Policy Institutes

The Brexit vote last month came as a surprise to many people (including me), and there is still a lot of uncertainty – both legal and political – as to how the United Kingdom (UK) will proceed.  In order for Brexit to go forward, the UK will have to invoke Article 50 of the Lisbon Treaty, and then enter into a complex negotiation with the European Union to establish a new UK-EU economic relationship.

As things move ahead, I will have more to say on the UK-EU negotiations, but for now I wanted to weigh in on the UK’s trading relationship with the rest of the world.  There are questions about when the UK can actually begin any such trade negotiations, but putting that aside, I wanted to address two points:  (1) With whom should the UK negotiate? And (2) what should the UK negotiate about in these trade agreements?

My long answer is here, in a new Free Trade Bulletin (a shorter, op-ed version is here), but here’s a quick summary.

In terms of negotiating partners, I would ask these questions: (1) Which countries have the most to offer in terms of a substantial economic relationship; (2) with which countries would the negotiations be the smoothest; and (3) which countries would involve the least external controversy in a trade negotiation.  Weighing and balancing all of these factors, it seems to me that the best candidates for the initial set of trade negotiations would be Australia, Canada, New Zealand, and the United States; and perhaps developed countries such as South Korea and Japan.  

As to the substance of the negotiations (that is, what to negotiate about), I suggest the following:

– Push for zero tariffs on all products, with limited or no phase-out periods.

– With services liberalization, pick a couple substantial and uncontroversial sectors and focus on liberalizing those.

– Open up government procurement markets as much as possible.

– Rely on existing WTO trade rules for issues such as intellectual property and product standards, so as to avoid getting bogged down negotiating on complex regulatory issues.

– With some trading partners, exclusion of trade remedies – e.g., anti-dumping – may be possible.  This may sound politically challenging, but it has happened before. For example, Australia and New Zealand have agreed not to take anti-dumping measures against each other, and perhaps these countries would consider doing the same for their trade with the UK.

Some people in a few of these potential trading partners are already pushing for trade deals, so there is a good chance something will go forward in the near future, although it looks as though the UK leaders may need to settle in and make some key decisions – such as when to invoke Article 50 – first.

A recent op-ed in the Times Herald took aim at a study by our dearly departed colleague, Andrew J. Coulson. In short, the author claimed that the study’s “flaw” was supposedly failing to take into account something that Andrew actually did take into account, as he explained in his study. Since Andrew is no longer available to address specious attacks on his research, it falls to his colleagues to do so. What follows is the letter that Rachel Reese, a research associate at the Cato Institute’s Center for Educational Freedom, and I submitted to the Times Herald:

In an op-ed urging support for a bond proposal for the Port Huron school district, Professor James Clatworthy took issue with a Cato Institute study by the late Andrew J. Coulson that found no correlation between spending and achievement. We take no position on the bond, but stand by our colleague’s research.

Despite a near tripling of the inflation-adjusted cost per pupil in public schools nationwide between 1972 and 2012, the performance of high school students on the SAT and National Assessment of Educational Progress has been flat. Coulson’s study compared state-level SAT scores, controlling for changing participation rates and student demographics, to the total, inflation-adjusted cost of a K-12 education, finding no discernable link between spending and performance.

Clatworthy erroneously claimed that Coulson’s findings did not account for SAT scores being periodically “mean centered,” meaning that the average scores were reset. In fact, contrary to Clatworth’s assertion that the test was recentered “multiple times” over the period of the study, the Educational Testing Service (ETS) only recentered the SAT once between 1972 and 2012 and Coulson used ETS’s own formula to compare the pre- and post-recentering data.

Ironically, Clatworthy also criticized Coulson for supporting policies empowering parents to choose schools, claiming that choice would “return us to the status of the 1700s.” But choice is clearly the right model for the 21st century, in which a quickly changing world will need a nimbly adapting education system. That requires choice and decentralized control, not a bureaucratic system that demands evermore money without measurably improving results.

Paul Romer becoming chief economist at the World Bank looks quite promising for economic development. 

In a 1990 explanation of new growth economics, Paul Romer and Robert Barro wrote, “If government taxes or distortions discourage the activity that generates growth, growth will be slower.” 

Speaking about the “Mauritian Miracle” at a 1992 World Bank conference, Romer emphasized that  “income and corporate tax rates were halved in 1983 (from about 70 to about 35 percent).” He also noted that free-trade zones allowed “unrestricted, tariff-free imports of machinery and materials, no restriction on ownership or repatriation of profits, [and] a ten-year income tax holiday for foreign investors.”  

Romer’s new growth economics should prove quite compatible with a timely rediscovery of the many global success stories with supply-side reductions in marginal tax rates and tariffs in the 1980s and 1990s in countries as diverse as Botswana, India, Chile, New Zealand, China, Ireland, Singapore, Mexico and more recently Turkey and Eastern Europe.  

As expected, the Permanent Court of Arbitration in The Hague ruled against China’s expansive territorial claims in the South China Sea. The Philippines was exultant. Beijing responded angrily.

Territorial disputes pose a perennial international problem. Great powers, including the U.S., typically refuse to be bound by the decisions of others when they believe important interests to be at stake.

The existing order in the Asia-Pacific was established at a time when China was unable to effectively assert its claims or defend its territory. Understandably, Beijing is dissatisfied with the status quo.

Nor is Beijing the first rising power to challenge a system seemingly biased against it. The young American republic responded truculently in border disputes with both Great Britain and Mexico, even invading the latter and seizing half of that country.

In recent years the PRC has challenged territorial claims of Japan, the Philippines, and Vietnam. Manila lacks an effective military and turned to the arbitration panel for support. The decision reaffirmed the position of the Philippines and nearby states, which will embolden them to take a tougher position against China.

Unsurprisingly, Beijing rejected the ruling and promised “to protect its territorial sovereignty and maritime rights and interests.” The PRC also won’t be inclined to step back.

The U.S. insists it takes no position in the ongoing disputes, but Washington has clashed with China over the former’s right to collect intelligence. If war erupted in the region, America’s alliance with Japan and ambiguous commitment to Manila could drag the United States into combat with nuclear-armed China.

All parties have an obligation to dampen tensions. They should start by recognizing that none of the disputed claims are worth war.

The resources in surrounding waters could be substantial but still would pale compared to the cost of conflict. In peacetime navigation would continue largely unimpeded. Wartime navigation would depend upon on the capabilities of the respective navies.

Calls on the U.S. to confront China are misguided. The PRC’s stake in securing its coast is vital and the waters beyond substantial.

America’s interests are more diffuse and distant. Dominating China’s borders might be theoretically desirable but isn’t necessary to protect American security. Navigational freedom is important but not directly threatened. Peaceful dispute resolution by others is welcome but not a matter for the U.S. military.

Of course, many in Washington believe that the sight of a few American ships would deter aggressive action by China. Alas, the PRC is not likely to respond by abandoning interests viewed as essential. Rather, it would do what the U.S. almost certainly would do if similarly provoked: increase military outlays.

Although the U.S. will remain wealthier and more powerful than China for years to come, the former cannot forever afford to maintain military forces strong enough to have a reasonable certainty of defeating the PRC in the latter’s home waters. Once the entitlement tsunami begins to overwhelm the federal budget, Americans will sacrifice Scarborough Reef and the Senkakus to protect Social Security. In contrast, Chinese citizens likely would spend and risk whatever is necessary to ensure the disputed territories remain Chinese.

