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Republicans have promised major tax reform, and Cato has suggestions for policymakers. In today’s Wall Street Journal op-ed, Chris Edwards and I argue for the elimination of the Low Income Housing Tax Credit (LIHTC). For those unfamiliar with the program, LIHTC is a corporate tax loophole that endeavors to create low-income housing. Unfortunately, research suggests the program has substantial difficulty doing that.

In the article, we describe a few of LIHTC’s problems: LIHTC mostly benefits developers and intermediaries, crowds out private market housing development, and receives minimal oversight. The latter issue leads to abuse.

We also point out that there are more effective ways to increase the supply of low-cost housing. Still, LIHTC’s advocates stubbornly overlook its failings.

Although willful blindness might be a natural posture for interest groups, it is a bad look for policymakers. Legislators should use tax reform as an opportunity to reduce loopholes and corporate cronyism, while reducing rates. 

Read the details here

By a vote of 89-8, the Senate yesterday passed a $700 billion defense budget. That isn’t particularly newsworthy. As the New York Times reported, “The vote marked the 56th consecutive year that Congress has passed the defense policy bill—a point of personal pride for Senator John McCain, the Arizona Republican who chairs the Senate Armed Services Committee.”

The important story is that Sen. McCain et al. have no plan for actually raising the necessary funds, either through more taxes, cuts elsewhere, or more debt. Previous budget fights played by the rules—compromising to abide by the bipartisan Budget Control Act caps on discretionary spending. Willfully ignoring the BCA elephant in the room, as the Senate just did, runs the risk of a government shutdown and/or sequestration.

The Trump administration opened the Pentagon funding floodgates when it debuted a $668 billion budget request earlier this year. Trump made good on his promise to rebuild the military by cutting deeply from non-defense accounts, thus creating the illusion of fiscal discipline. But he also called for increasing the BCA defense caps.

At the time, Sen. John McCain declared Trump’s budget “dead on arrival” because it cut too deeply from these other programs. He also declared the Defense Department increase to be insufficient. It was never clear how McCain would square that circle.

It still isn’t. It appears that he expects someone else to solve the BCA problem, or that it will magically disappear.

But he isn’t alone. Many in Congress took Trump’s budget as a signal to spend even more on the military. Until now, Congress used its favorite loophole—the cap-exempt Overseas Contingency Operations account—to offset perceived funding shortfalls at the Pentagon. Congressional abuse of OCO was predictable but shortsighted. It allowed Congress to maintain the fiction that it was adhering to the BCA caps without actually doing so.

Last night’s vote dispensed with the charade. In the just-passed NDAA, funding for the base budget exceeds the $549 billion cap by $91 billion and puts $60 billion in OCO. The House version passed last month also put a majority of its plus-up in base funding, exceeding the BCA cap by $72.5 billion. The Trump administration’s budget seems almost sane in comparison by asking for $54 billion over the cap—which, to be clear, is unnecessary in order to keep Americans safe and maintain the U.S. military as the finest fighting force in the world.

89 Senators, not merely McCain and a handful of outspoken hawks, apparently believe that the Pentagon needs a 16 percent increase over the BCA caps in order to function next year alone. Plus another $60 billion for OCO. But no senator knows where those extra billions will come from.

The BCA was enacted in 2011 to impose some fiscal discipline by providing an upper bound for defense and non-defense discretionary spending. Since then, members of Congress found ways to either budget under or raise (2013, 2015) the caps. The one time they failed to avoid sequestration—the October 2013 government shutdown—lasted only 16 days.

As much as members of Congress bemoan the budget caps and fear sequestration for its damaging effects, you would think they would take the risk of a government shutdown more seriously. Senator Tom Cotton offered the only amendment to the NDAA that would have altered the Budget Control Act for this fiscal year. Rather than trying to strike a bipartisan deal to increase the caps or repeal the legislation entirely, Cotton sought to render the BCA toothless by partially repealing the automatic sequestration mechanism.

Cotton’s amendment was a political non-starter because it failed to reassure Democrats worried about caps on spending for non-defense programs. Even if it miraculously passed in the Senate, the amendment would have faced a tough fight from some House members while in conference. Predictably, Cotton’s proposal, along with several other controversial amendments, was never granted a vote.

Congress can’t afford to ignore the political and fiscal reality forever. A military budget that exceeds the BCA caps, and offers no plan for undoing those caps, should be—as Sen. McCain said of President Trump’s first budget submission— “dead on arrival.”

* Thanks to Cato research associate Caroline Dorminey for her assistance.

Public pensions are complicated beasts. They represent the aggregation of promises made to public employees—both current and former—to pay them benefits from their retirement until their demise. They sum to a growing—albeit somewhat imprecise—stream of payments that presently extends to close to the end of the current century. The predilection of politicians to make promises that won’t come due until long after they’ve left office has resulted in many states with promised benefits far in excess of the money set aside to meet them.    Many state pension authorities managing underfunded pensions—often nudged by their legislatures—have aggressively invested their pension assets in an attempt to achieve supra-normal returns and reduce the shortfall, which would be infinitely preferable to them than increasing taxes, reducing benefits, or trimming other government spending.    But such a strategy amounts to a sucker’s game. On average, putting money in hedge funds—or practically any actively-managed stock fund for that matter—has returned less, after fees, than investing in a diversified stock/bond portfolio and does little to limit the downside risk should a sustained bear market develop, let alone another fiscal crisis.    For this reason, more prudent states have made an earnest attempt to reduce their management costs and risk by embracing passive investing, whereby the bonds and stocks owned consist of a broad-based index of the entire market. In essence, portfolio managers have no real decisions to make when they invest in a market index, so the management costs are minimal.    While a strategy that eschews actively selecting a portfolio may offer the highest long-term returns with the least risk, some object to such a strategy for a government pension. Holding stock of every single member of the S&P 500—the most common index used in passively-managed index funds—entails investing in companies and industries that some find objectionable. Activists have objected to companies that they perceive as being insufficiently welcoming to gay and lesbian workers (Cracker Barrel), or who pay a portion of their workforce below what they deem a livable wage (Walmart), or whose senior management has committed personal peccadillos (Abercrombie & Fitch), or treated women employees poorly (Tesla), or breached one of a number of other myriad precepts put forth by such groups. These days, some non-profits perceive any active participation with the current Trump Administration as being objectionable.   Perhaps the most objectionable sorts of investments for liberal activists these days consist of companies that extract and sell fossil fuels. Many perceive climate change, abetted by the burning of fossil fuels, as an existential threat to the planet and fear the actions taken by the governments across the world—and especially the United States—to be insufficient to effect a change.   The frustration that many feel about climate change inaction by the federal government has led them to pursue change at the state and local level. This political pressure has led to 34 states creating their own climate action plan, and 29 states now mandate that utilities increase the proportion of renewable energy they purchase. California has gone even further and has imposed strict new limits on emissions from new automobiles.    Another way that activists have pushed state and local governments to fight climate change has been to push for government pensions to eschew investments in companies that extract fossil fuels. Such a policy can be complicated since most index funds merely hold a basket of the stocks of companies in the exchange, these become out of bounds. Such a policy asks an important question: Can a pension fund avoid fossil fuel investments or other objectionable investments and still earn a comparable rate of return with minimal risk, as in an ordinary index fund?    The answer is no.   Past Performance Is No Guarantee of Future Returns    These days there are are a number of variants of “socially responsible” funds to help people avoid investing in companies whose business model, industry, or ethical practices they find disagreeable. Some of these funds are also passively managed and come with relatively low fees. For instance, in 2015 the S&P 500 created a fossil-fuel-free index, and investors can effectively invest in it by purchasing a “SPideR” ETF. Vanguard—considered to be the leader in passively-managed funds—offers the Vanguard FTSE Social Index Fund.   Some environmental activists have observed that broad-based, environmentally responsible stock funds that excluded shares of companies that extract fossil fuels outperformed the broader stock market index over the last three years. For instance, Vanguard’s Social Index Fund outperformed its broad market index both in the past 12 months and the past three years. Vanguard’s U.S. fossil-free index, created last year, has also outperformed the broader market since its inception.    These outcomes have led some to suggest that if state pension plans had invested in such vehicles the last few years they could have both higher returns as well as the moral high ground—a win-win situation.    For instance, in 2016 the research firm Corporate Knights concluded that if the New York State Common Retirement Fund, the third largest state fund in the country, had moved away from investing in fossil fuels it would have actually boosted its returns the previous three years by $5.3 billion. It presented these results as an example of one way that states could reduce pension funding shortfalls while helping the environment.    Are public pension managers doing a disservice to pensioners and taxpayers by failing to adapt to a changing economy by investing in companies that are polluting the planet?    In a word, no. Investing in an environmentally or ethically conscious way will invariably impose some sort of cost on an investor. While an individual investor may be willing to receive a lower return to assuage his conscience, asking a state’s current and future retirees—or the taxpayers who support them—to do the same in a world of underfunded pensions is a dangerous precept. And to pretend doing such a thing is costless is misleading.    Narrowing the scope of the stock held in a portfolio necessarily increases its volatility. Holding fewer stocks and industries results in a market basket that is more susceptible to market fluctuations. It is possible that the narrower portfolio works in favor of the investor in certain circumstances, but modern portfolio theory suggests that the probabilities are that it will, in fact, underperform the broader market index.   The rationale against such arithmetic is that such a fund excludes companies that produce an asset that is in decline, leaving it with what ought to be, at first blush, a superior-performing mix of companies. However, there’s no reason to believe this is true. For starters, the fortunes of an individual company are not wholly tied up in the fortunes of the larger industry.    For instance, the tech sector has grown exponentially in the 21st century, and companies such as Facebook, Google, and Apple have made hundreds of billions of dollars for their investors. However, investors in Microsoft, which had the highest market cap in the S&P 500 in 1999, have lost money by holding onto its stock.    In the U.S. smoking has been on a long decline both in the U.S. and elsewhere for the last twenty years, and there are only about half as many smokers in the country today as there were at the turn of the century. A similar trend has occurred in most developed countries.    A world where the popularity of its main product is steadily declining would presumably spell disaster for any company, but that has not been the case at all for Altria, the maker of the immensely popular Marlboro cigarettes. Its profits have grown throughout the 21st century, as has its stock price.    In 2000, The California Public Employee Retirement System (Calpers), the largest public pension fund in America divested its holdings in the tobacco industry, citing moral concerns about supporting a product known to be deadly. A number of other pensions followed suit. With mounting medical evidence of the dangers of tobacco and public consumption declining, it seemed like a financially sound decision as well. As a result Calpers have missed out on as much as $3 billion in gains.   Betting against fossil fuels is no less counterintuitive. ExxonMobil, by far the largest fossil fuel company in the U.S., has a stock price that moves closely with the price of oil, so any success in reducing demand for oil would at first blush harm their bottom line and stock price. However, it has also made a strong play into natural gas—which emits much less carbon dioxide when burned—and it has been increasing its investments in algae biofuels of late. Thus, a political environment less friendly to carbon emissions need not harm its stock price.    It also has a reputation of being an extremely well-managed firm that manages to keep its costs under control under all circumstances, a feat that has earned it the admiration of its industry rivals.    What’s more, the notion that the fortunes—and stock price—of ExxonMobil and other firms in its industry will collectively fall if and when pro-carbon policies and technological changes take off assumes a modicum of market myopia. If there were a collective perspective that carbon taxes are likely in the next five to ten years, the market would have already incorporated such information into its stock price. Given that its stock price is down over 20 percent since its peak in early 2014 suggests that this may indeed have occurred to some extent—which means that Exxonmobil’s fortunes are—as before—subject to its management performance as well as the fortunes of the broader energy markets.    It isn’t Easy Being a Green Index   Besides the impossibility of saying with any certainty that a carbon-free portfolio will outperform a broader internet index, the cost of actually constructing such an index results in management fees significantly higher than a simple index fund that attempts to mimic the behavior of the broader market. A market index can be constructed via a simple computer formula, and management fees tend to be quite low. The Vanguard 500 Index Fund, for instance, has an expense ratio of just .14 percent, compared to the average actively managed fund ratio of 1.25 percent.   However, a fund governed by certain moral or environmental principles requires a constant examination of the companies in the index and their behavior, which unavoidably results in a higher expense ratio. The Vanguard FTSE Social Index Fund has a management fee of .22 percent—lower than nearly all actively- managed funds but still 50 percent higher than Vanguard’s 500 index fund. The S&P 500 Fossil Free SPideR has an expense ratio of .4 percent—thrice that of the regular Vanguard Index Fund.    In its 2015 report on the problems of the Fiduciary rule, the Obama White House embraced the use of index funds for long-term investors because of the ultimate advantage of low expense ratios.    Higher management fees ultimately translate into lower returns and the performance of the Vanguard Social Index bears that out. While it did outperform the broader market index from 2012-2015, a period that coincided with a steep decline in oil and coal prices, the five and ten year comparisons show the broader index with higher returns, consistent with theory.    The idea that a state portfolio manage can improve his investment performance by assuming that the future will entail a substantial reduction in carbon, and that this environment will pull down the fortunes of ExxonMobil and other oil producers is facile. It may very well occur, but to assert that with any degree of certainty borders on hubris.    The Responsibilities of a Public Pension Fund Manager   The fiduciary responsibility of a public pension manager ought to be to pursue the maximum long-term return while minimizing the long-term risk. The fact that a government pension is, in a way, eternal introduces a modicum of complications and freedoms into that equation, but it doesn’t change that goal.    A public pension fund’s extended time horizon can allow the fund manager to pursue relatively illiquid investments that may not have a payoff for decades down the road. The tradeoff for that illiquidity should be, on average, a higher return.    Pension funds—as well as insurance companies and other entities with long-term liabilities—strive to match their long-term liabilities with similarly-lived assets, which serves to further reduce their exposure to risk. This preference for long-lived assets is one reason that the U.S. Treasury has begun considering the sale of fifty-year bonds. However, allowing political exigencies to determine a public pension fund’s portfolio complicates such decisions.    There is one crucial difference between a privately-managed hedge fund and a public pension fund. A private investment firm that performs poorly will ultimately lose clients and money if it fails to perform.    A state-run pension fund has no competition, and the consequences of poor performance are usually less dire for such investment managers. For this reason, the danger of political activism, catering to special interests, and making financial decisions based on rationale that go beyond the best interests of the plan participants is exceedingly problematic. That a government can potentially supplement a financially deficient plan with tax dollars may be true—and something the state of Illinois will soon have to contemplate—but it should not be an invitation to use a public pension to carry out a political agenda in a way that exacerbates volatility and reduces potential returns.   

