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Well, isn’t this a shame:

Brad Fitch, president and CEO of the Congressional Management Foundation, told Bloomberg BNA Feb. 16 that House “Democratic chiefs of staff are freaking out” about finding room in their budget for overtime wages.

It’s not clear whether the Obama administration’s forthcoming edict on overtime will apply to legislative staffers, but House Democratic leadership decided it would be prudent for their members to at least gesture toward the spirit of the controversial rule by preparing for compliance. [BNA Daily Labor Report] Now “the rule is creating administrative headaches” and more:

“We don’t have a set-hour kind of situation here; some kids work 12, 14, 16 hours a day, weekends, and I feel terrible that I cannot afford to give raises to the staff,” Rep. Alcee Hastings (D-Fla.) told Bloomberg BNA Feb. 11.

With $320,000 slashed from members’ representational allowances (MRAs) over the past four years, “I don’t see how we could pay overtime” for the “17 or 18 people that each of us is allowed to have—that’s problematic for me,” added Hastings, a senior member of the House Rules Committee.

Some members fear that an overtime mandate will result in having to send staffers home at 5 p.m., leaving phones unanswered and impairing constituent service. “Most members are of the sentiment that it’s impractical to be paying overtime,” said former Virginia Democratic Rep. Jim Moran, now a lobbyist, who suggests that members choose to close one of their district offices or reduce constituent correspondence to adjust to a smaller staff number.

If only there were some way for the U.S. Congress to influence federal labor law!

[cross-posted, slightly adapted, from Overlawyered]

Climate alarmists seem to be working overtime these days to persuade the public to support legislation to combat dangerous climate change, which they claim will occur unless CO2 emissions are drastically reduced. And after nearly two decades of over-predicting global warming (there has been little to no global warming since the late 1990s), they are getting awfully desperate in their attempts to convince the public that there is an imminent climate catastrophe on the horizon.

The rhetoric-of-choice is good old-fashioned fear mongering. The latest example is a New York Times article by Michelle Innis entitled “Climate-Related Death of Coral Around World Alarms Scientists.” In a nutshell it’s a lot one-sided reporting in making the case that unless climate change is stopped (i.e., fossil fuel use is reduced rapidly), highly important underwater coral ecosystems will be consigned an awful death due to coral bleaching. There’s a substantial literature on coral resilience that somehow was ignored. Surely an oversight!

Coral bleaching is one of the most frequently cited negative consequences projected to result from CO2-induced global warming. It is a characterized by a loss of color in certain reef-building corals that occurs when algal symbionts, or zooxanthellae, living within the host corals are subjected to various stresses (usually higher than normal ocean temperatures) and expelled, resulting in a loss of photosynthetic pigments from the coral colony. If the stress is mild, or short in duration, the affected corals often recover and regain their normal complement of zooxanthellae. However, if the stress is prolonged, or extreme, the corals eventually die, being deprived of their primary food source.

In her article, Innis reports that corals bleached at many locations this year as a result of warmer ocean temperatures associated with El Niño, so therefore if something isn’t done to stop global warming (note to the author: that is impossible), these incredible underwater species will go extinct. 

As noted above, there’s a substantial literature showing that corals are pretty resilient. Consider the recently published work of Guest et al. (2016), who reported on the status of a coral community on a highly disturbed reef site south of mainland Singapore before, during and after a major warming event that occurred throughout the Indian Ocean and Southeast Asia in 2010, leaving in its wake many severely bleached coral reefs. And in so doing, they discovered the following intriguing facts.

First of all, the 13 scientists note that approximately two thirds of the coral colonies bleached; but that “post-bleaching recovery was quite rapid and, importantly, that coral taxa that are usually highly susceptible were relatively unaffected.” Secondly, they note that “there was no significant change in coral taxonomic community structure” as a result of the bleaching. Third on their list of discoveries was the fact that “several factors may have contributed to the overall high resistance of corals at this site, including Symbiodinium affiliation, turbidity and heterotrophy.”

Taken together, all of these observations led the thirteen researchers to ultimately conclude that “turbid shallow reef communities may be remarkably resilient to acute thermal stress.” And they conclude that their results (1) “suggest an under-appreciated resilience in disturbed impacted reef systems” and that (2) “corals that have been classified as losers in the face of climate change may have a greater capacity for adaptation and/or acclimatization than previously supposed.”

The findings of Guest et al. are not unique and many other researchers have reached similar conclusions (see dozens of references in the chapter on Aquatic Life in Idso et al., 2014). As one other example, Guzman and Cortes (2007) studied coral reefs of the eastern Pacific Ocean, which “suffered unprecedented mass mortality at a regional scale as a consequence of the anomalous sea warming during the 1982–1983 El Niño.” At Cocos Island (5°32’N, 87°04’W), in particular, they found in a survey of three representative reefs, which they conducted in 1987, that remaining live coral cover was only 3 percent of what it had been prior to the occurrence of the great El Niño four years earlier (Guzman and Cortes, 1992). Based on this finding and the similar observations of other scientists at other reefs, they predicted “the recovery of the reefs’ framework would take centuries, and recovery of live coral cover, decades.” In 2002, therefore, nearly 20 years after the disastrous coral-killing warming, they returned to see just how prescient they might have been after their initial assessment of the El Niño’s damage, quantifying “the live coral cover and species composition of five reefs, including the three previously assessed in 1987.”

With respect to the subject of thermal tolerance, the most interesting aspect of their study was the occurrence of a second major El Niño between the two assessment periods. In fact, Guzman and Cortes state “the 1997–1998 warming event around Cocos Island was more intense than all previous El Niño events,” noting that temperature anomalies “above 2°C lasted 4 months in 1997–1998 compared to 1 month in 1982–83.” Nevertheless, they report “the coral communities suffered a lower and more selective mortality in 1997–1998, as was also observed in other areas of the eastern Pacific (Glynn et al., 2001; Cortes and Jimenez, 2003; Zapata and Vargas-Angel, 2003),” which is indicative of some type of thermal adaptation following the 1982–83 El Niño.

Corals are much more resilient to the stress of bleaching than many people have supposed, and that is an inconvenient truth for the coralline alarmists.



Cortes, J. and Jimenez, C. 2003. Corals and coral reefs of the Pacific of Costa Rica: history, research and status. In: Cortes, J. (Ed.) Latin American Coral Reefs. Elsevier, Amsterdam, The Netherlands, pp. 361–385.

Glynn, P.W., Mate, J.L., Baker, A.C. and Calderon, M.O. 2001. Coral bleaching and mortality in Panama and Ecuador during the 1997–1998 El Niño-Southern Oscillation event: Spatial/temporal patterns and comparisons with the 1982–1983 event. Bulletin of Marine Science 69: 79–109.

