Policy Institutes

Today’s removal of the filibuster – a parliamentary tool effectively requiring 60 votes to proceed with a vote on a matter – for Supreme Court nominees is the long overdue denouement of a process that began not with Senate Republicans’ refusal to vote on Merrick Garland, or even Harry Reid’s elimination of the filibuster for lower-court nominees in 2013, but with Reid’s unprecedented partisan filibusters in 2003. Recall especially the record 7 failed votes to end the filibuster of Miguel Estrada, who was blocked primarily because Democrats didn’t want President Bush to appoint the first Hispanic Supreme Court justice.

The Senate is now restored to the status quo ante, such that any judicial nominee with majority support will be confirmed. That’s a good thing.

RIP Partisan Filibuster (2003-2017)

A well-known obstacle to the greater popularity of Bitcoin as a medium of payment is the high volatility of its exchange value. This volatility results from its built-in quantity commitment: because the number of Bitcoins in existence stays on a programmed path, variations in the real demand to hold Bitcoin must be accommodated entirely by variations in its unit value. When demand goes up, there is no quantity increase to dampen the rise in price; and vice-versa for a fall in demand.

Not surprisingly, several cryptocurrency developers have thought of creating a cryptocurrency with a price commitment — namely a pegged exchange rate with the US dollar — rather than a quantity commitment, in hopes of greater popularity. The aim is to create a system in which dollar-denominated payments can be made with the ease, security, and low cost of Bitcoin payments, but without the exchange-rate risk.

The development of “Blockchain 2.0” platforms has enabled the launching of a variety of new digital assets, including such dollar-pegged (and euro-pegged and gold-pegged) currencies. As we will see, the histories of early (2014-2016) dollar-pegged cryptocurrencies show a series of flops. But one project, Tether, has become a late-blooming success. Tether had $55 million in circulation as of March 29, 2017, making it the #13 largest cryptocurrency. To keep this size in perspective, a brick-and-mortar US institution with $55 million in deposits is a tiny bank or a mid-size credit union, and Tether is currently only 1/300th the size of Bitcoin.

The Tether white paper explains in more detail the motivation for developing a dollar-pegged cryptocurrency by listing advantages to individuals using it for dollar-denominated transactions rather than using dollars held in “legacy bank” accounts:

  • Transact in USD/fiat value, pseudonymously, without any middlemen/intermediaries
  •  Cold store USD/fiat value by securing one’s own private keys
  • Avoid the risk of storing fiat on [cryptocurrency] exchanges ­– move crypto­fiat in and out of exchanges easily
  • Avoid having to open a fiat bank account to store fiat value

In sum, “Anything one can do with Bitcoin as an individual one can also do with” a dollar-pegged cryptocurrency, namely, “avoid credit card [or debit card] fees,” maintain greater privacy, “remit payments globally” more cheaply, and access blockchain financial services.

But what is the claimed advantage over using Bitcoin? It is the expectation of wider acceptance in payments, because of the advantages to merchants of accepting a dollar-pegged cryptocurrency over accepting Bitcoin in a US-dollar-dominated economy:

  • Price goods in USD/fiat value rather than Bitcoin (no moving conversion rates/purchase windows)
  • Avoid conversion from Bitcoin to USD/fiat and associated fees and processes
The Flops

First we consider the projects that have flopped. Three projects were launched in September 2014: CoinoUSD, NuBits, and BitUSD. Their pegging mechanisms were different, and are difficult to describe briefly (partly because they were not all entirely transparent), but two common features are important to note.

  1. The rate-pegging mechanisms were not programmed into a source code, like Bitcoin’s quantity commitment, but relied on non-programmed policy actions by a trusted central authority.
  2. None used the traditional currency pegging method of having the issuer hold reserves in physical dollars or dollar-denominated debt securities. (On the NuBits mechanism see this critique by a BitUSD promoter. On the BitUSD mechanism see this critique by the CoinoUSD developer.)

We can examine the fortunes of each project by looking at its price and “market capitalization” (value-in-circulation) history on the cryptocurrency tracking site CoinMarketCap.com.


CoinoUSD, which began trading in December 2014, was developed by a for-profit payments firm called Coinomat and built on the blockchain of the NXT cryptocurrency. (In November 2014 NXT was the #6 cryptocurrency with a market cap of $19 million; currently it ranks #38 with a market cap around $13 million.) CoinoUSD reached a market cap plateau of $2.7 million in early 2016, but shut down in early 2016, due to a “payout glitch” that flooded customers with free CoinoUSD units, making it impossible to maintain the exchange value at $1. Coinomat announced a reboot in which the erroneous payout would be reversed and said, “NXTUSD will replace CoinoUSD completely, and enhance it,” but this appears not to have happened. Since then it has had a market cap of zero, and its webpage at the Coinomat site declares it “disabled until further notice.”


The history of NuBits, also a for-profit enterprise, shows that it gained only a similarly small market foothold. Its market cap plateaued early on below $2.5 million, and since April 2015 has remained below $1 million. In June 2016 NuBits had a devaluation crisis, with the price falling to 20 cents. Its rate-pegging intervention mechanism, despite claiming many layers of reinforcement, was not robust and failed. Although the price later returned to par, today NuBits shows very little market activity. Since January 2017 the market cap has hovered around only $135,000, with daily trading volume in the neighborhood of $2000.


BitUSD is built on the blockchain platform of the cryptocurrency BitSharesX. Its highest market cap plateau was around $1 million soon after introduction, but it fell to below $200,000 in April 2015 and is currently less than $110,000.

BitUSD uses a novel pegging system that so far has proven robust. A piece promoting BitUSD emphasizes that “the bitUSD is an asset that is not backed by real dollar in someone’s bank account.” (It claims this a virtue: “We cannot trust anyone to hold and secure a physical asset so that people can redeem it eventually. History has repeatedly shown: It doesn’t work!” In fact, history shows the major banks in unhampered banking systems routinely justifying the public’s trust by redeeming their liabilities on demand for decades. Paypal works on the same supposedly non-working model, backed by Paypal’s dollar deposits at Wells Fargo Bank.) By contrast, BitUSD are created through collateralized forward currency contracts. The network provides an escrow service that credibly ensures repurchase (or “redemption”) of the BitUSD at or near par. Someone who wants to acquire BitUSD, say in order to buy from a seller who prefers a dollar-denominated medium of exchange, offers a contract: so many BitShares (hereafter BTS) for a certain amount of new BitUSD. Under the BitShare network rules, the acquirer must not only pay at the outset in BTS but also agree to post collateral in BTS equal to the value of the bid. If the bid is accepted by another network participant, explains the BitUSD white paper, “the collateral and purchase price are held by the network until the BitUSD is redeemed” by some third party repurchasing it. The acquirer of BitUSD thus puts 200% collateral into a contract “that only allows access to these BTS when the BitUSD are paid back.” In effect the acquirer is shorting the dollar price of BTS.

Note that the new BitUSD units are initially 200% collateralized not in dollar-denominated assets, but in BTS. If BTS fall 25% or more against the dollar, such that the value of the BTS collateral declines to 150% or less of the value to be repaid, under the network rules redemption can be compelled by any BitShares miner who “enforces a margin call.” (It should be noted that to enforce the collateral rules, the BitShares network relies on trusted human agents to inform it about the current $ price of BTS.) The system then “uses the backing BitShares to repurchase the BitUSD…thereby redeeming it.” Conversion back into dollars is thus not always at the initiative of the holder, as it is for a holder of ordinary demandable bank liabilities. Instead a BitUSD holder faces a risk of “forced settlement.” If the value of BTS falls so quickly “that the margin is insufficient, then the market price of the BitUSD may fall slightly below parity for a short time if there is insufficient demand for BitUSD relative to the supply of sellers.”

The white paper concludes: “The critical thing to understand is that BitUSD is an asset used to hedge a position in BitShares against changes in the price of USD and is not supposed to have an exact 1:1 exchange rate with USD.” A close look at the chart indeed shows that the price of 1BitUSD has not been exactly $1. It has vibrated around $1 but has not experienced any lasting devaluation. Nonetheless its clientele has declined and is currently small. No doubt this reflects in part the declining popularity of BTS, its market cap having fallen from more than $60 million in September 2014 to around $15 million today.

The Success: Tether

Now to the success story. Tether was launched in February 2015. In contrast to the previous contenders, as the chart shows, it started slowly and has grown in market cap. The series of discrete steps in its market cap path indicates that there have been a series of large purchases. The most recent step, on Wednesday, March 29, 2017, raised the value in circulation to $55 million from $45 million. Logically these are not speculative position-takings, because there are no capital gains to be had so long as the price per tether remains solidly pegged (or “tethered”) to $1. And Tether has in fact successfully maintained a steady peg throughout its history with only one small and brief blip. The steps are presumably big acquisitions for transaction use. Transactions volume in recent weeks has been running mostly in the neighborhood of at $20-40 million per day.

Tether transfers are executed using the Bitcoin blockchain. Tether’s pegging mechanism is also not programmed into a source code, but it is the traditional one: the issuer holds dollar-denominated reserve assets and pledges to redeem Tethers on demand. (Euro-Tethers have recently been introduced, but I focus here on dollar-Tethers.) According to the official FAQ, “Tether Platform currencies are 100% backed by actual fiat currency assets in our reserve account. Tethers are redeemable and exchangeable pursuant to Tether Limited’s terms of service. The conversion rate is 1 tether USD₮ equals 1 USD.”

The parent Tether firm, in other words, operates like a currency board: It holds 100%+ dollar-asset backing, and passively swaps Tethers for dollars and back again. Like a currency board, it can earn interest income by holding some of its dollar-denominated assets in interest-bearing form. The Tether white paper reveals that Tether’s dollar reserves are currently held in accounts at two major Taiwanese commercial banks: Cathay United Bank and Hwatai Bank. (Why these particular banks? “They also provide banking services to some of the largest Bitcoin exchanges globally,” they are okay with Tether’s business model, and they are experienced at compliance with Know-Your-Customer and Anti-Money-Laundering regulations.)  It adds that “additional banking partners are being established in other jurisdictions” to reduce political risk of the accounts being frozen. Tether is thus not a “100% reserve” institution in the sense of a money warehouse holding 100% literal cash reserves (which would mean Federal Reserve notes in a vault).

How does a potential purchaser of Tether verify the 100% backing claim? The website declares: “Our reserve holdings are published daily and subject to frequent professional audits. All tethers in circulation always match our reserves.” A webpage does give dollar values for assets and liabilities, but does not identify the auditors or provide copies of the audit reports, so the claim of being “fully transparent” is somewhat exaggerated. The transparency is as great as that of historical note-issuing banks, however. And perhaps the important test of trustworthiness is that Tethers have in practice been redeemed every day at par for about two years.

Dollar-pegged cryptocurrencies, by contrast to Bitcoin, separate blockchain-secured payments from the speculative holding of an irredeemable private currency. Thus they provide a potential window for learning how much of the demand for cryptocurrencies is transactional, and how much is speculative. The competition among dollar-pegged cryptocurrencies provides something of a market referendum on the relative credibility of alternative pegging arrangements. The much larger size achieved by Tether suggests (though not definitively, because other factors are also in play) a popular verdict that its pegging mechanism is more credible than those of CoinoUSD, Nubits, or BitUSD. It will be interesting to watch Tether’s progress from this point on, and to observe whether its model is copied by other entrants.

[Cross-posted from Alt-M.org]

Americans may take for granted that if they’re ever accused of a crime, they can choose their own attorney to represent them. The Supreme Court has ruled that Americans have a right to counsel in serious criminal cases, and nobody seriously argues that the government should make that important decision for us.  

Yet that is exactly what happens across the country when defendants are too poor to hire their own attorneys.  While other countries such as the United Kingdom have long allowed indigent defendants to choose their own lawyers, American jurisdictions historically restrict that choice to either a court-appointed lawyer or an assigned public defender. 