In school choice circles, a lot of people don’t much care for actor Matt Damon, at least his education politics. (I’m not sure where they stand on The Bourne Identity or Stuck on You.) Damon—son of education professor Nancy Carlsson-Paige—has been a vocal advocate for government schooling, and is the narrator of the documentary Backpack Full of Cash, which you might recall is the film those outraged over Andrew Coulson’s School Inc. say PBS must show to balance out perspectives. But here’s the thing: Damon sends his own kids to private school!

I am supposed to be outraged by the apparent hypocrisy, but I don’t think Damon’s selection falls under that heading. Damon and many progressives love public schooling but don’t like what it has become, especially under the standards-and-testing tidal wave of No Child Left Behind, and the only somewhat less inundating Every Student Succeeds Act. They don’t care for the reduction of education to basically a standardized test score. As Damon, who attended progressive public schools in Cambridge, MA, has said, “I pay for a private education and I’m trying to get the one that most matches the public education that I had, but that kind of progressive education no longer exists in the public system. It’s unfair.”

No doubt lots of people—choice fans and detractors alike—who want education to be more than a score sympathize with Damon’s frustration. The problem is that Damon champions exactly the wrong system to get sustainable change. By its nature, public schooling, if not doomed to reduction to simple metrics, is in constant, near-death peril of it.

When people can’t vote with their feet—which is very tough to do in a system in which where you go to school depends on where you can afford a home—their only hope to make schools do what they want is government action. But government is controlled by politics, which is itself driven by soundbites. And what is ideal for a soundbite on whether schools are “working”? Why test scores, of course! “The scores are up,” or “the scores are down,” or “25 percent of the kids are proficient,” and so on.

The key to escaping such peril is not hoping that nick-of-time, death-defying, Jason Bourne-esque political miracles will constantly save us, but basing education in freedom. Attach cash to students—via “backpacks,” if you must—give educators autonomy to teach and run schools as they see fit, and ground accountability in educators providing schools to which parents willingly entrust those backpack-bearing kids.

Of course, there is much more that is problematic about government education than just simplistic standardization. Far more deeply, if it is “unfair” that Damon can’t find the progressive schools he wants in the public system, it also unfair that many religious people—who by law cannot get the education they want in public schools—or Mexican Americans, or countless other people are also unable to access the education they want. Thankfully, the key to getting fairness for them is the same one to getting fairness for Damon: school choice.

Don’t blame Matt Damon for his choices. Blame the choice-killing system he defends.

The Fed’s persistent failure to reach its 2 percent inflation target ever since that target was first made explicit in 2012 has elicited a great deal of commentary in the last couple months, from economists, journalists, and some Fed officials themselves. And well it ought to, for whatever one may think of the Fed’s choice of target, the fact that the Fed has been persistently falling short of it suggests that something is awry, if not with U.S. monetary policy, then perhaps with the U.S. economy more generally.

Although plenty of explanations have been offered for the inflation shortfall, none of them is even close to being satisfactory. Bias or “noise” in the inflation numbers? Bias would explain things if the Fed were targeting some supposedly “ideal” measure of inflation. But it isn’t: it’s targeting the rate of change of the Personal Consumption Expenditure (PCE) index, and so long as that measure of inflation falls below the Fed’s target, the Fed isn’t “really” hitting its self-assigned target, even if the “real” inflation rate is higher than the PCE index suggests. As for noise, it should make the Fed just as likely to overshoot as to undershoot its target. Unemployment still isn’t quite low enough? Despite what some foolish Phillips-curve reasoning suggests, putting more people to work doesn’t make things more expensive. The public’s long-run inflation expectations are down? No doubt. But surely that’s a result, rather than a cause, of the persistently low values of actual (or measured) inflation?

Aggregate Demand is Part of the Story (But Only Part)

Of existing explanations, the least question-begging emphasize the fact that total spending, or its statistical counterparts such as nominal GDP, just hasn’t been growing rapidly enough to achieve the Fed’s inflation target. As Mickey Levy puts it in a paper he gave at last week’s SOMC meeting,

Obviously, if nominal GDP had accelerated in response to the Fed’s aggressive easing as planned, both wages and inflation would have risen faster, and inflationary expectations would be higher.

Scott Sumner has made essentially the same point: “The only way to have low inflation despite low RGDP growth,” he observes,

is if the Fed has such a tight monetary policy that NGDP growth remains slow. And that’s exactly what they’ve done since 2009. If you produce 4% NGDP growth year after year after year [when the norm has been substantially higher] then why be surprised that inflation remains low?

In fact, as David Beckworth pointed out recently, using the chart reproduced below, since the third quarter of 2009 NGDP has grown at an average rate of just 3.4 percent, compared to 5.4 percent between 1990 and 2007 and 5.7 percent for the full “Great Moderation” period of 1985-2007:

According to Beckworth the decline reflects “a monetary regime change” consisting in part of the Fed’s having failed to allow spending to “bounce back at a higher growth rate during the recovery” as it had done in past recessions.

But while explanations that attribute the Fed’s failure to reach its inflation target to slow NGDP growth have the distinct virtue of taking the equation of exchange (MV = Py) seriously (which is more than can be said for some of the others), they still beg the question: why hasn’t the Fed achieved higher NGDP growth?

To observe that it hasn’t done so because it hasn’t been directly targeting NGDP won’t do. After all, a 2 percent inflation target implicitly calls for whatever NGDP growth rate it takes to achieve 2 percent inflation. Arguments to the effect that the Fed has failed to achieve 2 percent inflation because it has failed to achieve 5 percent NGDP growth (or some such number) instead of 3.4 percent growth do no more than state the original question in slightly modified form.

The Regime Change that Matters

In fingering “regime change” Beckworth gets closer to the truth. Only the regime change that really matters isn’t the shift away from level to rate targeting that he emphasizes. It’s the switch, in October 2008, from the Fed’s conventional monetary control arrangements, with a market-based fed funds target achieved with the help of  open-market operations, to its current IOER-based (leaky) “floor system” — in which the fed funds rate is moved up or down by raising the rate of interest the Fed pays on banks’ excess reserves, either alone or together with the rate it offers in its overnight reverse repurchase (ON-RRP) agreements.

What does the Fed’s switch to a floor system have to do with the low inflation and NGDP numbers we’ve been seeing ever since? Bear with me, and I’ll explain.

To do so I must first explain in a bit more detail how a floor system works. In so doing, I’m going to abstract from the role of ON-RRPs, for those aren’t actually part of an orthodox floor system, in which the IOER rate alone serves as the central bank’s policy rate. In the U.S., the situation is complicated by the fact that various GSEs keep balances at the Fed, but aren’t eligible for interest on those balances. Consequently banks and those GSEs can mutually profit by having the GSEs lend their excess Fed balances to the banks for a rate somewhere between the IOER rate and zero. To partially address this “leak” in what would otherwise have been a solid IOER-based federal funds rate floor, the Fed offered the GSEs and some other non-bank financial institutions the opportunity undertake reverse repos with it, thereby establishing a solid ON-RRP subfloor below the leaky IOER-rate floor. This arrangement serves to limit the extent to which the effective fed funds can fall below the IOER, although it still allows it to vary between that rate and the ON-RRP rate, as can be seen in the chart below. Those two rate therefore serve as upper and lower “bounds” of the Federal Reserve’s post-2008 fed funds rate target “range.”

