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Every Republican wants to be Ronald Reagan reincarnated. At least that’s what GOP candidates say. But the 40th president probably wouldn’t feel comfortable running today.

First, he’d have a good laugh at the fear-mongering. For instance, New Jersey Gov. Chris Christie declared: “I don’t believe that I have ever lived in a time in my life when the world was a more dangerous and scary place.”

Reagan lived through World War II, the Korean War, the Vietnam War, and the Cold War. He likely would explain that never in its history has America been as secure from serious threats.

Reagan almost certainly would see Russia as a challenge more than a threat like the Soviet Union. He would appreciate how far America’s Asian and European allies have come over the last quarter century, which gives them the wherewithal to act in their own defense.

Second, Reagan likely would be skeptical of the GOP mantra of more military spending as an answer to invisible, unnamed threats. Reagan sought more Pentagon dollars because he feared America was behind the Soviet Union, an aggressive global antagonist. Today the U.S. is far ahead of everyone, accounting for 40 or more percent of the entire globe’s military outlays, and allied with most of the world’s industrialized states.”

Third, Reagan would insist on negotiating with adversarial regimes, especially that in Tehran. He did so with the worst of the Soviet leaders. Shortly after taking office Reagan advocated “meaningful and constructive dialogue.”

In fact, one reason Reagan pushed a military build-up was to allow America to negotiate from a position of strength. Which Washington certainly can do now. Not only does the U.S. enjoy overwhelming military advantages compared to Iran. So do Israel and Saudi Arabia.

Moreover, the ultimate anti-communist understood the importance of people. He dropped the label “evil empire” for the U.S.S.R. once Mikhail Gorbachev took control. A similar personality shift occurred in Iran when Hassan Rouhani succeeded Mahmoud Ahmadinejad. Reagan almost certainly would have explored the willingness of Tehran to make a deal.

Fourth, Reagan was horrified by the prospect of war. That is what animated his commitment to missile defense. In contrast, most of the Republican presidential candidates seem to believe that breathing threats and proclaiming toughness are essential elements of manhood.

Once elected he seldom used the military. Reagan preferred to rely on proxies when possible, as in Afghanistan and Nicaragua. Twice he employed the armed services in narrow operations—to retaliate for a Libyan terrorist attack on Americans in Berlin and overthrow a brutal Communist junta in Grenada, where U.S. medical students were potentially at risk.

He also intervened in the Lebanese civil war, which turned American personnel into targets. He soon recognized that he had made a great mistake and withdrew U.S. forces. The neoconservatives were horrified that Reagan didn’t double down to occupy and transform the country.

Fifth, he probably would have few delusions about past policies. Having backed the Mujahedeen against the Soviet Union, he almost certainly would not have devoted American lives and money to nation-building in Afghanistan. Reagan would have recognized that Iraq had turned into a disaster.

And while he would not have been impressed by the competence of President Barack Obama’s foreign policy team—who could be?—Reagan would realize that it was Dubya who really squandered the Reagan legacy. Nuance highlighted Reagan’s policies but is largely lacking in the current “bomb ‘em, invade ‘em, occupy ‘em” GOP crowd.

As I wrote for National Interest online: “If Ronald Reagan was running today, his competitors would be denouncing him as a wimpy appeaser, a naïf enthused with negotiation, a president far too reluctant to use the military. Bloggers, columnists, talk radio hosts, and Fox News would be piling on. Come the first primaries he’d likely end up as political road kill.”

There is much that we can learn from Ronald Reagan today. But those candidates who most claim to represent Reagan’s legacy are least like him.

Why does NATO exist? Certainly not to defend America. After all, the North Atlantic alliance’s latest policy move is to invite Montenegro to join.

Montenegro‘s military employs 2,080—1500 in the army, 350 in the navy, and 230 in the air force. Wow!

NATO Secretary General Jens Stoltenberg opined that “Montenegro has come a long way on its path to join the Euro-Atlantic family.” Extending the invitation was “a historic decision. It would signal our continued commitment to the Western Balkans,” he added.

Montenegro is a nice country. But what does it have to do with American security?

What was once an alliance expected to defend wrecked and impoverished Western Europeans nations from mass murderer Joseph Stalin and his Red Army has turned into the geopolitical equivalent of a Gentleman’s Club. Everyone wants to be a member simply because it’s the thing to do. So Podgorica is being invited to enter the “North Atlantic” Treaty Organization.” v:shapes=”Picture_x0020_3”>

It’s hard to blame Montenegro’s government and people for wanting to join. But what is in the deal for America? The U.S. collects allies like most people accumulate Facebook friends.

America nominally is a superpower, but Washington officials crave attention and affection from other states. So presidents and legislators continually write guarantees on the money and lives of the American people for foreign countries, even when, like Montenegro, they are utterly irrelevant to U.S. security.

At least Montenegro doesn’t matter. Expansion to the Baltic States turns out to have been a huge mistake, bringing in helpless nations which the rest of Europe has no interest in defending, countries of no geopolitical importance to America but involved in bitter disputes with Russia. If anything bad happens, America will be expected to confront, with minimal support from its European “allies,” nuclear-armed Russia over a controversy of far greater interest in Moscow than Washington.

Bringing in Georgia and Ukraine would be far worse. Both countries are unlucky and exist in bad neighborhoods viewed as critical security concerns by Moscow.

Neither matters much for American security. Moscow’s role may not be fair or just, but not everything is worth going to war over.

Particularly strange are proposals to treat Georgia and Ukraine like formal allies even if they aren’t. Commentators have advocated flying air patrols and introducing troops in Ukraine. During the short-lived Russo-Georgia war the Bush administration reportedly considered bombing the tunnels through which Russia was moving its forces. 

After getting through the entire Cold War without a shooting war with Moscow, why would Washington take action which essentially would force Russia to strike back militarily? NATO originally was created to act as a firebreak to war. Current policy threatens to turn it into a transmission belt of war.

American disengagement would not leave Europe defenseless. Withdrawing would simply change who does the defending. 

Robert Scales, retired commandant of the Army War College, complained that “At 30,000, there are fewer American soldiers protecting Western Europe” than cops in New York City. Actually, he should ask, why are there even 30,000 U.S. soldiers protecting Western Europe?

As I point out in Forbes online: “After all, 70 years have passed since World War II. The European Union has a larger GDP and population than America, and dramatically larger than Russia. Isn’t it time for Washington’s rich friends and allies to defend themselves? Or will Americans have to wait another 70 years before their government stops subsidizing Europe’s generous welfare states?”

Montenegro. A nice place to visit. It doesn’t threaten anyone. It isn’t threatened by anyone. And it doesn’t matter to America.

Why is it being brought into NATO?

It’s time for a serious debate in Washington about turning alliances into welfare for the well-to-do overseas. The Europeans. The South Koreans. The Japanese. The Saudis.

It truly is time for a change.


At the risk of belaboring the obvious, I feel compelled to begin this second installment of my response to Ben Bernanke’s memoirs with an observation — a platitude, if you like — concerning the proper role of emergency central-bank lending in a generally free economy.

The observation is simply that emergency lending, far from being an end in itself, is but one of many possible means by which a central bank might achieve the ultimate end of avoiding general reductions in lending and spending that might otherwise result in more general business failures — that is, in a recession or depression. For so long as the overall flow of spending remains stable, it must be the case, as a matter of simple logic, that aggregate business receipts do not fall remarkably short of aggregate outlays, and that the flagging incomes of particular firms are matched by the net revenues of others.

From this banal observation two others follow. The first is that central bank emergency lending can be justified only to the extent that it succeeds in keeping overall spending stable. The second is that a central bank that allows the overall volume of spending to collapse has blown it, no matter how much emergency lending it undertakes. Indeed, to the extent that a central bank engages in emergency lending while failing to preserve aggregate spending, it may be guilty of compounding the damage attributable to the collapse of spending itself with that attributable to a misallocation of scarce resources in favor of irresponsibly-managed firms. Thanks to moral hazard, the extent of such misallocation, instead of being proportionate to the actual volume of emergency lending, is augmented by the expectation that such lending will continue to be resorted to in the future.

In a previous post, I took Ben Bernanke’s Fed to task for contributing to the moral hazard problem during the recent crisis. It did this by repeatedly violating Walter Bagehot’s “dictum” (“lend freely at a high interest rate, against good collateral”), especially by extending credit to troubled institutions on collateral that was neither “commonly pledged” nor “easily convertible.” Although Bagehot himself never spoke in such terms, it seems to me that his emergency lending principles are broadly consistent with the overarching goal of preserving overall spending while limiting risk subsidies.