As I point out in National Interest: “the best outcome for Washington would be for events to take their natural course, that is, the PRC’s neighbors rearm and coordinate to counter Beijing’s aggressiveness. The participation of both India and Japan would make a serious regional coalition possible.”

Only mutually agreed solutions, not disputed legal rulings, can settle the region’s territorial disputes. In fact, the PRC peacefully resolved 17 of 23 previous border disputes.

Overall the parties should to “seek common ground while reserving differences,” as Wu Shicun of the National Institute for South China Sea Studies put it. The U.S. and its friends should demonstrate that China’s interests would be respected by adapting to changed circumstances.

The tribunal decision may prove to be a Pyrrhic victory for America’s allies. Despite the court ruling, they still will have to negotiate to settle the issue. 

Should big-city governments be giving valuable city property to its wealthy residents for a pittance? The answer to that is not dependent upon political party or ideology, it would seem, yet it remains the standard practice nearly everywhere.

The property in question consists of the parking lanes in neighborhoods and main thoroughfares, and the cost of this giveaway is immense: Besides the loss in foregone revenue adds greatly to traffic congestion, depresses demand for businesses in those areas, and contributes to pollution.

None of these are apparently sufficient to convince the supporters of these types of regulations who tend to be in charge of big cities like Washington, DC, where I live, to change this policy, so let me add another reason to do away with this: Giving away street parking is incredibly regressive. (for context, DC charged $25 a year for a neighborhood parking permit when off-street parking spaces go for $3,000 a year)

As I discussed in my recent Regulation Magazine piece and Cato Podcast, supporters of these types of regulations often justify nearly free street parking in these places as a necessary giveaway to help poor people who live in the neighborhood. The problem is that few poor people live in these neighborhoods and those who do usually do without an automobile. For instance, of the dozen cars parked on my street last night were three Mercedes, two BMWs, three Lexuses, and a Jaguar. Not the typical cars of the underprivileged trying to eke out a living.

This collection of pricey autos are not a random snapshot, either: the dirty little secret is that most cars are stored on the street and not parked. A majority of cars parked in my neighborhood don’t move in a typical week: they are baubles for their wealthy owners to be used on the occasional road trip or a weekly grocery run. There are also a number of vans in our neighborhood being used to store property of their owner. It’s certainly cost-efficient: the cheapest storage space nearby is $90 a month, and $1,000 buys a late model van that can be coaxed into running on occasion. Putting one’s winter clothes or surplus books or other paraphernalia in a nondescript van permanently parked in front of one’s apartment is cheaper and more convenient.

On-street parking is so cheap that there are area hotels without a garage that offer valet parking. They merely park the guests’ cars on the street for it and pay the parking tickets, which are still below what they charge their guests.

Giving away on-street parking engenders a fierce competition for every spot. It also creates a critical mass of people fearful of even more competition for their on-street parking spots, which results in stiff opposition of every new housing development proposed. The free parking lobby occasionally succeeds in stopping certain developments but at a minimum it can slow new construction and increase the legal costs of proceeding. Invariably this opposition results in developers being forced to construct smaller buildings with less housing, which is one reason that housing prices here remain so high in major metropolitan areas. That’s doubly good for the car owners, since they benefit from the parking access and higher real estate prices, but it’s bad for the middle and lower-income who can’t afford to buy.

In Washington DC this banal parking policy also hurts the poor by screwing up mass transit as well. The parking shortage created by this artificially low price pressures the city to allow parking in every conceivable spot. As a result, buses that go through this heavily-traveled route find it difficult to traverse this corridor. Parked cars abut most bus stops, making it difficult for buses to get in and out of the space. In other places the plethora of parked cars slows traffic to a crawl during rush hours. In essence, the city lengthens the commute of low-income minorities in order to help a paucity of wealthy car-owners.

Urbanists have decried the impact of “free” parking for some time–Donald Shoup’s The High Cost of Free Parking made a quiet sensation amongst this crowd when it appeared a decade ago. But there’s one aspect of it that the good-government types tend to overlook: It’s that it benefits the rich at the expense of the poor.

There are many reasons the government should reduce how much parking is available in urban areas and charge a market price for the parking it does allow, but the fact that it would lead to an incredibly progressive outcome ought to be acknowledged–and used to confront those who have made reducing inequality their cri de coeur yet advocate for the status quo.

Turkey was convulsed by an attempted coup last week. Nominally democratic but in practice increasingly authoritarian, the government of President Recep Tayyip Erdogan has initiated a broad crackdown that goes well beyond the military. He has the makings of becoming another Vladimir Putin—except supposedly on America’s side, but even that no longer is so sure.

Turkey’s dubious evolution should remind Americans how hard it is for U.S. officials to play social engineers to the world. Instead of constantly meddling in hopes of “fixing” other nations, Washington should step back when its interests are not vitally affected, which is most of the time. The physicians’ injunction, “First do no harm,” would be a good principle for American foreign policy.

Ankara joined NATO during the Cold War. Containment of the Evil Empire was the principal objective. That policy should have expired with the collapse of the Soviet Union and dissolution of the Warsaw Pact. Friendship rather than alliance should have become America’s objective.

Unfortunately, Washington decided to use its new “unipower” status to attempt to micro-manage the Middle East. Successive administrations launched a succession of ill-considered interventions.

Washington oft relied on bases in Turkey. The one time Ankara said no, in 2003, America’s deputy defense secretary suggested that the military straighten out the civilian government.

However, Erdogan transformed Turkish politics. He started as a reformer and won support in the U.S. and Europe. They looked at Turkey as the model of a moderate, democratic Islamic state.

But around 2010 the Turkish experiment began to go sour. Erdogan dropped his liberal veneer. He seemed to mutate into a corrupt and authoritarian throwback to Turkey’s seamy past. He also pushed a more fundamentalist Islam into the public sphere.

Erdogan went AWOL on foreign policy as well. He decided he wanted to overthrow his former ally, Syrian President Bashar al-Assad, and sought to drag the U.S. into that conflict. But until recently Erdogan turned a blind eye to the Islamic State’s use of Turkey as a base and transit route to Syria.

Then last fall Ankara risked a confrontation with Russia, shooting down one of the latter’s warplanes for briefly violating Turkish airspace. Erdogan recently decided to repair that relationship. Washington found itself uncomfortably tied to his increasingly erratic and repressive role.

Although last week the U.S. backed Erdogan as the legitimately elected president, conspiracy theories involving Washington were rife in Turkey. Some Turks couldn’t believe it wasn’t intervening again.

The U.S.-Turkey relationship shows how hard it is to stop meddling once you start. Washington is constantly (and usually futilely) involved, attempting to reshape the Mideast. That requires Turkish assistance. Which in turn requires friendship with whatever government is in power, no matter how antithetical to U.S. values.

As I pointed out in Forbes: “Washington is never going to be isolated from the world. But it should stop attempting to forcibly transform the world. In Turkey the U.S. has found itself forced to embrace a man who cannot be trusted to support people’s liberty at home or fight Islamic radicalism abroad. So why is America still supporting him?”