A Floor System Calls for Substantial Excess Reserves

Abstracting, then, from the “leakiness” of the Fed’s IOER-rate floor, and the presence of an ON-RRP rate sub-floor, the basic idea of a floor system is that the interest rate on excess reserves displaces the fed funds rate as the key monetary policy rate. That’s because, in an ideal (leak-free) floor system, banks would neither lend nor borrow federal funds, whether from other banks or from non-bank financial institutions. Instead, they find it more profitable to hold excess reserves. A necessary and sufficient condition for this is that the IOER rate be sufficiently high relative to equivalent private-market rates of interest. In that case, banks will find it more attractive to hold excess reserves than to lend in private overnight markets, including the fed funds market. So long as they accumulate sufficient excess reserves, they can also protect themselves against any need to borrow funds overnight to meet either their net settlement needs or their legal reserve requirements. Of course the banks will find it especially easy to accumulate excess reserves if the Federal Reserves creates large quantities of fresh reserves, as the Fed did through its various rounds of quantitative easing. Still in the long run what matters most for the existence of a floor system is, not that any particular nominal quantity of reserves should be available, but that banks should have a robust demand for excess reserves, as they will only so long as such reserves yield a sufficiently attractive return.

In an orthodox floor system, such as is established when these conditions hold, the market for bank reserves functions as in the diagram below, taken from Marvin Goodfriend’s locus classicus on the subject:

As the diagram shows, so long as banks hold sufficient excess reserves, monetary policy becomes a matter of making desired changes to the IOER rate alone. Through arbitrage those changes will influence other interest rates. Changes in the actual stock of bank reserves, on the other hand, are neither necessary nor sufficient to influence the general state of interest rates. Instead, banks holdings of excess reserves increase and decline in lock-step with shifts in the supply of total reserves, leaving not only interest rates but lending, spending, and the inflation rate largely unchanged.

Whence the Deflationary Bias?

You’re still wondering what all this has to do with the Fed’s persistent undershooting of inflation. Trust me, I’m getting there!

It might appear that the switch from a conventional to a floor system should make no difference in the Fed’s ability to pursue whatever policy it wishes. After all, all that has changed is the mechanism by which the Fed pursues its policy targets, rather than its ability to set and pursue those targets. Whereas before, to loosen (or tighten) policy, the Fed may have had to increase (or reduce) the available supply of bank reserves, now it only has to lower (or increase) the IOER rate. So, why shouldn’t it be able to lower that rate enough to get inflation to 2 percent, or whatever other figure it prefers?

The answer is that, while in principle it could achieve a higher rate of inflation by lowering its IOER rate sufficiently (or, in the actual case, by lowering both its IOER and ON-RRP rates sufficiently), it cannot generally achieve any inflation rate that it wants while also maintaining a floor system. On the contrary: as I’ll explain in a moment, although the masterminds behind the Fed’s turn to a floor system don’t seem to have realized it, maintaining such a system necessarily introduces a deflationary bias in monetary policy.

To see why, recall that, to maintain a floor system, the IOER rate has to be high relative to corresponding market rates. Otherwise banks won’t be inclined to accumulate and sit on substantial excess reserves. Instead, they’ll increase their lending in wholesale and other markets that offer them better risk-adjusted returns. To serve as a floor (and forgetting about GSE-based leaks), the IOER rate must be an above-market rate.

That the Fed’s IOER rate has in fact been kept above corresponding market rates is easily shown by comparing it to its closest private-market counterparts.  Of those the closest is probably the Depository Trust & Clearing Corporation’s GCF (General Collateral Finance) U.S. Treasury and Agency-Based MBS Repo rate index. The next figure shows how the IOER rate has generally been kept above, and often well above, that comparable market rate:

A comparison of the IOER rate and yields on various shorter-term Treasury securities tells a similar story:

As can be seen, whenever market rates have tended to increase, the Fed has made a point of having its IOER rate keep up with those changes. It has done so, moreover, despite the fact that it has persistently fallen short of its inflation target. Clearly the rate adjustments cannot be justified by appeal to the Fed’s desire to stick to that target. They can, on the other hand, be accounted for as inevitable consequences of the Fed’s determination to keep its shiny new (albeit leaky) floor system going.

A Wicksellian Perspective

I’m still not quite done, for I’ve yet to explain in the clearest way possible why a floor system introduces a low inflation bias in monetary policy. Doing that requires that I appeal to Knut Wicksell’s understanding of how an economy’s rate of inflation depends on the relation between its central bank’s chosen policy rate and the economy’s corresponding “natural” rate of interest.  According to Wicksell, a policy rate set below its “natural” level will tend to promote inflation, while one set above its natural level will tend to promote deflation.

One can quibble with the details of Wicksell’s argument, as I myself have done by noting that a nation’s inflation rate depends, not just on its central bank’s monetary policy stance, but on the state of economic productivity, among other things. (For this reason I think it better to speak of an above-natural policy rate inevitably leading, not necessarily to deflation or disinflation, but to an excessively low rate of NGDP growth.) The point  remains that a central bank that tends to set its policy rate too high will also tend to generate less inflation than it wants.

To see that this is exactly what will happen if a central bank insists on preserving a floor system, imagine that we are back in the pre-2008 monetary control regime, with no IOER and a market-determined fed funds rate. Assume as well that the rate is both on target and at it’s “natural” level — that is, the Fed’s target is consistent with a modest (if not zero) rate of inflation.

Now suppose the Fed decides to switch to a floor system.  To do that, it first has to set an IOER rate at least as high as the established fed funds rate, and therefore either at or above the natural funds rate, so as to encourage banks to accumulate excess reserves, in anticipation of boosting the supply of reserves. These steps are needed to get the fed funds market onto the flat portion of the reserve demand schedule shown in Goodfriend’s diagram above. Thenceforth, to stay in the new regime, as natural rates increase the Fed must increase the IOER as well. While a below-natural IOER rate will undermine the floor system by causing banks to shed their excess reserves, an above-natural IOER rate won’t. A permanent floor system is, for this reason, a recipe for monetary over-tightening.

Obviously, if the Fed decides to introduce a floor system at a time when policy is already tight, so that the going fed funds rate is already an above-natural rate, the switch will tend to result in additional over-tightening, since it must involve introducing an IOER rate that’s at least as high as the already excessively high established fed funds rate. Something like this appears, in retrospect, to be what happened in October 2008.

A Missing Piece

My explanation for the Fed’s persistent tendency to undershoot its inflation target is still not quite complete. For it rests on the underlying premise that the Fed is determined, by hook or by crook, to maintain a floor system of monetary control. What proof have I of that?

It is a good question. My answer is, first of all, that the proof lies at least partly in the pudding. For, as I’ve stated, were it not for its determination to keep a floor system in place, it would be difficult to explain the Fed’s insistence upon raising its policy rate despite falling short of its inflation target. Further evidence consists of the Fed’s present normalization plan, which calls for eventual increases in the federal funds rate by close to 175 basis points. So far as Fed officials have indicated, that increase is to be achieved entirely by means of equivalent increases in the IOER rate. In short, if the Fed has any intention of ever returning to its pre-IOER operating system, or to a true “corridor” system in which the IOER rate serves not as an upper but as a lower bound for the fed funds rate, it has given no indication of it. On the contrary: having spoken to several Fed insiders on the matter, I’m assured that the Fed has every intention of sticking to the present system.

Why it should wish to do so is a different matter. I’m pretty sure that part of the reason is that Fed authorities are themselves unaware of the over-tightening bias present in a floor system. They applaud, on the other hand, the fact that a floor system allows them to separately manage interest rates on the one hand and the state of bank liquidity on the other. In recent Congressional testimony,I likened the Fed’s gain in flexibility in a floor system — its being able to set its policy rate however it likes, while altering the supply of bank reserves however it likes — to the gain an automobile owner might secure, in being able to turn the wheel as much as she likes, while also stepping on the gas peddle however much she likes, by shifting from Drive to Neutral. The problem, of course, is that, while the driver seems to have more options, the car no longer gets her where she wants to go.

The Solution

What do you suppose it is? The Fed has to abandon its misguided floor system, the sooner the better, by moving to reduce its IOER rate, instead of increasing it — as it has been planning to do. As the rate falls from above market to below market, the money multiplier will revive; and that revival will, believe you me, prove more than adequate to boost spending enough to get the PCE inflation rate to 2 percent — and beyond. To keep it from getting too high, the Fed will have to plan on more aggressive balance sheet reductions or resort to its Term Deposit Facility or both. All this is difficult, but not impossible. The Fed can certainly do it if it tries. What it can’t do is stick to the present floor system and reliably hit its inflation target.

[Cross-posted from]

The new Cato Institute 2017 Financial Regulation national survey of 2,000 U.S. adults released today finds that Americans distrust government financial regulators as much as they distrust Wall Street. Nearly half (48%) have “hardly any confidence” in either. 

Click here for full survey report

Americans have a love-hate relationship with regulators. Most believe regulators are ineffective, selfish, and biased:

  • 74% of Americans believe regulations often fail to have their intended effect.
  • 75% believe government financial regulators care more about their own jobs and ambitions than about the well-being of Americans.
  • 80% think regulators allow political biases to impact their judgment.

But most also believe regulation can serve some important functions:

  • 59% believe regulations, at least in the past, have produced positive benefits.
  • 56% say regulations can help make businesses more responsive to people’s needs.

However, Americans do not think that regulators help banks make better business decisions (74%) or better decisions about how much risk to take (68%). Instead, Americans want regulators to focus on preventing banks and financial institutions from committing fraud (65%) and ensuring banks and financial institutions fulfill their obligations to customers (56%).

Americans Are Wary of Wall Street, But Believe It Is Essential

Nearly a decade after the 2008 financial crisis, Americans remain wary of Wall Street.

  • 77% believe bankers would harm consumers if they thought they could make a lot of money doing so and get away with it.
  • 64% think Wall Street bankers “get paid huge amounts of money” for “essentially tricking people.”
  • Nearly half (49%) of Americans worry that corruption in the industry is “widespread” rather than limited to a few institutions.

At the same time, however, most Americans believe Wall Street serves an essential function in our economy.

  • 64% believe Wall Street is “essential” because it provides the money businesses need to create jobs and develop new products.
  • 59% believe Wall Street and financial institutions are important for helping develop life-saving technologies in medicine.
  • 53% believe Wall Street is important for helping develop safety equipment in cars.

