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In September, the UK government gave the green light for the construction of the Hinkley Point power plant through a French-Chinese consortium. The project—which has received wide international attention after being very nearly relegated to the protectionist dustbin—has been agreed to after much hemming and hawing. It has been mired in controversy mainly over security concerns related to foreign ownership, viewed by some as smacking of protectionism.

It is no secret that there has been a worrying trend toward protectionism in the global markets. The appetite for international trade agreements and foreign investment has been consistently listless. In the United States, and globally, some politicians have been banking on this by flaunting protectionist rhetoric in an effort to garner support. But while protectionism may win votes in the short-term, domestic economic growth will lose out in the long-term. Ultimately, politicizing the global economic rut will only make matters worse.

A Global Trade Alert by the independent London-based think-tank, the Centre for Economic Policy Research, shows that between January 1 and October 31 2015 a total of 539 governmental measures adopted worldwide “harmed foreign traders, investors, workers, or owners of intellectual property” followed by a sobering observation that “in no previous year have we found so many trade distortions so quickly.”

According to the study, the three countries subjected most often to foreign protectionism have been China, the European Union and the United States, in order of ranking. Settling in to this new protectionist normal, however, will have dire economic consequences for all countries and not just developed ones.

Protectionism and an over-reliance on quantitative easing (QE) measures are key contributing factors toward the “new mediocre” which has set hold of the global economy. In this “new mediocre”, global growth is stuck at barely 3 percent a year, with the United States, the European Union, and Japan as the poorest performers. Relying on QE as a long-term solution as opposed to a short-term “fix” following the Financial Crisis of 2008 has had a hampering effect, lengthening rather than stemming the impact of the Financial Crisis – especially for countries that combined QE with austerity measures. Likewise, governments are exacerbating the situation by raising roadblocks on trade and investment opportunities.

The global economic outlook and mood has been gloomy. However the passage of the Hinkley Point deal, once security concerns were addressed, offers a light at the end of this clogged-up tunnel. In the post-Brexit world, the UK government’s decisions on investment and trade will come up against the current popular sentiment towards protectionism. The Hinkley Point deal bucks this protectionist trend, possibly signaling a shift in attitudes towards trade and investment.

Prime Minister May has announced that she would like to turn Britain into a “global leader in free trade,” even though barriers against doing so are going up. In the United States, both presidential candidates seem to be putting up the barriers themselves, shunning trade and investment opportunities and riding the wave of popular protectionist rhetoric instead. President Obama, in a new piece penned for The Economist, instead argues that trade helped the U.S. economy much more than hurt it. There is a choice, he continues: “retreat into old, closed-off economies or press forward, acknowledging the inequality that can come with globalization while committing ourselves to making the global economy work better for all people.”

Regardless of who takes office in the White House come January 2017, economic growth should not be held up or held back by congressional impasse or politicized protectionism. Jump-starting the global economy will require less reliance on federally enacted economic measures and more restraint from protectionist and nationalist tendencies instead. Only then can domestic and global economies stand the best chance of awakening from this prolonged slumber of stagnation. 

The outcome of Sunday’s vote in Colombia—where a slim majority of voters rejected a peace agreement with the FARC guerrillas—was definitely a stunner. No one saw it coming, not even the most enthusiastic opponent of the deal. But a closer inspection of the peace negotiations reveals that the writing was on the wall.

The main reason why nobody expected the NO campaign to win was the entirely one-sided coverage of the peace deal by the local media, something that was largely echoed by their international peers. For many years, the most important domestic outlets in Colombia have been under the government’s sway, downplaying the hardline adopted by the FARC during the negotiations and portraying the opponents of the deal as “far-right” or “enemies of peace.” There was little coverage of the real grievances that a significant number of Colombians had with the concessions given to the FARC and the low popularity of President Juan Manuel Santos.

On top of the biased media coverage, the government spent millions of dollars in publicity and in what Colombians commonly call “mermelada” (the outright use of public funds to get votes through pork and political patronage)—a practice that Santos is very fond of. Moreover, the YES campaign had the strong support of international actors, from the Cuban and the U.S. governments to the United Nations. Even Pope Francis promised to visit Colombia if the deal was backed by voters.

Despite all the odds, when faced with the biased question “Do you support the final accord to end the conflict and to construct a stable and lasting peace?” 50.24% of those who went to the polls said NO. Why?

Since negotiations began in Havana in 2012, poll after poll showed that even though a majority of Colombians wanted a successful peace process, they weren’t willing to grant the FARC significant concessions. You can’t blame them. For over 50 years the Marxist guerrilla terrorized the Colombian people, engaging in crimes against humanity, as well as hideous acts that not only targeted the government, but also innocent civilians: from massacres of peasants, car bombings, kidnappings and extortion, child recruitment, forceful abortions performed on female soldiers, to prolonged imprisonment and inhumane treatment of hostages, some of whom were held for over a decade.

During the four years of the negotiations, the FARC leadership showed little remorse for its crimes. When its Commander in Chief “Timochenko” formally “apologized” to the Colombian people during the signing ceremony of the peace deal, he said that his organization was sorry for all the pain it “may have caused” to the victims of the conflict. The half-apology didn’t go unnoticed by many Colombians.

Colombians were also suspicious of President Santos. A poll in March showed that his popularity stood at only 13%, the lowest point of any president in the history of Colombia. Many believed that Santos was mostly driven by his vanity and desire to win a Nobel Peace Prize. Thus, he was willing to compromise beyond what was palatable to many of his countrymen. The FARC seemed to have realized this. What was supposedly going to be a negotiation “of months, not years,” dragged on in Havana for almost 4 years. The FARC leadership played its hand well, knowing that the clock was ticking for a president whose only legacy depended on signing a deal.

Sensing the fine line he had to walk, Santos repeatedly said that in order to reach a successful agreement with the FARC, the Colombian people would have to swallow several bitter pills. These bitter pills were seldom reported by the foreign media, but many Colombians were very aware of them:

  • Immunity: As José Miguel Vivanco of Human Rights Watch put it, “With the agreement as it stands, ‘Timochenko’ and the guerrilla fighters under his command could avoid spending a single day in prison if they confess their war crimes. Instead, they would be subject to modest and short restrictions on certain rights while being required to carry out community service projects.” Vivanco described the deal as “a facade of justice that guarantees impunity for atrocities in Colombia.”
  • Political power: The deal allowed the FARC to become a political party. There is nothing wrong with that. Other peace agreements also allowed former insurgencies to become political actors. The problem is that the Havana deal went beyond that: it guaranteed the political party that would come up from the FARC 10 seats in Congress (5 in the House of Deputies, 5 in the Senate) for two constitutional terms of 4 years. It also created 16 temporary “Special Districts for Peace” for the House of Deputies in territories formerly controlled by the FARC that could only be contested by social movements. Many believed that this was a way to guarantee the FARC 16 extra seats in disguise.
  • Compensation to victims: The deal stipulated the compensation to the victims would be paid by Colombian taxpayers (the victims themselves), and not by the FARC—whose assets are estimated to be worth around $10.5 billion. Santos signaled that once the agreement was ratified, he would push for a tax increase to pay for it.
  • Generous support for FARC politics: As my colleague Ian Vásquez pointed out in a previous post, “The agreement ensures that the government will finance the political party of the FARC and the dissemination of its ideas. In addition, the state will pay for a ‘center for thought and political education’ of the FARC, a TV channel and 31 radio stations.” Rafael Nieto Loaiza, a former vice minister of Justice, said that the new party formed by the FARC “will receive an annual contribution proportionately higher than that of the other parties.”