In 2010, the Cato Institute published a study, Reforming Indigent Defense, which proposed a client choice model where poor persons accused of crimes would be able to choose their own attorney to represent them in court. If the accused opted for the public defender, he could make that choice, but if he wanted to explore other options, he could do that also.  The Texas Indigent Defense Commission became aware of the Cato report and decided to give it a try with a pilot program in Comal County, near San Antonio. The program went into operation in 2015.  

Today, the Justice Management Institute released an evaluation based on two years of data from the Comal Client Choice program.  The report, called The Power of Choice: The Implications of a System Where Indigent Defendants Choose Their Own Counsel, suggests that the program is working as well or better than the old system across a variety of metrics.  

The JMI study looks at four factors to assess the viability of the Comal program:

  • Does the model impact the quality of representation?  
  • Does the model produce a higher level of satisfaction and procedural justice?
  • Does the model impact case outcomes?
  • What is the impact of the model on overall cost and efficiency?

The study compares the results of Client Choice participants with the representations of defendants who chose to use the pre-existing court-appointment system.

While some aspects of representation were the same for both groups (for instance, client assessments of how hard their lawyers worked were not statistically distinguishable), participants in the Client Choice program were able to meet with their lawyers more quickly, had a stronger sense of fairness, and were more likely to either plead to lesser charges or exercise their right to trial than their peers.  The report also finds that the Client Choice program did not increase costs in the system.

Perhaps as important as any objective metric, a majority of defendants who were offered the ability to choose their own attorney opted to do so, suggesting that giving indigent defendants some agency in their choice of representation has a value in itself.  Freedom of choice matters to people.  

In too many jurisdictions, indigent criminal defense is in a state of crisis. Texas is in the vanguard with its Client Choice program. Hopefully these promising results will encourage more jurisdictions to consider injecting choice and market principles into their indigent defense systems.

The Supreme Court has ruled that Americans have a right to counsel in serious criminal cases. 

The meetings today and tomorrow between President Trump and President Xi in Florida are unlikely to delve deeply into substantive policy issues.  Rather, the focus will be on establishing a good relationship between the two leaders, in order to lay the foundation for future cooperation.  Trade and security tensions between the two countries will be discussed, but probably only in broad terms.

But difficult talks on the substance of these issues are inevitable. The question is how to approach the disagreements most productively.

On trade, there have been long-standing concerns from U.S. industry about a number of Chinese trade practices (including allegations of intellectual property theft, high tariffs, discriminatory regulations, non-commercial behavior by state-owned companies, and overcapacity in the production of steel and other goods).  To date, the U.S. government approach to addressing these concerns has consisted largely of litigation at the WTO, trade remedy cases (mainly anti-dumping and countervailing duties), and high-level dialogues between the two governments, but these actions have failed to resolve most of the concerns.  Litigation at the WTO can be helpful, but only in those areas where the WTO has rules, and there are many gaps in those rules; trade remedy cases impose tariffs that harm Americans, and do little to resolve the underlying problems with Chinese trade practices; and the dialogues tend to be broad, vague, and unenforceable.

The Trump administration has hinted at adding new unilateral trade restrictions into the mix (beyond trade remedy cases), but such measures are likely to lead to retaliation by China, which could escalate the current tensions into a tit-for-tat trade war.  If that happens, the big losers will be ordinary Americans and Chinese who would feel the brunt of any tariff increases.

In a Free Trade Bulletin published yesterday, my colleague Huan Zhu and I argue that a better approach to these issues would be to sit down with China and negotiate a formal trade agreement to deal with as many of these issues as possible.  For example, with regard to existing tariff levels, the two countries could agree to an across the board lowering of tariffs, a standard feature of trade agreements.

There will be a number of political obstacles to such a negotiation, and don’t expect any big announcement about it at the Trump-Xi meeting.  But as the U.S. government develops its trade policy over the coming months, it may begin to realize the limitations of the alternative approaches to addressing concerns about China.  Trump administration officials have emphasized that the trade deals it negotiates will be bilateral, rather than multilateral.  Why not try to negotiate a bilateral agreement with China, one of our biggest trading partners, and the one that is the source of so many trade concerns?

Puerto Rico came to Congress last year because it desperately needed some sort of help: after a decade of deficit financing, it is now $72 billion in the hole. It owes much of that money to traditional individual investors and savers across the United States, who have lent it money over the last decade, and even more to current and future pensioners.

The law that Speaker Ryan pushed through Congress, PROMESA, was meant to be that help. It provided the island’s government with breathing room to get its fiscal act together and authorized an Oversight Board to oversee its finances and–crucially–give it the political cover to make difficult decisions and negotiate with its many creditors.

Unfortunately, neither the government nor the Oversight Board have followed the law and, as a result, it looks destined to fall short of meeting its goals of restoring fiscal responsibility on the island and returning Puerto Rico to the capital markets.

To date, neither the Board nor the Puerto Rican government has had discussions with its creditors on the either the development of the fiscal plan or any process for debt negotiations. Instead, their activities have culminated in the Oversight Board certifying a fiscal plan from the Commonwealth that falls short of–or outright ignores–requirements in PROMESA. The plan does relatively little to reform what’s broken in the Puerto Rico government, including wayward spending and bloated pension system, and instead achieves short-run fiscal solvency via significant haircuts for the creditors that, in violation of the statute, do not comport with the lawful or constitutional priority of Puerto Rico’s obligations.

In response, a group of creditors that owns over $13 billion of the island’s debt recently sent a letter to the members of the island’s Oversight Board asking it to reject the government’s fiscal plan. The signees are a diverse group, including general obligation bondholders, COFINA bondholders, a bond insurer, and others who do not always share the same perspective. However, they all agree that the plan is so flawed it cannot be considered a serious starting place for debt negotiations. Key among their objections is that the fiscal plan clearly violates PROMESA by both ignoring the law’s explicit call that it “respect the lawful priorities or lawful liens” that exist. The plan does this both by making debt subordinate to every single other government expense and by muddying the clear seniority of the various different creditor groups.

Some bondholders are clearly senior. For instance, the island’s constitution promises that the government will use “all available resources” to pay the holders of general obligation bonds before anyone else. That assurance allowed Puerto Rico to borrow that money at a low-interest rate relative to riskier revenue-backed bonds.

Others expect dedicated revenue pledges to be respected. For instance, COFINA bonds, created to offer deficit borrowing capacity beyond the constitutional limit on general obligation debt, are backed by revenue generated by the island’s sales tax. Whether that diversion of resources was legal remains to be seen, but Puerto Rico managed to increase its borrowing capacity by promising these bondholders first dibs on this revenue stream.

Yet, in spite of the clear seniority of these creditors, the governor recently proposed what amounts to a magnanimous side deal with creditors of Puerto Rico’s utility–PREPA–that excludes these and all other creditors, a maneuver that makes little sense and smacks of political favoritism. It will almost certainly prolong negotiations with other creditors and potentially derail the credit markets’ faith and interest in helping Puerto Rico build a future.

The issue of debt priority is not the only infirmity of the plan highlighted by creditors. For starters, top line expenses grow by billions rather than shrink. There is an annual cushion of $600 million for anticipated deficits beyond the plan for the various agencies outside the general fund. It budgets $500 million per annum for infrastructure spending without considering that much of this could be privately financed–although investors may be naturally wary of lending money to any entity on the island, no matter what is promised. And all this is against a forecast of revenue declines unsupported by historical experience or analysis.

Meanwhile, the island’s pension, which is $48 billion in the hole, would not see any significant reductions in benefits or any other changes. In fact, there is little fiscal reform anywhere to be found in the budget: it calls for payroll expenses to increase by $1.5 billion in the next decade, with operational expenses rising by $400 million as well. In no way does this budget present a step towards fiscal solvency. 

Moreover, the plan’s call for bondholders to be compensated only after the island meets its other obligations makes a mockery of PROMESA. The budget calls for just $400 million to be set aside for bondholders in 2018, when $2.3 billion of interest payments will be due.

The island’s new governor, Ricardo Rosselló, has made achieving statehood a primary goal of his administration. However, the political reality is that there’s already little appetite for such a thing amongst the Republican Congress, and his manifest refusal to deal squarely with its fiscal morass only hurts the cause. Even Governor Rosselló admits the island’s government has a sizeable credibility gap. Its continued refusal to share pertinent financial information with Congress more than six months after the passage of PROMESA is only the most recent manifestation of the inherent problem here.

For Puerto Rico to ever have a chance to become a state–and to avoid it becoming a new federal entitlement–it has to fix its fiscal problems and restore its credibility. Its proposed budget does little to reform the economy and promises to keep the island shut out of capital markets for years to come.

Even worse, allowing the Commonwealth and Oversight Board to flout the principles of PROMESA will increase the potential liability at the federal level. Without access to the markets and no respect for private contracts, revenues will decline and the prospects for growth will vanish, and the island’s 3.5 million citizens will continue fleeing to the mainland.

There are already several state governments with woebegone budget problems that may be looking down the road towards some sort of federal bailout. No one has any appetite to add another to the list–not when the Republicans already spent a modicum of political capital to pass PROMESA in the first place. The side deal with PREPA only exacerbated an already bad situation.

For Puerto Rico to ever have a chance to become a state it has to first fix its fiscal problems and resume economic growth. The proposed budget does little to reform the economy and promises to keep the island shut out of capital markets for years to come. 

Comments on the National Highway Traffic Safety Administration’s proposed vehicle-to-vehicle communications mandate are due next on Wednesday, April 12. This is one of the rules that was published just before President Trump was inaugurated. If approved, it will be one of the most expensive vehicle safety rules ever, adding around $300 dollars to the price of every car, or (at recent car sales rates) well over $5 billion per year. 

Despite the high cost, the NHTSA predicts the rule will save no more than 31 lives in 2025, mainly because it will do little good until most cars have it. Yet even by 2060, after consumers have spent well over $200 billion so that virtually all cars would have it, NHTSA predicts it will save no more than 1,365 lives per year. 

The danger is not that it will cost too much per life saved but that mandating one technology will inhibit the development and use of better technologies that could save even more lives at a lower cost. The technology the NHTSA wants to mandate is known as dedicated short-range communications (DSRC), a form of radio. Yet advancements in cell phones, wifi, and other technologies could do the same thing better for less money and probably without a mandate.

For example, your smartphone already has all the hardware needed for vehicle-to-vehicle communications. Since more than three-fourths of Americans already have smartphones, mandating similar technology in new cars is redundant. Since that mandate will take more than a decade to have a significant impact on highway safety, NHTSA could see faster implementation using smartphones instead. It could do so by developing an app that could communicate with cars and provide extra features on the app that would encourage people to download and use it.  

All of the benefits claimed for the DSRC mandate assume that no other technology improvements take place. In fact, self-driving cars (which will work just as well with or without vehicle-to-vehicle systems) will greatly reduce auto fatalities, rendering the projected savings from vehicle-to-vehicle communications moot.

A mandate that one technology be used in all cars also opens the transportation system to potential hackers. The communications would necessarily be tied to automobile controls, which means that anyone who understands it could take control of every car in a city at once. If individual manufacturers were allowed to develop their own technologies, the use of multiple systems would make an attack both more difficult and less attractive.

There is also a privacy issue: vehicle-to-vehicle also means infrastructure-to-vehicle communications, raising the possibility that the government could monitor and even turn off your car if you were doing something it didn’t like, such as drive “too many” miles per year. That’s a very real concern because the Washington legislature has mandated a 50 percent reduction in per capita driving by 2050. Oregon and possibly other states have passed similar rules.

Comments on the proposed rule can be submitted on line or mailed to:

Docket Management Facility, M–30
U.S. Department of Transportation
West Building, Ground Floor, Rm. W12–140
1200 New Jersey Avenue SE.
Washington, DC 20590.

