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The Iran deal is working as advertised by containing Iran’s nuclear weapons program. That non-proliferation success creates a greater one: it vastly lowers the odds of a U.S. attack on Iran and pacifies relations. That’s what makes the deal anathema to those on both sides who would preserve enmity to gain in domestic political fights.

The deal’s fate may be sealed in the coming weeks. A presidential election Friday Iran will either re-elect Hassan Rouhani, who pushed for the deal and now defends it, or replace him with a hardliner. The Trump administration recently launched a review of Iran policy and the deal, which could yield a decision to try to undermine the agreement or to truly stay in it.

Under the 2015 deal, officially the Joint Comprehensive Plan of Action, Iran agreed to limit its nuclear program in various ways and allow International Atomic Energy Agency inspections in exchange for relief from some of the sanctions that the United States, the European Union, and the UN Security Council had imposed and the release of frozen funds. The deal leaves in place sanctions on Iran for human rights violations, ballistic missile development, and support for terrorist organizations. The Obama administration also dropped charges against a number of Iranian sanctions violators in exchange for Iran’s release of four American prisoners.

Last fall’s elections put the deal in peril. They matched a Republican Senate majority that had openly tried to undermine the deal’s negotiation with a militaristic president who opposed it as a candidate. Trump made typically contradictory statements about the deal in campaigning but mostly voiced hostility typical of GOP hawks. For example, he told the AIPAC convention, “My number-one priority is to dismantle the disastrous deal with Iran.” Trump’s top foreign policy appointees seemed to share a particular hostility to Iran. Even Secretary of Defense James Mattis, who many saw a lone voice of foreign policy caution, had notably belligerent views on Iran, even bizarrely suggesting that it had created ISIS, despite Iran’s aide for ISIS’s opponents in Iraq and Syria.

Despite this rhetoric, neither Congress nor the administration has raced to dismantle the deal. Congressional leaders have suggested they accept to abide by the deal. Senator Bob Corker (R-Tenn), chairman of the Senate Foreign Relations Committee did join the panel’s ranking member Robert Menendez (D-NJ) to introduce a bill that would heighten sanctions on Iran for missile development, support for terrorist organizations, and human rights abuses. Though adopting the bill would antagonize Iran and make it more difficult for the United States to hold up its end of the bargain, it would not directly violate its terms.

The Trump administration, thus far, has stuck with the deal, while huffing and puffing. Officials say they’ll honor its terms pending a review run by National Security Advisor General H.R. McMaster, who, notably, isn’t a strident proponent of confrontation with Iran, like his predecessor, General Michael Flynn. The State Department recently certified Iran’s compliance but proclaimed Iran’s continued support for terrorism in the same press release. Secretary of State Rex Tillerson knocked the deal for failing “to achieve the objective of a non-nuclear Iran,” seemingly referring to its retention of enrichment facilities. President Trump then claimed that Iran is “not living up to the spirit of the agreement” and called it “terrible.”

These statements are a boon to Iran’s hardliners, who call the deal a capitulation to the United States, which they see as irredeemably hostile. Evidence of that hostility also comes in U.S. policy: the Corker-Menendez bill, Iran’s inclusion in the Trump administration’s legally-fraught travel ban, potentially-heightened U.S. military aid for their rival Saudi Arabia in its brutal bombing campaign in Yemen, and a likely massive arms sale to the Saudis.

Ebrahim Raisi, now the main opponent of Iranian President Hassan Rouhani, says he would abide by the deal, but criticizes its failure to deliver the promised broad economic benefits. In recent debates, Rouhani has defended the deal, suggested he can produce greater economic growth by negotiating further sanctions relief, and even blasted the Iranian Revolutionary Guard for trying to undermine the deal through ballistic missile tests. Hawks on both sides thus unintentionally serve each other’s interests.

The difficulty that U.S. opponents of the deal face is that the case for it grows stronger with time, as the White House review should demonstrate. One reason for that is that the deal clearly aids relatively-reformist forces in Iran. Another is new business openings, which generate political support for the deal on both sides. Boeing, for example, has nearly finalized two agreements with Iranian airlines worth nearly $20 billion and conducive to a lot of U.S. jobs. Another is that addressing Iran’s problematic activities is easier with the deal in place.

The deal’s imperfections aren’t a reason to abandon it, and no deal could have made Iran saintly. Probably the most dangerous impulse in U.S. foreign policy is to try to eradicate problems rather than to manage them. Recent U.S. wars have shown that a bad situation can always get worse.

At 10 AM tomorrow, we’ll be discussing these issues at Cato. Journalist Laura Rozen will interview Ambassador Wendy Sherman, the lead U.S. negotiator in the talks that produced the deal. Cato’s Emma Ashford and Georgetown’s Ariane Tabatabai will provide comments.

The U.S. ambassador to the United Nations, Nikki R. Haley, told George Stephanopoulos on ABC’s “This Week” yesterday that “the president is the CEO of the country,” and thus “he can hire and fire whoever he wants. That’s his right.” Leaving aside the question of whether the president can fire everyone in the federal government, she is wrong on her main point. The president is not the CEO of the country. He can reasonably be described as the CEO of the federal government. The Constitution provides that in the new government it establishes, “The executive Power shall be vested in a President of the United States of America.”

Meanwhile, too many people keep calling the president—this president and previous presidents—”my commander in chief” or something similar. Again it’s important for our understanding of a constitutional republic to be clear on these points. The president is the chief executive of the federal government. He is the commander in chief of the armed forces, not of the entire government and definitely not of 320 million U.S. citizens. Article II, Section 2 of the Constitution provides:

The President shall be Commander in Chief of the Army and Navy of the United States, and of the Militia of the several States, when called into the actual Service of the United States.

Too many people who should know better keep getting this wrong. The highly experienced former first lady, senator, secretary of state, and presidential nominee Hillary Clinton for instance, who declared last year on the campaign trail, “Donald Trump simply doesn’t have the temperament to be president and commander in chief of the United States.” (She had also used the term a year earlier, and in her previous campaign she expressed a determination to be the “commander in chief of our economy,” so this wasn’t just a slip of the tongue.)

And also third-generation Navy man, senator, and presidential nominee John McCain who declared his support for President George W. Bush in 2007, saying, the Washington Post reported: “There’s only one commander in chief of the United States, and that’s George W. Bush.”

Now Donald Trump is getting the same treatment. Perhaps it’s no surprise that the Daily Mail, a popular newspaper in a country still headed by a monarch, would write

President Donald Trump sent a message to ex-FBI director James Comey and his detractors as he told Liberty University graduates that ‘nothing is more pathetic than being a critic’ during his first commencement address as the commander-in-chief of the United States.

But how about Democratic strategist Maria Cardona, writing in a Capitol Hill newspaper to mock President Trump’s historical ignorance:

How apropos that this famous and very fitting quote was likely used by the Abraham Lincoln, the president who actually was the commander-in-chief of the United States when the Civil War happened.


And here also Tim Weiner, a Pulitzer Prize-winning reporter and author of “Legacy of Ashes: The History of the CIA”: “Our commander-in-chief has made a serious miscalculation.”

The Military Times should know better than to write, “Business mogul Donald Trump was sworn as the nation’s 45th commander in chief on Friday, promising to return government to the people and return American might to the international stage.”

Even Joy-Ann Reid, who hates Trump, gives him a title he doesn’t possess, declaring that Trump’s “greed and neediness and vaingloriousness have made our commander in chief a national security threat.”

In this time when we worry about threats to the Constitution and our liberal republican order, we need to remember the basics. 

This is a constitutional republic, and we don’t have a commander in chief. 

That’s an important distinction, and it’s disturbing that even candidates for the presidency miss it. Hillary Clinton may well have wanted to be commander in chief of the whole country, of you and me, and to direct us and our economic activities the way the president directs the officers and soldiers of the armed forces. But if so, she would have needed to propose an amendment to the Constitution—an amendment that would effectively make the rest of the Constitution irrelevant, since it was designed as a Constitution for a limited government of a free people.

Donald Trump is not my commander in chief. Neither was Barack Obama. Each was elected president, charged with leading the executive branch of the federal government.

Kenesaw Mountain Landis, the legendary baseball commissioner, once said that every boy builds a shrine to some baseball hero, and before that shrine a candle always burns. Growing up a Baltimore Orioles fan during the franchise’s glory days, my shrine had many heroes, including central figures Cal Ripken (HOF 2007), Eddie Murray (HOF 2003), and John Lowenstein. Not central but still part of the shrine was Doug DeCinces, a good glove/solid bat third baseman who manned the O’s hot corner for nine of his 15 major league seasons.

And so I was saddened to read that last Friday DeCinces was convicted of 14 charges of insider trading.

Back in 2008, his neighbor, James Mazzo, then CEO of an ophthalmic surgical supply company, told DeCinces that the firm was about to be acquired by medical giant Abbott Labs. DeCinces owned stock in the firm and purchased more after he learned of the deal. He also shared the tip (though apparently not its provenance) with some friends, including Murray. DeCinces ultimately profited about $1.3 million on the deal according to press reports.

His maneuver seems inoffensive if shrewd; after all, who wouldn’t buy something that he can then sell at a profit? That is fundamental to the marketplace, and it typically makes all participants better-off.

But in DeCinces’ case it’s a crime, and a very serious one. He can receive as much as 20 years in federal prison for each of the 14 charges he was convicted on.

The question is why. Remember that all an inside trader does is act on private information that more accurately reflects the future value of some financial asset than the current price does. He buys or sells that asset at a price that someone else voluntarily accepts. He does nothing that damages (or falsely props up) the ultimate value of the asset. Nor does he hurt the broader financial marketplace; if anything, his trading slightly pushes the asset price toward a more appropriate value.

In fact, as Villanova law professor Richard Booth has explained in the pages of Regulation, it is the legal pursuit of inside traders that hurts other investors and the broader marketplace. Those prosecutions frighten would-be traders away from acting on—and thereby transmitting—their private information. The prosecutions also usually hurt the firms—which is to say the firms’ many innocent investors—because they end up paying large fines and legal expenses. For institutional investors—pension funds, 401k plans, etc.—those losses far outweigh whatever benefits might come from civil recoveries from insider trading and the phantom benefits of “policing” these activities. Really, the only beneficiaries from these legal actions are the well-heeled lawyers and government employees who participate in them.

DeCinces isn’t the first celebrity to be tripped up by fanciful claims of financial crimes. Recall Martha Stewart (pursued by one James Comey, interestingly) and Michael Milken (pursued by Rudy Giuliani), for just two examples.

According to press reports, upon hearing his conviction on Friday, DeCinces could only shake his head, dumbfounded. We should do the same. There is nothing for society to gain from sending him to prison, ostensibly for the rest of his life, for actions that don’t seem worthy of being deemed crimes, let alone federal felonies. Instead of locking away DeCinces and puffing up a new generation of Comeys and Giulianis, it’s time to reform America’s Kafkaesque finance laws.

There’s a new scholarly journal out there called American Affairs. Eliana Johnson of Politico describes it as “a journal of public policy and political philosophy with an eye toward laying the intellectual foundation for the Trump movement.” Many people in the Trump movement purport to be in favor of “nationalism” over “globalism,” so you can imagine the journal will have some things to say about this topic. In the mission statement, the editors note the following:

We are said to live in a “globalized” world. Yet the most conspicuous global phenomenon of the present time would appear to be the resurgence of nationalism, in the United States as well as in Europe and Asia. What is the future of nations and nationalism, and what are the consequences of further separating political sovereignty from the existing political community of the nation-state? Is further “globalization” both inevitable and desirable? Can nationalism be leavened by justice—or even be essential to it—rather than being abandoned to its worst expressions?

And in the first issue, nationalism vs. globalism gets some prominent discussion. Georgetown political science professor Joshua Mitchell has a piece called “A Renewed Republican Party,” in which he talks about the “repudiation of globalism” in the 2016 election:

What term, then, should Republicans use to name the repudiation of globalism during the recent historic election? There will be a division, I suspect, along the lines we saw during the painful run-up to the 2016 election itself. On the one hand, Republicans who sided with globalists on the issue of commerce or who had a low estimation of American culture will indeed call what has happened a populist revolt. On the other hand, Republicans who think that globalism has not only been a disaster for the whole of the America but also that it is theoretically untenable will—or should—call what has happened a revolt in the name of national sovereignty, not populism.

Now, I’m not convinced that Trump really is the nationalist he plays on the campaign trail, or that his supposedly nationalist advisers are either. (The way they reach out to like-minded people in the UK, France, Germany and Russia seems kind of, well, globalist. Maybe it’s not really a repudiation of globalism they are after, but rather a different kind of globalism.)

Regardless, that’s the narrative going on right now: nationalism vs. globalism. And not suprisingly, this talking point has made the leap to a full-fledged academic fad, as evidenced by the creation of the American Affairs journal.

