objected to Oklahoma’s Native American message but did not protect him when his objection was based on what it considered to be a misunderstanding about the Sacred Rain Arrow statue. As in religious-freedom cases, courts shouldn’t evaluate the reasons behind an objection to compelled speech.

Mr. Cressman has asked the Supreme Court to review his case, and Cato has filed an amicus brief making the above arguments in support of that petition. 

BEIRUT—“Syrians are everywhere,” an aid worker told me. “Everybody is poor now.” Well over a million Syrians are scattered across Lebanon, many in small “tented settlements.” Almost half live in sub-standard housing; many lack fuel and warm clothes for winter.

Jordan hosts even more Syrians at greater cost. (So does Turkey, though it is much larger and wealthier.) Six of every seven refugees live in poverty.

Almost five years of civil war have killed a quarter of a million Syrians, wrecked the country, created economic catastrophe, displaced millions, and left virtually no one unaffected. As many as five million people have fled to surrounding countries.

Thus, the stampede of Syrian migrants to Europe should not surprise the rest of the world. Americans traditionally have offered sanctuary to those fleeing repression and war. But, apparently, not now.

Private relief groups offer the best means for Americans to help Syrians in need. There are many worthy organizations. Earlier this year, I traveled with International Orthodox Christian Charities to Lebanon and Jordan to view several aid projects. Since 2012, the charity has helped more than 3.2 million Syrians throughout the Middle East.

Much of IOCC’s work is conducted in Syria. More than half Syria’s population now is estimated to require outside aid.

Assistance runs the gamut, starting with emergency food, infant care, clothing, and bedding. IOCC repairs sanitation and water systems, helps provide shelter, and supports education.

Alas, the longer the war rages, the greater the destruction. One aid official lamented: “Buildings can be rebuilt. You cannot rebuild human beings.”

In Lebanon, I visited a project focused on mother-child nutrition, from conception up to five years of age. The “public health system was overwhelmed by refugees,” explained Rana Hage of IOCC.

Children are screened, regularly measured and weighed, and provided with nutritional supplements, high-protein foods, and milk. Tens of thousands of children have been screened and hundreds have been rescued from malnutrition.

I visited a community kitchen, one of two that helps feed 1750 people. IOCC underwrote a large, efficient cooking facility and hired local women to cook. Pots of food are distributed to needy refugee and resident families.

The charity also runs the Water, Sanitation, and Hygiene program (WASH) at two refugee encampments with more than 7,500 people. I went to one of the settlements where IOCC is seeking to develop efficient and safe water and waste systems.

The agency also was establishing water/wash facilities while providing hygiene education to reduce disease. Here, as elsewhere, the IOCC hires staff from areas being served. Unfortunately, the job is never done. Another aid worker said that the camp is “constantly changing as more people come.”

Jordan may be less fragile than Lebanon, but it suffers greatly as well. Some 80,000 people are crowded into Jordan’s Zaatari Refugee Camp, sitting only a few miles from Syria.

IOCC runs a program to prevent and treat lice, especially affecting children. The charity has distributed anti-lice kits to more than 20,000 kids. There’s nothing glamorous about this sort of work, but it meets a critical need. Health coordinator Samer Makahleh explained: “To fill gaps we go to outside partners like IOCC.”

With most refugees living outside the camps, IOCC works outside as well, even making home visits for those unable to travel. The group provides everything from school uniforms—required to attend Jordanian schools—to infant supplies and household items. IOCC also provides vocational training and English instruction.

IOCC’s identity is Christian, but it serves the needy without discrimination. In the Middle East, the charity mostly aids Muslims.

Of course, even the best humanitarian efforts can only do so much. One top IOCC official worried: “Funding is going to diminish next year. Donors are not going to be there.”

As I wrote in Forbes: “Unless more Americans and other people of good will around the world step up to address Syria’s humanitarian disaster. Centuries ago Christ called on his listeners to help the ‘least among us.’ We must meet that challenge today.”


Christians in America remain free to celebrate Christmas, but not tens or perhaps hundreds of millions of believers abroad. Murder by groups such as the Islamic State and Boko Haram topped pervasive persecution and discrimination in many nations.

On Christmas Eve, senator and presidential contender Marco Rubio penned an article decrying the lack of “attention paid to the plight of these Christian communities in peril.” He criticized the Obama administration and called for action.

Undoubtedly, Rubio’s concern is genuine. However, the GOP’s policies have hurt and will continue to hurt Christians around the world.

No single action was as injurious to Middle Eastern Christians as the invasion of Iraq. American intervention triggered a sectarian conflict which displaced hundreds of thousands of Christians, spawned a new al-Qaeda organization which morphed into the Islamic State, and tolerated ruthless Shia rule which encouraged Baathists and Sunnis to support ISIL. Absent George W. Bush’s Iraq folly, backed by Rubio and most of his competitors, the Islamic State wouldn’t exist.

Most of the usual GOP suspects, starting with Rubio, also backed the Obama administration’s decision to intervene in the Libyan civil war. This misbegotten policy left two competing governments and multiple armed militias in its wake. Worse still, it left a vacuum partly filled by the Islamic State, which publicly murdered Egyptian Copts who were working in Libya.

Syria is engulfed by a hideous civil war. Bashar al-Assad is a secular dictator who uses fear of potential religious persecution for his political benefit. But Christians and other religious minorities have good reason to be terrified about Syria après Assad. After all, many of them fled Iraq where they’ve seen the ending of the movie: it isn’t pretty.

Should Rubio & Co. succeed in ousting Assad, the likely fate of Christians is grim. The State Department noted: In Syria “ISIL required Christians to convert, flee, pay a special tax, or face execution in territory it controls, and systematically destroyed churches, Shia shrines, and other religious sites.”

On a recent trip to Jordan and Lebanon, I met with several Christian aid workers active in Syria. Most complained about U.S. policy targeting Assad. One said simply, “You Americans don’t know what you are doing.”

Washington’s reflexive support of ruthless Islamic regimes throughout the Middle East–endorsed by Rubio and the rest of the GOP presidential gaggle–is almost as bad. For instance, despite complaining about foreign blasphemy laws, Rubio declared that the U.S. must “reinforce our alliances.” Some of his Republican competitors are even more insistent.

Yet Saudi Arabia is essentially a totalitarian state, without a single operating church (or synagogue or temple) for non-Muslims. The State Department wrote, “the government harassed, detained, arrested, and occasionally deported some foreign residents who participated in private non-Muslim religious activities.”

Coptic Christians remain victims of persecution, discrimination, and violence in Egypt, even after the military ouster of the Muslim-dominated government of Mohamed Morsi.

I wrote in Forbes, “Americans should remember the plight of Middle East Christians. At the same time, voters should remember that Republican support for promiscuous military intervention and Islamic dictators did much to bring down disaster upon Middle Eastern Christians.”

Unfortunately, doing more of the same in the Mideast, as Rubio proposed, would only yield the same result. He should put helping persecuted Christians before promoting misbegotten neoconservative crusades.

, endorsed by Rubio and the rest of the GOP presidential gaggle,

In this past summer’s controversy over whether Alexander Hamilton’s image should be replaced on the $10 bill, outraged commentators made many extravagant claims on behalf of Hamilton’s wisdom in matters of money and banking policy. For example, Ben Bernanke blogged that “Hamilton was without doubt the best and most foresighted economic policymaker in U.S. history,” citing among other evidence that “over the objections of Thomas Jefferson and James Madison, Hamilton also oversaw the chartering in 1791 of the First Bank of the United States, which was to serve as a central bank and would be a precursor of the Federal Reserve System.”

Now that the controversy has cooled we can take a more informed perspective. There is no denying Hamilton’s importance and influence, or that his life story is compelling, as evidenced by the sold-out hip-hop musical Hamilton currently running on Broadway. But the wisdom of his policy advice, and the merits of the First Bank of the United States (BUS), are another matter.

To describe Hamilton’s Bank accurately, one should note that Congress owned one fifth of its shares, and chartered it exclusively, that is, made it the only bank allowed by law to branch nationwide. (State governments chartered banks, but each state denied entry to banks with charters from other states.) The BUS monopoly franchise was among the chief of the objections of Jefferson and Madison, and deservedly so. One nationwide bank is better than none, but many is better than one. Creating a legal monopoly where open competition could and should prevail is hardly a mark of good or foresighted economic policy.

Many modern-day historians miss this point, and laud Hamilton as a man of unerring financial genius. Robert E. Wright and David J. Cowen, in their 2006 book Financial Founding Fathers: The Men Who Made America Rich, write of Hamilton’s “creative genius, as he became the architect and chief advocate of a powerful national bank.” They claim that “Hamilton’s thought was often far in advance of that of most of his contemporaries,” as when he was early to advocate a national bank. They quote Hamilton’s 1781 statement that “in a National Bank alone we can find the ingredients to constitute a wholesome, solid and beneficial paper credit,” and add: “He was correct.” They call Hamilton’s 1790 Report on the Bank “a masterpiece that cogently explained the importance of banks in a capitalist economy.” They credit Hamilton with the following argument, as though it made good sense: “Next, he stressed that all the great powers of Europe possessed public banks and were indebted to them for successful trade and commerce. The implications of the comparison were clear: if young America wanted to join the ranks of the elite powers, it too would have to create a banking infrastructure.” In much the same way, Hamilton would elsewhere argue that if the leading European nations have protective tariffs, we should have them too. The error should be plain.

Hamilton modeled the Bank of the United States after the Bank of England. But in truth, the monopoly privileges of the BOE and other national banks of Europe were badges of mercantilism, and drags on financial and economic activity by comparison with free competition in banking services. A more wholesome, solid, and beneficial credit system could be observed in Scotland at the time, with free entry into nationwide branch banking. Hamilton’s “masterpiece” was oblivious to the benefits of competition in banking, much less the separation of banking and state. In his banking policy views, as in his tariff policy views, Hamilton was a retrograde mercantilist.

