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Stalwart public schooling defender Diane Ravitch does not like what she saw in School Inc., a three-part documentary series created by former Cato education analyst Andrew Coulson. Of course, she is welcome to disagree with it. But her main complaint—that PBS dared show the documentary in the first place—is concerning from a public debate perspective, while her more substantive critiques of School Inc. illustrate precisely why we need to let all voices engage in debates, not just those with whom we agree.

From the outset, let’s be clear. Neither the documentary itself nor PBS hide one iota what is being presented: the views of Andrew Coulson. Heck, the subtitle of School Inc. is “A Personal Journey with Andrew Coulson.” It leaves it to viewers—not gatekeepers who may just dislike Coulson’s point of view—to decide if the case Coulson makes is persuasive. And if we are after open discussion and truth, what should matter is not who funded the documentary—Ravitch portrays School Inc. sponsors as frightening bogeymen—but the content of the documentary.

Ravitch does address some of the substance of School Inc., but in so doing reveals why it is so crucial that all sides of controversial issues get heard, not just those with which she agrees. Quite simply, many of her knocks on the substance are themselves highly questionable.

Ravitch, for instance, says that by states allowing money to follow children to private schools, “the long-standing tradition of separating church and state in K-12 education is crumbling.” This ignores that for most of our history, American public schools were largely de facto Protestant institutions, with readings from the King James Bible and sometimes pointed attacks on Roman Catholicism. Indeed, the “Blaine” amendments to which Ravitch obliquely refers as prohibiting vouchers were inspired by blatantly anti-Catholic efforts to make sure public funds only went to the Protestant public schools.

Next, Ravitch suggests that private school choice does not work because recent studies have shown that “vouchers actually have had a negative effect on students in the District of Columbia, Indiana, Louisiana, and Ohio.” It is true that some recent research has found negative standardized test score effects for voucher programs. But all come with huge caveats Ravitch fails to mention. For instance, the DC study covered only one year, and the majority of non-voucher students went to other schools of choice—private and charter schools. The Indiana study to which Ravitch is likely referring has not actually been published; initial findings were from a preliminary conference discussion and were not supposed to be publicly disclosed. The Louisiana results may well reflect a program that is so heavily regulated it kept good schools from participating—not the kind of program Coulson would call for. And the Ohio study? Assuming I am thinking of the same one Ravitch is, it says this: “We can only identify with relative confidence the estimated effects…for those students who had been attending the highest-performing EdChoice-eligible public schools and not those who would have been attending lower-performing public schools.”

Then there’s this: While some recent studies have detected some possibly negative outcomes, the large majority of random-assignment studies—the research “gold-standard”—have found at least some positive effects with few negative outcomes.

There is a lot more Ravitch has written that is dubious, including much about the documentary itself. For instance, when you watch it you’ll find that Coulson does not just rave about South Korea, as Ravitch intimates, but also discusses the downsides of an achievement-obsessed culture. And while it is true that the documentary does not show “the absence of any students in wheelchairs or any other evidence of students with disabilities in the highly regarded KIPP charter schools,” it also does not note that the vast majority of New York City public school are not “fully accessible” to students with disabilities. Why didn’t Ravitch mention the latter?

Diane Ravitch has every right to critique School Inc. Indeed, such critiques are exactly what we should want, because they enable us to dive deeper into serious issues. But if School Inc. had never gotten airtime, we would not be having this debate. And that would be too bad, because no one has a monopoly on truth.

The Miami-Dade Police Department (MDPD) is scrapping plans to test persistent aerial surveillance technology following criticism from privacy advocates. This kind of technology has prompted privacy concerns in others cities, with Baltimore being perhaps the most notable. One of the best-known aerial surveillance companies allows users to keep a roughly 25 square mile area under surveillance and comes with “Google Earth with TiVo” capability, The news from Miami-Dade county. while reassuring, underlines a number of issues concerning federalism, privacy, and transparency that lawmakers must tackle as aerial surveillance tools improve and proliferate.

MDPD Director Juan Perez was set to ask county commissioners to retroactively approve a grant application to the Department of Justice for the aerial surveillance testing. The fact that MDPD was seeking federal money for the surveillance equipment reminds us that federal involvement in state and local policing should be strictly limited.

The aptly-named Persistent Surveillance Systems (PSS), the Ohio-based company that made the sensor system deployed in Baltimore, uses technology originally designed for military operations in Iraq and Afghanistan.

Military equipment has an unfortunate tendency to make its way from foreign battlefields into the hands of domestic law enforcement, as my colleagues have been outlining for years. This is a trend that ought to be strongly resisted.