But what I keep wondering is: where are all these globalists that we are supposed to be afraid of? Mitchell tells us that American citizens want “their towns, counties, cities, states, and country” back. But back from whom? Who exactly has taken these things from us?

Reading the Mitchell piece, I was left without any clear answers to this question. He offered a few suggestions, but nothing concrete. In his view, “global elites” have used “the apparatus of the state” to push globalist initiatives which take power from the nation-state:

The post-1989 experiment with globalism and identity politics demonstrates that Hobbes was correct, so long ago, that supra- and sub-state sovereignty are perennial temptations of the human heart. The post-1989 version of that temptation saw global elites use the apparatus of the state to bolster so-called free trade, international law, global norms, and international accords about “climate change,” the advances towards which purported to demonstrate the impotence of the state itself. In such a world managed from above, the only task left for the Little People was to feel good—or feel permanent shame—about their identities, and perhaps to get involved in a little “political activism” now and again, to show their commitment (on Facebook, of course) to “social justice.” 

This argument fits solidly within the narrative about globalism, but it is almost completely devoid of any factual basis. Here’s the thing about trade agreements, international law, global norms, and environmental accords: they have an extremely limited impact on American sovereignty.

Now, I can understand why someone not familiar with international law and agreements might think there has been some massive loss of sovereignty, as people who don’t know the details often make this claim, and others then repeat it. But if you take the time to read the texts of international agreements, you will quickly see how limited their scope is. Often there is no enforcement mechanism at all in these arrangements, but even where there is, enforcement is pretty weak. The United States has not signed on to any arrangement with an international prosecutor who can put Americans in a global jail. So here’s what those who fear globalism need to understand: globalism has not taken your governing power. You still have it.

Of course, if you want to debate the precise contours of global rules and institutions, that’s fine. We should be careful with delegating power to international or supra-national bodies. But don’t delude yourself into thinking there is some big global power center out there, undermining American sovereignty. It just doesn’t exist.

(Now, if you are European, I can see how the facts are different. The EU involves supra-national institutions that do have a significant amount of power. Europeans should definitely have a vigorous debate about how they want power allocated across various levels of governance.)

Turning back to the Mitchell article, here he is weighing in on what the thinks trade agreements do: 

Trump’s critics have informed us that there is no way to avoid this inevitable consequence of globalization if there is to be “improvement”—Adam Smith’s favorite word in The Wealth of Nations—and a global increase in the standards of living. Protectionism will not solve this problem; it will make things worse. In our own day, however, the seemingly simple opposition between protectionism and “free trade” has become blurry. NAFTA is hundreds of pages long; the TPP is ten times that large. The remarkable thing that has happened in our own day is that these “free trade” agreements are in fact a new form of protectionism. That is, they involve endless stipulations, enforced by the state and often promulgated by self-interested global corporations themselves, which protect those very corporations because smaller enterprises seldom have the compliance staff necessary to adhere to, let alone understand, those stipulations. For us today, so-called free trade is not opposed to protectionism; it is a species of it. Globalization, to put the matter otherwise, involves not the supersession and growing irrelevance of the state, but the close alliance between growing state bureaucracies and large corporations—the name for which is crony capitalism. …

This gets the situation almost completely backwards. Protectionism is, inherently, about crony capitalism. Well-connected companies go to their national government with requests for protection from competition, which the government often grants. This transfers wealth from all consumers to a few corporations and expands the power and role of government as well. Protectionism is the epitome of big and corrupt government.

Trade agreements try to take this on, and overall have done a pretty good job. When governments can agree amongst themselves not to give in to crony capitalism, we the people are much better off.

Now, these agreements are not perfect, and yes, some companies and NGOs have been able to use trade agreements as a tool for pursuing their particular interests (strong intellectual property protection, labor rights, etc). I’m not going to defend these aspects of trade agreements. I’ll just say that we should not let the perfect be the enemy of the good.

So how do we respond to this apparent movement to intellectualize Trumpism, with its argument that nationalism is superior to globalism? My focus here has been putting the burden on this movement to show that globalism actually has an impact on American sovereignty, and to push people to understand what the global governance rules actually say.

By contrast, an approach I would not recommend is the response to Mitchell offered by Anne-Marie Slaughter:

Feelings of being disconnected and despised, however, are powerful emotions, strong enough to twist facts into a dark alternate reality. It is critical to look beyond a simple story of populism, of masses versus elites. A narrative of grounded, connected nationalism versus sanctimonious free-floating globalism is one that will generate support and staying power even among many well-educated people.

The right response is not to deny the existence or legitimacy of a desire to stay grounded amid tumultuous change, or love of country and culture, much less to look down on the less educated. It is to build a new narrative of patriotism, culture, connection, and inclusion. Even if Wilders lost this month and Le Pen loses in May, they and their supporters will not be going away.

I am puzzled by the suggestion that there is an effort “to deny the existence or legitimacy of a desire to stay grounded amid tumultuous change, or love of country and culture,” or “to look down on the less educated.” Perhaps this is happening at the margins, but mainly what I see is outrage over the rise of neo-fascist nationalists around the world. Hopefully, we can at least come together and repudiate this.

Putting that aside, I take her point to be that we need to fight Trumpist nationalism with some other form of nationalism. In my view, however, competing visions of nationalism are not the answer here. Slaughter’s nationalism-lite will not be an effective response to Mitchell’s industrial strength nationalism.

What we need instead is an informed debate about how power should be allocated at the local, national and global level, and a discussion of the proper role of global governance and institutions. What will become clear is that Americans have control over their towns, counties, cities, states, and country. The question is, what do they want to do with that control? So far, the answer from Trump and his purported nationalist supporters has been pretty vague, and also far from unified. To the extent there is anything they actually want to achieve, they may want to start now. Because pretty soon, their supporters will start to realize there aren’t really any globalists out there to fear, and the people they elected are not doing anything for the nation they claim to love so much.

Allan Meltzer passed away this week. He was one of the great economists I was lucky to have known and to have occasionally worked with. My colleague Jim Dorn wrote a very nice summary of his scholarship and influence here. Jim also recounts his close work with Cato over the years. Jerry O’Driscoll offers a remembrance here.

My own thinking on economic development benefitted substantially from Allan’s work on international debt, foreign aid, and financial crises. I benefitted even more from Allan’s guidance and interest in my work on those issues. He always took whatever time needed to discuss economic and policy topics with me, and recommend readings and research ideas. When Mexico experienced its 1994-95 peso crisis, Allan was an invaluable and generous resource. At the time, few market advocates in Washington criticized the proposed bailout of Mexico. The country, after all, had been considered a star reformer, and the government there was deemed worthy of U.S. support. We at Cato dissented and published a strong critique against “rescuing” Mexico because we thought it promoted moral hazard, it was a use of public resources that was unfair to ordinary Mexicans and Americans alike, and it supplanted and undermined superior market solutions to the crisis. From his perch at Carnegie Mellon University and the American Enterprise Institute, Allan was one of the few making the same arguments. It was useful to have him on our side and to employ some of the arguments he developed.

A few years later, when the Asian financial crisis erupted and the International Monetary Fund began bailing out not only countries in that region but also Russia, Argentina, and Brazil, the consensus finally started to shift. Allan was one of the more prominent voices in Washington critical of giving the IMF the capital increase it was requesting. The Congress finally did approve an increase, but as part of the deal, it set up a special bi-partisan congressional commission to look into the effectiveness of the leading international financial institutions. Allan headed up the group, which became known as the Meltzer Commission.

The commission’s final report received widespread attention and was influential. Among other things, it found a 55% to 60% failure rate of World Bank projects. As part of its proceedings, Allan asked me to provide an overview paper on the effectiveness of the IMF. (See my testimony here.) I was proud to have contributed analysis that made it into the final report and helped change the debate about IMF effectiveness and even the IMF’s own self-perception. Among my findings was that the IMF, set up to be a temporary lender to countries experiencing short-term economic problems, was in practice a long-term lender. Most countries that began borrowing from it did so for decades at a time—not a sign that it was fulfilling its stated role. My view of the IMF’s role during the Third World debt crisis was also revisionist. I provided evidence to support Anna Schwartz’s observation that official intervention “prolonged and worsened the debt problem.” And by then, experience itself was providing support for the view that massive bailouts were bad policy. Allan provided his moral and intellectual support to all of those arguments.

One time Allan invited Fed Chairman Alan Greenspan to AEI for a small meeting with top economists. He also invited me. Greenspan provided initial comments for about 25 minutes, after which I turned to Anna Schwartz, one of the world’s leading monetary economists who was sitting next to me, and I confessed that I really didn’t understand much of what he said. She looked at me calmly and said, “That’s alright, I didn’t understand him either.” As was my experience with Allan, I was lucky to have known and occasionally worked with Anna on many of the same issues. And as with Allan, Anna never made me feel academically inferior, though that was clearly the case. I could see why Allan and Anna were friends and colleagues.

Over the years, I would see Allan at meetings like the yearly Alamos Alliance gathering of Chicago-tradition economists in Mexico or Cato’s annual monetary conference. I almost always learned something from Allan, and it was always good to see him since he would typically be in good spirits.

The economics profession and those who knew him will miss him. Thank you Allan for being so generous.

In recent years, criminologists, law enforcement organizations, government agencies, and other criminal justice experts have been experimenting with various methods of data collection to improve American criminal justice. For example, some researchers look at recidivism—that is, how likely a person who has been incarcerated will end up back in jail or prison—to stem the tide of mass incarceration. Others have turned to “hot-spot policing” to better focus limited police resources on preventing new crimes in highly specific, high-crime areas.  Each method typically has its strengths and weaknesses, and much can be learned from new techniques.

But more data isn’t always a good thing. After a long battle with the Sun-Times, the Chicago Police Department released its “Strategic Subject List.” From the report:

“We have 1,400 individuals that drive this gun violence in this city,” police Supt. Eddie Johnson said in August, assuring the public his department was keeping tabs on the people on its closely guarded “Strategic Subject List.” “We’ve gotten very good at predicting who will be the perpetrators or victims of gun violence.”

Yet the list is far broader and more extensive than Johnson and other police officials have suggested. It includes more than 398,000 entries — encompassing everyone who has been arrested and fingerprinted in Chicago since 2013.

Nearly half of the people at the top of the list have never been arrested for illegal gun possession. About 13 percent have never been charged with any violent crime. And 20 of the 153 people deemed most at risk to be involved in violent crime, as victim or shooter, have never been arrested either for guns or violence.

What’s more, the data isn’t being used in the way the designer intended. 

“Let’s say you’ve never been shot or been arrested,” [Yale professor Andrew] Papachristos says. “But if your friends have been shot, you are at a greater risk of being shot.”

But Papachristos, a Chicago native, now distances himself from the way the police are using the Strategic Subject List in Chicago, noting that his work focuses on identifying potential victims, not on predicting the chances someone will shoot another person.

It is impossible to know exactly how the CPD uses this information, but if indices of potential victimization are interpreted as reasons to suspect violent behavior, officers may treat those people in the greatest danger as the most dangerous individuals, flipping the protective function of policing on its head. 

Secret lists, especially ones with hundreds of thousands of people on it, will not reduce crime or make the public safer. Data collection and analysis can be very useful in finding better ways to treat hard-to-solve problems, but putting a bunch of names on a list is akin to building a haystack to find a needle. 

There are many more problems with the data and you should read the whole Sun-Times report about it here

If you’d like to learn more about how data can shape what we know about policing, check out this panel I moderated last year at our most recent criminal justice conference.

In education, there is a widespread belief: the federal government ended segregation. This is, of course, based on the Supreme Court’s landmark ruling in Brown v. Board of Education, and subsequent federal efforts to end segregated schooling. But as a sobering new book by the Economic Policy Institute’s Richard Rothstein makes clear, while all levels of government forced, coerced, or cajoled racial segregation through housing policy, the feds may have been the worst, and the crippling legacy of those actions may be much further reaching than even schooling policy.

The Color of Law: A Forgotten History of How Our Government Segregated America is essentially a catalogue of discriminatory housing policies perpetrated throughout the 20th Century, but peaking from the 1930s through the 1960s. It chronicles local injustices including police ignoring or even stoking mobs that tormented African Americans who dared buy a home in a white neighborhood, and states with segregationist intent mandating local referenda to approve low-income family public housing. But it is the federal government that seems to have had the most powerful hand in it all, if for no other reason than only it could sweep every American into the corners where it decided they did—or did not—belong.