Wright and Cowen note that in drafting his plan for the Bank, “Hamilton also drew on Adam Smith’s seminal work, An Inquiry into the Nature and Causes of the Wealth of Nations, where financial matters, including the advantages of banks and bank money, were amply and ably discussed. Hamilton must have brimmed with excitement as he read Smith declare that ‘the trade of Scotland has more than quadrupled since the first erection of the two publick banks at Edinburgh.’” They should also have noted that in his able discussion Smith — the penetrating Scottish critic of mercantilism — did not defend monopoly privileges in banking, but argued for free competition (see below). The “publick” banks of Edinburgh were chartered non-exclusively (note that Smith refers to the two earliest; later there would be a third plus dozens of non-chartered joint-stock banks that were similarly sized and equally branched nationwide), and were completely privately owned. Nor were they great engines of the state, as the Bank of England was according to Smith. Unlike the BOE or the BUS, which were created in large part to lend the national government money, the Bank of Scotland was actually prohibited by its 1695 charter from lending to the government.

The policy conclusion of Smith’s chapter on banking (Book II, chapter II of the Wealth of Nations) bears quoting here:

The late multiplication of banking companies in both parts of the United Kingdom, an event by which many people have been much alarmed, instead of diminishing, increases the security of the public. … By dividing the whole circulation into a greater number of parts, the failure of any one company, an accident which, in the course of things, must sometimes happen, becomes of less consequence to the public. This free competition, too, obliges all bankers to be more liberal in their dealings with their customers, lest their rivals should carry them away. In general, if any branch of trade, or any division of labour, be advantageous to the public, the freer and more general the competition, it will always be the more so.

In light of Smith’s clarity and correctness here, it is actually a telling criticism of Hamilton to note that he read Smith on banking, because it means that he ought to have known better when he promoted monopoly privileges. Although Hamilton’s Report on the Bank alludes to Smith’s understanding of how banking promotes the wealth of a nation, Hamilton either didn’t understand Smith’s policy message — the more banks competing the better — or rejected it as not helpful to his own mission of empowering the federal government, for which his chosen means was to forge an alliance between the government and a new privileged financial elite.[1] Smith’s policy here was wise, and Hamilton’s not.

In brief, contrary to what is nearly the conventional wisdom, Alexander Hamilton was not “far in advance” of contemporary thinking on banking. He was decidedly retrograde in pushing for an exclusive nationwide bank with a sweetheart government deal. He was not a creative policy genius so much as a persuasive second-hand dealer in discredited mercantilist ideas.

Here I draw upon a dissertation chapter, unfortunately not available online, by Nicholas Curott.

[Cross-posted from Alt-M.org]

Shortly before Christmas, the Department of Homeland Security (DHS) released a report detailing deportations (henceforth “removals”) conducted by Immigration and Customs Enforcement (ICE) during fiscal year 2015.  Below I present the data on removals in historical context – combined with information from the Migration Policy Institute and Pew.  See my previous writing on this topic here, here, and here.       

ICE deported 69,473 unauthorized immigrants from the interior of the United States in 2015, down from a peak of 188,422 in 2011.  Removals from the interior are distinct from removals of recent border crossers.  Removals from the interior peaked during the Obama administration and have since fallen to a level similar to that of 2005 and 2006. 

Source: MPI and DHS.

The number of interior removals during the last six years of the Bush administration (the first two years are unavailable so far) was 475,103. The Obama administration has removed unauthorized immigrants about 1,019,637 from the interior of the United States during the seven full years of his administration.  

President Bush’s administration removed an average of about 276,000 unauthorized immigrants per year for the years available and an average of 79,000 of them annually were interior removals.  President Obama’s administration has removed an average of 381,101 unauthorized immigrants a year, an average of 145,662 of them annually were interior removals.  There were a large numbers of unknowns during the Bush administration that decreased as the years progressed. 


Source: MPI and DHS.

The Obama administration’s expansion then slashing of interior enforcement is not the whole story.  The best way to measure the intensity of immigration enforcement is to look at the percentage of the unauthorized immigrant population removed in each year.  Based on estimates of the total size of the unauthorized immigrant population that I updated to reflect Pew’s most recent estimates, 0.61 percent of that population was removed from the interior of the United States in 2015 – down from 0.9 percent in 2014.  Interior removals as a percent of the unathorized population peaked at 1.64 percent in 2011.  That is a substantial decrease in interior removals down from President Obama’s previous high. 

Source: MPI, Department of Homeland Security, Pew, Author’s Calculations.

For every year for which data was available, the Bush administration removed an average of 0.71 percent of the interior unauthorized immigrant population.  President Obama’s administration has removed an average of 1.29 percent of the interior unauthorized immigrant population every year of his presidency – less than twice the rate as under the Bush administration.  Even when focusing on interior removals, President Obama’s entire administration has out-deported President Bush based on the data available. 

The unauthorized immigrant population increased under the Bush administration from 9.4 million in 2001 to a peak of 12.2 million in 2007 and then declined to 11.7 million in 2008.  During Obama’s administration, the number of unauthorized immigrants has, so far, stayed at or below 11.5 million.   The slow economy during the Obama years as well as a shift of would-be unauthorized Mexican immigrants onto temporary work visas stopped the growth of the illegal population. 

Obama’s interior removal statistics show a downward trend beginning in 2012 through to 2015 with the number of interior removals falling by over 63 percent.  The Obama administration has also focused immigration enforcement on criminal offenders (not all unlawful immigrants are criminals).  During the Obama administration, 56.7 percent of all removals have been those convicted of a criminal offense, including immigration crimes.  In 2015, 92 percent of criminal removals were either priority 1 (threats to national security, border security, and public safety) or priority 2 (misdemeanants or new immigration violators).  Many of those “criminals” removed fit the strict legal definition of the word but hardly comport with the popular image of criminals.

Only the last year of the Bush administration is available for comparison but it shows that only 31 percent of those removed were criminals in 2008. 

The Obama administration has cut interior immigration enforcement down to the level of enforcement that existed from 2005 to 2006 but has refocused removal efforts to target criminals.  President Obama’s expansion of interior immigration enforcement effort that peaked in 2011 has reversed and is returning to Bush-era levels.         

I wrote yesterday that governments want to eliminate cash in order to make it easier to squeeze more money from taxpayers.

But that’s not the only reason why politicians are interested in banning paper money and coins.

They also are worried that paper money inhibits the government’s ability to “stimulate” the economy with artificially low interest rates. Simply stated, they’ve already pushed interest rates close to zero and haven’t gotten the desired effect of more growth, so the thinking in official circles is that if you could implement negative interest rates, people could be pushed to be good little Keynesians because any money they have in their accounts would be losing value.

I’m not joking.

Here’s some of what Kenneth Rogoff, a professor at Harvard and a former economist at the International Monetary Fund, wrote for the U.K.-based Financial Times.

Getting rid of physical currency and replacing it with electronic money would…eliminate the zero bound on policy interest rates that has handcuffed central banks since the financial crisis. At present, if central banks try setting rates too far below zero, people will start bailing out into cash.

And here are some passages from an editorial that also was published in the FT.

…authorities would do well to consider the arguments for phasing out their use as another “barbarous relic”…even a little physical currency can cause a lot of distortion to the economic system. The existence of cash — a bearer instrument with a zero interest rate — limits central banks’ ability to stimulate a depressed economy.

Meanwhile, Bloomberg reports that the Willem Buiter of Citi (the same guy who endorsed military attacks on low-tax jurisdictions) supports the elimination of cash.

Citi’s Willem Buiter looks at this problem, which is known as the effective lower bound (ELB) on nominal interest rates. …the ELB only exists at all due to the existence of cash, which is a bearer instrument that pays zero nominal rates. Why have your money on deposit at a negative rate that reduces your wealth when you can have it in cash and suffer no reduction? Cash therefore gives people an easy and effective way of avoiding negative nominal rates. …Buiter’s solution to cash’s ability to allow people to avoid negative deposit rates is to abolish cash altogether.

So are they right? Should cash be abolished so central bankers and governments have more power to manipulate the economy?

There’s a lot of opposition from very sensible people, particularly in the United Kingdom where the idea of banning cash is viewed as a more serious threat.

Allister Heath of the U.K.-based Telegraph worries that governments would engage in more mischief if a nation got rid of cash.

Many of our leading figures are preparing to give up on sound money. The intervention I’m most concerned about is Bank of England chief economist Andrew Haldane’s call for a 4pc inflation target, as well as his desire to abolish cash, embrace a purely electronic currency and thus make it easier for the Bank to impose substantially negative interest rates… Imagine that banks imposed -4pc interest rates on savings today: everybody would pull cash out and stuff it under their mattresses. But if all cash were digital, they would be trapped and forced to hand over their money. …all spending would become subject to the surveillance state, dramatically eroding individual liberty. …Money is already too loose - turning on the taps would merely further fuel bubbles at home and abroad.

Also writing for the Telegraph, Matthew Lynn expresses reservations about this trend.

As for negative interest rates, do we really want those? Or have we concluded that central bankers are doing more harm than good with their attempts to manipulate the economy? …a banknote is an incredibly efficient way to handle small transactions. It is costless, immediate, flexible, no one ever needs a password, it can’t be hacked, and the system doesn’t ever crash. More importantly, cash is about freedom. There are surely limits to the control over society we wish to hand over to governments and central banks? You don’t need to be a fully paid-up libertarian to question whether…we really want the banks and the state to know every single detail of what we are spending our money on and where. It is easy to surrender that freedom – but it will be a lot harder to get back.

Merryn Somerset Webb, a business writer from the U.K., is properly concerned about the economic implications of a society with no cash.