It’s not clear if the Department of Justice’s Office of Justice Programs would have approved MDPD’s grant application, but given the current attorney general’s record on civil liberties, as well as the president’s own enthusiasm for aerial surveillance, we shouldn’t be surprised if similar grants are approved during the Trump administration.

In the most recent edition of the Cato Handbook for Policymakers my colleague Adam Bates and I argue that federal grants for drones, cell-site simulators, and body cameras should be dependent on a number of privacy, transparency, and accountability policies. Among the privacy policies we outline are a warrant requirement for police use of drones. Both of us fear the kind of persistent snooping made possible by aerial surveillance technology, whether it is attached to manned or unmanned aircraft.

Thanks to a handful of Supreme Court cases from the 1980s, police do not need a warrant to observe your property from the air. PSS and Baltimore police relied on these cases when issuing a memorandum supporting the use of persistent aerial surveillance, which reads in part:

Here, like in Ciraolo, Dow Chemical, and Riley, the photographs taken from a manned aircraft flying within publicly navigable airspace do not constitute a search, and do not run afoul of the Constitution. Particularly, the photographs were obtained by wide area airborne surveillance by manned aircraft operating in publicly navigable airspace at 3,000 to 12,000 feet altitude. 

It is hard to see how PSS’ technology can be used with a warrant requirement in place given that it requires the continuous filming of a 25 square mile area. Perhaps some kind of safeguard could be implemented that requires law enforcement to have a court order before examining PSS’ data, thereby preventing police from going on fishing expeditions for crimes. Indeed, PSS’ own privacy policy already states that its sensors are only used to support crime investigations. But PSS’ privacy policy isn’t law, and until such policies are codified into law it’s probably best for PSS’ technology to be grounded and for the federal government not to fund state and local persistent aerial surveillance operations.

Aside from the privacy concerns associated this persistent aerial surveillance there are also worries related to transparency.

Members of the public deserve to know what surveillance technologies police are using and what data about their behavior are being collected. In Baltimore, PSS’ technology was flown over the city without elected officials (including the mayor), the state’s attorney, or members of the public being informed first. In Miami-Dade county, the mayor wasn’t aware of MDPD’s persistent aerial surveillance plans. 

Local and state officials can take steps to address surveillance secrecy. For example, earlier this year California lawmakers introduced a bill that would require police to reveal information about the surveillance equipment they use to local officials. The bill would also require local officials to approve police using new surveillance technology.

Persistent aerial surveillance can be useful in investigating crimes, but we should be conscious of its costs as well as its benefits. Policies that protect privacy should be in place before snooping airplanes take to the sky, and the public as well as local officials should be informed about the surveillance tools police are using.

A pdf of this statement may be found here.

Statement for the Record
of David Bier of the Cato Institute
Submitted to
House Committee on the Judiciary
Markup of
“Refugee Program Integrity Restoration Act of 2017 – H.R. 2826”
June 14, 2017

The Refugee Program Integrity Restoration Act of 2017 (H.R. 2826) would restrict the liberty of Americans to welcome people fleeing violence and persecution around the world. It would enact a hard and inflexible limit on America’s generosity toward refugees. This arbitrary restriction has no basis in American tradition, individual Americans’ desire or ability to assimilate refugees, or the state of the world today. Indeed, it turns a cold shoulder toward the most severe refugee crisis in many decades.

The legislation adopts a flawed approach to refugee resettlement based on a fundamentally flawed premise: that refugees pose a significant threat to the lives of Americans. The facts cannot sustain the belief that widespread fraud has allowed the admission of large numbers of refugee terrorists. Only two refugees admitted since 9/11 have plotted or attempted attacks in the United States. Neither killed anyone. Looking over the last four decades, refugees have been far less likely to kill Americans in acts of terrorism in the United States than other immigrants or U.S.-born citizens, and none have since 1976.

Above all else, successful refugee integration requires a hospitable policy environment toward refugees. Yet this legislation would move America in the opposite direction: it politicizes refugee acceptance and imposes new constraints on integration for those few refugees that it would continue to admit. Rather than policies intended to promote rapid adoption of America’s way of life, this legislation would keep refugees in a state of long-term legal limbo without permanent status in the United States and allow certain localities to ban their resettlement in their jurisdictions. It notably lacks any provision for welcoming communities to accept refugees beyond its arbitrary cap.

These policies would have negative economic and fiscal effects on the United States. Refugees contribute significantly to the economy through employment, entrepreneurship, and consumption. While their upfront fiscal costs are higher than for other immigrants, studies have shown that they do eventually become net fiscal contributors. Rather than taking measures to reduce refugee dependence on welfare—such as relying on private sponsorship—or creating policies to encourage faster movement into the labor market—such as validating professional credentials prior to arrival—H.R. 2826 will actually make integration more difficult and costly.