I now turn to consider the bearing of the Fed’s actions on the course of spending. As I have plenty to say on the topic, I plan to divide my observations into two posts, with this one dealing with the period prior to October 2008, and the next addressing developments after that. Still, I don’t want to keep anyone in suspense, so allow me to come right out and state my conclusion: Far from seeing to it that its emergency lending and subsequent large-scale asset purchases served to preserve the flow of aggregate spending, or to revive that flow following its collapse, Bernanke’s Fed went out of its way to make sure that the programs in question did no such thing.

Note that I am choosing my words quite deliberately: the Fed did not merely fail in its efforts to revive the flow of spending. It deliberately prevented such a revival, and by so doing prolonged the Great Recession.

Of course Bernanke and other Fed officials did not see things this way. They viewed the steps they took as ones essential to maintaining control of monetary policy. But what they imagined they were doing, and what they actually did, were two very different things.

What steps? Until the AIG bailout, the Fed made a point of “sterilizing” its emergency lending. Afterwards, finding that it lacked the resources it needed to continue to sterilize its loans and asset purchases, it sought to achieve similar results by alternative means. On September 17, 2008, the Treasury, at the Fed’s request, inaugurated its “Supplementary Financing Program,” whereby it issued additional Treasury bills, the proceeds of which were deposited in a new Fed account created for the purpose. Then, on October 1st, the Board of Governors announced that it would soon begin paying interest on depository institutions’ required and excess reserve balances. The Fed took these steps, which served either to drain reserves from the banking system, or to immobilize excess reserves that remained outstanding, for one reason only, to wit: to make sure that its crisis-related lending and asset purchases did not sponsor any corresponding increase in bank lending.

You need not take my word for it. Here is Bernanke’s own explanation of the Fed’s decision to sterilize its emergency loans:

We were facing what might prove to be a critical question: Could we continue our emergency lending to financial institutions and markets, while at the same time setting short-term interest rates at levels that kept a lid on inflation? Two key elements of our policy framework — lending to ease financial conditions, and setting short-term interest rates — could come into conflict.

When the Fed makes a loan, taking securities or bank loans as collateral, the recipient of the loan deposits the funds in a commercial bank. The bank in turn adds the funds to its reserve account at the Fed. When banks hold substantial reserves, they have little need to borrow from other banks, and so [sic] the interest rate that banks charge each other for short-term loans — the federal funds rate — tends to fall (p. 236).

Bernanke’s account calls for some further elaboration. It is, of course, not lending on the federal funds market per se, but a more general increase in lending, that has the capacity to “raise the lid” on inflation. Bernanke’s concern must, in other words, have been that the Fed’s emergency lending would result, not merely in a reduced federal funds rate, but in a general loosening of credit. Such a loosening was, evidently, not what Bernanke had in mind in claiming that the Fed’s emergency lending was supposed to “ease financial conditions.”

Sterilization, Bernanke goes on to explain, involved

selling a dollar’s worth of Treasury securities from our portfolios for each dollar of our emergency lending. The sales of Treasuries drained reserves from the banking system, offsetting the increase in reserves created by our lending (p. 237).

The sterilization shows up in the chart below (reproduced from James Hamilton’s Econbrowser) as a decline in the light-gray field representing the Fed’s holdings of (mostly Treasury) securities, which served to more-or-less perfectly offset its pre-AIG emergency lending.

To understand just how misguided the Fed’s sterilized lending program was, it helps to go back to the event that marked the beginning of the crisis: BNP Paribas’ August 9, 2007 decision to suspend withdrawals from three of its subprime mortgage funds. The French bank’s announcement had banks everywhere scrambling for liquidity. Bernanke’s description of the Fed’s response to that event makes for a revealing comparison with his subsequent defense of sterilized lending:

That morning, I emailed Brian Madigan…to instruct the New York Fed to buy large quantities of Treasury securities on the open market. The cash that the sellers of the securities received from us would end up in banks, meeting the banks’ increased demand for cash. If banks had less need to borrow, the federal funds rate should move back to target and the pressure in short-term funding markets should ease. If all went well, we would withdraw the cash from the system in a day or two.

Walter Bagehot’s lender-of-last-resort concept argues that central banks should stand ready during a panic to lend as needed, which in turn would help stabilize financial institutions and markets. Later that morning, consistent with Bagehot’s advice and my instructions to Brian, the New York Fed injected $24 billion in cash into the financial system (pp. 143-4).

Although Dan Thornton is probably correct in calling the Fed’s response to the BNP Paribas event “anemic,” the point remains that at the time Bernanke understood the Fed’s responsibility as being that of avoiding a general contraction of bank lending by seeing to it that the U.S. banking system as a whole remained well-stocked with reserves, which the Fed made available by means of net open-market asset purchases. A plot of excess reserves during 2007 and the first quarters of 2008 makes the point better than words can:

Notice that the increase in banks’ excess reserves in August 2007 was due to the Fed’s having expanded the monetary base, so as to loosen credit, and not to its having rewarded banks for holding reserves, as it was to begin doing in October 2008. Although paying banks to hold reserves led to very substantial growth in banks excess reserve holdings, that policy served not to loosen credit but to tighten it.

In contrast to the Fed’s actions in August 2007, its subsequent turn to sterilized lending had it, not buying, but selling Treasury securities, with the aim of preventing its emergency lending from resulting in any overall increase in the supply of bank reserves. Financial conditions were thus “eased,” not generally, but for particular institutions and their creditors. For the rest, credit was actually tightened. Because it serves to redistribute credit rather than to alter its overall availability, sterilized lending is properly regarded, as Marvin Goodfriend insists, as an exercise in fiscal policy rather than one in monetary policy in the strict sense of the term. The principle beneficiaries of this fiscal policy were the creditors of the aided institutions, while the losers were those prospective borrowers who were denied credit because the Fed had directed the reserves that might have supported lending to them elsewhere.

Between December 2007 and September 2008, the Fed sold over $300 billion in Treasury securities, withdrawing a like amount of reserves from the banking system, or just enough to make up for reserves it created through its emergency lending, chiefly through its Term Auction Facility. Bank lending suffered, because available reserves, instead of being augmented to accommodate the increased demand for liquidity that normally accompanied worsening economic conditions, were instead withdrawn from relatively well-capitalized institutions while being supplied to ones that were more likely to be capital-constrained.

By mid 2008, commercial bank loans and leases had declined to one-tenth their value at the time of the BNP-Paribas scare:

The reduced lending contributed to an equally precipitous decline in overall spending, as measured by nominal GDP:

What was the FOMC thinking? It isn’t the case that it was blind to what was happening to bank lending, or to the fact that the economy was contracting. “In a particularly worrisome development,” Bernanke writes concerning the situation as of August, 2008,

our quarterly survey of bank loan officers had revealed that banks were tightening the terms of their loans, especially loans to households, very sharply. The staff maintained its view, first laid out in April, that the economy was either in or would soon enter recession (p. 238).

In fact, as the NBER subsequently determined, the Great Recession began back in December 2007. Yet even with the benefit of hindsight Bernanke insists that sterilization was called for, because it alone allowed the Fed “to make loans as needed while keeping short-term interest rates where we wanted them” (ibid.). In particular, the Fed wanted to keep the federal funds rate at 2 percent, where it had been since April.

But why 2 percent, rather than 1 percent, or (for that matter) zero percent? According to Bernanke, the Fed determined to keep its rate target unchanged owing to concerns about inflation. In early August the Fed’s economists were predicting a core CPI inflation rate of 2.5 percent (which was also the rate over the course of the proceeding year) — high enough to cause one FOMC hawk, Richard Fisher, to actually favor raising the federal funds target rate. According to Bernanke, the FOMC

could not completely dismiss inflation concerns. Oil prices had fallen to $120 per barrel from their record high of $145 in July. However, staff economists still saw inflation running at an uncomfortable 3-1/2 percent in the second half of the year. Even excluding volatile food and energy prices, the staff expected inflation to pick up around 2-1/2 percent, more than most FOMC members thought was acceptable (p. 238).

In retrospect it is all too clear that the hawks were mistaken, and that the FOMC ought to have paid less attention to inflation (and to headline inflation especially), and more attention to NGDP and other measures of total spending. Scott Sumner and other Market Monetarists have harped on this for some time, so I won’t bother to repeat their arguments.