The day that the peace deal was signed in Cartagena, The Economist’s Michael Reid tweeted that in 2001, Alfonso Cano, back then one of the FARC top commanders, told him that the guerrilla wouldn’t give up arms in exchange for “houses, cars, scholarships and seats in Congress.” Reid added, “This is what they’re doing now.” However, in 2001 the FARC was a mighty military force with approximately 16.000 troops. It controlled large swathes of the country and surrounded Colombia’s main cities, Bogotá included. By 2012, when the peace process began, the FARC had been decimated and demoralized. Most of its historic leadership, Cano included, had been killed. The latest official tally of the number of FARC troops stood at less than 5,700. Many Colombians believed that the costly concessions given to the FARC in terms of impunity, political power and economic support didn’t reflect the relative strength of the guerrilla when it decided to enter peace negotiations.

Instead of blaming those who voted NO as war-mongers, foreign analysts should make an effort to understand the reasons why a majority of Colombians rejected this peace deal. It’s not that they don’t want to live in a peaceful country. They do. But they also aspire to live in a nation with justice and rule of law. 

Freedom House simply categorizes Uganda as “not free.” Transparency International ranks it among the 30 worst countries for perceived public sector corruption. And the American Federation of Teachers—the second largest teachers union in the United States—is outraged a for-profit company is daring to provide low-cost education to Ugandan children against the wishes of the government.

From the AFT press release hailing a new study attacking Bridge International Academies (BIA) by an outfit the AFT helps bankroll:

The report…documents in distressing detail BIA’s disregard for legal and educational standards established by the Ugandan government….

Randi Weingarten, president of the American Federation of Teachers, an EI member organization, said: “This report serves as a warning about what happens when private education providers put profits above people. BIA’s shameful abuses, cookie-cutter curriculum and cost cutting make for distressing reading but sadly aren’t in the least bit surprising.”

That’s right: The AFT will apparently side with even one of the world’s worst governments if, it seems, doing so could hobble for-profit schooling.

But what about those horrible abuses Weingarten bemoans? If you read the report, you’ll get the sense that the most egregious is that BIA schools use a scripted curriculum delivered electronically, which is apparently excruciating torture for teachers and children. How they have any employees, and over 100,000 students, is a mystery.

The schools also don’t seem to follow rules and regulations set forth by Uganda’s education ministry, such as building and curriculum standards. But if you have ever read James Tooley’s revelatory writing on education in countries like Uganda, you’d understand why people who want to get education to poor children don’t comply with rules and regs: complying would make delivering affordable education at scale extremely difficult, and the regulations often exist to protect the public sector, including government inspectors who expect to get paid in both salaries and bribes.

At the very least, though, we know that the “cookie-cutter curriculum” is awful because the free public schools are using something very different and are clearly succeeding at better educating huge swaths of Ugandan children. Right?

If they are, you wouldn’t know it from this report. Unlike Tooley’s work on for-profit schooling among the world’s poorest people, this report offers no concrete comparisons between BIA and public schools except when it comes to teacher salaries. There public schools clearly win: They pay more, which may reveal why the AFT finds this report so powerful. But do they get better educational outcomes? That’s apparently irrelevant; only how BIA schools stack up against progressive schooling ideals, and the dictates of the Ugandan government, seem to matter.

This report provides basically nothing to seriously assess how Bridge International Academies is doing in Uganda. But it sure says a lot about the AFT.

Since Germany first accepted more than a million asylees into its country, the successes and failures of the decision were bound to reverberate around the world. Yet despite this openness at the borders, Germany remained stubbornly closed inwardly, delaying the integration of the people it chose to accept. Most importantly, it retained employment restrictions that prevent asylum seekers from obtaining the jobs they need to survive. Fortunately, America has a much better system with much greater success.

In 2015, Germany waited the longest of any country in Europe to restrict the flow of asylum seekers from the Middle East. Yet once they arrived, the asylees who immediately sought work in Europe’s largest economy were greeted by bureaucracy. The law initially forbade asylees from seeking work for 9 months after their arrival, but was reduced to 3 months in November 2014. Then, inexplicably, at the height of the inflows, the German government banned working if the asylee was forced to stay a reception center, which could be up to 6 months.

After the initial waiting period, asylees did not receive unrestricted employment authorization. Instead, they would have to find a “concrete” job offer—i.e. a firm must promise to hire them if the permit is granted—then apply for authorization. Even then, companies can only hire them during the first 15 months if the jobs are offered first to EU residents, and the federal labor department agrees that no one was willing to take. They also set asylee wages, which can price out low-skilled workers.

The hoops don’t end there. Asylees still have to get the approval of the immigration office at the municipal level. Under the law, it would take four years before they could compete equally with EU citizens.

On top of all these refugee-specific regulations, skilled workers are then tasked with proving that they can work in certain occupations. In order to obtain an occupational license, documentary proof of training—proof that’s often buried under bombed-out homes in Syria—is required. Some states in Germany allow asylees to demonstrate their skills in order to receive licensing, but others do not. “I am a dentist and could work, but what am I supposed to do? I am not allowed to work here!” one asylee told DW News.

Low-skilled immigrants haven’t avoided being targeted either. Germany introduced its first ever minimum wage in 2015—which disproportionately hits lower skilled migrants—and a study by the German government in August 2016 found that it had already cost 60,000 jobs.

The Cologne Institute for Economic Research in Germany produced a report in September 2015, calling for loosening the labor regulations, but it wasn’t until July 2016 that Germany passed a new law that suspended for three years the requirement that firms must offer jobs to EU residents first. Yet even so, the suspension will only apply in areas with low unemployment, and states and localities can still require discrimination against the asylee job seekers. They can also tell asylees where they must live—which could prevent them from following economic demand.

It is no surprise that this system has produced extremely high unemployment among the asylees in Germany—now almost a year after the bulk of the arrivals. Refugees generally in Germany show very slow economic integration, with less than half working after 5 years. Naturally, Syrians face many hurdles beyond bureaucracy in finding work, especially language and skill acquisition. But it’s clear that the restrictions play an important role in preventing employment.

“I’ve been waiting one year and three months for permission to work, everything is slow here. I was expecting it to go a little bit faster,” one Syrian engineer told the Financial Times, saying that his problem was “red tape, not language.” Robert Barr, co-founder of Jobs4Refugees, agreed with this assessment, telling the paper that the bureaucracy was “definitely too complicated,” and that “the sheer amount of paper work and the complexity of it is even difficult for Germans to understand.”

By comparison, the United States rapidly incorporates refugees into the labor market. U.S.-bound refugees have no restraints on employment and can compete equally with U.S. citizens, except that certain states can limit occupational licenses for noncitizens and refugees for 1 year, although they may have difficulty getting recognition of their credentials even after that. They also face a crop of new state-level minimum wage laws that can make low-skilled employment scarcer.

Figure: Employment Rates in United States and Germany for Refugees (Ages 16+) By Years Since Arrival   


Sources: Office of Refugee Resettlement, Directorate General for Internal Policies European Parliament

Despite these restrictions, after just one year, the majority of U.S. refugees were participating in the labor force, and after just three years, a majority had has jobs. As Figure 1 demonstrates, they significantly outperform refugees in Germany in this regard. The employment rate after 5 years was much higher for male refugees than refugee women in both countries, which makes the overall better U.S. performance all the more surprising, given that Germany’s asylees are overwhelmingly young men while the United States flow is evenly divided.

In the long-term, the U.S. model proves successful. During the 2009 to 2011 period, all refugees in the United States were more likely to be employed than the overall population, according to a 2015 study by the Migration Policy Institute. Two-thirds of all refugee men were employed compared to only 60 percent for all U.S. men. Refugee women had the same employment rates as all U.S. women.