…at the beginning of the financial crisis, there was much talk about financial repression — the ways in which policymakers would seek to control the use of our money to deal with out-of-control public debt. …We’ve seen capital controls in the periphery of the eurozone… Interest rates everywhere have been at or below inflation for seven years — and negative interest rates are now snaking their nasty way around Europe… This makes debt interest cheap for governments…and it and forces once-prudent savers to move their money into the kind of risky assets that are supposed to drive growth (and tax receipts).

Amen. She’s right that low interest rates are good news for governments and not very good news for people in the productive sector.

Last but not least, Chris Giles wrote a column for the FT and made one final point that is very much worth sharing.

Mr Haldane’s proposal to ban cash has all the hallmarks of a public official confusing what is convenient for the central bank with what is in the public interest.

Especially since the central bankers are probably undermining long-run economic prosperity with short-run tinkering.

Moreover, the option to engage in Keynesian monetary policy also gives politicians an excuse to avoid the reforms that actually would boost economic performance. Indeed, it’s quite likely that an easy-money policy exacerbates the problems caused by bad fiscal and regulatory policy.

Let’s conclude by noting that maybe the right approach isn’t to give politicians and central bankers more control over money, but rather to reduce government’s control over money. That’s one of the arguments I made in this video I narrated for the Center for Freedom and Prosperity.

The $1.83 billion arms sale package to Taiwan that the Obama administration announced to Congress in mid-December won’t change the military balance across the Taiwan Strait. Hawkish American commentators criticized the arms sale for not doing enough to provide for Taiwan’s security, but this misses the point. The most important aspect of the arms sale is not the kind of equipment being sold but the message sent by the transaction.

From a military perspective, the equipment in the arms sale is nothing to get excited about. The most prominent items are two refurbished Oliver Hazard Perry-class frigates and 36 AAV-7 amphibious assault vehicles. Guided missiles, Phalanx ship defense systems, and communications equipment make up the rest of the package. None of these capabilities will significantly change the balance of power between Taiwan and mainland China.

What does it accomplish?

First, the timing of the arms sale announcement is important. On January 16th, voters in Taiwan will go to the polls to select a new President and legislators. The period of rapprochement between Taiwan and mainland China championed by President Ma Ying-jeou since 2008 will likely come to an end. It is too early to tell how the election will impact cross-strait relations, but announcing an arms sale so close to the election demonstrates a continued U.S. commitment to Taiwan’s defense.

Second, the modest size of the sale is a signal to Taiwan to get serious about self-defense. Taiwan’s military spending has increased in recent years after a deep decline in the late 1990s and early 2000s, but spending is well under three percent of GDP despite a 2008 campaign pledge by Ma to hit the three percent target. The Democratic Progressive Party (DPP), the presumptive winning party, has issued a series of policy papers outlining a wide-ranging plan to improve Taiwan’s defenses. The problem with announcing a large arms sale before these policies are implemented is that it could serve as a disincentive for the DPP to follow through with its defense policy.

Third, the arms sale signals the Obama administration’s willingness to push back against Chinese assertiveness in East Asia. America and its regional allies and partners are modestly balancing against the threat posed by China by increasing military spending, adding ships to their fleets, and increasing defense cooperation. The arms sale to Taiwan is a continuation of this trend. Whether or not pushing back is going to succeed is a different question, but the arms sale was likely announced with this trend in mind.

The December 2015 arms sale to Taiwan gives off more light than heat, but that light is significant. While the material side of the sale is modest, it sends a message to Taiwan and mainland China for Obama’s last year in office. In 2016, the United States will likely be more involved and more assertive in East Asia.

In a recent blog post, St. Louis Fed Vice President David Andolfatto suggests that central banks “consider offering digital money services (possibly even a cryptocurrency) at the retail and wholesale level.” His reasoning is straightforward. Bitcoin, he observes, offers a host of benefits, most of which relate to its role as a payment device. It enables individuals to transfer funds more cheaply than traditional payment mechanisms. But it also has shortcomings, the chief of which, Andolfatto claims, is its short-run price volatility.

As an alternative, Andolfatto points to “Fedcoin” — a central bank-issued cryptocurrency proposed earlier by J.P. Koning. In theory, Fedcoin would employ the same blockchain ledger technology as bitcoin to transfer funds between accounts. However, as Koning explains, “One user — the Fed — would get special authority to create and destroy ledger entries, or Fedcoin.” To what end? According to Koning, “The Fed would use its special powers of creation and destruction to provide two-way physical convertibility between both of its existing liability types — paper money and electronic reserves — and Fedcoin at a rate of 1:1.” Hence, Fedcoin would offer the payment system advantages of bitcoin — the ability to transfer funds cheaply — without its excessive purchasing power instability.

In an earlier post on the topic, Andolfatto goes even further by claiming that “the Fed is in the unique position to credibly fix the exchange rate between Fedcoin and the USD.” And, lest one think his claim applies exclusively to Fedcoin, he clarifies that “the Fed has a comparative advantage over some private enterprise” issuing a distinct cryptocurrency “backed by USD at a fixed exchange rate.”

Although Andolfatto is right to claim that the Fed — or any central bank for that matter — has a comparative advantage in issuing substitutes that are accepted at par with its other liabilities, it is certainly not in a unique position to issue a digital, P2P (peer-to-peer or person-to-person) cryptocurrency that is accepted at par. There are all sorts of par-valued, dollar-denominated private digital monies. In the US, private banks issue electronic balances that exchange at par with the dollar. There are also P2P monies that trade at par. The notes and coins issued by a currency board are P2P (in the sense of person-to-person and that they need not be cleared by a central authority). And, since an orthodox currency board holds sufficient reserves by definition, it will maintain par acceptance. Private banks in Scotland and Northern Ireland issue circulating notes that exchange at par with the British pound. Clearly, private providers are capable of supplying either a digital or P2P money that trades at par with an established official currency.

In fact, there is even today at least one dollar-based, privately-provided digital, peer-to-peer cryptocurrency. Billed as the world’s first stable digital currency, NuBits (an altcoin governed by the Nu protocol) has only deviated from its $1 par value by $0.025 or more on fourteen days — and only twice for two consecutive days — since it was launched on September 23, 2014. In other words, NuBits are remarkably stable in terms of the dollar. Figure 1 tells the whole story:

How does the Nu protocol maintain a fixed exchange rate between its NuBits and the dollar? In brief, its owners (“NuShareholders”) vote to adjust the supply of NuBits in circulation to equal current demand for NuBits at exactly $1. Those interested in all the details should consult the original white paper and discussion forum. I sketch out the basics below.

The Nu protocol relies on the premise that demand for NuBits will tend to grow over time. For a fixed-supply cryptocurrency, like bitcoin after it reaches the 21-million-coin cap, an increase in demand increases its price and market capitalization (i.e., price times quantity of coins). The increase in the market capitalization, or network value, of a fixed-supply cryptocurrency accrues to coinholders as their coins appreciate. For NuBits, in contrast, an increase in demand only increases the market capitalization — not the price. The increase in the market capitalization, or network value, of NuBits accrues to NuShareholders, who (through custodial grants) create and sell new NuBits for $1. Revenues generated through the sell of these newly created NuBits are used to cover operating expenses and pay dividends to NuShareholders. Hence, NuShareholders are residual claimants on the network value of NuBits and, as such, have an incentive to maximize the value of the NuBits network.

NuShareholders stand ready to create and sell NuBits anytime demand increases because it generates the revenue used to pay their dividends. In other words, we can be pretty confident there will be sell side liquidity in the market for NuBits. Any buyer will be able to find a seller at $1. But how and why would NuShareholders produce buy side liquidity? Or, to state the matter another way, how and why do they contract the supply of NuBits in circulation when demand decreases?

NuShareholders have several mechanisms to decrease the supply (or effective supply) of NuBits in circulation when demand decreases, thereby offsetting a reduction in price. Originally, NuShareholders would simply vote to pay interest to NuBit owners who agree to “park” a balance of NuBits for a period of time. When a user agrees to park a balance of NuBits, the balance is marked as parked on the blockchain and cannot be spent for the agreed upon park period. When the agreed park period expires, control of the balance is returned to the owner along with the interest earned. Park rates vary by duration and are adjusted regularly by NuShareholders to ensure that enough NuBits are effectively (if only temporarily) removed from circulation when needed.

Recent updates offer additional mechanisms to reduce the supply of NuBits. NuShareholders can vote to increase the transaction fee, which, rather than being distributed to participants (as is the case with bitcoin and most other cryptocurrencies), is permanently destroyed. They might also vote to convert some NuBits to NuShares. This process, known as “NuBits burning,” is described as follows:

In the event of parking rates being offered for a prolonged period of time, NuShareholders can vote to create new NuShares that are sold through auction. The proceeds from this auction would then be used to purchase NBT on the open market, at which point the purchased NBT would be destroyed permanently by the custodian. The net result would be a dilution of equity value for all NuShareholders in order to reduce the outstanding supply of NBT in circulation. This price support mechanism allows NuShareholders to reduce the supply of NBT to match periods of contracting demand.

With these mechanisms, NuShareholders are able to manage the supply of NuBits in circulation to maintain par acceptance with the dollar.

Why would NuShareholders incur the costs to maintain par acceptance in the face of a negative, transitory shock to the demand for NuBits? Essentially, NuShareholders believe that, as Nu protocol developer Jordan Lee states in the original white paper, “Temporarily losing peg will harm the value of the network.” They are surely right. After all, there are a lot of alternative cryptocurrencies available. The unique feature of NuBits is that it has a fixed exchange rate with the dollar. Abandoning that commitment would render NuBits no better than the competition. To boost the network value — and maximize their dividends — NuShareholders must protect the fixed exchange rate.

Is the Nu protocol the answer to all our monetary economic prayers? Absolutely not. First, it would not seem to meet the robustness standards of a “real monetary rule,” as outlined by George Selgin. Unlike the automatic (if crude) supply protocol of bitcoin and most other cryptocurrencies, the NuBits supply protocol depends on voting NuShareholders. Second, it can — by definition — be no more stable than the dollar. Widespread adoption of NuBits would provide no refuge from the Fed’s monetary mismanagement.