British commentator Owen Jones was published yesterday by the New York Times, with a piece entitled “Why Britain’s Trains Don’t Run on Time: Capitalism.” I’ve learned through experience not to judge articles by headlines, but this one seems especially curious, given 89.1 per cent of trains were, in fact, on time in 2015/16—a figure that has improved somewhat since 1997, just a couple of years after some of British Rail was part-privatized.

Yet aside from the bizarre opening assertion we might judge the state of a nation by how the railways run, the purpose of the article and headline soon becomes clear: to push the case for the British left’s hobby horse—full renationalization of Britain’s rail industry.

The hook this time is the dreadful ongoing dispute that has been rumbling for almost a year between Southern Rail and the rail unions, resulting in the substantial strike action Jones cites. For those uninitiated, the dispute mainly centers around a proposed business decision by Southern rail (a train operating company granted the running of trains between London and the south coast by government) to reassign the duty of operating train doors from conductors to the train driver, allowing onboard conductors to focus solely on dealing with passengers. The unions fear this because they believe it will render the role of conductors obsolete, and reduce their power. The reason is simple. If drivers control the doors, conductor strikes will no longer be able to bring down whole services.

Yet rather than judge the strikes on this naked self-interest, Jones suggests that somehow they are a consequence of privatization and of letting “market ideology into key public services.” He then throws everything but the kitchen sink at private involvement in the railways, implying that privatization is responsible for high prices, underinvestment, substantial government subsidy, and inefficiency.

For some commentators, particularly on the left of the UK’s political spectrum, increasing prices and the fact that privatized companies make profits are evidence enough that the blame for rising costs to consumers can be laid squarely at the door of privatization itself. Jones’ article is the latest in a long line of misleading, potted histories, which utilize any problems as a hook to push for public ownership.

To understand why the article is misleading, one needs to consider what “privatization” of the railways in Britain actually entailed. Virtually all of the UK’s rail network was privately built and operated for more than 100 years before its nationalization following World War II. But the 1995 reforms did not return to this framework. Instead, the government imposed a top-down model of separating track and train, with the former kept nationalized and operation of the latter franchised out on a regional basis, such that firms could compete to operate a line for a set contracted period. This was supposedly to deal with the natural monopoly problem, but in reality fragmenting the sector eliminated potential economies of scale and scope, whilst introducing additional transactions costs. The train operating companies, who run the franchises, remain heavily regulated, having to meet certain government conditions and being very restricted in many cases on pricing.

The move to this model has certainly had mixed success. Passenger numbers have exploded since the part-privatization of the trains, and (as Ben Southwood shows here) this does not appear to be at the expense of customer satisfaction or safety, nor driven purely by economic growth or regional development. Yet undoubtedly the degree of government subsidy remains high, as do overall prices.

There is no evidence, however, that it is privatization or capitalism that is to blame for either the current strikes or high prices.

What Jones omits to tell readers is that the current situation with Southern is different to other ordinary franchises. Poor performance led to an effective merger and reorganization for the running of the line in 2015. Unlike with ordinary franchises, the government simply pays Southern’s parent company, Govia Thameslink, to operate the line and the company pays any revenues to the government. Southern has no control over prices or conditions for staff. In essence, the government is already the patron for the line, so the company has little incentive to end the dispute and the strikers are emboldened. Indeed, Britain has a long history of widespread strikes in government-owned enterprises, as anyone who lived in or studied the 1970s can attest. It is unclear then why nationalization is regarded as a solution to that problem.

Out-of-pocket rail prices in Britain do tend to be higher than many other countries. The unions exaggerate this by comparing “on the day” prices, when many British routes offer significant discounts for advanced bookings. Nevertheless, previous detailed research has found rail fares per passenger-kilometer are on average around 30 percent higher in Britain than in comparable Western European countries.

There are many reasons for this. In part, it is because Britain has deliberately shifted to a user pays system compared with others (though even then there is still around 25 percent subsidy). This is both more economically sound and also equitable, given those who use the railways tend to have relatively high incomes.

Indeed, the whole idea that nationalization could somehow deliver cheaper fares is pure fantasy. Even if we assume that the railways would be as cost effective in public ownership, profit margins for train operating companies tend to be around just 3 to 4 percent. The ‘savings’ from no longer paying out dividends to shareholders would simply not be large enough to fund a significant reduction in fares. The average household spends approximately £64 per week on transport, but only about £3.30 is spent on train fares, suggesting fare reductions would do little to boost real living standards either.

What are the alternative explanations for why fares tend to be high? Geography is one. The high share of rail travel involving trips to and from London—a vast and expensive global city—raises costs compared with other countries. The structure imposed on the industry is a second, negating the potential benefits of vertical integration. Wasteful uneconomic new infrastructure spending is a third key reason, with plans now to push on with High Speed 2, an expensive new planned rail line through the west coast.

That’s not to say the current model does not have other problems. The high degree of price regulation contributes directly to the overcrowding problem, as the train operating companies cannot price discriminate and smooth usage. And the nature of the franchise system can deter investment in some circumstances (why invest significantly if you suspect you might lose the franchise?). But these are details, rather than fundamental flaws of allowing private companies to run railways.

As Britain’s history shows, private companies can and have run railways successfully. The part-privatization seen since 1995 could undoubtedly be improved upon, not least through allowing the integration of track and train and greater freedom in setting prices. Yet there is no reason to suspect nationalization would produce better results than the status quo. Indeed, given the legacy of government-owned enterprises in the U.K., the results would likely be more rent-seeking, industrial strife, poor cost control, a lack of entrepreneurship, more political interference, and an endemic misallocation of resources.

Last time around, we brought forth evidence against organismal “dumbness”—the notion that species found only in defined climatic environments will go extinct if the climate changes beyond their range. We picked on cute little Nemo, and “found,” much like in the animation, that his kind (Amphiprion ocellaris) could actually survive far beyond their somewhat circumscribed tropical reef climate.

The key was the notion of plasticity—the concept that, despite being linked to a fixed genetic compliment, or genotype, the products of those genes (the “phenotype”) changed along with the environment, allowing organisms some degree of insurance against climate change. How this comes about through evolution remains a mystery, though we may occasionally indulge in a bit of high speculation.

“Science,” according to the late, great philosopher Karl Popper, is comprised of theories that are capable of making what he called “difficult predictions.” The notion that gravity bends light would be one of those made by relativity, and it was shown to be true by Sir Arthur Eddington in the 1919 total solar eclipse. It just happened to be in totality in the Pleiades star cluster (also the corporate logo of Subaru), and, sure enough, the stars closest to the eclipsed sun’s limb apparently moved towards it when compared to their “normal” positions.

So we have been interested in a truly difficult test of phenotypic plasticity, and we think we found one.

How about a clam that lives in the bottom of the great Southern Ocean surrounding Antarctica? Specifically, the burrowing clam Laternula elliptica. According to a recent (2017) paper by Catherine Waller of the University of Hull (in the, perhaps temporarily, United Kingdom) “75 percent of the recorded specimens [of L. elliptica] are from localities shallower than 100 m,” where the populations are exposed to “low and stable water temperatures in the range of -1.9 to +1.8 °C” (the remaining 25 percent inhabit cooler waters of the continental slope down to ~700m).

Laternula elliptica

Now let’s bring the critters into the lab and torture them with climate change. Experimental analyses revealed that this saltwater clam suffers “50 percent failure in essential biological activities at 2-3°C and complete loss of function at 5°C,” rendering L. elliptica a fine example of a dumb organism—or so it was thought!

During the austral summer of 2007, Waller et al. sampled the intertidal zone (region of the coast that is submerged at high tide, but above water and in the air at low tide) at locations along James Ross Island, East Antarctic Peninsula, writing that “prior to this study, there have been no reports of [L. elliptica] animals surviving the more variable environmental conditions of the littoral [intertidal] zone south of the Antarctic Circumpolar Current.” To their great surprise, however, they report finding specimens of this clam at densities “similar to many subtidal locations,” ranging in age from one to eight years.

In other words, if the depths of the Southern Ocean warmed several degrees, they would still be happy as clams!

Commenting on their findings, the five United Kingdom researchers state that “the presence of this species in intertidal sediments raises questions about their physiological tolerances and capacity to cope with warming sea temperatures.”

We respectfully disagree. It provides answers. Indeed, for at the time of their collection by Waller et al., temperatures within the sediment were measured at 7.5°C while air temperatures were even greater at 10°C—both values far above laboratory-defined tolerance limits! This discrepancy between laboratory and field temperature tolerances, in the words of the authors, “has major implications for our understanding and interpretation of the physiological tolerances of Antarctic shallow water marine organisms. If one of the best-studied model species can be found surviving far beyond its predicted environmental envelope, then our use [of] laboratory-based experimental results may underestimate the ability of polar organisms to cope with environmental change.”

And so it is that laboratory-based analyses showing negative impacts of rising temperatures on ostensibly dumb organisms should be taken with a large grain of salt, and we can be much more optimistic for their future survival.

This seems to be an important phenomenon, to say the least. So try searching for the words “phenotypic plasticity” in the entire 829-page 2014 U.S. “National Assessment” of the effects of global warming on our country. You won’t get one hit.  

You will find one “plasticity” in a citation on Pacific Salmon. Here’s what the Assessment says:

Rising temperatures will increase disease and/or mortality in several iconic salmon species, especially for spring/summer Chinook and sockeye in the interior Columbia and Snake River basins.

And here’s what the actual paper says:

Climate change might produce conflicting selection pressures in different life stages, which will interact with plastic (i.e. nongenetic) changes in various ways. To clarify these interactions, we present a conceptual model of how changing environmental conditions shift phenotypic optima and, through plastic responses, phenotype distributions, affecting the force of selection. Our predictions are tentative because we lack data on the strength of selection, heritability, and ecological and genetic linkages among many of the traits discussed here. Despite the challenges involved in experimental manipulation of species with complex life histories, such research is essential for full appreciation of the biological effects of climate change.

The U.S. Global Change Research Program, which puts out these horrible Assessments, consumes $2.3 billion per year. Is that all you get for your money, a massive distortion of what a paper actually says?


Crozier, L.G. et al., 2008. Potential responses to climate change in organisms with complex life histories: evolution and plasticity in Pacific salmon. Evol Appl. 2008 May;1(2):252-70. doi: 10.1111/j.1752-4571.2008.00033.x.

Waller, C.L., Overall, A., Fitzcharles, E.M. and Griffiths, H. 2017. First report of Laternula elliptica in the Antarctic intertidal zone. Polar Biology 40: 227-230.

House Republican leaders cancelled a vote on the American Health Care Act nearly two weeks ago, after it became clear the measure would not command a majority. The conservative House Freedom Caucus objects that, far from repealing and replacing ObamaCare, the AHCA would make ObamaCare permanent. It would preserve the ObamaCare regulations that are driving premiums higher, causing a race to the bottom in coverage for the sick, and causing insurance markets to collapse. The Congressional Budget Office projects the bill would cause premiums to rise 20 percent above ObamaCare’s already-high premium levels in the first two years, and leave one million more people uninsured than a straight repeal. Oh, and it also reneges on the GOP’s seven-year campaign and pledge to repeal ObamaCare.

The House Freedom Caucus has offered to hold their noses and vote for the AHCA despite several provisions its members dislike, including a likely ineffectual repeal of ObamaCare’s Medicaid expansion, new entitlement spending, and the preservation of most of ObamaCare’s regulations. All they ask is that House leaders agree to repeal the “community rating” price controls and the “essential health benefits” mandate that are the main drivers of ObamaCare’s higher premiums, eroding coverage, and market instability. Repealing those provisions would instantly stabilize insurance markets and cause premiums to plummet for the vast majority of Exchange enrollees and the uninsured.