H.R. 2826’s Numerical Limit on Refugees Is Not Grounded in America’s Capacity or the World’s Humanitarian Need

Sec. 2(a) of H.R. 2826 would limit individual Americans’ freedom to welcome refugees into the United States by imposing a new annual statutory limit of 50,000 refugees. Assuming that the federal government should directly determine the extent of Americans’ generosity toward refugees, it should consider two primary factors: the humanitarian need for resettlement around the world and the capacity of the United States to accept refugees.

Since its conception, the primary purpose of the U.S. Refugee Admissions Program (USRAP) has been—as the Refugee Act of 1980 put it—“to provide a permanent and systematic procedure for the admission to this country of refugees of special humanitarian concern.”[1] Thus, the need for resettlement should factor highly into the government’s calculation of the refugee limit. Yet this legislation dramatically escalates a trend of the U.S. government toward accepting a smaller and smaller proportion of people displaced by violence and persecution around the world.

As Figure 1 below highlights, America has chosen to accept a rapidly decreasing share of displaced persons under the United Nations High Commissioner for Refugee’s mandate since the early 1990s.[2] H.R. 2826 would worsen this trend, essentially rejecting the highest share of displaced persons worldwide in the history of the modern U.S. refugee program. H.R. 2826’s cap for 2018 would constitute a share of internationally displaced persons nearly one-sixth of the historical average from 1981 to 2017 and a mere 4 percent of the historic high in 1981. 

Figure: Share of U.N. High Commissioner for Refugee Population of Concern Resettled in the United States, FY 1981 to 2018

Sources: United Nations High Commissioner for Refugees; U.S. Department of State

In absolute terms, this refugee crisis is the largest since World War II.[3] The raw numbers fail to capture fully the horrors that underlie them. The United Nations, the U.S. Department of State, and Congress have all found that the Islamic State is carrying out a “genocide” against Christians, Shia Muslims, and other religious groups in the region.[4] More than 7,000 refugees have drowned in the Mediterranean alone in 2015 and 2016.[5] In total, more than 10,000 displaced people around the world died in flight in 2016, the most on record.[6] Doctors Without Borders has found “catastrophic malnutrition” in refugee camps.[7]

H.R. 2826 would also be abnormal relative to the capacity of the United States, representing a major departure from its historic refugee intake. It would allow a per-capita admission rate almost half the average from 1980 to 2017, and 250 percent below the average rate under the Reagan and H.W. Bush administrations from 1981 to 1993.[8] Refugee inflows already add only a tiny amount to U.S. population growth. Had all 110,000 refugees come in 2017, it would have amounted to only a 0.03 percent increase in the U.S. population. Even in absolute numbers, 50,000 is almost 40 percent below the historic average of 80,000 from 1980 to 2017. Given that America is more populous and wealthier than ever, it is clear that H.R. 2826’s cap is not based on America’s capacity to accept refugees.

In most other immigration programs, the government determines the capacity and desire of Americans to accept immigrants directly. The Department of State, for example, does not attempt to calculate how many foreign spouses to admit indirectly. Instead, it admits those spouses whom Americans have chosen to sponsor and petitioned for their admission. If the Committee is concerned that the administration inaccurately estimates the capacity and demands of the public, it should allow U.S. residents and U.S. humanitarian organizations to petition for refugees and sponsor them directly.

Canada has successfully operated a private refugee sponsorship program since 1978, resettling more than 220,000 refugees with private sponsors during that time.[9] One government report found that privately sponsored refugees had better economic outcomes than government sponsored refugees.[10] In 2016, sponsors, including churches, nonprofits, and groups of five Canadian citizens, have helped resettle 18,000 Syrian refugees with private money—more than the entire United States government during the same period.[11] In recent years, other countries have also adopted this model.[12]

H.R. 2826’s Cap Is Inflexible to Changing Circumstances

H.R. 2826’s cap is thoroughly divorced from current realities, but even if the bill had based its cap on the current needs and capacity of the United States, its approach would still be wrongheaded. This legislation will have effects on refugee resettlement long after 2018 and its rigid refugee limit has no provision to adjust to changing circumstances or unforeseen emergencies that arise over time. Good governance requires that Congress create systems that are responsive to changes in the world so that its laws do not become anachronistic.

In 1980, Congress had the foresight to understand that it could not predict the future. Under the Refugee Act of 1980, the president establishes a refugee target at the start of each fiscal year after consulting with nonprofits, localities, and Congress.[13] This arrangement allows the administration to adjust flows based on a thorough accounting of the needs of the world and capacity of the country. Congress always has the opportunity to review, reject, or revise the target before it goes into effect.