Few Americans Want “More” Financial Regulations—They Want the Right Kinds of Regulations, Properly Enforced

Polls routinely find that a plurality or majority of Americans want more oversight of Wall Street banks and financial institutions. This survey is no different. A plurality (41%) of Americans think more oversight of the financial industry is needed. However, only 18% think the problem with federal oversight of the banking industry is that there are “too few” rules on Wall Street. Instead, 63% say the government either fails to “properly enforce existing rules” (40%) or enacts the “wrong kinds” of regulations on big banks (23%).

Most Are Skeptical Dodd-Frank Will Prevent Future Financial Crises

Will Dodd-Frank financial reforms work? Nearly three-fourths (72%) of Americans don’t believe that new regulations on Wall Street and the financial industry passed since the 2008 financial crisis will make future crises less likely. Just over a quarter (26%) believe such regulations will make future financial downturns less likely.

Americans Oppose Too Big to Fail

Americans reject the idea that some banks are so important to the U.S. economy that they should receive taxpayer dollars when facing bankruptcy. Instead, 65% say that “any bank and financial institution” should be allowed to fail if it can no longer meet its obligations. A third (32%), however, believe that some banks are too important to the U.S. financial system to be allowed to fail.

  • Part of the reason most oppose the “Too Big to Fail” model may be that 60% believe that banks would make better financial decisions if they were convinced government would let them go out of business.
  • Clinton voters (41%) are about twice as likely as Trump voters (20%) to believe some banks are too integral to the U.S. economy to fail. Libertarians are most opposed (81%) to bailing out banks. 

Despite Distrust of Wall Street, Americans Like Their Own Banks and Financial Institutions

  • 90% are satisfied with their personal bank; 76% believe their bank has given them good information about the rates and risks associated with their account.
  • 87% are satisfied with their credit card issuer; 81% believe their credit card issuer has given them good information about the rates, fees, and risks associated with their card.
  • 83% are satisfied with their mortgage lender.
  • Of those who have used payday or installment lenders in the past year, 63% believe the lender gave them good information about the fees and risks associated with the loan.[1]

Americans Want Regulators to Prioritize Fraud Protection, Ensure Banks Keep Promises

Financial regulators have a variety of tasks and goals. The public, however, believes that regulation should serve two primary functions: to protect consumers from fraud (65%) and to ensure banks fulfill obligations to their account holders (56%). Other initiatives such as restricting access to risky financial products (13%) is a priority among far fewer people.

Democrats and Republicans Want a Bipartisan Commission to Run CFPB, Divided on CFPB Independence 

  • Most support changing the structure of the Consumer Financial Protection Bureau (CFPB), a new federal agency created by Dodd-Frank in 2011. Nearly two-thirds (63%) of Americans think the CFPB should be run by a bipartisan commission of Democrats and Republicans, rather than by a single director. Support is post-partisan with 67% of Democrats and 64% of Republicans in favor of a bipartisan commission leading the agency.
  • A majority (54%) of Americans think that Congress should not set the CFPB’s budget and should only have limited oversight of the agency. Given that only 7% of the country has confidence in Congress, these numbers are not surprising. A majority of Democrats (58%) support keeping the CFPB independent while a plurality of Republicans (50%) say Congress should closely oversee the new agency and set its budget.
  • Few Americans (26%) believe the CFPB has achieved its mission to make the terms and conditions of credit cards and financial products easier to understand. Instead, 71% say that since the CFPB was created in 2011 credit card terms and conditions have not become easier to understand—including 54% who believe they have stayed the same and 17% who think they have become less clear.

Americans as Likely to Say CEOs, NFL Football and NBA Basketball Players Are Overpaid, But Most Oppose Government Regulating Pay

Americans are about equally likely to think that CEOs (73%) and professional athletes like NBA players (74%) and NFL players (72%) are paid “too much.” Yet, the public doesn’t think the government ought to regulate the salaries of either corporate executives (53%) or professional athletes like NBA players (69%). Nonetheless, there is more support for regulating CEO pay (43%) than NBA salaries (28%).

Notably, compared to CEOs (73%) and NBA players (74%), far fewer believe that major tech company entrepreneurs are overpaid (51%). 

Democrats support (56%) government regulating the salaries of CEOs but oppose regulating salaries of NBA players (66%) and famous actors (69%). In contrast, about 7 in 10 Republicans oppose government regulating the salaries of all three professions, even though they are more likely than Democrats to believe NBA players (60% vs. 47%) and famous actors (59% vs. 37%) are overpaid. 

Most Support Risk-Based Pricing for Loans, Say Low Credit Scores are Due to Irresponsibility

Nearly three-fourths of Americans (74%) say they’d be “unwilling” to pay more for their home mortgage, car loan, or student loan to help those with low credit scores access these loans.

Americans may be unwilling to pay more to help those with low credit scores in part because a majority (58%) believe low credit scores are primarily due to irresponsibility, rather than circumstances beyond a person’s control (41%).

  • Partisans sharply disagree about the cause of a low credit score. Most Democrats (57%) say low scores are primarily the result of “circumstances beyond [one’s] control” while 74% of Republicans and 63% of independents say “irresponsibility” is the primary cause.

Americans are Unsure if Banks Charging Some People Higher Interest Rates is Justified or Predatory

A slim majority (52%) believe banks and financial institutions need to charge some people higher interest rates for loans and credit cards if those individuals present higher credit risks. Another 46% believe banks charge some people higher rates for loans in order to take advantage of those with few other options.

  • Partisans disagree about why banks charge people different rates. A majority (56%) of Democrats believe lenders charge some people higher interest rates because they are predatory and take advantage of the vulnerable. In contrast, two-thirds (67%) of Republicans believe banks need to do this to compensate themselves for some borrowers’ greater credit risk.

Most Oppose Accredited Investor Standard, Say Law Should Not Restrict Investment Options Based on Wealth

Due to current law, some investments are deemed too risky for the common investor and are only available to those with one million dollars in assets or who make $200,000 or more a year. However, a majority of Americans (58%) say the law should not restrict what people are allowed to invest in based on their wealth or income—even if the investments in question are risky. Thirty-nine percent (39%) think the law should restrict access to certain investments deemed risky.

  • Strong liberals are unique in their support (57%) of government restricting access to risky investments based on a person’s wealth. Support drops to 45% among moderate liberals and to a third among conservatives. 

Most Support Helping Low-Income Families Own Homes Unless Policies Escalate Mortgage Defaults

Nearly two-thirds (64%) of the public support government policies intended to make it easier for low-income families to obtain a mortgage. However, a majority (66%) would oppose such policies if they resulted in more mortgage defaults and home foreclosures.

43% of Americans Would Pay for $500 Unexpected Expense with Savings

Less than half (43%) of Americans say they would pay for an unexpected $500 expense using money from savings or checking. The remainder would put the expense on a credit card (23%), ask family and friends for money (8%), sell something (7%), borrow the money from a bank or payday lender (5%), or simply not be able to pay it (12%).[2]

Most Say Bad Financial Decisionmaking Due to Lack of Financial Education and Self-Discipline 

The public says the top three reasons consumers make bad financial decisions include lacking financial education (70%), lacking self-discipline (60%), and facing financial hardship (54%). Less than half say that consumers being “misled or tricked” (43%), taken advantage of (42%), or incapable (30%) are primary causes.

  • Both Democrats (72%) and Republicans (72%) agree that a lack of financial education is key.
  • Republicans (70%) are nearly 20 points more likely than Democrats (51%) to say that a lack of self-discipline is a primary reason for unwise decisionmaking.
  • Democrats are roughly 20 points more likely than Republicans to say that poor financial decisionmaking is due to external circumstances such as financial hardship (66% vs. 45%), being tricked (52% vs. 32%), or being taken advantage of (52% vs. 30%).

Most Say Government Should Allow Individuals to Make Their Own Financial Decisions—Even If They Make the Wrong Ones

When it comes to promoting and managing consumers’ financial health, most believe (58%) that individuals “should be allowed to make their own decisions even if they make the wrong ones.” However, 4 in 10 say that sometimes government regulators “need to write laws that prevent people from making bad decisions.” 

  • A majority of Democrats (57%) believe that sometimes regulators need to write laws that protect people from making bad decisions
  • Majorities of Republicans (73%) and independents (69%) don’t think government should restrict people’s financial choices to protect them.

Few Americans Know a Lot about the Federal Reserve; Among Those Informed, the Fed Polarizes Partisans 

  • Only 20% of Americans say they have heard of the Federal Reserve and understand what it does very well. Half (50%) have heard of the Fed but don’t understand everything it does; 22% have heard of the Fed but don’t know what it does while 6% have never heard of it.
  • Tea Partiers (67%), libertarians (57%) and conservatives (50%) are about three times as likely as liberals (19%) to say the Fed has “too much power.”
  • Pluralities of libertarians (50%) and strong conservatives (50%) believe the Fed helped cause the 2008 financial crisis. In contrast, a plurality of liberals (43%) believe the Fed cut the crisis short.
  • Among those with an opinion, 68% of Democrats want Federal Reserve officials to primarily determine interest rates in the economy. Conversely, 74% of Republicans want the free-market system to do this. 

Click here for full poll results and methodological information

Sign up here to receive forthcoming Cato Institute survey reports

The Cato Institute 2017 Financial Regulation Survey was designed and conducted by the Cato Institute in collaboration with YouGov. YouGov collected responses online May 24-31, 2017 from a national sample of 2,000 Americans 18 years of age and older. Restrictions are put in place to ensure that only the people selected and contacted by YouGov are allowed to participate. The margin of error for the survey is +/- 2.17 percentage points at the 95% level of confidence.

[1] Asked of 4% of respondents who have used payday or installment lenders in the past 12 months, N=71.

[2] One percent (1%) say they would find some other way to pay the unexpected expense.


On the topic of tax reform, I wrote the “opposing view” column yesterday for USA Today. But rather than oppose the newspaper’s editors, I agree with most of their views.

The editors said:

The federal tax code is an unholy mess. It consumes 6 billion hours of Americans’ time each year. It coddles politically entrenched industries. And it burdens America’s blue-chip corporations in their bid to compete with overseas rivals.”

“Some taxes should be cut. The corporate income tax of 35%, for instance, should be set at 20% or lower, with a lot fewer loopholes. The current rate gives an advantage to companies not headquartered in the United States. And its complexity encourages all manner of tax gamesmanship.


The editors continued:

At the same time, everyday Americans need to confront the fact that their rates are far higher than they need be thanks to massive—and highly popular—deductions for such expenditures as mortgage interest, health care, charitable gifts and state and local taxes.

Of these, only the charitable gifts break has a strong case for being left alone. The tax-free status of health plans needs a limit. The deductions for mortgage interest and state and local taxes should be gradually phased out or capped, as they have perverse effects.

I agree with that too. Leave the charity deduction alone, cut or eliminate the mortgage interest and state and local tax deductions, and cap the health insurance exclusion.