U.S. policymakers cannot base their estimates of how refugee flows will impact the labor market on the situation in Germany. Labor market institutions in the United States are better equipped to handle an influx of new workers. While Germany is attempting to improve its laws to better integrate asylees, much work remains. The United States can continue to accept and integrate refugees with the knowledge that we have the experience and markets to handle the flow.

The U.S. Department of Agriculture (USDA) runs an array of rural subsidy programs, which are aside from the farm subsidy programs that it also runs. USDA’s rural programs are grouped within three agencies: the Rural Housing Service (RHS), the Rural Utilities Service (RUS), and the Rural Business-Cooperative Service (RBS). The agencies will spend $6.5 billion in 2016.

These subsidies are the focus of a new essay at

The USDA’s rural agencies have tentacles into a wide range of activities, as illustrated by the following projects funded in 2015:

  • $10 million to Exela Pharma Sciences in North Carolina.
  • $3.4 million for a sewer system in Geraldine, Alabama.
  • $8.5 million for a college expansion in Pocahontas, Arkansas.
  • $7,500 to an individual in Red Bluff, California, to fix his water well.
  • $200,000 to “one of the largest clam producers in Florida.”
  • $7.5 million to fix a dam in Idaho.
  • $1 million to an automotive shop and other businesses in Du Quoin, Illinois.
  • $63,000 to a biofuels company in Maine.
  • $200,000 for a farmers market in Michigan.
  • $651,000 for an arts center in Bozeman, Montana.
  • $373,000 to a paper company in Nevada.
  • $1.5 million to an apartment developer in Monticello, New York.
  • $2 million for a vet clinic in North Dakota.
  • $1.1 million for street improvements in Pittston, Pennsylvania.
  • $113,000 to fix up an old theatre in Rutland, Vermont.
  • $5.2 million for a fire station in Sweetwater County, Wyoming.

In the U.S. economy, these sorts of projects are usually funded by local governments and the private sector. So why should the USDA spend money on them? The assumption seems to be that the federal government has a magical source of cost-free funds. But all the money for federal aid programs ultimately comes from taxpayers who live in the 50 states. So the USDA’s aid programs are a zero-sum game for the nation as a whole.

Indeed, the programs are worse than zero-sum because taxpayers have to pay for the bureaucratic middlemen who run the programs. The USDA employs about 5,000 people to run its three rural agencies. The costs of wages, benefits, office space, travel, and supplies for these workers totaled $680 million in 2016. Thus about 10 percent of the $6.5 billion cost of USDA’s rural programs gets consumed by the federal bureaucracy.

Even if rural subsidy programs were administered efficiently, they represent an unfair redistribution of wealth. In many ways, rural Americans are better off than urban and suburban Americans. They enjoy cheaper housing, cleaner air, less congestion, and other advantages. So people who live in rural areas should not be a privileged class receiving special subsidies.

Rural subsidies should be ended, and the RHS, RUS, and RBS should be closed down.

Over at Cato’s Police Misconduct web site, we have selected the worst case for the month of September.  It was the Connecticut State Troopers who were caught on tape harassing a protester and fabricating charges against him.

According to news reports, Michael Picard was protesting near a DUI checkpoint.  He had his cell phone camera out and was recording the scene.  When a trooper noticed what he was doing, he angrily approached Picard and seized his phone saying it was illegal to record him.  This is when things got interesting.  Unbeknownst to the trooper, Picard’s cell phone was still recording as the trooper went back to his patrol car to confer with his colleagues.  The troopers were anxious to “hit” Picard with some kind of charge, but they became frustrated with their options.  Picard had a firearm, but a valid concealed carry permit.  Picard did record them with his cell phone, but that’s legal too.  What to do?  To “cover their ass,” they decide to fabricate a story that several citizens were complaining about Picard’s supposedly “disruptive actions,” but these “witnesses” did not want to stay on the scene, so the troopers just had to take action on their own.

The charges against Picard were quickly dismissed.  The ACLU has now filed a lawsuit on behalf of Picard.

The cell phone recording of the incident can be found here.  Because the phone is evidently sitting on the roof of the patrol car, the value is in what can be heard, not seen. Listen and decide for yourself.

You just never know what kind of government agents you may encounter.  Those who choose to film the police are especially vulnerable.  We must all remember to lawyer-up when necessary.


At the Mercatus / Cato CMFA conference a few weeks ago on “Monetary Rules for a Post-Crisis World,” David Laidler and David Glasner gave interesting and informative talks on the history (and history of economic thought) regarding the evolution of monetary rules during the first panel. Video of their talks, and that of co-panelist Mark Calabria, is available here. Ari Blask recaps the entire conference here.

I haven’t seen Glasner’s paper, but he has posted a summary of it on his blog. (All subsequent quotes are drawn from that source.) There he suggests that perhaps the earliest monetary rule, in the general sense of a binding pre-commitment for a money issuer, can be seen in the redemption obligations attached to banknotes. The obligation was contractual: A typical banknote pledged that the bank “will pay the bearer on demand” in specie. (Demand deposit contracts, which preceded banknotes historically, made the same pledge.) He rightly remarks that “convertibility was not originally undertaken as a policy rule; it was undertaken simply as a business expedient” without which the public would not have accepted demand deposits or banknotes.

I wouldn’t characterize the contract in quite the way Glasner does, however, as a “monetary rule to govern the operation of a monetary system.” In a system with many banks of issue, the redemption contract on any one bank’s notes was a commitment from that bank to the holders of those notes only, without anyone intending it as a device to govern the operation of the entire system. The commitment that governs a single bank ipso facto governs an entire monetary system only when that single bank is a central bank, the only bank allowed to issue currency and the repository of the gold reserves of ordinary commercial banks. Under a gold standard with competitive plural note-issuers (a free banking system) holding their own reserves, by contrast, the operation of the monetary system is governed by impersonal market forces rather than by any single agent. This is an important distinction between the properties of a gold standard with free banking and the properties of a gold standard managed by a central bank. The distinction is especially important when it comes to judging whether historical monetary crises and depressions can be accurately described as instances where “the gold standard failed” or instead where “central bank management of the monetary system failed.”

As the author of Free Banking and Monetary Reform, Glasner of course knows the distinction well. So I am not here telling him anything he doesn’t know. I am only alerting readers to keep the distinction in mind when they hear or read “the gold standard” being blamed for financial instability. I wish that Glasner had made it more explicit that he is talking about a system run by the Bank of England, not the more automatic type of gold standard with free banking.

Glasner highlights the British Parliament’s legislative decision “to restore the convertibility of banknotes issued by the Bank of England into a fixed weight of gold” after a decades-long suspension that began during the Napoleonic wars. He comments:

However, the widely held expectations that the restoration of convertibility of banknotes issued by the Bank of England into gold would produce a stable monetary regime and a stable economy were quickly disappointed, financial crises and depressions occurring in 1825 and again in 1836.

Left unexplained is why the expectations were disappointed, why the monetary regime remained unstable. A reader who hasn’t read Glasner’s other blog entries on the gold standard might think that he is blaming the gold standard as such.

My own view is that because the Bank of England’s monopoly was not broken up, even with convertibility acting as a long-run constraint, the Bank had the power to create cyclical monetary instability and occasionally did so by (unintentionally) over-issuing and then having to contract suddenly as gold flowed out of its vault — as happened in 1825 and again in 1836. Because the London note-issue was not decentralized, the Bank of England did not experience prompt loss of reserves to rival banks (adverse clearings) as soon as it over-issued. Regulation via the price-specie-flow mechanism (external drain) allowed over-issue to persist longer and grow larger. Correction came only with a delay, and came more harshly than continuous intra-London correction through adverse clearings would have. Bank of England mistakes boggled the entire financial system. It was central bank errors and not the gold standard that disrupted monetary stability after 1821.