Nonetheless, one might appreciate that the Nu protocol offers the advantages of transferring funds with blockchain ledger technology, like bitcoin, without the disadvantages of bitcoin’s short-run price volatility. Although the Fed has a comparative advantage in issuing substitutes that are accepted at par with its other liabilities, it is far less likely, as Andolfatto acknowledges, to offer a permissionless, privacy-protecting cryptocurrency. The Nu protocol provides a pseudonymous cryptocurrency that trades at par with the dollar. In other words, it is already doing precisely what advocates of FedCoin hope a central bank-issued cryptocurrency would do.

[Cross-posted from Alt-M.org]

Politicians hate cash.

That may seem an odd assertion given that they love spending money (other people’s money, of course, as illustrated by this cartoon).

But what I’m talking about is the fact that politicians get upset when there’s not 100 percent compliance with tax laws.

They hate tax havens since the option of a fiscal refuge makes confiscatory taxation impractical.

They hate the underground economy because that means hard-to-tax economic activity.

And they hate cash because it gives consumers an anonymous payment mechanism.

Let’s explore the animosity to cash.

It’s basically because a cashless society is an easier-to-tax society, as expressed by an editorial from the U.K.-based Financial Times.

…unlike electronic money, it cannot be tracked. That means cash favours anonymous and often illicit activity; its abolition would make life easier for a government set on squeezing the informal economy out of existence. …Value added tax, for example, could be automatically levied. …Greece, in particular, could make lemonade out of lemons, using the current capital controls to push the country’s cash culture into new habits.

And some countries are actually moving in this direction.

J.D. Tuccille looks at this issue in an article for Reason.

Peter Bofinger of the German Council of Economic Experts…wants to abolish the use of cash… He frets that old-fashioned notes enable undeclared work and black markets… So rather than adjust policy to be more palatable to the public, he’d rather leave no shadows in which the public can hide from his preferred policies. The idea is to make all economic activity visible so that people have to submit to control. Denmark, which has the highest tax rates in Europe and a correspondingly booming shadow economy, is already moving in that direction. …the Danmarks Nationalbank will stop internal printing of banknotes and minting of coins in 2016. After all, why adjust tax and regulatory policy to be acceptable to constitutents when you can nag them and try to reinvent the idea of money instead?

By the way, some have proposed similar policies in the United States, starting with a ban on $100 bills.

Which led me to paraphrase a line from the original version of Planet of the Apes.

Notwithstanding my attempt to be clever, the tide is moving in the wrong direction. Cash is beginning to vanish in Sweden, as reported by the New York Times.

…many of the country’s banks no longer accept or dispense cash. Bills and coins now represent just 2 percent of Sweden’s economy, compared with 7.7 percent in the United States and 10 percent in the euro area. This year, only a fifth of all consumer payments in Sweden have been made in cash, compared with an average of 75 percent in the rest of the world, according to Euromonitor International. …Cash machines, which are controlled by a Swedish bank consortium, are being dismantled by the hundreds

Though the article notes that there is some resistance.

Not everyone is cheering. Sweden’s embrace of electronic payments has alarmed consumer organizations and critics who warn of a rising threat to privacy and increased vulnerability to sophisticated Internet crimes. …The government has not sought to stem the cashless tide. If anything, it has benefited from more efficient tax collection, because electronic transactions leave a trail; in countries like Greece and Italy, where cash is still heavily used, tax evasion remains a big problem. Leif Trogen, an official at the Swedish Bankers’ Association, acknowledged that banks were earning substantial fee income from the cashless revolution.

What matters, by the way, is not the degree to which consumers prefer to use alternatives to cash.

That’s perfectly fine, and it explains much of what we see on this map.

The problem is when governments use coercion to limit and/or abolish cash so that politicians have more power. And this is why the French (gee, what a surprise) are trying to crack down on cash.

Writing for the U.K.-based Telegraph, Matthew Lynn mentions the new policy and France and also explores some worrisome implications of this anti-cash trend.

France is banning the use of cash for transactions worth more than €1,000…part of a growing movement among academics and now governments to gradually ban the use of cash completely. …it is a “barbarous relic”, as some publications loftily dismiss it. The trouble is, cash is also incredibly efficient. And it is a crucial part of a free society. There is no convincing case for abolition. …When it comes to creeping state control, it is no surprise to find the French out in front. …A cashless economy would be far easier to both tax and control. But hold on. …cash is far too valuable to be given up lightly. …While terrorists and criminals may well use cash to buy weapons, or deal in drugs, it is very hard to believe that they would not find some other way of financing their operations if it was abolished. Are there really any cases of potential jihadists being foiled because they couldn’t find two utility bills (less than three months old, of course) in a false name to open an account?

Amen. Banning cash to stop terrorists is about as foolish as thinking that gun control will thwart jihadists.

In any event, we need to consider trade-offs. Chris Giles highlighted that issue in a piece for the Financial Times.

…an unfortunate rhetorical echo of Maoist China. It is illiberal… Some argue there would be beneficial side effects from abolishing notes and coins through the regularisation of illegal activities. Really? …Cash would have to be abolished everywhere and the BoE does not have those powers, thankfully. The anonymity of cash helps to free people from their governments and some criminality is a price worth paying for liberty.

Though I suppose we should grudgingly give politicians credit for cleverly trying exploit fear to expand their power.

But never forget we’re talking about a bad version of clever. If they succeed, that will be bad news for freedom.  J.D. Tuccille of Reason explains in a second article why a growing number of people prefer to use cash.

Many Americans happily and quietly avoid banks and trendy purchasing choices in favor of old-fashioned paper money. Lots of business gets done that way…the Albuquerque Journal pointed out that over a third of households in the city either avoid banks entirely (the “unbanked”) or else keep a checking account but do much of their business through cash, check-cashing shops, pawn shops, money orders, and other “alternative financial products” (the “underbanked”). A few weeks earlier, the Kansas City Star reported a similar local situation… Twenty-six percent cite privacy as a reason for keeping clear of banks – bankers say that increased federal reporting and documentation requirements drive many customers away. “A lot of people are afraid of Uncle Sam,” Greg Levenson, president and CEO of Southwest Capital Bank, told the Albuquerque Journal. …most people aren’t idiots. When they avoid expensive, snoopy financial institutions, it’s because they’ve decided the benefits outweigh the costs.

Very well said, though I’d augment what he wrote by noting that some of these folks probably would like to be banked but are deterred by high costs resulting from foolish government money-laundering laws.

More on that later.

Let’s stay with the issue of whether cash should be preserved. A business writer from the U.K. is very uneasy about the notion of a society with no cash.

…tax authorities have become increasingly keen on tracking everything and everyone to make absolutely certain that no assets slip under their radars. The Greeks have been told that, come 2016, they must begin to declare all cash over €15,000 held in safes or mattresses, and all precious stones, gold and the like worth more than €30,000. Anyone else think there might be a new tax coming on all that stuff? …number-crunchers…are maddened by the fact that even as we are provided with lots of simple digital payment methods we still like to use cash: the demand for £20 and £50 notes has been rising. …They are maddened because “as untraceable bearer instruments, it is not possible to locate where banknotes are being held at any one time”… Without recourse to physical cash, we are all 100% dependent on the state-controlled digital world for our financial security. Worse, the end of cash is also the end of privacy: if you have to pay for everything digitally, every transaction you ever make (and your location when you make it) will be on record. Forever. That’s real repression.

She nails it. If politicians get access to more information, they’ll levy more taxes and impose more control.

And that won’t end well.

Last but not least, the Chairman of Signature Bank, Scott Shay, warns about the totalitarian temptations that would exist in a cash-free world. Here’s some of what he wrote in a column for CNBC.

In 2010, Visa and MasterCard, bowed to government pressure — not even federal or state law — and banned all online-betting payments from their systems. This made it virtually impossible for these gambling sites to continue operating regardless of their jurisdiction or legality. It is not too far-fetched to wonder if the day might come when the health records of an overweight individual would lead to a situation in which they find that any sugary drink purchase they make through a credit or debit card is declined. …there is…a sinister risk…a cashless society would certainly give governments unprecedented access to information and power over citizens.

And, he warns, that information will lead to mischief.

…the U.S. government is already using its snooping prowess and big-data manipulation in some frightening ways. …the U.S. government is becoming very fond of seizing money from citizens first and asking questions later via “civil forfeiture.” Amazingly, the government is permitted by law to do this even if it is only government staff members who have a suspicion, not proof, of wrongdoing. …In recent years, it made it increasingly difficult for companies to operate or individuals to transact by adding compliance hurdles for banks wishing to deal with certain categories of clients. By making it too expensive to deal with certain clients or sending the signal that a bank should not deal with a particular client or type of client, the government can almost assuredly keep that company or person out of the banking system. Banks are so critically dependent on government regulatory approval for their actions… It is easy to imagine a totalitarian regime using these tools to great harm.

Some folks will read Shay’s piece and downplay his concerns. They’ll say he’s making a slippery slope argument.

But there are very good reasons, when dealing with government, to fear that the slope actually is slippery.

Let’s close by sharing my video on the closely related topic of money laundering. These laws and regulations have been imposed supposedly to fight crime.

But we’ve slid down the slope. These policies have been a failure in terms of hindering criminals and terrorists, but they’ve given government a lot of power and information that is being routinely misused.

P.S. The one tiny sliver of good news is that bad money laundering and know-your-customer rules have generated an amusing joke featuring President Obama.

P.P.S. If politicians want to improve tax compliance in a non-totalitarian fashion, there is a very successful recipe for reducing the underground economy.