The failed coup attempt in Turkey – and President Erdogan’s harsh crackdown in response – has provoked reassessment of Turkey from a number of perspectives. Most obviously, the episode indicates that Turkey is both less stable and even less democratic than most people imagined not long ago. Though the United States has long criticized Erdogan’s authoritarian proclivities, it is rapidly becoming clearer that Erdogan’s vision is the remaking of Turkey’s secular democracy into an Islamic republic. For Europe, Turkey’s instability will aggravate concerns about Syrian refugees (over two million of whom are living in Turkey) and reignite debate about the wisdom of welcoming Turkey into the European Union.

But Turkey’s domestic politics also have important implications for American foreign policy. In the short run, instability in Turkey will cause discomfort for its NATO allies and likely cause problems in the fight against the Islamic State (ISIS). More fundamentally, however, Turkey provides a cautionary tale about the dangers of relying on authoritarian regimes to help conduct foreign policy.

One immediate concern is the physical security of several dozen American B61 tactical nuclear weapons “purportedly” housed at Incirlik air base in southern Turkey. Turkey has long played host to the weapons as part of the American effort to extend nuclear deterrence to its NATO allies. During the coup activists flew sorties from Incirlik, prompting the Turkish government to cut off power to the base. Eventually, Turkey also arrested the head of the base. Regardless of whatever electronic safeguards might exist to keep the weapons from misuse, this experience should serve as a wake-up call. As Hans Kristensen of the Federation of American Scientists noted, “You only get so many warnings before something goes terribly wrong. It’s time to withdraw the weapons.”

Another worry is that the turmoil in Turkey will hamper its contribution to the fight against ISIS. Given its location, Turkey plays an important role in the American response to ISIS. The United States relies on the air bases in Incirlik and Diyarbakir to fly bombing missions in Syria. The coup forced only day’s interruption in the Incirlik-based air campaign, but the episode raises concerns about what might happen should more unrest follow.

More generally, the coup raises further doubts about Turkey’s interest in engaging ISIS. Despite sharing a border with Syria and Iraq, Turkey has always seemed to be a bit conflicted when it comes to its priorities. Turkey, for example, has failed to secure its border with Syria, enabling ISIS to move stolen goods into Turkey and thereby fueling its rise. In addition, Turkey won’t support the Syrian Kurds who are fighting ISIS (and who are U.S. allies) because Turkey’s longstanding “Kurdish problem” means that Erdogan is just as concerned about making sure the Kurds do not carve out an independent territory on the border as he is about ISIS.  Thus, at the best of times, the United States has been frustrated with Turkey’s performance.

The wake of a failed military coup, of course, represents something far from the best of times. Observers like former NATO supreme allied commander Admiral James Stavridis have argued that the loss of civilian confidence in the Turkish military and the fallout from the purges will have “a chilling effect on military readiness and performance.”

It is important to realize, however, that none of these short-run problems are Turkey’s fault. Instead, they are the result of flawed American grand strategy. Since the end of the Cold War, and especially after 9/11, the United States has adopted a strategy of liberal hegemony that places a heavy emphasis on military intervention and the role of the United States in managing regional security regimes. This strategy, in turn, makes it necessary to rely on “partners” and “allies” that can enable American military power projection.

The only reason the United States has to worry about the security of nuclear weapons in Turkey is the mistaken belief that NATO still needs American help to provide for its members’ security. In reality, however, Europe enjoys a much larger population and economy than Russia, and NATO forces – even without the United States – are far better trained and equipped than Russian forces. The fact is that the United States no longer needs to belong to NATO, much less deploy nuclear weapons on European soil.

The question is somewhat more complicated when it comes to fighting ISIS, but the same lesson applies. The only reason Turkish air bases matter to the United States is their utility for conducting air campaigns in the Middle East. Though there are certainly some situations where such campaigns might be necessary, the American experience in the Middle East since 9/11 has made it clear that traditional military means are a poor (and probably counterproductive) strategy for fighting terrorism. If the United States were not so devoted to military intervention, the need for Incirlik and other bases in the Middle East would disappear.

International politics is a full contact sport. Difficult trade-offs are often required and sometimes cooperating with authoritarian regimes is necessary. But the need to do so will be greatly reduced if the United States can succeed in adopting a more restrained approach to foreign policy. If the United States can wean itself from the need to try to solve every problem through the use of military force, there will be no reason to soft-pedal human rights and other violations in Turkey. Cutting fewer deals with authoritarian regimes will also help limit their legitimacy while strengthening American calls for greater liberty and democracy. Most importantly, the United States will be free to align its foreign policy more closely with its own democratic values.

Recep Tayyip Erdogan has ruled Turkey for more than a decade. He should be enjoying his time of triumph.

Yet his country almost crashed and burned last week. Elements of the army and air force attempted a coup d’etat, leading to street battles and air attacks.

Erdogan promised revenge against those involved, who will “pay a heavy price for their treason.” No doubt they will, since the thin-skinned Erdogan long has been making even mild critics suffer for their alleged sins. To tame the military, his government previously tried hundreds of military officers and others in mass trials involving improbably fantastic conspiracies.

Turkey is one of the least friendly nations for independent journalists. Around 2000 people, including students and even a beauty queen, have been prosecuted for criticizing Erdogan. His government periodically targets Internet freedom.

The briefly constituted junta announced that it had seized power “to reinstall the constitutional order, democracy, human rights and freedoms, to ensure that the rule of law once again reigns in the country, for last and order to be reinstated.” Worthy objectives for an increasingly desperate Turkey today.

Unfortunately, a coup may be the least likely vehicle for moving Turkey into a genuine liberal, democratic future. Those who look back nostalgically on earlier military seizures of power ignore the ugly reality. For instance, the 1960 coup led to the execution of the popularly elected prime minister and other officials and imprisonment of thousands.

Moreover, the public today is well-organized and committed to democracy. Having provided Erdogan and his Justice and Development Party (AKP) with a half dozen election victories since 2002, the Turkish people were never likely to quietly accept his ouster and the imposition of a hostile military regime.

Unfortunately, as I wrote for Forbes, “the botched coup is likely to act like the infamous Reichstag fire under the Nazis and accelerate the Erdogan government’s race to the dictatorial bottom. He is likely to become more vindictive and paranoid—because he does have enemies everywhere. Never mind that he bears responsibility for the authoritarian policies and corrupt practices which have energized his most fervent opponents.”

Politics almost certainly will grow more polarized. Anger against those who struck at his rule may intensify Erdogan’s extra-legal campaigns against other political parties. His supporters could practice private revenge and vigilante justice.

In fact, Erdogan might reap political advantage from the coup. Other parties might feel greater pressure to work with him to deliver the super-majority which he needs to change the Constitution to expand his presidential powers. He also could call a snap election in hopes of winning that majority on his own.

Turkey’s security is likely to suffer in the coup’s aftermath. The Erdogan government originally played footsie with the Islamic State, but several terrorist attacks in Turkey forced a crackdown. Moreover, he reignited the long fight against the Kurdistan Workers’ Party (PKK) and targeted Syrian Kurds to enlist nationalism as his electoral ally. Now, however, the military is badly damaged and faces internal disarray for an extended period of time.

Ankara is a difficult ally for America, but the Obama administration took the right approach, immediately backing Turkey’s elected government. Democracy is yielding ever more illiberal outcomes, with Erdogan seemingly determined to accrue Putinesque powers.

Yet military rule could succeed only by killing and imprisoning on a large scale. And a successful junta was likely to produce a society with even less liberty and respect for human rights.