Guest, J.R., Low, J., Tun, K., Wilson, B., Ng, C., Raingeard, D., Ulstrup, K.E., Tanzil, J.T.I., Todd, P.A., Toh, T.C., McDougald, D., Chou, L.M. and Steinberg, P.D. 2016. Coral community response to bleaching on a highly disturbed Reef. Scientific Reports 6:20717, DOI: 10.1038/srep20717.

On April 6th, the Wall Street Journal published an editorial that merits careful examination: “Jack Lew’s Political Economy”. The Journal correctly points out that the Obama administration’s meddling with regulations and red tape is killing U.S. investment and jobs. The most recent example being the Treasury’s new rules on so-called tax inversions, which burried a merger between Pfizer, Inc. and Allergan PLC.

As the Journal concluded: “This politicization has spread across most of the economy during the Obama years, as regulators rewrite longstanding interpretations of longstanding laws in order to achieve the policy goals they can’t or won’t negotiate with Congress. Telecoms, consumer finance, for-profit education, carbon energy, auto lending, auto-fuel economy, truck emissions, home mortgages, health care and so much more.”

“Capital investment in this recovery has been disappointingly low, and one major reason is political intrusion into every corner of business decision-making. To adapt Mr. Read [Pfizer CEO Ian Read], the only rule is that the rules are whatever the Obama Administration wants them to be. The results have been slow growth, small wage gains, and a growing sense that there is no legal restraint on the political class.”

Washington’s destructive policies have been dubbed “regime uncertainty” in a strand of innovative analyses pioneered by Robert Higgs of the Independent Institute. Regime uncertainty relates to the likelihood that an investor’s private property – namely, the flows of income and services it yields – will be attenuated by government action. As regime uncertainty is elevated, private investment is notched down from where it would have been. This can result in a business-cycle bust and even economic stagnation. I recommend Higgs’ most recent book for evidence on the negative effects of regime uncertainty: Robert Higgs. Taking a Stand: Reflections on Life Liberty, and the Economy. Oakland, CA: The Independent Institute, 2015.

This past weekend, The Economist uploaded and shared a short video to its Facebook page called, “The year of the 1 percent.” The video shows a graph superimposed over the Earth seen from space, while a voice narrates, “2016 is set to be a more unequal world than ever before. For the first time, the richest 1 percent of the population will enjoy a greater share of global wealth than the other 99 percent.” The video has been viewed more than one hundred thousand times.

The Economist’s graph reminded me of another graph, which also shows two lines that eventually cross but tells a very different story. Despite population growth, there are fewer people living in extreme poverty today than ever before:How can both graphs be accurate? Poverty can decline even as inequality rises, as long as the total amount of wealth in the world is growing. To ignore this is to fall prey to the “fixed pie fallacy.” Throughout most of human history, global wealth hardly changed. But thanks to trade and industrialization, wealth has skyrocketed since the 1900s and continues to climb. At the same time, technological advances have also increased human wellbeing in ways not captured by looking at GDP alone. Because the pie is growing, focusing solely on inequality, like The Economist’s video did, makes little sense. Most of us would rather have a relatively small slice of a gigantic pie than the biggest slice of a microscopic pie. In other words, most of us would rather be wealthier in absolute terms, regardless of our relative position. This is why many of us, if given the choice, would choose to be an ordinary person today instead of a member of the upper crust a century ago or a 17th century king

The territorial dispute between China and multiple Southeast Asian countries in the South China Sea (SCS) is the most pressing geopolitical issue in U.S.-China relations. The United States has responded to Chinese island building by increasing its military presence around the SCS and coordinating with friendly countries. However, criticism of the Obama administration’s approach, grounded on the presumption that U.S. efforts to date have been inadequate, calls to mind a set of lyrics from the anti-Vietnam War anthem “Fortunate Son” by Creedence Clearwater Revival:

And when you ask them, ‘How much should we give?’
They only answer More! More! More!”

It is difficult to determine what exactly “more” means given the already high level of U.S. activity in the SCS since the USS Lassen conducted a freedom of navigation operation (FONOP) in late October 2015. Since then, the U.S. Navy has conducted another FONOP in addition to other patrols involving aircraft carrier strike groups. Additionally, Philippine-U.S. military cooperation has reached its highest point since American forces were ejected from the country in 1991. Notable examples of cooperation are the recently finalized agreement for the U.S. military to set up “permanent logistics facilities” at five Filipino air bases, and tens of millions of dollars in military aid to improve the Philippines’ maritime patrol and surveillance capabilities.

Many pundits and experts have responded to this increased American presence and engagement by demanding “more”. A recent article by AEI’s Edward Linczer recommends increasing America’s foreign military financing to friendly SCS countries, and Senator John McCain called for “more than symbolic gestures” in the event that China declares an air defense identification zone in the region. The overwhelming consensus among American SCS watchers is that the United States is not doing enough to stand up to China, which is giving China tacit permission to act aggressively. By doing “more” China will eventually be forced to back down.

Asking for “more” in the SCS is not a long-term solution. Beijing has been willing and able to respond in kind to greater American shows of force or resolve. The “do more” advocates argue that the United States just hasn’t hit China’s breaking point yet, but, given the importance of the SCS for China and the relatively low level of military hardware it has placed in the region thus far, such a breaking point, if it exists, will be difficult to reach. Additionally, if “doing more” triggers an assertive response by China, then regional allies and partners will likely feel more threatened and demand even greater American shows of commitment. This creates a dangerous spiral of increasing threat perceptions and additional armaments in the SCS.

America’s short-term fixation on signaling and posturing in the SCS ignores questions about our long-term goals. Is the United States willing to risk armed conflict with China for the sake of interests that are more pressing to Vietnam and the Philippines? Does “doing more” carry downsides that will make America’s long-term position in the SCS more difficult to maintain? These are the kinds of strategic questions that need to be seriously debated; without such a debate, calls for “more” amount to tactics in search of strategy.

When there is a trade negotiation going on, people often try to bring various other policies into the mix. One way they do this is to argue that if another country wants to trade with the U.S., they should have to change some of the policies we don’t like. One recent example comes from the so-called Panama Papers. This is from the Washington Post: 

The Panama Papers’ detailed revelations of a massive international tax-haven scheme have snowballed this week into a fierce debate among Democrats over President Obama’s trade policies with the tiny Central American nation and again laid bare sharp divisions within the party over such agreements.

Trade critics lambasted the administration as failing to heed their prior warnings and win sufficient financial reforms from Panama before signing a landmark free-trade deal in 2011, missing a chance to disrupt the elaborate financial arrangements disclosed in a massive leak of private data last weekend.

