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Zoning regulations and occupational licensing aren’t the only regulations with regressive impacts. A new study circulated by National Bureau of Economic Research (NBER) suggests building energy codes hurt the poor, too. The NBER report focuses on California, but most states adopted statewide building energy codes decades ago. As a result, regressive impacts may be widespread.

Building energy codes regulate a home’s energy footprint, and they are often justified by concerns about energy-related environmental externalities. But well-intentioned objectives don’t insulate the public from trade-offs.

The NBER study looks at impacts on home characteristics, energy use, and housing prices. In all three categories, the impact of residential energy codes is negative for those in the lowest income quintiles.

For example, stricter energy codes were associated with a decline in home values for low-income households of 8-12 percent. Stricter codes reduced the number of bedrooms and square footage of homes in the lowest income households by 4-6 percent. On the other hand, home values increased and changes to square footage and number of bedrooms were minimal for wealthier households.

For some environmental advocates, the distributional consequences may still be justified if energy codes reduced energy use. But the authors state there is “debate about the extent to which building energy codes reduce energy use at all.” The study finds no signficiant reduction in energy use per square foot, although it does find energy reduction on a per-dwelling basis but only in the second lowest-income quintile. 

This suggests energy codes do not meet even their own stated objectives. Energy codes provide another example of how various political objectives – including protecting the environment – unavoidably require trade-offs. Often the costs of regulation are borne by the poor.    

In his State of the Union address last night, President Trump said that one of his “greatest priorities” is to reduce the price of prescription drugs. “In many other countries,” he said, “these drugs cost far less than what we pay in the United States.” Alluding thus to the “drug reimportation” issue, he added that he had directed his administration “to make fixing the injustice of high drug prices one of our top priorities. Prices will come down.” That won’t be easy.

Back in 2004, when Congress took up the idea of lifting the ban in place on importing lower-priced drugs from abroad, I wrote a long, complex Cato Policy Analysis on the issues at stake, urging, as the subtitle said, “The Free Market Solution.” Unfortunately, three years later, when the Senate finally acted, the bill was anything but a free market solution. In fact, it amounted to importing foreign price controls, as I explained in a piece in the Wall Street Journal. Fortunately, the bill died, but in the face of state efforts along the same lines in 2013, I wrote this time at Cato@Liberty, explaining why the “simple” solution of lifting the ban would not work. Drawing from that post, here’s why, in a nutshell. (See the Policy Analysis for the complex details.)

Given the Food and Drug Administration’s safety and efficacy standards, it takes 12 to 15 years and upwards of a billion dollars to bring a new drug to market, but only pennies a pill to manufacture it thereafter. Obviously, drug companies need strong patent protection or they’d never undertake that research and development.

But when they go to market a new drug, they find a relatively free market only in America. Everywhere else they face socialized medical systems and strict price controls, so they segment markets and price their drugs differentially, garnering such profits as they can from each market. Naturally, therefore, they have to guard against “parallel markets”—vendors in low-price markets reselling the drugs (at a profit) in high-price markets, especially when supply limitations and no-resale contracts are legally suspect. That’s where the reimportation ban comes in. If low-price drugs sold abroad flood the American market, displacing higher-priced domestic drugs, there go the profits—and there goes the R&D needed to discover new drugs.

Naturally, Americans resent having to subsidize the rest of the world, in effect, which is why letting them import cheap drugs from abroad plays so well politically. But we’re faced here with a Hobson’s Choice—which I’ve only sketched in this post. As I said, it’s a complex issue, involving treaty arrangements, patent law, and much more, rooted ultimately in the socialized medical systems we find abroad, toward which, alas, we ourselves are moving. In fact, the ultimate aim of many of the reimportation proponents is to have the federal government subsidize, if not do, the R&D needed to bring new drugs on line. Talk about bad medicine.

The market approach to this problem that I originally proposed would have to allow drug companies to protect themselves through contractual arrangements that limited supplies and policed parallel markets. That may not be the only solution to this problem, however. In fact, Cato adjunct scholar Dr. David Hyman and attorney Charles Silver have a book coming this spring from Cato entitled Overcharged: Why Americans Pay Too Much for Health Care in which they propose, if anything, an even more complex “prize regime” to reduce drug costs. It’s a clever proposal that addresses even the orphan drug problem, but because it would involve both changes to our patent system and a measure of public funding, the authors grant that it faces a steep uphill battle.

As a political matter, therefore, the more likely approach will be the one we’ve seen from time to time that simply lifts the ban and includes a few other touches. If so, members will need to think it through carefully. The current arrangements did not come about by accident. But it’s hardly a stretch to say that the administration and Congress could make things worse.


Residents of Berkeley, California are a little bit scared about potential radio-frequency exposure from cellphones. Despite the FCC’s conclusion that there’s “no scientific evidence” linking “wireless device use and cancer or other illnesses,” the city mandated that any party buying or leasing cellphones communicate a specific message to every customer about radio-frequency exposure. Getting bad vibes from that requirement, CTIA (the wireless industry’s trade group) sued Berkeley for violating the First Amendment by compelling that speech.

It’s a cornerstone of First Amendment law that the right to speak necessarily entails the right to remain silent. This principle ensures the freedom of conscience and prevents citizens from being conscripted to serve as unwilling bullhorns for government communications. Likewise, it is a bedrock principle of First Amendment law—recently affirmed by the Supreme Court—that content-based restrictions of speech must survive the strictest scrutiny to pass constitutional muster.

Unfortunately, these rules don’t apply with the same force to regulations of “commercial speech,” which the Supreme Court has ruled need not meet the same rigorous standards of review as other types of speech. In a 1985 case called Zauderer v. Office of Disciplinary Counsel of Supreme Court of Ohio, the Court went further and created an additional narrow exception. Zauderer allowed courts to apply less rigorous scrutiny when analyzing the constitutionality of disclosures of “purely factual and uncontroversial information” when mandated in an effort to combat misleading commercial speech. The Zauderer standard also requires that any disclosures not be “unduly burdensome” and be “reasonably related to the State’s interest in preventing deception of consumers.”  

In ruling against CTIA, the U.S. Court of Appeals for the Ninth Circuit further eroded that already lax standard of judicial review. Instead of requiring Berkeley to show a need to combat consumer deception – and how the mandated disclosure provision alleviates that need – the Ninth Circuit skipped right over Zauderer to find that compelling speech content posed no constitutional issues because mandated disclosures need only be reasonably related to “non-trivial” government purposes. This dangerous dilution would allow government entities to compel a nearly unending amount of speech on any number of controversial topics, even if the compelled script was itself misleading.  

CTIA is now petitioning the Supreme Court to review that flawed decision. The Cato Institute, joined by the Competitive Enterprise Institute and Cause of Action Institute, has filed an amicus brief supporting that petition.

This important area of law desperately needs clarification, particularly at a time when compelled-disclosure regimes have proliferated and some courts have distorted the already insufficient Zauderer standard beyond recognition. To remain faithful to the First Amendment and the Court’s jurisprudence on compelled speech and content-based speech regulations, courts should apply strict scrutiny – meaning the government needs a really good reason and can’t achieve its goal any other way – to review laws that force market participants to disparage their own products and participate in policy debates they wish to avoid.

The Supreme Court will decide whether to take up CTIA v. City of Berkeley later this winter or spring.

A new study by Canadian scholars says that the users of infrastructure should pay for it generally, not taxpayers. Cato’s Peter Van Doren lauded the study by distinguished fiscal experts Richard Bird and Enid Slack, and dropped it on my chair.

Here are some highlights:

As Adam Smith (1776) said long ago, local public works such as roads and bridges should be financed and managed by the appropriate local government and paid for by those who use them. … [A]lthough there are some reasons for higher level governments to provide some local infrastructure projects, Smith was broadly right. No matter how infrastructure is financed, there is no free lunch. In the end, the bill must be paid either by user charges or by taxing someone and, whenever feasible, user charges are better.

… People should pay directly for many services provided by the public sector, particularly such congestible services as roads or water and sewerage provided to easily identifiable users.

One reason is simply because services that users pay for do not need to be paid from distorting taxes that reduce economic welfare.

Another reason is because when user charges for services fully cover the marginal social cost of providing them people buy such services only up to the point at which the value they receive from the last unit they consume is just equal to the price they pay, so that resources are more efficiently allocated.

Moreover, providers who are financed by full cost pricing have incentives to adopt the most efficient and effective ways of providing the service and to supply it only up to the level and quality that people are willing to pay for.