Much of the major federal impact started with the New Deal and World War II. As Washington sought to provide housing first for the economically displaced, then for workers at newly opened arsenal-of-democracy factories, racial segregation was the norm. Rothstein examines the case of Richmond, California, not far from uber-progressive Berkeley where he lives. He writes:

From 1940 to 1945, the influx of war workers resulted in Richmond’s population exploding from 24,000 to more than 100,000. Richmond’s black population soared from 270 to 14,000….With such rapid population growth, housing could not be put up fast enough. The federal government stepped in with public housing. It was officially and explicitly segregated. Located along railroad tracks and close to the shipbuilding area, federally financed housing for African Americans in Richmond was poorly constructed and intended to be temporary. For white defense workers government housing was built farther inland, closer to white residential areas, and some of it was sturdily constructed and permanent. Because Richmond had been overwhelmingly white before the war, the federal government’s decision to segregate public housing established segregated living patterns that persist to this day.

Discriminatory poison was spread even more widely by Washington via housing assistance programs, especially Federal Housing Administration-backed loans that were awarded with relative ease for white people moving into white neighborhoods, or developers aiming to build housing for whites, while freezing out African Americans. Levittowns—massive developments of cookie-cutter houses that made thousands of people homeowners—illustrate the crippling consequences of discriminatory aid. While access to good, affordable housing had many immediate benefits, the long-term consequences of such access may have been even greater—accumulation of wealth:

By the time the federal government decided finally to allow African Americans into the suburbs, the window of opportunity for an integrated nation had mostly closed. In 1948, for example, Levittown homes sold for about $8,000, or about $75,000 in today’s dollars. Now, properties in Levittown without major remodeling…sell for $350,000 and up. White families who bought those homes in 1948 have gained, over three generations, more than $200,000.

While white homeowners were living in, essentially, little banks, African Americans were often renters, accumulating no equity, or owners of far less desirable houses. It is a major reason that African Americans typically have only a tiny fraction of the accumulated wealth of whites.

The question this shameful history inevitably leads to, of course, is what can we do to remedy its effects? But many, if not all, of the possible answers carry major unintended consequences, likely one reason that Rothstein is hesitant to propose any in the book. His other reason is that the vast majority of people likely have little if any knowledge of the history he recounts, and knowledge of the disease must precede a cure. Such ignorance may be manifested in the tendency to see Washington as a savior against all discrimination, or my own mental imagery of housing discrimination before reading this book, consisting of hazy apparitions of homeowners entering covenants against selling to African Americans, or realtors redlining neighborhoods, but no concrete government policies essentially requiring such things.

Rothstein only outlines some food-for-thought proposals, including the federal government buying for-sale houses in Levittowns at today’s prices and selling them to African Americans at the price their grandparents would have paid, or ending zoning requiring that homes be built only on large—and expensive—lots.

My own, still embryonic thought is that solutions may have to eschew overtly race-based remedies, even though the wrong we’re trying to right was indisputably grounded in race. Clichéd though it may seem, “two wrongs do not make a right” feels correct: moving from race-based preferences for whites to such preferences for African-Americans, even to ameliorate unquestionable racial injustice, seems unacceptable. We must have preferences for no race under the law, but rather equal treatment for all.

Perhaps more practically, we have seen powerful evidence with policies ranging from affirmative action to forced busing that race-based policies foster resentment and can ignite conflicts that may well make matters worse. We should also be clear-eyed that even if we tear down all barriers to housing integration we may not see much of it, at least not at first. Research has repeatedly found that people are strongly inclined to self-segregate. Indeed, even in schools where physical integration has largely been achieved, friendship groups are often decidedly homogenous.

Perhaps the solution is to focus not on policy prescriptions, but to constantly and powerfully educate the public about the massive injustice that has been done—the primary goal of Rothstein’s volume. Then change efforts should be concentrated on an avenue we too often forget: civil society—individuals voluntarily forming communities that take collective action, such as churches, Kiwanis clubs, Habitat for Humanity, or any other groups people freely choose to form. They could perhaps pool funds to help African Americans purchase homes, or reach out to black communities and say “consider moving where we live, and if you come we will greet you with open arms,” or other potential actions.

Does this feel satisfactory in light of the grave injustice that has been done? No. But it seems crucial that government cease putting its thumb on the scale for any race, both as a matter of principle and of practical effect. No one would be forced to help make things right, but they may well feel compelled. Compelled by the conviction, grounded in knowledge, that African Americans have been grievously wronged, and that we should all strive to set things, as closely as possible, right.

Earlier this week, PBS Frontline ran a documentary titled Poverty, Politics, and Profit discussing major barriers to housing America’s poor. The show centered on the Low Income Housing Tax Credit (LIHTC) program, a federal program that subsidizes low-income housing construction.

Chris Edwards described Frontline’s LIHTC investigation well here. In short, the show found LIHTC costs taxpayers 66% more, but produced 20,000 fewer housing units than 20 years ago. Frontline made the case that the program’s failure is partly due to poor oversight and attendant corruption.

For those unfamiliar with LIHTC, Frontline’s narrative about developers’ outsized profits may sound extraordinary. But PBS does well to highlight a problem that the social sciences have long provided evidence for. For example, in Rethinking Federal Housing Policy, economist Edward Glaeser suggests that LIHTC’s “prime beneficiaries are the recipients of the tax credits, not poor renters …. [there] is little doubt that … a significant portion of program benefits accrue to developers.” And on the issue of LIHTC oversight, the Government Accountability Office flatly stated in a 2015 report that “oversight of the Low-Income Housing Tax Credit (LIHTC) program has been minimal.”

There are additional issues that were not covered in the Frontline piece. For one, the private market would produce the same housing in the absence of LIHTC subsidies. Economists call this phenomenon “crowd-out” and a recent study suggests “the impact of the [LIHTC] program on the [real] number of newly developed rental housing units appears to be small” because of it. In other words, LIHTC’s advocates are disingenuous when they pretend LIHTC-subsidized housing would not exist without government subsidy.

These issues and others provide good reason to reduce or eliminate the program. But despite the program’s many failings, Congress continues to look for ways to expand it. For example, this March Senator Hatch (R-UT) and other Republican legislators co-sponsored a bill to increase state LIHTC allocations. And last year Senator Wyden (D-OR) attempted to create a cousin program, the Middle Income Housing Tax Credit (MIHTC). 

It’s concerning when Republicans and Democrats find common ground in a crony business program, but it isn’t the first time. Some Republicans buy into the idea that tax credits are free (they aren’t) and other Republicans are pro-business rather than pro-market (the Ex-Im bank neatly illustrated this divide). Of course, redistributive subsidies of all stripes appeal to a majority of Democrats.

The point that Frontline makes – and it’s an important one – is that LIHTC isn’t effective even at what it tries to accomplish. Where LIHTC claims to support the poor, it excels at supporting crony business. Where it pretends to create new housing, it actually replaces equivalent, privately-produced housing with publicly subsidized development. Given mounting evidence of LIHTC’s dereliction, Republicans and Democrats should reconsider their support.

And so it begins:

In a move expected to swell federal prisons, Attorney General Jeff Sessions is scuttling an Obama administration policy to avoid charging nonviolent, less-serious drug offenders with long, mandatory-minimum sentences.

Mr. Sessions’s new guidelines revive a policy created under President George W. Bush that tasked federal prosecutors with charging “the most serious readily provable offense.”

Drug War critics have feared this moment ever since President Trump nominated Sessions; now it is a reality.  The effects will be no different than after past escalations: more crime and corruption, with little or no impact on drug use.


At a Cato event last week, Sen. Ron Johnson announced that he would be introducing new legislation that day to allow states to sponsor foreigners to live and work in their states. The innovative idea has produced a huge amount of interest and responses. Several business and conservative groups endorsed the bill. Sen. John McCain cosponsored it. Positive write-ups ran online in the Washington Post, The Week, and other outlets. The Wall Street Journal, New York Times, Los Angeles Times, and the Economist have all run articles supporting Congress taking this approach.

However, the organizations that are categorically opposed to all immigration—NumbersUSA and Center for Immigration Studies—as well as a National Review columnist have also responded with some criticisms. I will focus primarily on the criticisms that are specifically related to guest worker programs or state-sponsored visas in particular. Their criticisms arrive primarily from their flawed reading of the bill, assuming that they did read it.

NumbersUSA writes:

Critically, unlike even the most flawed of existing guestworker programs, this new program establishes no uniform rules to offer even nominal protections for American workers.

This criticism is strange, given that the entire point of the legislation is to allow states to decide the conditions under which migrants enter. That said, it’s not even true. Under the bill (p. 5), states are required to allow any worker admitted under the program to leave their initial employer. This is an incredibly important protection for American workers. Under the current federal programs, migrants are often stuck with the employer that sponsored them. This can make them more attractive than U.S. workers because the migrants can’t negotiate fairly for wages.

More from NumbersUSA:

DHS doesn’t have the resources to enforce current immigration law with uniform regulations. Expecting it to juggle as many as 51 new and distinct sets of rules under this program is ludicrous.

This misses the point again. The fact that DHS cannot enforce the current rules is exactly why devolving the rulemaking to the states makes sense. DHS doesn’t have to “juggle” if the states are the ones setting the rules and informing DHS of the violations of their rules, as the bill requires (p. 4). The level of government with the most at stake would conduct the oversight, as opposed to the current system where the level of government with almost nothing at stake is responsible for enforcement.

Center for Immigration Studies (CIS) writes:

There is little reason to think that the state- or regional-system(s) urged by the Cato Institute would be run any better or more honestly than the cornucopia of malfeasance that has attended investor visa programs.

The EB-5 investor program gives permanent residency to immigrants who invest at least $500,000 in a rural area or an area with high unemployment and that investment creates at least 10 jobs. State agencies have a limited role in selecting the areas where investment should go. CIS notes a few dozen cases out of literally tens of thousands of EB-5 investments where investors may have been defrauded. Pinning all of these cases on the states is unwarranted.

The few cases where states may have misused the EB-5 have arisen in part because 1) there’s a disconnect between state decision-making and federal oversight, and 2) the governors have total control over the decision-making. The bill eliminates the first problem—states would set and enforce the rules, having full accountability for the results—and it addresses the second one by imposing democratic oversight—state legislature must enact legislation creating the rules for the programs, not leave it totally to the state agencies.

More from CIS:

If [the migrants left the state], in violation of the terms and conditions of the program, whatever it might be, who would be expected to clean up the mess, find the aliens, and deport them? …the states or their subdivisions would most assuredly hand the mess over to the federal government…. the states and regions would then demand to re-fill the now-vacated jobs.

This criticism comes from ignoring the actual language in the bill. States are responsible for the full cost of apprehending and removing any person that they sponsor. If they fail to pay, they get no more visas. Moreover, the concern that guest workers will overstay and violate their status in large numbers has always been a lie. Lesser-skilled federal guest workers make up barely 2 percent of all overstays, according to the Government Accountability Office (GAO), implying an overstay rate of less than 3 percent. This low rate is due to the powerful incentive guest workers have to stay legal and be eligible to be invited back.

The bill builds in the same incentives, making eligibility for renewals or readmission conditional on compliance. Moreover, it requires states to maintain the same overstay rate or else each migrant would be required to post a $4,000 bond prior to entry, returned only if they exited in compliance with the rules. If this didn’t work, the visas to the state would be cut in half, and in half again, and in half again, and finally eliminated entirely for 5 years (p. 27). Again, these are incentives that the federal government does not have to enforce its rules, but would be imposed by this bill. CIS needs to (re?)read the bill.

CIS concludes:

Finally, let us return to the question of “whether the federal government should maintain its near-complete monopoly over legal immigration”: I thought that question was resolved in 1789 when our founders brought the Constitution into force, specifying in Article I, Section 8, Clause 4, that “The Congress shall have Power To … establish an uniform Rule of Naturalization,” which has repeatedly been construed by the Supreme Court to include immigration generally.

Congress has the power over immigration, but the Arizona v. U.S. and Chamber v. Whiting cases clearly explain that states are limited only to the extent that Congress chooses to limit them in the area of immigration. In any case, the bill does not concede to the states the authority to admit people to the country. It simply allows them to “sponsor” them for visas issued by the federal government and federal rules. States already act as sponsors on behalf of their foreign-born employees or students at their public universities. U.S. employers and U.S. citizens also sponsor workers and immigrants for various purposes. Can the federal government really not take into account the desire of any entity other than itself when deciding who to admit? Obviously not.

National Review writer Fred Bauer writes:

Guest-worker programs drastically undercut civic belonging. It is probably not healthy for a republic to have a large class of residents who are viewed purely as economic resources with no stake in American society.

The argument that noncitizens undermine “civic belonging” is untestable speculation that is the social science equivalent of counting how many angels can dance on the head of a pin. It makes the left-wing argument about the benefit of diversity seem entirely science-based. The left at least makes claims about how objectively measurable facts relate to specific outcomes unlike vague feeling-based claims of “civic belonging.” Mr. Bauer’s same criticism could be levelled at a resident of one state residing in another and not bothering to update his voter registration.