“The Panama Papers just show once again how entirely cynical and meaningless are American presidents’ and corporate boosters’ lavish promises of economic benefits and policy reforms from trade agreements,” said Lori Wallach, director of Public Citizen’s Global Trade Watch. The Panama free-trade deal’s “investor protections and official U.S. stamp of approval made it safer to send dirty money to Panama,” she said.


… Wallach, the consumer advocate, said the Obama administration did not push hard enough. The financial-transparency treaty, she said, “requires someone in the U.S. to know what to ask for. It’s not like in Canada, where a financial transaction is automatically reported.”

She said that the trade talks were “a potential opportunity, and if Panama really wanted that opportunity, the administration should have said, ‘These are the things you must do if you really want it and your government is interested enough to change some of this.’ But they didn’t even ask those things.”

There’s a general problem with this kind of criticism. There are many ways U.S. domestic policies might differ from those of other countries, and going down the road of using our leverage to change other countries’ policies is dangerous. We already use trade agreements to influence other countries’ intellectual property, labor and environmental policies. If we keep going in this direction, you could imagine governments taking aim at a wide range of additional domestic policies. (As an extreme example, trade could be used as leverage to encourage pro-choice abortion policies; or it could be used to encourage pro-life policies).  And you could also imagine other governments with large economies doing something similar. The EU already does this to some extent. If it sees others doing so, China might decide to join in.

All in all, this approach to trade policy creates a mess for trade negotiations and trade liberalization, distracting everyone from their main purpose, and causing conflict rather than promoting economic integration.

As it happens, in the context of the Panama Papers, there is also a more specific criticism: It turns out that the critics may be wrong on the facts. The Washington Post editorial board explains:

Data culled from the documents by the International Consortium of Investigative Journalists, and presented in several charts on the group’s website, show that the Panama-based law firm Mossack Fonseca, which specialized in setting up offshore accounts and shell companies for wealthy people, has been steadily reducing its activity in Panama for about a decade. As it happens, the decline began about the time the Bush administration and Panama began discussing a free-trade pact — and accelerated after the deal took effect during Mr. Obama’s first term.

Specifically, the number of offshore incorporations fell from 4,741 in 2005 to 835 in 2015. Most important, as of last year Mossack Fonseca appeared to have nearly completely ceased incorporating the least transparent form of company — known as “bearer shares” — which often don’t need to register an owner’s name.

This should provide an effective rebuke to the critics here. On the other hand, it is problematic if it suggests this type of trade leverage can accomplish domestic policy change abroad, as it might encourage more such efforts. Much better to let trade agreements focus on free trade, and leave discussions of other issues to a separate forum.

Today, the Library of Law and Liberty is carrying my review of Dale Russakoff’s book, The Prize: Who’s in Charge of America’s Schools?, which explored the impact of Mark Zuckerberg’s $100 million gift to Newark’s district school system. Years later, it had little to show for it. At times The Prize reads like a comedy of errors, but given what was at stake, it was really a tragedy. But it didn’t have to be.

Zuckerberg’s gift was matched by other philanthropists and foundations, but even $200 million wasn’t enough to bring the “transformational” changes that reformers desired. The bureaucracy was just too good at impeding reform and sucking up resources:

The new labor agreement was also pricier than initially anticipated: it consumed nearly half of the $200 million of the philanthropic package. The teachers’ contract itself cost $50 million, including $31 million in back pay to cover the raises that teachers hadn’t received over the previous two years.

The union boss, Joe Del Grosso, made the back pay a condition for even holding the negotiations. “We had an opportunity to get Zuckerberg’s money,” Del Grosso later explained, “Otherwise, it would go to the charter schools. I decided I shouldn’t feed and clothe the enemy.” The contract also included merit bonuses and financial incentives for teachers to switch to a universal pay scale.

On top of that, [Newark Superintendent Cami] Anderson asked for $20 million in “buyout” funds to incentivize low-performing teachers, principals, and support staff to leave; $8.5 million in tuition support for teachers to earn graduate degrees relevant to their subject area; and $15 million for a new contract with the principals’ union (which didn’t actually happen during Anderson’s term because the principals refused to negotiate).

The high cost of the agreement meant eliminating plans to invest in community organizing, early-childhood programs, and vocational programs for Newark’s thousands of recent dropouts, which had been one of [Newark Mayor Cory] Booker’s priorities.

Then, too, the teachers’ contract contained fine print that raised its cost even higher. Teachers received 15 paid sick days and three paid personal days (in a less than year-round job, that is, a school year of 180 days), meaning that the district had to pay for both regular and substitute teachers for up to one out of every 10 school days—a particularly large expense given that at least 560 teachers earned more than $92,000 a year. The seniority pay bumps also remained in place, so the district couldn’t afford the performance incentives that they had wanted to give promising young teachers to persuade them to stay.

The great expense was deemed necessary to get greater flexibility and accountability, but it was never clear how permanent those features would be. Asked if the union would continue the accountability reforms after the contract expired in three years, Del Grosso replied: “Let’s pray there’s another Zuckerberg.”

Four years after Zuckerberg’s announcement on the Oprah Winfrey Show, the reforms had not lived up to expectations. The 2014 state test results showed that proficiency in both math and English had declined in every tested grade since 2011. Moreover, the ACT college admission test, which all high school juniors had taken, revealed that only 2 to 5 percent of non-magnet school students in the district were ready for college. Anderson resigned the following year. By then, Booker had already moved on to the U.S. Senate, and his successor, Democratic Mayor Ras Baraka, was elected largely because of his opposition to the Booker/Anderson reforms. Soon after, [New Jersey Governor Chris] Christie turned his attention to his (ultimately failed) presidential bid.

If anything, Newark’s education reform debacle is further evidence of the wisdom of Professor Jay P. Greene’s advice: Build New, Don’t Reform Old

With the New York primary just days away, a policy fight has erupted on the left regarding the 1994 Clinton Crime Bill.  I have a piece today over at Newsweek on the subject.  Here’s an excerpt:

The Crime Bill maddens today’s BLM activists because it earmarked $7.9 billion in grants to the states for the building of prisons. To be eligible for the funds, states had to meet certain conditions. The idea was to encourage the states to embrace the stricter policies found in the federal system, which had abolished parole and limited good time credits for prisoners, which allow well behaved inmates to earn an earlier release date.

Many states were eager to do just that. During the 1990s, America was building a new prison every week, on average. And as soon as those facilities opened up, they were soon operating beyond their original design capacity.

Many of the prisoners were young minority men, nonviolent drug offenders who were serving mandatory minimum sentences….