In addition, when services are financed fully by user charges, political decision makers can more readily assess the performance of service managers – and citizens can do the same with respect to the performance of politicians.

While user pays should be the general approach, the scholars go on to discuss some of the practical and political hurdles.

All in all, the paper is a nice introduction to the economics of public infrastructure, and is directly applicable to the current infrastructure debate in the United States.

For more on infrastructure, see


During his State of the Union speech, President Trump will tout his plan for draconian restrictions on legal immigrants. Supporters, like House Judiciary Committee Chairman Bob Goodlatte (R-VA), justify the plan by claiming that America is “by far the most generous nation in the world for legal immigration.” Not only is “by far” clearly false, but when you consider its wealth, America is already among the least generous to immigrants around the world.

The United States ranks in the bottom third of wealthy countries in terms of net new immigration as a share of total population from 2015 to 2017 as well as total foreign-born residents as a share of total population, according to figures  from the United Nations. Trump’s plan would make America even more closed than it already is.

The United Nations data contains information on the foreign-born populations in all countries (or semi-independent provinces) around the world.* U.S. immigration is decidedly unimpressive compared to all countries. Although America does have the highest total number of foreign-born residents in the world, a fair comparison requires controlling for the size of its current population. After all, a million new people entering India with a population of 1.3 billion would have very different effects than a million new people entering Estonia with a population of 1.3 million.

With this in mind, it is clear that America is nowhere near “the most generous country in the world” on immigration. Of the 232 jurisdictions that the UN includes, America ranks just 64th overall. Focusing on the rate of new immigrants as a share of total population, the United States had only the 49th highest net immigration rate from 2015 to 2017 (inflows minus outflows of foreign residents divided by total population). This places the United States rank in the 72nd and 79th percentiles in the world, respectively.

This assessment is still misleading, however, because it compares the United States to countries that very few immigrants would want to immigrate to. The United States’ ranking among more prosperous countries is even less inspiring. Of the 50 countries or provinces which had, according to the United Nations, a gross domestic product (GDP) of at least $20,000 per capita in 2015, the United States has the 34th highest share of foreign-born residents as well as the 34th highest net immigration rate (Table 1). This places the United States rank in the 32nd percentile on both measures.

The 50 most prosperous countries have double both the average foreign-born share and average immigration rate of the United States. Those countries at or above the 50th percentile have an average foreign-born share three times the U.S. share and an immigration rate four times as high as the U.S. rate. The United States is far from generous: it is downright stingy to immigrants. Figure 1 provides the net immigration rate from 2015 to 2017 for the United States and the 33 countries that rank higher than it. 

Figure 1: Countries With Highest Net Per Capita Immigration From 2015 to 2017 and a Per Capita GDP Above $20,000 in 2015


Sources: United Nations (Foreign Populations); United Nations (Total Populations); United Nations (GDP Per Capita) 

This still considerably overstates America’s generosity because such a large share of America’s foreign-born population is here illegally: almost a quarter. This appears to be one of the highest shares in the world. Many of America’s immigrants are already defying America’s attitude toward them. In other words, U.S. law is not only hostile toward new immigrants. It is hostile toward its existing foreign-born residents.

By almost any reasonable standard, America is already one of the least generous countries in the world toward legal immigrants. If the United States does implement the White House’s immigration framework, it would be moving its nation’s immigration system in the opposite direction of the rest of the world. Other developed economies are opening their borders to more immigrants than ever, while the United States would have sent its immigration rate back to its lowest level since World War II.

America, however, doesn’t need to be “generous” toward immigrants at all. It is in the country’s self-interest not to prohibit foreigners from living and working in America. Allowing people to freely move and work where they want is not charity. It is an expansion of the free market and allows people to contribute to the economic prosperity of the country and expand the pie for everyone. The president’s plan would make America both less generous and less prosperous.


Table 1: Immigration and Immigrant Population Ranking for Countries with Greater Than $20,000 Per Capita Gross Domestic Product

  Increase in Foreign-Born* From 2015-17 As a Share of Total Population Total Foreign-Born* Residents as a Share of Total Population   Country Rate Country Share




United Arab Emirates



Turks and Caicos





Saudi Arabia


Sint Maarten



United Arab Emirates


Turks and Caicos



British Virgin Islands





Sint Maarten


British Virgin Islands










China, Macao SAR








Macao SAR















Brunei Darussalam







Cayman Islands





Hong Kong SAR





Saudi Arabia























Cayman Islands












Brunei Darussalam





New Caledonia













United Kingdom


New Zealand








New Caledonia










Hong Kong SAR





New Zealand












San Marino



United States


United States















United Kingdom








San Marino

























Republic of Korea



























Republic of Korea







Sources: United Nations (Foreign Populations); United Nations (Total Populations); United Nations (GDP Per Capita)

*Note: The UN defines “foreign-born” to include people who receive citizenship through their parents despite being born overseas. Typically, the United States does not consider such people “immigrants” as they are citizens at birth. This results in a higher share of foreign-born for the United States than other estimates.

The federal government imposes a mandate to blend corn ethanol and other biofuels into the nation’s gasoline. This “renewable fuel standard” or RFS raises prices at the gas pump. The “10% Ethanol” sticker you see when filling your tank signals that you are being economically exploited by the government in cahoots with corn farmers.

At Downsizing Government, Nicolas Loris discusses how the RFS raises fuel and food prices. The mandate also damages some energy businesses, as the Wall Street Journal is reporting:

Philadelphia Energy Solutions LLC affiliates accounting for more than one-quarter of the fuel-refining capacity on the East Coast filed for bankruptcy protection, blaming the steep cost of complying with a federal environmental regulation.

… The company cited the Clean Air Act’s renewable-fuel-standard program as the primary reason for its financial distress, saying it is a victim of “regulatory compliance costs that specifically penalize independent merchant refiners.” It also blamed adverse economics in the energy sector.

Independent refiners have long complained about the program, which was introduced during President George W. Bush’s administration to boost the amount of ethanol in the country’s gasoline supply. The Renewable Fuel Standard requires companies to either blend ethanol with the gasoline they produce or buy credits. Refiners that don’t purchase the credits have to pay penalties to the government.

The credits are awarded where ethanol and gasoline are blended, which for the most part means facilities owned by integrated oil companies like Chevron Corp. CVX -2.07% and Exxon Mobil Corp. XOM -1.11% and by large retail gas-station chains. The system disadvantages smaller refiners like Philadelphia Energy with few blending facilities.

If it wants to avoid fines, Philadelphia Energy has to purchase blending credits, exposing the company to an “unpredictable, escalating, and unintended compliance burden” that has cost it $832 million since operations began in September 2012, the company said in court papers. Philadelphia Energy said it paid $13 million to comply in 2012, with the figure rising to $231 million by 2016.

The first sentence says a “federal environmental regulation” is to blame. That is ironic because the ethanol mandate, the RFS, is anti-environmental in numerous ways.

Loris concludes that the RFS creates no net green benefit, imposes costs on motorists, harms businesses, and is a “bureaucratic nightmare.” In his State of the Union message tonight, President Trump will discuss his deregulatory successes. He should put RFS repeal on his agenda for 2018.

Bloomberg has a good piece on the US economy under President Trump. Headline takeaway: on almost all metrics, the economy has improved or remained largely unchanged since he took office.

From Q4 2016 to Q4 2017:

-       GDP grew by 2.5 percent, the fastest annual increase since Q4 2015, and higher than the post-recession average of 2.2 percent.

-       Real nonresidential investment increased by 6.3 percent, higher than the post-recession average of 4.8 percent and after falling in three of four quarters in 2016.

-       The unemployment rate fell from 4.7 to 4.1 percent, and is now its lowest since 2000.

-       The unemployment rate for black and African-American workers fell to 6.8 percent, the lowest rate in the 45 years of recorded statistics.

-       The 25-54 civilian labor force participation rate crept up from 81.4 percent to 81.9 percent.

-       Labor productivity grew by 1.5 percent, historically below the 2.1 percent post-war annual average, but above the post-crisis 1 percent average.

The only really disappointing indicators for the President have been:

-       A fall in real median weekly earnings (official statistics show a 1.1 percent increase to Q3 2017 but a large fall in Q4, such that there has now been a 1.1 percent decline overall)

-       A widening budget deficit to 3.4 percent of GDP.

(Note: Bloomberg also chalks up an increase in manufacturing jobs as a “win”, but which sectors jobs come in should not concern us in a free economy. Nor should the trade deficit, the outlook for which it reports is moving in the “wrong direction.”)

Expect the President to herald the economic performance in his State of the Union speech tonight then. And with good reason – there’s lots of positive economic news.