Erdogan is an increasingly undemocratic president elected democratically. He should use the failed coup to address the substantial portion of the population which has come to loathe and even fear him. If he doesn’t, he should be removed and his government should be ousted—but by Turkey’s voters, not its soldiers.

Someday, Turkey may be truly free. Hopefully, a military coup will not be necessary to make it so.

James G. Gimpel’s new report for the Center for Immigration Studies (CIS) has a good summary of voter opinion on immigration and how the issue influenced the rise of Donald Trump.  Undoubtedly, that issue key to his success in the GOP primary, although it’s unclear why equally nativist but more polite candidates like Mike Huckabee, Rick Santorum, and Scott Walker failed to gain traction.        

My only problem with this report is its selective display of Gallup’s immigration polling data.  The CIS starts reporting the results in 1999 and omits whether Americans support more immigration (Figure 1).  By starting the data in 1999, the report is able to argue that opposition to legal immigration and those supporting the same number of immigrants have been roughly constant since 1999. 

Figure 1

CIS Graph   

 

Source: Immigration Opinion and the Rise of Donald Trump.

If the CIS report had included the “Increased” immigration option in the poll and the years going back to 1965, you would have seen this (Figure 2).  I highlighted the years 1993 and 2015 to show how far public opinion has shifted toward the pro-immigration side over the last 22 years. 

Figure 2

Gallup Opinion on Immigration

 

Source: Gallup.

A mere six percent of the public supported increased immigration in 1993, but that increased to 25 percent in 2015 – a more than four-fold jump.  Those satisfied with present immigration levels increased by 13 percentage points.  Those who supported less immigration, CIS’ stated policy goal, decreased from 65 percent of the U.S. population to 34 percent.  Since nativism’s high-water mark in 1993, a greater percentage of Americans support the same level of immigration and more legal immigration than ever before.  The last time the less immigration position was this unpopular, Congress passed the Immigration Act of 1965 - that’s a good omen.

Gallup’s findings are not an aberration.  Other polls conducted by the General Social Survey, the American National Election Survey, and New York Times-CBS all find similar results.  Trump has done well with the segment of the population that wants to shrink immigration, but that segment has imploded over the last 22 years.  Americans are not anti-immigration and those who do hold such beliefs are shrinking as a percentage of the population.     

Coccolithophores are calcifying phytoplankton that comprise the base of marine food webs all across the world ocean. They play an important role in the cycling of carbon into the deep ocean and act as a feedback to climate change. Anything that alters their function or abundance, therefore, could have significant impacts on marine ecosystems and global climate. Thus, it is no surprise that scientists are interested in how coccolithophores will respond to future changes in atmospheric CO2 and climate. And in this regard, Krumhardt et al. (2016) say there has been “much speculation [that has] inspired numerous laboratory and mesocosm experiments, but how they are currently responding in situ is less well documented.” Working to provide just such an in situ analysis, the team of four researchers thus set out to analyze coccolithophore abundance in the subtropical North Atlantic over the period 1990 to 2014.

To accomplish their objective, Krumhardt et al. used coccolithophore pigment data collected at the Bermuda Atlantic Time-series Study (BATS) site (located at 31.7°N, 64.2°W in the Sargasso Sea) in conjunction with satellite estimates of surface chlorophyll and particulate inorganic carbon as a proxy measure of coccolithophore abundance. Results of their analysis revealed that “coccolithophore populations in the North Atlantic subtropical gyre have been increasing significantly over the past two decades. More specifically, they note there was a 37 percent increase in euphotic zone-integrated (integrated from 140 m depth) in coccolithophore pigment abundance at BATS and a larger 68 percent increase in the upper 30 m of the water column (see figure below). Such findings, in the words of the authors, add to those of a growing number of studies showing that coccolithophores in the North Atlantic “are increasing in abundance and are likely stimulated by additional carbon from anthropogenic sources.”

The significance of Krumhardt et al.’s work is two-fold.  First, they note that the increased coccolithophore abundance they found “is contrary to what numerous laboratory studies have predicted, highlighting the importance of in situ observations,” as observations clearly suggest that coccolithophores benefit from higher levels of atmospheric CO2. Second, for those who are concerned about the potential climatic impacts of CO2-induced global warming, the increase in coccolithophore abundance is providing a natural brake on increasing levels of atmospheric CO2, as more carbon is exported to the deep ocean with their increased abundance. What is more, Krumhardt et al. note that in addition to transporting more carbon into the deep ocean, coccolithophores produce dimethyl sulfide, a marine trace gas that affects cloud formation and acts as a negative feedback to climate warming (see Dimethyl Sulfide for background on this topic). Thus, it is that the four researchers conclude that overall increases in coccolithophore abundance will likely induce “a multitude of effects on marine ecosystems in the North Atlantic, as well as global carbon cycling and climate,” all of which, we note, appear to be for the better.

Figure 1. Chlorophyll a (Chlahapto) from haptophytes (planktonic group to which coccolithophores belong) measured at BATS integrated from 30m (panel a) and 140m depth (panel b). Adapted from Krumhardt et al. (2016).

 

Reference

Krumhardt, K.M., Lovenduski, N.S., Freeman, N.M. and Bates, N.R. 2016. Apparent increase in coccolithophore abundance in the subtropical North Atlantic from 1990 to 2014. Biogeosciences 13: 1163-1177.

Tuesday’s long-anticipated ruling by the Permanent Court of Arbitration (PCA) regarding the territorial disputes in the South China Sea (SCS) between the Philippines and China was a big win for the Philippines. China’s sweeping claim to sovereignty over the SCS embodied by the infamous “nine-dash line” was invalidated. The court also admonished China for causing ecological damage with island building activities, and generally aggravating the SCS dispute.

As policymakers in Washington and Beijing think about what to do next they should consider the ruling as an opportunity to counteract the dangerous escalation of tensions in the SCS. Both sides can take relatively low-cost actions that could keep a lid on tensions and help manage the dispute.

It will be more difficult for China to de-escalate than the United States given the fiery official rhetoric surrounding the PCA ruling. Beijing also took provocative actions before the PCA ruling was issued, most notably conducting military exercises in the SCS and declaring a “no-sail zone” in the area of the exercises. However, despite the (expected) bombastic rhetoric, China has shown considerable restraint in its actions or, more accurately, its lack of action. Ankit Panda at The Diplomat notes, “Beijing has not declared an air defense identification zone in the SCS, moved to begin reclamation at Scarborough Shoal, sanctioned the Philippines, or announced an intent to withdraw from the UN Convention on the Law of the Sea.” The gap between official rhetoric and restrained behavior in the wake of the PCA ruling means that China’s long-term intentions are unclear, but restraint from Beijing is a positive development.

Policymakers in Washington will likely feel compelled to enforce the PCA ruling, but they should formulate U.S. policy very carefully. While the PCA’s ruling is legally binding on the Philippines and China, the court lacks an enforcement mechanism. Protecting the “rules-based international order” is an important U.S. foreign policy interest, which means that it will likely take on enforcement responsibilities. Any freedom of navigation operations conducted in support of the PCA ruling should be done without the media fanfare that has accompanied past operations. Additionally, the United States should try to influence other states that want to conduct their own freedom of navigation operations. For example, given the historical animosity and ongoing territorial dispute in the East China Sea between China and Japan, Washington should discourage Tokyo from conducting its own freedom of navigation operations in the SCS.