But there’s a more fundamental point I think worth emphasizing, which is that conceiving of monetary stability as a matter of stability of total spending, or aggregate demand, or NGDP — call it whatever you like — makes nonsense of any supposed “conflict” between maintaining an appropriate monetary policy stance (“setting short-term interest rates”) and keeping the financial system liquid (“eas[ing] financial conditions”), for the connection between a sufficiently liquid financial system and a stable flow of spending is (or ought to be) obvious in a way that the connection between a sufficiently liquid financial system and, say, a stable rate of inflation, is not. Had the Fed acted to preserve overall liquidity in the financial system, instead of letting would-be borrowers go begging for the sake of bailing-out troubled firms, overall spending might never have collapsed.

Please do not misunderstand me: I am not claiming that the Great Recession was entirely due to the Fed’s failure to maintain a steady flow of overall spending during 2008. I am not pretending that by doing so it could somehow have erased all the losses and prevented all the failures connected to the subprime bust, let alone prevented the bust itself. Nor do I mean to deny that easy money contributed to the boom that led to the bust. I am saying that, whatever part the Fed played in the boom, it also deepened the bust by keeping money excessively tight throughout much of 2008. There is no economic law that says that central banks must err only on the side of loose money, or only on the side of tight money. They can, and do, err both ways.

Just as a rising tide lifts all boats, a collapse in aggregate spending depresses all markets, including the market for overnight funds. The collapse was therefore bound eventually to undermine the Fed’s 2 percent funds target, and (as the chart below suggests) would have done so even if the Fed had continued to sterilize its emergency lending. The irony of this is that, by attempting — by hook or by crook — to hold the federal funds rate at 2 percent, the FOMC, far from succeeding in keeping interest rates a safe distance from their zero lower bound, propelled them in that direction. As any fan of Knut Wicksell will tell you, this outcome was, according to that great economist, inevitable once the “natural” funds rate fell below the Fed’s target.

With its September 2008 rescue of AIG, the Fed exhausted its capacity to sterilize its emergency loans. Yet instead of giving up its goal of keeping the fed funds rate pegged at 2 percent, and allowing its emergency asset acquisitions to assist a revival of bank lending in what was by then a downward-spiraling economy, the Fed remained determined to keep a lid on credit. It found a new means for doing so in the permission Congress had given it two years earlier, for reasons quite unrelated to the crisis, to pay banks interest on their excess reserves. I plan to discuss the consequences of that fateful discovery in another post.


P.S.: In a post he published yesterday, David Beckworth offers some further evidence of the Fed’s having engaged in what he calls “passive tightening.”

[Cross-posted from]

The federal corruption trial of former New York Assembly Speaker Sheldon Silver (D-Manhattan) has concluded with a conviction on all counts, despite his lawyers’ interesting argument that trading favors — in this case, funneling state grant money to a doctor’s clinic in exchange for highly lucrative asbestos-claim referrals to Silver’s law firm — is just the way everyone does politics in New York. It’s a huge win for Preet Bharara, who holds Rudy Giuliani’s old job as chief federal prosecutor in Manhattan — often seen as the only jobholder capable of cleaning up New York politics, because all the relevant actors within the state government itself are too compromised one way or another.

Ward heelers and frank rogues are common enough in Northeastern politics, but Silver always presented himself as something else, the voice of conscience speaking for every kind of progressive movement in New York. He had won the National Conference of State Legislatures’ “William M. Bulger Excellence in State Leadership Award,” delightfully named after the notorious boss of Massachusetts politics. Silver had the power, but he also had the pretensions.

As John Podhoretz writes in the New York Post, “That Silver was (to use a Yiddish term for thief) a goniff was a universally suspected fact even back in the late 1990s.” The Assembly boss was also for many years one of the fabled “three men in a room” in Albany — the governor and senate majority leader being the others — who decide important questions in privately cut deals. It happens that another of the three men in that room — Sen. Majority Leader Dean Skelos (R-Long Island) — is in the midst of his own trial on corruption charges.

So does this mean better days ahead for New York, a terribly misgoverned state? As one who has been writing about New York politics since way back, I can’t bring myself to be too optimistic.

I got interested in Silver originally because of his distinctive role as protector of New York’s trial lawyers and their various schemes for using liability law to keep up a steady flow of redistribution through the court system. Most of these schemes raise the cost of living and doing business in New York, such as the state’s unusual rule which used to expose car-lease providers to unlimited liability for crashes in leased cars, which drove up the price of a car lease for many New York consumers by $600. The state’s unique “scaffold law,” which makes business 100% liable for many on-the-job falls even if caused primarily by others’ negligence, has been estimated to drive up the cost of the Tappan Zee Bridge reconstruction alone by hundreds of millions of dollars. For the past decade Silver has been associated with a large mass tort firm (not charged with wrongdoing in this case) which has benefited from many official programs and policies, from the liberal stance of the New York judiciary on asbestos litigation, to its role in Sept. 11 claims, to Medicaid recoupment actions.

With Silver gone, there might be movement on a few issues like this. But legal policy was only one of the many pots in which Silver kept his fingers, as Steven Malanga and Seth Barron detail in separate articles at City Journal. New York sluices huge amounts of money in its gigantic social services apparatus through non-profits, and friends of Sheldon were there to profit. Real estate development in New York is subject to famously convoluted restrictions, and huge sums are at stake in its rent control and rent stabilization system. Again and again, Silver was there to broker deals for his friends behind the scenes.

This particular wheeler-dealer may be off the scene for good, pending appeal, but it is the overreach of Empire State government that made his career possible. So long as New York pursues failed policies like rent control, it will open huge leeway for hidden favoritism. And then, sure as day, in will move the Sheldon Silver types.

This week’s Congressional passage of the 1,301-page Fixing America’s Surface Transportation (FAST) Act represents, for the most part, a five-year extension of existing highway and transit programs with several steps backwards. Once a program that was entirely self-funded out of dedicated gasoline taxes and other highway user fees, over the past two-and-one-half decades the surface transportation programs has become increasingly dependent on deficit spending. The FAST Act does nothing to mitigate this, neither raising highway fees (which include taxes on Diesel fuel, large trucks, trailers, and truck tires) nor reducing expenditures.

If anything, deficit spending will increase under the FAST Act, which will spend $305 billion ($61 billion a year) over the next five years. Highway revenues, which were $39.4 billion in F.Y. 2015, are not likely to be much more than $40 million a year over the next five years, so the new law incurs deficits of about $20 billion a year. The law includes $70 billion in “offsets”–funding sources that could otherwise be applied to reducing some other deficit–which won’t be enough to keep the program going for the entire five years.

Aside from deficit spending, the greatest mischief in federal surface transportation programs come from competitive grants. When Congress created the Interstate Highway System in 1956, all federal money was distributed to the states using formulas. But in 1991 Congress created a number of competitive grant programs, supposedly so the money would be spent where it was most needed. In fact, research by the Cato Institute and Reason Foundation showed that Congress and the administration tended to spend the money politically, either in the districts represented by the most powerful members of Congress or where the administration thought it would get the greatest political return for its party.

Fortunately, the 2012 surface transportation law turned all but two major competitive grant programs into formula funds, thus taking the politics out of most transportation funding. This upset some members of Congress because they could no longer get credit for bringing pork home to their districts. So it is not surprising that the FAST Act goes backwards, putting more money into political grants than ever before.

First, the law creates a new fund of $4.5 billion over five years for “Nationally Significant Freight and Highway Projects.” This will lead state transportation departments to go out of their way to define projects as “freight” projects so that they can eligible for the fund. Some of the projects funded will no doubt be worthwhile, but experience with other competitive grant programs suggests that many will be frivolous or focused more on giving political leaders opportunities to cut ribbons rather than spend money effectively.

Second, the law converts part of the Bus & Bus Facilities Fund into a competitive grant program. The 2012 law had converted this to a formula fund, so the FAST Act is going backwards. The $300 million per year on competitive grants will encourage cities to build massive bus terminals that do little to increase mobility.

Third, the FAST Act increases funding for the New Starts transit capital grants program from just under $2 billion per year to $2.3 billion per year. This is probably the most pernicious grant program as it has given transit agencies incentives to propose the most expensive forms of transit–light rail, subways, and commuter trains–so they can get the most federal dollars.