My article said that if Republicans cannot agree on substantial offsets to rate reductions, “they should scale back their tax package to just the most pro-growth elements, particularly a corporate tax rate cut.” If the GOP focuses on growth-generating reforms, the deficit may increase in the short term, but the tax base would expand over time offsetting the initial budgetary effect.

The important thing is that America’s businesses and their workers desperately need a more competitive tax code. The Republicans have a rare chance right now to get it done.

In the days before Hurricane Irma made landfall in Florida, the state ordered 6.3 million people to leave their homes. As people in the rest of the nation watched videos and photos of bumper-to-bumper northbound traffic on Interstates 75 and 95, while the southbound lanes were nearly empty, most had one of two reactions. Some said, “If only Florida had large-scale passenger train service that could move those people out,” while others asked, “Why aren’t people allowed to drive north on the empty southbound lanes?” 

The aftermath of the storm has already opened a debate over what Florida should do to increase its resilience in the future: build more roads or build more rail lines. The right answer is neither: instead, state transportation departments in Florida and elsewhere need to develop emergency plans to make better use of the transportation resources they already have. 

Rail advocates like to claim that rail lines have much higher capacities for moving people than roads, but that’s simply not true. After the San Francisco earthquake of 1906, the Southern Pacific Railroad moved 300,000 people–free of charge–out of the city in what was probably the largest mass transportation evacuation in American history. While impressive, it took the railroad five days to move all of those people on three different routes. Even accounting for improvements in rail capacities in the last century, moving 6 million people out of south Florida by rail would take weeks, not the four days available between Florida’s first evacuation orders and the arrival of Hurricane Irma.

At the same time, the state of Florida could have done more to relieve congestion on major evacuation routes. The most it did was to allow vehicles to use the left shoulder lanes on part of I-75 and part of I-4 (which isn’t even a north-south route), but not, so far as I can tell, on I-95. What the state should have done, since there was very little southbound traffic, was to open up all but one of the southbound lanes of I-75 and I-75 to northbound traffic.

A typical four-lane freeway has wide shoulders on both left and right sides of each of the two pairs of lanes. The opposing lanes are often separated by concrete barriers called Jersey Barriers that are designed to be easy to move. The state could have moved a few dozen of those barriers in strategic locations to give northbound traffic access to the southbound lanes. The state could also have put up plastic pylons to separate the north- and southbound traffic in what are normally the south-bound lanes. States take these actions all the time for road construction.

In the case of a four-lane freeway, opening one southbound lane and both center shoulders to northbound traffic would turn two northbound lanes into five. For six-lane freeways, this would turn three northbound lanes into seven. In both cases, there would still be one lane for southbound traffic and the outside shoulders for emergency vehicles. The leaders of every state highway bureau that doesn’t have an evacuation plan reversing some lanes to the prevailing direction of travel should be ashamed of themselves.

Successful private businesses respond rapidly and flexibly to changes in the market. Only the government would say, “Look: travel demand is changing dramatically. Let’s do absolutely nothing about it.”

Rail advocates argue that trains are more egalitarian because not everyone can afford to own a car. In particular, Florida’s older population supposedly meant that fewer than the average number of households have cars. In fact, data from the 2016 American Community Survey indicates that Florida households are more likely to have cars than the national average: 93.4 percent of Florida households have at least one car compared with 91.3 percent nationwide.

The reality is that passenger trains are far more expensive to operate per passenger mile than cars. Amtrak fares average nearly 30 cents a passenger mile and subsidies to Amtrak are another 25 cents a passenger mile. Americans spend an average of about 24 cents a passenger mile driving and those who wish can spend a lot less by buying used cars instead of new. Highway subsidies add only another penny or so. For daily transportation, this makes trains the elitist form of travel while cars are more egalitarian.

Nor do trains offer better service in the event of natural disasters. Tri-Rail, south Florida’s commuter-rail line, shut down 60 hours before Irma hit so employees could tie down trains and facilities for the storm. Amtrak cancelled its Florida trains at the same time as Tri-Rail. 

After the storm, it took Tri-Rail almost five days to clear the tracks of fallen trees and restore power to its electric trains. One part of the rail line was so damaged that the agency is busing people around that part of the line. As of this writing, Amtrak is still not running trains south of Jacksonville.

Using trains to evacuate people after a sudden natural disaster such as an earthquake is even more problematic than before the event. Rail infrastructure, especially for fast trains, requires a high level of precision that is not needed for highways. Vehicles on pavement are far more resilient than trains on inflexible tracks since pavement doesn’t have to be as smooth as tracks. Unlike trains, highway vehicles can drive around obstacles that are partly blocking roads and by-pass roads that are completely blocked.

Natural disasters are going to happen. Eastern and Southern coastal states suffer from hurricanes. The Midwest has tornadoes. The West Coast has earthquakes and the occasional volcanic eruption. What America needs to respond to these events is not more trains but more creative and flexible highway management.

Earlier this week, Sen. Rand Paul put forth an amendment that would sunset the 2001 AUMF and 2002 Iraq AUMF after 6-months. Somewhat unsurprisingly, the amendment was defeated as nearly all Senate Republicans (and a handful of Democrats) voted to strike it down.  

As I looked through the roll call, however, I was surprised by the vote of one Senator in particular: Jeff Flake. In 2015 and again this year, Flake, along with Tim Kaine of Virginia, introduced legislation for a new AUMF. Yet, Flake voted to table (i.e. kill) Paul’s amendment. 

Why would a Senator who clearly wants a new AUMF vote against this measure?

I wouldn’t have to wait long for an answer. Yesterday, I attended a “Conversation with Senator Jeff Flake,” hosted by the Council on Foreign Relations, and was able to ask the Senator directly about the rationale behind his recent vote. Here is an excerpt from Sen. Flake’s response:

I didn’t support the Paul amendment because I’m trying to be a stickler for regular order. And when we have an opportunity to actually move something through in regular order, that’s what I’d like to do. And it is proper for this bill—we have had a hearing on it already—the next move would be a markup to actually amend it and…it will be a bipartisan bill that will move. I spoke to Chairman Corker… just yesterday, and got a commitment that this bill is going to move. So I’m confident that it will. Had I not been confident, then I would have voted for the forcing mechanism.

His justification has merit. And I hope that he is correct, and that Chairman Corker moves on AUMF legislation in the coming months. But if that fails to happen, and Sen. Paul again offers his amendment, Senator Flake is now on record that he would support it.

You can see my exchange with Senator Flake in full here.

Congress may loosen 401(k) rules to allow Harvey and Irma victims to access their retirement savings without the usual 10 percent penalty on early withdrawals. The Washington Post reports mixed views from experts on the idea. In the past, the government has allowed “hardship loans” against 401(k) assets in the wake of disasters.

Individuals own the money in their 401(k) accounts, and after disasters they may need to use it. However, a better way for Congress to address that need is to create Universal Savings Accounts (USAs).  

As Ryan Bourne and I describe in this study, USAs would provide a tax-efficient vehicle for families to save for all purposes, including saving for unplanned costly events. USAs would be simpler and more flexible than current single-purpose accounts in the tax code, including those for retirement, education, and other purposes.

When a disaster happened, families could simply withdraw money from their USAs as needed without government paperwork or penalties. They could leave their retirement accounts untouched.

Ryan and I discuss how current tax policies favor saving for some purposes over others. But all saving is beneficial because it improves financial security and funds capital investment in the economy. USAs would reduce the tax bias against saving in an across-the-board manner for all individuals, and the accounts would encourage people to save for future expenses rather than rely on debt, retirement accounts, or government aid.

In Congress, Senator Jeff Flake (R-AZ) and Representative Dave Brat (R-VA) have introduced companion bills to create USAs. Ryan and I would tweak their plan to allow individuals to build even larger accounts than proposed.

We think USAs would be very popular, a real boon for individual saving and financial stability. Both Britain and Canada have created USA-style accounts, and large shares of people in all age and income groups in those countries use them.

So rather than fiddling with 401(k)s, Congress should be bolder and create a liquid and flexible savings vehicle to help all families. USAs would be a great addition to the tax reform plan that Congress and the Trump administration are assembling.  

For more on USAs, see

President Trump will support legislation to provide legal status to young immigrants who, as he said on Twitter, “have been in the country for many years through no fault of their own—brought in by parents at young age.” The legislation with the most cosponsors in the House and the Senate that would do so is titled the Dream Act. The proposal would help many unauthorized immigrants who deserve help, but for reasons that I cannot explain, the Dream Act prioritizes them above legal immigrant children in virtually the same position who meet all the eligibility criteria.

Most high-skilled immigrants initially enter the United States on temporary H-1B visas. H-1B workers can bring with them their spouses and minor children. As I have explained before, H-1B children live here, attend U.S. schools, grow up and attend U.S. universities, but on their 21st birthday, they lose their legal status, and the law requires them to self-deport if they cannot find another temporary legal status. Most stay at least for a few years longer by switching to a student visa, but this status prohibits work and expires again as soon as they graduate, leaving them in the same position they were before.

These children were “brought in by their parents” through “no fault of their own” and have “been in the country for many years”—the three criteria that President Trump mentioned for his dreamer legislation, yet the Dream Act, which would provide permanent residency, explicitly excludes them. This is not an oversight. The authors—Senators Graham and Durbin in the Senate—had to write that the law would apply only to a person “who is inadmissible or deportable from the United States” (p. 4) or who is in “temporary protective status,” which is typically given to unauthorized immigrants who can’t be deported due to a crisis in their home country.

In other words, the only way for legal dreamers to obtain status under this bill would be to somehow find a way to violate the law in order to become “deportable.” Even then, the Dream Act makes applicants ineligible if they have violated the rules of a student visa (p. 5), which most legal immigrant dreamers have to switch to when they turn 21 to avoid deportation, unless the Secretary of Homeland Security decides that it is necessary for “humanitarian purposes or family unity” or “otherwise in the public interest” to allow them to apply. Who knows whether he would decide that in any particular case? Few legal immigrants would take the chance that he wouldn’t and risk being deported and banned from the United States for life. 

But why is the requirement to violate the law necessary in the first place? What would change if the highlighted of the portion of the bill below was removed? Everyone that the current bill protects would still receive protection. The standards for inclusion would be just as tough. All participants would still have had to reside in the country for 4 years, enter before the age of 18, not have committed any significant crimes, be a high school graduate, etc. So why prioritize unauthorized immigrants over those who are here legally? It creates perverse incentives.

Dream Act Requirements (pp. 4-6)

As I have also explained before, the existence of legal immigrant dreamers is a product of a broken legal immigration system. Current law allows H-1B employers to sponsor H-1B workers, their spouses, and minor children for green cards or legal permanent residency. The green card waits for these workers are decades long (see here for a detailed explanation of that problem), so the law also allows H-1Bs waiting for a green card to extend their status and the status of their spouses and minor children indefinitely while they all wait for green cards. But despite having waited in line for many years, children of H-1B workers still lose their status as soon as they turn 21. Those who don’t self-deport then become foreign students, which provides temporary status but they cannot work and lose status again as soon as they graduate.