A collection of House moderates known as the Tuesday Group, meanwhile, has threatened to vote against the AHCA if it repeals community rating. The group has refused even to negotiate with the House Freedom Caucus. One Tuesday Group member recommended to the others, “If that call comes in, just hang up.”

In an attempt to bridge the divide, the White House has proposed to let individual states opt out of certain ObamaCare regulations, including the essential-health-benefits mandate and (presumably) the community-rating price controls. Reportedly, states could apply to the Secretary of Health and Human Services to waive some (but not all) of ObamaCare’s Title I regulations, and the Secretary would have discretion to approve or reject waiver applications based on their compliance with specified metrics, such as premiums and coverage levels. 

What might seem like a fair-minded compromise is anything but. The fact that White House officials are floating this offer means they have reneged on their prior proposal to repeal ObamaCare’s “essential health benefits” mandate nationwide. The current proposal would keep that mandate in place, and make it the default nationwide. That alone makes this “opt out” proposal a step backward for ObamaCare opponents.

Even if the White House were not displaying bad faith, an opt-out provision offers little to ObamaCare opponents. The obstacles to using such a waiver would be so great, it is unlikely any states would be able to exercise it, which would leave ObamaCare’s regulations in place in all 50 states.

Opting-Out Would Be All But Impossible

Under an opt-out, ObamaCare’s regulations—in particular, the community-rating price controls and essential-health-benefits mandate that the House Freedom Caucus has said are the price of their votes—would remain the law in all 50 states. States that do not want those regulations would have to take action (and get federal permission) to roll them back. Federal control would remain the default.

To take advantage of the waiver process, ObamaCare opponents would have to fight, again and again, in state after state, to achieve in each state just a portion of what President Trump and congressional Republicans promised to deliver in all states. Opponents would have to convince both houses of each state legislature (Nebraska excepted), plus the governor, plus the Secretary of HHS to approve the waiver, all while being vastly outspent by insurance companies, hospitals, and other special interests.

If President Trump and congressional Republicans advance an opt-out provision, they will essentially be telling ObamaCare opponents, “Thank you for spending all that money and effort electing us, but we are not going to repeal ObamaCare. Instead, we want you to spend even more money having ObamaCare-repeal fights in all 50 states. And good luck getting state officials to keep a promise they haven’t made, when we won’t even keep the promise we did make.”

(Above: President Donald Trump promised in his “Contract With the American Voter” to deliver legislation that “fully repeals” ObamaCare. It’s a contract, so that’s legally binding, right?)

Given these obstacles and the low likelihood of success, many ObamaCare opponents would decide the waiver option it isn’t worth the effort.

A Provision with a Short Shelf Life

Even if states tried to take advantage of the “opt-out,” states could not possibly enact, submit to the federal government, secure federal approval of, and implement a such waiver in time to stabilize their markets under the withering assault from ObamaCare’s regulations, as modified by the AHCA. So the “opt-out” would not even protect Republicans in willing states from the political backlash against the AHCA.

Even if states went through all those steps in time, the White House’s proposal reportedly would allow states to opt out of guaranteed issue but not ObamaCare’s ban on coverage exclusions for preexisting conditions. In other words, even if a state successfully used a waiver to stabilize their markets, Republicans would come under fire because the waivers would prevents patients with preexisting conditions from getting any coverage, even for illnesses they have not yet acquired.

Like the AHCA itself, an opt-out strategy would thus condemn Republicans to suffer electoral losses because Democrats could reasonably blame ObamaCare’s—and the AHCA’s—premium hikes, lousy coverage, and Exchange instability on Republicans and their supposedly free-market reforms.

Those Republican losses and the concomitant Democratic gains would make states less likely to use the opt-out provision, and would enable Congress to repeal it by slipping a few lines in an omnibus bill as early as 2019. With few states using the option, there would be little objection.

Even if Congress did not repeal the “opt-out” authority, a future HHS secretary could reject state waiver proposals and/or refuse to renew waivers.

Full Repeal Is Fair to Blue States. An Opt-Out Is Unfair to Red States.

An opt-out approach is also inequitable, for two reasons. States that opt out of ObamaCare’s regulations would end up subsidizing states that did not, which itself would create a disincentive for states to opt out. And while full repeal would not disadvantage states that want ObamaCare-style regulations, an opt-out approach would disadvantage states that don’t.

First, even if some states do opt out of ObamaCare’s regulations, those regulations would continue to cause instability in states that don’t opt out. That instability would likely lead Congress to bail out states where those regulations still have force. Yet all states would have to pay for those bailouts, including states that opted out of the regulations. In other words, states that made the right decision (to opt out of ObamaCare’s regulations) would have to pay to repair the damage done by states that made the wrong decision (i.e., not to opt out). This inevitable and inequitable dynamic would itself discourage states from opting out.

Second, under either full repeal or the House Freedom Caucus’ offer, states that have enacted community-rating price controls and benefit mandates themselves could keep those regulations without taking any further action. An opt-out, by contrast, would require states who don’t want those regulations to take action to remove them.

Prior to ObamaCare, for example, many states had imposed community-rating price controls on their individual and small-employer markets (see graphics below).

Under either full repeal or the House Freedom Caucus’ stipulation that Congress repeal ObamaCare’s community-rating price controls and essential-health-benefits mandate, any regulations that states have enacted would still have force. Members of Congress from states like Maine, Massachusetts, Minnesota, New Jersey, New York, and Vermont that have enacted community rating thus cannot claim they must vote against full repeal to preserve community-rating for their constituents. Both full repeal and the House Freedom Caucus’ proffer are therefore equitable, because they would let each state revert to the regulatory environment they have chosen, without taking any action.

An opt-out, by contrast, would impose community-rating and other regulations on states that do not want them, and force those states to take action to remove them. Crudely put, an opt-out is an attempt by blue states, at no benefit to themselves, to impose their will on red states.

Full repeal and the House Freedom Caucus position are an opt-in. They would give each state what it wants, because the default under an opt-in is freedom and federalism.


Congress should repeal all of ObamaCare’s regulations. States that then want to impose those regulations on their own citizens would have the power to do so.

The White House’s “opt-out” proposal is unworkable, and therefore gives ObamaCare opponents next to nothing. Indeed, it is an admission that the AHCA is not a repeal bill. And not only does the White House’s “opt-out” proposal not move the AHCA in the direction of full repeal, the White House’s decision to revoke its offer to repeal the “essential health benefits” mandate nationwide means this proposal moves the farther away from full repeal.

One silver lining is that this proposal implicitly concedes that community rating is not sacrosanct, and that the states rather than the federal government should decide whether those regulations apply.

Those concessions, the White House’s reneging on “essential health benefits,” and the fact that full repeal would have little impact on states that have similar regulations on the books, gives the ObamaCare opponents leverage to push President Trump to do what he should have been doing all along: push moderates and Democrats to repeal community rating, essential health benefits, and more.

If dismissing this White House proposal out of hand is not possible, the House Freedom Caucus could propose a counteroffer: that the waiver process allow states to opt out of all of Title I, including the subsidies; that the Secretary of HHS have no discretion to reject state opt-out proposals; and that when a state opts out, residents of all other states may purchase insurance licensed by that state. Such an approach would effectively repeal Title I in every state.

Absent those changes, this proposal leaves ObamaCare opponents with less than they had before.

On Monday NPR’s Marketplace shared a tale of woe that Uber has created for the hard-working blue collar men who own taxicab medallions in New York City, thereby illustrating once and for all that in today’s liberal zeitgeist, the enemy of my enemy is my friend.

In a normal world, public radio’s reflexive liberalism would greatly object to the system of taxicab medallions: A few decades ago New York City set a cap for the number of drivers and gave each driver at that time a medallion that must be displayed on the cab itself to be legal. Because demand for cabs went up over the last four decades, the medallions became more valuable. For those drivers who received theirs at the start the medallion became a wonderful gift and those that sold it did quite well. A few years ago the price of a medallion exceeded $1 million.

However, an increase in medallion value does nothing to help most drivers today, who cannot afford to buy one at any price. Instead, investment companies own most medallions, which bought them from retiring cab drivers through the years and saw them as a safe investment. And they were, at least until Uber came along. Most drivers rent a medallion from the investment company, and pay a good portion of what they earn to the company.

Normally, public radio would object to the exploitation of working class men, especially when it’s been aided and abetted by the government, but when Uber is involved all bets are off. Uber has dramatically reduced the value of these medallions, since people can drive with Uber (or its competitor, Lyft) without a medallion. The barriers to becoming a driver are now almost nonexistent–no more than the price of a car. Taxicabs have lost their effective monopoly, and consumers have gained as a result.

But that doesn’t matter here, as the liberal narrative is that these entities (and somehow not the investment companies that own medallions) are exploitative because they don’t make their drivers actual employees; they are categorized as independent contractors, as are most cabbies. What’s more, they don’t give them health insurance or a pension. Also, the person who runs Uber is apparently isn’t the nicest guy, and–most egregiously–Uber did not recognize an impromptu taxi strike at JFK airport called to protest Donald Trump’s immigration policies in January, so there’s a suspicion that the company might not be reliably Democratic.  

As a result, NPR, the New York Times, and the rest of Big Media has lit into Uber every chance it gets, and Lyft for good measure.

Consistency is the hobgoblin of little minds, of course, but I remain mystified that any media program focused on economics would lament the decline of the taxicab medallion system in New York, which hurt customers, taxi drivers and even the environment (as more people had to own cars in that inefficient system) with the only beneficiaries being the taxi fleets and investment companies that owned the medallions.

It’s also worth remarking that the left has heretofore–and correctly– complained in the past that the traditional cab system serves New York’s outer boroughs quite poorly, and that’s where lower income people tend to live.

Marketplace apparently mourns such an archaic, inefficient, and in-egalitarian system and went to great lengths to find a couple of sympathetic victims to protest a technological change that has otherwise greatly improved the lives of urban denizens just goes to show that the status quo is always difficult to change. And that too many entities base their position on any topic based on the opposition.

Today is Equal Pay Day, the day that marks how far into the next year women on average have to work to bring home the same income men earned in the previous year. In light of Equal Pay Day I published an op-ed in the Washington Examiner that looks at women’s opinions about the gender pay gap. What I found might surprise you:

Pew Research Center survey found that 62 percent of women believe that women “generally” get paid less than men for doing the same work. However, when asked about their own companies, far fewer — just 14 percent total — believe women are getting paid less than men where they work, and 17 percent say women have fewer opportunities for promotions where they work.

These are nearly 50-point shifts in perception from what women believe is generally happening in society at-large, and what they collectively report is happening based on their experiences in their own jobs.

This in no way discounts the negative experiences women have had, and we should not shy from denouncing inequitable treatment. Yet these data also reveal that although most women believe they are being treated fairly, they also believe that most other women aren’t.

These data indicate that women have come to believe the myth that women are getting paid less than men for doing the same work. However, academic studies show that gender discrimination is not largely influencing wages, as I explain in the op-ed:

Although Census data show that women make less money on average than men, this fails to consider any information about how women and men choose to pursue a work/life balance, whether they enter a career that requires 80-hour work weeks or 40-hour work weeks, whether they take time out of the workforce to raise children, how much education they attain, whether they go into careers like investment banking or education, surgery or nursing, etc.

Studies that take these other factors into account find that the gender pay gap narrows to about 95 cents on the dollar. The remaining 5 cent difference might be due to discrimination, or it might be due to differences in salary negotiations, or other reasons. Harvard economist Claudia Goldin writes, “The gender gap in pay would be considerably reduced and might even vanish if firms did not have an incentive to disproportionately reward individuals who worked long hours and who worked particular hours.”

The Pew Survey found several disconnects between what women believe is causing the gender pay gap and the empirical research. First, Pew found that 54% of women believe that gender discrimination is a “major reason” for the pay gap. Although gender discrimination in pay can occur and should be sharply rebuked, research finds it is not significantly impacting wages.