Fourth, a subset of New Starts money is dedicated to “small starts,” including streetcars and bus-rapid transit projects. Streetcars may be the most ridiculous form of transit as they are slow, far more expensive than buses, and with far lower capacities: a single streetcar line can only move about a fifth as many people per hour as buses on city streets. Bus-rapid transit isn’t much better if it dedicates lanes to buses, as most such lanes will end up moving only a tiny fraction of the number of people who are moved by general purpose lanes. Despite these problems, the FAST Act increases federal funding for streetcar and other small starts projects from $75 million to $100 million per project.

Finally, the FAST Act broadens the use of Transportation Infrastructure Finance and Innovation Act (TIFIA) funds to include a much wider range of activities. TIFIA is supposed to be a competitive loan program, allowing state and local governments to borrow money to find high-priority projects and repay those funds at low interest rates out of local taxes and revenues. TIFIA has funded some important projects, but it has also helped fund many transportation boondoggles such as San Juan’s Tren Urbano, a 10-mile rail line that cost $2.3 billion and that carries well under half the number of projected riders. Such boondoggles will increase under the FAST Act, which allows the use of TIFIA funds for, among other things, transit-oriented real-estate developments that have nothing to do with improving mobility.

Although the FAST Act is a five-year bill, Congress will start to run out of money to pay for it in about three years. That means that, shortly before that time, you can expect the drumbeats to begin about the phony infrastructure crisis. In fact, it is federal funding itself that is responsible for the infrastruture problems we have because earmarks, competitive grant programs, and other political distributions of funds have focused on building new, often unnecessary, projects rather than maintaining the infrastructure we have.

Unfortunately, fiscal conservatives in Congress who understand this played virtually no role in the writing of the FAST Act. Now they have five years to put together an alternative program of funding transportation without deficits and figuring out a strategy for passing that program through Congress in 2020.

As the air’s CO2 concentration rises in the years and decades to come, the negative impacts of drought on wheat biomass and grain yield should diminish, a conclusion that can be derived from the recent work of Dias de Oliveira et al. (2015).

The five-member Australian research team noted that “elevated CO2 and high temperature are climate change drivers that, when combined, are likely to have an interactive effect on biomass and grain yield,” leading to three possible outcomes: (1) a “reduced positive effect of elevated CO2,” (2) an “amelioration of the effect of high temperature, or (3) a “synergistic effect where high temperature increases the positive effect of elevated CO2.” They also note that the resultant response “may be influenced by [plant] genotypic differences.” In an effort to study these interactions and possibilities, Dias de Oliveira et al. designed a field experiment to determine the interactive effects of CO2 and temperature, as well as those of a third variable—drought—on two pairs of sister lines of wheat (Triticum aestivum L.) over the course of a growing season, where one of the contrasting pairs of wheat sister lines differed in tillering, or branching (free vs. reduced), while the other differed in early vigor (high vs. low). The experiment was conducted out-of-doors in Western Australia in poly-tunnels under all possible combinations of CO2 concentration (400 or 700 ppm), temperature (ambient or + 3°C above ambient daytime temperature), and water status (well-watered or terminal drought post anthesis). So what did it reveal?

After presenting a very long list of findings, Dias de Oliveira et al. summarized their results as follows: (1) elevated CO2 “increased grain yield and aboveground biomass,” (2) terminal drought “reduced grain yield and aboveground biomass,” but elevated CO2 “was the key driver in the amelioration of [its negative] effects,” (3) “temperature did not have a major effect on ameliorating the effects of terminal drought,” and (4) although “the mechanisms by which [the CO2-induced] enhancements were brought about differed in each pair of sister lines,” there was “no difference in aboveground biomass or grain yield within each pair.” Thus, it would appear that the overall outcome the researchers observed in this study was one in which elevated CO2, acted alone, overpowered the negative effects of a debilitating environmental stress (drought). Consequently, as the air’s CO2 concentration rises in the years and decades to come, the negative impacts of drought on wheat biomass and grain yield should diminish. And that is good news worth celebrating!


Dias de Oliveira, E.A., Siddique, K.H.M., Bramley, H., Stefanova, K. and Palta, J.A. 2015. Response of wheat restricted-tillering and vigorous growth traits to variables of climate change. Global Change Biology 21: 857-873.

Over at the EdChoice Blog today, Robert Enlow of the Friedman Foundation for Educational Choice, Lindsey Burke of the Heritage Foundation, and I argue that the government should not force nonprofit scholarship-granting organizations (SGOs) to check their values at the door as a precondition of participating in scholarship tax credit programs, as some groups have recently proposed in Georgia. In addition to violating core American principles, such as freedom of conscience, the proposed regulation would also reduce SGO effectiveness and jeopardize the financial support for tax-credit scholarships, which is certainly not in the best interest of the children who rely on them. The policy is not only unwise, it is also unnecessary:

As it happens, in nearly every state with tax-credit scholarships, at least one of the largest SGOs makes scholarships available to all or gives priority to lower-income students, including Arizona School Choice TrustGeorgia GOALStep Up for Students in Florida, the Network for Educational Opportunity in New Hampshire, and the Children’s Scholarship Fund of Pennsylvania, among others. This is a noble and popular approach, but it is far from the only legitimate kind.

There are also dozens of scholarship-granting organizations with varied, but specific institutional missions.

Some SGOs focus on students with special needs. Others only serve students attending Montessori schools, Waldorf academies, or schools that meet certain academic standards. Some religiously affiliated SGOs issue scholarship only to students attending Catholic, Protestant, Jewish, or Muslim schools. Others encourage recipients to perform community service.

Clearly, there is a diverse array of SGO options serving equally diverse communities. But regulations like the one that was proposed in Georgia would alienate all mission-driven SGOs like these from tax-credit scholarship programs and ultimately force them out of business. That is certainly not in the best interest of the children using their services, much less the growing movement of families in search of more schooling options.

In short, private organizations should have the right to determine their own mission, and donors should have the freedom to choose to support the organizations that align with their values. Ultimately, preserving the autonomy of SGOs is in the best interest of the children they serve.

One of the rampage killers in the recent mass-shooting in San Bernardino, California entered on the K-1 visa for fiancés with the intent of marrying her fellow shooter Syed Farook – an American citizen.  From 1989 to 2014, the government issued 512,164 K-1 visas.  According to David North of the restrictionist Center for Immigration Studies (CIS), this is the first potential terrorist to enter the United States on a K-1 visa.

One potential terrorist out of 512,164 K-1 visas issued is not a good reason to tighten that visa’s already rigorous application process. 

In 2015 there have been four mass shooting according to Mother Jones with 37 fatalities and 33 injuries.  Your chance of being killed in a mass shooting in the United States in 2015 is one in 8,617,758.  Your chance of chance of being injured in a mass shooting this year so far is one in 9,662,335.  Your chance of being killed or injured in a mass shooting is one in 4,555,101.       

Your chance of being killed by a foreign-born terrorist in 2015 (so far) is one in 16,781,950, your chance of being wounded is one in 13,863,350, and your chance of being killed or wounded is one in 7,591,835, assuming the broadest possible definition of terrorism committed by an immigrant (Dylan Roof is was born in the United States) on U.S. soil. 

David North at CIS implies that the 99.7 approval rate for the K-1 visa in 2014, which is very high, is evidence of lax visa security.  The K-1 visa requires a lot of documentation and many steps to acquire.  The high approval rate could mean that the process of obtaining a K-1 visa is so onerous that it deters those who intend to commit visa fraud from even trying, instead funneling fraudsters to other visas and the leaving legitimate claimants behind.     

In the debate over reforming the K-1 visa, the relevant metric is the number of K-1 visa beneficiaries who are likely to become terrorists and the degree of damage are they able to cause.  One potential terrorist who entered on a K-1 visa who partners in a single mass shooting, as heinous as that crime is, does not mean that security for the K-1 visa needs strengthening.


  K-1 Visas























































Sources: Yearbook of Immigration Statistics and FY 2014 Nonimmigrant Visas Issued

The Organization for Economic Cooperation and Development is a Paris-based international bureaucracy. It used to engage in relatively benign activities such as data collection, but now focuses on promoting policies to expand the size and scope of government.

That’s troubling, particularly since the biggest share of the OECD’s budget comes from American taxpayers. So we’re subsidizing a bureaucracy that uses our money to advocate policies that will result in even more of our money being redistributed by governments.