The Refugee Act also reflects the reality that no one can predict even a few months into the future. Thus, it allows the president to raise the refugee limit in the middle of the year in response to certain refugee emergencies. This authority cannot be exercised without first consulting and notifying Congress, and the president must establish that the emergency was unforeseeable and that he cannot admit the refugees under the existing target.[14] H.R. 2826 authors themselves should understand the impossibility of predicting the correct future refugee limits, given that they proposed a 60,000 refugee cap less than a year ago in a bill by the same name.[15] Nonetheless, Sec. 2(b) would strike this important flexibility for the president.

Indeed, the bill’s only “procedure” for an adjustment in the refugee limit is its repeal by a future Congress. History amply demonstrates that Congress has had little ability or desire to revise its immigration laws despite vast domestic crises that these laws have created. The idea that it will pass new refugee legislation every single year—and possibly multiple times a year—in response to international crises simply cannot be believed. If the Committee does accept this view, then it should explicitly build that assumption into the legislation, stating that Congress must take action to establish a new cap or concede its duty to the Executive.

Refugees Are Not a Serious Terrorist Threat

H.R. 2826’s other provisions highlight that the reduction in the refugee limit is based on the premise that refugees pose a significant terrorism risk to the lives of Americans in the United States.[*] Yet this premise is false. Refugees not only have posed an infinitesimally small risk of terrorism in absolute terms—they have posed a much lower risk of terrorism to Americans than all other legal immigrants and foreign travelers as well as U.S. citizens themselves.

The Cato Institute’s 2016 report on immigration and terrorism provides the only estimate of terrorism risk by category of admission to the United States.[16] From 1975 to 2015, the chance of an American being murdered by a refugee terrorist in the United States was 1 in 3.64 billion per year. This risk is 135 times less than the risk of death from all U.S.-born terrorists, 1,000 times less than all other foreign terrorists, and 255,000 times less than the risk of death from a regular homicide in the United States (see the Table below). By no measure can the data support the conclusion that refugees are a major threat to the lives of Americans.

Nor is there any reason to believe that this risk will change significantly in the future. Refugee terrorists committed all three of their murders in the 1970s, and more than half of the 21 refugees who have even plotted or attempted an attack of any kind—include non-deadly ones—did so before 1990. Refugees have not involved themselves in any kind of plots or attacks of any scale that would have altered these estimates in any important way. At the same time, the U.S. immigration system has substantially upgraded its vetting procedures since 9/11, making the likelihood of a major terrorist infiltration even more remote today than in the past.

Table: Annual Chance of Being Killed in an Attack on U.S. Soil by Original Visa of Terrorist, 1975-2015

Category Deaths Annual Chance of Being Killed Tourist

2,834

1 in 3.9 million U.S.-Born

408

1 in 26.7 million Student Visa

159

1 in 68.9 million Fiancé Visa

14

1 in 779.7 million Permanent Resident

8

1 in 1.4 billion Asylee

4

1 in 2.7 billion Refugee

3

1 in 3.6 billion

Sources: Alex Nowrasteh, “Terrorism and Immigration: A Risk Analysis,” Cato Institute: Policy Analysis No. 798, September 13, 2016.

The bill also emphasizes the risk of terrorists committing fraud to access the refugee program. Again, this risk is incredibly small. Only two refugees admitted since 9/11—Uzbek national Fazliddin Kurbanov and Somali national Abdul Artan—have plotted or carried out a terrorist attack in the United States. Neither killed anyone. While it is possible that they committed fraud to obtain refugee status, the government never presented any evidence that they did.[†] It is impossible to view these numbers and consider refugee fraud a major threat to Americans. 

H.R. 2826 Would Obstruct Refugee Integration

Given the fact that almost no refugees enter the United States as terrorists, the United States should focus heavily on successful post-entry assimilation and integration. Yet H.R. 2826 moves in the other direction, making it more difficult for refugees to integrate and assimilate into American life. Most importantly, Sec. 7 delays the ability of refugees to adjust from refugee status to permanent residency by two years and Sec. 8 makes it effectively impossible for the vast majority of refugees to obtain permanent residency in the United States.

Sec. 8 appears to create a system intended to discourage refugees from thinking of America as their new home. It would impose a new requirement that refugees prove that they still meet the legal definition of a refugee after three years of residence in the United States. By itself, this is already an unreasonable request because they have already firmly established themselves in the United States after three years. Moreover, being in the United States and removed from the conflict, refugees would have more difficulty obtaining evidence to support their claim. Sec. 3 would rescind their status if they returned home, so they could not even briefly return to obtain supporting evidence or find witnesses. 