Most would probably agree that this year’s race has already exceeded expectations in terms of sheer entertainment value, but as we head into January the presidential campaign season will really start to heat up. Foreign policy is poised to play an even bigger than expected role in this election, thanks to the many fires burning across the globe. In particular, of course, every candidate will have to explain how he or she intends to grapple with the mess in the Middle East. Unfortunately, as we heard during the most recent debates, most of the answers so far involve more American military intervention.

Over at the Council on Foreign Relations, Micah Zenko has started keeping track of all the candidates’ calls for the use of force. The Presidential Candidates Use of Force Tracker, as he calls it, is a wonderful public service, providing voters with an easy way to compare the candidates’ proposals for intervening in Iraq, Syria, and elsewhere. What’s missing, however, is an even quicker way to compare just how interventionist one candidate is compared to the others.

In order to simplify the data provided by Zenko and his research associate, Amelia M. Wolf, I have created a scoring system so we can compare the candidates more easily. I call it the “Presidential Candidate Intervention Meter.” The Intervention Meter is based on an analysis of proposals made between August and December 14, 2015 and quantifies each candidate’s interventionist position by scoring each proposal for the use of force according to how expansive, expensive, or entangling it is. A call for the major use of ground force, for example, earns more points than a call for the limited use of Special Forces. Likewise, carpet-bombing proposals score higher than calls for air support of Iraqi troops (the scoring rules follow at the end of this post).

Admittedly, the Intervention Meter is a simple and not entirely scientific tool. Reasonable people will disagree on exactly how many points to assign each type of proposal as well as how to categorize each of the proposals. Nor can a single score encompass all the complexity and consequences of a policy proposal. Nonetheless, by applying the same scoring process to each candidate’s policies the Intervention Meter contributes to the conversation about what level of military intervention each candidate would pursue as president.

So, what do we find when we run the analysis? There have been 67 calls for the use of force to date, an average of four per candidate; 25 for the use of ground forces, 17 for airstrikes, 20 for no fly/safe zones, and 5 for non-specific action to combat terrorism globally. The average candidate score was 181. Unsurprisingly, Senator Graham topped the chart, scoring 360 points in our inaugural edition thanks to his appeal for sending U.S. ground troops to the Middle East. More surprising, perhaps, is the fact that Hillary Clinton took the second spot. This was due in large part to the fact that although Clinton has called for a somewhat less interventionist approach to the Middle East (i.e. no major use of ground troops), she has called for the unlimited global pursuit of terrorists, which earned her an extra 100 points in our scoring system. With Graham out of the race Clinton now leads the field over the not much less hawkish Senator Marco Rubio.

At the other end of the spectrum, Senator Rand Paul unsurprisingly brings up the rear as the least interventionist candidate, along with Governor O’Malley. Governor Christie also scores quite low given the hawkish tone he has struck in all of the Republican debates thus far. It seems likely that as the campaign progresses and he continues to press his case as the counterterrorism expert that we will see his score go up. Senator Sanders, on the other hand, may not deserve quite as high a score as he gets. Although he has called for air support for Iraqi forces in the fight against ISIS, most of his score comes from a half-hearted call to combat terrorism worldwide in response to a question in the last Democratic debate.

Things will shift as the campaign moves forward. It will be interesting to see how the Republican candidates do or don’t shift their interventionist rhetoric as they approach the primaries and then again when the eventual nominee launches into the general election. Meanwhile, Hillary Clinton is already running as the most hawkish and interventionist Democrat in a very long time. Having staked out such a position as she appeals to Democratic primary voters, it is hard to see her becoming any less interventionist in the general election as she begins to appeal more energetically to moderate voters.

2016 Presidential Candidate Intervention Meter


Scoring Rules:

Calls for ground forces

High (i.e. thousands of troops): 100 points
Medium (i.e. embed with Iraqi forces): 50 points
Low (i.e. Special Forces): 25 points

Calls for Air Power

High (i.e. carpet bombing): 50 points
Medium (i.e. air support for Iraqi forces): 25 points
Low (i.e. drone strikes to kill terrorists): 10 points

Calls for No Fly/Safe Zones: 10 points

Calls for global/unlimited action against terrorism: 100 points

Philip Bump of the Washington Post, still in thrall to the labor theory of Congress’s value, declares, “The 112th Congress, you might remember, was the least productive in modern times.” That is to say, it passed fewer bills than other recent Congresses. But all is not lost!

After the first year of this 114th Congress, more bills have been enacted than in the 112th or 113th, according to data compiled by GovTrack.us. So far, the 114th is tracking more closely with the more-productive 110th and 111th.

So good news for those of you have been worrying that you didn’t have enough new laws to discover, understand, and obey. Bump’s article is full of charts and data, all organized around the theme that a good, “productive” Congress is one that produces bills.

But as I’ve written before, journalists may well believe that passing laws is a good thing, and passing more laws is a better thing. But they would do well to mark that as an opinion. Many of us think that passing more laws – that is more mandates, bans, regulations, taxes, subsidies, boondoggles, transfer programs, and proclamations – is a bad thing. In fact, given that the American people pondered the “least productive Congress ever” twice, and twice kept the government divided between the two parties, it just might be that most Americans are fine with a Congress that passes fewer laws.

Is a judge “less productive” if he imprisons fewer people? Is a policeman less productive if he arrests fewer people? Government involves force, and I would argue that less force in human relationships is a good thing. Indeed I would argue that a society that uses less force is a more civilized society. So maybe we should call the 112th and 113th Congresses the most civilized Congresses since World War II (the period of time actually covered by the claim “least productive ever”), and the first session of the 114th Congress slightly less civilized.

As before, I wonder if congressional reporters would applaud the productivity of such Congresses as

The 31st Congress, which passed the Fugitive Slave Act in 1850

The 5th Congress, which passed the Alien and Sedition Acts in 1798

The 21st Congress, which passed the Indian Removal Act in 1830

The 77th Congress, which passed Public Law 503, codifying President Franklin D. Roosevelt’s Executive Order 9066 authorizing the internment of Japanese, German, and Italian Americans, in 1942

The 65th Congress, which passed the Eighteenth Amendment (Prohibition), the Espionage Act, and the Selective Service Act, and entered World War I, all in 1917

And hey, fans of legislation: If you’re really disconsolate over the passage of barely more than 100 new federal laws a year, take heart: According to my former colleague Ryan Young, now with the Competititive Enterprise Institute, federal regulators are on pace for the most pages in the Federal Register in a single year. They’ll need a strong final week, but Ryan thinks they can break the old record of 81,405 pages of new regulations. Will the Washington Post hail the regulators’ “productive” year? How about the Americans who have to comply with those regulations?

After the Supreme Court blocked Hawaii’s race-based election pending appeal, its organizers—a government contractor named Na’i Aupuni—canceled it and decided instead to seat all the candidates as delegates to a special constitutional convention for the purported new nation of “native Hawaiians.” The plaintiffs have asked the Supreme Court to find the election/convention organizers in contempt of its earlier order. Meanwhile, the appeal of the district court’s earlier denial of an injunction proceeds in the U.S. Court of Appeals for the Ninth Circuit. Cato has joined the American Civil Rights Union on a brief supporting the challengers. We point out that this is the second time that Hawaii has attempted to conduct a discriminatory voter-registration procedure to facilitate a racially exclusionary election. The first time this occurred, the Supreme Court held that such elections violate the Constitution. Rice v. Cayetano (2000). Things are no different this time. The voter qualification requirements here again make eligibility contingent on ancestry and bloodlines, which are nothing more than proxies for race. (There’s a further requirement that voters affirm a belief in the “unrelinquished sovereignty of the Native Hawaiian people,” which is an ahistorical assertion.) Such a discriminatory scheme is per se unconstitutional under the Fifteenth Amendment.

For PR professionals, the holiday season is like one big Friday at 5:00 p.m. That’s when you release information that you don’t want getting too much attention.

So it’s no surprise that we learned yesterday that the Transportation Security Administration has just awarded itself the authority to make airport strip-search machines mandatory. Until now, having a machine create a digital representation of your unclothed body has had a happy alternative: a prison-style pat-down! (That’s my choice. It’s sometimes a little massage-y.)

It takes a lot of gall for the Department of Homeland Security to make this move now, though—not because it’s the holiday season, but because the DHS (of which TSA is a part) is currently under a court order to establish the legality of its strip-search machine policies in toto.

In July 2011, the D.C. Circuit Court of Appeals ruled that the DHS had failed to follow the procedures required by law when it established its policy of using strip-search machines for primary screening. The court ordered the DHS to “promptly” undertake a notice-and-comment rulemaking. Four years later, our friends at the Competitive Enterprise Institute initiated a new lawsuit seeking to compel DHS to finish what was amounting to an endless rulemaking process.

DHS recently told the D.C. Circuit that it would finish the regulation by March 3, 2016. In the meantime, they’re screwing the lid down just a little bit more on air travelers. Chutzpah!

When the regulation is done, it can finally be challenged under the Administrative Procedure Act’s “arbitrary and capricious standard.” Our John Mueller and Mark Stewart have already shown that strip-search machines are a cost-ineffective security measure.

In a similar vein, rumors are swirling that the DHS will soon announce full REAL ID enforcement at airports. The quiet week between Christmas and New Years seems like a ripe time to get that news out.

They’ve said they’d give 120 days’ notice that TSA is going to start rejecting drivers’ licenses and IDs from states that don’t participate in the national ID system. A December announcement means that April would be white-knuckle time for travelers.

There will not be enforcement, of course. The goal is to bluff about enforcement to state legislatures in advance of their 2016 legislative sessions, so that they’ll pass laws implementing the federal national ID mandate. Just yesterday, two DHS bureaucrats issued orders to Minnesota governor Mark Dayton (D) detailing how the law in Minnesota must change to satisfy their demands.

Federal bureaucrats ordering around governors and legislators! Chutzpah!

DHS isn’t dumb enough to do it … I’m sometimes wrong … but actual REAL ID enforcement at airports would be quite a show. Not only would there be howls of protest aimed at TSA in the media, the DHS would catch a delicious lawsuit from some law-abiding American citizen trying to visit family who is denied the right to travel.