Second, although differences in the number of hours men and women work (and when those hours are worked) is a significant driver of the wage gap, most women don’t find this believable. Only 28% thought this was a “major reason” that women on average earn less than men. Perhaps it sounds like one is accusing women of being lazy. Just because men on average work more hours in an office setting doesn’t mean women aren’t working the same or more hours when you combine hours worked in the office and taking care of family and home responsibilities.

Women responded better to the idea that men and women on average make different choices about how to balance work and family responsibilities and that might explain differences in pay. In fact, this was the most likely reason selected with 60% of women saying it was a major reason men and women earn different incomes.

As we talk about Equal Pay Day and the gender pay gap, it’s important to keep in mind both the empirical facts and where people are coming from. Some women have experienced discrimination in their jobs and such treatment should be condemned. We also need to be mindful about how we explain the sources of the gender pay gap, and avoid suggesting women aren’t working as hard as men.

Furthermore, in light of Equal Pay Day, we should point out the potential harms caused to women by perpetuating the idea that there is widespread injustice set against them. If women believe the deck is stacked against them regardless of their choices, this risks undermining risk-taking, accountability, and initiative. 

You can read the whole op-ed at the Washington Examiner here.

Yesterday, Attorney General Jeff Sessions ordered a review of existing federal consent decrees with respect to troubled police departments.  Sessions’s legal memorandum is right that primary responsibility for dysfunctional police agencies resides with local officials–mayors, police chiefs, and city councils.  Those officials too often deflect criticism of their oversight failures with loud calls for a “federal investigation.”  When the feds announce their intervention, attention shifts to what the federal findings and recommendations may be later on.  For example, Mayor Rahm Emanuel was under heavy fire after the video of the Laquan McDonald shooting was disclosed.  By agreeing to a federal investigation, Emanuel survived, at least temporarily.

Some on the right mistakenly believe that the Obama administration was “anti-police” and that the DOJ investigations exhibited some sort of bias against law enforcement.  Not true.  Sessions is making a grave mistake if he thinks previous DOJ investigations did not uncover severe problems in American policing.  The problems are there.  The real question is how to address them.  In the education area, teacher unions are the main obstacles to reform.  Police unions are the major obstacle to sensible accountability measures for police organizations.  But over the long run, local mayors and city councils must be make a sustained commitment to proper oversight of police.  It is unrealistic to expect the Attorney General or a federal monitor to do their jobs.

For related Cato work, go here and here.

(This is the last of a three-part series.)

In my first and second posts addressing a recent Bank of Canada Working Paper by Ben Fung, Scott Hendry, and Warren E. Weber, I argued that the paper exaggerates the shortcomings of Canada’s 19th-century currency system, with its reliance upon the notes of numerous commercial banks, and also that it wrongly credits “government intervention” for various improvements to the system that were in fact instigated by Canada’s commercial bankers themselves.

With this third and final post, I come to the brass tacks of Fung et al.’s paper: its conclusion, supposedly informed by shortcomings of Canada’s 19th-century currency system, that even if governments supply their own, official digital monies, so long as private digital currencies aren’t altogether outlawed, it will take government regulation to render them safe and uniform.

The validity of this conclusion depends, first, on that of Fung et al.’s understanding of the shortcomings of Canada’s private banknote currency; second, on whether they are correct in arguing that government interference played an essential part in perfecting that currency; and, lastly, on whether they are justified in treating today’s digital currencies as analogous to yesterday’s banknotes. Having addressed the shortcomings of Fung et al.’s assessment of Canada’s banknote currency in my previous posts, I now turn to consider whether they are justified in claiming that whatever was true of private banknotes is likely to be true for private digital currencies as well.

Redeemable Digital Currencies

At one point Fung et al. declare (p. 3) that “the only difference” between the commercial banknotes of long ago and today’s digital currencies is that in the one instance “monetary value was ‘stored’ on a piece of paper” whereas in the other value exists “electronically.” But the declaration doesn’t hold water. Indeed, it’s so leaky that Fung et al. themselves quickly contradict it.

The contradiction occurs as soon as Fung et al. acknowledge the existence of two quite distinct sorts of digital currency. There are, first of all, “fractionally backed digital currencies that are redeemable on demand” (p. 28), mentioned examples of which include “Octopus cards in Hong Kong, M-pesa in Kenya, PayPal Prepaid card balances and Visa/Mastercard prepaid cards,” all of which are “denominated in a country’s monetary unit” (p. 32).  Then there are private digital currencies “that have their own unique monetary unit that differs from any national currency unit,” the best-known example of which is Bitcoin.

It should be obvious that only redeemable digital currencies have much in common with Canada’s 19th-century commercial banknotes, which were also “fractionally backed,” “redeemable on demand,” and “denominated in [Canada’s] official monetary unit,” and that these digital currencies alone could possibly possess the same flaws as banknotes sometimes did.

Redeemable Digital Currencies: Riskiness and Vulnerability to Counterfeiting

It’s conceivable, for example, that PayPal might default, leaving holders of its prepaid card balances to collect what they may from its receiver or liquidator. So those prepaid balances aren’t perfectly safe, just as commercial banknotes were never perfectly safe. It’s even possible that PayPal balances might someday command less than their par value, though (for reasons I’ll get to) it isn’t so easy to imagine why they’d ever be discounted so long as PayPal stays solvent. Finally, prepaid cards can be, and sometimes are, counterfeited, by compromising the data in a genuine card and using it to create fake copies. Though chip-based cards are much harder to clone, even those aren’t entirely safe.[1]

But while redeemable digital currencies may possess all these imperfections, that hardly means that they possess them to the degree that banknotes sometimes did, or to one warranting government intervention. To repeat a point I insisted on in my first installment in this series, imperfection doesn’t imply inefficiency, which is to say that the costs of regulatory interference aimed at correcting the imperfections may exceed those of the imperfections themselves.

In fact, neither the imperfect safety nor the vulnerability to counterfeiting of today’s redeemable digital currencies appear significant enough to justify any sort of government interference. Regarding the risk of counterfeiting, for example, although stored value cards are sometimes counterfeited, the problem is far less serious than it is for ordinary credit card counterfeits.  For that reason few stored value card issuers have so far found it worthwhile to add chips to their cards. Should the counterfeiting problem become more severe, more will presumably take that step, just as many credit card issuers have done.

Redeemable Digital Currencies: Likelihood of Discounts

When we come to consider the likelihood that redeemable digital currencies will routinely command less than their par or face value, as banknotes sometimes did, it becomes apparent that even these superficially similar types of currency are in some respects as different as night and day. Discounts applied to the notes of solvent banks mostly reflected the costs brokers stood to incur in getting them redeemed, including the costs of receiving, sorting, and storing the notes and, once enough were accumulated, those of bundling and sending them on their way back to their places of origin via mail stage, railway mail car, or St. Lawrence steamer. There were besides this the costs of having their redemption proceeds sent back to them, whether by the same costly means, in the shape of gold or Dominion notes, or by bank draft.

Redemption of banknotes’ modern digital counterparts is, in contrast, accomplished by means of a few keyboard strokes, by which light pulses are sent hurtling through glass-fiber cables, at speeds lately approaching that of unimpeded light itself. It all happens, moreover, at trifling cost. For this reason alone, even if it had taken government intervention to do away with discounts on Canada’s commercial banknotes, it wouldn’t follow that such intervention will be needed keep today’s redeemable digital currencies current.[2]

Am I saying that the market for redeemable digital currencies is efficient? Not quite. Because the digital currency industry is still in its swaddling clothes, there are ample opportunities for successful providers to assess fees exceeding their costs, and to secure corresponding surpluses. Still the presumption ought to be that, as the industry matures, competition will prove no less effective in hammering-down the surpluses than it is in rewarding relatively efficient firms in the first place.

Indeed, one need only look to see this very process taking place before one’s eyes. Consider Safaricom, one of the two Kenyon mobile network operators (the other is Vidacom) that launched M-pesa back in 2007. Safaricom charges fees typically ranging between one and two percent for various M-pesa transactions, and has  made handsome profits by so doing. Yet it recently chose to dispense with charges for smaller transfers; and it’s bound to make similar decisions in the future as competition among rival digital currency suppliers stiffens.

All this, I realize, is the stuff of any principles text. Yet it’s worth pointing out  lest anyone should lose sight of it. I also think it prudent to observe that, generally speaking, if one wishes to avoid inefficiency, the last thing one ought to do, except perhaps in those uncommon instances in which an industry qualifies as a “natural monopoly,” is to let an outfit already gifted with a statutory monopoly of some product — whether it be paper currency, soap bars, or salt — compete with private sector suppliers of other products, including substitutes for the monopolized good. Letting it enter these other markets is, after all, a recipe for having it resort to cross-subsidies to defeat its more efficient private sector rivals — an alternative to outright prohibition that Fung et al. (p. 32) don’t appear to consider.

Non-Standard Digital Currencies

Turning to private digital currencies that are neither denominated nor redeemable in some official money — and that aren’t, for that matter, redeemable claims to anything at all — it should be perfectly obvious that these have about as much in common with old-fashioned banknotes as a $50 gold Maple Leaf has with a $50 deposit credit at the RBC or Scotiabank. While both a banknote and a bank deposit credit are IOUs, bitcoins and Maple Leafs aren’t.

It should therefore be equally obvious that non-standard digital currencies are necessarily both free of default risk and incapable of having a market “value” distinct from their nominal or face value.  The value of a bitcoin can and does fluctuate in terms of other currencies; but a bitcoin is always worth precisely one bitcoin. It follows that, whatever experience may tell us concerning losses suffered by banknote holders owing to either bank failures or discounts applied to the notes of solvent banks, that experience tells us even less about today’s non-standard digital currencies than the precious little it tells us about their standardized and redeemable counterparts.

That leaves counterfeiting. Fung et al. think it “likely that digital currencies would be subject to criminal attempts to counterfeit them,” and it is hard to disagree with them. But here again, the statement is more true of redeemable digital currencies than of non-standard ones, including bitcoin and other cryptocurrencies which, as Fung et al. recognize (p. 27), appear to have solved the counterfeiting problem “by requiring ‘proof of work’ or ‘proof of stake’ before a block of transactions can be added to the blockchain.” The concession is important, for, so far at least, no other actual or would-be currencies, whether official or private, can claim to be counterfeit-proof. That point ought surely to be seen as a decisive one in at least some digital currencies’ favor.

Yet instead of emphasizing the point, Fung et al. devote but a single, fleeting sentence to it. They also surround that sentence with others concerning problems other than outright counterfeiting to which decentralized digital currencies are supposed to be uniquely vulnerable, namely, the so-called “double spending” problem, and the risk of “fraud and cyber attacks.” But “proof of work” schemes are just as effective in preventing double spending, where a legitimate owner of digital currency units makes and spends copies of those units, as they are in ruling-out outright counterfeiting. The outright theft of stored bitcoin through successful hacking of security systems has, in contrast, been a very real problem. But despite what Fung et al. claim, and as Willie Sutton (or any garden-variety mugger or purse-snatcher) might tell you, currencies that “rely on a trusted third party,” including the paper currencies that central banks supply, can be stolen no less easily.

The Question of Scarcity

Thus far, both here and in my previous posts in this series, I’ve referred to only three items in Fung et al.’s list of “five desirable characteristics of a medium of exchange”: minimal exposure to counterfeiting,  a high degree of safety (taken to mean safety from loss owing to a providers’ insolvency), and uniformity with respect to the prevailing standard monetary unit. I’ve overlooked the other two, ease of transacting and scarcity, because Fung et al. themselves allow that with respect to these characteristics Canada’s private banknotes were no worse than available alternatives, including Dominion notes.