This hypothesis about the source of England’s cyclical instability is far from original with me. It was offered during the 1821-1850 period by a number of writers. Some, like Robert Torrens, were members of the Currency School and offered the Currency Principle as a remedy. Others, like James William Gilbart, are better classified as members of the Free Banking School because they argued that competition and adverse clearings would effectively constrain the Bank of England once rival note issuers were allowed in London. Although they offered different remedies, these writers shared the judgment that the Bank of England had over-issued, stimulating an unsustainable boom, then was eventually forced by gold reserve losses to reverse course, instituting a credit crunch. Because Glasner elides the distinction between free banking and central banking in his talk and blog post, he naturally omits the third side in the Currency School-Banking School-Free Banking School debate.

Later in his blog post, Glasner fairly summarizes how a gold standard works when a central bank does not subvert or over-ride its automatic operation:

Given the convertibility commitment, the actual quantity of the monetary instrument that is issued is whatever quantity the public wishes to hold.

But he then immediately remarks:

That, at any rate, was the theory of the gold standard. There were — and are – at least two basic problems with that theory. First, making the value of money equal to the value of gold does not imply that the value of money will be stable unless the value of gold is stable, and there is no necessary reason why the value of gold should be stable. Second, the behavior of a banking system may be such that the banking system will itself destabilize the value of gold, e.g., in periods of distress when the public loses confidence in the solvency of banks and banks simultaneously increase their demands for gold. The resulting increase in the monetary demand for gold drives up the value of gold, triggering a vicious cycle in which the attempt by each to increase his own liquidity impairs the solvency of all.

These two purported “basic problems” prompt me to make two sets of comments:

  1. While it is true that the purchasing power of gold was not perfectly stable under the classical gold standard, perfection is not the relevant benchmark. The purchasing power of money was more stable under the classical gold standard than it has been under fiat money standards since the Second World War. Average inflation rates were closer to zero, and the price level was more predictable at medium to long horizons. Whatever Glasner may have meant by “necessary reason,” there certainly is a theoretical reason for this performance: the economics of gold mining make the purchasing power of gold (ppg) mean-reverting in the face of monetary demand and supply shocks. An unusually high ppg encourages additional gold mining, until the ppg declines to the normal long-run value determined by the flow supply and demand for gold. An unusually low ppg discourages mining, until the normal long-run ppg is restored. It is true that permanent changes in the gold mining cost conditions can have a permanent impact on the long-run level of the ppg, but empirically such shocks were smaller than the money supply variations that central banks have produced.
  2. The behavior of the banking system is indeed critically important for short-run stability. Instability wasn’t a problem in all countries, so we need to ask why some banking systems were unstable or panic-prone, while others were stable. The US banking system was panic prone in the late 19th century while the Canadian system was not. The English system was panic-prone while the Scottish system was not. The behavioral differences were not random or mere facts of nature, but grew directly from differences in the legal restrictions constraining the banks. The Canadian and Scottish systems, unlike the US and English systems, allowed their banks to adequately diversify, and to respond to peak currency demands, thus allowed banks to be more solvent and more liquid, and thus avoided loss of confidence in the banks. The problem in the US and England was not the gold standard, or a flaw in “the theory of the gold standard,” but ill-conceived legal restrictions that weakened the banking systems.

[Cross-posted from]

The distinguished Stanford University economist Robert Hall, co-architect of the famed Hall-Rabushka flat tax, once described himself to me as a [Bill] Clinton Democrat. Bob Hall wrote one of the most serious studies trying to figure out why the U.S. economy has remained so weak for so long. He concluded that much of the explanation lies in the ways in which recent marginal tax and transfer incentives discourage work.

In an analysis similar to that of Casey Mulligan of the University of Chicago, Hall attributes much of the startling drop in labor force participation to the expansion of federal transfer payments. Disability benefits and food stamps, in particular, are quickly phased-out if nonworkers take a job, or part-time workers switch to full-time work, or single-earner families become two-earner families. In other words, higher tax rates on work and more generous subsidies to leisure leave the economy with fewer people seeking work and therefore less production, lower tax revenue and greater federal spending on transfers from those who earn income to those who instead rely on government.

As Hall put it,

Labor-force participation fell substantially after the crisis, contributing 2.5 percentage points to the shortfall in output. The decline showed no sign of reverting as of 2013. Part is demographic and will stabilize, and part reflects low job-finding rates, which should return to normal slowly. But an important part may be related to the large growth in beneficiaries of disability and food-stamp programs. Bulges in their enrollments appear to be highly persistent. Both programs place high taxes on earnings [emphasis added] and so discourage labor-force participation among beneficiaries. The bulge in program dependence …  may impede output and employment growth for some years into the future.

What does it take to make a state-level Republican policymaker work to grow the power of the Obama Administration? Not much! Washington Secretary of State Kim Wyman is a case in point.

In the wake of a shooting at a Macy’s in Mount Vernon, Washington, late last month, Secretary Wyman called for Washington State to comply with the national ID program run by the U.S. Department of Homeland Security under the REAL ID Act.

Secretary Wyman’s rationale for joining the national ID is that state authorities (including, for some reason, election officials) were unable to immediately identify the citizenship status of the shooter (who turned out to be a naturalized American citizen).

Washington State has hitherto declined to embrace REAL ID, and has been one of the states most actively pushing back against the federal program. Secretary Wyman argues that adopting REAL ID would allow the state to more quickly access federal databases and records and help prevent voter fraud in Washington State elections.

Whatever a state’s need for securing their vote, that’s no reason to join the national ID system. And REAL ID is a bloated, costly, and opaque federal program. Compliance would require Washington State to share its drivers’ personal data and copies of their digitally scanned documents with departments of motor vehicles across the country through a nationwide data sharing system. This database sharing is a two way street: Secretary Wyman might be able to access other jurisdiction’s databases, but any bad actor in a DMV from California to Connecticut could access Washington State’s.

In the wake of recent DMV hacking scandals in Louisiana and elsewhere, this concern is not overblown. Because of the hacking and identity fraud risks, and the lack of any real national security benefit, adoption of REAL ID would only make Washingtonians less safe.

Reuters dropped a bombshell story Tuesday afternoon, reporting that in 2015 Yahoo agreed to scan all their users’ incoming e-mails on behalf of a U.S. intelligence agency, hunting for a particular “character string” and turning over messages where it found a match to the government. Yet the vagueness of the story—which appears to be based on sources with limited access to the details of the surveillance—leaves a maddening number of unanswered questions.  Yahoo did not greatly help matters with a meticulously worded non-denial, calling the story “misleading” without calling it substantively false, and asserting that the “scanning described in the article does not exist on our systems.” (Obvious follow-up questions: Did it exist in 2015? Does it now exist on some other systems?)  Then, on Wednesday, Charlie Savage and Nicole Perlroth of The New York Times published a follow-up article fleshing out some of the details: The bulk scan was conducted pursuant to an order from the secretive Foreign Intelligence Surveillance Court, and hunted for a “digital signature” associated with a foreign state-sponsored terror group.