The lawsuit would expose that DHS enforcement is entirely arbitrary. REAL ID is unworkable, and the agency has been handing out waivers like they were candy canes since the statutory deadline in 2008. Having selected a pared-down “material compliance checklist” to treat as compliance, DHS bureaucrats have been arbitrarily claiming that some states are in compliance and some states are not, giving waivers to some states and not to others based on internal, self-selected criteria. That is not how law works, and once they try to enforce, they’ll have to square-up their enforcement efforts with the terms of the REAL ID law, equal protection, and due process.

Should DHS try to show that it has rational criteria for refusing IDs, that may bring in the question of ID security, which, like strip-search machines, is another cost-effectiveness loser. I won’t belabor that point, but my Christmas list includes a TSA and DHS operating under the rule of law, required to defend its programs in light of solid points made by security analysts like this guy Adam.

Learn more than you ever wanted to know about REAL ID from this recent Hill briefing.

The recent Omnibus increased H-2B visas for seasonal non-agricultural workers by not counting some renewals against the annual cap of 66,000.  Numerical estimates of the increase vary widely but the Congressional Budget Office estimated 8,000 additional H-2B visas will be issued in 2016.  This small policy shift is consistent with channeling would-be illegal immigrants onto temporary work visas – a strategy that has succeeded in decreasing unlawful immigration. 

There has been a dramatic decrease in Mexican unlawful immigration over the last decade.  The majority of illegal immigrants apprehended along the border had always been Mexican until 2014.  Beginning in 2006, with the slowdown in the housing boom, fewer Mexicans started coming to the United States illegally which led to fewer apprehensions.  The number fell to 229,178 in 2014, down from 1,073,468 in 2004. 

Mexican illegal immigration did not rebound after the Great Recession because the United States had expanded temporary migration programs that allowed far more Mexicans to enter lawfully.  Mexican migration to the United States didn’t disappear – it just became legal.  The Omnibus’ modest expansion of H-2B visas builds on this successful strategy by widening the legal pathway for lower-skilled migrant workers.

The Omnibus’ H-2B visa reform is an important, albeit small, part of continuing this strategy.  H-2B admissions are up 20 percent from 2002 to 2013 while the percentage of Mexicans getting those visas rose from 64 to 84 percent.  As the H-2B expanded, it also Mexicanized, diverting many would-be Mexican unlawful immigrants and their families onto legal temporary migrant visas. 

Increased Temporary Migration

There has been a tremendous rise in the number of temporary migrants on E, H, O, P, and L visas along with their derivative family members.  Their number of admissions increased by 104 percent from 2002 to 2013, from about 1.5 to 3 million (Chart 1). The number of Mexican temporary migrants admitted increased 512 percent during the same time period, which explains the rapid collapse in Mexican illegal immigration.  Mexican migrants didn’t stop coming after 2006, they just came legally as the temporary migrant programs expanded. 


Source: Yearbook of Immigration Statistics

The share of temporary worker visa admissions that went to Mexicans also increased from 7 percent in 2002 to over 21 percent in 2013 (Chart 2).  Not only were more visas issued but a larger percentage of them went to Mexicans. 

Chart 2

Mexican Share of All Temporary Migrants

Source: Yearbook of Immigration Statistics

Chart 3 combines the gross number of Mexican illegal immigrants (gross) who successfully entered the United States each year with the number of Mexican temporary migrants.  It reveals a line that shows a dip during the Great Recession that soon recovers afterward to the pre-recession migration levels.  The only difference post-recession is that most of them are coming legally.  An average of 929,000 entered each year from 2002 to 2005.  During the post-recession years of 2010 to 2013, an average of 930,000 entered each year.       

Chart 3

Mexican Temporary Workers and Illegal Immigrants

Source: Yearbook of Immigration Statistics

Chart 3 obscures the spectacular decline of Mexican illegal immigration that began in 2006 and the increase in legal temporary Mexican migration that took its place.  Beginning in 2009, an increase in temporary migrant visas funneled Mexicans who would have otherwise entered illegally onto visas (Chart 4).  The number of admissions for Mexican temporary migrants surpassed illegal Mexican entrants in 2008 and every year afterward.  The percent of all Mexicans that entered on temporary visas (excluding green cards) increased from 11 percent in 2002 to 57 percent in 2008 to 71 percent in 2013.  I attribute this shift to both an increase in temporary migrant admissions which decreased the supply illegal Mexican entrants by funneling them in to a legal market.           

Chart 4

Legal Temporary Mexicans and Illegal Mexicans

Source: Pew Research Center, Yearbook of Immigration Statistics, Author’s Calculations

Temporary legal migrants gradually displaced those who came illegally.  From 2002 to 2008, the change in the number of Mexican illegal immigrants each year explains 97.8 percent of the variation in all Mexican entrants.  From 2009 to 2013, the annual change in temporary migrants on visas explains 97.8 percent of the annual variation in all Mexican entrants.  Legal temporary visas are now driving Mexican migration.        

The temporary visas also include the family members of these workers who enter as derivatives.  Family reunification has been an important component of unlawful immigration so allowing them to come reduces the pressure to migrate illegally.

Each visa issued during the 1950s-era Bracero guest worker visa program displaced 3.4 illegal workers.  If anything like that relationship hold today, the expansion in temporary migrants visas and mobility is the only policy preventing a re-ignition of unlawful Mexican migration on a pre-recession scale.    

Increased Enforcement or Increased Legal Migration?

Another explanation for the decrease in Mexican illegal immigration is that border enforcement improved and became an actual deterrent.  The same people who make that argument also paradoxically claim that President Obama left the border wide-open, but no matter. 

The number of Border Patrol agents is negatively correlated with both the gross flow (-0.93) and net change in Mexican illegal immigration (-0.9) from 2002 to 2013.  In other words, more Border Patrol agents seem to deter unlawful immigration.  However, the increase in temporary Mexican migration and the decrease in gross Mexican illegal immigration has a correlation coefficient of (-0.82) while the correlation between apprehensions and temporary migrants is -0.94.  Part of the reason why they’re so similar is that the numbers of Border Patrol agents and temporary Mexican migrants move in the same direction (+0.93).  That’s hardly a slam-dunk for the enforcement cheerleaders. 

If Border Patrol deters Mexican illegal immigrants then it should also deter those from countries other than Mexico (OTM).  Remarkably, the gross flow of illegal OTM migrants is positively correlated with the number of Border Patrol agents (+0.29).  Even the number of OTMs apprehended on the border is positively correlated with the number of Border Patrol agents (+0.06) while the correlation for the selected years of 2009 to 2013 is greater still (+0.50), showing a distinct lack of deterrence for OTMs.  Perhaps those OTM number would be even greater if it weren’t for Border Patrol getting more effective but the proponents of this theory have yet to demonstrate that.    

The number of OTM illegal immigrants has increased as the number of Mexicans has fallen (Chart 5).  If Border Patrol is really responsible for the collapse in Mexican illegal immigration, then why did the apprehensions of OTMs increase along with the number of Border Patrol agents?

Chart 5

Mexicans and OTMs Apprehended and Number of Border Patrol Agents

Source: Customs and Border Protection


Above I use temporary admissions of guest workers and their families on I-94s as a proxy measurement for the increase in temporary migration.  An I-94 is made each time a temporary migrant enters the United States.  Several I-94s could be issued to each migrant as they go back and forth across the border during a given year, so a temporary migrant could rack up several I-94s over the course of his or her work period.  That means there are more I-94s for temporary migrants than there are temporary migrants.  Regardless of the I-94 increase, whether due entirely to a relaxation of mobility restrictions or an increase in the numbers, they are now more substitutable and able to displace illegal migrants.

Billionaire Warren Buffett is campaigning with presidential candidate Hillary Clinton, and he is echoing her class warfare rhetoric. In Nebraska the other day:

As Mr. Buffett introduced Mrs. Clinton, he outlined statistics showing that the richest 400 Americans saw their incomes rise sevenfold between 1992 and 2012, the most recent year IRS data were available. During that period, their average tax rate dropped by about one-third, he said.

Buffett is referring to this data published by the IRS. The sevenfold increase Buffett refers to is not adjusted for inflation. The IRS provides a column with inflation-adjusted income, but Buffett decided not to use that data.

But the main problem with Buffett’s statement is that the one-third tax rate drop is explained by 2012’s lower capital gains and dividend tax rates. Buffett probably wants people to believe that nefarious loopholes caused the drop, but the real reason was a serious policy change widely supported by economists and tax experts.

Under the income tax, dividends and capital gains are generally taxed at both the corporate and individual levels. That double taxation creates serious distortions, such as inducing U.S. corporations to become excessively indebted. The capital gains and dividend tax rate cuts under George W. Bush (now rescinded) partly fixed the double taxation.

In the following table, I roughly recalculate the 1992 and 2012 tax rates for the Top 400 excluding the reduced-rate dividends and capital gains. (Capital gains had a reduced rate both years, and dividends had a reduced rate in 2012).

Without the reduced rates on capital gains and dividends, the average tax rate for the Top 400 was virtually unchanged—25.6 percent in 1992 and 25.4 percent in 2012.

So Buffett’s complaint about the tax rate on top earners is really a complaint about tax reforms for capital gains and dividends. Rather than trying to inflame liberal voters with out-of-context data, Buffett should provide his economic arguments about the proper treatment of capital gains and dividends in the tax code.

I provide the arguments for reduced capital gains tax rates here. Just about every developed country has reduced capital gains tax rates. In 2012 the average tax rate across the OECD was just 16 percent. So Buffett should explain why he thinks all those countries are getting it wrong on capital gains.