There are other examples of low-cost actions that the United States and China could take to reduce tensions in the SCS. First, the United States should support dialogue among the other claimants and China. Two days after the PCA ruling, the new president of the Philippines, Rodrigo Duterte, asked a former president of the Philippines to help start talks with China. Second, China could play a more active role in environmental protection in the SCS through the creation of a “marine peace park” in the Spratleys. Claimants would suspend territorial claims to allow the replenishment of depleted fisheries and the recovery of damaged coral reefs. This would be a low-cost policy for Beijing because it would not have to permanently abandon its territorial claims.

The SCS has become a more dangerous place over the last year. The PCA ruling is a prime opportunity for China, the United States, and the Philippines, as well as other claimants, to put a lid on tensions and work with one another to resolve disputes peacefully. It would be impractical to force either side to back down from their core policy positions. But small adjustments in areas such as freedom of navigation operations and environmental cooperation would be a step in the right direction. 

It looks like Indiana Governor Mike Pence may be chosen as Donald Trump’s running mate. On tax and budget matters, that would be a good choice. While Trump has followed an erratic approach to economic policy issues, Pence has been a solid fiscal conservative.

Cato scored Pence on the 2014 edition of the Fiscal Policy Report Card on America’s Governors. He was only one of four governors who received a grade of “A.” The report noted:

Mike Pence of Indiana has been a champion tax cutter, and he has held the line on spending. He signed into law a 2013 tax package that cut the individual income tax rate from 3.4 to 3.23 percent and repealed the state’s inheritance tax. In 2014 he approved cuts to the corporate income tax rate and to business property taxes, both of which will be phased in over time.

When Pence came to office in fiscal 2013, Indiana’s general fund spending was $14.25 billion. In fiscal 2017, it’s going to be about $15.56 billion. That translates into annual average growth of 2.2 percent, which is substantially less than the 50-state average over those years of 4.2 percent.

Look for a new Cato fiscal report card in October.

A while back, the Cato Institute’s vice president for defense and foreign policy studies and director of health policy studies took to the pages of the New York Times to explain why privatizing the Veterans Health Administration would lead to less war and better health care for veterans. 

Today in The Hill, I discuss why this proposal has enduring relevance:

As Britain Tries to Learn from Iraq Mistakes, So Should the U.S. — by Privatizing the VA

[…]

Many Democrats remain angry with their presumptive presidential nominee Hillary Clinton for voting as a U.S. senator from New York to authorize the Iraq invasion in 2002. Clinton later wrote, “I had acted in good faith and made the best decision I could with the information I had … But I still got it wrong.”

There is a reform that could have given Clinton and other policymakers better information about the costs of invading Iraq – information that could conceivably have prevented the invasion altogether or at least shortened the U.S. occupation.

Read the whole thing.

The civil unrest following last week’s police shootings of black men in Louisiana and Minnesota, followed by the sniper attack on police officers in Dallas, has sparked a new bout of public concern over the hardships of Black America. Those hardships include significantly higher violent crime victimizationhigher joblessness, higher poverty, and lower income than the general U.S. population.

Previous moments of such concern have prompted politicians to respond with the standard, tired slate of policies that supposedly would “empower” and “lift” African Americans. All too often, those policies mainly empowered government employees and vendors, while the gap between Black America and the rest of the country remains. By the time the policy failures became obvious, public and political interest had waned, and little else happened until new headlines brought new concern.

Perhaps this time will be different, and policymakers will try some different ideas that might actually help. Cato offers many recommendations for reforming education, criminal justice, and the social safety net that would especially help black Americans.

To those, add this simple, seemingly counterintuitive recommendation: repeal the minimum wage.

Though some politicians deny it, the link between the minimum wage and unemployment is well established; denying that empirical research is akin to denying the research on climate change. Among the findings is that the minimum wage’s detrimental effects fall hardest on young black males: the same group that suffers some of the worst hardships of Black America. Perhaps if they had greater opportunities to take starter jobs that would give them both income and the work experience that leads to better-paying jobs, they’d have a better chance to escape violence and poverty. (Meanwhile, far too many young African American males are pushed into the black market, where they earn sub-minimum wages for dangerous work.) Indeed, the empirical work suggests that there’s a direct causal relationship between the minimum wage and crime.

Repealing the minimum wage for the sake of black youth would be a great piece of historical closure. The minimum wage was established, in part, to push blacks and women out of jobs that progressives believed should go to white family men. The economic struggles of African Americans today reflect, in part, how well the progressives’ plan worked.

Ten years ago, if you walked down the street looking at faces passing by, you could have counted off “young, young, young, young, young, old …”. Fifteen years from now, if you do the same, it’s going to be “young, young, young, old …”.

That’s a striking bit of data included in new CBO budget projections. America has already grayed, but it’s nothing like what’s ahead. The number of old folks is going to soar over the next 20 years. The chart below shows that the ratio of oldsters (age 65+) to youngsters (age 20 to 64) is rising from 1-to-5 to more than 1-to-3. Is America ready for that radical shift?

The federal budget isn’t ready. Politicians have failed to reform oldster subsidy programs, with the sad result that the livelihoods of youngsters will be dragged down by an anchor of debt and taxes. The first, third, and fourth largest federal programs (Social Security, Medicare, Medicaid) transfer vast and increasing resources from young taxpayers to old retirees. There’s no justice in that, and social tensions will rise as the unfairness becomes ever more obvious in coming years.  

There is good news, however. When I’m flipping around radio stations in my car today, it’s teen pop, teen pop, teen pop, classic rock. But when I’m an oldster in the 2030s, it’s going to be classic rock, classic rock, classic rock. To me at least, that will be fair and just.

The Congressional Budget Office has just released the 2016 version of its Long-Term Budget Outlook.

It’s filled with all sorts of interesting data if you’re a budget wonk (and a bit of sloppy analysis if you’re an economist).

If you’re a normal person and don’t want to wade through 118 pages, you’ll be happy to know I’ve taken on that task.

And I’ve grabbed the six most important images from the report.

First, and most important, we have a very important admission from CBO that the long-run issue of ever-rising red ink is completely the result of spending growing too fast. I’ve helpfully underlined that portion of Figure 1-2.

And if you want to know the underlying details, here’s Figure 1-4 from the report.

Once again, I’ve highlighted the most important portions. On the left side of Figure 1-4, you’ll see that the health entitlements are the main problem, growing so fast that they outpace even the rapid growth of income taxation. And on the right side, you’ll see confirmation that our fiscal challenge is the growing burden of federal spending, exacerbated by a rising tax burden.

And if you want more detail on health spending, Figure 3-3 confirms what every sensible person suspected, which is that Obamacare did not flatten the cost curve of health spending.

Medicare, Medicaid, Obamacare, and other government health entitlements are projected to consume ever-larger chunks of economic output.

Now let’s turn to the revenue side of the budget.

Figure 5-1 is important because it shows that the tax burden will automatically climb, even without any of the class-warfare tax hikes advocated by Hillary Clinton.

And what this also means is that more than 100 percent of our long-run fiscal challenge is caused by excessive government spending (and the Obama White House also has confessed this is true).

Let’s close with two additional charts.

We’ll start with Figure 8-1, which shows that things are getting worse rather than better. This year’s forecast shows a big jump in long-run red ink.

There are several reasons for this deterioration, including sub-par economic performance, failure to comply with spending caps, and adoption of new fiscal burdens.