Critics will claim most of the above represent cyclical improvements unrelated to policy. But we know from history bad policy can seriously derail growth prospects (especially temporarily). Why else would so many economists have warned of the consequences of a Trump victory?

The Trump administration have avoided major mistakes. There’s good reason to think the President’s direct deregulatory efforts coupled with slowing new regulations to a halt has enhanced business certainty and the productive capacity of the economy. Fears of severe trade shocks have not (yet) materialized. And perhaps most importantly, the administration has recognized the key challenge moving forward: with the labor market nearing full employment, robust growth and higher wages will only come primarily from an enhanced sustainable growth rate driven by productivity improvements.

The tax reform package’s central features - the cut in the corporate tax rate to 21 percent and immediate expensing on equipment - were designed explicitly to enhance investment to achieve this. The cutting of marginal income tax rates for most should likewise both enhance labor supply while also encouraging human capital accumulation at the margin. While I have concerns about other elements of the package, infrastructure reform which speeds up or lower the cost of economic projects could have beneficial supply-side consequences too.

Sure, there are always economic and policy risks and long-term challenges, some of which are more serious than others. A NAFTA unwinding in 2018 could cause a negative supply-side shock. An immigration package which slashes legal migrant numbers could reduce GDP and blow a hole in the public finances. In the longer-term, it would probably reduce GDP per capita too, through dampening specialization and job matching. Faulty expectations about long-term growth and wealth effects from high net worth could lead to a negative adjustment if there are downward asset price movements. And the US’s public finances are still on an unsustainable path.

But all in all the President’s first year has a positive economic story. And whether you agree with their exact prescriptions, the administration’s focus on raising productivity is the right one.

This year’s Federal Open Market Committee (FOMC), which meets for the first time this week, faces many unknowns, including new faces at the Fed. In fact, by year’s end, the Fed’s rate-setting body will have, at most, only two continuity voters — that is, members who voted during all of 2017 and will vote throughout 2018.

Only twice before in its history has the FOMC had so few continuity voters across two consecutive years: in 1987 and in 2007. On the first occasion, the Fed had to deal with a major stock market crash, while on the second it was confronted by the decline in the subprime market that heralded the 2008 Financial Crisis. These are only two data points to be sure, but the point is that a relatively inexperienced FOMC may find itself having to cope with situations that would pose a challenge even to the Fed’s most seasoned veterans.

Continuity FOMC Voters

This week’s FOMC meeting will be Janet Yellen’s last vote. Yellen will step down from the Federal Reserve Board on February 3, when her term as Chair expires, though she could have remained a Governor until 2024. Jerome “Jay” Powell, Yellen’s colleague on the Board, will succeed her, having been confirmed by the full Senate last Tuesday.

Powell is one of those two continuity votes on the FOMC this year, having voted at all of last year’s FOMC meetings. He’s expected to lead the Fed by hewing closely to Yellen’s example. As I previously noted, he will likely continue the normalization plan developed under Yellen — with its gradual path for rates increases and monthly reductions of the balance sheet. However, should deviations from the plan become necessary, Powell’s limited background in monetary economics and track record for relying on his staff and his FOMC colleagues suggest that he would work to maintain policy consensus.

Governor Lael Brainard, who has served on the Board since 2014, will join Powell as the only other continuity voter. She has previously been skeptical of removing monetary accommodation and raising interest rates, yet has never dissented in an FOMC vote. Despite her dovish reputation, she is very likely to support Powell’s leadership and policy decisions. Fed Governors have supported the Chair on FOMC decisions without exception for more than a decade. The last Governor’s dissent — when Mark W. Olson wanted an easier policy — was in 2005. Conversely, regional bank presidents have dissented 70 times since then.

New Faces at the Board of Governors

The most recently appointed Governor, Randal Quarles, voted only twice last year. Quarles came to the Fed with a background in private equity (he and Powell were both partners at the same private equity firm, The Carlyle Group). As Vice Chair of Supervision, it is widely believed that Quarles will focus more on his regulatory portfolio than staking out new ground in monetary policy. Recent comments indicate he’ll be determining how much of a burden current regulations impose, using a cost-benefit approach that Powell supports. But he has gone further than Powell in proposing regulatory relief for any large financial institution that does not impose systemic risk.

The Board of Governors is a 7-member body. So, with Yellen stepping down and Stanley Fischer having left the post of Vice Chair in October, four vacancies have yet to be filled. Yet so far the president has put forward but one nominee: Marvin Goodfriend.

Though he didn’t escape criticism at last week’s Senate Banking confirmation hearing, Goodfriend’s longstanding academic record of thinking about experimental monetary policy, as well has his considerable experience as a policy advisor at the Richmond Fed, would make him a valuable asset to the Board, and to the FOMC.

For example, Goodfriend was writing about how to overcome the zero lower bound in 2000, when the federal funds rate was 6.5%. And more than a decade ago he was writing on the utility of using interest on reserves as a tool for implementing monetary policy. My colleague George Selgin has questioned the Fed’s IOER-based “floor” system, suggesting that it harbors an inherent deflationary bias, among other shortcomings. Yet, it is desirable to have a permanent FOMC voter who has spent more than a decade thinking about the unconventional operating framework that the Fed is currently using.

And the other vacancies? While no names have circulated as potential Governors, several potential Vice Chair nominees have been mentioned. Those include Mohamed El-Erian, former CEO at PIMCO and economist at the IMF who currently serves at the chief economic adviser at Allianz; Larry Lindsey, a former Fed Governor and current CEO of the Lindsey Group, an economic consultancy; and Richard Clarida, the Global Strategic Advisor and a Managing Director at PIMCO and the C. Lowell Harriss Professor of Economics at Columbia University.

The most recent name reported is John Williams, President of the San Francisco Fed; incidentally, the same position Janet Yellen held before she moved to Washington to be Vice Chair under Ben Bernanke.

While Williams is eminently qualified for the role, his selection would be a curious one for the administration, if they intend to shake up the Fed, as it would dampen their overall impact on staffing officials in the Federal Reserve System. Williams is a 2018 FOMC voter. He is eligible to serve as SF Fed President through June 2027 — giving him a vote on the FOMC four years out of the next ten, since the SF Fed President sits on the FOMC every third year. Promoting him to Vice Chair would turn him into an annual FOMC voter (in addition to elevating him to the Board, of course), but the administration would have no direct say in who replaces him at the San Francisco Fed. Regional bank presidents are selected by that regional bank’s Class B and Class C Directors, not by executive nomination and are not subject to Senate confirmation.

Rotating Regional FOMC Voters

Each year, five Federal Reserve regional bank presidents vote on the FOMC: four rotate annually while the President of the New York Fed is a permanent voter. San Francisco has a seat on the FOMC in 2018, so Williams votes this year — with or without the Vice Chair promotion.

Unlike some of the regional bank presidents rolling off the FOMC, Williams is open to accelerating the path of rates hikes. He will be joined by Loretta Mester — who, as the President of the Federal Reserve Bank of Cleveland, votes every other year, rather than every third. Mester has been one of the most aggressive voices for a steeper path of rates hikes, having dissented twice in 2016, when she felt the Fed ought to be raising rates faster.

Mester and Williams are stark contrasts to two of last year’s voters. Recall that in December, Charles Evans, President of the Chicago Fed, joined Neel Kashkari in dissent, preferring to hold rates steady. Kashkari, President of the Minneapolis Fed, had already dissented during the other two rates hikes of 2017, preferring to maintain monetary accommodation in light of low inflation numbers.

But the major question marks are with the two most recently appointed regional bank presidents. They are both FOMC voters this year and between them there have been only five speeches.

Rafael Bostic took over leadership at the Atlanta Fed in June of last year. He’s been a public policy professor at the University of Southern California, an Assistant Secretary at the Department of Housing and Urban Affairs, and an economist at the Federal Reserve Board. In his only speech of the year thus far, he broadly underscored the normalization framework in place, though he sees different risks to the economy than his colleagues Williams and Mester. Where they see potential upside risk that may hasten rates hikes, Bostic believes that monetary policy is already “approaching a more neutral stance” and he is open to fewer than three hikes, as he believes the Fed will achieve its 2% inflation target by year’s end.

Thomas Barkin, starting just this month as President of the Richmond Fed, is even more of an unknown quantity. He is not totally new to the Federal Reserve System, having sat on the Atlanta Fed’s Board of Directors for six years, serving as Chairman for two. He was a senior partner and the chief risk officer at the consulting firm McKinsey & Company, which makes him a sensible choice for running the Richmond Fed as CEO. But these experiences shed no light on his views on monetary policy. His first speech will be read with great interest.