Adding insult to injury, the OECD’s shift to left-wing advocacy has been accompanied by a lowering of intellectual standards. Here are some recent examples of the bureaucracy’s sloppy and/or dishonest output.

Deceptively manipulating data to make preposterous claims that differing income levels somehow dampen economic growth.

Falsely asserting that there is more poverty in the United States than in poor nations such as Greece, Portugal, Turkey, and Hungary.

Cooperating with leftist ideologues from the AFL-CIO and Occupy movement to advance Obama’s ideologically driven fiscal policies.

Peddling dishonest gender wage data, numbers so misleading that they’ve been disavowed by a member of Obama’s Council of Economic Advisers.

Given this list of embarrassing errors, you probably won’t be surprised by the OECD’s latest foray into ideology-over-accuracy analysis.

As part of its project to impose higher taxes on companies, here’s what the OECD is claiming in a recent release.

Corporate tax revenues have been falling across OECD countries since the global economic crisis, putting greater pressure on individual taxpayers… “Corporate taxpayers continue finding ways to pay less, while individuals end up footing the bill,” said Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration. “The great majority of all tax rises seen since the crisis have fallen on individuals through higher social security contributions, value added taxes and income taxes. This underlines the urgency of  efforts to ensure that corporations pay their fair share.” These efforts are focused on the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project.

And what evidence does the OECD have to justify this assertion?

Here’s what the bureaucracy wrote.

Average revenues from corporate incomes and gains fell from 3.6% to 2.8% of gross domestic product (GDP) over the 2007-14 period. Revenues from individual income tax grew from 8.8% to 8.9% and VAT revenues grew from 6.5% to 6.8% over the same period.

Those are relatively small shifts in tax receipts as a share of GDP, so one certainly could say that the OECD bureaucrats are trying to make a mountain out of a molehill.

But that would mean that they’re merely guilty of exaggeration.

The much bigger problem is that the OECD is disingenuously cherry-picking data, the kind of methodological mendacity you might expect from an intern in the basement of the White House, but not from supposed professionals.

If you go to the OECD’s website and click on the page where the corporate tax data is found, you’ll actually discover that corporate tax receipts have been slowly climbing as a share of GDP.

Yes, receipts are slightly lower than they were at the peak of the financial bubble.

However, honest analysts would never claim that those numbers were either sustainable or appropriate to use as a bennchmark.

Sadly, “honest” and “OECD” are words that don’t really belong together any more.

The bureaucrats in Paris also are being mendacious in their portrayal of what’s happening with individual income tax revenues.

Monsieur Saint-Amans wants us to think that falling corporate tax receipts are being offset by a rising burden on individuals, but check out this table from the OECD’s Revenue Statistics. As you can see, he wants us to look at one tree (what’s happened in the past few years) and ignore the forest (the fact that the burden of the personal income tax today is lower than it was in 1980, 1990, or 2000).

By the way, the real story is that the OECD wants higher tax burdens, period. Anytime, anywhere, and on everybody.

It’s attack on low-tax jurisdictions is designed to enable higher income tax burdens on individuals.

Its “base erosion and profit shifting” project is designed to facilitate higher income tax burdens on companies.

And the bureaucrats reflexively advocate higher value-added tax burdens.

All of what you might expect from an organization filled with overpaid officials who realize their cosseted lifestyle is dependent on producing output that will generate continuing subsidies from statist politicians such as Obama and Hollande.

P.S. If you want an amazing example of the OECD’s ideology-over-analysis approach, here’s what the bureaucrats recently wrote about achieving more growth in Asia.

Increasing tax revenues and ensuring sustainable domestic resource mobilisation will be critical as emerging Asian economies seek to boost the provision of public goods and services and improve economic growth and living standards. …Comparable and consistent tax statistics facilitate transparent policy dialogue and provide policy makers with an important tool to assess alternative tax reforms. …Continued reforms will be necessary to help these tax administrations raise additional tax revenues in the future.

Yup, you read correctly (at least if you understand that “domestic resource mobilisation” is OECD-speak for higher taxes). The bureaucrats think generating more tax revenue to finance bigger government actually is a recipe for more prosperity.

For all intents and purposes, they’re advising nations in the region to copy France and Italy instead of seeking to be more like Hong Kong and Singapore.

Though, to be fair, the OECD isn’t just trying to impose bad policy on Asia. The bureaucrats in Paris have an equal-opportunity mindset when advocating statism since that’s the exact same prescription the OECD gave for Latin America.

Events on both sides of the Atlantic yesterday made for an interesting contrast in the way Western democracies go to war. In the United Kingdom, they decided to actually have a vote before letting the bombs fly—with PM David Cameron winning approval in the House of Commons by a wider-than-expected 174-vote margin.

Meanwhile, the Washington Post reports that the Obama administration is sending a new Special Operations task force of some 200 soldiers to Iraq, to “enable the U.S. military to launch additional commando-style operations and increase intelligence collection, both in Iraq and in neighboring Syria.” Thus, while our cousins across the pond have secured legislative approval for war against ISIS, the “world’s oldest constitutional democracy” slips further toward a ground combat role in a war that the president ordered up some 16 months ago without a shred of legal authority. 

American’s fundamental law vests the decision to go to war in Congress. Under British law, however, the decision to use military force is a “prerogative power”—a decision taken by the Prime Minister “on behalf of the Crown.” “In constitutional terms Parliament has no legally established role and the Government is under no legal obligation with respect to its conduct.” And yet, in practice, as F.H. Buckley points out in The Once and Future King: The Rise of Crown Government in America, the British system has lately done a better job than the American one at forcing public deliberation over war: “the government’s day-to-day accountability before the House of Commons make[s] it far more difficult for a prime minister to disregard Parliament’s wishes.” Indeed, the last time Cameron contemplated airstrikes on Syria—over the use of chemical weapons in 2013—he had to abandon the idea after losing the vote in the House of Commons: “Parliament has spoken,” as Foreign Secretary William Hague summed up.

The U.S. Congress hasn’t spoken, in any formal sense, on our latest war in the Middle East, and it’s in no particular hurry to do so. The Obama administration continues to insist that, under the use-of-force resolution Congress passed over 14 years ago, it has all the legal authority it needs to wage war against ISIS, a group that’s also at war with Al Qaeda, the target of the original resolution. That pretext, offered mainly in unsigned “talking points” by anonymous administration officials, is too thin to hide the sweeping claim of executive war power on which the president’s war rests. Oddly enough, today royal prerogative thrives in the country that fought a revolution to overthrow it. 

Congratulations to Senator James Lankford of Oklahoma for his new report “Federal Fumbles.” The senator and his staff identify 100 screw-ups in federal programs and agencies, and propose some modest fixes.

I like the report because it will help educate the public in a fun way about the vast size and scope of the federal government. It will also help to counterbalance the nonstop propaganda coming from federal agencies about what an awesome job they are doing.

I don’t like the report because the reform proposals are too small. Lankford opens his report noting that out-of-control federal activism has loaded us with $19 trillion of debt, and is burying us under more than 3,500 new regulations a year. Yet most of his proposals would not put much of a dent in the problem. He identifies real waste in programs and agencies, but often doesn’t draw the logical conclusion that the waste is systematic and the whole program or agency ought to be repealed.

About half of the senator’s “fumbles” relate to activities that should be state, local, or private, and not federal at all. But Lankford usually just calls for administrative fixes to the problems, not a full devolution or privatization to fully end the federal fumbling. As the report notes, the government fumbles with school lunches, public housing, and Amtrak, but we will only begin to solve our $19 trillion debt problem when members of Congress start calling for full repeal of such programs.

That said, the report identifies some very important policy issues that the public needs to be aware of. For example, Lankford rightly criticizes a 377-page HUD regulation proposed in 2015 that would require communities across America to submit detailed plans to the federal government about how they will address segregation. The regulation is one of many ways that the federal government— through numerous agencies—is increasingly micromanaging local planning and zoning. It’s a dangerous trend that will squelch diversity, community, and local control in the nation.

So give Lankford’s report a read. He deserves credit for focusing his time and energies on the project and identifying a lot of waste, especially since many of his colleagues are in denial about the overspending problem.

But keep in mind that many of the programs and agencies discussed in Lankford’s report ought to be completely repealed. If they aren’t, the government is just going to keep on fumbling year after year, and the debt is going to keep piling up.    