Using Bauer’s reasoning, one could actually make the case that non-citizen residents have a much greater stake in American society. Migrants often come from poorer countries, know the value of prosperity as a result, and truly recognize how unique America is. At the very minimum, they treasure America more than some of our fellow native-born Americans who are apparently content with subsisting off of welfare and languishing in permanent unemployment for lack of a desire to migrate to prosperity in another area.

Perhaps the migrants view the situation differently than Mr. Bauer, believing that employment will better their situation in a land of opportunity. Recognizing that individuals have their own desires is the core of treating them as people, not just economic resources, or as Mr. Bauer prefers, pawns in a collectivist scheme.

National Review’s Mr. Bauer continues:

Minor children are allowed to go with guest workers, and those children will be able to go to public schools, which in part are financed by federal tax dollars. So, when a state chooses to admit guest workers, it is making decisions that very much have a bearing on the federal coffers.

Mr. Bauer neglects to mention that, to begin with, the bill completely walls off the federal welfare state and tax credits from the state-sponsored workers. Thus, they would be paying many taxes for Social Security and Medicare that many of them will never receive, so even if they receive some indirect benefits—roads or education—they would be paying far more in taxes. My recent report conservatively estimated more than $100 billion federal surplus every year from these state-sponsored workers. And states could also choose not to admit the children as well (p. 28).

National Review’s Mr. Bauer continues:

Moreover, an expansive guest-worker program would almost certainly ignite a huge effort to ensure that guest workers and their families have access to at least some federal benefits… If [Republicans] tried to withhold benefits from guest workers, they would be smeared as cold-hearted and “anti-immigrant”…

Even when pro-immigrant members of Congress correct the supposed problems with the system, the opponents of reform always find a way to oppose it anyway, raising the specter of what may happen in the future. Yet federal guest workers have been barred for all means-tested federal public benefits for decades, and the restriction has remained. And while it’s true that Democrats could try to smear them as cold-hearted, public opinion—unlike on mass deportation—is on the side of Sen. Johnson. People oppose welfare for immigrants, so Democrats would most likely lose this (entirely hypothetical) fight.

More from National Review:

Birthright citizenship complicates all guest-worker programs in the United States and means that the nation as a whole would be even less insulated from the consequences of a state-based guest-worker program.

The goal of state-based visas is not to guarantee that there are zero consequences of immigration for the country as a whole, but rather to make the currently positive consequences more positive. As my report about the bill explains, the goal is to build flexibility into our economic migration system in order to allow it to respond to economic changes faster. This is exactly what is lacking in the federal monopoly where changes happen once every three decades. Certainly, there will be some impact nationally, but the net impact will be even more positive than under the sclerotic federal system. 

More from National Review:

The atrocities of optics presented by state-based guest-worker programs would also be legion: tenements swollen with guest-workers and their beleaguered families, young children denied visits to the doctor, [and] companies laying off Americans to hire phalanxes of underpaid guest workers, and tearful U.S. citizens waving goodbye to their guest-worker parents…

It’s amazing how Mr. Bauer can see the future of a program that has never existed. It’s remarkable for a conservative to claim that the only way to succeed in the United States is with government-funded welfare, denying that private charity and individual action could not lead to better outcomes. Yet the evidence indicates that when federal welfare was restricted to immigrants, those in the states that extended state-funded benefits had worse outcomes than in states that didn’t. Conservative Harvard economist George Borjas found that the immigrants in the anti-welfare states had greater reductions in poverty and higher rates of health insurance because they had an incentive to find employment.

His assumption that guest workers would be “underpaid” is pulled from thin air. He has no idea what the regulations for this non-existent program would be. (Retooling old rhetoric to a brand new idea is a common theme in all three of these responses.) 

Some immigrants will have to return to their home countries with their U.S.-born children if they lose their employment. But some states could adopt rules that allow long-term state residents to remain in the states for a period while they look for jobs, especially if they have U.S. children. And again, if they do have to leave, let immigrants make the choice whether they want to come under those conditions. There is no perfect system. There will always be difficult choices. The question for policymakers is which set of policies reduce potential downsides and increase the potential upsides.

More from National Review:

As Nicholas Eberstadt noted in a recent cover story for Commentary — a piece that Senator Johnson himself referenced in his remarks at Cato — the United States has experienced a growing crisis of work over the past 15 years. …Guest-worker programs weaken the viability of the average worker, and in so doing they damage the culture of work.

On my invitation, Nicholas Eberstadt spoke at Cato about his recent book on this topic—not a single word of his book supports the hypothesis that U.S. workers’ problems are caused by immigrants. Indeed, he repeatedly rejects this hypothesis (pp. 70, 76), and as I note in my commentary on his book, if it were true that increased foreign competition was the cause of men dropping out of the workforce, foreign-born men should be leading the way out of the workforce because studies have repeatedly shown that the only clear and large negative wage effect from immigration is on the immigrants already here. Yet they are not. Despite increased competition, they are working more than ever.

More from National Review:

A guiding principle of American policymakers for many decades was that the completely fluid movement of capital, labor, and goods across international borders was a utopian vision, and, like many utopian visions, probably could not be achieved. Instead, it was thought wiser to increase the fluidity of movement within the United States. The absence of trade and immigration barriers between states, the development of federal infrastructure programs, and other efforts were designed to realize that vision of internal fluidity. A radically federalized immigration policy would reverse it, making the internal movement of labor more difficult in order to increase movement across international borders.

This objection is just bizarre. Mr. Bauer is appealing to a principle of policy that he rejects—the fluid movement of labor—as a basis for rejecting reforms in that direction. In any case, the bill would not make internal movement more difficult. For people already here, the bill makes no difference at all on that score, and because the bill contains provisions allowing states to share state-sponsored workers across interstate lines, total movement between states would almost certainly increase under this legislation. It would certainly increase it within states, as the bill guarantees the ability to change employers (p. 5). To the extent that labor fluidity—international or domestic—is a goal of policy, then that is a reason to support this idea. It will increase both.

The idea that this is a “radically federalized immigration policy” is just not true. Its purpose is to federalize a portion of the system to allow faster policy responses and more tailored approaches to develop, not to devolve the entire system. This legislation is a complement to, not a rejection of the current system.

Jeffrey Herbst, the President and CEO of the Newseum, recently released a report about free speech on campus. It is brief and well worth reading.

Herbst believes we are missing the major problem exposed by recent attacks on free speech at universities.

Systematic public opinion polling and anecdotal evidence suggests, however, that the real problem of free expression on college campuses is much deeper than episodic moments of censorship: With little comment, an alternate understanding of the First Amendment has emerged among young people that can be called “the right to non-offensive speech.” This perspective essentially carves out an exception to the right of free speech by trying to prevent expression that is seen as particularly offensive to an identifiable group, especially if that collective is defined in terms of race, ethnicity, gender, or sexual identity. The crisis is not one of the very occasional speaker thrown off campus, however regrettable that is; rather, it is a generation that increasingly censors itself and others, largely silently but sometimes through active protest.

Many people believe university students have adopted a “right to non-offensive speech” under the influence of their leftwing professors who are hostile to libertarian values. But Herbst shows that high school students and their teachers are equally doubtful about protecting speech that offends. He notes, “young adults come to campus with some fairly well-developed views that explain much of what subsequently occurs as they confront challenging speech.”

Jeffrey Herbst notes that young people support free speech in theory but not, as we have seen with Murray and others, in particular cases. In the past polls showed that while the First Amendment in the abstract received near unanimous support, its applications to unpopular speakers sometimes failed to attract a majority. Maybe the boomers were different, and young people now are returning—ironically enough—to views held by pre-boomers.

Herbst shows that millennials in general are less supportive of free speech than older cohorts. I would like to see if this pattern holds controlling for age. Were baby boomers less supportive of free speech in 1974? If so, people may grow out of intolerance. For purposes of argument, let’s assume that in the past people became more tolerant with age. Perhaps the millennials will follow that path too. But might the world have changed? Might some factor now exists that could preclude millennials from following the normal path of increasing toleration and greater support for free speech?

Maybe. Jeffrey Herbst argues that early education now fosters illiberalism:

The approach to diversity in many elementary and secondary schools seems to be little more than ‘Don’t say things that could hurt others.’ While this might be very good life advice, students have come to interpret it as curtailing the First Amendment.

What can be done to counteract this trend? The libertarian answer to most free speech problems is always: more speech. Notice, however, that education is different from most speech situations. In a normal speech situation, two people speak and argue about a topic, and neither has authority about that topic if we understand authority as a presumption of being correct. Teachers, especially teachers of children, do have such authority. And advocates of free speech cannot simply interpose themselves and their arguments between teacher and student. By the time students enter the university (which can approximate the normal speech situation), they apparently have learned to be illiberal in pursuit of “niceness.”

Private schools are another answer to this problem. If most parents want a genuinely liberal education for their children, the authority of teachers will inculcate a respect for free speech even if it offends. But what if parents value virtue or social justice more than free speech? The children of those parents may become illiberal. What then? Of course, for now private schools can only be part of the answer to our problem even if all such schools were libertarian in outlook.

We need teachers who support free speech or specifically teachers who see free speech and diversity as compatible rather than as values in conflict that should be reconciled by limiting speech. Professors and public intellectuals should be working on that reconciliation while defending a strong view on freedom of speech. For example, Cato’s Flemming Rose is thinking hard about the importance of free speech in a multicultural society.

One final point. We live in a world too defined by partisanship and closed minds. Progressives may doubt the case for free speech when it is made by people who otherwise doubt progressivism. On the other hand, progressives who defend free speech will have real authority with those who doubt free speech but are otherwise progressive. The world being what it is, the future of free speech depends crucially on progressive advocates of the First Amendment. But not just them. Perhaps though, especially them.

Law professor Catherine Ross is a leading progressive advocate of free speech. She explores the challenges to the First Amendment in schools in Lessons in Censorship. You can see Cato’s forum on her book here.

Robert F. Bauer is an important progressive defender of free speech. You can read his thoughtful blog here.

The world lost a great champion of liberty with the passing of Allan Meltzer, a longtime Professor of Political Economy at Carnegie Mellon University.  Allan was a prodigious worker who wrote hundreds of articles and more than ten books, including his monumental A History of the Federal Reserve and more recently Why Capitalism?  The latter provides a strong defense of limited government, the rule of law, private property and free markets, which he saw as the surest means to increase the wealth of nations.

A Passion for Ideas and Policy

Allan had a passion for ideas and a desire to influence policy; he sought to make the world a better place by safeguarding economic and personal freedom. He became a major player in the marketplace for ideas — writing, teaching, advising policymakers, serving on editorial boards, co-founding the Shadow Open Market Committee with his close colleague and lifelong friend Karl Brunner, acting as president of the Mont Pelerin Society founded by F. A. Hayek, chairing the International Financial Institution Advisory Commission (also known as the “Meltzer Commission”), and participating in numerous conferences. He continued working right up until his death on May 8, at the age of 89.

A Giant in Monetary Economics

I first met Allan in the early 1980s, when he began to participate in Cato’s Annual Monetary Conference. His paper “Monetary Reform in an Uncertain Environment” was delivered at the first conference, in January 1983, and published in the Cato Journal later that year; it was reprinted in The Search for Stable Money (University of Chicago Press, 1987), a book I co-edited with Anna J. Schwartz.

In that article, Allan examined alternative monetary regimes and their implications for reducing risk and uncertainty. He sought a rule-based regime that would minimize uncertainty and best allow markets to flourish. He preferred, at the time, a quantity rule that would have the monetary base grow in line with the growth of real output adjusted for changes in the velocity of base money. Such a rule, he argued, would anchor expectations regarding the path of nominal income and achieve long-run price stability. However, the rule had to be credible and be supplemented with a fiscal rule that limited the taxing and spending powers of government. He did not want the Fed to finance government deficits or to allocate credit.

It is important to note that Allan was not opposed to private money. At the 1993 monetary conference and in his paper, he held that

individuals or groups should be permitted to issue and use privately produced money or monies… . The objective of policy rules is to reduce the uncertainty that the community must bear, not to prevent voluntary risk taking.

Allan was open-minded and was willing to change his policy advice based on logic and evidence.

He continued to participate in Cato’s Annual Monetary Conference for many years and contributed 15 articles to the Cato Journal (see Table 1). Although he was often critical of Fed policy, he thought Paul Volcker was correct in ending double-digit inflation by slowing the growth of money and credit, and that Alan Greenspan was correct in following an implicit monetary rule to prevent wide fluctuations in nominal income during the “Great Moderation.”

Meltzer, however, was highly critical of the Fed’s unconventional monetary policy and wrote in the Spring/Summer 2012 Cato Journal:

Overresponse to short-run events and neglect of longer-term consequences of its actions is one of the main errors that the Federal Reserve makes repeatedly. The current recession offers many examples of actions that some characterize as bold and innovative. I regard many of these actions as inappropriate for an allegedly independent central bank because they involve credit allocation, fill the Fed’s portfolio with an unprecedented volume of long-term assets, evade or neglect the dual mandate, distort the credit markets, and initiate other actions that are not the responsibility of a central bank.