There are other interesting things about the IRS data on the Top 400. Buffett, Clinton, Sanders, and the rest would have us believe that this is a permanent group of the wealthy aristocracy. Actually, there is huge turnover in the Top 400, as I discuss here. Most reach this top group for only a single year, often when they are selling their family businesses and realizing a capital gain. The IRS table shows that 68 percent of all income of the Top 400 is capital gains.

Finally, the IRS data show that the share of overall federal taxes paid by the Top 400—even with the reduced capital gains and dividend tax rates in 2012—rose from 1.04 percent in 1992 to 1.89 percent in 2012. Buffett is quoted saying of the Top 400, “the game has been stacked in their direction.” But if the Top 400 are paying a higher share, the game is clearly stacked against them.

In his 1999 book The Age of Spiritual Machines, the famed futurist Ray Kurzweil proposed “The Law of Accelerating Returns.” According to Kurzweil’s law, “the rate of change in a wide variety of evolutionary systems (including but not limited to the growth of technologies) tends to increase exponentially.” I mention Kurzweil’s observation, because it is sure beginning to feel like we are entering an age of colossal and rapid change. Consider the following:

According to The Telegraph, “Genes which make people intelligent have been discovered [by researchers at the Imperial College London] and scientists believe they could be manipulated to boost brain power.” This could usher in an era of super-smart humans and accelerate the already fast process of scientific discovery.

Elon Musk’s SpaceX Falcon 9 rocket has successfully “blasted off from Cape Canaveral, delivered communications satellites to orbit before its main-stage booster returned to a landing pad.” Put differently, space flight has just become much cheaper since main-stage booster rockets, which were previously non-reusable, are also very expensive.

The CEO of Merck has announced a major breakthrough in the fight against lung cancer. Keytruda “is a new category of drugs that stimulates the body’s immune system.” “Using Keytruda,” Kenneth Frazier said, “will extend [the life of lung cancer sufferers] … by approximately 13 months on average. We know that it will reduce the risk of death by 30-40 percent for people who had failed on standard chemo-therapy.”

Also, there has been massive progress in the development of “edible electronics.” New technology developed by Bristol Robotics Laboratory “will allow the doctor to feel inside your body without making a single incision, effectively taking the tips of the doctor’s fingers and transplant them onto the exterior of the [edible] robotic pill. When the robot presses against the interior of the intestinal tract, the doctor will feel the sensation as if her own fingers were pressing the flesh.”

Congress rejected the Forest Service plan to give the agency access to up to $2.9 billion a year to suppress wildfires. In response, Secretary of Agriculture threatened to let fires burn up the West unless Congress gives his department more money. In a letter to key members of Congress, Vilsack warned, “I will not authorize transfers from restoration and resilience funding” to suppress fires. If the Forest Service runs out of appropriated funds to fight fires, it will stop fighting them until Congress appropriates additional funds.

This is a stunning example of brinksmanship on the part of an agency once known for its easygoing nature. Since about 1990, Congress has given the Forest Service the average of its previous ten years of fire suppression funds. If the agency has to spend more than that amount during a severe fire year, Congress authorized it to borrow funds from its other programs, with the promise that Congress would reimburse those funds later. In other words, during severe fire years, some projects might be delayed for a year–hardly a crisis.

Yet Vilsack and the Forest Service are intent on turning it into a crisis. In a report prominently posted on the Forest Service’s web site, the agency whines about “the rising costs of wildfire operations”–that cost not being the dollar cost but the “effects on the Forest Service’s non-fire work.”

Numerous graphs in the report show declines in inflation-adjusted funding for various line items–but, deceptively, none of the graphs have the Y-axis set to zero, thus exaggerating those declines. Moreover, many of those line items are ridiculous anyway: who cares of land-management planning budgets have declined? The Supreme Court decided in 1998 that land-management planning was a waste of time, so why are they still spending any money at all on it? In any case, most of the items tracked by the charts aren’t programs the Forest Service borrows against for fire, so creating the proposed $2.9 billion emergency fund would do nothing to stop the funding declines.

The question Vilsack should ask is not “Why won’t Congress give his agency a blank check?” but “Why does the Forest Service spend so much on fire anyway?” The answer to that question is complex but comes down to one simple thing: the Forest Service has no incentive to control costs as long as Congress keeps reimbursing them.

As wildfire historian Stephen Pyne wrote in 1995, Forest Service fire managers have long been known for “creative accounting,” transferring “as many costs as possible” to the emergency fire funds. One of these is the “presuppression fund” that becomes available when fire danger is high; the other is the suppression fund that becomes available when a fire isn’t controlled by the first responders. When either of these conditions takes place, Pyne notes, “everything imaginable is charged to fires.” This situation has only gotten worse in the last two decades.

So it’s not surprising that many Forest-Service-fed news articles have reported that 2015 was the costliest fire year ever, citing Forest Service costs of $1.7 billion. But none of the articles mention costs to the Department of the Interior, and while I can’t find that number anywhere, I suspect it was not a lot more than half a billion dollars, as the most it has ever spent in the past was around $470 million.

The reason why this is important is that most fires this year were on Interior lands, not national forests. The Forest Service and its parent, the Department of Agriculture point to the near-record number of acres burned in 2015, about 9.8 million. But less than 20 percent of those acres were on national forest lands, while 54 percent were on Interior lands. 

Firefighting Costs Per Acre Burned   Forest Service Interior 2010 2,834 177 2011 818 200 2012 564 105 2013 983 252 2014 1,371 264 2015 922 ? Average 916 171

As the table above shows, the Forest Service habitually spends more than five times as much as the Department of the Interior per acre burned on their respective lands. Unlike the Forest Service, Interior agencies have never had a blank check for suppressing fire, so they have had little incentive to wildly overspend. 

Worse, Congress’ policy of giving the Forest Service the average of its previous ten years’ of fire suppression costs gives the agency an incentive to spend more each year so that its ten-year average spirals upwards. Meanwhile, in mild fire years, Congress says that the appropriated fire suppression funds that the agency doesn’t need “may be transferred to the National Forest System, and Forest and Rangeland Research accounts to fund forest and rangeland research, the Joint Fire Science Program, vegetation and watershed management, heritage site rehabilitation, and wildlife and fish habitat management and restoration.” 

Thus, it’s heads the Forest Service wins; tails the taxpayers lose. When fire years are mild, the agency gets a windfall to spend on non-fire programs. When fire years are severe, it gets to borrow from those non-fire programs to spend all it wants on fire suppression, knowing it will be reimbursed–and then complains that its non-fire programs are hurt by the borrowings.

One of the reasons why the administration and some environmental groups are behind the Forest Service proposal to give it $2.9 billion a year to draw upon is that increasing fire costs fit neatly into their global climate apocalypse. Yet the data don’t show that the United States is suffering worse droughts today than in the past. According to the National Oceanic and Atmospheric Administration, the percentage of the nation that was severely or extremely dry during summer months (July-September) averaged about 15 percent in 2015. That’s high, but hardly a record.

In recent years, this percentage has ranged as low as 3 percent in 1992 to as high as 24 percent in 1953. It was 20 percent in 2012 and 22 percent in 2000. There was a six-year period in the 1950s when it was 15 percent or more in all but one year (when it was 13 percent), and reached as high as 24 percent. So far, both the 1930s and the 1950s were dryer than the 2010s. This suggests that droughts are cyclical, not growing.

What is growing is the Forest Service’s spending on fire. It will continue to grow until Congress gives the agency incentives to contain its costs rather than incentives to spend more each year.

On December 3, Congress passed a new highway and transit bill allocating $305 billion over the next five years.  Part of the funding, allegedly $35.8 billion, will be taken from the Federal Reserve’s capital account.  Further details on the maneuvering between the Senate and House versions, and Fed objections, are here, here, and here.  Under the final compromise bill, about 8 percent of the Fed’s $35.8 billion contribution will involve a diversion of dividends from commercial banks, but the remainder is just a silly and deceptive gimmick for covering future federal expenditures.  Both the banks and the Fed failed in their last-minute efforts to curtail these provisions during the debate over the omnibus spending bill that Congress passed last week.

To appreciate exactly what these provisions will do, we need to examine more closely the nature of the Fed’s capital account.  The Fed is only nominally owned by its member banks, which comprise all nationally chartered banks and eligible state-chartered banks that choose to join.  Member banks are required to hold an amount equal to 6 percent of their own capital and surplus in the “shares” of their respective district Federal Reserve Banks.  Half of this amount is paid in; the other half is subject to call by the Fed’s Board of Governors.  As member banks increase or decrease in size, their holdings must be adjusted accordingly.  Obviously these “shares” are not like ordinary shares.  They cannot be bought or sold on a secondary market, nor are they in any sense residual claims to the Fed’s earnings.

In exchange for these “shares,” member banks get a few limited privileges.  Prior to 1980, the Fed’s check clearing and discount window was confined to member banks, but since then all banks and other depositories have access to both of these, with a market fee now imposed for check clearing.  Member banks still get to choose six of the nine directors of their respective district Fed Banks, but only with severe constraints, which have gotten more severe with the passage of the Dodd-Frank Act.  This gives banks some slight formal and circuitous influence over Fed policy.

But the main benefit of these “shares” is the dividend they pay, until now fixed by law at exactly 6 percent of the paid-in portion of a member bank’s capital.  This is a bad deal for banks whenever inflation and nominal interest rates are high but a very good deal since the financial crisis.  These “shares” therefore are financially more like debt than equity, in which member banks pass on funds to the Fed, which in turn buys Treasury securities (almost exclusively in the past) and now mortgage-backed securities.  The member banks are in effect indirectly loaning money to the government in exchange for a fixed 6-percent return.