Vice Chair of the FOMC

A final source of FOMC uncertainty is the anticipated change in the leadership of the New York Fed. President William Dudley announced he will be stepping down this summer, rather than next January when his term ends. Dudley, who as NY Fed President is the Vice Chair of the FOMC, is currently the longest tenured FOMC voter. The search for Dudley’s replacement is already underway in earnest, and will be selected without direct input from the administration. But, whoever takes over for Dudley this summer will immediately and permanently vote on the FOMC throughout his or her tenure as NY Fed President.

Changes have already happened and more are coming to the Fed in 2018. As Powell takes the helm and Yellen’s normalization plan continues, uncertainties remain. With much still unknown about the 2018 Federal Open Market Committee, let us hope we learn more about the voters’ views long before we learn about how they respond to a crisis.

[Cross-posted from]

Immigration and Customs Enforcement (ICE) has access to billions of license plate images that allow for the agency to engage in near real-time tracking of its targets. This surveillance capability should instill a sense of unease in us all, even if we aren’t in ICE’s crosshairs. 

Vigilant Solutions, the private company that reportedly collects the data ICE will query, owns a database with more than 2 billion license plate photos that produces 100 million hits a month. These photos come from toll roads, parking lots, vehicle possession agencies, as well as local law enforcement. According to ICE’s privacy impact assessment for the license plate tracking program, Vigilant Solutions’ data includes images from 24 of the US’ top 30 most populous metropolitan areas. ICE does not contribute license plate images to the database.

ICE policy does provide some privacy protections, but they fall far short of what the agency should impose on itself. ICE may only query the database for license plate numbers in order to find information about vehicles that are part of “investigatory or enforcement activities.” Given that ICE has been increasing the number of noncriminal undocumented immigrants it arrests, it’s safe to assume that ICE’s use of the license plate database will extend beyond investigations into undocumented immigrants who are wanted for violent crimes. 

ICE’s privacy impact assessment states that investigators with ICE’s Enforcement and Removal Operations, the agency responsible for deportations, will be able to access five years worth of license plate location data.

Those who believe that ICE should be dedicating significant resources to deporting non-violent undocumented immigrants may applaud the use of license plate location data. What they should consider is that they could be the targets of identical surveillance in the future. The federal government has conducted surveillance on a wide range of targets, and surveillance tools won’t change just because the target will.

The Constitution provides little protection when it comes to long-term warrantless tracking. In 2012, the Supreme Court unanimously held that the warrantless 28-day GPS tracking of a car violated the Fourth Amendment. However, the opinion of the Court, written by Justice Scalia and joined by his colleagues Chief Justice Roberts and Justices Kennedy, Thomas, and Sotomayor, is grounded in the physical intrusion of the GPS locator on the car rather than the GPS tracking violating the driver’s expectation of privacy.

Although Justice Sotomayor joined Justice Scalia’s majority opinion, she wrote her own solo concurrence highlighting the dangers of long-term monitoring that does not require tracking devices to be attached to property. She wrote, “physical intrusion is now unnecessary to many forms of surveillance.” Later in the concurrence, she described the information that location tracking can reveal: “I would ask whether people reasonably expect that their movements will be recorded and aggregated in a manner that enables the Government to ascertain, more or less at will, their political and religious beliefs, sexual habits, and so on.”

License plate readers are not the only tools that could be used to uncover intimate details of someone’s life. Police in Compton, Philadelphia, and Baltimore have used persistent aerial surveillance technology that enables analysts to use “Google Earth with TiVo” capabilities to track targets. Law enforcement agencies at the state, local, and federal level have been using so-called “Stingrays,” tracking devices that mimic cellphone towers. When merged with body cameras and CCTV cameras facial recognition technology will make it easier for officials to monitor people’s public movements. 

Until Congress or the Supreme Court imposes restrictions on ICE scouring through years of license plate location data without a warrant civil libertarians will have to wait for the Trump administration to adopt policies that restrict this kind of surveillance. The Trump administration’s rhetoric and policy announcements so far make hell freezing over seem more likely.

Those who agree with the Trump administration’s immigration policies are perhaps willing to overlook the significant civil liberties concerns associated with ICE being able to access five years worth of location information without a warrant. They shouldn’t. This technology won’t be put back in the box it came from after President Trump leaves the White House. It’s anyone’s guess who the next target of government surveillance will be. 

The other day, the Wall Street Journal looked at the Trump administration’s efforts to reduce the costs of building infrastructure:

The administration is hoping to roll back regulations in place for decades to reduce the period between project approval and construction, limiting environmental reviews and litigation in favor of getting big things built.

The effort is likely to face resistance from environmental groups and their Democratic allies in Congress. But the president’s advisers believe they can alter the permitting process in ways that change how the government builds roads, bridges, rails and pipelines for years to come. “ … I think one of the most important things this administration can do is take permit delivery times from what is now an average of 4.7 years down to two years,” said Alexander Herrgott, the lead infrastructure aide on the White House’s Council on Environmental Quality…”

… Previous presidents have tried to streamline the federal permitting process as a way to jumpstart rebuilding of the nation’s critical infrastructure. That includes President Barack Obama, who signed the FAST Act in 2015, a bipartisan transportation funding package that created a federal permitting improvement council aimed at speeding up the environmental review process.

Mr. Trump and his aides have cited studies suggesting that environmental review can often take a decade, and calling for that period to be reduced to two years. A Government Accountability Office study of the environmental review process in 2014 cited third-party estimates that reviews average 4.6 years.

We will hear more about Trump’s infrastructure approach in his State of the Union message tomorrow night. So far it appears the approach combines:

  1.  government spending increases, as I noted,
  2.  deregulation, as the WSJ noted,
  3.  privatization, as with Trump proposals for air traffic control and federal electricity assets, and
  4.  corporate tax cuts to boost private-sector infrastructure investment.

Approaches 2, 3, and 4 are very positive. Approach 1 is not.

More on permitting here. More on infrastructure policies here. More on privatization here.

Picking up on Simon Lester’s reaction on Friday to President Trump’s near 180-degree rhetorical pivot on the Trans-Pacific Partnership, I agree with the implication that one would be ill advised to set his watch to the man’s words. However, there are plenty of good reasons for Trump to change his mind and seek to rejoin the TPP, so maybe—just maybe—the president is beginning to see the bigger picture.

Before the 2016 election, I wrote a piece in Forbes explaining why any president would want the tools of the TPP at his or her disposal and predicted that the next president (despite both major party candidates disavowing it) would ultimately support it:

The TPP is a blueprint for securing U.S. geoeconomic and geopolitical interests now and into the future by updating the rules and institutions of international trade that facilitated 70 years of global economic expansion, poverty reduction, and relative peace. As an agreement that includes countries on four continents, the TPP is well-suited to fill the void created by the breakdown of the multilateral negotiating “round” approach to global trade liberalization. The TPP is open the new members and the fact that it has achieved critical mass (40% of global GDP represented) means that the cost of remaining outside the deal will rise with every new accession, so most eligible countries will choose to join.

As investment has begun to shift from TPP outsiders to TPP members in anticipation of implementation, non-members have been implementing various domestic reforms to improve their prospects for eventually joining. And with China’s most important trade partners joining TPP, Beijing with have no better alternatives than to embrace the TPP, as well—and accept the new rules that will rein in some of the abusive trade practices of which China is so frequently accused.

After Trump won the election, I remained unconvinced that he’d pull out. I wrote in Foreign Affairs:

The TPP offers the last best chance to achieve a fresh round of comprehensive global trade liberalization under U.S. leadership. It reasserts the primacy of the rule of law in trade and expands its coverage to aspects of global commerce that didn’t even exist when the current rules were last updated, 22 years ago. As an agreement that includes countries on four continents and is open to new members that qualify, the TPP could evolve into a vehicle for achieving a much more broad-based round of multilateral trade liberalization.

Economies accounting for nearly 40 percent of global output and one-third of trade are among the TPP’s charter members, so the deal has achieved critical mass. That heft allows the TPP’s terms to be offered to prospective new members on a take-it-or-leave-it basis. If regional investment shifts from TPP nonmembers to TPP members, the incentive to join the agreement would only grow. Many countries, including Indonesia, South Korea, Taiwan, and Thailand, have already expressed interest in joining and have begun to undertake the domestic reforms necessary to qualify for the TPP.