This week, Cato hosted an all-day conference, “Policing in America.” We brought together experts with different perspectives to discuss the opportunities and pitfalls facing police organizations today. The video of the event is below and will be available in the Cato event archives.

It was a great event all around. The speakers were able to distill complex problems and incentives into easy-to-understand presentations. Experts and laypersons alike came away with some new information that can be used to frame the policing debate in the months and years ahead. I encourage you to check out each panel and guest speaker in the videos below. 

Welcoming Remarks and Panel 1: The Costs and Benefits of Emerging Police Technologies

Remarks by Jonathan Blanks, Cato Institute

Nathan Freed Wessler, Staff Attorney, Speech, Privacy, and Technology Project, American Civil Liberties Union
Alex Rosenblat, Researcher and Technical Writer, Data & Society Research Institute
Lynn Overmann, Senior Policy Advisor to the US Chief Technology Officer at the White House’s Office of Science and Technology Policy
Moderated by Matthew Feeney, Cato Institute

Remarks by Grover Norquist, President, Americans for Tax Reform

Panel 2: To Serve and Protect: A Discussion about Police Accountability

Max Geron, Major, Dallas Police Department
Cynthia Lum, Associate Professor, George Mason University Department of Criminology, Law and Society and Director, Center for Evidence-Based Crime Policy
Samuel Walker, Emeritus Professor, University of Nebraska-Omaha
Moderated by Wesley LoweryWashington Post

Luncheon Remarks by Ronald L. Davis, Director, Community Oriented Policing Services, U.S. Department of Justice

Panel 3: Police and the Community: Minority Perspectives

Vicki Gaubeca, Director, Regional Center for Border Rights, ACLU-New Mexico
Wadie E. Said, Professor, University of South Carolina School of Law
Moderated by Jonathan Blanks, Cato Institute

Panel 4: Rethinking Law Enforcement Strategies

David A. Klinger, Professor, University of Missouri-St. Louis
Clark Neily, Senior Attorney, Institute for Justice
Jerry Ratcliffe, Chair, Department of Criminal Justice, Temple University
Moderated by Trevor Burrus, Cato Institute

American Attitudes Towards the Police and Closing Remarks

Emily Ekins, Cato Institute

Adam Bates, Cato Institute

Readers have surely been disappointed at this blog’s recent dearth of Hawaiian constitutional news, but not to fear: the Aloha State doesn’t go too long without generating legal controversies worthy of national attention. The latest development comes from the Supreme Court, which blocked an election with racial qualifications that could eventually establish a new government for so-called “native Hawaiians.” (See this background on the ongoing legislative and regulatory saga surrounding this movement for ethnic separatism.) 

The voters in the disputed election, once they establish certain ancestral lineage and affirm their belief in the “unrelinquished sovereignty of the Native Hawaiian people,” are picking delegates to a convention that would write a new constitution for a new nation. The Obama administration supports this process as a prelude to the creation of a new government within but separate from the state of Hawaii, akin to an Indian tribe (which is an inappropriate analog).

A group of Hawaiians, led by Grassroot Institute president Keli’i Akina, sued to try to stop this election, which is being run by a private organization contracted by the state Office of Hawaiian Affairs. (Full dislosure: I’m on Grassroot’s very informal board of scholars.) While several of the plaintiffs have the qualifying ancestry, they complain that the race-based exclusion violates the Fifteenth Amendment. The election’s sponsors insist that it’s a private affair and therefore not subject to constitutional limitations. (See here and here for more background.)

The district court had inexplicably allowed the balloting to proceed and the U.S. Court of Appeals for the Ninth Circuit affirmed that ruling. Justice Kennedy, as the circuit justice for the Ninth Circuit, temporarily enjoined the counting and certification of ballots on Friday, and now the Court has issued a short order preserving the injunction pending the full appeal in the lower court.

Unfortunately, the vote on this emergency injunction application was 5-4, with Justices Ginsburg, Breyer, Sotomayor, and Kagan dissenting. This result presumably maps the underlying views on the merits of the case, regarding the constitutionality of this race-based election. That’s disappointing given some recent history: In the 2000 case Rice v. Cayetano, the Supreme Court ruled 7-2 against such “native Hawaiian” voting qualifications and in 2009, the Court reached a unanimous ruling against the state Office of Hawaiian Affairs (OHA) on a related property-rights dispute (in which Cato filed a brief). That era of good feelings is now apparently over.

Akina v. Hawaii will now continue on appeal and you can bet that Cato will be filing briefs. Perhaps a summary of our argument can be boiled down to the following: “While Hawaii is far away from the rest of the United States, the Constitution - including the 14th and 15th Amendments - still applies there.”

Stay tuned.

Conservatives outright reject the idea that big-government gun-control schemes would reduce mass shootings like the recent murders committed at a Planned Parenthood clinic in Colorado Springs. So why do so many conservatives seem to believe a big-government mental-health-care scheme, like the bill sponsored by psychologist and congressman Tim Murphy (R-PA), would be any more effective?

Murphy’s bill would reorganize and expand the federal government’s involvement in mental-health care. It would create a new Assistant Secretary for Mental Health and Substance Use Disorders at the U.S. Department of Health and Human Services. It would create an Interagency Serious Mental Illness Coordinating Committee. It would encourage telepsychiatry–by subsidizing it. It would expand Medicare and Medicaid subsidies for mental-health goods and services. It would leverage federal grants to coerce control how states treat mental-health patients suspected of being a threat to others. It would do other things.

Conservatives have lauded the bill and demonized its opponents. In October, National Review editorialized basically that Murphy’s bill would manage mental-health treatment from Washington better than Washington has ever managed mental-health treatment before.  Last week, The Wall Street Journal editorialized that opponents, including some Republicans, “object to involuntary commitment for the mentally ill, despite overwhelming evidence of the risks to society and the sick.” The Journal neglected either to recognize that involuntary commitment is a dangerous power for the government to wield, one with both benefits and costs, or to offer evidence that the benefits to society and the sick of broader involuntary commitment would exceed those costs.

The best way for government to aid the mentally ill is not a medical question. It is an economic one. What makes conservatives think that command-and-control economics will work better in mental health than in any other area? (Or are they just looking for a talking point in response to mass shootings?)

But that’s not what I’m here to tell you about. I’m here to talk about a Balanced Budget Amendment.

The Congressional Budget Office projects the Murphy bill would increase federal spending by a mere $3 billion over 10 years. But that projection comes with a very big asterisk.

The bill contains a weird quirk. It allows, and creates the expectation of, broader federal subsidies for mental-health services under both Medicare and Medicaid (much of it for ObamaCare’s new Medicaid-expansion population). But that broader coverage can happen if and only if the chief actuary of the Centers for Medicare and Medicaid Services certifies that such additional coverage will not increase net Medicare or Medicaid spending. The idea being, presumably, that this coverage expansion will be budget-neutral because the feds will pay for that additional stuff (much of which is currently being paid for by states) if and only if it produces, or CMS can otherwise find, offsetting savings elsewhere in Medicare and Medicaid. Without that funny little requirement, CBO projects the Murphy bill would increase net federal spending by as much as $66 billion over 10 years.

In other words, if those required certifications can be gamed–and political pressure from states and mental-health-care providers to game it will be considerable–the Murphy bill would increase federal spending by as much as 22 times the official projections. That’s not just an asterisk: it’s an exponent.

What does all this have to do with a Balanced Budget Amendment? It seems ideologically inconsistent for rock-ribbed, limited-government conservatives at the Wall Street Journal and National Review to support a bill like Murphy’s. But in a world of deficit spending, it costs them little. ‘Meh,’ they can say, ‘$3 billion over 10 years is a drop in the bucket.’ And it is easier to hand-wave away the looming threat of an additional $66 billion of federal spending.

Were there a constitutional requirement that federal spending must be financed by current taxation rather than deficit spending (i.e., a promise to raise taxes in the future), these conservatives probably would think twice about a bill like this because of the tax increases it portends.

Interestingly, both the Wall Street Journal and National Review have long editorialized against a Balanced Budget Amendment. Their principal objections are (1) to be effective, the impetus for a balanced budget must be political, not constitutional, and (2) a constitutional amendment would be difficult to enforce and, therefore, easy for politicians to game.

What these objections fail to appreciate is that the very process of ratifying a Balanced Budget Amendment would alter the political landscape, by creating expectations and thus a political constraint that augments the constitutional constraint and helps to make that constraint binding.