What’s troubling here is that it suggests Yahoo was asked to scan the contents of all messages for as a string of characters indicating that the message was produced using a particular software tool—such as, for instance, the Mujahideen Secrets encryption software used by Al Qaeda. There is, of course, nothing inherently wrong with targeting tools associated with known adversaries, but this does represent a dramatic inversion of the traditional way surveillance is conducted.  Normally, we expect that the government will identify a “communications facility” being used by a particular target, then proceed to scrutinizing their communications.  Here, the government has scrutinized an entire stream of communications in bulk, searching for something in the contents that would allow them to identify the target! 

It is not hard to see why intelligence agencies would find such scans useful, but it would be a serious mistake to normalize the bulk scanning of communications content—an indiscriminate “search” of people not known to be foreign intelligence targets—even if one is not overly dismayed by a particular application of that approach.  Surveillance architectures create their own institutional momentum, and a software tool designed to scan for digital fingerprints can just as easily scan for words or phrases in messages written by humans, or for cryptographic tools used by many innocent people seeking to protect their privacy as well as a few bad actors—a possibility that becomes far more tempting once the necessary technical infrastructure is in place.

That the government would employ this approach, however, should not exactly come as a great surprise. The National Security Agency’s targeting procedures for §702 of the FISA Amendments Act of 2008, disclosed three years ago by Edward Snowden, seem to contemplate keying surveillance to such signatures. One of the criteria mentioned for verifying the “foreignness” of a surveillance target is: 

Information indicates that  Internet Protocol ranges  and/or specific  electronic  identifiers or signatures  (e.g., specific types  of cryptology  or steganography)  are  used  almost  exclusively by individuals  associated with  a foreign power  or foreign territory,  or are extensively  used  by individuals  associated  with a foreign power  or foreign territory.

Note that “exclusively”—which may sound reassuring—is quickly followed by “extensively,” which would no doubt encompass a great deal of privacy protecting technology used by many law-abiding Americans as well as foreign criminals or terrorists. 

It also seems at least plausible that searches of this sort have been carried out domestically for far longer than a year.  Under the FISA Amendments Act’s §702, the government can designate foreign targets for intelligence collection—including electronic surveillance carried out domestically—under broad targeting procedures approved by the FISA Court, without any specific judicial approval of individual targets.   At last count, there were 94,368 such “targets” being monitored under the a single blanket authorization. As we know thanks to the Snowden disclosures, one way they conduct §702 surveillance is known as PRISM collection, and carried out with the cooperation of communications providers like Yahoo or Google.  The other main mechanism is known as “Upstream” collection and involves scanning of traffic on the Internet backbone—including not just message headers, but also the contents of messages—for “selectors” associated with approved targets. This has sometimes been dubbed “about collection”—because it means that the NSA would intercept not only messages to or from the e-mail address used as a selector, but also messages mentioning or “about” that selector.  It is at least possible that the government has been routinely using digital fingerprints—the text that says, in effect, “the following message is encrypted with a certain type of software”—along with more conventional selectors like e-mail or IP addresses to scan Internet traffic in bulk.

Why, then, would the government ask Yahoo to start doing such scannig for them in 2015?  One possibility is that ever since the Snowden revelations began, more and more companies have been encrypting their traffic by default, using a protocol known as Transport Layer Security, or TLS (the e-mail specific version of which is called STARTTLS).  The wider adoption of such encryption means data that would have been visible to an NSA sniffer sitting on the Internet backbone is now scrambled and unintelligible, making Upstream increasingly useless.  Even for NSA, breaking the encryption on traffic wholesale is likely infeasible—but aside from any message content separately encrypted by individual users, that traffic would be readable once it had arrived at Yahoo and been decrypted with the company’s private keys. Yahoo began making such encryption the default in 2014.

One obvious question is whether Yahoo is the only company to be served with such an order, or whether it reflects a more widespread practice.  Sam Biddle of The Intercept queried some major providers and got relatively straightforward denials from Google, Facebook, Twitter, and Apple—though it remains possible that this is a byproduct of the Reuters story having gotten some details of the story wrong. Microsoft said they had “never engaged in the secret scanning of e-mail traffic like what has been reported” but “would not comment on the record as to whether the company has ever received such a request,” which could reflect simple legal caution—intelligence surveillance requests are invariably covered by broad gag orders, and it gets awkward quickly if you deny getting some types but “no comment” others—or could be an indication that the company received a similar demand, but successfully fought it. 

A second, perhaps less obvious question, is why the scanning would be limited to incoming messages (rather than messages either sent or received by Yahoo users) and only to realtime scanning (rather than encompassing older messages stored in the company’s servers).  One possibility has to do with affecting the “facility” at which the surveillance was “directed.”  In NSA jargon, there is the “target” of surveillance (the person or entity about or from whom information is sought); the “selector” (the specific term used to filter out the information to be collected); and the “facility” at which surveillance is directed (the physical or virtual communications channel from which the information is obtained).  In the simplest type of case, these could all be the same:  There is a target known only as the user of a particular e-mail address, which serves as both the “selector” and—when communications are obtained from the provider who hosts that account—the “facility” at which surveillance is directed.  But they might also all be different.  An individual target might have several associated “selectors” (different e-mail accounts or other digital identifiers), and as the case of Upstream “about collection” shows, the “facility” might be an Internet routing switch rather than a particular repository of stored messages associated with that account.  My (possibly incomplete) understanding from discussions with intelligence officials is that a scan of the content of message sitting in a particular user’s inbox would be considered surveillance “directed at the facility” of the individual user’s account, even if the scan was based on some different selector.  Such a scan would likely require that the person whose inbox it was be considered a “target.”  Conceivably, however, intelligence community lawyers have decided the situation is different if the scans are conducted before messages are routed to specific inboxes—at which stage they’re treated analogously to Upstream traffic.  Before arriving in the recipient’s inbox, in other words, there might be no “particular, known U.S. person” who could be considered a “target” of the scan, triggering a laxer set of rules constraining searches.     

Whatever the reality, the government should now release an appropriately redacted version of the FISA Court opinion authorizing this bulk e-mail scanning—which appears to have come just months before the passage of the USA Freedom Act, under which they would be obligated to prepare an unclassified legal opinion for public release.  If the government is going to be compelling companies to scan everyone’s communications in its hunt for terrorists, the public is entitled to understand the legal framework within which it plans to do so—and to modify or reject that framework if it fails to meet Fourth Amendment standards.

Budget experts worried about the growth of federal spending and deficits have proposed various statutory and constitutional restraints to get the budget under control. I favor a simple cap on the percentage growth in annual total outlays.

Many state governments have spending, deficit, and debt restraints on the books, both statutory and constitutional. The restraints do help to tame state fiscal policy, but there is lots of cheating by the politicians.

Researching Cato’s new Governors Report Card, I came across an illuminating story about Connecticut’s spending restraint mechanism. I quote here at length:

The 1991 General Assembly tried to temper outrage over enactment of the state income tax by drafting a statutory spending cap. Voters would add the cap requirement to the state Constitution one year later by adopting the 28th Amendment.

The cap is supposed to keep spending increases in line with the annual growth in personal income or inflation, whichever is larger. For most of the cap’s history, the legislature has relied on personal income.

The cap system uses an average of personal income growth over the previous five years. That means that the sluggish growth years immediately following the last recession — which ended in 2010 — will continue to limit spending growth under the current cap system.

That makes sense to me—citizen income is stagnant in slow-growth Connecticut, so government growth should be limited so that it doesn’t squeeze people more when they can least afford it.

But that’s not how Connecticut politicians see it:

Both political parties have looked for ways around the cap over the past decade. The governor and legislature can exceed the cap legally if they agree and take special steps.

That happened in 2005 when Gov. M. Jodi Rell, a Republican, signed a declaration of fiscal exigency — declaring a budget emergency. More than 60 percent of the Democrat-controlled House and Senate voted to approve the plan.