With each new accession to the deal, the cost of remaining on the outside would only increase. That applies to China, too, which could watch some of its most important trade partners join TPP and, at some point, concede to having no better alternatives than to embrace the TPP, as well-and to accept the new rules that would rein in some of the abusive practices for which it is so frequently criticized.

Well, the costs of remaining outside the agreement have begun and will continue to mount and be borne by the United States unless we move quickly to change course. By bailing out of TPP, which will set sail without us as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP-11) in March, U.S. exporters will be at a disadvantage when it comes to foreign market access, U.S. consumers will be deprived of lower-priced goods, and the U.S. economy will be a less attractive destination for investment. 

But just as important, being outside the TPP deprives U.S. negotiators of meaningful leverage to address, curtail, and reverse China’s objectionable practices in the realm of forced technology transfer, intellectual property theft, discrimination, and state intervention—especially those practices that might not be adequately restrained by WTO rules. Standing shoulder-to-shoulder, resolutely, with other trade partners who face similar problems in China is probably the best—maybe the only—way to get Beijing to change course short of a deleterious trade war.

Although it’s far from clear whether Trump has really changed his mind about the TPP, I think he’s probably learned over the past year that his decision to withdraw came at a pretty steep cost. He may have a case of buyer’s (returner’s) remorse. Let’s hope so. Let’s encourage him to make amends. But Trump’s off-the-cuff conditionality for reentering the deal assumes a degree of negotiating leverage the United States probably doesn’t have anymore. As humbling as this may be, joining the TPP as a non-charter member is likely to mean the United States would have to give more and get less than what Obama’s USTR was able to do.

(Link to Cato Trade’s Comprehensive Assessment of the TPP.)


The White House released another immigration framework Thursday. Like its past efforts, this plan calls on Congress to enact draconian restrictions on legal immigrants. Members of Congress will have to flesh out the details, but in the most likely scenario, the new plan would cut the number of legal immigrants by up to 44 percent or half a million immigrants annually—the largest policy-driven legal immigration cut since the 1920s. Compared to current law, it would exclude nearly 22 million people from the opportunity to immigrate legally to the United States over the next five decades.

The White House Plan: Full Changes

The language in the framework is vague enough that members of Congress have some flexibility in its implementation. The most vocal supporters of the new plan in Congress are Senators Tom Cotton (R-AR), David Perdue (R-GA), James Lankford (R-OK), Thom Tillis (R-NC), and Charles Grassley (R-IA). This group has previously introduced the SECURE Act (S. 2192), legislation that would make many similar changes to legal immigration as those called for by the White House. This analysis will take the SECURE Act as the initial blueprint for a bill implementing the White House ideas.

The president’s new plan adds two major elements that distinguish it from the senators’ current bill. First, it would immediately end the diversity visa lottery and, before eliminating its 55,000 visas completely, reallocate them toward reducing the current family- and employer-sponsored backlogs. Second, it would end—like the SECURE Act—most family-sponsored visa categories, but the White House would apply the changes only “prospectively, not retroactively, by processing the backlog.” This means that the number of legal immigrants would drop more gradually than under the senators’ current bill.

Table 1 provides the fully implemented changes. The White House plan—enacted as an amended and narrowed version of the SECURE Act—would reduce the number of legal immigrants by more than 490,000 people annually, or 44 percent. The final column shows the estimated timing for the entire category to have fully phased out. (See below for a full explanation of these estimates.)

Table 1: Legal Immigrants Under Current Law & White House Framework

Sources: Authors’ calculations based on White House; S. 2192; Department of Homeland Security (FY 2018 based on FY 2016 figures, accounting for the FY 2018 cut to refugees)*Plan provides for a temporary increase

The White House plan would end the categories for parents and siblings of U.S. citizens as well as those for adult children of citizens and legal permanent residents. Based on the SECURE Act, the “minor child” category would be limited to those under the age of 18, rather than 21. The White House framework calls on Congress to end “loopholes exploited by smugglers”—language that the GOP has used to refer to a bill to restrict asylum, elements of which are included in the SECURE Act.

While spouses and minor children of residents are theoretically preserved, the SECURE Act reduces their allotment by the number of parolees—foreigners granted temporary admission for humanitarian or public interest reasons—who stay in the United States for more than a year. Because the number of parolees appears to be greater than the allotment, this category would likely never issue any green cards in practice.

The effects of the White House immigration framework are similar only to two notorious pieces of legislation: the Emergency Quota Act of 1921 and the Immigration Act of 1924, which reduced the number of legal immigrants by 495,672 and 412,582, respectively. Congress saw these bills as preventing the degradation of America’s racial stock—by Italians and Eastern Europeans, specifically Jews.

The White House Plan: Phase-Out Period

The State Department records 3.7 million applicants waiting abroad in the categories that the SECURE Act would eliminate, and Department of Homeland Security figures indicate that between 6 and 9 percent of family-sponsored immigrants, depending on the category, adjust to permanent residency inside the United States. This would imply another quarter of a million applicants waiting inside the United States (presumably in temporary statuses).

Adding half of the 55,000 green cards from the diversity visa lottery to the combined quota for the eliminated family-sponsored categories would allow 165,566 green cards to be issued annually to those in the backlog. Simple division would lead to a full implementation date of the White House plan 24 years from today.

But this is not the most likely method of implementation. Under current law, each category has a separate annual quota, and within the categories, each nationality has a quota of no more than 7 percent of the total number in that category. For example, the sibling category quota is 65,000, and Mexicans can use no more than 4,550. This means that if the senators leave all other aspects of current law the same, the categories will expire at radically different times for each nationality. For several reasons, the senators are more likely to adopt this staged implementation.

First, it delays or prevents the entry of the greatest number of legal immigrants, which is the bill’s goal. Second, the framework states that the changes would apply “prospectively, not retroactively,” implying that the legislation would allow the current system to continue without any changes. Finally, the SECURE Act already allows the categories to continue unchanged for a single year, so the simplest amendment would be to replace “for one year” with something like “until all current beneficiaries receive visas.” Similarly, the easiest and most restrictive way to implement the diversity visa reallocation would be to distribute them equally among the four eliminated categories.

White House advisor Stephen Miller in his press call explaining the framework indicated that both the employer-sponsored and family-sponsored diversity reallocation was temporary and could be accessed only by green card applicants in line as of 2018. Only employer-sponsored applicants from India would be taking advantage of this increase by 2029 or 2039. While some family-sponsored Mexican applicants would be technically still eligible more than 100 years from now, this analysis assumes 2069 as the date of final implementation (i.e., the date when all applicants who have yet to immigrate are likely to be dead).

As Table 1 shows, 61 percent of the cuts would occur immediately and 71 percent within a decade. From 2019 through 2028, nearly twice as many immigrants—3.6 million—would be banned as would potentially receive residency through the Dreamer legalization—at most 1.8 million—under the White House plan. By the end of the second decade, the number of banned immigrants would rise to 7.6 million. By final implementation, the White House plan would exclude almost 22 million legal immigrants.

Table 2: Legal Immigrants Admitted Under Current Law & White House Framework Phase-Out

Sources: See Table 1

Figure 1 provides the phase-out schedule for the four eliminated family-sponsored preference categories that have a backlog. The implementation occurs in large jumps as the backlog for nationalities that are not at their per-country limits disappears all at once. The more gradual drops happen as the backlogs for individual nationalities are eliminated. 

Figure 1: Number of Family-Sponsored Preference Immigrants under White House Framework By Year

Sources: Authors’ calculations based on White House; S. 2192; Department of Homeland Security (DHS)

As Figure 1 shows, even in 2069, some legal immigrants are still scheduled to receive green cards. These immigrants are entirely from Mexico and the Philippines. Therefore, assuming 2069 as the final implementation date implies that up to 706,665 family-sponsored Mexican and Filipino applicants would die or make alternative plans before they received their green cards under this plan as well as under current law.

This does not mean most people in the current family-sponsored categories typically wait this long to immigrate. Instead, it reflects the impact exerted by the per-country limit in some of the categories, particularly affecting Mexicans and Filipinos in particular. Modifying the per-country limit and increasing quotas in the categories would shorten the family wait times under current law or in the backlog reduction plan.


Restricting legal immigration will unnecessarily deny opportunity to many people and have far-reaching negative consequences for economic growth in the United States. Labor force growth is one of the most important growth factors. Cutting the number of new legal immigrants by about 50% would initially reduce the rate of economic growth in the United States by an estimated 12.5% from its projected level, according to Joel Prakken, senior managing director and co-founder of Macroeconomic Advisers. This penalty would increase in later years as America becomes even more dependent upon immigrants for the country’s labor force growth due to our aging population.