No Balanced Budget Amendment would or could be flawless. It would just be a vast improvement over what we have right now. Consider: following that ratification process, the politics of government spending might be sufficiently altered such that, when politicians presented conservatives with (say) a new big-government mental-health bill, conservatives would be forced to think about the additional taxes required to fund it, and would, therefore, reject it out of hand.

U.S. military personnel are heading to Iraq and Syria. The administration continues its slow progression to renewed ground combat.

Defense Secretary Ashton Carter informed Congress that a “specialized expeditionary targeting force” would be sent to Iraq on top of the 3,500 personnel already there. They were sent with the authority to operate in Syria too. Where greater opportunities appear to work with local forces, he added, “We are prepared to expand it.”

Unfortunately, no matter how combat-effective these forces, they won’t turn around a 16-month deadlock. The more men and materiel the president commits to “win”–whatever that means–the more he will have to introduce after the failure of every successive escalation. The president’s promise not to commit “boots on the ground” was trampled underfoot in October, when a Delta Force soldier was killed while accompanying Kurdish forces on a raid in Iraq.

Presidential wannabe Sen. Lindsey Graham and Sen. John McCain also proposed a 100,000 man “regional army to go into Syria.” Of this force, the United States would provide perhaps 10,000. Alas, waiting for Saudi Arabia, Turkey, Egypt, and other Sunni states to contribute the rest would be akin to waiting for the Easter Bunny or Great Pumpkin to appear.

The lessons of the Iraq War have been forgotten–or, perhaps, never learned. Yet retired Lt. Gen. Michael Flynn, U.S. Special Forces Commander in both Afghanistan and Iraq and director of the Defense Intelligence Agency, recently observed that the invasion and overthrow of Saddam Hussein unleashed the Islamic State and was “a huge error.”

The Obama administration is attempting to do everything, which means it likely will achieve nothing. Washington hopes to simultaneously defeat ISIL and defenestrate Syrian President Bashar al-Assad, the single strongest force opposing the Islamist radicals. The administration wants to re-establish Baghdad’s authority nationwide while convincing Iraqi leaders to grant more authority to the Sunnis, with whom they have effectively been at war since the U.S. invasion.

American officials are trying to persuade Sunni allies such as Saudi Arabia and Turkey to focus their efforts on ISIL, a Sunni group which is the strongest force deployed against Assad, their top priority. Washington is working closely with Kurdish forces, which Ankara views as an existential threat dedicated to breaking up Turkey.

The United States has devoted a lot of money and effort to bolstering the weak and decreasingly effective “moderate” insurgents in the hopes that they can defeat both Assad and the Islamic State. Now Washington is caught in between Turkey and Russia as they confront each other over Assad’s survival.

Nor is ISIL easy to defeat. How long is America prepared to occupy yet another Arab country or two in order to establish order, remake the state, impose liberal institutions, and ensure the preservation of the foregoing?

A better policy would be for the United States to back away. In fact, ISIL never threatened the United States directly because it was focused on creating a caliphate, or quasi-nation state.

Having a return address made the group susceptible to retaliation. Only recently has it begun to employ terrorist attacks—against Russia, Lebanon’s Hezbollah, France, and probably Turkey’s Kurds—as retaliation for their active operations against the Islamic State.

Indeed, the Islamic State prospers only because of the weakness of its adversaries. Without America’s presence, they would have to confront a much more serious ISIL threat.

As I point out in Forbes online: “Powers which Washington cannot force into a coherent coalition might more informally reach a complicated, regionalized modus vivendi. At the same time, the United States could concentrate its resources on incapacitating or killing those dedicated to striking America even after Washington’s disengagement.”

There is still time for the president to reverse course, pulling the United States out of yet another extended ground war in the Middle East. For more than a decade, Washington has been engaged in what historian Barbara Tuchman referred to in another time and circumstance as “the march of folly.” It is time to call a halt.

The Telegraph has just published a fascinating map, showing how long it took to get from London to anywhere else in the world in 1914.

Created by John George Bartholomew, a British royal cartographer who worked for King George V… the colorful grid is sectioned by isochrones – lines that connect all the points on the map that are accessible within the same amount of time from London.

As you can see, to get from London to, for example, Sydney took between 35 and 40 days.

Today it takes 23 hours.

After initial public offerings (IPOs) had a robust 2014, it looks like 2015 has been a bit quieter, according to a recent article in the Wall Street Journal.  But not because companies aren’t growing.  The companies are doing fine; they’re just not going public, opting instead to court buyers and quietly sell themselves.  The trend away from IPOs isn’t a new one; it’s been in the works at least since the late 1990s.  While some celebrated 2014 as a return to vibrant public capital markets in the Unoted States, it may be that the year was simply an anomaly. 

The question, of course, is whether this trend is a bad one.  The answer depends on the cause.  For any one company, the decision to sell may be exactly the right one, no matter what the IPO environment.  Some business models may work better as a business line within a larger organization, or the two companies may be able to exploit synergies and create a new company that is greater than the sum of its parts.  But it’s not clear that these motives are what’s driving the current trend. 

The Journal found that at least 18 companies that had filed papers with the SEC abandoned their IPOs due to acquisition.  This suggests that companies that are otherwise interested in going public nonetheless find acquisition the more attractive option.  The process of going public and maintaining good standing as a public company has been increasingly difficult (and expensive) over the last several years, due to increasing the regulatory requirements imposed by Sarbanes-Oxley and other follow-on regulation.  Increased regulatory compliance imposes both direct and indirect costs.  Direct costs include the expense of paying internal and external experts (mostly accountants and lawyers) to provide guidance and prepare disclosures.  Indirect costs include the risk of facing either litigation or an enforcement action (or both) due to a misstep in the compliance process. 

Another reason companies may forgo the IPO is that the private capital markets have become roomier.  One of the key drivers behind going public has always been the need to access cash, and lots of it.  Recent changes in the securities laws have made it easier for a company to stay private even while amassing shareholders, and to reach out to potential investors.  Even with these changes, however, companies must still register with the SEC (i.e., go public) when they have more than $10 million in assets and more than a certain number of shareholders.  And for a growing company, $10 million is not really that much money.  Which means that at a certain point, rapidly growing companies will face a choice: artificially cap growth to stay below the $10 million ceiling; go public; or merge. 

Of course, a merger is not the same as an IPO.  A large number of mergers without complementary growth in new companies tends to result in consolidation and decreased competition.  Decreased competition tends to result in decreased innovation.  Also, in a merger where one or both of the parties is privately held, valuation can be more art than science (with a dose of conjecture as well).  Publicly traded securities benefit from the market’s price discovery mechanism.  While the securities of non-public companies can be traded, these trades are subject to a number of restrictions and lack the transparency that trading on a public exchange provides.

A company that sells itself provides an exit for its early investors and a liquidity event for its employee shareholders.  It is not, however, a true substitute for raising capital.  To the extent that a company’s management and owners would prefer to keep building rather than sell their creation, they should not be stopped because the regulatory burden of becoming a public company is too daunting.  

In the late 1990s, as the Banco Central de Ecuador rapidly expanded the quantity of its currency–the sucre–prices denominated in sucres soared into hyperinflation. In response, Ecuadorians spontaneously adopted the U.S. dollar as a far safer savings vehicle, a far less chaotic pricing unit, and a far more reliable medium of exchange. Demand to hold sucres all but disappeared. With the collapse of the sucre, Ecuador’s government finally bowed to the market verdict and officially dollarized in January 2000. (I have previously written about these events here).

Dollarization has been a clear success. The Ecuadoran monetary and banking systems have been much more stable and trustworthy (real bank deposits have grown considerably) since dollarization, and the economy has enjoyed better growth despite being ruled by a political party that speaks and acts in anti-market tones. Because of its success, dollarization is enormously popular. Even President Rafael Correa, who has complained that dollarization is a “straitjacket” because it prevents expertly managed monetary policy (this is in fact its greatest virtue), promises not to undo dollarization.

This background is useful for considering a recent Wall Street Journal news analysis article entitled “Cheap Oil and Strong Dollar: Ecuador’s Twin Troubles” by Carolyn Cui and Manuela Badawy. As many other writers have done, Cui and Badawy suggest that dollarization is currently hurting Ecuador, that the country “has the misfortune to be an oil producer with a ‘dollarized’ economy that uses the U.S. currency as legal tender.”