Yet the bill would make this already difficult task next to impossible by requiring them to meet their burden with “clear and convincing” evidence, a standard of proof typically required only when someone’s civil liberty is at stake.[17] This would require refugees to meet the second highest standard of proof in the law—second only to “beyond a reasonable doubt”—in order to adjust to permanent residency.[18] It is even higher than the “more likely than not” standard used in most civil lawsuits.

Not only would very few refugees be able to provide “clear and convincing” evidence of their fear—which is an internal state—but the ones who enter under this bill would be even less likely to meet it. That is because the bill maintains the current lower standard of proof—“reasonable possibility”—to enter initially the United States as a refugee.[19] Refugees would enter having proven their claim under a lower threshold, and once in the United States, they would have a much higher burden to adjust to permanent residency. This strange process virtually guarantees the inability of most refugees to adjust to permanent status.[‡]

The United States has long benefited from its open labor market that rapidly incorporates refugees and other immigrants. A major difference between the U.S. refugee system and the German asylum system, for example, is that the U.S. refugees quickly receive permanent residency that allows them to compete on an equal footing. U.S. refugees are more than twice as likely to have employment during their second year in the United States as German asylees.[20] U.S. refugees in refugee status do have work authorization, but dozens of states limit professional licenses to permanent residents or citizens.[21] Thus, by keeping them in this second-class status indefinitely, H.R. 2826 would inhibit their ability to access the labor market, which is the most powerful tool for assimilation.

Various studies have demonstrated a relationship between the expected period of residency in a country and the willingness of immigrants to invest in skills relevant to that country.[22] Yet this legislation would make it clear that Americans do not accept that the United States is the refugees’ permanent home. Rather than investing in language and technical skills to succeed in the United States, H.R. 2826 would incentivize refugees to subsist on welfare while they await their return.

H.R. 2826 Would Negatively Affect the U.S. Economy

H.R. 2826 reduces the refugee limit from 110,000 to 50,000. Limitations on the entry of refugees are essentially a type of labor market regulation. Refugees, like all other immigrants, contribute to the economy through entrepreneurship, employment, and consumption—all of which benefit  U.S. residents. Studies on refugees in the United States and other countries have found that refugees can create wage gains for native workers through their consumption or through skill complementarities.[23] They can also lower prices overall by decreasing the cost of production and creating a new pool of consumers without brand loyalties for which businesses must compete.[24]

The Cato Institute has used a conservative estimate of immigrants’ positive economic contributions to project that U.S.-born citizens benefit to the tune of at least $476 in wages per refugee.[25] Over the next decade, that would equal at least $326 million in economic costs directly to U.S.-born citizens specifically, assuming that the cap had continued to average 110,000 or greater during that time. To make economic sense, refugee terrorism would have to become a much more common phenomenon. Accepting both the most extreme cost estimates of deaths from terrorism and that the cap reduction would eliminate all deaths from terrorism by refugees, the number of deaths from refugee terrorists would still have to be 26 times greater in the future than it was in the past for the security benefits of the cap reduction to outweigh its costs.

One recent study found that despite their high upfront costs, refugees “pay $21,000 more in taxes than they receive in benefits over their first 20 years in the U.S.”[26] While the legislation is correct to request further analysis of refugees’ use of welfare, the appropriate response to fiscal costs is to find ways to reduce costs by promoting economic integration and finding ways to cost-share with the private sector. Canada’s successful private refugee sponsorship system allows private parties, churches, and nonprofits to sponsor refugees with private money, removing some of the fiscal burden from the government.[27]

[*] Sec. 14 requires that the federal government to “ensure” that any refugee “does not pose a threat” based solely on a background check. Sec. 16 requires reports on refugees convicted of “terrorism-related” offenses. Sec. 8 requires 5-year inspections in federal custody of any refugee who fails to adjust status. Sec. 6 allows recurrent background checks and monitoring of refugees after admission.

[†] Even if we expand our view to refugees convicted of supporting terrorist groups abroad, we find just four other refugees admitted since 9/11 who entered as adults or older teenagers and who committed their offense within their first seven years in the United States, indicating that they may have been terrorism sympathizers at the time of their entry.

[‡] If they fail to reprove their claim, they may live in the United States for five years after which Sec. 8(b) requires the Department of Homeland Security to take “custody” of them and inspect them again. The text is unclear, but it appears possible that, if they fail to prove their eligibility again, they may actually be placed in removal proceedings.

[1] 8 U.S. Code § 1521, note. https://www.law.cornell.edu/uscode/text/8/1521

[2] United Nations High Commissioner for Refugees, “The Global Appeal and Supplementary Appeals,” http://www.unhcr.org/en-us/the-global-appeal-and-supplementary-appeals.html.