The bottom line is that we’re becoming more like Greece at a faster pace.

Last but not least, here’s a chart that underscores why our healthcare system is such a mess.

Figure 3-1 shows that consumers directly finance only 11 percent of their health care, which is rather compelling evidence that we have a massive government-created third-party payer problem in that sector of our economy.

Yes, this is primarily a healthcare issue, especially if you look at the economic consequences, but it’s also a fiscal issue since nearly half of all health spending is by the government.

P.S. If these charts aren’t sufficiently depressing, just imagine what they will look like in four years.

Last week police in Dallas used an explosive attached to a robot to kill a man suspected of killing five Dallas-area police officers and wounding eleven other people, including two non-officers. The detonation-by robot is widely believed to be the first killing of its kind in the history of American policing, and has prompted much discussion and debate. In the days since the Dallas shooting, questions have been raised concerning when police should be permitted to kill citizens and if lethal use-of-force policy should change depending on the tool police officers use the kill citizens. While it is tempting to view new technologies as devices worthy of a special set of rules, policymakers should consider regulations that make police-citizen interactions safer and less frequent rather than craft new use-of-force rules for robots.

For the purposes of this post, assume that what Dallas Police Chief David Brown said about the killing of the suspect is true. According to Brown, following hours of failed negotiation “[Dallas police] saw no other option but to use our bomb robot and place a device on its extension for it to detonate where the suspect was.” He also said, “Other options would have exposed our officers to grave danger.”

Given America’s federalist system, it is appropriate that there is no universal use-of-force policy guiding this country’s roughly 18,000 law enforcement agencies. Yet police officers are generally permitted to use force in order to make a suspect comply with a lawful order or arrest. Such force is deemed excessive when it goes beyond what is necessary, although there isn’t a nationwide consensus on what is deemed excessive. For instance, in some jurisdictions chokeholds are permitted while in others they’re banned.  

Despite the diversity of American police departments, most use-of-force policies allow for a police officer to use deadly force if he reasonably believes that a suspect poses a threat of serious injury or death to the officer himself or others. The Dallas shooting suspect clearly fits into this category.

While the use of robots to kill suspects may prompt a sense of unease among some–evoking scenes from dystopian science fiction movies–there are few reasons to think that a robot should be treated differently from a handgun or sniper rifle under deadly use-of-force policy.

That, of course, doesn’t mean that we shouldn’t be wary of bomb robots being used needlessly and in a manner than poses significant risk of collateral damage. Not all cases are as clear cut as the Dallas standoff, during which the suspect was hiding behind a brick corner, threatening officers, and resistant to negotiations in the immediate aftermath of a massacre. It would be inappropriate for police to first reach for a bomb-throwing robot (or perhaps in the near future, a bomb-laden drone) every time a suspected armed suspect barricades himself in an empty house.

According to The Guardian’s “The Counted” project, 1,146 people were killed by American police or died in police custody last year. The Guardian’s data reveal that while the vast majority of people killed by police last year died as a result of gunshots, just over two dozen were killed after being struck by vehicles. Officers’ use of Tasers killed 50, and 45 died in custody. In The Guardian’s 2016 data set, the Dallas suspect’s cause of death is listed as “other.”

Police lethal and non-lethal options are going to change as technology advances. But regardless of technological advances, policymakers should limit police use of deadly force to the rare instances when their lives or the lives of others are put at imminent risk.

Many of the police killings that have received nationwide attention have involved victims who encountered officers after committing non-violent offenses that do not require face-to-face interaction. Samuel DuBose was pulled over for not having a front license plate. Philando Castile’s car had a broken taillight. Walter Scott’s brake light wasn’t working. As Conor Friedersdorf recently explained in The Atlantic, in an age of license plate readers, it’s not necessary for officers with guns on their hips to have a face-to-face interaction with a driver suspected of a minor traffic violation:

What I’m suggesting is a change in protocol: A police officer who sees a car with a broken taillight, or a malfunctioning blinker, should pull it over, park behind it, photograph the license plate, and issue a “fix it” ticket to the registered owner of the vehicle without ever approaching a window or interacting with anyone on the roadside.

Friedersdorf’s proposal does avoid some of the surveillance and reduced discretion concerns by specifically requiring officers to identify cars with broken taillights before using license plate reader technology.

In addition, police authorities can change the nature of the face-to-face interactions that are necessary. Community policing that takes officers out of cruisers and onto the streets while avoiding divisive policies such as “stop and frisk” could go a long way in improving police interactions with citizens. While community policing has not been definitely proven to be a crime panacea, New Haven Police Chief Dean Esserman, an advocate of such an approach, did see a reduction in crime after implementing community policing.

Policymakers should also look at “pretextual stops,” which involve officers using minor traffic violations as justification for stopping vehicles for the purpose of investigating activity (such as drug offenses) not related to the traffic violation. As my colleague Jonathan Blanks has pointed out, pretextual stops are unnecessarily antagonistic and may contribute to antipathy between the officer and a driver. That antipathy could lead the officer to unnecessarily escalate the situation and lead to the use of force.

Regrettably, when an officer pulls a driver over, it’s not uncommon for the officer to be wary of a possible violent or deadly interaction because he has been trained to be aware of potential dangers. Likewise, a driver may fear that the officer may escalate the situation and genuinely fear for his safety.  This dynamic can raise tensions and stress levels that sometimes contribute to needless deadly use-of-force incidents.  As Blanks suggests, police leadership should consider limiting the number of unnecessary and antagonistic police stops as part of a broader effort toward public safety.

It’s tempting to think that the wake of the killing of the Dallas shooting suspect that police leadership should also consider limits on technology as part of their public safety efforts.  However, instead of dwelling on the use of new technologies–which were used properly here– policymakers should take this opportunity to reduce unnecessary use-of-force incidents generally. 

As we enter the summer of Crump (or Trinton, take your pick), many Americans are unsatisfied with the two-party oligopoly that has produced the two most unpopular presidential candidates in modern memory. While some of these will nevertheless hold their noses and pick whomever they see as the “lesser evil,” others can’t fathom pulling that proverbial lever. Of these, some are “feeling the Johnson” and look forward to becoming part of what will likely be the best showing for a Libertarian Party candidate. Still others don’t find the Johnson satisfying and so, like Bill Kristol at his rolodex, are hoping for an as-yet unnanounced candidate of whatever ideological stripe.

Not to rain on anybody’s parade, but as a lawyer – or at least someone who plays a lawyer on TV – I have to ask the question of whether this is even legally possible (forget the political and financial practicalities). During the primary season, when Donald Trump was lumbering towards the GOP nomination, we heard nervous #NeverTrumpers discussing ballot-access deadlines in Texas and elsewhere.

And indeed, the Lone Star State’s deadline for an independent candidate to collect and file the requisite signatures – 79,939 for those counting at home – came and went on May 9. We’re now past seven other states’ deadlines, with a further six being hit this week. These 13 states account for 178 of the 538 electoral votes, and include red, blue, and purple states. (There are separate, generally earlier deadlines for so-called “minor” parties, but I’ll stick to analyzing the rules for independent candidates because the logistics of having a theoretical white knight “take over” an existing third party with already-qualified ballot access are even more complicated.)

Then 17 more state deadlines arrive by August 2, accounting for 168 more electoral votes. That means that we are now three weeks away from an independent candidate’s being mathematically prevented from winning an Electoral College majority – though of course at that point Twelfth Amendment scenarios are still in play.