Compared to what are these misfortunes? Having oil resources is better than not having them (provided that the wealth is not entirely squandered in battles to control it). And being dollarized has clearly been better for Ecuador than the unanchored monetary policy that preceded it.

Cui and Badawy acknowledge that “dollarization helped officials rein in inflation in 2000.” But this is oddly put. Dollarization is not a policy that local experts can manipulate as a tool, so it is odd to say that it “helped officials” to reduce inflation. Dollarization itself has reined-in inflation. Local officials merely got out of the way. Under dollarization, arbitrage in traded goods ties the dollar price level in Ecuador to the dollar price level in the United States, more or less tightly, just as it ties the California price level to the overall U.S. price level. Inflation rates cannot widely diverge. No local management is needed.

Cui and Badawy immediately continue with the supposed downside: “Now, [dollarization] is depriving them of the relief valve a depreciating local currency can provide at a time when the drop in oil prices is hurting its exports.” This is exactly the line taken by President Correa, who a year ago said that “Dollarization was a bad decision” and that “Right now, it is doing exactly the opposite of what it must do to address the scenario of falling oil prices.”

How might a depreciating currency provide a “relief valve” in a period of declining oil export revenues? Relief can’t come from changing the world prices of Ecuador’s other main exports. Just as oil is competitively and flexibly priced in dollars on world markets, so too are fresh flowers, fresh fruit, and seafood. Flowers grown in a weak-currency country do not have a selling-price advantage over flowers grown in a strong-currency country. The coherent argument for a “competitive depreciation” is rather that considered in dollar terms it cuts wages and other input payments that are priced in local currency. Such input price reductions, the argument goes, are appropriate given the reduced demand for labor and other inputs that follows from the drop in oil revenue (or similar negative productivity shock). And depreciation makes the reductions faster (in a world of “sticky” wages and prices) than can be achieved by waiting for unemployment to force reductions in nominal wages and other input prices. Non-oil export businesses can take advantage of higher profit margins to expand their output and sales.

For the sake of argument, let us suppose that a prompt reduction of wage rates in dollar terms by a certain percentage is indeed prudent in this case and that a timely, well-measured depreciation of the local currency could accomplish this. Is this a cost of dollarization? Yes. It is nonetheless a mistake to think that it follows that the country would be better off with a monetary regime in which the currency sometimes depreciates against the dollar.

Depreciation is not a measure that can be considered in isolation. It is only possible under a different monetary regime. We need to compare total costs and benefits of alternative regimes. Or in statistical terms: a regime that commits some Type I errors may still be much better than a regime that commits massive costly Type II errors.

There are two alternative regimes to dollarization to consider: an adjustable peg against the dollar and freely floating exchange rates. The first problem with an adjustable peg is that no expert knows in real time exactly how much wages and other input prices should be cut in dollar terms, and therefore the central bank cannot know just how much to devalue the currency against the dollar. It can easily err in the direction of overdoing it. The second and larger problem is that a pegging regime is simply not viable in a world of free capital flows. When the market begins to suspect that a devaluation is coming, speculators attack the currency, draining dollar reserves from the central bank, and forcing a devaluation that is likely to be larger than what was theoretically desired.

A freely floating exchange rate regime avoids the problem of speculative attack. And the market rather than the local central bank adjusts the exchange rate. But floating has its own fundamental problem: it removes the constraint that dollarization provides against the chronic problem of excessive money creation by the central bank. The “fear of floating” historically exhibited by many Latin American countries is justified: floating makes the inflation rate and the exchange rate unpredictable, which damages local capital markets and the financing of productive investment. High devaluation risk means highly risky real returns on long-term claims denominated in the local currency (call it “pesos”). The market for long-term peso bonds and mortgages evaporates. Foreign investors with dollars are similarly discouraged from bringing them into the peso economy by devaluation risk. Economic growth suffers.

The relevant alternative to dollarization is thus not an imagined regime in which precisely calibrated depreciations of the local currency’s exchange rate are administered by experts to adjust wages. To give a central bank like Ecuador’s discretion in issuing its own currency is to discard the dollar anchor that currently holds the public’s inflation expectations in place and thereby stabilizes the system. There is no way for the central bank to make a credible pre-commitment to use depreciation only for warranted real wage corrections.

The replacement of the dollar by a New Sucre that can be depreciated by the Banco Central would immediately be greeted by justified suspicion that, as with the old sucre, the New Sucre will be copiously issued and depreciated. Few would voluntarily switch from dollars to the New Sucre. Forced conversions of currency and deposit holdings would be necessary to get the new currency into circulation, hardly a sign that the new regime would improve consumer welfare. Inflation expectations would once again be unmoored, and indeed the public would justifiably fear a return to very high inflation. Speculative attacks would likely drive depreciation far beyond any extent desired by the experts. Exchange-rate chaos would return.

The lesson here is that Ecuador’s exchange rate against the dollar cannot be re-pegged while the benefits of dollarization are retained. Re-pegging implies a fundamental change in the monetary regime, which history and theory tell us would be a strong turn for the worse. The suggestion that dollarization is hurting Ecuador is based on a very myopic accounting of the costs and benefits.

[Cross-posted from]

The sharp defeat of Narendra Modi’s Bharatiya Janata Party in the state of Bihar has put the prime minister’s reform plan and political legacy at risk. He still has time to act, but governments usually grow more timid the longer they hold office.

A trading people who had succeeded at commerce around the globe, Indians long were held back by an officious bureaucracy notable for its inefficiency and corruption. The first systematic economic reforms were implemented in the 1980s, but a succession of weak governments never allowed their people to fulfill India’s high promise. According to the Economic Freedom of the World report, in 2013, the latest year for which numbers are available, India ranked a dismal 114 out of 157 nations rated.

Eighteen months ago Modi won a dramatic victory and seemed poised to transform India’s economy and more. Some called him the Indian Reagan.

However, his government has not delivered much change. One reason was that the opposition continues to control the legislature’s upper chamber. Moreover, Modi always was more pro-business than free market.

Finally, the government has been timid despite its sizeable legislative majority. Deficits continue. Banking remains state-directed. Privatization has disappointed. The law still discourages creation of family firms.

Many reformers worry that Modi missed his chance to transform the economy during the “honeymoon” period immediately after his election triumph. Since then, Modi has lost his electoral magic.

In February a new anti-corruption party won the vote in Delhi. Last month a coalition of two regional parties worked with other opposition parties, such as Congress, and triumphed in Bihar state.

Nevertheless, it would be foolish to count Modi out.

The list of necessary reforms is long. Everyone points to lifting restrictions on foreign investment, modernizing the sclerotic legal system, and creating a comprehensive bankruptcy code. Public sector banks are loaded with bad debt. There’s also electricity restructuring, privatization, subsidy reductions, tax reform, and labor rules.

The economy is not the only issue requiring the premier’s attention. In Bihar the BJP pandered to religion and caste.

Religious intolerance—which mostly means majority Hindu attacks on Muslims and Christians—has worsened since Modi’s election. The latest incidents have been mob attacks on Muslims thought to have eaten or smuggled cattle.

Popular Bollywood star Aamir Khan brought the issue to India’s mainstream when last month he criticized the sense of “insecurity and fear” felt even by his own family. The harsh response to him only reinforced Khan’s point.

Sectarian violence does more than harm innocent Indians. It also discourages foreign investment. Religious intolerance provides skittish investors with another reason to put their money elsewhere.

More state elections are pending. To win, the BJP should focus on economics, which is what boosted Modi and his party to last year’s overwhelming victory. With an expanding population India needs strong economic growth to move people out of poverty. The Minister of State for Finance, Jayant Sinha, said India needs at least eight percent growth annually for decades to provide sufficient jobs.

This kind of progress isn’t easy or common. Yet India’s current growth rate, around seven percent so far this year, suggests that India could take off after sustained, real economic reform.

As I wrote for Forbes: “Despite the recent challenges to his government, Modi retains a rare opportunity to advance his nation. Moreover, given his Hindu nationalist background, Modi also is well-positioned to reinforce tolerance and secularism in government. Doing so would promote domestic stability in a nation with tens of millions of people of different religious faiths, strengthen economic growth by encouraging foreign investment, and enhance India’s international influence.”

Will the 21st Century be another American Century, the Chinese Century, or something else? If Prime Minister Modi makes tough decisions in leading his country forward, the 21st Century might end up being the Indian Century. But if so, he can’t delay much longer in putting his words into action.