Fung et al. say nothing about the relative ease of transacting with private digital versus government-supplied currency. They do, however, compare the capacity of digital currencies to remain scarce to that of government fiat currencies, to the disadvantage of the former.  While at least some central banks, including those of Canada, the U.S., England, Europe, and Japan, are, in their words, “committed to keeping inflation low and stable,” they believe that

Private digital currencies are likely to be scarce only when subject to strong government regulation  or when their are rules for issuance hard coded from the beginning and not subject to any change (p. 28).

It’s hard to see just how Fung et al. arrive at this conclusion. With regard to redeemable digital currencies, the mere fact that their issuers (like most private issuers of redeemable IOUs but unlike modern central banks) face the penalty of failure in the event of nonpayment has been by far the most powerful constraint against excessive issues. It sufficed, at any rate, to keep the supply of banknotes in check in Canada when its banks were able to issue notes subject to no practical limit save the requirement that banks  pay their notes on demand.[3] If there is some reason for supposing that a similar obligation won’t suffice to contain the growth of today’s redeemable digital currencies, Fung et al. should spell it out.

Concerning non-standard digital monies, it’s of course true, as Fung et al. say, that these may not be sufficiently scarce, and may therefore fail to “ever enjoy wide spread acceptance,” unless rules limiting their multiplication are “hard coded from the beginning.” But whoever thought otherwise? And is this not something we can safely let private digital currency suppliers discover for themselves, as at least some have already done? What’s the point, in short, of insisting on the necessity of government regulation in the event that private firms attempt to do what they can’t possibly get away with doing? One might as well observe that government regulation “may” be called for to keep privately-manufactured airplanes from dropping out of the sky, or never getting off the ground, unless their manufacturers happen to take the trouble to equip them with wings and other such aerodynamically-appropriate devices.

Fung et al. insist nonetheless that even those non-standard private digital currencies that manage to get off the ground are more likely to end up becoming worthless than their government-supplied counterparts. In defense of this view they note that several non-standard digital currencies have already come and gone, whereas they are unaware of “evidence of any government issued fiat currency having become valueless” (p. 29). Reading that last statement, I couldn’t help thinking of an old bank building in  Madison, GA, not far from where I used to live, that still contained the former bank’s vault. When I saw it the vault’s interior was literally  lined with Confederate States’ notes. Were they not smothered with glue and varnish, those notes would be worth something to collectors today. But they sure couldn’t have been worth much to whoever glued them on the vault walls in the first place!

To be fair, Confederate money only became worthless after Lee surrendered at Appomattox, so perhaps the example shouldn’t count. But there are numerous other examples one might point to — enough, at least, to have inspired Irving Fisher to remark, in 1910, that “Irredeemable paper money has almost invariably proved a curse to the country employing it” (Introduction to Economic Science, p. 219, my emphasis). Consider those famous pictures, taken in Weimar Germany, of a man papering a wall with Reichsmarks while the Reichsbank was still a going concern, or of a woman lighting her stove with them? And how about those $100 trillion Zimbabwean notes that ended up being worth less than a penny — and that mainly because their very worthlessness made them popular with souvenir hunters?[4] Last and, in this case, also least, let’s not forget those notorious Hungarian pengős, 3.8 of which were worth a gram of gold when they were first introduced in 1927. By August, 1946, when the forint was introduced, a gram of gold cost 5300 octillion pengős! Admittedly a unit of currency worth 1/5300 octillion grams of gold is, mathematically speaking, worth more than zero. But who’s counting?

Admittedly Fung et al.’s claim that government fiat currencies are less likely to become worthless than their private digital counterparts rests on something other than the difference between 1/5300 octillion and zero. It depends as well on the authors’ belief that official currency issuers enjoy the ability “to declare their currencies legal tender and require that they be accepted in certain transactions.” But while legal tender laws may suffice to render fiat currencies valuable in the settlement of certain preexisting debts, they have no bearing at all on such currencies’ value in spot transactions.

As for such currencies’ acceptability in payment of taxes and other government dues sufficing to keep them from becoming worthless, the claim begs the question: acceptable at what rate? Imagine, if you will, a poll tax payable in old Zimbabwean dollars. Unless Zimbabwe’s tax authorities suffer from money illusion, that tax would tend to increase no less rapidly than other prices. The public receivability of official fiat monies tends, in other words, to contribute little more to their value than their receivability among other sellers of goods and services. As a bulwark against hyperinflation, a paper currency’s legal tender status is in itself far less reassuring than an absolute quantity limit like the one that will forever keep the quantity of bitcoins below 21 million.

Overlooked Advantages of Banknote Currency

I come now to what I regard as the most serious shortcoming of Fung et al.’s paper, namely, it’s failure to consider the ways in which private currency may be better than government-supplied alternatives. That in assessing Canada’s 19th century experience, Fung et al. never take this possibility seriously is evidenced by their asking, “Did Dominion Notes Improve the System?” without ever asking whether Dominion Notes may actually have been worse than Canada’s commercial banknotes.

Yet to judge either by the opinion of contemporary experts, or by the preferences of Canada’s citizens, Dominion notes were inferior to commercial banknotes. Regarding the public’s verdict, it’s notorious that the notes of Canada’s commercial banks were its currency of choice, which it preferred, not only to government currency, but to gold itself. Consequently to create a demand for Dominion notes the Canadian government had, not only to make them full legal tender, and  require that the chartered banks hold them in amounts equal to no less than 40 percent of their legal tender reserves, but to outlaw banknote denominations below $4 and (after 1880), below $5. Were it not for the last of these provisions, it’s highly doubtful that Dominion notes would have circulated at all, for the chartered banks would naturally have been inclined to “push” their own notes, and there’s no evidence that Canada’s citizens would have hesitated to take them.

And while the verdict of Canada’s citizens might be set aside by some readers as proof of nothing save those citizens’ lack of discernment, that of contemporary experts can’t be so readily dismissed. And that verdict was also unanimous in holding banknotes to be superior to redeemable government paper currency.

Banknotes were considered superior to government paper money in three important respects. First, banks stood to lose more by dishonoring their promises, bankers were less likely to break those promises than government authorities were. Second, bankers were more likely to employ the scarce savings represented by the public’s currency holdings productively. Finally, banknote currency was “elastic,” meaning that its quantity tended to adapt automatically to secular, cyclical, and (especially) seasonal changes in demand, whereas government-supplied currency was not. Because there’s no place for these advantageous qualities of banknote currency among the “desirable characteristics of a medium of exchange” Fung et al. consider relevant “for determining how well private bank notes and government notes performed” (p. 3n. 2), their appraisal severely underrates banknotes in comparison to their government counterparts.

Banknotes Contributed to the Efficient Employment of Savings

I have already, in the first part of this series, referred to the superior efficiency and elasticity of Canada’s banknote currency in arguing that these advantages more than compensated for the somewhat lower security of such currency (judged solely in terms of its specie backing) compared to Dominion notes. So it remains for me only to elaborate a bit more on these traits.

As Joseph Johnson pointed out in 1910 (p. 129), thanks to the Canadian public’s “unquestioning confidence” in Canadian banks’ notes and other credit instruments, they “never demand that they be converted into gold,” which is “used only between banks and in the foreign exchanges.” The banks, in other words, had succeeded in developing “an almost perfect credit system” — the very embodiment of Adam Smith’s ideal highway “suspended upon Daedalian wings.” The savings represented by the Canadian public’s currency holdings, or that part of it which the government did not acquire by monopolizing the supply of currency of denominations below $5, was almost entirely backed by  productive bank loans, rather than by either specie or loans to the Dominion government. Had the government succeeded in any of its several attempts to completely substitute Dominion notes for banknotes, those savings would instead have been either locked-up in so much gold coin and bullion, or commandeered by the Canadian government.

In summary, Canada’s banknotes were, in contrast to either Dominion notes or the notes of U.S. national banks, genuine commercial credit instruments, as opposed to fiscal devices whose real purpose was to secure forced loans to the government from the public, either directly or via bank reserve or note-collateral requirements. It’s possible, of course, that Fung et al. don’t consider the difference important. Perhaps they don’t believe it matters much how scarce savings are employed. Or perhaps they deny that Canada’s private banks were any more capable of employing such savings productively than Canadian government authorities were. But if they believe either of these things, they ought to say so. And since in holding either view they’d be bucking centuries of received opinion, they also ought to say why.

Banknotes Provided an “Elastic” Currency

However impressive it may have been, the efficiency of Canada’s banknote currency was not nearly as widely appreciated as its elasticity was. For while Canadians themselves may have been inclined to take their elastic currency system for granted, U.S. observers were keenly aware of it, and of the stark contrast between it and their own nation’s notoriously inelastic paper currency, consisting of greenbacks and national bank notes. During the final decades of the 19th century, and the first decades of the 20th, the inelasticity of the U.S. currency stock was an important cause, if not the main cause, of recurring financial crises. Just how currency inelasticity contributed to U.S. crises is a subject too involved to go into here (though readers can find a quick summary in this Cato Policy Analysis). But that it did so ought to be evident enough from the fact that the Federal Reserve System was established “to furnish an elastic currency.”

That Canada’s elastic banknote currency allowed it to avoid the crises that afflicted the U.S. economy is no minor detail. Yet Fung et al. never so much as hint at this advantage of Canada’s banknotes — or at the fact that the supply of Dominion notes were even less elastic than national bank notes in the U.S. The only reference Fung et al. make to variations in the stock of Canadian banknotes consists of some remarks concerning year-to-year growth rate changes (p. 19), which they illustrate with the following chart:

Someone knowing nothing more about the behavior of the Canadian banknote supply than what this chart reveals might be forgiven for supposing that the vaunted “elasticity” of Canada’s banknote supply was but a euphemism referring to its volatility. But here is a different picture, showing levels rather than growth rates, and using monthly rather than annual data, for both U.S. national bank notes (left scale) and Canadian banknotes (right scale) :

Alas, Fung et al.’s paper supplies neither such chart, nor any other indication of the lovely saw-tooth pattern of Canada’s currency stock, perfectly reflecting both the comings and goings of the harvest season, and the secular growth of Canada’s economy.[5]

Canada’s banknote currency had yet another important advantage that not only Fung et al. but most other modern authorities overlook: its role in fostering branch banking. Branch banking itself was, of course, a highly advantageous feature of the Canadian system that the U.S. banking system long lacked. Besides contributing to Canadian banks’ safety by making it relatively easy for them to diversify their assets and their liabilities, it also made it much easier for bank-intermediated credit to flow where it was most needed, equalizing interest rates in the process.

But it was only because they were free to issue their own notes that Canada’s chartered banks found it profitable to establish far-reaching branch networks. For had Canada’s banks been obliged to stock their branches’ tills and safes entirely with specie and Dominion notes, instead of having them serve only as small change, the cost would have been prohibitive. By equipping those branches with their own notes instead, they saved a corresponding amount of resources, for until those notes were actually placed into circulation, they were, as one Canadian banker put it (p. 834), “merely so much paper.”

The Real Lesson

I come now at last to what I consider to be the most disappointing thing about Fung et al.’s working paper. It isn’t that it exaggerates the flaws of Canada’s private banknote currency, or that it understates the bankers own part in correcting those flaws. And it isn’t that it overlooks Canadian banknotes distinct advantages over government paper currency. Nor is it that Fung et al. employ their misleading appraisal of Canada’s 19th-century system to arrive at still less reliable conclusions regarding the inherent defects of digital currencies. What’s most disappointing  about the paper is that one might read every word of it, and carefully, without ever realizing that, even before the reforms of the 1880 and 1890, Canada’s private currency system was widely considered, by experts and non-experts alike, to be one of the world’s best currency systems ever, and a darn good one at that.