United States Department of State, “Admissions and Arrivals,” Refugee Processing Center, http://www.wrapsnet.org/admissions-and-arrivals/.

[3] Euan McKirdy, “UNHCR report: More displaced now than after WWII,” CNN, June 20, 2016, http://www.cnn.com/2016/06/20/world/unhcr-displaced-peoples-report/index….

[4] Nahal Toosi, “House unanimously condemns ISIL for genocide,” Politico, March 14, 2016, http://www.politico.com/story/2016/03/congress-genocide-220736.

Greg Myre, “John Kerry: ISIS Is Carrying Out ‘Genocide’,” NPR, March 17, 2016, http://www.npr.org/sections/parallels/2016/03/17/470801112/john-kerry-is….

“UN human rights panel concludes ISIL is committing genocide against Yazidis,” United Nations, www.un.org/apps/news/story.asp?NewsID=54247#.WUAkaOvyuUl

[5] UNHCR Staff, “Mediterranean death toll soars, 2016 is deadliest year yet,” October 25, 2016, http://www.unhcr.org/afr/news/latest/2016/10/580f3e684/mediterranean-dea….

[6] Mark Townsend and Tracy McVeigh, “Migrant death toll expected to exceed 10,000 in 2016,” The Guardian, https://www.theguardian.com/world/2016/sep/17/migrant-death-toll-2016-sy….

[7] “Catastrophic malnutrition in refugee camps,” Doctors Without Borders, http://www.msf.ca/en/article/catastrophic-malnutrition-refugee-camps.

[8] United States Department of State, “Admissions and Arrivals,” Refugee Processing Center, http://www.wrapsnet.org/admissions-and-arrivals/.

[9] Rachel Browne, “‘What’s Enough?’: Pressure Builds to Bring More Syrian Refugees to Canada,” Vice News, September 8, 2015, https://news.vice.com/article/whats-enough-pressure-builds-to-bring-more….

[10] Citizenship and Immigration Canada, “Summative Evaluation of the Private Sponsorship of Refugees Program,” April 2007, http://www.cic.gc.ca/english/resources/evaluation/psrp/psrp-summary.asp.

[11] Zi-Ann Lum, “Canada Limits New Private Sponsorships Of Syrian Refugees,” Huffington Post, January 12, 2017, http://www.huffingtonpost.ca/2017/01/12/canada-private-sponsorship-syria….

[12] Judith Kumin, “Welcoming Engagement: How Private Sponsorship Can Strengthen Refugee Resettlement in the European Union,” Migration Policy Institute, December 2015, http://www.migrationpolicy.org/research/welcoming-engagement-how-private….

[13] 8 U.S. Code § 1157(a)

[14] 8 U.S. Code § 1157(b)

[15] H.R. 4731

[16] Alex Nowrasteh, “Terrorism and Immigration: A Risk Analysis,” Cato Institute: Policy Analysis No. 798, September 13, 2016, https://www.cato.org/publications/policy-analysis/terrorism-immigration-….

[17] http://www.nolo.com/legal-encyclopedia/legal-standards-proof.html

[18] U.S. Court of Appeals for the Ninth Circuit, “Burden of Proof,” http://www3.ce9.uscourts.gov/jury-instructions/node/48

[19] U.S. Citizenship and Immigration Services, “Radio Directorate - Office Training: Well-Founded Fear Training Module,” July 18, 2012, https://www.uscis.gov/sites/default/files/USCIS/About%20Us/Directorates%….

[20] David Bier, “Why Refugees Find Jobs Faster in the U.S. Than Germany,” Cato at Liberty, October 6, 2016, https://www.cato.org/blog/why-refugees-find-jobs-faster-us-germany.

[21] Jennesa Calvo-Friedman, “The Uncertain Terrain of State Occupational Licensing Laws for Noncitizens: A Preemption Analysis,” Georgetown University Law Journal: Vol. 102:1597, 2014, https://georgetownlawjournal.org/articles/78/uncertain-terrain-of-state/pdf.

[22] Miao Chi; Scott Drewianka. “How much is a green card worth? Evidence from Mexican men who marry women born in the U.S.” Labour Economics Volume 31, December 2014, Pages 103–116. http://www.sciencedirect.com/science/article/pii/S0927537114001328.