Two years later, Rell and lawmakers used the same approach, this time approving a biennial budget that shattered the cap by a record-setting $690 million in the first year.

Since in 2011, Malloy has refused to declare a budget emergency. But that doesn’t mean he hasn’t bent to the cap’s weight.

The governor has proposed or approved moving spending outside of the cap – in large quantities …

The Democrat-controlled Appropriations Committee stunned the Capitol in April 2015 when it proposed a budget that moved billions of dollars in spending for pensions and other retirement benefit costs out from under the cap — for the first time since the spending control was established in 1991.

Both Rell and Malloy have been awarded “F” grades from Cato for their fiscal irresponsibility. It’s a shame that politicians of both parties in Connecticut aren’t abiding by a sensible constitutional restraint passed with the support of 80 percent of voters

Earlier this afternoon in the Rose Garden, President Obama celebrated the ratification of the Paris Agreement. I had this to say in response:

President Obama was a bit less than candid in his speech about the adoption of the U.N.’s Paris Agreement. Using realistic assumptions about role of carbon dioxide in climate change, the Agreement will prevent 0.1 to 0.2°C of global warming by the year 2100, not the inflated figure the U.N. gets by assuming all warming since the Industrial Revolution is caused by human emissions of carbon dioxide. Few, if any, climate scientists would defend that. It also assumes that emissions will—without the Paris Agreement—increase much faster than the average increase used in climate simulations. In reality, the UN’s own Climate Panel states only that carbon dioxide is causing more than 50% of the warming observed since 1950, not 1800. Further, the switch from coal to natural gas for electrical generation has already invalidated the UN’s assumptions about the growth of atmospheric carbon dioxide.

He is also a bit optimistic about China, which has said it will stop increasing carbon dioxide emissions “around” 2030. This is exactly the time that researchers in Obama’s own Department of Energy said, in 2011, that their emissions would level off due to their maturing economy, and without any explicit policy to reduce greenhouse gas emissions, best known as “business as usual.”

In this Norwegian documentary, former Conservative Party MP and Norway’s current Minister of Education and Research Torbjørn (“Thor Bear”) Røe Isaksen and I debate which provides a better guarantee of access to health care – government or a market system?

Washingtonians may recognize the locale: Bob & Edith’s Diner in Arlington, Virginia. 

A rough translation/transcript of the documentary is available here.

A law-abiding resident has few options to protect herself, if she is luckless enough to live in the Nation’s Capital. This truth became abundantly clear this weekend, when a neighborhood drunk attempted to break into my apartment way past either of our bedtimes. Once the situation resolved, I became hell-bent on determining how someone in my circumstances should respond in case next time they fared less agreeably.

A cursory web search of DC urban policy was less-than-encouraging: in the Nation’s Capital, urban policy so markedly favors the assailant that the victim’s best tool in the event of an emergency seems to be something like practicing jujitsu moves in the corner while she runs the clock out.

Conventionally speaking, there are two options when you are assaulted; lethal or nonlethal resistance. Guns fall into the former category, but leaving the matter of D.C.’s gun laws aside – as bewildering as they are – the perhaps more asinine urban policies are those surrounding non-lethal deterrents.

Non-lethal deterrents include 1) self defense sprays (mace or pepper spray) and 2) tasers. If you’re a woman, don’t own a gun, and would like to protect yourself, your best option is probably a good self-defense spray, followed by a taser or knife, except that in D.C. all of these options are either sometimes or always illegal.

For self-defense sprays, this is because certain sprays do not meet the requirements the City Council has set forth, requirements like containing approved chemicals from a list, being labeled with “clearly written instructions for use, and dated with [their] anticipated useful life.” (Apparently, in a life-or-death situation you should be thinking about whether you’ve labeled your itty bitty mace keychain’s expiration date properly.)

City council members are also rarefied luddites, insisting that your self defense spray use an aerosol-propelled mechanism, rather than the more effective, recent innovations that use a incendiary charge to direct the spray, like the Kimber Pepperblaster.*

This requirement is especially obnoxious, because aerosol-propelled self-defense sprays are less precise than self defense sprays with newer mechanisms. This means they must be used within close range, and that there is considerable risk that the spray blows back in your face, so that you can’t easily flee.

Adding insult to injury, if you still decide to bite the bullet – so to speak – and buy a strain of compliant self defense spray in DC, they are only sold in a limited number of stores, and you’ll be required to register your pathetic “weapon” before you check out.

Oh well, at least you can substitute a taser (which is legal in 45 states) if you get into a pinch? Not so fast. Just possessing a taser in DC, not using it, is a misdemeanor punishable by one to five years of jail time and a $1,000 - $5,000 fine. And don’t you dare think about arming your teenage daughter with a taser to protect her on her sketchy walk home from school; distributing a taser to someone under the age of 18 will land you ten years in jail and a $25,000 fine.

This is in spite of the fact that earlier this spring the Supreme Court found bans on tasers unconstitutional, and ruled that the Second Amendment  “does not mean … that only weapons popular in 1789 are covered…”**  

Still, at least you have one decent option to defend yourself, right – a good, old fashioned knife? Unfortunately, no: knives with blades longer than three inches, razorblades, switchblades, and daggers are illegal, too.

That doesn’t leave you with much to work with. Tragically, in this, Weapon Control Utopia, it seems our enlightened legislators favor a “come and get it” approach when it comes to law-abiding resident’s life and property. It shouldn’t be a surprise; those that sit on the thirteen-member City Council likely hold all sorts of advantages, including those that provide for basic security. Instead, if you’re a regular young woman or just a law-abiding citizen in DC, it’s probably time to get practicing those air punches. 

* Verified with DC’s Metropolitan Police Department, 10/03/16.

** There are signs this rule may change in the wake of a recent DC lawsuit, but in the meantime, DC’s Metropolitan Police Department confirmed that tasers are illegal, 10/05/16.

In a society such as ours … is appears crazy at first to want revolution.  For we have whatever we want.  But the aim here is to transform the will itself so that people no longer want what they now want… .The question with which we had to deal … amounts to the question of whether … in order to set free these needs, a dictatorship appears necessary…

–Herbert Marcuse, “The End of Utopia” (1967)

All ‘favourable’ Utopias seem to be alike in postulating perfection while being unable to suggest happiness.  . .  The inhabitants of various [Utopias] are chiefly concerned with avoiding fuss. They live uneventful, subdued, ‘reasonable’ lives, free not only from quarrels, disorder or insecurity of any kind, but also from passion … .  Nearly all creators of Utopia have resembled the man who has toothache, and therefore thinks happiness consists in not having toothache. They wanted to produce a perfect society by an endless continuation of something that had only been valuable because it was temporary. The wiser course would be to say that there are certain lines along which humanity must move, the grand strategy is mapped out, but detailed prophecy is not our business. Whoever tries to imagine perfection simply reveals his own emptiness.

–George Orwell, “Why Socialists Don’t Believe in Fun” (1943)

If another group tie takes the place of the religious one – and the socialistic tie seems to be succeeding in doing so – then there will be the same intolerance towards outsiders as in the age of the Wars of Religion.

–Sigmund Freud, “Group Psychology and the Analysis of the Ego” (1921).

The actual distribution of income or wealth has often been compared with a hypothetical ideal (Utopia) rather than actual experience in any country at any time. 

Many Westerners once believed incomes were nearly equal in the former Soviet Union, for example, but we now know that substantial privileges did exist for a select few – based on political power rather than economic contribution.[i] Even aside from bribery and corruption, special access to health care, education, housing and special shops was often granted to the Communist Party hierarchy and the bureaucratic elite.  Urban people in general were subsidized at the expense of rural areas.