He kept up his criticism until the end, writing articles for the Hoover Institute, where he was a distinguished senior fellow, with such titles as “Fed Up with the Fed” (Defining Ideas, February 17, 2016), “Fed Failures” (March 9, 2016), and “Reform the Federal Reserve” (October 12, 2016).  His last article in Hoover’s online journal appeared on April 25, less than two weeks before he died.

The last time I saw Allan was in Switzerland, in September 2016, where we had enjoyed many discussions at Karl Brunner’s Interlaken Seminar on Analysis and Ideology. He was in Zurich to commemorate the 100th anniversary of Karl’s birth, sponsored by the Swiss National Bank, and to deliver a paper discussing Karl’s many contributions to monetary theory as well as to political economy in general. In his paper, “Karl Brunner, Scholar: An Appreciation,” he emphasized that Karl

highlighted information, institutions and uncertainty as well as the importance of microanalysis in macroeconomics. Karl Brunner explained that nominal monetary impulses changed real variables by changing the relative price of assets to output prices. And he concluded that economic fluctuations occurred because of an unstable public sector — especially the monetary sector — that disturbs a more stable private sector, a policy lesson forgotten or never learned by many central banks.

Those ideas also were central to Allan’s work — both with Karl and independently — and they are evident in his interpretation of Keynes’s monetary theory.

John Maynard Keynes and Meltzer’s Monetary Rule

In a careful study of John Maynard Keynes’s writings, Meltzer argues that the vast literature on Keynes neglected the importance he placed on credible rules, which he thought would reduce uncertainty and improve economic welfare (see Keynes’s Monetary Theory: A Different Interpretation, Cambridge University Press, 1988).[i]

In particular, Allan was influenced by Keynes’s classic A Tract on Monetary Reform (1923), which discusses rules for domestic (internal) price stability and for international (external) price stability — that is, exchange rate stability. In thinking about a rule to reduce the variability of unanticipated changes in prices and outputs, Meltzer ([1987] 1989: 78–81) draws on Keynes’s distinction and his recognition of the benefits of reducing both internal and external instability.[ii] The problem, of course, is to choose the appropriate institutional framework. Countries operating independently cannot achieve both internal and external stability, argued Keynes, unless a key country anchors its price level by enforcing a credible rule.

Building upon Keynes’s insights, Meltzer (p. 78) notes that if each major trading partner makes domestic price stability a priority, then uncertainty about the future path of prices will diminish and exchange rates among the partners will be more stable. To realize both internal and external stability, Meltzer proposes a simple rule: each major country should set “the rate of growth of the monetary base equal to the difference between the moving average of past real output growth and past growth in base velocity” (p. 83). If each country complies, the rule will reduce the “variability of exchange rates arising from differences in expected rates of inflation.”[iii]

Meltzer’s proposed rule is “forecast free” and adaptable; it is mildly activist but nondiscretionary, similar to Bennett McCallum’s monetary rule.[iv]  By choosing to stabilize the anticipated price level rather than the actual price level, there is no need “to reverse all changes in the price level,” argues Meltzer (1989: 79). Instead, the actual price level is allowed “to adjust as part of the process by which the economy adjusts real values to unanticipated supply shocks.”  In other words, Meltzer’s monetary rule “does not adjust to short-term, transitory changes in level, but it adjusts fully to permanent changes in growth rates of output and intermediation (or other changes in the growth rate of velocity) within the term chosen for the moving averages” (p. 81).

In the current environment — with the Fed paying interest on excess reserves (in excess of  what banks can get on highly liquid assets), no competitive fed funds market, banks subject to uncertainty about future monetary policy and complex macro-prudential regulations, and depositors holding more cash due to ultralow interest rates, Meltzer’s monetary rule would be severely constrained. The link between base money and broader monetary aggregates has weakened significantly since the 2008 financial crisis and the Fed’s unconventional monetary policy.

Before serious consideration can be given to implementing any rule-based monetary regime, the Fed needs to normalize monetary policy by ending interest on excess reserves and shrinking its balance sheet to restore a pre-crisis fed funds market. Once changes in base money can be effectively transmitted to changes in the money supply and nominal income, Meltzer’s rule would reduce uncertainty and spur investment and growth.

The key point, however, is that Allan wanted to explore alternative monetary rules and select those he thought would work best to reduce the variability of prices and output. That comparative-institutions approach was evident in all his work. But he recognized that, ultimately, the choice of a rule would be heavily influenced by the political economy. His careful scholarship was intended to help shape the climate of ideas and public policy in the direction of what Richard Epstein has called “simple rules for a complex world.”[v]

A Breadth of Knowledge

Although Allan was known primarily for his work on monetary theory and history, he was deeply interested in the role of government in a free society; the relation between institutions, incentives, and behavior; the determinants of economic growth; the theory of public choice; the damaging effects of official foreign aid; and the distribution of income.[vi] He wrote many articles for the popular press, including the Wall Street Journal, Los Angeles Times, and Financial Times, and he was always willing to help younger scholars and students understand the complexities of political economy.

A Man of Integrity

Allan Meltzer was a great scholar and teacher, a friend of liberty, a man of integrity who kept his word, and a fine human being. He was persistent in his research and his life. Allan taught at Carnegie Mellon for 60 years and was married to his lovely wife Marilyn for 67 years.

When Allan was five years old, he lost his mother and went to live with his grandmother for several years until he moved to Los Angeles where his family ran a business. Reflecting on his early years, Allan said, “Her most important influence on my career and my outlook was her strongly held belief that, in America (and only in America), there were no real limits other than ability to what one could achieve by personal effort.”[vii]

In his many accomplishments and honors, Allan certainly realized the American Dream, and had a life well lived.[viii] He will be sorely missed, but his work will live on.


TABLE 1: Allan H. Meltzer’s Articles in the Cato Journal
  1. Monetary Reform in an Uncertain Environment,” Cato Journal 3 (1), Spring/Summer 1983. Reprinted in J. A. Dorn and A. J. Schwartz (eds.) The Search for Stable Money, University of Chicago Press (1987).
  2. The International Debt Problem,” Cato Journal 4 (1), Spring/Summer 1984.
  3. Monetary and Exchange Rate Regimes: A Comparison of Japan and the United States,” Cato Journal 6 (2), Fall 1986.
  4. Comment on “Can Monetary Disequilibrium Be Eliminated?Cato Journal 9 (2), Fall 1989.
  5. Some Empirical Findings on Differences between EMS and Non-EMS Regimes: Implications for Currency Blocs,” Cato Journal 10 (2), Fall 1990.
  6. Karl Brunner: In Memoriam,” Cato Journal 12 (1), Spring/Summer 1992.
  7. Benefits and Costs of Currency Boards,” Cato Journal 12, Vol. 12 (3), Winter 1993.
  8. Asian Problems and the IMF.” Cato Journal, 17, (3), pp. 267-274.
  9. Monetary Policy in the New Global Economy: The Case of Japan,” Cato Journal 20 (1),Spring/Summer 2000.
  10. Argentina 2002: A Case of Government Failure,” Cato Journal 23 (1), Spring/Summer 2003.
  11. A Monetary History as a Model for Historians,” Cato Journal 23 (3), Winter 2004.
  12. New Mandates for the IMF and World Bank,” Cato Journal 25 (1), Winter 2005.
  13. Learning about Policy from Federal Reserve History,” Cato Journal 30 (2), 2010.
  14. Federal Reserve Policy in the Great Recession,” Cato Journal 32 (2), Spring/Summer 2012.
  15. What’s Wrong with the Fed? What Would Restore Independence?”  Cato Journal 33 (3), Fall 2013.


[i] When Allan’s book was still being drafted, I organized a conference in October 1986, sponsored by the Liberty Fund, which took place in San Francisco and brought together a number of leading monetary scholars to critique Allan’s arguments and help facilitate completion of his book. Participants included Milton Friedman, Anna Schwartz, Karl Brunner, Leland Yeager, David Laidler, John Whitaker, Lawrence H. White, and Axel Leijonhuvud.

[ii] A. H. Meltzer, “On Monetary Stability and Monetary Reform,” in J. A. Dorn and W. A. Niskanen (eds.) Dollars, Deficits, and Trade, 63–85. Boston: Kluwer (1989).  This paper was originally presented the Third International Conference of the Institute for Monetary and Economic Studies at the Bank of Japan, June 3, 1987.

[iii] Meltzer’s proposal is similar to Brunner’s call for a “club of financial stability.”  See K. Brunner, “Policy Coordination and the Dollar,” Shadow Open Market Committee: Policy Statement and Position Papers (PPS 87-01), 49–51. Center for Research in Government Policy & Business, University of Rochester, March 1987.

[iv] See B. T. McCallum, “Monetarist Rules in the Light of Recent Experience.American Economic Review 74 (May 1984): 388–96.

[v] See R. A. Epstein, Simple Rules for a Complex World, Cambridge, Mass.: Harvard University Press, 1995.

[vi] Meltzer viewed economics as “a policy science, not a branch of applied mathematics.”  He argued that “economics will be poorer if it does not include institutions and the incentives embodied in the rules, institutions or arrangements that we call society.”  See A. H. Meltzer, “My Life Philosophy,” The American Economist 34 (1), Spring 1990, p. 27.

[vii] Ibid., p. 22.

[viii]  Meltzer’s many honors include: Distinguished Fellow, American Economic Association; Irving Kristol Award, American Enterprise Institute; Distinguished Professional Achievement Medal, UCLA; The Adam Smith Award, National Association for Business Economics; The Bradley Foundation Award; The Harry Truman Award for Public Policy; and the Distinguished Teacher Award, International Mensa Foundation.

[Cross-posted from]

Former House Ways and Means Committee staffer Joanne Butler wrote a recent piece calling for greater use of E-Verify to fight illegal immigration. Like other pieces advocating for the massive expansion of this government-run employment verification program, Butler’s presents a rosy view of E-Verify that is at odds with the reality. E-Verify remains an ineffective program that promises much, accomplishes little, and is dangerous to citizens and non-citizens alike.

E-Verify is still based off of Reagan-era employment verification forms. After collecting I-9 tax forms from employees, the employer enters the information into a government website. The system compares these data with information held in Social Security Administration (SSA) and Department of Homeland Security (DHS) databases. SSA data is then used to check the validity of the Social Security number while DHS checks immigration status.

If both databases decide that the data are valid then it approves the employee for work. A flag raised by either database returns a tentative non-confirmation that requires the employee and employer to sort out the error. These errors can range from the simple (a misspelled name) to the complex (such as the system flagging a Social Security number as fake or already in use). The employer and the employee must correct these errors, eating up valuable labor hours and resources. The current I-9 form costs employers an estimated 13.48 million man-hours each year, while 46.5 percent of contested E-Verify cases took longer than eight working days to resolve. A hypothetical nationwide E-Verify mandate would sacrifice many millions more work hours on the altar of immigration enforcement.

E-Verify’s errors and inaccuracies are far too frequent and notoriously difficult to actually measure. The last major survey of E-Verify’s accuracy rates was published in 2012.  According to that last survey, 54 percent of unauthorized workers were incorrectly found to be work authorized due to E-Verify’s reliance on documents presented by the workers themselves. This makes it easy to fool E-Verify: the system checks the validity of documents but does little to check the veracity of documents.

For example, a blatantly false Social Security number, such as one with the wrong number of digits or an impossible combination of numbers, will be flagged. However, an unauthorized worker utilizing a valid number illicitly acquired will not be flagged by the system. The system will not question why a 44-year-old man in California is using, say, a Social Security number issued to a 5-year-old girl born in Texas or one of the 6.5 million numbers attached to Americans who are 112 years old or older who are not recorded as deceased. Any documents acquired with the valid but illicit number will also fail to trigger the system.

E-Verify also blocks some legal workers.  Around 0.15 percent of E-Verify queries result in a false final non-confirmation, locking out otherwise legal citizens and permanent residents. An SSN “lockdown” feature only makes things worse, as the Social Security Administration can lock a number used multiple times in the system. An American could find their Social Security number “locked” and have to go through a long process to unlock it. The valid number holder is forced to bear the burden of having to prove to the government that they are who they say they are.

Even more absurd, about half of all new hires in states that require mandatory E-Verify for all new hires are not run through E-Verify.  Enforcing E-Verify is about as difficult and expensive as enforcing the current I-9 system except that it adds another layer of bureaucracy for employers and employees to overcome.  Arizona, Mississippi, South Carolina, and Alabama are states committed to immigration enforcement.  If they can’t even make mandatory E-Verify truly mandatory then there is no hope for the federal government accomplishing that goal.