The National Academy of Sciences has estimated that the average immigrant contributes, in net present value terms, at least $92,000 more in taxes than they receive in benefits over their lifetime, so banning them would harm government finances. Diversity and family-sponsored immigrants—who the White House framework would ban—are better educated than the average immigrant (and Americans), so the effects of the White House ban could be even more negative.

The United States needs legal immigrants to maintain a strong rate of current economic growth and stay competitive internationally. America already has an immigration level as a share of its population near the bottom of OECD countries. Real “merit-based” immigration reform would focus on increasing the number of immigrants at both ends of the skill spectrum to fill difficult manual labor jobs as well as contribute to technology, science, and finance. The White House proposal is the opposite of the reforms that would lead America toward prosperity.

Starting today and throughout this week, the Cato Daily Podcast (Subscribe!) will drill down into issues related to immigration. First up, Alex Nowrasteh and I discuss the persistent myths surrounding immigrants and crime. Put simply, if you’re going to worry about crime rates among groups, worry relatively more about your fellow Americans and relatively less about immigrants, both legal and illegal.

Late on the night of January 25, the Arizona legislature unanimously approved “The Arizona Opioid Epidemic Act,” introduced at the urging of Governor Doug Ducey (R) just 3 days earlier. The Governor and legislature were in such a hurry that they took no time to request testimony from representatives of the medical profession or from any other experts that might have differing views about the best ways to approach the overdose crisis. The overdose crisis is such an “emergency” that there was no time for that. Yet, most of the Act’s provisions are not scheduled to take effect until 2019.

Among the harmful features of the Act are strict restrictions on the amount and dose of opioids doctors can prescribe to new and postoperative patients. Prescriptions may be for only 5 days, and the dosages are capped. Doctors wishing to exceed these limits must first consult a board-certified pain management specialist which, of course, might take several days. This policy is not evidence-based. It will cause injured patients and those recovering from surgery to suffer needless and agonizing pain. In December, the Arizona Medical Association and the Arizona Osteopathic Medical Association wrote the state Department of Health Services warning of harmful “unintended consequences” that may ensue from one-size-fits-all 5-day limits on prescriptions and dosages for patients in acute pain.

This policy is not just inhumane, it’s dangerous. Desperate patients might seek to get better relief for their undertreated pain by supplementing their prescriptions with alcohol and/or other drugs, or by obtaining drugs through the illegal market, increasing the risk of overdose or death.

Another provision requires all providers to use a state-approved E-prescription system to prescribe opioids, placing a burden on health care providers in remote and rural areas of the state, where broadband internet access is inadequate and where some practitioners lack technological sophistication in their practices.

A “Good Samaritan Law” was a feature of the legislation. This law, a good idea already on the books in over 40 other states, is intended to encourage witnesses of overdoses to call first responders with the rescue antidote naloxone. In many cases, witnesses are afraid to call for help out of fear they might be arrested for possession of an illicit substance or some other offense. A “Good Samaritan Law” assures them they will not be arrested. However, in some states, the laws contain loopholes that have resulted in witnesses being arrested and charged with non-drug related offenses, or even with manslaughter if the overdose victim dies.

Unfortunately, in the rush to pass Arizona’s Good Samaritan Law, such loopholes were included. They allow law enforcement first responders to confiscate any drugs or drug paraphernalia they find on witnesses, and to arrest witnesses for non-drug related crimes. It won’t take long for word to spread after the first such arrest or confiscation. Don’t look for this Good Samaritan Law to reduce many overdose deaths.

It’s not as if the legislators weren’t aware that they were acting in haste and might be making matters worse. Senator Sylvia Allen (R) expressed concerns about the costs of second opinion consultations and how long it may take to obtain them. She also questioned the state’s micromanagement of medical practitioners. She told a reporter for the Arizona Capitol Times, “Here’s a doctor who’s practiced for years, knows that patient, and now they have to get a second opinion. It’s kind of an insult to them. So I don’t like that at all.” Similarly, Senator Steve Smith (R) was unhappy with imposing a new regulatory scheme on doctors, pointing out that only a few “bad doctors” overprescribe, and that adding this new burden is “still not going to solve the problem.” Republican Senator Warren Petersen agreed. 

Senators Rick Gray (R) and Regina Cobb (R) worried about the burden the new E-prescribing requirements place on rural providers. Senator Gray worried that “some of this software isn’t even developed yet.” And Senator Cobb, pointing out that rural doctors might have to lay out $20,000 to set up their systems, called it an “unfunded mandate” on rural doctors.

Senator Sonny Borrelli (R) openly worried about the Act’s potential harm to patients. The Arizona Capitol Times reported him saying, “I don’t want to restrict the ability of good doctors to do their job and force that patient (who needs painkillers) to black tar heroin.”

Along with many of his colleagues on the other side of the aisle, Senator Borelli lamented the fact that barely any attention was given to harm reduction measures that have a proven record of saving lives and preventing the spread of disease. Short shrift was given to Medication Assisted Treatment, and Senator Borelli was unhappy that nothing was done to promote needle-exchange programs. Safe Syringe Programs have been long supported by the Centers for Disease Control and Prevention.

Even Republican Senate Majority Leader Kimberly Yee was unhappy with the rush to action: “If we’re not implementing this until 2019 I don’t know why we’re voting on this this afternoon…Sometimes when we rush through legislation there are consequences.”

Despite the objections raised by these and many other legislators, they voted for the bill along with everyone else— the bill passed unanimously later that day. It is based on the false premise that the opioid overdose crisis is the result of doctors and pharmaceutical companies teaming up to ensnare unsuspecting patients in the web of drug addiction. Yet all the evidence shows that, to the contrary, the overdose crisis is the result of nonmedical users seeking drugs in the illicit market. And in recent years the majority of overdose deaths are due to heroin and fentanyl.

This Act will not cause any intravenous heroin users to pull the needle out of their arm. But it might add to the growing number of deaths from drug abuse.

This sloppy, ill-conceived, and hasty piece of legislation is best understood as a bipartisan act of political grandstanding by the Governor and the legislature in a year when the Governor and most lawmakers are up for re-election. They have until 2019 to fix it before its harmful effects begin to appear.

In its final ruling issued just minutes ago, the U.S. International Trade Commission determined that the U.S. industry (Boeing) was NOT threatened with material injury by reason of dumped or subsidized imports of 100- to 150-Seat Large Civil Aircraft from Canada (Bombardier). This is big news in the trade world for a variety of reason.

Typically, domestic industries seeking relief under these statutes (the U.S. Antidumping and Countervailing Duty laws) are successful because the evidentiary thresholds are so low. The antidumping law was changed in 2015 to lower the thresholds even further, which helps explain the near record number of trade remedy case filings in 2017.  Boeing seemed to be testing how low that threshold was. As I wrote a few months ago, “The language in the statute would seem to preclude an affirmative threat of material injury finding if there haven’t been any import sales.” 

I’m glad the ITC seems to have agreed.  It’s important that a case as meritless as Boeing’s, which was predicated on the notion that the domestic industry was “threatened” with material injury by reason of sales by Bombardier to Delta that haven’t even happened, of airplanes that haven’t even been built, which are of a class of aircraft that Boeing doesn’t even produce, was found wanting by the ITC.  Seems like common sense, but the AD/CVD statutes accord very little room for common sense to prevail. It’s good to see some a crucial check on the system working.

But there’s still a lot of work to do to rein in the routine abuses and to make these laws more compatible with economic reality. 

The Ontario bar association has adopted a rule under which all lawyers “must prepare and submit a personal ‘Statement of Principles’ attesting that we value and promote equality, diversity and inclusion,” according to Bruce Pardy in the National Post, who says it’s a bad idea:

In free countries, law governs actions rather than expressions of beliefs. People can be required to obey the speed limit and pay taxes, but they may not be compelled to declare that the speed limits are properly set or that taxes are a good thing. The Supreme Court of Canada has said that forcing someone to express opinions that they do not have “is totalitarian and as such alien to the tradition of free nations like Canada, even for the repression of the most serious crimes.”

The rule and resulting suggested Statements of Principles have been the subject of numerous criticismsdebate, and defenses in Ontario and throughout Canada. According to No Forced Speech, an effort of the Canadian Constitution Federation, the society rejected a proposal “to create an exemption to the new mandatory Statement of Principles for persons who believe the requirement violates their freedom of conscience.”

Now, per the CBC,

Ryan Alford, an associate professor with the faculty of law at Lakehead University, filed an application in Ontario Superior Court on Monday that seeks an injunction to block the requirement.