For testimony on this point, one might turn to the any of the same authorities upon whom Fung et al. rely in cataloguing the Canadian system’s flaws, as well as to many other authorities. For our purposes, the two sources upon which Fung et al. rely upon most heavily should suffice. Toward the end of his history Breckenridge (p. 355) says that “The efficiency of the banks … their services to the country, have received about all the positive description that the subject permits.” He then devotes his book’s final chapter (p. 360ff) to a detailed description of the Canadian banking system’s many advantages, ending with a flurry of rhetorical questions that, read in context, amount to a summary:

How the Canadian banks economize capital; how they utilize and distribute it; what is the security, convertibility and elasticity of the circulating medium they supply; how thoroughly are their creditors protected against loss; how low and how nearly equal are the rates of interest in different parts of the country; how cheaply are other banking services sold; how easy of access are banking facilities; what support have worthy customers in critical times; and how far does the system promote the stability of commercial confidence: these are questions to which, perhaps, this chapter forms an answer. According to the true response, the merits of the Canadian Banking System must be judged. If the present answer be sufficient, the reader may draw his own conclusions.

According to Joseph French Johnson (p. 128), Canada’s banknote-based currency system

possesses features of extraordinary merit, adapting it admirably to the needs of the country which it serves. It performs most efficiently the service for which banks are created, gathering up the country’s idle capital and placing it in channels of useful employment. … The law leaves the banks such freedom that business is never brought to a halt through lack of instruments of exchange; whether the need be for checks and drafts or for bank notes, the supply is always adequate. The redemption system insures perfect elasticity for both the note and deposit currency. …Finally…the system possesses a solidarity that makes possible united action in the face of a common peril.

Similar words of praise can be found in works not mentioned by Fung et al.  Thus George Hague, in his “Historical Sketch of Canadian Banking” (p. 476), observes that “No person acquainted with Canada can doubt that its banking system has been conducive to its material interests in a very high degree, and it is the opinion of many who are conversant with the matter, that no other system would have been equally beneficial.” Elsewhere (p. 452) Hague remarks that Canada’s system is “perfectly adapted to the wants of the country, and has proved itself so during the most trying periods of commercial depression, no matter how long protracted.”

Nor, as I’ve shown previously on Alt-M , was such praise voiced only by bankers and economists.

Yet for Fung et al., the sole merit of Canada’s 19th-century currency arrangement lies in its supposed ability to adumbrate the likely flaws of today’s private digital currencies, and the consequent need for regulators (including, presumably, the Bank of Canada) to stick their mitts in it. Honing-in as it were on every knot and toadstool they can discover disfiguring trunks within the forest of Canada’s chartered banks, they overlook the tremendous merits of the forest itself, and thus manage to arrive at precisely the wrong answer to the question their paper poses.

That question, to paraphrase it, is, “In light of Canada’s experience with commercial banknotes, what must regulators do to perfect today’s private digital currencies?” Stand back a ways, ignore those toadstools and knots, and behold that glorious old forest. The right response, surely, is not unlike the one French businessmen famously gave to Jean-Baptiste Colbert, France’s Comptroller-General of Finances, back in 1681: leave them be.


[1] PayPal Prepaid card balances are, on the other hand, safer than cash itself in at least one respect, for if you lose cash you’re out of luck, while according to PayPal “If your card is lost or stolen, we will, upon your request, send you a new card. Your funds will be transferred to the new card account.” In this as well as in other respects, including the fees involved, prepaid card balances resemble travelers’ checks rather than banknotes, raising the question whether Fung et al. should be drawing conclusions regarding the need to regulate them from past experience with such checks, rather than with circulating banknotes.

[2] If Canada’s experience with banknote discounts supplies only dubious grounds for regulating digital currencies, antebellum U.S. experience, to which Fung et al. also appeal (p. 30), is still less pertinent, for the relatively extensive note discounts of that episode were peculiar byproducts of unit banking, which is now defunct.

[3] Fung et al. wrongly attribute the scarcity of Canada’s commercial banknotes to official “restrictions on the quantity that could be issued,” and particularly to the post-1871 stipulation limiting banks’ circulation to their paid-in capital. “Since banks did not increase their capital very often,” they write, “this [capital limitation] controlled the supply of banknotes” (p. 18). But the capital limit didn’t actually become binding until 1906. Something  else must have kept banknotes scarce until then. That something was, surely, the fact that banknotes were routinely presented for payment in gold or Dominion notes, which were themselves scarce, with failure as the penalty for non-payment. That Fung et al. don’t recognize this most basic mechanism for limiting the expansion of redeemable bank money is more than a little disconcerting.

[4] Regarding that Zimbabwean $100 trillion note, Fung et al. observe (p. 29n32) that instead of being valueless it was still worth a loaf of bread in 2009. But the story of the Zimbabwean dollar didn’t end in 2009, for that currency wasn’t officially abandoned until the summer of 2015, when a new Zimbabwean dollar was introduced, with a starting value once again equal to one U.S. dollar. At the then official exchange rate, one old $100 trillion note was worth just 40 cents of the new currency, while in Harare a loaf of plain white bread cost $1.3, which is to say more than three old $100 trillion notes.

[5] For an excellent discussion of how Canada’s banks furnished the extra paper currency needed for its harvest season — and automatically took it back once the season had passed — see A. St. L Trigge, “How Canada Provides Currency for Moving the Crops,” The Bankers’ Magazine 72 (1906), pp. 834-41.

[Cross-posted from Alt-M.org]

A major issue in the summit meeting between President Trump and Chinese President Xi Jinping will be the growing U.S. insistence that Beijing do much more to rein-in its disruptive North Korean ally. “If China is not going to solve North Korea, we will,” Trump told the Financial Times on Sunday. His blunt comment is only the latest in a series of escalating warnings from Washington. Administration officials have indicated that all options, including unilateral military force, are on the table.

Unfortunately, the administration’s approach to inducing Beijing to take action against North Korea consists of all sticks and no carrots. The fear that the United States might launch airstrikes against North Korea, with all the possible adverse ramifications of such a move for China’s interests, is apparently deemed sufficient to cause a change in Xi’s policy.

Like its predecessors, the Trump foreign policy team overestimates China’s normal influence over Pyongyang and is oblivious to the reasons for Beijing’s reluctance to apply maximum pressure on Kim Jong-un’s regime. China undoubtedly has more leverage over North Korea than does any other country, but it is still limited. Pyongyang has defied the Chinese government’s repeated requests and warnings to cease both its nuclear tests and its ballistic missile launches.

True, since China supplies so much of North Korea’s food and energy supplies, it could probably bring Kim’s regime to its knees if it severed such assistance. But as I point out in a new article in China-U.S. Focus, Chinese leaders have several reasons for refraining from adopting that option. There is the worry that intense pressure might cause Kim’s volatile regime to engage in even more risky military provocations, thereby triggering the very war that the United States and all East Asian nations want to prevent. Even if that nightmare did not occur, cutting off food and energy aid might cause the North Korean state to unravel. Among many other potential problems, that development would lead to massive refugee flows into China.

Beyond those immediate dangers, Chinese officials are concerned that if North Korea imploded, Washington would exploit that situation to Beijing’s geostrategic disadvantage. A united Korea allied with the United States would mean the loss of the geographic buffer between China and the rest of Northeast Asia dominated by America and its allies. Chinese leaders would wonder further if someday Washington might seek to have military bases in what is now North Korea. Given the recent U.S. behavior in deploying military forces in what was formerly Moscow’s East European satellite empire, despite promises to the contrary, such Chinese worries are not unfounded.

There is no indication that the Trump administration has moved to address any of these concerns, much less all of them. So far, the administration’s diplomatic approach appears to be comprised entirely of demands that China take more vigorous action against its troublesome ally or the United States will, despite the potential catastrophic consequences. Concessions to either China or North Korea do not appear to be on the table. I have discussed elsewhere the possible concessions Washington could offer to China, both with respect to the Korean Peninsula and other areas, to increase the incentives for Beijing to adopt more decisive measures toward Pyongyang. But expecting China to incur great risks to implement a hardline policy that would primarily benefit the United States and its allies is inherently unrealistic. Foreign policy is rarely a charitable enterprise, and Chinese foreign policy is never such an enterprise. If the Trump administration wants China to get tough with North Korea, it will need to make it worthwhile for Beijing to do so.

Since his election to Congress in 2012, Beto O’Rourke (D-TX) has been one of the federal legislature’s most outspoken critics of the failed drug war. Rep. O’Rourke is in the news again this week following his announcement that he plans to run against sitting Senator Ted Cruz in 2018.

In November of 2011, O’Rourke spoke at Cato’s “Ending the Global War on Drugs” conference regarding his experiences as an El Paso native and the costs of drug prohibition on both sides of the border.

Rep. O’Rourke also spoke with Cato regarding his support for immigration reform in March of last year.

Last week The Washington Post reported that D.C. will be “among [the] first in [the] nation to require child-care workers to get college degrees.” This jumps on a bandwagon gathering pace in recent years: that child care should be seen as formal pre-school education rather than whatever parents decide is best for their children.

The logic behind the move is simple. Development gaps between poor and middle-class kids arise early, in part due to the failure for many children to experience an environment imbued with the knowledge of how best to deliver early learning. By setting the requirement for “lead teachers” to have an associate degree, child care directors to obtain a “bachelor’s degree” and for home carers to have the Child Development Associate (CDA) Credential, it is believed a better-educated workforce will raise the “quality” of care when children do experience it, in turn improving child outcomes.

Yet the push for professionalization and “improvements in quality” has led to child care becoming increasingly expensive in other countries, such as the U.K., with little evidence of the development objectives being achieved.

Regulatory restrictions such as these, which make becoming a child carer more expensive and time-consuming, will (other things equal) reduce the number of people opting for this type of job. Even though there is evidence it may raise some measure of the “quality of care”, this reduces the number of child care options available to parents overall and increases its price. Mercatus Research estimates requiring “lead teachers to have at least a high school diploma [note: a much lower standard] is associated with an increase in child care costs for infants of between 25 and 46 percent, or between $2,370 and $4,350 per year, per child.”

Given D.C. already has the highest cost of care in the country (the average annual cost of infant care in D.C. is $22,631, taking up close to 36% of a typical family’s income), reducing accessibility to care for low-income families seems a particularly dumb idea. It may reduce the payoff to returning to work for many individuals, or else result in substantial reductions in post-care disposable incomes, which could be used for other positive purposes.

The policy will likely ratchet up too. This is a classic example of how governments restrict the supply of a service, resulting later in demands to subsidize it given the high price. This has certainly been the case in the U.K., where regulations on qualifications and staff-child ratios have been buttressed with provision of so-called “free child care” for 3 and 4-year-olds. The result? There has been some evidence that the provision has a very small average beneficial impact to educational attainment at age 5. Yet this effect weakens by age 7 and has completely disappeared by age 11.

Even if it does improve the average quality of child care then, this type of policy will make child care more expensive and is likely to be completely overshadowed in the longer term by other factors which affect development (not least parenting). Given we do not force parents to take degrees in child development, or else put children in educational centers from birth, it is unclear what the robust explanation is for the government determining what constitutes quality, and restricting the availability of child care. Parents should be free to make judgments about their own wants and needs.  

You Ought to Have a Look is a regular feature from the Center for the Study of Science. While this section will feature all of the areas of interest that we are emphasizing, the prominence of the climate issue is driving a tremendous amount of web traffic. Here we post a few of the best in recent days, along with our color commentary.

This time around You Ought to Have a Look at a brilliant analysis of the profound illogic of “climate catastrophizing” appearing, in all places, in Foreign Affairs, arguably the most important international contributor to precisely just that.

Written by the Manhattan Institute’s Oren Cass (“he’s just like you and me, only smarter”), who often finds himself YOTHALed in these writings, it’s a logical tour-de-force that skewers the exaggerated bathos of the apocalyptics with simple economic logic and hard numbers. Along the way, the usual purveyors of gloom-and-doom, like Stanford’s Paul Ehrlich and The Club of Rome, as well as some more modern-day would-be autocrats like Harvard’s Daniel Schrag, fall victim. The intellectual carnage wrought by Cass is truly breathtaking. And it’s all in Foreign Affairs.