Hillary has tried to sound like a reformer, saying, “We need a true national debate about how to reduce our prison population while keeping our communities safe.”  

Such throwaway lines are not nearly enough for BLM activists. For them (and others too), support for the 1994 Crime Bill is the political equivalent of Hillary’s vote to support the Iraq war: It was a key indicator of policy judgment—and the Clintons failed the test.

I also point out that Cato’s 1995 Handbook for Congress called for repealing the Clinton Crime Bill precisely because it would lock up thousands and thousands of people who do not belong there.  We urged policymakers to call off the drug war and to reserve prison space for violent offenders.  Alas, Congress turned away from our policy advice. 

One of Michael Mandelbaum’s tasks in his highly provocative new book, Mission Failure: America and the World in the Post-Cold War Era, is to locate the principal inspiration for American foreign policy debacles over the last quarter century.

He finds it in the American foreign policy establishment that has surrounded him over the last decades during which he has been the Christian A. Herter Professor of American Foreign Policy at the Johns Hopkins School of Advanced International Studies in Washington, DC.

He will be talking about his work at a book forum to be held at noon on April 20 several blocks down Massachusetts Avenue at the Cato Institute. Although Cato has been perhaps the only think tank in the city that has managed to stay out of the foreign policy establishment, members of that establishment might do well to attend (and don’t forget: there is a free lunch afterward). Mandelbaum’s presentation will be followed by comments on the book by Keir Lieber of Georgetown University and Brad Stapleton of Cato.

Assessing the history of American military and foreign policy between 1993 and 2014, Mandelbaum identifies a pattern of nearly perfect failure: policies that proved to be counterproductive and military interventions that failed to achieve their presumed purpose which was to create viable, responsive, and effective governments.

Although, as he points out, the American public as a whole was able to contain its enthusiasm for transforming other countries, the establishment has rarely suggested that regrettable happenings overseas were not the business of the United States or that America was simply not capable of setting things right. That is, it was the establishment, not the general public, that principally applauded such extravagant, self-infatuated (and incorrect) pronouncements as the one Mandelbaum quotes from Secretary of State Hillary Clinton: “American have always risen to the challenges we have faced. It is in our DNA. We do believe there are no limits on what is possible or what can be achieved.”

It certainly seems, however, that there have been two levels of failure. Those of the 20th century generally failed to correct bad situations that had been created by the locals—as in Somalia. Those of the 21st mostly made bad conditions much worse—as in Afghanistan, Iraq, Yemen, Libya, and Pakistan. In the last of these, 74% of Pakistanis have come to view the United States as an enemy even as their government cashes the aid checks of $2 or $3 billion it receives annually from that enemy. As negative foreign policy achievements go, that is quite spectacular. There is thus a difference between failure and abject failure.

In reflecting on the phenomenon, Mandelbaum suggests that one reason the United States serially ventured into disastrous interventions “was that it could.” It had the resources and “no other country or coalition of countries was in a position to stop it.”

In the wake of the Vietnam War, strategist Bernard Brodie wistfully reflected, “One way of keeping people out of trouble is to deny them the means for getting into it.” A third of a century later, that sage admonition continues to resonate.

You can register for the book forum here.

Donald Trump says, “we’ve got to start balancing budgets,” and promises that he is “going to cut spending big league.” Trump provides few specifics, but his impulse is certainly commendable.

Ted Cruz offers a much more detailed plan, which includes abolishing four cabinet departments and a couple dozen agencies and programs. The presidential candidate is right that the “current and projected rates of government growth are unsustainable, irresponsible, and constitutionally indefensible.”

Large spending cuts should be on the agenda when the next president enters office in 2017. Spending cuts would spur economic growth by shifting resources from lower-valued government activities to higher-valued private ones. Cuts would expand freedom by giving people more control over their lives and reducing the regulations that come with spending programs.

What should the next president cut? I have updated a plan at DownsizingGovernment to cut dozens of agencies and programs across the budget. I’ve included cuts to entitlements, business subsidies, aid to the states, and other items. The cuts would not only balance the budget and begin reducing the government’s massive debt, but they would also enhance our civil liberties by dispersing power from Washington.

See the new spending cut plan here.

Great powers usually have client states. Although a sign of influence, the latter often are more trouble than they are worth. North Korea increasingly appears that way for Beijing.

The Chinese-North Korean relationship was oft said to be like lips and teeth, forged in blood during the Korean War. But even then, the relationship was fraught with tension.

Today those look like the “good ol’ days.” There is little doubt that the so-called Democratic People’s Republic of Korea has lost the support of Chinese public opinion.

Academics and analysts outside of government also show little love for China’s one ally, which only takes and never gives. Top officials no longer attempt to disguise their frustration with the North’s behavior.

The Kim regime has returned ill-disguised contempt. Emissaries from the People’s Republic of China came and went as the North Korean leader failed to make even a pretense of listening.

So Se Pyong, Pyongyang’s ambassador to the UN in Geneva and the UN’s Conference on Disarmament, predictably denounced the United States and South Korea. When asked if the North felt pressure from the PRC after President Xi called for dialogue over the Korean “predicament,” So responded: “Whether they are going to do anything, we don’t care. We are going on our own way.”

While even great powers cannot always control their international dependents, few accept being publicly humiliated. Even though China provides the North with the bulk of the latter’s energy and food, Beijing’s counsel is treated with no more respect. The PRC has lost credibility.

Thus, it is in Beijing’s interest to end its business-as-usual treatment of North Korea. However, the United States and its allies, most obviously the Republic of Korea and Japan, should make it easier for China to effectively join America’s anti-Pyongyang coalition.

The PRC is reluctant to impose the kinds of penalties supported by Washington for good reasons, based on its own interests. China does not want millions of refugees running north or violent conflict bursting out to the south. Beijing would lose if reunification turned its buffer into an advanced base for U.S. containment policy. The PRC wants to preserve economic preferences which have been dearly bought.

Beijing abhors instability, a likely outcome of greatly ratcheting up pressure on Pyongyang. As I point out for China-U.S. Focus, “Nationalistic leaders attempting to restore China’s international role certainly do not want to be seen doing America’s bidding.”

The United States needs a different strategy. Along with its friends in the region, Washington should offer to share any humanitarian burden, protect Chinese economic interests, acquiesce to Beijing’s direct involvement in a messy transition, and pledge to withdraw American forces from a reunified peninsula.

Moreover, Washington should offer to negotiate with the North without preconditions, and address issues other than nuclear weapons. Winning North Korean acceptance is less important than satisfying Beijing. 

If China can win Western assurances on the issues of greatest importance, it should act. The primary reason would be to advance the PRC’s interest. The current situation is anything but stable.