Or does it mean that? I haven’t yet researched this deeply, but I’ve read enough to know that there are colorable legal arguments to be made that these state ballot-access laws – signature thresholds, due dates, verification procedures, etc. – violate the First Amendment right of free association and, to the extent they privilege the major parties, the Fourteenth Amendment’s Equal Protection Clause. (Interestingly, in election-law-related litigation, the Libertarian Party’s interests are sometimes aligned with the big two, and sometimes against them.) The putative independent candidate or his/her supporters would likely have standing to force federal courts to resolve such constitutional questions.

Of course, the states would argue that their ballot-access laws serve a compelling interest in orderly election administration and related concerns: there have to be procedures in place so states can prepare the ballots and prevent fraud. The Supreme Court’s ruling Anderson v. Celebrezze (1983) governs when weighing the rights of voters and candidates against such state interests.  There, the Court rejected the use of any “litmus-paper test” for separating valid from invalid restrictions. Instead, there’s a holistic balancing test – so nobody can tell you off the bat what’s legally kosher and what’s not. But regardless, the Anderson Court noted that a state’s interest in regulating presidential elections is less important because the outcome of that election “will be largely determined by voters beyond the State’s boundaries” and “the pervasive national interest in the selection of candidates for national office … is greater than any interest of an individual State.” 

As a practical matter, ballot-access challenges would involve battles-of-the-experts, with both sides relying on political scientists to explain why the balance tilts in their favor. The challengers’ experts would discuss the practical and financial hurdles associated with gathering signatures; the unusual 2016 election cycle where the major parties didn’t settle on presumptive nominees until late May/early June; and argue, for example, that a 5,000-signature requirement (not 80,000 or Florida’s 119,316) and a deadline of Sept. 1 (or Sept. 9, as the three latest states currently have it) is adequate to further the state’s interest in keeping “frivolous candidates” off the ballot while still providing members of the public an opportunity to associate with like-minded people.  (Richard Winger of Ballot Access News has done yeoman’s work in this area.)

At its core, the argument is one about fundamental fairness, so should appeal to Sandernista Democrats as much as #NeverTrump Republicans. In an election cycle where most Americans would rather vote for someone other than the nominees of the two major parties, it just might work as a legal strategy. And an argument that the ballot box rather than ballot-access rules should dictate voters’ choices could well resonate as a matter of political messaging.

All this depends on whether a worthy nominee can be found, perhaps by Better for America, an organization working to find an attractive independent candidate and enable such a campaign. I’m not saying that I’d vote for whoever emerges from this woodwork – or that I will or won’t vote for Gary Johnson, or write in someone else – but it’s an intriguing idea that’s worth exploring in this crazy political year.

Members of NATO are meeting in Warsaw. They are dragging the U.S. back into its traditional role of guaranteeing the security of Europe, even though the continent is well able to defend itself.

The North Atlantic Treaty Organization was a necessary part of Containment, preventing the Soviet Union from dominating or conquering Western Europe. But after recovering from World War II the Europeans remained dependent on America.

NATO lost its raison d’etre once the Warsaw Pact disbanded and Soviet Union collapsed. Alliance officials eventually added “out of area” activities, that is, wars of choice irrelevant to Europe’s defense (Balkans, Libya, Mideast, Afghanistan). Such conflicts have wasted lives and resources with no benefit to Europe and America.

Still, enabling ethnic cleansing in Kosovo and spawning chaos in Libya were better than returning to a quasi-Cold War with Russia. Vladimir Putin is a nasty character, but upon taking office he appeared to bear the West little animus. However, the allies did their best to change that, expanding the alliance up to Russia’s borders, lawlessly dismembering historic Russian friend Serbia, backing Georgia in 2008 after it started the shooting, and supporting a street putsch against an elected Ukrainian president friendly to Moscow.

None of that justified the Putin government’s response, but Moscow’s ambitions have been limited. He shows no interest in conquering the NATO countries which so fear him; rather, he unsettled them by treating non-members Georgia and Ukraine rather like NATO treated Russia’s Belgrade friends.

In Georgia Moscow backed separatist-minded territories whose estrangement predated Tbilisi’s independence. In Ukraine he focused his ill attention on heavily ethnic-Russian areas.

He’s done nothing to the Baltic States: the fact that Moscow could overrun them doesn’t mean it has any rational reason to do so. Putin is no Hitler or Stalin, just a garden variety thug.

Which makes Europe’s behavior all the more disappointing. For decades the allies have been cutting military outlays. Collective defense spending by NATO’s European members continued to fall last year, when they devoted an anemic 1.45 percent of GDP to the military.

The Europeans enjoy around eight times the total GDP, devote more than three times as much to military spending, and have about three times the population of Russia. Yet they are demanding that America, with a smaller economy and population, defend them.

Many of today’s difficulties stem from NATO expansion, which treated the alliance like an international social club, bringing in countries of little strategic interest and no military value to America. For instance, Montenegro has been invited to join. With a military of precisely 2080 personnel, the best that can be said of Podgorica is that it is irrelevant to most everything geopolitically.

But Beke Kiria of Georgia’s Ministry of Defense recently asked, if Montenegro, why not Tbilisi? Luke Coffey of the Heritage Foundation and Daniel Kochis of the Davis Institute recently called on the alliance to “deepen its partnership with Ukraine” and keep the door open “for potential future Ukrainian membership.”

Including Tbilisi and Kiev would be reckless and dangerous, greatly increasing the risk of confrontation with a nuclear-armed power over minimal stakes. Of course, NATO’s security guarantee is supposed to deter Moscow. However, deterrence often has failed in Europe.

Russia’s interest in securing its borders is far greater than America’s and Europe’s interest in protecting Georgia’s and Ukraine’ borders. If deterrence failed, which NATO members would support war far from home and be prepared to escalate to nuclear weapons in order to safeguard … Georgia and Ukraine?

Washington should say no new members in NATO. But that should merely be the starting point at the meeting in Warsaw for a spirited debate about the alliance’s future.

As I ask on Forbes online: “Why, seven decades after the end of World War II, is Europe still helplessly dependent on America? Washington should announce that it plans to allow the Europeans to finally take over responsibility for their own security.”

In my last post in this series, I observed that an economy’s “base” money serves as the “raw material” that commercial banks and other private-market financial intermediaries employ in “producing” deposits of various kinds that can themselves serve as means of exchange.

If they could do so profitably, these private intermediaries would, by making their substitutes more attractive than base money itself, collectively gain possession of every dollar of base money in existence. In some past monetary arrangements, most notably that of Scotland before 1845, banks came very close to achieving this ideal, thanks to the their freedom to supply their customers with circulating paper banknotes as well as with deposits, and to the fact that between them these two substitutes could serve every purpose coins might serve, and do so more conveniently than coins themselves.

All save a handful of commercial banks today are, in contrast, able to supply deposits only, so that only base money itself can serve as currency, that is, circulating money. The extent to which national money stocks have been “privatized,” in the sense of being made up mainly of private IOUs of various kinds rather than officially-supplied base money, has been correspondingly limited, as has the extent to which private money holdings have served as a source of funding for bank loans.