Amuedo-Dorantes, Bansak, and Raphael, “Gender Differences in the Labor Market: Impact of IRCA,” American Economic Review, 2007, Rivera-Batiz, “Undocumented Workers in the Labor Market: An Analysis of Earnings of Legal and Illegal Mexican Immigrants in the United States,” Journal of Population Economics, 1999, Kossoudji and Cobb-Clark, “IRCA’s Impact on the Occupational Concentration and Mobility of Newly-Legalized Mexican Men,” Journal of Population Economics, 2000, Kossoudji and Cobb-Clark, “Coming Out of the Shadows: Learning about Legal Status and Wages from the Legalized Population,” Journal of Labor Economics, 2002, Baker, “Effects of the 1986 Immigration Reform and Control Act on Crime,” SSRN Working Paper, 2011.

[23] Mette Foged; Giovanni Peri. “Immigrants’ Effect on Native Workers: New Analysis on Longitudinal Data.” IZA DP No. 8961. March 2015. http://ftp.iza.org/dp8961.pdf

 Örn B. Bodvarsson, Joshua J. Lewer and Hendrik F. Van den Berg, “Measuring Immigration’s Effects on Labor Demand: A Reexamination of the Mariel Boatlift,” IZA Discussion Paper No. 2919, 21 July 2007. http://repec.iza.org/dp2919.pdf.

[24] Mark Bils. “Pricing in a Customer Market.” Q.J.E. 104, 1989. http://www.jstor.org/discover/10.2307/2937863?uid=3739560&uid=2&uid=4&ui… 69230837.

Saul Lach, “Immigration and Prices,” The Hebrew University of Jerusalem and Centre for Economic Policy Research, 2007. http://www.uh.edu/~adkugler/Lach.pdf.

Robert E. Lipsey and Birgitta Swedenborg, “Explaining Product Price Differences Across Countries,” National Bureau of Economic Research, July 2007. http://www.nber.org/papers/w13239.

[25] Alex Nowrasteh, “Huge Net Costs from Trump’s New Executive Order Cutting Refugees,” Cato Institute, March 6, 2017, https://www.cato.org/blog/huge-net-costs-trumps-new-executive-order-cutt….

[26] William N. Evans, Daniel Fitzgerald, “The Economic and Social Outcomes of Refugees in the United States: Evidence from the ACS,” NBER Working Paper No. 23498, June 2017, http://www.nber.org/papers/w23498?utm_campaign=ntw&utm_medium=email&utm_….

[27] Government of Canada, “Guide to the Private Sponsorship of Refugees Program,” http://www.cic.gc.ca/english/resources/publications/ref-sponsor/.

On Monday, the Treasury Department released the first of four planned reports on the U.S. financial system. While the 150-page report, focusing on banks and credit unions, includes a number of observations and recommendations worth discussing, there is one page I’d like to highlight here. It’s a single chart. And yet it speaks volumes about the current state of regulation in the financial sector. Here’s the chart:

Those in Washington often talk about the “alphabet soup” of federal agencies. We do love our acronyms here. But this chart shows that the financial sector has a complete soup all of its own. There are nine federal regulators who oversee the financial sector. Additionally, each state has its own regulators, typically one each for securities, insurance, and banking. Plus, there are the self-regulatory organizations—quasi-private bodies whose decisions can have the effect of law on the companies and individuals they oversee. A single organization can be subject to as many as six regulators. An organization that does business in multiple states can potentially be subject to regulation in each of them, in addition to regulation at the federal level.

There are two key problems with this kind of overlapping and duplicative regulation. First, there is the compliance burden. A broker-dealer in the securities markets, for example, must (with the help of expensive lawyers) thoroughly review and understand the regulations and rules issued by the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Financial Industry Regulatory Authority, the Municipal Securities Rulemaking Board, the National Futures Association, and at least one state securities board. This requires not only understanding the rules of each regulator, but also how they intersect with one another. The broker-dealer must then (with the help of expensive lawyers) devise a series of compliance protocols to ensure that each of its employees, in each of their separate duties, acts within the confines of the regulations. 

Second, such a high compliance cost creates barriers for new companies and new products. If a bank wants to try offering a new type of loan, it must ensure that the new product complies with all of the rules of every one of its regulators. Anyone with a bank account has probably noticed the massive changes new technology has brought to the financial sector. Being able to deposit a check using a smart phone is a great convenience. But before any bank rolled out that service, their lawyers had to ensure that the application’s features complied with all existing regulation. Furthermore, the bank had to consider whether any one of its regulators was likely to introduce new regulation that would affect the proposed service. There may be (and I would guess it is very likely there are) many products that consumers would like that banks are unwilling to offer because of the high cost of compliance and risk of getting that compliance wrong.

These barriers are even more challenging to new companies looking to enter the market. The technological changes that have made mobile banking possible have also opened the door to new ways of exchanging value outside of traditional banks. Anyone with a new idea will want to vet this idea with regulators before investing too much capital. And yet to conduct a vetting process, the entrepreneur will need to contact not one but often a half dozen regulators, each of whom might express a different view of the proposed product and a different set of concerns. 