If Kim is ever tempted to act on his many threats against the United States, South Korea, or Japan, he might trigger the war that no one wants. Even limited military action might spark a retaliatory spiral. And if full-scale war erupted, Beijing could not expect America to stop short of the Yalu.

Acting responsibly in Korea also would demonstrate China’s maturity and readiness for global leadership. Taking action would help repair the damage done Beijing’s reputation by its ham-handed maneuvers over disputed territorial claims in the Asia-Pacific.

The DPRK might be beyond China’s ability to solve. However, the North’s continuing irresponsible behavior puts a premium on Beijing taking a more active role. The PRC has suffered one too many humiliations at the hands of its supposed client state. It is time for China to restore balance to their relationship.

Principled Republicans have been dismayed by the way this primary season has gone, rightly believing that their party has been hijacked by people having little or no connection with the party or its principles as articulated over the years in party platforms. In this morning’s Wall Street Journal, Kimberley Strassel has a long interview with former Cato board member Eric O’Keefe, head of the Wisconsin Club for Growth, who puts his finger on the heart of the problem.

Pointing to “the party’s constitutional right to operate as a wholly private, autonomous political actor,” and looking ahead to the convention, O’Keefe asks, “Why should Republicans bow down to the results of state-mandated open primaries that allow liberal and independent voters to bum-rush what is supposed to be a private poll?” “There’s nothing that special or even good about the government-run primary process,” he adds, and this year’s process is Exhibit A. While the media focus on the anger in the country—which surely there is, and for good reason—still, no one can tell how much mischief has been done through cross-over, sometimes strategic voting in state-mandated open primaries. When that happens, a party—a private organization, not contemplated by the Constitution’s Framers—loses control of its message and its purpose: to put forward in the general election the candidates that best represent the views of its members.

The hijacking of the primary process is only part of the problem, of course. Campaign finance restrictions, about which O’Keefe has had bitter experience in Wisconsin in the last few years, are an equal or even greater burden on a party’s ability to conduct its affairs and get its message out, but that’s a subject for another day. For the present, O’Keefe is looking ahead to the July convention:

The delegates have been going to conventions for years and treating them like Super Bowl parties because there was nothing else to do. But this year they have the opportunity to practice a great national tradition, to exercise their legal, historical right to defeat a man who opposes most of what they believe in, and instead nominate a candidate who represents them.

If they succeed, and succeed in November as well, perhaps the first order of business should be to work with the states toward restoring the principle that political parties are private entities, not extensions of the government, and how they run their affairs are for their members alone to decide.

Yesterday, The Guardian published a provocative opinion piece titled, “Are Robots Going To Steal Your Job? Probably.” 

At first glance, the author’s pessimism would seem justified. From robotic gardeners and farmers to robotic pizza delivery services, it seems like every day robots make new forays into jobs traditionally done by humans. 

But pause to consider technology in historical perspective. Pessimism about new technologies is not new. In 1918, people decried automobiles for destroying the livery stable business. In the early 1800s, frustrated textile workers known as “Luddites” famously smashed apart mechanized looms. The Guardian author himself admits that his fears echo those of the Luddites: 

This is not a new concern. Since at least as early as the time of the Luddites, in early 19th-century Britain, new technologies have caused fear about the inevitable changes they bring. 

The Luddites and livery stable proprietors were correct to realize that new machines would utterly change their industries, but they failed to appreciate the overall effects of new technologies on human wellbeing. 

Banning mechanized looms would have prevented everyone from enjoying cheaper clothing. Similarly, banning automobiles would have robbed everyone of enjoying modern transportation. 

It is certainly true that technological change makes some jobs obsolete, but it has also made humanity better off in many ways. Importantly, it has led to the creation of new jobs. 

In fact, technological progress tends to create more jobs than it destroys. The new jobs tend to be better, while the eliminated jobs tend to be difficult and dangerous. 

The debate over the precise ways in which robots will affect human employment, productivity, incomes, leisure time, and living standards rages on. Cato’s upcoming forum, “Will a Robot Take Your Job?” will tackle these questions and more. Please consider registering here.

California and New York have approved bills to increase their state minimum wages over time to $15 an hour. Presidential candidates Hillary Clinton and Bernie Sanders favor raising the federal minimum wage. But such mandated increases do more harm than good, and they hurt the exact groups of people that policymakers say that they want to help.

Labor economist Joseph Sabia of San Diego State University summarized the academic evidence on minimum wages in this 2014 bulletin for Cato.

Sabia’s own statistical research with economist Richard Burkhauser “found no evidence that minimum wage increases were effective at reducing overall poverty rates or poverty rates among workers.” And a study by economists David Neumark and William Wascher “found that while some poor workers who kept their jobs after minimum wage increases were lifted out of poverty, others lost their jobs and fell into poverty.”

Sabia said that there are two key reasons why the minimum wage does not alleviate overall poverty the way that supporters believe that it will. The first reason is that minimum wages reduce the work available for low-skill workers:

Many firms respond to minimum wage increases by substituting away from low-skilled labor and toward other inputs. For example, grocery stores may substitute away from cashiers and toward self-checkout systems or toward higher-skilled labor. If some near-poor, low-skilled workers lose their jobs or have their hours cut as a result of minimum wage increases, then their incomes may fall, resulting in a rise in poverty among these households.

The vast majority of credible empirical evidence produced by labor economists … suggests that minimum wage increases reduce low-skilled employment. Estimates of the employment elasticity with respect to the minimum wage for low-skilled individuals generally range from -0.1 to as large as -0.3, suggesting that a 10 percent increase in the minimum wage reduces low-skilled employment by 1 to 3 percent.

The second reason that minimum wages do not alleviate poverty is that few beneficiaries of minimum wage increases live in poor households. This fact surprised me when I first read about it, but that is what the data shows. Sabia notes:

Advocates of minimum wage increases paint a vivid portrait of what they see as the typical minimum wage worker: a working single mother struggling to keep her family above the poverty line. But is this portrait accurate? Are most minimum wage workers poor or near poor?

In fact, relatively few minimum wage workers live in poor households. In a new study, Burkhauser and I examine Census data, and find that workers earning between $7.25 and $10.10 per hour—workers who would be directly affected by [a] proposed federal minimum wage increase—overwhelmingly live in non-poor households. We find that only 13 percent of workers who would be affected live in poor households, while nearly two-thirds live in households with incomes over twice the poverty line, and over 40 percent live in households with incomes over three times the poverty line. Other research suggests that poor single-female headed households make up less than 5 percent of all affected workers.