Children of other high-skilled immigrants on less used visa categories—primarily L, O, and E—also face the same problem. The Recognizing America’s Children Act in the House, which some 32 Republicans have signed onto, would allow E-2 nonimmigrant children to apply for permanent legal status with unauthorized immigrant dreamers but it would exclude all other legal immigrant dreamers (p. 5). That’s better than nothing, but E-2 nonimmigrant children are only a very small portion of the legal immigrant dreamers. Why would these members open themselves up to prioritizing illegal immigrants over legal immigrants? Many members have explicitly said that they oppose a “special pathway” for illegal immigrants.

It’s not that they want to limit the number of applicants, since both bills dramatically expand eligibility beyond the criteria for the DACA program that President Trump just announced would wind down. DACA protects only unauthorized immigrants who entered under the age of 16 before June 15, 2007 and who were under 31 as of June 15, 2012. The Dream Act would raise the age of entry to 18, the date of entry to 2013 or 2014, and remove any age requirement at the time of application (see above). The RAC Act would move the date of entry to before 2012 (p. 6). These changes would allow far more people to apply.

In any case, the decision to ignore the plight of legal immigrant dreamers is baffling from a political standpoint. Including legal immigrant children in the Dream Act would 1) remove the criticism that the bill is unfair to legal immigrants, 2) create a new constituency to advocate for the bill, and 3) not increase the applicant pool any more than the Act’s existing changes to DACA eligibility. Someone should ask these members why they have chosen to limit their bills in this way.

About a month ago, a Facebook post drew my attention to an attempt, by Casey Pender of Prague’s CEVRO Institute, to test my thesis that free banking contributes to NGDP stability using statistical evidence from Canada, which had a relatively free banking system between 1867, the year of Canada’s confederation, and 1935, when the Bank of Canada was established.

In “Some Odd Data on Free Banking in Canada,” a blog post discussing his preliminary findings, Pender reports that he had hoped to be able to show that Canada, from 1867-1935, had a more stable NGDP percent change from year to year than the U.S. And I thought this would be an easy and quick historical example that I could use to bolster my underlying theory. But things seem like they just ain’t so.

Instead, in comparing the fluctuations of Canadian and U.S. NGDP using data from the Macrohistory database, Pender found that Canadian NGDP was not less but more volatile. Moreover that conclusion held not just for the full 1870-1935 sample period, but also for the sub-period 1870-1914, which omits various extraordinary Canadian government interventions during WWI and the Great Depression.

Here is Pender’s chart showing his results from the full sample period:

Having now been made privy to these findings, I suppose that you are looking forward to seeing ol’ Doc Selgin eat humble pie. Well, you can quit holding your breath ‘cause that won’t be happening anytime soon. In fact, for the moment at least, I remain thoroughly impenitent.

How come? First of all, I never claimed that free banking alone could achieve any particular degree of absolute stability of nominal spending. What I have claimed is that, by tending to offset changes in the velocity of money with opposite changes in its quantity, free banking makes for a more stable relationship between the level of overall spending and the available quantity of base or high-powered money than might exist otherwise. To the extent that the available quantity of base money itself changes, however, the quantity of money will also tend to change independently of its velocity. Total spending will then tend to vary also.

What’s more, under an international gold standard regime like the one in place during Canada’s free banking episode, the amount of base money in any particular gold standard country was hardly likely to remain stable or grow at a very steady rate. On the contrary: changes in trade patterns and international capital flows were bound to routinely alter the distribution of gold among gold standard countries, just as changes in trade patterns and capital flows within individual countries are bound to alter the distribution of gold among those countries’ various regions. To the extent that it consisted of holdings of monetary gold, Canada’s monetary base was no less subject to change than the monetary base of, say, Nova Scotia.

In fact during the free-banking era Canada’s base money consisted of both monetary gold and paper “Dominion notes” first issued by the Canadian government in 1866. While some portion of these had to be fully backed by gold, there was also an un-backed or fiduciary component, the quantity of which rose from just $8 million in 1868 to $30 million by the outbreak of World War I. Until 1885 or so at least, those fiduciary issues, instead of being linked even loosely to gold flows, or otherwise regulated for the sake of economic stability, varied according to the Canadian governments’ fiscal needs. Consequently Dominion note issues tended to be an additional cause of irregular changes to Canadian NGDP.

A proper test of the theory that free banking helped to stabilize Canadian NGDP must therefore consider, not just fluctuations in Canadian NDGP as such, but the relationship between those fluctuations and underlying changes in Canada’s monetary base. So long as Canada’s NGDP fluctuations were driven by underlying changes in Canada’s stock of base money, instead of being independent of such changes, the fluctuations were perfectly consistent with the theory.

So, what does the record have to say about it? To find out, I had Tyler Whirty, the CMFA’s trusty RA, run some simple regressions for me, with Canadian NGDP as their dependent variable, and Canada’s stock of base money (M0) as the independent variable. The NGDP estimates are the same ones employed by Pender, from the Macrohistory database[1], while the monetary base numbers are from Metcalf, Redish, and Shearer (1998). So far we’ve looked only at the pre-WWI record, as that era is most aptly described as one of relatively unblemished free banking. We also ran the regressions both using raw data and after taking logs. I shall report only the log results, as those fit the data best; but the general conclusions to be reported here don’t depend in the least on the log transformations.

The results, shown in the next figure, are not just consistent but remarkably consistent with the theory, and especially so given that Canada’s arrangement involved some not entirely trivial departures from the theory’s assumptions, one of which is that paper money is supplied by commercial banks alone. (In fact, Canada’s banks were prohibited from issuing notes worth less than $5.) The regression R-squared is .980254, while the coefficient on M0, about .80, seems quite reasonable allowing for the fact that some Canadian base money, including smaller Dominion notes, circulated instead of serving as bank reserves.

Although the Canadian results seem perfectly consistent with the theory, we still have to compare them with evidence from the U.S. as a step toward establishing that the stable relationship they point to might be attributable to Canada’s having had a free banking system: were a similarly close relationship to exist in the U.S. data, that would suggest that Canada’s distinct institutional arrangements, including free banking, didn’t really make any difference.

For our base U.S. regression, we drew again upon the Macrohistory database, using its U.S. NGDP estimates (which were originally developed by Louis Johnston and Samuel H. Williamson[2]). For the U.S. monetary base, we subtracted national bank notes from Philip Cagan’s monetary base figures: while Cagan himself justified including those banknotes by noting that they were practically claims against the U.S. Treasury, we exclude them because, despite that, they were neither legal tender nor capable of satisfying banks’ legal reserve requirements.

Because Cagan’s numbers only start in 1875, the U.S. regression covers a somewhat shorter period than the Canadian one.

While the results of the U.S. regression suggest a relationship between U.S. NGDP and M0 that’s broadly similar to the Canadian one (M0 coefficient .825), that relationship, as depicted in the next figure, is considerably less tight, with an R-squared of .908. That the Canadian relation should be so much tighter now seems all the more remarkable, given both the relatively small size and openness of Canada’s economy, and its heavy dependence upon U.S. exports to the U.S.

To check the robustness of these U.S. results, we performed the same regression using Angus Maddison’s NGDP estimates in place of the Johnston-Williamson numbers. Although the R-squared, of about .0935, is a bit higher in that case, the coefficient (.769) is similar:

In brief, both our Canadian regression results themselves, and a comparison of those results with results using U.S. data, seem fully consistent with the theory that free banking helps to stabilize the relationship between NGDP and the monetary base.

Does that mean they confirm the theory? Alas, it doesn’t. Freedom in banking is but one of many differences between the pre-WWI Canadian system and its U.S. counterpart. Furthermore, even if Canada’s more stable NGDP-M0 relationship were in fact due to its having had a relatively free banking system, it wouldn’t follow that my theory is correct. Free banking could well have contributed to the stable relationship in question for reasons apart from the one my theory points to. We know, for example, that branch banking — itself an element of free banking — made Canada’s system less fragile, and therefore less vulnerable to financial crises, than the U.S. system. We also know that financial crises tend to involve a collapse in bank credit and spending. So the relative stability of the Canadian NGDP-M0 relationship, instead of reflecting a tendency for changes in M to offset opposite changes in V, may instead simply have reflected a relative lack of banking crises and associated increases in the ratio of bank reserves to bank credit.  Although all this is still good news for fans of free banking, it leaves my particular hypothesis unproven.

In short, while my theory has yet to be discredited, it also has yet to be confirmed. I hope that either Mr. Pender or some other enterprising econometrician will eventually settle the matter, one way or the other.

[1] Òscar Jordà, Moritz Schularick, and Alan M. Taylor, “Macrofinancial History and the New Business Cycle Facts,” in NBER Macroeconomics Annual 2016, volume 31, edited by Martin Eichenbaum and Jonathan A. Parker. 2017. Chicago: University of Chicago Press.

[2] Louis Johnston and Samuel H. Williamson, “What Was the U.S. GDP Then?” MeasuringWorth, 2017.

[Cross-posted from]

In April, President Trump’s Office of Management and Budget (OMB) launched a year-long effort to improve management of federal agencies and to cut spending. I testified to a Senate committee yesterday on the OMB effort, and provided suggestions on how to cut the bloated federal budget.

The OMB memo that launched the reform effort said that there is “growing citizen dissatisfaction with the cost and performance of the federal government.” That is certainly true, as I discuss in this study. The federal government has grown much larger over the decades—and is thus providing more “services” to the people—yet trust in federal competence has plunged.

Why? One reason is that the government has grown far too large to adequately manage and oversee. The federal government funds 2,300 aid and benefit programs today, more than twice as many as in the 1980s. And the federal budget at $4 trillion is 100 times larger than the budget of the average U.S. state of $40 billion.  

So the OMB-led effort to dig through federal agencies to find savings is crucial. The government would perform far better with fewer failures if it were much smaller.

My full testimony is here.

Fear is the main source of superstition, and one of the main sources of cruelty. To conquer fear is the beginning of wisdom.

- Bertrand Russell, Unpopular Essays

Do you have the strong sense that the United States has become a more anxious and fearful place during the Trump era? If so, you are certainly not alone. Recent news stories reveal all sorts of concerns including the fate of the Dreamershealthcare, North Korea, and even America’s democratic norms and institutions.

But exactly how worried are we today compared to other times?

As it turns out, the answer is: quite a bit more worried.

In this blog post I introduce a simple measure called the American Fear Index. The index is an attempt to improve our understanding of fear and its role in American politics by tracking the level of fear in our public discourse about the nation, the world, and the challenges we face.