“We need to have an understanding about whether or not this is within the law society’s powers under the Law Society Act and whether or not it’s constitutional. I think a lot of people just want clarity on this,” Alford said in an interview.

Good luck to Prof. Alford and the CCF. But the U.S. is not so far behind. In 2016 the ABA adopted Model Rule 8.4 (g), which makes it “professional misconduct” for an attorney to engage in “conduct,” including verbal “conduct,” that “the lawyer knows or reasonably should know is harassment or discrimination on the basis of race, sex, religion, national origin, ethnicity, disability, age, sexual orientation, gender identity, marital status or socioeconomic status in conduct related to the practice of law.”

Aside from its many other problems — lawyers “discriminate” on the basis of “socioeconomic status” every time they turn down a client they adjudge unlikely to pay their fee — UCLA law professor Eugene Volokh has argued that the ABA rule’s scope “is broad and vague enough to potentially apply to a wide range of political speech, and thus violate the First Amendment.” Texas Attorney General Ken Paxton has declared in an advisory opinion that if his state adopted the ABA model rule, the courts would probably strike it down as an unconstitutional restriction on “freedom of speech, free exercise of religion, and freedom of association.”

The “Test Acts” were a series of enactments in England that excluded from public office and penalized in other ways those who would not swear allegiance to the prevailing religious tenets of the day. There is no good reason to bring back their principles.

Regulation is often portrayed as the use of government authority to alter market outcomes away from the interests of firms and toward those of consumers and employees.  In turn, the “story” associated with deregulation is the opposite: Corporations and the powerful use their influence to eliminate public sector controls on their conduct at the expense of consumers and employees.

But if the usual narrative is true how do we explain a full-page ad that AT&T recently published in multiple newspapers, including the Washington Post and the New York Times, calling on Congress to pass new legislation to guarantee internet neutrality?  The short answer is that existing companies often favor regulation that reduces competition in ways not well understood by consumers or legislators.   

AT&T, one of the nation’s largest ISPs and a company that recently dedicated significant resources to support the FCC’s recent repeal of Title II net neutrality regulations, seems like an unlikely proponent of net neutrality legislation. But its position on the policy highlights why companies sometimes support regulations that would appear to harm them.

AT&T’s opposition to Title II net neutrality regulations is not based on a general hostility towards all regulations, but instead stems from the specific types of rules that Title II regulations would impose. Title II of the Federal Communications act of 1934 was originally intended to regulate telephone companies, and gave the government the ability to review and accept or reject telephone rates. During the fight for net neutrality regulation over the last ten years, the FCC sought to regulate the internet under other parts of the Communications Act, but courts continually said no, forcing the Commission to regulate under Title II. Because Title II comes with the possibility of price controls like those imposed on telephone companies, AT&T opposed that regulatory system and called for Congressional action to ensure net neutrality without the possibility of price controls.

As I’ve previously argued, net neutrality regulations are an attempt to settle fights between ISPs and content providers, like Netflix or Hulu. Both sides “need each other to satisfy consumers, but they fight each other to capture the larger share of consumers’ payments.” Title II price controls would have disadvantaged ISPs and benefitted content providers. Now that the debate over whether ISPs should be regulated under Title II is, at least temporarily, seemingly in its favor, why is AT&T continuing to call for new legislation?

Whereas Title II regulations disadvantaged AT&T, new legislation could create regulations that would benefit it by reducing the number of dimensions over which firms can compete and differentiate themselves. This would disproportionately hurt smaller companies and new market entrants and aid larger companies with larger networks and economies of scale allowing them to offer lower prices than competitors.

One example of differentiation that would be banned under net neutrality is known as “zero rating,” the offering of internet access plans that allow customers to access specific content or applications that don’t count against a customer’s data cap. Christopher Yoo of the University of Pennsylvania Law School argues that, on the demand side, zero rating would allow companies to tailor plans to different groups and types of consumers, and would help consumers save money by enabling them to buy only the plan they need.

Zero rating is a threat to AT&T because it increases competition. As Yoo contends, “on the supply-side, service differentiation promotes competition by broadening the ways that ISPs can compete. Offering service-specific plans that are targeted at key subsegments of the population can promote entry even by firms that suffer from disadvantages in cost and network.” AT&T’s call for new legislation constitutes an attempt to stifle smaller companies ability to compete through differentiation and specialization.

Instead of enacting new legislation to aid AT&T, the internet should be allowed to operate under the hands-off regulatory framework under which it flourished  This would allow continuing innovation and let companies specialize to attract consumers without restricting AT&T’s own ability to differentiate.

The ad says:

AT&T is committed to an open internet. We don’t block websites. We don’t censor online content. And we don’t throttle, discriminate, or degrade network performance based on content.

Regulation is not necessary for AT&T to continue that commitment. It can market its position on net neutrality as a business model and let competitors that don’t support the policy explain to consumers why their position is better. Congress should resist the call for legislation and let the value of net neutrality be determined by consumers.

Written with research assistance from David Kemp.

Recently Sen. Ted Cruz (R-Texas) criticized the large tech companies who host private forums for speech and association. Having questioned representatives of the companies closely, Sen. Cruz concluded:

The pattern of political censorship we are seeing across the technology companies is highly concerning. And the opening question I asked of whether you are a neutral public forum — if you are a neutral public forum, that does not allow for political editorializing and censorship. And if you are not a neutral public forum, the entire predicate for liability immunity under the CDA [Communications Decency Act] is claiming to be a neutral public forum, so you cannot have it both ways.

Sen. Cruz is wrong about the Communications Decency Act. Section 230 of the Act does not require tech companies to provide a “neutral public forum.” The section does say that Congress finds that “the Internet and other interactive computer services offer a forum for a true diversity of political discourse, unique opportunities for cultural development, and myriad avenues for intellectual activity.” That finding does not create a legal obligation. Even if it did, those who support free markets would maintain that private management of internet forums would be the best way to attain diversity, cultural development, and intellectual activity. Beyond that, Section 230 of the CDA freed tech companies from liability for restricting “access to or availability of material that the provider or user considers to be obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable, whether or not such material is constitutionally protected.” In other words, Section 230 helps tech companies act non-neutrally toward user generated content on their platforms! 

The managers of the tech companies may wish to offer a neutral public forum for speech and association, even though the CDA does not require it. But that is very different from the government requiring neutrality. The Fairness Doctrine sought to enforce neutrality on broadcasters, a dangerous policy for the reasons discussed in this Cato Policy Analysis. Having the government manage speech to attain neutrality or fairness or other goals violates the freedom of speech. The managers of the tech companies (as agents of their owners) have the right to oversee these private forums as they see fit. The forums are, after all, private not government property. 

I feel certain that once Sen. Cruz reconsiders his interpretation of CDA, he will return to form and support strong private property rights on the Internet. In doing so, he will also vindicate the speech and associational rights of the customers of the tech companies. 

Right after he took office, President Trump famously withdrew from the 12 nation Trans Pacific Partnership (TPP) trade agreement that the Obama administration had negotiated. That was not too surprising, given that during the campaign, he had referred to the TPP as “a continuing rape of our country.”

But the other 11 TPP nations decided to move forward without the U.S., and on Tuesday they were able to agree on a revised deal (with key changes to the text undertaken in the form of suspensions, so that the original provisions can be reinstated if the U.S. decides to rejoin). By Thursday, President Trump seemed to be rethinking his TPP opposition:

Trump: I like bilateral, because if you have a problem, you terminate. When you’re in with many countries — like with TPP, so you have 12 if we were in — you don’t have that same, you know you don’t have that same option. But somebody asked me the other day, ‘Would I do TPP?’ Here’s my answer — I will give you a big story. I would do TPP if we made a much better deal than we had. We had a horrible deal. The deal was a horrible deal. NAFTA’s a horrible deal, we’re renegotiating it. I may terminate NAFTA, I may not — we’ll see what happens. But NAFTA was a — and I went around and I tell stadiums full of people, I’ll terminate or renegotiate.

Kernen: So you might re-enter, or? Are you opening up the door to re-opening TPP, or?

Trump: I’m only saying this. I would do TPP if we were able to make a substantially better deal. The deal was terrible, the way it was structured was terrible. If we did a substantially better deal, I would be open to TPP.

Kernen: That’s interesting. Would you handicap … ?

Trump: Are you surprised to hear me say that?

Kernen: I am a little bit, yeah, I’m a little taken aback.