Sabia concluded his Cato bulletin: “While alleviating poverty is a widely shared goal, raising the minimum wage is unlikely to achieve that end. In reality, it is more likely to result in making many low-skilled workers worse off. The minimum wage fails to reduce net poverty because of its adverse effects on employment and poor ability to target workers living in households below the poverty threshold.”

Economist Milton Friedman said that “one of the great mistakes is to judge policies and programs by their intentions rather than their results.” Alas, that is the mistake that continues to drive the minimum wage debate in the United States.

Further analysis of the minimum wage is available here.

The MQ-9 Predator drone is probably best known as a tool of American foreign policy. Since 2002 the Bush and Obama administrations have used unmanned aircraft such as the predator in missions that have (according to New America) resulted in the deaths of hundreds of civilians and thousands of militants in the ongoing War on Terror.

However, Customs and Border Protection (CBP) has used predator drones in American airspace, albeit with limited success. As my colleague Patrick Eddington pointed out in September last year, CBP has a poor track record when it comes to using drones. At the end of 2014 the Department of Homeland Security’s Inspector General found

Although CBP anticipated increased apprehensions of illegal border crossers, a reduction in border surveillance costs, and improvement in the U.S. Border Patrol’s efficiency, we found little or no evidence that CBP met those program expectations.

In a blunt press release issued last year the Department of Homeland Security’s Inspector General’s office said that it  ”recommends that CBP abandon plans to spend $443 millionmore on additional aircraft and put those funds to better use.”

Two senators recently singled out border patrol drones for special treatment in proposed legislation that would restrict the government’s use of drones.

An amendment to the FAA Reauthorization Act of 2016 proposed by Sens. Rand Paul (R-KY) and Edward Markey (D-MA) would prohibit the government from using drones to “gather evidence or other information pertaining to criminal conduct or conduct in violation of a statute or regulation or for intelligence purposes except to the extent authorized in a warrant.”

The amendment, which can be read below, does make exceptions to this requirement that would allow the government to use drones amid high risk of terrorism and exigent circumstances. It also makes an exception for border patrol:

The 3-mile provision is significant given that CBP is permitted to operate within 100 miles of the border, an area where around two-thirds of Americans (~200 million people) live.

Sens. Paul and Markey’s amendment would improve the FAA authorization bill if passed as written, but as lawmakers continue to grapple with the issues raised by drone technology they shouldn’t forget that flying robots on the border have proven to be inefficient and expensive as well as potentially intrusive.

This week the Washington Post has been publishing commentary on the legal doctrine of jury nullification, which boiled down refers to situations in which a jury returns a “not guilty” verdict in a criminal case even though the accused broke a law, rule, or regulation.  To take a quick example, a jury might acquit a patient for using marijuana to alleviate her symptoms even though federal law does not allow any exceptions.  It’s a controversial subject because lawyers and prosecutors and judges have been taught that jury nullification is totally inappropriate–so it is understandable where they’re coming from.

However, most lawyers are not familiar with the history.  You can’t find references to “jury nullification” around the time of the American Revolution.  That’s because it was considered to be part and parcel of what a jury trial was all about.  If jurors thought the government was treating someone unjustly, they could acquit and restore that person’s liberty.  Jury trials were celebrated–and explicit provisions were put into the Constitution so that the government could not take them away. 

Today, the legal system is hostile to the doctrine of jury nullification–even to the point of punishing people who distribute pamphlets!  Some years ago, Cato published the most comprehensive book on the subject, Jury Nullification: The Evolution of a Doctrine by Texas attorney, Clay Conrad.  I’m glad to see that our author has a piece in the Washington Post series today.

One reason the Post decided to run this series is that there’s a move in New Hampshire to revive the doctrine there.  A jury nullification bill had enough support to pass the General Assembly, though its prospects in the Senate are uncertain.

If you agree that jury nullification is an important check on the power of government, take a moment and share this post and/or related material with all your friends and contacts.  The government wants to keep everyone in the dark on this one.

For additional information, go here and here.

News this week that Ford Motor Company will invest $1.6 billion to build a new small-car production plant in Mexico has elicited the usual responses from the usual politicians, each one decrying “un-American” companies and a U.S. trade policy that encourages multinational corporations (MNCs) to invest in countries with cheap labor or other “unfair” advantages over the United States.  Republican presidential candidate Donald Trump, for example, called Ford’s decision an “absolute disgrace” that – similar to recent offshoring decisions by Carrier and Nabisco before it – shows just how badly America is “losing at trade” and just how horribly our free trade agreements have hurt the American working class. 

Trump’s critique, echoed by other protectionist candidates and the news outlets that love them, is nothing new: it’s basically the same dire warning of a “giant sucking sound” of investment moving offshore that candidates like Pat Buchannan, Ross Perot and John Edwards have been spewing ever since the United States first started liberalizing trade through the NAFTA.  Yet, like most things Trump and trade, the candidate is very wrong, having erroneously treated a few highly-publicized and emotional anecdotes as if they are broadly representative of American economic reality. 

Indeed, a quick look at the latest facts on U.S. and global investment show that not only is there no “giant sucking sound” here, but America remains, by far, the world’s top investment destination.

First, American MNCs continue to invest far more in their domestic operations than in their offshore affiliates.  In fact, the most recent Bureau of Economic Analysis report on the Activities of U.S. Multinational Enterprises finds that these firms spent about three times as much on capital expenditures and research & development at home as they did abroad in 2012 and 2013 (the latest data available).  In fact, U.S. manufacturing MNCs alone invested about one-and-a-half times as much in the United States in 2012 and 2013 as all U.S. MNCs invested abroad during the same years:

The numbers for automakers like Ford aren’t this stark, but they’re still impressive: the Center for Automotive Research estimates that, of the $18.25 billion in additional North American investments that U.S. car companies announced in 2014, $10.5 billion was earmarked for projects in the United States, while $7 billion and $750 million was planned for Mexico and Canada, respectively.  These numbers demonstrate that, while Ford and other MNCs might occasionally choose to invest in Mexico or elsewhere, they’re still investing heavily in the United States too. 

Furthermore, more investment by American MNCs abroad does not mean less investment at home.  Additional crunching of the same BEA dataset by my colleague Dan Ikenson reveals that MNCs’ investments in their U.S. and foreign operations are complementary, not substitutes.  In other words, one more dollar spent by U.S. multinationals abroad does not translate to one less dollar spent in the United States; in fact, it’s much the opposite: expansion abroad typically means expansion here at home too.  These data destroy the myth, advanced by Trump and others, that when Ford and others choose to send their investment dollars abroad, American jobs go with them.