Finally, E-Verify is expensive. Expanding E-Verify through a nationwide mandate would, per the CBO, cost the federal government $635 million from 2018 to 2023. It would additionally impose $10 million in annual costs on state and local governments, as well as a minimum $200 million in costs to the private sector as employers struggle to verify millions of employees. All that cost for a system that doesn’t even work very well – what a bad deal.

While there’s been thousands of legacy media stories about the very real decline in summer sea-ice extent in the Arctic Ocean, we can’t find one about the statistically significant increase in Antarctic sea ice that has been observed at the same time.

Also, comparisons between forecast temperature trends down there and what’s been observed are also very few and far between. Here’s one published in 2015:

Observed (blue) and model-forecast (red) Antarctic sea-ice extent published by Shu et al. (2015) shows a large and growing discrepancy, but for unknown reasons, their illustration ends in 2005.

For those who utilize and trust in the scientific method, forming policy (especially multi-trillion dollar policies!) on the basis of what could or might happen in the future seems imprudent. Sound policy, in contrast, is best formulated when it is based upon repeated and verifiable observations that are consistent with the projections of climate models. As shown above, this does not appear to be the case with the vast ice field that surrounds Antarctica.

According to the most recent report by the Intergovernmental Panel on Climate Change (IPCC), CO2-induced global warming will result in a considerable reduction in sea ice extent in the Southern Hemisphere. Specifically, the report predicts a multi-model average decrease of between 16 and 67 percent in the summer and 8 to 30 percent in the winter by the end of the century (IPCC, 2013). Given the fact that atmospheric CO2 concentrations have increased by 20 percent over the past four decades, evidence of sea ice decline should be evident in the observational data if such model predictions are correct. But are they?

Thanks to a recent paper in the Journal of Climate by Josefino Comiso and colleagues, we now know what’s driving the increase in sea-ice down there. It’s—wait for it—cooling temperatures over the ocean surrounding Antarctica.

This team of six researchers set out to produce an updated and enhanced dataset of sea ice extent and area for the Southern Hemisphere for the period 1978 to 2015. The key enhancement over prior datasets included an improved cloud masking technique that eliminated anomalously high or low sea ice values, assuring that their work is the most definitive study of Antarctic sea ice trends to date.

The six scientists report the existence of a long-term increasing trend in both sea ice extent and area over the period of study (see figure below), with the former measure increasing by 1.7 percent per decade and the latter by 2.5 percent per decade. 

Figure 1. Monthly anomalies of Southern Hemisphere sea ice extent (left panel) and area (right panel) derived using the newly enhanced SB2 data (black) of Comiso et al. and the older SBA data (red) prior to the enhancements made by Comiso et al. Trend lines for each data set are also shown and the trend values with statistical errors are provided. Source: Comiso et al. (2017).

With regard to these observed increases, Comiso et al. confirm “the trend in Antarctic sea ice cover is positive,” adding “the trend is even more positive than previously reported because prior to 2015 the sea ice extent was anomalously high for a few years, with the record high recorded in 2014 when the ice extent was more than 20 x 106 km2 for the first time during the satellite era.”

They compared satellite-based estimates of temperature over the ocean/ice and found a very high negative correlation between ice cover and temperature. So, the large and systematic increase in ice extent must be related to a cooling over the sea-ice region throughout the 36-year period of record in this study.

Why is this important? Much like the problems with the missing “tropical hot spot” we noted last month, Antarctic sea-ice modulates a cascade of meteorology. When it’s gone, or in decline, as is the forecast from the climate models, much more of the sun’s energy goes into the ocean, as that energy is only very poorly absorbed by ice, which means an enhanced warming of the Southern Ocean. That has effects on Antarctica itself, where slightly warmed surrounding waters will dramatically increase snowfall on the continent. The fact that there are only glimmerings of this showing up (if at all) should have tipped people off that something was very wrong with the temperature forecast for the nearby ocean.

Consequently, it is clear that despite a 20 percent increase in atmospheric CO2, and model predictions to the contrary, sea ice in the Antarctic has expanded for decades. Such observations are in direct opposition to the model-based predictions of the IPCC.

(N.B. as noted in our May Day post, the Antarctic ice sensor crashed last April, and subsequent data appears to be very unreliable and, in some cases, physically impossible.)



Comiso, J.C., Gersten, R.A., Stock, L.V., Turner, J., Perez, G.J. and Cho, K. 2017. Positive trend in the Antarctic sea ice cover and associated changes in surface temperature. Journal of Climate 30: 2251-2267.

IPCC. 2013. Climate Change 2013: The Physical Science Basis. Contribution of Working Group I to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Stocker, T.F., D. Qin, G.-K. Plattner, M. Tignor, S.K. Allen, J. Boschung, A. Nauels, Y. Xia, V. Bex and P.M. Midgley (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA, 1535 pp.

Shu, Q., et al., 2015.  Assessment of sea ice simulations in the CMIP5 models.  The Cryosphere 9, 399-409.

A Class Camping Trip

Forget about monetary policy for a moment or two, and imagine, instead, that you’re back in 6th grade. You and your classmates are about to go on a camping trip, involving some strenuous hiking, and lasting several days.

Somehow, your teacher must see to it that all of you are kept well fed. To do so, she plans to appoint one of you Class Quartermaster. The school’s budget is limited, and rations can get heavy, so there will only be so much food to go around — so many hotdogs, baked beans, scrambled eggs, peanut butter sandwiches, and granola bars. The Quartermaster’s job will be to make sure it all gets divvied-up fairly and efficiently.

The catch is that your classmates are a motley bunch. Pete Smith, the football team captain, is even taller than the teacher, and otherwise built like an old oak tree. His body goes through fuel like a small steam locomotive. Mary Beth Johnson, on the other hand, looks like a gust of wind might carry her off, and eats so little that she doesn’t mind Peter grabbing her grilled cheese sandwich on tomato soup day. The rest generally fall between those two extremes. But just how several days of hiking will affect all their needs is anybody’s guess.

Still the food has got to be rationed somehow. And the class must decide how before a drawing of straws determines who will be Quartermaster. Will it be Jane “Goody Two Shoes” Miller, the teachers’ pet, or Wesley “The Weasel” Jones, who, though never caught red-handed, is widely suspected of cheating on his tests? Or could it — perish the thought! — turn out to be the ravenous Pete Smith himself? Whatever the choice, the class will have to live with it once the straw poll has been taken.

After some discussion, the class decides to vote for one of two options for rationing the food. The first is to simply let the Quartermaster dole out food according to his or her best judgement. That option will allow the limited provisions to be used as efficiently as possible, with Pete Smith getting the bigger helpings he needs, and Mary Beth getting less, assuming that less suffices. The second option is to insist that the Quartermaster give equal rations to everyone, big, small, or in-between. That’s bound to be inefficient, of course. Still, it can easily beat having Wesley or Peter decide!

So, which option will you vote for? If you settle for the first, you favor a “discretionary” rationing policy; if the second, you favor a rationing “rule” over discretion.

The Lesser of Evils

The point of the camping trip story is that neither of the two alternatives — rules or discretion — is obviously better than the other, let alone perfect. Instead, the task you and your classmates faced was that of selecting the lesser of two evils.

The long-standing debate between proponents of monetary rules on one hand, and defenders of monetary discretion on the other, should likewise be understood as a debate concerning the lesser of evils, that is, the least-bad choice among inevitably imperfect alternatives. Only a fool would want to force monetary authorities to cling to a rule that could only serve to rule-out better policy choices. But real-world monetary authorities are capable of screwing-up for all sorts of reasons too. Just as our Class Quartermaster might misjudge his or her classmates’ caloric needs, they might misjudge an economy’s need for monetary accommodation. And just as the Quartermaster might be inclined to favor particular students, or the teacher, over others, so too might monetary authorities cater to special interests, including the government, instead of doing what’s best for the public taken as a whole.

For these reasons one can’t just dismiss the case for a monetary rule by observing how unhindered monetary authorities might improve upon it. Yet such dismissals are encountered surprisingly often, especially (though here their presence is perhaps a little less surprising) in the statements and writings of monetary authorities themselves. Not long ago, for instance, Fed Chair Janet Yellen responded to the suggestion that the FOMC follow a monetary rule by observing, with supporting figures and charts, that “rules often do not take into account important considerations and information.” Following one mechanically, she said, “could have adverse consequences for the economy.” Of course Yellen’s claim is correct. But whoever denied it? Certainly no proponent of monetary rules ever did. The argument for a monetary rule isn’t that sticking to such a rule will never have adverse consequences. It’s that the adverse consequences of sticking to a rule may be less serious than those of relying upon the discretionary choices of fallible monetary authorities.

Limited Knowledge

Let’s have a closer look at some reasons why unfettered monetary authorities can’t avoid making  mistakes. The most fundamental reason is that, despite all the statistics and other information available to them, monetary authorities generally lack the knowledge required to choose the best possible policy stance.

In a previous Alt-M  article, summarizing the limited-knowledge case for monetary rules, CMFA Senior Fellow Gerald O’Driscoll explains that much of the information required to determine the optimal course for monetary policy at any time “is dispersed among the millions of actors in society.” Like any rule of thumb, a monetary policy rule compensates for this unavoidable lack of knowledge concerning actual and developing circumstances by leaning on past experience. Although critics of monetary rules sometimes suggest that, unless a perfect monetary rule can be devised, discretion is necessary, the truth, O’Driscoll observes,

is just the opposite. There would be no need for reliance on a rule if the economy were fully understood. The less we know about the specifics of a situation, the more we must rely on rules. A good rule incorporates the general features of a class of situations, in which the specific features vary unpredictably. If we possess full information, why would we want to rely on a rule?

While O’Driscoll’s version of the limited-knowledge argument for a monetary rule draws on Friedrich Hayek’s famous essay, “The Use of Knowledge in Society,”  the arguments of Milton Friedman — perhaps the best-known proponent of monetary rules — are (as O’Driscoll notes elsewhere) similar in spirit. So far as Friedman was concerned the main challenge facing monetary policymakers was that of keeping their own actions “from being a major source of economic disturbances.” He considered a monetary rule the best means for meeting this challenge, in part because such a rule would make monetary policy more predictable, thereby avoiding unsettling policy surprises and the uncertainty that the very possibility of such surprises engenders.

Friedman believed, furthermore, that discretionary policymakers’ attempts to improve upon a rule were likely to backfire, not only because they lacked needed knowledge of existing circumstances, but because of the “long and variable lags” that stood between their decisions and those decisions’ ultimate effects on spending, inflation, and employment. A decision to ease monetary policy today, based on information suggesting that money is or may be getting tight, could end up making money too loose months from now, when the decision has had its greatest impact on the money stock, because the demand for money has since subsided. The problem is especially likely during recoveries, when central bankers are loathe to stop administering monetary medicine until their patient displays robust health. The opposite problem — of money becoming excessively tight in the midst of a crash — is also common, because central banks often come to realize that their policies have been too loose, and therefore decide to tighten, just as asset prices that had been bolstered by their formerly loose stance are set to come crashing down.

Political Pressure

Even if they could command the necessary knowledge, monetary authorities might fail to choose the best policies for political, bureaucratic, or psychological reasons.

Among such unwelcome influences, political pressure reigns supreme. No matter how nominally “independent” they may be, central banks are creatures of legislation, and as such depend on government support for whatever powers they possess. They who give, can take away; so central bankers can never altogether avoid having to set-aside their preferred policies for the sake of mollifying those  government officials who are in a position to punish them or their institution.

That even nominally independent central banks have often acted as if they were mere backscratchers of fiscal authorities, especially by taking part in inflationary wartime finance, is only the most obvious example of their tendency to set-aside sound monetary policy for the sake of accommodating their sponsoring governments’ fiscal needs. That tendency surprising, given that fiscal accommodation of governments was the very raison d’être of all early central banks. The Fed is no exception to this rule: it helped to finance every one of this country’s major post-1913 military conflicts, though doing so meant tolerating high rates of inflation.

Nor has the Fed been immune to peacetime political pressure, especially from Presidents. That during the 1971 Presidential election President Nixon pressured then Fed Chairman Arthur Burns to ease policy to boost his prospects for re-election, despite mounting inflation, is notorious, thanks mainly to the Nixon Tapes, which leave no room for doubt concerning what took place. But Burns’ conduct, far from being exceptional, was of a piece with the by then well-established understanding of the Fed’s limited “independence within government” as Burns’ predecessor, William McChesney Martin, described it. In essence, Martin was saying that, although the Fed was independent, it could remain so only if it occasionally did whatever the government wanted it to do!

In short, although it’s tempting to assume that an “independent” central bank is one that’s not operating under the sway of government officials, the truth is that, so long as central bankers enjoy discretionary powers, government officials will try to influence their decisions, and will succeed in doing so at least to some extent. To truly insulate monetary policy from short-run political influences, something beyond central bank independence is needed, that can rule-out any tendency for central bankers to  pander to their own overseers — something like an inviolable monetary rule.