The study of fear is far from just an academic matter. Fear is a powerful political force. At times, a well-warranted fear is an important motivator of caution and prudent behavior. History provides numerous examples of publics without sufficient concern about the behavior of their government leaders. But on the other hand, fear also has the ability to cloud people’s senses, to destroy their ability to conduct rational debate, and to warp their decision-making. Fear has always been a useful tool for propagandists and zealots. 

Measuring Fear: Data and Methods

The American Fear Index (AFI) is simply the percentage of all news stories during a given time period that contain at least one of four fear-related keywords: fear, risk, danger, or threat. The choice of these words reflects the desire to identify a small set of general words that were very likely to appear in discussions of things that worry people across as broad a set of topics as possible.

Of course, not every story containing one of these words is entirely focused on fear or terrible things. And some stories contain just one of these words; in other stories the words appear many times. But a review of stories containing these words shows that the passages in which they appear do in fact tend to focus on issues and events that Americans find threatening, dangerous, risky, and scary.

Though this is an exceedingly simple and blunt approach to measuring fear, previous studies have shown the effectiveness of similar approaches at tracing complex phenomenon such economic policy uncertainty, partisan conflict, and interstate tensions. Moreover, the simplicity allows us to apply the AFI across more data and over time far more easily than more complex measures. Ideally, of course, more complex approaches should complement simpler tools like the AFI.

The universe of news stories for this analysis was a list of sixty or so of the top U.S. newspapers available in the Dow Jones Factiva “Top U.S. newspapers” database. This allows the AFI to trace the dominant themes in national discourse, which typically originate with major newspapers like the New York Times, the Wall Street Journal, and the Washington Post, while also casting a wide net encompassing the other major city and regional dailies. Though each paper has a unique AFI score across time (a topic I will address in a future post), the goal of bundling them together is to create a metric that measures fear-related discourse at the national level.

To calculate the AFI, I first ran a search using the Factiva search engine to establish how many stories were published each year since January 1, 1981. I did this by searching for the word “the,” which shows up in all (or at least almost all) stories. I then ran a search for all stories containing at least one fear keyword using the search string “fear or risk or danger or threat.” To calculate the AFI I divided the number of news stories containing a fear keyword by the total number of stories published each year, and then multiplied the result by 100.

With the general fear index measured, I then turned to topic-specific AFI levels, tracking how often the fear keywords appeared in stories that also mentioned various issues of potential concern. To produce an AFI score specific to cancer, for example, I ran a search using the search string “cancer and (fear or risk or danger or threat).”

Fear in America

Figure One displays the American Fear Index from 1981 through June 30, 2017. Two important things stand out.

First, the results provide stark support for anyone who has suspected that we are living through unusually turbulent times. Through the first eight months of 2017, 17.9% of all news stories contain at least one fear keyword, the highest level recorded in the analysis and well above the historical average of 10.8%. Making the recent spike even more interesting is just how stable the annual fear index was until recently. The index averaged 10% between 1981 and 2008, with a low of 9% in 1996 and a high of just 11% in 2002 and 2003.

Second, Trump may have poured gas on the fire of America’s recent worries, but he certainly didn’t start the fire. The fear index jumped sharply to 11.4% in 2009 as the Great Recession hit and hovered right at that level during Obama’s first administration. Since 2013, however, the index has risen each year.

Figure One. The American Fear Index 1981 - 2017

What Are Americans Afraid Of?

Figure Two provides a snapshot of the fear associated with a variety of issues in 2017. Though this figure by no means contains a comprehensive account of American fears, it includes many of the hot button issues of the day and a slew of perennial risks, threats, and dangers of all kinds.

Given the turbulent 2016 election campaign and the prospects for a bruising set of Congressional midterms in 2018, it is perhaps depressing but not surprising to see that the word election has been most closely associated with fear so far in 2017. Nor are most of the other top fears much of a surprise given Trump’s campaign rhetoric and initial policy decisions on issues such as Syria, North Korea, and the travel ban.

Figure Two. Snapshot of American Fears, 2017


As it turns out, most fears rise and fall over time. Figure Three examines the historical evolution of three of them, chosen to illustrate just a few of the different patterns that emerge. 

Figure Three: Climate Change, Murder, and War



Rising American Fears

At this point we know that American discussion of fear, risk, threat, and danger is up sharply over the past few years. We also have a sense for the relative level of anxiety across a range of important issues.

Figure Four extends the analysis to provide a sense of how much more worried Americans are in 2017 about these specific issues compared to the past. The gray columns indicate the AFI scores for 2017, while the black bars represent the average AFI score between 1981 and 2016.

Strikingly, the average AFI score for these issues in 2017 is 120% higher than in 2016 and 278% higher than the historical average. In short, the level of fear-related discourse in major American newspapers  - for these specific issues – doubled between roughly 2013 and 2016, and then doubled again (plus some) between 2016 and 2017.

Figure Four. Rising Fear by Issue, 2017 vs. Historical Average

Explaining Patterns of American Fear

Fear related discourse is clearly at an all-time recent high in 2017. The big question is why. The world certainly has been exciting in 2017, but is this really about the threats facing the United States, or is it more about how Washington is addressing them? More specifically, how much of the 2017 spike in fear talk is related to Donald Trump himself?

Figure Five suggests that the answer is a great deal. Trump’s 2017 fear index (7.2%) is almost 11 times higher than Obama’s highest score (0.72%). The average historical “presidential fear index” – stories mentioning both the president and at least one of the keywords – is just 0.32%.

Figure Five. Trump: Threat Inflator in Chief?


Unfortunately, this simple metric does not help us determine the extent to which Trump himself is actively inflating threats, others are blaming Trump for problems, or Trump as president is simply at the center of more fear related discourse thanks to the general craziness of the world today. The most likely case is that some of all of these things are happening, leading to Trump’s unprecedented personal fear index.

I cannot resolve that puzzle here, so for now I offer the following hypotheses to explain Trump’s elevated fear index:

  1. The surprise outcome of the election, combined with Russian election meddling and the pursuant investigation into the Trump campaign has generated more stories mentioning Trump and various fears
  2. The unprecedented opposition to Trump by both liberals and conservatives has generated more Trump related fear discourse in the news
  3. Trump’s decision to focus on highly controversial and fear-laden policy issues (immigration, healthcare, etc.) has inserted Trump into fear related discussions on those topics
  4. Trump’s controversial and clumsy foreign policy efforts that have stoked tensions abroad (North Korea, in particular), leading to news stories that mention both Trump and various international threats
  5. News media bias (whether a liberal bias or just a “Trump = news” bias) has led to far more coverage of Trump than other presidents and to far more negative (i.e. fear related) coverage
  6. Trump’s inexperience, his nontraditional and cavalier approach to governance, and the lack of discipline exhibited by his White House have raised fears about democratic institutions, leading to a higher fear index for Trump

The Implications of Fear

How should we interpret the pattern of American fears and the fact that fears seem to be rising across the board over recent years? Again, I will not try to draw sweeping conclusions at this point. Instead, I note two important questions raised by the data presented here.

First, are we worrying the right amount about the right things? As noted above, fear can be an important motivator for self-protection. Americans should discuss the threats and risks to national security, to public health, and the future of the planet. But even a cursory glance at the pattern of topical fear indexes suggests that threat perception is not an entirely rational process. What is not helpful, in particular, is hyping threats to such a degree that society over invests in policies to deal with them, while underinvesting in dealing with other threats. An important agenda, therefore, is the attempt to determine how closely the nation’s fear discourse mirrors the real world and what sorts of factors tend to distort it.

Second, what exactly is the AFI telling us? If the increase in fear related discourse is simply a response to an increasingly dangerous world, then the AFI is a measure of a healthy marketplace of ideas. If, on the other hand, the AFI reflects competition among elites to use fear for political purposes, then the AFI represents not a healthy marketplace of ideas but instead one held captive to propaganda. Or, perhaps even worse, rising fears may reflect the loss of public confidence in the ability of the democratic process to meet the challenges of the day. If this is the case, then the AFI may be a measure of our society’s weakening cohesiveness and resilience.  

Few people probably remember the post-punk band Timbuk 3, but maybe they can recall that wonder’s one hit: “The Future’s So Bright,” about a kid who was doing so well his future required him to “wear shades.” If a new survey of Millennials is any indication, that song may well apply to school choice.

According to a survey of adults ages 18-34 from GenForward, a project based at the University of Chicago, a whopping 71 percent of Millennials “strongly” or “somewhat support” using “government funds in the form of vouchers to pay some of the tuition of low income students who choose to attend private schools.” Yes, even with the dreaded “v” word—vouchers—in the question, private school choice garners massive support. Unsuprisingly, when broken down by race, the highest level of support is among African Americans at 79 percent, and the lowest is among whites at 66 percent.

Support declines when the proposal opens vouchers to “all students” instead of just “low income,” but it is still pretty impressive. 57 percent of all respondents are at least somewhat supportive, with the range going from 69 percent support among African Americans to 49 percent among whites.

If this holds up as millennials age, and if such support is replicated in the generation to follow, school choice will, indeed, have to start wearing shades. Hopefully, those super dark eclipse ones…

Over the last decade and a half, we’ve heard over and over again that “September 11th changed everything”—but maybe September 14 was the pivotal date. Sixteen years ago today, Congress passed the 2001 Authorization for the Use of Military Force (AUMF). Aimed at the perpetrators of the 9/11 attacks and those who “harbored” or “aided” them, the AUMF has been transformed into an enabling act for globe-spanning presidential war.  

“I don’t think one generation should bind another generation to war,” Sen. Rand Paul (R-KY) insists, but that’s exactly what’s happened: the AUMF Congress passed in 2001 still serves as legal cover for “current wars we fight in seven countries.”

Sixteen years ago, Barack Obama was an unknown state senator and part time law professor, and Rep. Gary Condit (D-CA) was, up till 9/11, the biggest story in American politics. Steve Jobs had yet to introduce the first iPod, and some people thought it was the Segway that was really going to “change everything.” In that faraway time, believe it or not, the federal government actually had a budget surplus

Two-thirds of the House members who voted for the 2001 AUMF and three quarters of the Senate are no longer in Congress today. But judging by what they said at the time, the legislators who passed it didn’t think they were committing the US to an open-ended, multigenerational war. They thought they were targeting Al Qaeda and the Taliban. The 2001 AUMF was nothing like the Gulf of Tonkin Resolution that underwrote the Vietnam War, then-Sen. Joe Biden (D-DE) insisted after the vote: “we do not say pell-mell, ‘Go do anything, any time, any place.’”

The 2001 AUMF has now been in effect over twice as long as the Gulf of Tonkin Resolution, and three imperial presidents in a row have stretched it into the boundless grant of power Biden disclaimed: broad enough to cover an ever-expanding succession of “associated forces” (a term absent from the AUMF), as well as everything from “boots on the ground in the Congo” to drones over Timbuktu.