By the late seventies, only a handful of Western leftists continued  to defend such dictatorships as Stalin’s Soviet Union, Mao’s China, Castro’s Cuba, or North Korea’s Kim Jong-il/Kim Jong-un feudal dynasty.  

In recent years, the left’s previous romanticism of communism has sometimes been briefly salavaged by relabeling similar authoritarian regimes as “socialist” (Chavez in Venezuela), which sounds nicer but isn’t. Others have switched to romanticizing some golden age of the past.  In the U.S., for example, the Golden Age of greater equality was said to have occurred between 1930 and 1973. Yet the realtively egalitarian (“fair”?) suffering of 1930-39 is difficult to romaticize, for obvious reasons, as is the post-1973 stagflationary collapse of Nixon’s authoritatian price controls.

Vague allusions to social justice are often employed to suggest that a larger fraction of the economy’s benefits (food, housing, health care, etc.) could and should be distributed by government rather than by markets.  In theory, we could turn over all of our income to democratically elected officials and let them decide who gets what. But distribution on the basis of political criteria is not necessarily fairer than distribution on the basis of economic criteria.  Political markets also tend toward one-size-fits-all solutions, with less variety and innovation than in economic markets.

Those currrently expecting politicians to make various goods or services “affordable” or “free” are really just asking government officials to force someone else to pay.  But artificially low prices (e.g., for colleges or physicians) inflate demand and discourage supply, requiring some bureaucrat to use nonprice rationing such as waiting lists, lotteries or preferential treatment for those with the most political clout.

The only alternative to a free market is a politically rigged market, and that invariably turns out to be neither fair nor pleasant. 

The only way to ban markets is to beat them down with force. And since markets are abstractions, the force is used against people. So the alternative to a market-oriented society in which everyone is required to respect everyone else’s rights is a society in which those in power use force on whomever they can get away with using it on.”

–David R. Henderson, The Concise Encyclopedia of Economics (1997)

[i] David R. Henderson, Robert M. McNab & Tamás Rózsás, “The Hidden Inequality in Socialism,” The Independent Review (Winter 2005)

Most state governments are in an expansionary phase, as revenues are growing at a steady clip. Some governors are using the growing revenues to expand spending programs, while others are pursuing tax cuts and tax reforms.

That is the backdrop to this year’s 13th biennial fiscal report card on the governors, which Cato released today. It uses statistical data to grade the governors on their taxing and spending records since 2014—governors who have cut taxes and spending the most receive the highest grades, while those who have increased taxes and spending the most receive the lowest grades.

Five governors were awarded an “A”: Paul LePage of Maine, Pat McCrory of North Carolina, Rick Scott of Florida, Doug Ducey of Arizona, and Mike Pence of Indiana.

Ten governors were awarded an “F”: Robert Bentley of Alabama, Peter Shumlin of Vermont, Jerry Brown of California, David Ige of Hawaii, Dan Malloy of Connecticut, Dennis Daugaard of South Dakota, Brian Sandoval of Nevada, Kate Brown of Oregon, Jay Inslee of Washington, and Tom Wolf of Pennsylvania.

The report describes the record of each governor and discusses the outlook for state budgets. Medicaid costs are rising, and federal aid for this huge health program will likely be reduced in coming years. At the same time, many states have high levels of unfunded liabilities in their pension and retiree health plans.

Those factors will create pressure for states to raise taxes. Yet global economic competition demands that states improve their investment climates by cutting tax rates, particularly on businesses, entrepreneurs, and skilled workers.

News reports about the states often focus on policymaker efforts to balance their budgets. Balanced budgets are important, but policymakers should also be running their governments in a lean and frugal manner, reforming tax codes to spur growth, and generally expanding fiscal freedom for state residents.

Cato’s new report helps to sort out the governors who are moving in that direction from those who are not. An oped describing the main results is here.

In the media, the issue of trade is sometimes presented as two sides debating whether free trade is good for the economy, with no way to determine the answer. For example, when Donald Trump suggests imposing tariffs on Carrier or Ford or Nabisco if they produce in Mexico and sell in the U.S., commentators may treat it as a serious suggestion that should be considered.  When you ask economists, though, you get a pretty clear answer: This is a bad idea. Recently, a group of leading economists was presented with this proposition:

Adding new or higher import duties on products such as air conditioners, cars, and cookies — to encourage producers to make them in the US — would be a good idea.

The 39 economists who answered the question all said – not surprisingly – that they disagreed or strongly disagreed with this proposition.

What was particularly interesting was a comment offered by one of the economists. David Autor of MIT said this: “Taxing consumers to subsidize domestic production is bad economics and a violation of the WTO agreement.”  I’m interested in his views because his paper that has been cited by some people to claim that trade with China is different, and the old rules do not apply.  As my colleague Dan Ikenson explains:

Unfortunately, a recent academic paper called “The China Shock,” by economists David Autor, David Dorn, and Gordon Hanson, which finds evidence of prolonged labor market adjustments in regions where local industries faced direct competition from imports from China last decade, is being portrayed by some in the media as a refutation of free trade. These interpretations have found their way into the political debate and are serving to obscure the proper meaning of the paper’s findings: Labor market frictions have been too severe for some workers with certain skills in certain industries in certain traditionally high-tax, pro-union states to find new jobs. The collective residue of decades of piling bad policies on top of bad policies has gummed up the works.

When you read Autor saying that these tariffs are bad economics, it becomes even more clear that the implications of his paper are being distorted. The laws of economics have not changed, and protectionist tariffs are still bad.  Perhaps what we need to get this point across to the media is to have all 39 of the economists on CNN at once to “debate” the issue. The host can ask each of them about Trump’s tariff proposals, and we can settle the issue once and for all.

People react to public policies by changing their behavior.  Foreigners committed to immigrating to the United States are confronted with two options – they can come legally or they can come illegally.  When visas are legally available, cheap, and plentiful they choose to come legally.  When visas are difficult to get, expensive, and few in number then many immigrants decide to come illegally.*  Employers face a similar dilemma when choosing to hire workers.

The inflow of illegal immigrants has slowed dramatically in recent years.  The poor American economy, economic growth south of the border, Mexican demographics, and heightened border security all partially explain that decline.  Another explanation is that the number of guest worker visa has increased, convincing some would-be illegal immigrants to instead enter and work legally.    

The annual number of guest worker visas issued on the E, H, L, O, P, and TN visas increased by 157 percent from 1997 to 2015.  The annual number of green cards for new arrivals also increased by 25 percent during the same time period and, although the majority are for lower-skilled family members, they also work in many of the occupations that would otherwise be filled by illegal immigrants.  The gross number of illegal immigrants making it into the United States each year also shrank during that time.

The number of guest workers, gross illegal immigrant entries, and green cards issued to new arrivals is surprisingly flat from 1997 to 2015, ranging from a high of 1.66 million in 1999 to a low of 1.17 million in 2009 (Figure 1).  The average during the entire period is 1.41 million entries a year.  The number of entries is remarkably constant even when considering the Great Recession and slow recovery, indicating that the number of entries doesn’t change nearly as much as the method of entry.  New green cards and guest worker visas are being used by many immigrants who would otherwise have entered illegally. 

Figure 1

Guest Worker Visas Issued, Green Cards for New Arrivals, and Gross Illegal Immigrant Inflows


Sources: State Department, Department of Homeland Security, Bureau of Labor Statistics, and Pew.