Other Sources of Bad Discretionary Policy

Even when central bankers aren’t caving-in to pressure from politicians, their choices can reflect considerations apart from those that ought to inform their policies. Being bureaucrats, they are no less inclined than other bureaucrats to take advantage of opportunities to increase their institutions’ budgets, even when doing so isn’t consistent with their assigned objectives. And being like politicians themselves to some extent, when faced with an emergency they often can’t resist acting according to the “politician’s syllogism,” to wit:

  • We must do something.
  • This is something.
  • Therefore, we must do this.

It’s well established, to offer an analogy, that doctors tend to over-prescribe both drugs and tests, and also to have patients admitted to hospitals more often than is in their patients’ own interest, because existing insurance arrangements are such that, by doing those things (“something”) they can both earn more and reduce their risk of being sued for malpractice. Although central bankers can’t be sued for malpractice (alas), they have their own reasons for insisting on doing “something” whenever one of their patients — entire economies — so much as sneezes.

The same central bankers are, on the other hand, all too inclined to refrain from taking action to address troubles brewing in an economy that seems all-too-healthy. Besides coming up with “independence within government,” Martin also memorably compared a responsible central banker to a chaperone whose unenviable responsibilities included that of having “the punch bowl removed just when the party was really warming.” Unfortunately the quip has gained notoriety mainly as a description of what discretionary central bankers often fail to do.

There are plenty of other reasons why central bankers might misuse their discretionary powers, including various psychological biases to which they might be prone. Drawing on the field of behavioral economics, Mark Calabria, the Cato’s former Director of Financial Regulation Studies, has discussed several of these potential biases;  so has Andrew Haldane, the Bank of England’s Chief Economist. Status-Quo bias, Myopia bias, Hubris biases, and Groupthink, are just a few of the afflictions they consider. Just how serious these afflictions are in practice is an open question. But the likelihood that central bankers suffer from at least some of them supplies that much more reason for entertaining the possibility that the right sort of monetary rule might outperform monetary discretion.

The Time-Inconsistency Twist

The case for a monetary rule, as I’ve summarized it so far, rests on the claim that central bankers may lack either the information required, or the inclination, to pursue the best possible monetary policies. But according to a now-famous paper by Finn Kydland and Edward Prescott, even omniscient altruists, left to manage the money supply as they think best, might be bested by a  monetary rule. That’s so because of what Kydland and Prescott call the “time-inconsistent” nature of optimal monetary policy, which can prevent even well-intentioned and well-informed central bankers from carrying-out their preferred plans.

To illustrate the problem, Kydland and Prescott imagine a case in which inflation, deflation, and unemployment are all considered undesirable.  An unexpected burst of money creation can, however,  make everyone better off by temporarily reducing unemployment, albeit at the cost of a one-time increase in the price level.

So what’s the best policy? Suppose that a committee of benevolent central bankers promises to keep inflation at zero, and that the public believes it. The very fact that the public doesn’t expect any inflation will then tempt the central bankers to take advantage of “surprise” inflation to lower unemployment, since doing so results in a one-time gain. The temptation in question is what makes the announced policy “time-inconsistent.”

Were the public naive enough to go on believing the central bankers’ promises no matter how often these were broken, the central bankers’ best strategy would be to trick them again and again, thereby achieving a permanently lower unemployment rate, albeit at the (perhaps worthwhile) cost of a higher inflation rate. But hoodwinking the public, even for its own good, isn’t so simple. The public will eventually come to anticipate the central bankers’ inflationary strategy, assuming it isn’t smart enough to divine it from the get-go. Either way, instead of allowing them to make everyone better off than they might by sticking to zero inflation, the discretion the central bankers exercise ends up trapping them in a high-inflation equilibrium, with no employment gains at all, because they find that they must either continue to live up to the public’s positive inflation expectations, or surprise them with a non-inflationary policy that will lead, for some time, to higher-than-necessary unemployment.

Is it possible for our central bankers to avoid the trap that Kydland and Prescott describe? It is, but to avoid it they must renounce their discretionary powers, and instead commit the central bank to a strictly-enforced zero inflation rule. Unlike central bankers’ mere promises, an unbreakable rule will necessarily be “time consistent.” Consequently the public has no reason to anticipate any deviation from it. Just as Ulysses was only able to resist the Sirens’ call by having himself lashed to the mast, our altruistic central bankers are only able to avoid being drawn into an inflationary equilibrium by renouncing their freedom to “fine tune” monetary policy.

Flexible and Inflexible Rules

Showing that a monetary rule might outperform discretionary central banking is one thing; identifying a particular rule that’s likely to do so is another. Indeed, it’s fair to say that, of countless monetary rules that have been proposed at one time or another, the vast majority would eventually have led to some extremely undesirable outcomes, if not to outright disaster.

Take, for example, the “k-percent” money supply growth rule that Milton Friedman once favored — a rule according to which some simple monetary aggregate (Friedman tended to prefer M2) was set to grow at a modest but unchanging rate. Such a rule could work reasonably well only so long as there were no major changes in people’s real demand for the money assets in question. If that demand increased at a steady pace of 5 percent each year, a 5 percent growth rule would just meet the public’s needs, keeping spending stable. But in practice the rate at which the demand for any fixed set of monetary assets — for M1, or M2, or M3, or whatever — grows is likely to change over time, and perhaps dramatically — as financial innovations and other changes alter different asset’s relative attractiveness. Speaking generally, Janet Yellen was entirely correct in observing some months ago that “sensible implementation of policy rules requires adjustments to take such changes into account, as a failure to do so would result in poor monetary policy decisions and poor economic outcomes.”

But, valid as it is, Yellen’s observation doesn’t mean that we must, after all, fall back on discretion as our only hope for getting monetary policy (almost) right. Instead, it’s possible to design monetary rules that themselves take account of changing conditions. The most well-known example of such a “flexible” monetary rule is the so-called “Taylor Rule,” named after Stanford Economist John B. Taylor, in which the central bank sets a federal funds rate target that is constantly adjusted in response to deviations of inflation and output from their desired and “potential” levels, respectively. Taylor himself has argued that, had it stuck to his rule (as it did, more-or-less, from the mid-1980s until 2000 or so), the Fed might have avoided a good part of the calamitous boom-bust cycle of 2002-2009. But the more important and general point is one that Athanasios Orphanides and John Williams emphasized at the start of the crisis, to wit: that it is after all “possible to design a simple policy rule that can deliver reasonably good macroeconomic performance even in an environment of considerable uncertainty regarding expectations formation and natural rate uncertainty.”

Furthermore, having a monetary rule, however rigid or flexible the rule may be, doesn’t necessarily mean having one written in stone: provisions can be made for a rule’s periodic reconsideration and revision, according to a regular schedule, or in response to designated circumstances, and following agreed-upon procedures. One can, in other words, combine a monetary rule in the ordinary sense of the term with a “meta” monetary rule for revising the rule over time. In short, to think clearly about the relative merits of rules and discretion, its important to realize that there are many weigh stations between the extremes of an inflexible and unalterable rule on one hand and unalloyed monetary discretion on the other.

A Stable Spending Rule

If discovering  a reliable monetary rule has been harder in practice than it appears to be in theory, that’s largely because of confusion regarding the appropriate, ultimate objectives of monetary policy. Keynesians have, on the one hand, tended to insist on a “full employment” objective, while (old-school) monetarists have, on the other, insisted on the need for low (if not zero) and steady inflation. Some monetary rules, like Taylor’s, attempt to strike a compromise between these positions.

If you ask me, such compromises, for all their practical merits, still have economists barking up the wrong tree. The belief that inflation and deflation are necessarily bad, and the related belief that a constant (if not necessarily zero) inflation rate is better than a varying rate, are both widely subscribed to, even among professional economists. Those beliefs are nevertheless mistaken: as I’ve suggested in previous chapters of this primer, and as I’ve argued at some length elsewhere, there are good reasons, and plenty of them, for letting the inflation rate vary along with an economy’s productivity, so that in more-productive times prices rise less quickly, and perhaps even decline, than in less productive ones.

The goals of “full employment” and its close counterparts, including “potential” output, also leave much to be desired as guides to sound monetary policy, in part because they’re nebulous, but also because theory tells us that even if they weren’t so, attending to them alone wouldn’t suffice to “pin down” monetary policy in the sense of establishing a uniquely desirable path for either the money supply itself or the price level. Instead, many such paths might be equally capable of keeping employment and output close to their “full” or “potential” levels.

So, what should monetary policy aim for? I’ve said it before, and I’ll say it again: it’s aim should be the stable growth of total spending in the economy. Let spending grow at a steady rate, roughly equal to the rate of growth of the labor force, and the inflation rate will vary only as productivity varies, which is what it ought to do. At the same time, employment, though perhaps less than “full” according to some other criteria, will not be so on account of any lack of spending, and will therefore not be so in any way warranting further doses of monetary medicine.

While devising a monetary rule that strikes a correct balance between the supposed “wrongs” of price level movements on one hand and less than “full” employment on the other may ultimately prove as intractable a problem as squaring the circle, devising one that’s consistent with preserving a stable level of spending is, comparatively speaking, child’s play. The challenge consists of getting both Keynesians and Monetarists, as well as others, to agree that stability of spending, rather than any particular values of inflation or unemployment, ought to be the ultimate objective of monetary policy.

[Cross-posted from]

Like Allan Meltzer, I received my Ph.D. from UCLA. He and his major professor, Karl Brunner, had both left by the time I arrived. UCLA is an important intellectual connection. At the time, UCLA was informally known as “Chicago West,” for its intellectual affinity to the University of Chicago Economics Department.

The characterization was misleading if not wrong. UCLA was where Chicago and Vienna (the Austrian School) intersected. UCLA’s professors and their students were influenced by both traditions. That explains positions taken by them over the years on many issues. For instance, in their work, Brunner and Meltzer adhered to a conception of Knightian (after Frank Knight) or true uncertainty. That type of uncertainty is not readily modeled with definitive results.

For a long time, I had minimal interaction with Allan. When he came to Washington, D.C., to begin writing his multi-volume history of the Federal Reserve System, however, that began to change. AEI supported the research, and its president, Chris DeMuth, provided Allan with an office and association. Early on, Allan invited me over to AEI for lunch.

Importantly, he began inviting me to attend the meetings of the Shadow Open Market Committee as an observer. They were very instructive and illuminating. Aside from the substance, I marveled at his performance as Chairman. Getting academics to agree is like herding cats. Allan had the skill.

Later, I worked at the Heritage Foundation. Ed Feulner, Heritage’s President, was appointed to the Congressionally mandated International Financial Institutions Advisory Commission (IFIAC). In the wake of multiple global financial crises, Congress wanted a review of the IMF, World Bank, and other international agencies. The Commission’s original Chairman withdrew before the Commission began meeting. Ed asked my advice on a replacement. Without hesitation, I replied “Allan Meltzer.” “Why?” I was asked. “He can herd cats,” I replied.

Allan accepted on the condition I would be his Chief of Staff. Now I had two full-time jobs, each with lots of overtime.

Allan’s domination of the Commission soon led the press to rename IFIAC as “The Meltzer Commission.” From the beginning, Allan was determined that the commission would arrive at a nonpartisan set of recommendations. The membership had 6 Republican and 5 Democratic members and was expected to divide along those partisan lines.

Because of an informal alliance the Chairman struck with Jeffrey Sachs, the deliberations of the Commission were largely nonpartisan. With a few exceptions, the deliberations were conducted in a collegial atmosphere. The final vote was 8-3 in favor of the findings. It was a remarkable result because the Democratic members were under extreme pressure not to sign the majority report. It was all a testimony to the Chairman’s remarkable political skills.

Allan passed away early Tuesday. He will be remembered. He will be missed.

[Cross-posted from]

Following is my response to the Commerce Department’s request for public comments on the “Causes of Significant Trade Deficits.”

In a globalized economy, where the value embedded in most manufactured goods originates in multiple countries and two-thirds of trade flows are intermediate goods, bilateral trade accounting is meaningless.  In a world where statistical agencies attribute the entire $180 cost of producing an Apple iPhone to China, where it is merely assembled for a cost of about $6, what do trade statistics and trade balances mean?   By assigning 100 percent of the value of an import to the final country on the assembly line, trade statistics have lost most of their meaning.

The misguided belief that the trade account is a scoreboard measuring the success or failure of trade policy explains much of the public’s skepticism about trade and trade agreements, lends plausibility to claims that the United States is routinely outsmarted by shrewder foreign trade negotiators, and provides cover for the same, recycled mercantilist and protectionist arguments that have persisted without merit for centuries.

If the trade deficit reduces economic activity and destroys jobs, why are there positive relationships between these variables?  The overall trade deficit, by and large, is also a meaningless statistic.  It is neither a barometer of economic health nor a running tally of debt with which we are burdening future generations.