The Senate version of the highway bill would have reduced the members dividends to 1.5 percent, with the remaining 4.5 percent payable by the Fed to the U.S. Treasury.  When member banks unsurprisingly and strongly objected, the House struck out this provision to replace it with a second way of tapping into Fed capital explained below.  The bill’s final compromise ties the dividend for member banks with more than $10 billion in assets to the interest rate on 10-year Treasury bonds, currently 2.2 percent, up to a maximum of 6 percent.  This will release for payment to the Treasury an estimated $2.8 billion over the next five years.  In essence, it constitutes a trivial reduction in the interest cost of government borrowing, annually about a quarter of a percent of the government’s current interest costs of over $200 billion (and this is net of existing Fed remittances to the Treasury).

This feature of the bill also makes more obvious the fact that the so-called “ownership” of the Fed by private banks is little more than a requirement to fund the Treasury.  The reduced dividend over the long run may decrease the attractiveness of Fed membership for state-chartered banks.  Given that the Fed power over non-member banks is now almost as extensive as over member banks, that hardly seems to matter much.  The one attractive aspect of this way of funding is that, rather than increasing the total level of government spending, it merely redirects outlays from banks to transportation.

The paid-in portion of member bank “shares,” however, is only one of two components of the Fed’s capital account.  The other component, labeled “surplus,” comprises residual Fed earnings from interest on its assets.[1]  The House version of the bill, instead of diverting dividends, proposed employing this surplus capital, which today amounts to $29.3 billion, to cover new expenditures on highways and transit.  Congress in the past has imposed levies on the Fed’s surplus, starting in 1933, when it took half to fill the coffers of the new Federal Deposit Insurance Corporation.  In 1997 and again in 1998, Congress pulled out $100 million, and in 2000 it extracted $3.7 billion.  Yet in each of these cases, the Fed replenished the surplus out of subsequent earnings.  The House, in contrast, intended to empty the account permanently.  The compromise version of the bill that passed both houses caps the Fed’s surplus capital at $10 million, with the remaining being passed to the Treasury, supposedly providing $33 billion of extra revenue over the next five years.

Until now, the Fed has almost always kept the value of surplus capital equal to the value of the other, paid-in component of the Fed’s capital, a mere reflection of that half of member bank “shares” that have not been paid in.  Only briefly have Federal Reserve district banks ever drawn down their capital surplus, at least 158 times according to 2002 study by the General Accounting Office (since renamed the Government Accountability Office).  This step was taken so as to absorb losses the Fed had incurred, mainly through its foreign-exchange operations, between 1989 to 2001.

But since the Fed creates money, the surplus capital is basically an accounting mirage.  There  is no idle pot of cash sitting in the account.[2]  Any money that has been paid into the Fed — either through the sale of assets, through repayment of loans made by the Fed, or even through interest the Fed has earned on its assets — is not counted in the monetary base.  When the receipts come from private banks or the general public, the money is withdrawn from circulation at the moment the Fed receives it, temporarily vanishing.  Only if the Fed again pays out that money, does the monetary base go back up.  Of course, much of it is immediately paid back out, as the Fed rolls over its asset portfolio or covers its operating expenses, so there is a constant flow of base money in out.  Yet otherwise, these Fed receipts merely create an accounting entry on the Fed’s balance sheet labeled either as “accrued dividends and other liabilities” or “surplus capital.”

Much of the Fed’s revenue, however, comes not from the private sector but directly from the Treasury, as interest on the Fed’s portfolio of Treasury securities.  Prior to the financial crisis, this was indeed the primary source of Fed income, but now it accounts for just a bit more than half of the total ($63 billion out of total earnings of $116 billion for calendar year 2014), with nearly all of the remainder from interest on mortgage-backed securities.  The effect of these Treasury interest payments on the monetary base is a bit convoluted, but broadly it works out the same as for other Fed earnings.  The difference is that the money has already been pulled out of circulation by the Treasury.[3]  Still, when the Treasury initially pays interest to the Fed, the net amount not paid out again appears on the Fed’s balance sheet as “accrued dividends and other liabilities” or “surplus capital.”

In other words, the surplus capital is merely an entry on one side of the Fed’s balance sheet matching assets on the other side.  To be sure, those assets do earn interest.  So one way of thinking about the Fed’s surplus capital is that it permits the Fed to hold interest earning assets without increasing the monetary base.  But after covering its expenses, the Fed remits most of its earnings to the Treasury on a monthly basis.  (Out of $116 billion in Fed interest earnings from all sources during 2014, $97 billion was remitted to the Treasury.)  Thus, to the extent that surplus capital increases the size of the Fed’s balance sheet, any additional earnings are ultimately funneled back to the Treasury already.[4]

With no actual money in the surplus capital account to begin with, the Fed can only reduce the account in one of three possible ways.  The most straightforward would be for the Fed to create $19.3 billion of new base money for the Treasury to spend.  In the first year, surplus capital would be run down to $10 billion, with $19.3 billion of Fed deposits and currency on the same side of the balance sheet ultimately replacing this fall in capital.[5]  The total on each side of the balance sheet would remain unchanged.  The Congressional Budget Office estimates that future increases in the capital of member banks will require the Fed to continue funneling between $2 and $3 billion of “surplus capital” per year to the Treasury.  Because this method increases the money supply and is mildly inflationary, the Fed will more likely sterilize the transfer in two other ways discussed by Ben Bernanke in a blog post criticizing the House plan.

One of these alternatives would involve the Fed immediately selling off $19.3 billion of Treasury securities and transferring the proceeds from those sales to the Treasury.  This would reduce the Fed’s total balance sheet on both sides by the same amount, but keep the monetary base roughly unchanged, sterilizing the transfer.  But since the Treasury securities sold are now owned by the general public rather than the Fed, the Treasury no longer receives Fed remittances for the interest paid on this portion of its debt.  What the Treasury has gained in one lump sum it now looses in the form of future income from the Fed, with the present value of both approximately the same.  In short, with no new revenue or increased taxation, the Treasury’s new transportation expenditures will merely increase government deficits.

The Fed could instead cover its payment of $19.3 billion to the Treasury by directly reducing its regular Treasury remittances.  In effect, the Fed would still only be giving back to the Treasury what it has first received from the Treasury in the form of interest payments.  Again, the Treasury will lose approximately as much as it gains.  Recall that in 2014, total Fed remittances to the Treasury came to $97 billion.  So all the Fed would have to do is reclassify $19.3 billion of its future excess earnings as a payment from the surplus capital.  To simultaneously reduce the surplus account to $10 billion without selling off any assets, all the Fed needs to do is move $19.3 billion into “other liabilities and accrued dividends.”  Ceteris paribus, the balance sheet totals and the monetary base remains unchanged.  The additional highway spending will still increase current and future budget deficits.

The Fed will probably use some judicious mix of all three methods to comply with the new requirement.  Admittely, reducing the surplus capital from $19.3 to $10 billion also reduces the amount subject to call by the Fed Board from member banks.  But since the Fed creates money, it has no need to exercise this call.  This reduction in capital on call could decrease the extent to which the Fed can impose on bank shareholders any losses from a bank failure.  Given how many other capital controls are placed on banks through the Fed, FDIC, and other federal agencies, it is hard to imagine that this will really have noticeable consequences.

In the final analysis, the only significant change for the Fed brought about by the highway bill is the adjustment in dividends paid to member banks, probably a desirable reform.  The reduction in the Fed’s surplus capital, on the other hand, is an ineffectual cosmetic change, which the Fed can easily offset, raising the question of why Janet Yellen and other Fed officials have objected at all.  The most insidious and misleading aspect of this attempted raid on the Fed is Congress’s ridiculous pretense that it will finance a spending hike without increasing taxes, increasing the deficit, or having the Fed print money.  In reality, there are no other options.


[1] Prior to January 1, 2011, the Fed’s capital account included a third component, labelled “other capital,” which consisted of additional Fed earnings that had not yet been remitted on a monthly basis to the Treasury or paid out as dividends.  Since then, this component has been removed from the capital account and relabeled as “other liabilities and accrued dividends.”  But in practice, it works out the same as the surplus capital, except its total value, which is much lower, is more volatile.

[2] There is one minor exception. The Fed does hold as an asset some Treasury created base money in the form of coins, currently about $1.9 billion.

[3] I’ve abbreviated what happens for clarity.  Most tax and other payments from the public to the Treasury are initially deposited in tax and loan accounts at assorted depositories.  Since these Treasury bank deposits are not counted in the broader monetary measures, tax payments reduce the total money stock, ceteris paribus, but have no initial impact on the base.  Before the Treasury makes expenditures, it transfers these deposits from the banks to the Fed, sometimes within a day or less.  At that point, these transfers do reduce the monetary base.  On the Fed’s balance sheet, bank reserves fall by the amount by which Treasury deposits at the Fed go up.  The exact reverse occurs when the Treasury makes expenditures, except for when it pays interest to the Fed.

[4] Milton Friedman and Anna Jacobson Schwartz were well aware of the quasi-fictitious nature of the Fed’s capital accounts when in Appendix B, “Proximate Determinants of the Nominal Stock of Money,” of A Monetary History of the United States, 1867-1960 (Princeton, NJ: Princeton University Press, 1963), pp. 797-798, they consolidated the Fed and Treasury monetary accounts by subtracting Fed capital from U.S. government securities on the asset side.

[5] Again I’ve abbreviated.  Treasury deposits at the Fed will most likely go up with the initial fall in surplus capital, and the base will only increase as the Treasury draws down its deposits to spend the money.

[Cross-posted from Alt-M.org]

Senator Bernie Sanders recently tweeted the following.

Fortunately, the gruelingly long workweek described by Sanders is not the norm. In fact, leisure time has been on the rise. In 1950, an average U.S. worker worked 1,984 hours a year, or about 38 hours a week. In 2015, an average American worker worked 1,767 hours, or about 34 hours a week.

That means that the average U.S. worker had 217 more hours for leisure or other pursuits in 2015 than in 1950. That is about 9 days of extra time.

The 50-hour workweek described by Sanders is more common in China, where the average worker worked 2,432 hours in 2015, or around 47 hours a week. Compare other countries using HumanProgress.org’s interactive dataset.