Cass starts off with a bang:

Climate change may or may not bear responsibility for the flood on last night’s news, but without question it has created a flood of despair. Climate researchers and activists, according to a 2015 Esquire feature, “When the End of Human Civilization is Your Day Job,” suffer from depression and PTSD-like symptoms. In a poll on his Twitter feed, meteorologist and writer Eric Holthaus found that nearly half of 416 respondents felt “emotionally overwhelmed, at least occasionally, because of news about climate change.” 

For just such feelings, a Salt Lake City support group provides “a safe space for confronting” what it calls “climate grief.”

Panicked thoughts often turn to the next generation. “Does Climate Change Make It Immoral to Have Kids?” pondered columnist Dave Bry in The Guardian in 2016. “[I] think about my son,” he wrote, “growing up in a gray, dying world—walking towards Kansas on potholed highways.” Over the summer, National Public Radio tackled the same topic in “Should We Be Having Kids In The Age Of Climate Change?” an interview with Travis Rieder, a philosopher at Johns Hopkins University, who offers “a provocative thought: Maybe we should protect our kids by not having them.” And Holthaus himself once responded to a worrying scientific report by announcing that he would never fly again and might also get a vasectomy

Cass then notes that this fear is stoked at the highest levels, with gaudy statements by President Obama (as long as there’s no chance of an audience question, he notes), Hillary Clinton, Bernie Sanders, and Bill di Blasio (the last made at the Vatican, which has also been fanning the flames).

The problem, according to Cass, is that all of this just isn’t warranted. Worst-case scenarios based upon business-as-usual give, according to the UN, a warming of three-to-four degrees (C) from 2015 to 2100 (the earth may be telling us these numbers are way high, see here for a summary of recent findings). Using even the high end of that, integrated economic/climate models (don’t laugh at the concept, please) project a worldwide increase in GDP from $76 trillion today to $490 trillion. That’s with climate change. Without it, the 2100 figure is $520 trillion. Small beer.

How small? Cass cites the model output:

In the [economic/climate model, moreover, the climate-change-afflicted world of 2105 is already more prosperous than the climate-change-free world of 2100. And because the impacts and costs of climate change emerge gradually over the century—0.3 percent of GDP in 2020, 1.0 percent in 2050—in no year does the model foresee a reduction in economic growth of even one-tenth of a percentage point. Average annual growth over the 2015–2100 period declines from 2.27 percent to 2.22 percent. 

The reason catastrophizing is wrong is its proponent’s inability to comprehend the huge degree that affluence immunizes society against catastrophe. In 1970, a severe tropical cyclone (“hurricane” in American) killed 500,000 in Bangladesh. In 2007, a similar storm took out 4,000. That’s 4,000 tragedies to be sure, but 496,000 less than there would have been with 1970 infrastructure and technology there.

Cass notes that the lurid future scenarios are often based upon some very hokey “science.” Our EPA, for example, says that in 2100, the heat-related death rate in New York City will be 50 times that of Phoenix—even though today’s Phoenix is a lot hotter than 2100’s New York. Here—and we have written scientific papers on this—EPA ignores the fact that as heat waves become more frequent, heat-related mortality drops. It’s this thing called “adaptation,” something catastrophists tend to ignore.

In one of the better turns of phrase in the climate/economic literature, Cass notes that “The costs of climate adaptation can also appear deceptively large if the alternative of maintaining the status quo is imagined to be free.” That’s because all along we are adapting to climate, changing or not.

Cass closes back-to-bathos:

As for Bry, the newspaper columnist; Rieder, the philosophy professor; and Holthaus, the meteorologist? They each decided to have kids after all.

Speaking of which, YOTHAL at the testimony before the House Science Committee hearing on Climate Science: Assumptions, Policy Implications, and the Scientific Method on March 29 by Judith Curry, John Christy, and Roger Pielke, Jr. Penn State’s Michael Mann also testified, and one-half hour after the hearing sent out a fundraising letter for 314 Action, a nonprofit group lobbying for, among other things, the defeat of Science Committee Chairman Lamar Smith. Talk about chutzpah! And his letter certainly didn’t tell the truth:

But today when I appeared before the House Science Committee, I was seated with three witnesses, all of whom deny climate science or its implications.

For field notes on this trainwreck, you also ought to have a look at witness Judith Curry’s report on her blog, Climate Etc.

On Thursday, the Supreme Court ruled in Expressions Hair Design v. Schneiderman that imposing restrictions on how merchants inform buyers about the prices they charge triggers First Amendment scrutiny. This would seem to be an obvious conclusion, but the decision is an important, although limited, victory for those who want to convey honest information to their customers, and for those who have a right to receive that information.

The case dealt with New York Business Law § 518, which prohibits merchants from imposing a “surcharge” on customers who use credit cards, but allows for a “cash discount.” To put it simply: the law allows stores to advertise “discounts” for paying cash, but makes it a crime to advertise an economically equivalent “surcharge” for paying with plastic.

Expressions Hair Design, along with several other merchants, sued the state, arguing that the law was vague and a violation of their First Amendment right to convey information to their customers. The federal district court agreed, but the U.S. Court of Appeals for the Second Circuit reversed that decision. The circuit court’s ruling held that the First Amendment wasn’t implicated because the law didn’t regulate speech but merely regulated prices. The Supreme Court granted review to determine two issues: The threshold question of whether the law regulated speech rather than conduct and, if so, whether the law violated the First Amendment.

Chief Justice John Roberts, writing for a majority of the Court, held that the New York law was not only a price regulation dealing with conduct, but also a speech regulation: “What the law does regulate is how sellers may communicate their prices.” As he explained:

A merchant who wants to charge $10 for cash and $10.30 for credit may not convey that price any way he pleases. He is not free to say “$10, with a 3% credit card surcharge” or “$10, plus $0.30 for credit” because both of those displays identify a single sticker price—$10—that is less than the amount credit card users will be charged. Instead, if the merchant wishes to post a single sticker price, he must display $10.30 as his sticker price. Accordingly, while we agree with the Court of Appeals that §518 regulates a relationship between a sticker price and the price charged to credit card users, we cannot accept its conclusion that §518 is nothing more than a mine-run price regulation.  In regulating the communication of prices rather than prices themselves, Section 518 regulates speech.

While this part of the Court’s decision is an important victory for free speech, the Court also held that the law was not vague and did not decide whether the speech restriction amounted to a First Amendment violation under the commercial speech doctrine. In what has become a theme, the Court made a point of ruling as narrowly as possible and remanded the case to the Second Circuit to make that hard balls-and-strikes call that John Roberts discussed at his confirmation hearing. This means the merchants will have to continue to fight for their rights in the lower court.

Although the judgment remanding the case to the circuit court was unanimous, Justices Stephen Breyer and Sonia Sotomayor (joined by Justice Samuel Alito) wrote separate concurring opinions. Justice Breyer continued his disheartening plea for the Court to adopt a rational-basis-type test when dealing with certain commercial speech (meaning the government wins). As Cato pointed out in our amicus brief, however, this approach has no foundation in First Amendment law. All restrictions based on content of speech should be subject to exacting scrutiny. Justice Sotomayor wrote a longer concurrence, arguing that because of the complexity of the case, the Court should have sought the input of the New York Court of Appeals (New York’s highest state court) to get a clearer picture of what the statute actually does.

Ultimately, while the victory was small, the Court chose to recognize the law for what it was—a restriction of the merchants’ ability to tell their customers the truth. Only time will tell whether the Second Circuit will now do the right thing and rule that the restriction violates the First Amendment.

Once again, a court has refused to recognize any meaningful limit to Congress’s authority to regulate Americans’ private lives through the Commerce Clause. On Wednesday, after a long delay in considering the case, the U.S. Court of Appeals for the Tenth Circuit reversed a district court order that had declared the U.S. Fish and Wildlife Service (FWS)’s regulations prohibiting the “taking” of the Utah prairie dog (effectively, anything that may disrupt its habitat) unconstitutional. (This is a case in which Cato had filed a brief nearly two years ago.)

The court held that, since Congress had a rational basis to believe that protecting the prairie dog “constituted an essential part of a comprehensive regulatory scheme that, in the aggregate, substantially affects interstate commerce,” the FWS regulations are authorized under Article I, section 8. This, despite acknowledging that “taking” the prairie dogs—which exist solely within the borders of Utah and have no economic value—is a “noncommercial, purely intrastate activity.”

The case was brought by People for the Ethical Treatment of Property Owners (PETPO), a nonprofit organization formed by Utah residents and property owners to protect their interests in the face of FWS’s burdensome regulations. Its members have been prevented from building homes, starting small businesses, and even from protecting local parks and cemetery grounds. Finally, enough was enough and PETPO brought suit against the FWS on the grounds that neither the Commerce Clause nor the Necessary and Proper Clause authorizes Congress to regulate this rodent on nonfederal land. Such is the bizarre dreamscape in which the Tenth Circuit exists: where the power to regulate interstate commerce somehow covers activities that are neither interstate nor commercial.

But how did we get here? The Commerce Clause, while always a fairly broad source of authority—at least since Chief Justice Marshall’s landmark decision in Gibbons v. Ogden (1824)—wasn’t always read as a congressional blank check.  It wasn’t until 1942, when the post-New Deal Supreme Court held in Wickard v. Filburn that even wholly interstate, noncommercial activity can be regulated by Congress, as long as, looked at in the aggregate, the activity could theoretically impact interstate commerce if enough people engaged in it. And while the Court has made some effortsto place outer limits on Congress’s commerce power—most notably in United States v. Lopez (1995), United States v. Morrison (2000), and NFIB v. Sebelius (2012)—these opinions seem to have done little to actually rein in federal overreach. The medical-marijuana case of Gonzales v. Raich (2005), which held that an activity may be regulated if it’s plausible that Congress thought doing so would be an “essential part of a comprehensive regulatory scheme that, in the aggregate, substantially affects interstate commerce,” is the precedent most relied on here. The Tenth Circuit, uncritically following a line of much-maligned cases holding only the most tenuous connections to actual constitutional text, has managed to chip away at the limits on federal power even more than the Supreme Court has already done.

The Constitution’s Commerce Clause affords Congress the power to regulate only items, channels, or instrumentalities of interstate commerce. If Congress wants to regulate activities that “substantially affect” interstate commerce, that power rests in the Necessary and Proper Clause, which gives Congress the means to regulate interstate commerce—provided those means are both necessary and proper. But the activities prohibited by the FWS regulation don’t substantially affect interstate commerce. Moreover, the “take” rule isn’t necessary: Congress can regulate interstate commerce without interfering with residents’ use of their property. Nor is it proper: the power to regulate uses of property that don’t affect interstate commerce belongs to the states.

Hopefully PETPO will now appeal to the Supreme Court, which, newly invigorated by the words and ideas of an energetic textualist like Neil Gorsuch (who, by the by, wasn’t on this Tenth Circuit panel), will see this as another opportunity to place meaningful limits on federal authority. Until then, it appears that the good citizens of Utah will have to continue bearing burdens caused not by the critters at issue – this isn’t Bill Murray in Caddyshack – but by federal regulators’ use of powers that simply aren’t theirs to assert.

The economist Herbert Stein, chairman of the Council of Economic Advisors under Richard Nixon, once quipped,

Most of the economics that is usable for advising is at about the level of the introductory undergraduate course.

One lesson from such courses is that minimum wage laws reduce employment, so this is reassuring:

I critically review the recent findings regarding the effects of minimum wages on employment. Contrary to often asserted statements, the preponderance of the evidence still points toward a negative impact of permanently high minimum wages.

From Jesus Fernandez-Villaverde at the University of Pennsylvana.