Mexicans are less likely to illegally immigrate than in previous years.  In 1997, Mexicans accounted for 97 percent of all border patrol apprehensions.  According to Customs and Border Protection (CBP), Mexicans accounted for little more than half of all apprehensions in 2015 and were less than half for the first time in 2014.  The number of guest worker visas issued to Mexicans increased 5.4 fold from 1997 to 2015 – from a mere 33,759 to 182,698 (Figure 2).  By contrast, the total number of guest worker visas issued to those of every nationally annually doubled over that time.  In 1997, Mexicans were issued 15.7 percent of all the guest worker visas.  In 2015, they were issued 33.4 percent.  The guest worker programs expanded and Mexicanized, funneling would-be illegal immigrants into the legal market – helping to explain the particularly sharp drop in Mexican illegal immigration. 

Figure 2

Guest Work Visas Issued to Mexicans and Non-Mexicans

Source: State Department.

If increased border security was really the source of the decline in gross Mexican illegal immigrant entries then illegal immigration from other countries south of the border should also decline.  After all, a new border patrol agent deters Central American just as well as he deters Mexicans.  However, Central Americans are the new growing source of illegal immigrant entries according to the apprehensions data.  The number of guest worker visas issued to Central Americans has remained steady since 2005 while the number of apprehensions by border patrol has shot up (Figure 3). 

Figure 3

Guest Worker Visas Issued to Salvadorans, Guatemalans, and Hondurans Compared to Other Than Mexican Apprehensions


Source: State Department and Customs and Border Protection.

Central Americans also have new reasons to flee such as violence and the second stage of immigration – children and other family members reuniting with their parents who emigrated first.  The lack of guest worker visa programs for Central Americans means that they will continue to come illegally.  Policy makers could instead increase the legal options for Central Americans to legally migrate to the United States for work and thus eradicate the incentive to come illegally.  Such a policy contributed to the decline of Mexican illegal immigration and could accomplish the same goal a lot more cheaply, humanely, and safely than building a wall.   

The government’s ability to control immigration is limited because Americans and the immigrants themselves react to incentives.  Creating a legal pathway for lower-skilled workers to come and work greatly reduces unlawful immigration.  In the 1950s, each new Bracero guest worker visa issued replaced about 3.4 illegal workers.  To reduce unlawful immigration to zero would require many fewer visas than there are unlawful immigrants.      

*Of course, the cost of circumventing border security can absorb much or the entirety of the benefits.  Acquiring a tourist visa with the intent of overstaying requires fooling a Foreign Service Officer.  Traveling to Mexico and then crossing the border illegally isn’t a picnic either.  Human smugglers charge high prices and there’s no guarantee that they’ll succeed.  The number of foreigners who would come here illegally in the absence of border security is vastly greater than those who try today, which means border security is more effective than most people realize.

After the New York Times published the 1995 tax returns of Donald Trump, Callum Borchers at the Washington Post and others have said it might be illegal. Trump’s lawyer claimed that publishing the returns was illegal without Trump’s consent, and, being Trump’s lawyer, he of course threatened “prompt initiation of appropriate legal action.”   Adding to the confusion, during a panel discussion at Harvard Law School in mid-September, Bob Woodward, associate editor of the Washington Post, and Dean Baquet, executive editor of the New York Times, presciently discussed whether they would publish Trump’s tax returns if they got ahold of them. “You know what your lawyers would tell you,” Woodward said, ”if you publish them, you go to jail.” Baquet said he would “seriously fight to publish [Trump’s] tax returns.”   For federal tax returns, there is a specific statute that prohibits publishing without consent (26 U.S.C. § 7213(a)(3)). But the Times only published the first page of Trump’s New York, New Jersey, and Connecticut tax returns (not the federal tax returns) so that statute would not apply.    Of those states, only New York has a privacy statute that could be construed to apply to non-government employees/contractors like the Times. Not to make your brain atrophy from an overdose of legalese, but the New York statute says that any person who, pursuant to this section, is permitted to inspect any report or return or to whom a copy, an abstract or a portion of any report or return is furnished, or to whom any information contained in any report or return is furnished, to divulge or make known in any manner the amount of income or any particulars set forth or disclosed in any report or return required under this article. This bit of printed chloroform is a convoluted statute (welcome the study of law), but the fairest reading is that the phrase “pursuant to this section”—i.e., the entire section describing the “general powers of the tax commission”—applies only to those who are “permitted to inspect any report or return” under New York law, such as some government contractors. The other entities listed, such as those “to whom a copy, an abstract or a portion of any return is furnished,” can be anyone, even those who obtained a return not “pursuant to this section.” That includes the Times.   So, let’s assume that what the New York Times did was against the law. A more interesting question is: would that law be constitutional under the First Amendment? After all, prohibiting someone from divulging information to the public is clearly an abridgement of speech, so would the law fall under an exception to the general rule that the government cannot prohibit speech?   The most relevant case would be Bartnicki v. Vopper from 2001. That case dealt with a radio commentator who broadcast a tape of an illegally recorded conversation between a chief union negotiator and a union president. The federal statute at issue prohibited people from “willfully disclosing the contents” of any communication that the person knew or had reason to know “was obtained through an illegal interception.” The Court struck the statute down as unconstitutional because it “implicates the core purposes of the First Amendment” by imposing “sanctions on the publication of truthful information of public concern.” Publishing crucial and truthful information about a presidential candidate a month before the election certainly implicates matters of “public concern.”   Finally, because the New York law makes it illegal to merely “divulge or make known” tax return information,  it is broader than laws that prohibit someone from releasing a tax return that he knows (or has reason to know) was obtained illegally. In other words, it prohibits even more speech than the law in Bartnicki. Therefore, it seems likely that the law would be struck down as unconstitutional. 

If you follow state policy issues, you may think that there has been a lot of tax cutting recently because of high-profile reforms by Mike Pence, Sam Brownback, and a few other governors. I examine those reforms in Cato’s 13th biennial fiscal report card on the governors, released tomorrow.

However, a chart from NASBO shows that recent tax cutting across the 50 states has been limited and mainly offset by tax hiking. The chart shows net state revenue changes from legislated cuts/hikes since 1979. In 2017, for example, the dollar value of hikes is expected to outweigh cuts.

That is a disappointing because there is usually a trend toward tax cutting during economic expansions, or at least there was during the 1990s. Recent tax cuts in places such as Florida, Indiana, Maine, New York, North Carolina, and Texas have been offset by hikes in places such as Alabama, Connecticut, Delaware, Nevada, Pennsylvania, and South Dakota.

What makes the current dearth of tax cuts odd is that state legislatures have become more Republican since the 1970s. The Wall Street Journal had a chart yesterday showing that the share of state legislature seats held by the GOP has risen from 40 percent in the 1980s to 55 percent today.  

Republicans are supposed to be the tax-cutting party. That is the core of their “brand.” So why isn’t there more tax-cutting? One reason is that some Republican governors start siding with special interests over taxpayer interests after they have been in office a while. They forget that they are supposed to work for all the citizens, not just the ones lobbying for more government spending. Nevada’s Governor Brian Sandoval seems to be a good example, as I discuss in the report tomorrow.

Another problem is that in some state legislatures that are nominally Republican, some of the members have chosen that label only because it was advantageous for election and reelection. In South Carolina, Governor Mark Sanford and then Nikki Haley long pursued major tax reforms, but to little avail.

A final problem is that the Democratic Party has moved to the left on fiscal issues. Andrew Cuomo of New York is about the only Democratic governor in recent years who has been amenable to substantial tax reductions.

Learn what grades Cuomo, Haley, Sandoval, and the others earn on their recent fiscal performance in tomorrow’s report.