Trump: Don’t be surprised, no, but we have to make a better deal. The deal was a bad deal, like the Iran deal is a bad deal, these are bad deals.

Following up on these remarks, he said this in his speech in Davos today:

As I have said, the United States is prepared to negotiate mutually beneficial bilateral trade agreements with all countries. This includes the countries in TPP 11, which are very important. We have agreements with several of them already. We would consider negotiating with the rest, either individually, or perhaps as a group, if it is in all of our interests. 

What should we make of all this? Perhaps Trump is deviously trying to disrupt the momentum of the TPP 11, by encouraging the others to slow down and wait for the U.S.? More likely, TPP was in the news, and Trump therefore decided to talk about it in his usual incoherent way. I encourage reporters to press Trump and other U.S. trade officials on what exactly the U.S. has in mind now for the TPP, but I would be surprised if these remarks signal any change in U.S. trade policy.

The leading arguments for banning large-denomination currency notes are those made in a much-cited working paper by Peter Sands and at book length by Kenneth Rogoff. They have been rebutted persuasively by Pierre Lemieux and Jeffrey Hummel in their respective reviews of Rogoff’s book. I have previously offered my own rebuttals here and here.

The justification for returning to the topic now is that two recent reports, issued by the Federal Reserve Bank of San Francisco and by the European Central Bank, provide new evidence on the public’s use of large-denomination notes. This evidence is essential to any serious evaluation of proposals to ban large-denomination in notes in the United States and Europe.

The Sands and Rogoff argument assumes that the users of large bills are almost entirely criminals; use by innocent citizens is rare. Rogoff writes in his book:

The bulk of US cash in circulation cannot be accounted for by consumer surveys. Obviously, if consumers are holding only a small fraction of all cash outstanding, they cannot possibly be holding more than a small fraction of the $100 bills in circulation, since $100 bills account for nearly 80 percent of the value of US currency.

By contrast: “The drug trade is a famously cash-intensive business at every level.”

Peter Sands declares: “Eliminating high denomination notes has limited downside since such notes play such little role in the legitimate economy.” Sands downplays any effect of eliminating large notes on the welfare of non-criminals, those he calls “legitimate” currency hoarders, on the assumption that they are at most a small minority of currency holders, while criminals are the vast majority:

The other arguments for retaining high denomination notes [besides profitability to the issuing government] largely revolve around some individuals’ desire to hoard or save cash “under the bed” given concerns about banks, or the utility of high denomination notes in emergencies, war zones or natural disasters. There probably is some legitimate hoarding, particularly in countries with a history of banking crises, but the reality is that most of the money that is hoarded in cash is kept from the banking system in order to keep its origins from scrutiny. Hoarding cash appears highly correlated with tax evasion. [Legitimate hoarding] can only account for a minute fraction of high denomination notes.

In actual reality, nobody really knows the shares of the stock of large bills held by non-criminal hoarders and by various types of criminals, because people who agree to answer survey questions have every incentive to under-report their holdings, whether acquired lawfully or otherwise. It stands to reason that ordinary citizens who hoard cash, say because they dislike surveillance of their banking activity, or fear a breakdown in banking system functionality for reasons of natural disaster (such as recently happened in Puerto Rico) or political upheaval, are the very people who are least likely to divulge the true size of their hoards to strangers, no matter what assurances of anonymity they receive.

Sands argues that in cases of legally acquired hoards, the welfare loss from banning large notes would be minimal, because “lower denomination notes offer an only slightly more inconvenient solution for ordinary people, given the sums involved. Only the very wealthy would be truly inconvenienced by having to make such a substitution.” But this is a hand-waving argument rather than a factual deduction. To securely hoard any dollar amount in $10 bills rather than $100 bills requires a safety deposit box ten times as large, or buying a lockbox ten times as large to hide at home. It is far from obvious that “only the very wealthy” hoarders would be “truly inconvenienced.”

Directly addressing the concern that large bills have legitimate uses, Sands responds [footnote call omitted]:

Some suggest that high denomination notes play an important role in economic activity. There is little evidence for this assertion. Whilst low denomination notes continue to play a significant role in legitimate economic activity even in the most advanced economies given the transactional convenience they provide, high denomination notes do not.

The new FRBSF and ECB survey evidence is most relevant to assessing claims like this one, allowing us to quantify (if imperfectly) how significant a role high-denomination notes actually play.

Shaun O’Brien’s report on “Preliminary Findings from the 2016 Diary of Consumer Payment Choice” for the San Francisco Fed unfortunately does not break down US currency use by denomination. Nonetheless it has at least three useful takeaways for the “war on cash” debate:

  • “Cash is held and used by a large majority of consumers, regardless of age and income.”
  • “[C]ash was the most, or second most, used payment instrument regardless of household income, indicating that its value to consumers as a payment instrument was not limited to lower income households that may be less likely to have access to an account at a financial institution.”
  • Cash is used to make 8 percent of all payments of $100 or more. We don’t know the mix of denominations used, but this certainly leaves open the possibility that $100 and $50 bills play a significant role in a non-negligible share of legitimate economic activity.

The ECB study by Henk Esselink and Lola Hernández, entitled “The use of cash by households in the euro area,” reports on cash use in all 19 eurozone countries, based on a 2016 survey. Two immediately relevant findings are that many ordinary members of the public store cash for emergency use, and commonly handle even the highest denomination notes:

The study confirms that cash is not only used as a means of payment, but also as a store of value, with almost a quarter of consumers keeping some cash at home as a precautionary reserve. It also shows that more people than often thought use high denomination banknotes; almost 20% of respondents reported having a €200 or €500 banknote in their possession in the year before the survey was carried out. […]

Of those respondents who acknowledged that they put cash aside, only 23 percent kept €100 or less.  22 percent kept between €101 and €250, 19 percent between €251 and €500, 15 percent between €500 and €1000, and 12 percent more than €1000. In addition 10 percent refused to specify the amount. If we assume conservatively that the non-specifiers were distributed in the same proportions as the specifiers, then those who kept more than €100 as a precautionary reserve comprised about 75 percent of respondents (almost 25 percent of those surveyed) who reported keeping cash in reserve. Thus about 18 percent of the Eurozone population has cash holdings large enough that they may benefit from using notes of €100 and above merely as a compact means of storing wealth.

By contrast with the US figure of 8 percent cash among payments over $100, Europeans use cash to make 32 percent of payments over €100. Such payments, the authors report,

amounted to 10% of the value of all cash payments at the POS [point of sale] in the euro area. The share of cash payments above €100 in the total value of cash payments at the POS was wide-ranging, from 3% in France or 5% in Belgium, to 21% in Ireland and Slovenia or 26% in Greece.

These numbers do not indicate to me that law-abiding cash use is negligible — but armed with the figures, the reader can make his or her own judgement about what level of cash use counts as non-negligible.

I want to add a somewhat tangential but related additional comment: Besides making the debatable quantitative assumption that law-abiding cash use is negligibly small, Sands and Rogoff also make a normative assumption that strongly tilts their seemingly neutral estimates of overall welfare effects. They assume that the welfare of people who use cash for illicit purposes doesn’t count, while disrupting their operations by banning large notes is pure benefit to the rest of us.

As Lemieux, Hummel, and also David Henderson have noted, however, an economic analyst may justifiably distinguish, among the set Sands lumps together as “financial criminals,” those actors who violate personal and property rights (kidnappers, thieves and fences, extortionists, terrorists) from those whose illicit activity consists of peacefully trading in illicit goods and services (drug dealers, sex workers, and the like). The first group clearly generates negative-sum outcomes, while the second group generates positive-sum outcomes — mutual gains from trade — from the point of view of the participants. Taking the point of view of the participants is the standard approach in modern welfare economics. The principle of gains from trade — gains from capitalist acts between consenting adults — applies to drug sales and sex work despite their illicit status in many jurisdictions. Banning high-denomination notes in order to raise the cost of such trades means reducing the economic welfare of the participants in those markets. To the extent that the main illicit use of high-denomination notes is in victimless markets, a policy to suppress their use is harmful rather than beneficial from this perspective

Cases of people who make or take illicit bribes, pursuing this logic, have to be sorted between trade-enhancing bribes and trade-restricting bribes. Making bribery more costly is not an unmixed blessing if without certain bribes the economy fails to function as smoothly. It likewise cannot be taken for granted that all tax evasion reduces overall economic welfare once it is recognized that some taxes may be too high from a Kaldor-Hicks efficiency standpoint, meaning at a level where their marginal deadweight loss (the uncaptured gains due to tax-blocked trades) exceeds the net gains from the government projects they finance.

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