Undeclared wars and drive-by bombing raids were hardly unknown before 9/11. But most of the military excursions of the post-Cold War era were geographically limited, temporary departures from a baseline of peace. No longer: war is now America’s default setting; peace, the dwindling exception to the rule.

Barack Obama left office as the first two-term president in American history to have been at war every single day of his presidency. In his last year alone, U.S. forces dropped over 26,000 bombs on seven different countries.

Seven months into his presidency, Donald Trump has almost certainly passed Obama’s 2016 tally already. The Trump administration used the AUMF for an additional troop surge against the Taliban, in the never-ending quest to “Make Afghanistan Great Again,”—and may yet use that authority for airstrikes in the Philippines. The administration recently sent a letter to Sen. Bob Corker (R-TN), chairman of the Senate Foreign Relations Committee, suggesting they view the authorization as broad enough to underwrite the use of force against the Assad regime in Syria. Moreover, they’re “not seeking revisions to the 2001 AUMF or additional authorizations to use force.” And why would they? As Lyndon Johnson once cracked about the Gulf of Tonkin resolution, like “grandma’s nightshirt,” it’s big enough to cover everything.

“Ten to 20 years” is the standard, recurring answer Pentagon officials give, whenever they’re asked how long the various wars on terror will go on, perhaps “a generation or more.” The droning will continue until morale improves.

Convinced that at least once a generation, Congress should vote on the multiple wars we’re fighting, this week Senator Paul forced that vote by threatening to hold up the Defense appropriations act. Yesterday, Paul’s amendment sunsetting the existing war authorization after six months went down to defeat, 61-36.

Sen. Jeff Flake (R-AZ), explained his vote to scuttle Paul’s amendment in terms of the “real risk associated with repealing such a vital law before we have a something to replace it with.” If it’s such a vital law and they’re such vital wars, presumably Congress could motivate itself to address the issue in the space of six months, and would be more likely to act if forced to. Still, Flake expects Senator Corker to hold hearings on repealing and replacing the AUMF in the near future.

We’ll see. The debate can’t end with the defeat of Paul’s amendment—if it does, he warns, we’ll find ourselves embroiled in far-flung conflicts and foreign occupations “another 16 years down the road.”


On Wednesday, Senator Orrin Hatch of Utah came out in support of medical marijuana and, in particular, removing federal barriers to medical marijuana research. This is a welcome development. Hatch, the longest serving senator in U.S. history, comes from a state where there is a strong aversion to intoxicating substances. Nevertheless, lawmakers in Utah recognized the medical potential of cannabis-derived medicines when they legalized cannabidiol oil (CBD) in 2014.

The MEDS Act, first introduced by Senator Brian Schatz of Hawaii, would greatly streamline the arduous process of research into marijuana’s medicinal applications. As I recently discussed at a Capitol Hill event, as well as in a recent article and on a recent Cato Daily Podcast, it is unnecessarily difficult to research marijuana. All research on controlled substances must satisfy various legal requirements in order to be authorized by the federal government. Marijuana researchers, however, must jump through the additional hoop of acquiring government-authorized marijuana from the only place where it is legally grown: the University of Mississippi. The government’s supply, however, is often inadequate to the needs of researchers, as well as being generally low quality. Nevertheless, the federal government has consistently argued that, under various UN treaties, it cannot authorize more than one source of legal, research-grade marijuana. This is despite the fact that there are many sources from which researchers can acquire nearly every other Schedule I drug.

Late in the Obama administration, the DEA opened up applications for more suppliers of research-grade marijuana. After taking office, Attorney General Sessions apparently shut down that program by simply not considering the 25 or so applications that were submitted. Among other things, the MEDS Act forbids the attorney general from establishing a quota for marijuana manufacturers and requires all applications to be acted on within 30 days.

Sessions has also asked Congress to repeal the Rohrbacher-Farr amendment, which prohibits the Department of Justice from using federal funds to interfere with states that authorize medical marijuana. In other words, while much of the country is moving on to legalizing marijuana for recreational use, Sessions is still trapped in the past and fighting against medical marijuana.

That’s not surprising, as much of our marijuana policies are trapped in the past. From the Marihuana [sic] Tax Act of 1937 to the Controlled Substances Act of 1970, our marijuana policy was largely created by people who believed Reefer Madness is a level-headed and reasonable portrayal of the effects of marijuana use. That’s like running the Smithsonian’s natural history museum based on insights gleaned from Raquel Welch’s 1,000,000 Years B.C. or The Land Before Time. I applaud Senator Hatch for pushing to update our prehistoric laws.

Last month, President Trump outlined his new strategy for Afghanistan that calls for increasing troops on the ground, a reverse of the Obama administration’s policy of gradual withdrawal. The President also reprimanded Pakistan for continuing to harbor militants while urging India to assist the United States in developing Afghanistan’s economy.

The long awaited strategy has three fundamental faults that if ignored will create an even more dire situation in Afghanistan and more fissures in the already fragile U.S.–Pakistan relationship, all the while further undermining U.S. interests.

First, the strategy is not new. It’s really a repackaging of old strategies that have already been tried and tested—and have failed. For example, prioritizing the capturing and killing of terrorists over the building of sustainable institutions has been tried in Afghanistan before, and in Iraq from 2003–2010, and has been ineffective in the long run. Weeding out safe havens and ensuring that they do not redevelop is the job of a law enforcement agency, not a military. Putting more U.S. troops on the ground, therefore, is not a solution. Instead, it’s a recipe for more—and unnecessary—U.S. casualties. It also puts the U.S. military in a role to conduct nation-building—despite the President’s comments against it—which is an unpredictable, slow, and costly strategy with a low success rate.

Second, Trump’s strategy reinforces the security dilemma between Pakistan and India. It is true that as a non-NATO ally, Pakistan has been a recipient of millions of dollars in aid. It is also true that it is sympathetic to the Taliban and supports the Haqqani Network in its attempts to establish a Pakistan-friendly Afghani government. But chastising Pakistan while encouraging India to invest even more in Afghanistan’s economic development in the same breath merely intensifies the animosity between the nuclear rivals while threatening regional stability and U.S. interests. For example, the United States has become increasingly interested in building economic ties in Central and South Asia, and cannot do so without some kind of relationship with Pakistan. More significantly, U.S. troops rely heavily on routes within Pakistan for NATO supplies. Aid cuts, sanctions, increasing drone strikes or designating Pakistan as a “state sponsor of terrorism” will all jeopardize U.S. troops’ access to these vital supplies. Alternative routes, such as going through Central Asia, are available but will be costlier. Furthermore, utilizing alternative routes will involve cooperation with Russia, a potentially less reliable partner than Pakistan.

And third, the strategy largely ignores China, who has reinforced its position as a key player in the form of the China–Pakistan Economic Corridor (CPEC). China is beginning to serve as a mediator between the United States and Pakistan. Earlier this year, Hafiz Saeed, the leader of Jamaat-ud-Dawa, affiliated with the banned Lashkar-e-Taiba, the perpetrator of the 2008 Mumbai attacks, was put under house arrest. While it seems plausible that Pakistani authorities did so to curry favor with newly elected President Trump, Michael Kugelman of the Wilson Center concludes that Saeed’s arrest was mainly done to satisfy the steady progression of CPEC. While Saeed does not pose a direct threat to China or CPEC, any militant attack within the Pakistani state could turn into a liability for Chinese investors and citizens working there. CPEC, therefore, is opening avenues for China to exert its influence on Pakistan, which may or may not work in the United States’ favor.

After 16 years, the United States remains entrenched in a war in Afghanistan that remains troublesome and lacks a clear end state. The President’s strategy does little to overcome these challenges. Repeating failed strategies, further aggravating unreliable allies, and ignoring other powerful states engaged in Afghanistan will destabilize the region and damage U.S. interests.    

On July 31st, Arizona, Maryland, and Wyoming became the latest states to sign up to the Department of Homeland Security’s Records and Information from DMVs for E-Verify (RIDE) program. RIDE is an add-on to E-Verify that draws upon state-level motor vehicle departments’ records to supposedly improve E-Verify’s accuracy. The three states join Florida, Idaho, Iowa, Mississippi, Nebraska, North Dakota, and Wisconsin as participants in the RIDE program.

Driver’s licenses and non-driver ID cards account for nearly 80 percent of proof of identity documents submitted by users of E-Verify. RIDE allows the E-Verify system to run a license issued by a participating state against state driver’s license databases, ostensibly in order to check the document’s validity. As all of the participants in the RIDE program are also participants (or actively working towards full participation) in the REAL ID federal national identification program, joining the former further integrates a state’s driver’s database with federal systems.

As with REAL ID, the RIDE program represents the creeping use of non-law enforcement “civilian” state and local databases by government agencies for purposes far beyond their original intent. With the increased use of E-Verify and DHS’s renewed push on REAL ID enforcement, expect more states to join RIDE in the future, putting more and more personal and state data in the hands of the federal government and DHS.

Edith Windsor, a heroine of property rights as well as constitutional protection for gay persons, has died at age 88. After the IRS levied a $363,053 estate tax bill following the death of her spouse, Thea Spyer, Windsor went to federal court to challenge the constitutionality of Section 3 of the 1996 Defense of Marriage Act, which prohibited the federal government from recognizing same-sex couples. She scored a notable 2012 victory at the U.S. Court of Appeals for the Second Circuit, in an opinion written by Chief Judge Dennis Jacobs, one of the most respected conservatives on the federal bench. The case then went up to the U.S. Supreme Court, with Cato supporting her cause in an amicus brief.

As the Cato amicus program page describes our role: 

In a case of interesting bedfellows, Cato joined the Constitutional Accountability Center (CAC) [a progressive outfit more usually opposed to our positions] on a brief arguing that DOMA violated the Fifth Amendment’s guarantee of equal protection….

A five-justice majority agreed with Cato and CAC, holding Section 3 unconstitutional “as a deprivation of the liberty of the person protected by the Fifth Amendment.” Justice Anthony Kennedy, writing for the majority, held that the federal government cannot intrude into a state’s traditional role in recognizing marriages to bring disfavor onto an unpopular minority.

After supporting marriage equality for longer than nearly any institution in Washington, it was gratifying to see the Court adopt Cato’s position. This was a trailblazing decision and an important step on the road to equal rights for the LGBT community.

Elizabeth Wydra of CAC looked back on the case and its results in the next (2013) Cato Supreme Court Review. 

Litigants whose names wind up on landmark cases can sometimes be a tiny bit disappointing to meet in person, but not Edith Windsor. She gave delicious interviews, like this with the NYT in 2013 (“I would trust no Clinton anywhere any time.”) Accomplished, outspoken, life-loving, and successful, she cut a comprehensively cool figure – and helped make American history.