Second, there is little evidence that the United States is “losing” at the global investment game: America remains the world’s top destination for foreign direct investment (FDI), and it’s not even close.  The UN Conference on Trade and Development estimates that FDI inflows into the United States in 2015 reached their “highest level since 2000” at $384 billion – more than double second place Hong Kong and almost triple third place China:

This pole position is not unusual – except for a one-time blip in 2014 due to a major telecommunications merger, the United States routinely sits atop UNCTAD’s FDI rankings.  Such position makes clear that, despite America’s policy faults, the country remains the most attractive investment destination in the world.

And this foreign investment isn’t just going to sexy, innovative sectors like information technology; it’s going to American manufacturing too.  According to new research from the Heritage Foundation’s Bryan Riley, the United States amassed a whopping $614 billion “manufacturing investment surplus” with the rest of the world between 2000 and 2015:

Riley’s data, also from the BEA, further demonstrate the eye-popping magnitude of the United States’ comparative advantage as a global investment destination – one that should finally put to rest the silly notion that U.S. and global trade and investment liberalization has caused American manufacturers and services providers to leave our shores for greener, cheaper pastures (or for foreign companies never to arrive).  Sometimes U.S. (or foreign) companies invest abroad; more often they invest here.  That decision is based on a complex, company-specific examination of cost and other factors, not some rudimentary quest for the cheapest labor or slackest environmental regulations.

There are certainly things that the U.S. government could do to improve the country’s attractiveness as a global investment destination – reforming one of the world’s most onerous corporate tax regimes is an obvious place to start, as is fixing our increasingly-sclerotic labor market.  But the numbers here leave little doubt that, for now at least, the only “giant sucking sound” we’re hearing in America is the one of investment dollars being hoovered into the U.S. economy, not out.

The views expressed herein are Mr. Lincicome’s alone and do not necessarily reflect those of his employers.

Reuters has an investigation today of the ways in which the Saudi-led War in Yemen has empowered Al Qaeda in the Arabian Peninsula (AQAP), the group’s local affiliate. While it’s been relatively obvious to observers for some time that AQAP had benefitted from the conflict, the extent of their newfound control and wealth as detailed in the article is fascinating.

Thanks to the seizure of the city of Mukalla, AQAP now controls Yemen’s third largest port, a position that Reuters estimates has allowed them to earn up to $2 million per day in fees and taxes. Extortion of businesses, including around $1.4 million from the state oil company, has also provided an easy revenue source, as has the far less subtle method of simply robbing the city’s banks.

Perhaps of more interest is AQAP’s approach to providing civic services and stability. While it’s untrue that Al Qaeda has never experimented with state-building before, such a strategy has more typically been associated with ISIS. As the Reuters investigation notes,  in Mukalla, Al Qaeda is trying to present themselves as a less cruel and brutal ruler than ISIS, an approach which seems to be working with some Yemeni citizens who fear a return to instability.

So entrenched is the group that it attempted to set up a formal profit-sharing deal with the national government to split oil revenues. It is even managing taxes for the citizens of Mukalla, cancelling payroll taxes and promoting various populist policies. All of this is a remarkable feat for a group which has been the focus of concerted US drone strikes and counterterrorism activities for more than a decade.

But it should not be surprising. The ongoing GCC-backed military campaign has effectively ignored AQAP in its single-minded focus on the Houthi rebels and their allies. There is even evidence that AQAP fighters have fought alongside the Saudi-backed militias.

Meanwhile, the Saudi-led campaign – designed to restore exiled President Hadi and his government – has been bloody and ineffectual. Not only has it created one of the world’s worst humanitarian crises, its forces have stalled south of the capital without meeting their key objectives.

Today’s report really highlights the inherent contradictions in America’s Yemen policy. By backing the Saudi-led campaign, the U.S. is allowing Al Qaeda to accumulate wealth and territory, effectively undermining at least a decade of counterterrorism work inside Yemen. Adding another wrinkle to this is the fact that the Houthi rebels have often fought against AQAP inside Yemen.

While much criticism of the war in Yemen has focused on humanitarian issues, the sheer reactiveness of our Yemen policy and utter lack of any overarching strategy is worrying. Indeed, the effectiveness of some of those past policies, particularly drone strikes, is itself debatable. Studies actually suggest that there are only limited situations in which decapitation strikes are effective.

Yet the gains made by AQAP serve to highlight that any benefit produced by U.S. attacks on AQAP training camps or other counterterrorism work during the last decade is being rapidly undermined by our support for the current war. 

The campaign to attach legal consequences to supposed “climate denial” has now crossed a fateful line. Yesterday:

The Competitive Enterprise Institute (CEI) today denounced a subpoena from Attorney General Claude E. Walker of the U.S. Virgin Islands that attempts to unearth a decade of the organization’s materials and work on climate change policy. This is the latest effort in an intimidation campaign to criminalize speech and research on the climate debate, led by New York Attorney General Eric Schneiderman and former Vice President Al Gore….

The subpoena requests a decade’s worth of communications, emails, statements, drafts, and other documents regarding CEI’s work on climate change and energy policy, including private donor information. It demands that CEI produce these materials from 20 years ago, from 1997-2007, by April 30, 2016.

CEI General Counsel Sam Kazman said the group “will vigorously fight to quash this subpoena. It is an affront to our First Amendment rights of free speech and association.” More coverage of the subpoena at the Washington Times and Daily Caller.

A few observations:

  • If the forces behind this show-us-your-papers subpoena succeed in punishing (or simply inflicting prolonged legal harassment on) a group conducting supposedly wrongful advocacy, there’s every reason to think they will come after other advocacy groups later. That includes yours.
  • This article in the Observer details the current push to expand the probe of climate advocacy, which first enlisted New York AG Eric Schneiderman and then California’s Kamala Harris — into a broader coalition of AGs, with Massachusetts and the Virgin Islands just having signed on. More than a dozen others, such as Maryland Attorney General Brian Frosh, seem to be signaling support but have not formally jumped in. More: Peggy Little, Federalist Society.
  • CEI people, many of whom we count as longtime friends and allies in the pro-liberty policy community, have been active critics of the Schneiderman effort, with Hans Bader, a senior attorney there, highly critical just a week ago.
  • In these working groups of attorneys general, legal efforts are commonly parceled out among the states in a deliberate and strategic way, with particular tasks being assigned to AGs who have comparative advantage in some respect (such as an unusually favorable state law to work with, or superior staff expertise or media access). Why would one of the most politically sensitive tasks of all — opening up a legal attack against CEI, a long-established nonprofit well known in Washington and in libertarian and conservative ideological circles — be assigned to the AG from a tiny and remote jurisdiction? Is it that a subpoena coming from the Virgin Islands is logistically inconvenient to fight in some way, or that local counsel capable of standing up to this AG are scarce on the ground there, or that a politician in the Caribbean is less exposed to political backlash from CEI’s friends and fans than one in a major media center? Or what?
  • I recommend checking out the new Free Speech and Science Project, which intends to fight back against criminalization of advocacy by, among other things, organizing legal defense and seeking to hold officials accountable for misusing the law to attack advocacy.
  • This is happening at a time of multiple, vigorous, sustained legal attacks on what had been accepted freedoms of advocacy and association. As I noted yesterday in a piece in this space, Sen. Elizabeth Warren has just demanded that the Securities and Exchange Commission investigate several large corporations that have criticized her pet plan to impose fiduciary legal duties on retirement advisors, supposedly on the ground that it is a securities law violation for them to be conveying to investors a less alarmed view of the regulations’ effect than they do in making their case to the Labor Department. This is not particularly compelling as securities law, but it’s great as a way to chill speech by publicly held businesses.