For 42 straight years, the United States has registered an annual trade deficit with the rest of the world.  That means that year after year, Americans spend more on foreign-produced goods and services than foreigners spend on U.S.-produced goods and services or, put simply, the dollar value of U.S. imports exceeds the dollar value of U.S. exports.

For almost as long, some economists have been arguing that trade deficits are unsustainable – they sap economic growth, bleed jobs, and saddle our descendants with debt.  Perhaps if one fixates on the trade deficit (or the slightly broader current account deficit, which includes interest on foreign assets and remittances) in isolation, these concerns might seem to have merit.  But looking at the U.S. trade or current account deficits without considering the capital account surplus is a meaningless, misleading exercise.

The trade deficit is not a problem because the associated capital surplus (the excess of inward investment over outward investment), which includes high-quality foreign direct investment, bestows huge advantages on the U.S. economy. 

After all, one of the reasons that trade is so maligned is that the public has been led to believe that the trade account is a scoreboard, with the deficit indicating that Team America is losing – and it’s losing on account of poorly negotiated trade deals and foreign cheating.  The United States runs a trade deficit with the rest of the world because Americans spend more dollars on foreign-produced goods and services than foreigners spend on U.S.-produced goods and services. The dollar value of U.S. imports exceeds the dollar value of U.S. exports, so our trade account is negative. It’s in deficit. That’s straightforward.

A slightly broader measure of international transactions than the trade account is the current account. The current account includes the trade account plus net proceeds on investment (income earned on U.S. assets abroad minus income earned on foreign-held assets in the United States) plus net transfers (remittances and aid, primarily, flowing into the United States minus remittances and aid, primarily, flowing out of the United States). Those two components (net proceeds and net transfers) are much smaller than the value of exports and imports, so the U.S. current account typically isn’t much larger or much smaller than the trade account. In 2016, the trade deficit amounted to $503 billion and the current account deficit was $481 billion.

So, how is it even possible to run a trade deficit in the first place? How can Americans send $503 billion more abroad for goods and services than foreigners send to the United States for goods and services?

Americans are able to purchase more goods and services from foreigners than they sell to them because foreigners buy more assets from Americans than Americans buy from foreigners. There is a positive inflow of dollars on the capital account. Foreigners don’t only buy goods and services from Americans. They buy U.S. assets (equities, property, factories, service centers, shopping malls, machines, other physical assets, corporate debt, and government debt) from Americans. Likewise, Americans don’t only buy goods and services from foreigners. We buy the same kinds of assets from foreigners, as well.

The proper way to account for international transactions is to note that the value of the goods, services, and assets that Americans purchase from foreigners is approximately identical to the value of the goods, services, and assets that foreigners purchase from Americans.  If there is a difference between the current account deficit and the net capital inflow, it is accounted for by the change in foreign reserves.

The United States ran a $481 billion current account deficit with the rest of the world in 2016, and it ran a $481 billion capital account surplus. The capital account consists of three broad components: U.S. purchases of foreign assets; foreign purchases of U.S. assets; and, the change in foreign reserves. And it is a mathematical certainty that the current account plus the capital account equals zero. Put another way, the value of the current account deficit is identical to the value of the capital account surplus.

So, the U.S. trade deficit is financed by inflows of foreign capital used to purchase U.S. assets. Most of the assets purchased are equities and physical assets (direct investment). Some of the assets purchased are corporate debt and government debt. As of the end of 2014, Americans held a total of $24.6 trillion of foreign assets. Foreigners held a total of $31.6 trillion of U.S. assets. Of that $31.6 trillion foreign asset portfolio, treasury bills and bonds accounted for about $6 trillion — just under 20 percent of the total. It is only this portion — government debt owned by foreigners — that the American public (of this generation or the next) is on the hook to pay back. Corporate debt has to be repaid, but only by the shareholders and employees of the companies issuing the debt — not by you or me or our children, generally. Equity purchases don’t have to be paid back at all — they’re not loans! When European, Japanese, Korean, Chinese or any foreign investors purchase U.S. companies or make “greenfield” investments to build new production or research facilities or hotels or shopping centers, there is no debt to be repaid.  Americans are not on the hook to repay Honda for its investment in production facilities in Marysville, Ohio, for example.  Americans simply benefit from Honda’s success, earning wages and profits they would not have enjoyed without Honda’s presence. 

Selling equity or property or even entire U.S. companies to foreigners does not constitute debt and it is not akin to subsidizing our consumption by draining down our assets, as some suggest. It’s not a reverse mortgage. By the simple logic of supply and demand, the presence of foreigners in U.S. asset markets is good for U.S. asset holders. Foreign participation constitutes greater demand in the market, which increases the price of the assets in question. And, there are some real knock-on benefits associated with foreign-headquartered companies operating in the United States. These “insourcing” companies tend to perform well above the average U.S. company in terms of value creation, capital investments, research and development spending, compensation, employment, and many other metrics, as this paper documents.

In fact, there is a compelling argument that a trade deficit is actually good for the U.S. economy because the quality, experience, and successes of the foreign companies that actually come and operate in the United States are better, deeper, and more numerous, respectively, than the average U.S. company.  Foreign direct investment in the United States is a conduit for bringing world class companies that have succeeded and thrived in other markets to share their expertise with Americans.

Let me conclude this one by reiterating that only a portion of our trade deficit needs to be repaid by the American public to foreigners, and it is that portion used to finance government budget deficits — roughly one-fifth of the annual trade deficit.  The trade deficit is not an argument for trade barriers, but rather one for reducing profligate government spending.

The Low Income Housing Tax Credit (LIHTC) is a federal program that subsidizes the construction of housing for poor tenants. The $8 billion program suffers numerous failures, as discussed in this study. One problem is that the program’s subsidies may flow more to developers and financial institutions than to the needy population that is supposed to benefit.

National Public Radio investigated the LIHTC for a show aired yesterday. The joint investigation with PBS found that the program has “little federal oversight” and is producing “fewer units than it did 20 years ago, even though it’s costing taxpayers 66 percent more.” The investigation discovered that “little public accounting of the costs exists, even among government officials and regulators charged with monitoring the program.”

Here’s how the program works:

Every year, the IRS distributes a pool of tax credits to state and local housing agencies. Those agencies pass them on to developers. The developers then sell the credits to banks and investors for cash. Often, to find investors, developers will use middlemen called syndicators. The banks and investors get to take tax deductions, while the developers now have cash to build the apartments.

With lots of groups on the federal gravy train—state and local housing bureaucracies, developers, banks, syndicators, and investors—the LIHTC program has fortified itself politically. Developers apparently take a 15 percent cut on the total value of housing projects, while syndicators earned more than $300 million in fees last year.  

Some share of LIHTC subsidies disappear in corruption and fraud. NPR profiles a Miami-area criminal enterprise led by Biscayne Housing and Carlisle Development Group, which is “one of the country’s top affordable housing developers.” The companies stole $34 million from 14 LIHTC projects. Biscayne’s former head Michael Cox admits, “It was a construction kickback scheme … The scam was to submit grossly inflated construction numbers to the state in order to get more money than the project required and then have an agreement with the contractor to get it back during construction.”

NPR interviewed Assistant U.S. Attorney Michael Sherwin, who has spent five years investigating the LIHTC program in Florida. “This program has been described as a subterranean ATM, and only the developers know the PIN,” he says.

The IRS runs the program at the federal level, but its oversight is “minimal” says the GAO. The IRS relies on local housing agencies to prevent corruption, but those agencies don’t put much effort into program integrity. “It’s really a program of trust,” Sherwin noted to NPR.

The man who ran Florida’s housing agency at the time of the Biscayne/Carlisle crime spree, Steve Auger, defended the LIHTC and assured NPR such scams would not happen again. He said, “It’s probably the most efficient tax housing program that has ever existed.”

So far, this blog has had a serious focus. But now it’s time for the comic relief:

After the interview with NPR and Frontline in late 2016, Auger was forced to resign from the agency after an audit revealed he spent more than $50,000 on a steak and lobster dinner for affordable housing lenders and gave his own staff almost half a million dollars in bonuses.

I guess Auger was lying about the efficiency thing, but he was also wrong about scams not happening again:

A few months later, Sherwin charged a Miami-based shell company called DAXC LLC belonging to the owners of Pinnacle Housing Group, another one of the largest developers in the country, with the theft of $4 million from four tax credit developments. In an agreement with prosecutors, a DAXC representative acknowledged that the company “inflated costs” for its own “personal benefit.”

Is LIHTC corruption confined to Florida? The Assistant U.S. Attorney doesn’t think so:

Sherwin says he is not done investigating the LIHTC program. He says he is turning his investigation to more developers with projects in other states and also to the banks, lenders and syndicators. “I know that this fraud doesn’t just reside in South Florida,” he says. “There’s too much money involved, and based upon other information that we’ve looked at, this fraud exists in other jurisdictions.”

The vast majority of housing agencies have never been audited. There have been only seven audits of the 58 state and local housing agencies that the IRS relies on to watch the program since it began in 1986. And when you trace the tax credits of LIHTC properties upward to syndicators and investors, the profit structure becomes even more obscure.

Congress is considering tax reform this year to cut rates and eliminate loopholes. The LIHTC is a corporate loophole that should be chopped. Tax reform means less steak and lobsters for the insiders and more income and opportunity for average families.

Kudos to NPR and PBS for their investigation. Further discussion of the LIHTC herehere, and here. Discussion of reforms to reduce housing costs here

Yesterday President Trump fired FBI Director James Comey.  Although the manner in which this was handled was ham-fisted, this is likely to be seen, at least in retrospect, as a wise move.

The warning signs about James Comey were there all along.  The Wall Street Journal summarized some of his spectacular misjudgments in a 2013 editorial titled, “The Political Mr. Comey.“  The overzealous pursuit of Frank Quattrone and Steven Hatfill.  The appointment of Patrick Fitzgerald who then ran amok in the Valerie Plame and Robert Novak case.   

I disagree with the Journal’s take on Comey’s fight with then-White House Counsel Alberto Gonzales over the reauthorization of Bush’s warrantless surveillance program—that goes on the plus side of Comey’s ledger.  But there are even more bad judgments that the Journal did not mention. For example, Comey went after Martha Stewart in a case of ruthless ambition.

When the high stakes “enemy combatant” controversy was pending before the Supreme Court, Comey pulled one of his stunts, holding a press conference to “inform” the public of the gravity of the case.  Attorney and author Scott Turow rightly called out Comey’s outrageous trial by news conference.

We can do much better than James Comey.  If Trump can repeat the careful process by which he selected Neil Gorsuch for the Supreme Court and secure a fairly swift confirmation vote, this matter will soon be forgotten.  If the selection process is mishandled, the political storm clouds will hang over the White House for quite some time.

My own review of the troubled history of the FBI can be found here and here.

Traditional educators frequently claim that public charter schools are failing, even when evidence indicates that they perform no worse than traditional institutions on student test scores. This logic fails to recognize costs, which are paramount to educational success, primarily because wasted funds could otherwise be efficiently allocated towards further academic achievement. If students are receiving less public funding in charters, then choice schools are significantly outperforming residentially assigned institutions.

I just released a study with Patrick Wolf, Larry Maloney, and Jay May examining disparities in funding between students in charters and traditional public schools in 15 metropolitan areas in the 2013–14 school year. As shown in figure 1 from the report, students enrolled in a public charter school receive substantially less funding than those in traditional public schools in all but one location. In fact, we find that students in charter schools receive about $5,721 less in total annual funding than their peers in district schools.

Source: Wolf, Maloney, May, and DeAngelis (2017). “Charter School Funding: Inequity in the City.” School Choice Demonstration Project, Department of Education Reform, University of Arkansas.

Critics of this type of evaluation often argue that funding disparities are due to differences in types of students. After all, traditional public schools (TPS) may have a larger proportion of students requiring additional educational resources. While the TPS in our study do enroll more special needs children, we find that these differences do not fully explain the funding gap between traditional public schools and public charter schools.

Funding inequity across the two sectors has only gotten worse over time. Eleven years after the research team first revealed that public charter schools receive less funding than their traditional public schools peers, the funding disparity had grown by about 79% in eight cities.

Should these results surprise us? If you could force your customers to buy your product at a high price, would you need to reduce expenses? Perhaps more importantly, if your customers could not leave, how would you know which costs to cut? The traditional system of schooling makes it impossible to allocate resources efficiently, even if local public school leaders are highly competent and benevolent.

Nonetheless, these findings are important for decision-makers to consider, especially if they care about improving student outcomes through efficiently allocating educational funding. Just imagine what would happen to the education sector if families could choose which institution to send their funds to. Schools would be rewarded for quality and efficiency, freeing up the resources necessary to improve the lives of millions of children around the nation.