When banks and other private-market intermediaries acquire base money, they do so, not for the sake of holding on to it, as they might were they mere warehouses, but in order to lend or otherwise invest it. More precisely, they do so in order to lend or invest most of the base money that comes their way, while keeping some on hand for the sake of either meeting their customers’ requests for currency, or for settling accounts with other banks, as they must do at the end of each business day, if not more frequently. While banks’ own substitutes for base money may serve in place of base money for all sorts of transactions among non-banks, those substitutes won’t suffice for settling banks’ dues to one another, for every bank is anxious to grab for itself as large a share of the market for money balances as possible, while contributing as little as possible to the shares possessed by rival banks.

Bankers have also learned, through hard experience, that by accumulating the IOUs of other banks, and thereby allowing other banks to accumulate their own IOUs in turn, they expose themselves to grave risks, which risks are best avoided by taking part in regular interbank settlements. Because even the most carefully-managed banks cannot perfectly control or predict the value of their net dues at the end of any particular settlement period, all would tend to equip themselves with a modest cushion of cash reserves even if they did not have to do so for the sake of stocking their ATM’s or accommodating their customers’ over-the-counter requests for cash.

Because banks typically receive fresh inflows of reserves every day, as a result of ordinary deposits, loan repayments, or maturing securities, a responsible banker, once having set-aside a reasonable cushion of reserves, has only to see to it that the lending and investment that his or her bank engages in just suffices to employ those inflows, in order to succeed in keeping it sufficiently liquid. Greater reserve inflows, if judged likely to be persistent, will inspire increased lending or investment, while reduced ones will have the opposite effect. The bankers’ general goal is to keep funds that come the bank’s way profitably employed, while holding on to just so many reserves as are needed to accommodate fluctuations of net reserve drains around, and therefore often above, their long-run (zero) mean. More precisely, bankers’ strive to keep reserves on hand sufficient to reduce the probability of losses exceeding available reserves to a (usually modest) level, reflecting both the opportunity of holding reserves, which is to say the interest that might be earned on other assets, and the costs involved in making-up for reserve shortages, by borrowing from other banks or otherwise.

Throughout the history of banking, and despite laws that have suppressed commercial banknotes while often imposing minimum (but never maximum) reserve ratios on banks, bank reserves have generally constituted a very modest part of banks’ total assets, and therefore a modest amount compared to their their total liabilities. Indeed, bank reserves have generally been but a small fraction of banks’ readily redeemable or “demandable” liabilities. England’s early”goldsmith” banks are supposed to have held reserves equal to only a third of their demandable liabilities — a remarkably low figure, given the circumstances; at the other extreme, Scottish banks at the height of that nation’s pre-1845 “free banking” episode often managed quite well with gold or silver reserves equal to between one and two percent of their outstanding notes and demand deposits. Modern banks, even prior to the recent crisis, have generally had to keep somewhat higher reserve ratios than their pre-1845 Scottish counterparts, mainly owing to the fact, mentioned above, that they must stock their cash machines and tills with base money, instead of being able to do so using their own circulating banknotes.

Between 1997 and 2005, for instance, U.S. depository institutions’ reserves ranged, with rare exceptions, between 11 and 14 percent of their demand deposits (see figure below). Put another way, for every dollar of base money “raw material” they acquired, U.S. commercial banks were able to “manufacture” (that is, to create and administer) just under 10 dollars of demand deposits. That figure, the inverse of the banking system reserve ratio, is what’s known as the reserve-deposit “multiplier.”

Depository Institutions’ (Demand Deposit) Reserve Ratio, 1997-2005

The multiplier’s significance to monetary policy is, or used to be, straightforward: it indicated the quantity of additional bank deposits that monetary authorities could expect to see banks produce in response to any increment of new bank reserves supplied them by means of either open-market operations or direct central bank loans. If, around 2000 (when the reserve-demand deposit multiplier was about 14), the Fed wanted to see bank’s demand deposits increase by, say, $10 billion, it had only to see to it that they acquired $(10/14) billion in fresh reserves, which meant creating a somewhat larger quantity of new base dollars — the difference serving to make up for the tendency of some of any newly created bank reserves to be converted into currency. The ratio of the total amount of new money, including both currency and bank deposits, generated in response to any new increment of base money, to that increment of base money itself, is known as the “base money multiplier.”

Since the recent crisis, all sorts of nonsense has been written about the “death” of the reserve-deposit and base-money multipliers, and even (in some cases) about how we ought to be glad to say “good riddance” to it. I say “nonsense” because, first of all, the multipliers in question, being mere quotients arrived at using values that are themselves certainly very much alive cannot themselves have “died,” and because the working of these multipliers does not, as some authorities suppose, depend on the particular operating procedures central banks employ. Finally, although it’s true that, until the recent crisis, economists were inclined, with good reason, to take the stability of the reserve-deposit and base-money multipliers for granted, it doesn’t follow that they (or good ones, at least) ever regarded these values as constants, as opposed to variables the values of which depended on various determinants which were themselves capable of changing.

What certainly has happened since the crisis is, not that the reserve-deposit and base-money multipliers have died, but that their determinants have changed enough to cause them to plummet. U.S. bank reserves, for example, have (as seen in the next picture) gone from being equal to a bit more than a tenth of demand deposits to being about twice the value of such deposits! The base-money (M2) multiplier, shown further below, has, at the same time, fallen to below half its pre-crisis level, from about 8 to 3.5 or so (not long ago it was less than 3).

The Reserve Demand-Deposit Multiplier Since 2005 The Base-Money M2 Multiplier since 2005

These are remarkable changes, to be sure. But they are hardly inexplicable. Banks’ willingness to accumulate reserves depends, as I’ve already noted, on the cost of holding reserves, which itself depends on the interest yield of reserves compared to that of other assets banks might hold instead. Before the crisis, bank reserves earned no interest at all. On the other hand, banks had all sorts of ways in which to employ funds profitably, especially by lending to businesses both big and small. Consequently, banks held only modest reserves, and bank reserve and base-money multipliers were correspondingly large.

The crisis brought with it several changes that are more than capable of accounting for the multipliers’ collapse. The recession itself has, first of all, resulted in a general reduction in both nominal and real interest rates on loans and securities, to the point where some Treasury securities are now earning negative inflation-adjusted returns. Regulators have in turn responded to the crisis by cracking-down on all sorts of bank lending, making it costly, if not impossible, for banks, and smaller banks especially, to make many of the higher-return loans, including small business loans, they would have been able to make, and to make profitably, before the crisis. (More here.) U.S. bank regulators have also begun to enforce Basel III’s new “Liquidity Coverage Ratio” rules, compelling banks to increase the ratio of liquid assets, meaning reserves and Treasury securities, to less-liquid ones on their balance sheets. Finally, since October 2008, the Fed has been paying interest on bank reserves, at rates generally exceeding the yield on Treasury securities, thereby giving them reason to favor cash reserves over government securities for all their liquidity needs.

Whatever their cause, today’s very low money multiplier values mean that commercial banks have ceased to contribute as they once did to the productive employment of scarce savings. Instead, those savings have been shunted to the Fed, and to other central banks, which use them to purchase government securities, and also for other purposes, but never, with rare exceptions (and with good reason), to fund potentially productive enterprises. Although discussions of monetary policy since the crisis have mainly had to do with the quantity of money, and central banks’ efforts to expand that quantity so as to stimulate spending, the effects of the crisis, and of governments’ response to it, on the quality of money, and especially on the investments its holders have been funding, deserve at least as much attention.

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