[cross-posted, with slight changes, from Overlawyered]

I often find myself described, not as a monetary economist, plain vanilla or otherwise, but as a “free banker,” and (therefore) as someone who wants to “abolish” the Fed.  Yet I’ve also been accused of lacking consistency, and even of being an outright apologist for monetary central planning, because I also have some nice things to say about monetary rules in general, and about nominal spending rules in particular.

So, am I a free banker or not?  The short answer is…well, there isn’t a short answer other than “it’s complicated.”

First of all, I don’t much like being called a “free banker,” or a free banking “advocate.”  Yes, I have a soft spot for free banking; yes, I think that the Scottish and Canadian systems of yore, which approximated most closely, performed a helluva lot better than their modern, centralized counterparts; and yes, I think more people should study those systems, and free banking more generally, so as to better appreciate the extent to which competitive market arrangements are capable of producing stable and efficient systems of money and banking.

Yet these beliefs of mine don’t mean that I’m not interested in reforms that fall short of any sort of some free-banking ideal.  Still less do they mean that I imagine that, were we to simply get rid of the Fed, root and branch, a set of currency-issuing private banks would rush in at once to fill the void. Nor do I suppose for a moment that allowing commercial banks to issue their own notes, and otherwise deregulating them, while leaving the Fed’s current money-creating powers unchanged, would put an end to monetary instability.  Finally, despite having moved from the academy to Cato, I’m more interested in promoting a proper understanding of the economic implications of free banking than I am in leading a crusade of any sort.  (Then again, I’m confident that, if more people understood free banking, we’d have crusaders aplenty for it.)

But there’s a more fundamental reason why partiality to free banking today doesn’t automatically translate into a desire to annihilate central banks.  When banknotes were still redeemable claims to some “outside” money, like gold or silver coin, to favor free banking — that is, to favor having rival banks issue redeemable notes over having a single bank alone do so — was equivalent to being opposed to having a central bank.  In a metallic standard context, freedom of entry into the currency business sufficed to keep any one bank’s actions from provoking a general expansion or contraction, because while a monopoly issuer might count on other banks treating its IOUs as cash reserves, a bank enjoying no monopoly privileges could expect rival issuers to treat its notes like so many checks, to be promptly presented to it for redemption.  Subjecting a formerly privileged bank of issue to competition therefore served, no less than abolishing it altogether might, to deprive the bank of its short-run ability to influence aggregate nominal magnitudes.  Were the bank to be abolished, on the other hand, other banks, perhaps including new entrants, could readily make up for its absence, because the economy’s (metallic) monetary standard would remain intact.

The situation becomes quite different once metallic standards give way to fiat money.  In a fiat system free banking ceases to be a straightforward alternative to, or substitute for, central banking.  That’s so because the monopoly bank of issue is now responsible, not just for issuing paper currency, but for supplying the economy’s standard money.  There is, in other words, no monetary standard apart from that embodied in the central bank’s liabilities.  A “standard” U.S. dollar today is no longer a quantity of silver or of gold; it is a one-dollar Federal Reserve Note, or a one-dollar credit on the Fed’s books.  It follows that, to simply abolish the Fed, in the strict sense of liquidating it (that is, parceling-out its assets to its creditors, and destroying and retiring its paper liabilities),  would be tantamount to abolishing the U.S. dollar itself.  Though it’s still possible, and perhaps even likely, that some sort of new new banking and currency system would arise, that development would have to be accompanied by the prior or concurrent development of a new monetary standard or standards — a potentially fraught proposition.  Some may well be willing to risk such a radical change; but no one could predict its results with any degree of confidence.

In contrast, a free-banking reform that left the Fed’s money-creating powers unchanged, while allowing private firms to issue dollar-denominated paper currency in competition with it, wouldn’t make a big difference, even supposing that the new currency would be so attractive that no one bothered holding Federal Reserve notes at all.  The change wouldn’t be entirely without significance.  For one thing, it would substantially reduce the Fed’s, and therefore the Treasury’s, seignorage revenue, converting it from producers’ to consumers’ surplus.  The reform would also relieve the Fed of the burden of providing for seasonal and cyclical changes in currency demand.  Finally, for reasons I’ve spelled-out in The Theory of Free Banking and elsewhere, the change could make for a more stable relationship between the quantity of base money and the volume of aggregate spending or NGDP.  But so long as paper currency consists either of Federal Reserve dollars themselves or of dollar-denominated private banknotes, a competitive banknote regime alone would not reduce, let alone undermine, the Fed’s general ability to influence nominal magnitudes by buying or selling assets, and perhaps by other means.  Nominal values would be no less dependent than before on the size of the Fed’s balance sheet, holding other determinants of the real demand for reserves (including interest rates on reserves and alternative assets) constant.  It follows that allowing other banks to issue currency would not rule out undesirable central-bank sponsored changes in spending, output, and the rate of inflation.

It follows from this that, so long as an economy relies on fiat money, the quantity of standard money itself, instead of being regulated by private market forces, has to be regulated by some other means.  That must either mean discretionary control by bureaucrats, or control by means of some sort of monetary rule.  The rule might itself replace the fiat standard with a revived commodity standard, by turning purely nominal official monetary liabilities into genuine claims to definite quantities of gold or silver.  But that is only one possibility among many — and an especially difficult one to pull off.  Most rules would instead preserve the standard money’s “fiat” status.  And most would preserve the rumps, if nothing else, of established central banks.  Call it central banking, night-watchman style.

In short, although a century or more ago, free banking and monetary rules were rival ideas for guarding against abuses of discretionary monetary policy, today they are properly seen as complementary schemes, one for improving the performance of the banking system, the other for reforming the base-money regime.  Therefore there’s no reason why one can’t favor, and even crusade for, both.

[Cross-posted from]