These regulatory schemes are no laboratories of democracy. This chart shows a stunning pile-up of regulators and regulations. It is one thing to talk about how regulation is stifling innovation and growth. It is another to see such a stark illustration of what this web actually looks like.

The Trump administration’s proposal to repair and expand America’s roads, bridges, ports and airports includes the expanded use of public-private partnerships (P3s). Under P3s, state and local governments award franchises to private companies that agree to pay for and manage the infrastructure in exchange for the companies receiving toll payments from future users. A number of P3 projects currently operate in the United States, and they are common in other developed nations.

Despite the growing embrace of these projects by policymakers around the world, the Trump proposal is being met with skepticism. For example, the New York Times dropped this article last week ahead of Trump administration efforts to promote the proposal. According to the article, “experts agree” that “there is little hard evidence” that such projects produce long-term benefits to the public as compared to traditional government-provided infrastructure. (That “agreement” came as news to many transportation experts.)

At heart, the article charges that P3 programs are “win/no lose” proposals for the private firms: if the projects prove popular, the firms profit—sometimes handsomely, to the detriment of consumers. But if the new infrastructure doesn’t get many toll-paying users, the financial losses from the projects fall on taxpayers.

To illustrate this, the NYT cites California State Route 91, one of the first P3s in the United States. Initially intended to reduce congestion, the project awarded a private company the right to build and operate a special four-lane toll road in the middle of the highway. The road was “congestion priced,” meaning the tolls fluctuated in order to limit use just enough to guarantee the free flow of traffic.

The original lease on the road included a noncompete clause that limited the state’s ability to add additional lanes to the non-P3 part of SR-91 or to build parallel infrastructure. This resulted in heavy congestion on the old lanes, pushing motorists onto the toll lanes and producing a financial windfall for the toll company. That ultimately prompted Orange County to buy out the toll company for $207 million in 2003.

However, the SR-91 problem is not inherent to P3s. It arose as a result of the conditions under which the franchise was arranged. Traditionally, P3s have been awarded through negotiations between private companies and transportation authorities, leading to high initial private investments and uncertainty about demand for the road. That risk, in turn, encourages toll road companies to want protections like the noncompete clause.

But there are ways to reduce the risk to the private companies while also protecting taxpayers and infrastructure users, as transportation experts Eduardo Engel, Ronald Fischer, and Alexander Galetovic explained in Regulation back in 2002. The authors suggest using a particular type of auction to award highway projects: a Present-Value-Revenue (PVR) auction. In a PVR auction, it is understood that the private company will only operate the road for a time, and then it will be returned to the public. Regulators set a maximum toll level that motorists will be charged to use the road. Private companies then bid on the amount of toll revenue, measured in present value terms, they would want to receive before the road is returned to the public. The lowest PV bid wins. The winner collects revenues and pays for the maintenance of the road until it has earned the revenue that it bid in present value, regardless of whether it takes five years or 50. Thus, the term of the franchise is variable depending on road usage; if usage is less than expected, the lease extends. If usage is greater than expected, the lease is shorter-term. The private company won’t “lose,” but it won’t make a windfall either.

PVR auctions provide resilience against shocks, such as lower-than-expected traffic. They also provide the basis for governments to buy back roads. For PVR franchises, a fair buyout is simply the difference between what the company has earned to date and the total revenue it bid to earn in present value.

In the case of SR-91, a PVR auction would have reduced the risk of the investment, and therefore would have precluded the need for risk-reducing contract obligations like the noncompete clause. If difficulties still arose, the government would have been better equipped to buy back the road for a more reasonable price.

Written with research assistance from David Kemp.

Multiple organizations, businesses, taxpayers, and now the District of Columbia and state of Maryland have sued Donald Trump for violating the Emoluments Clause by not sufficiently separating himself from business holdings that benefit financially from foreign patronage. These lawsuits are a waste of time and resources, having been orchestrated by certain elites who can’t reconcile themselves to the election results and are doing their best to #resist Donald Trump to the point of denying the legitimacy of his presidency. To put a finer legal point on it, the charge that President Trump’s hotels, because they benefit from foreign business, constitute a kind of corruption that the Framers explicitly sought to prevent is, to be blunt, frivolous.

Article I, Section 9, of the Constitution provides that “no Person holding any Office of Profit or Trust under [the United States] shall, without the Consent of Congress, accept any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State.” This Emoluments Clause was passed unanimously by the Constitutional Convention, based on the young nation’s own recent diplomatic history – namely, gifts given by foreign kings to Ambassador Benjamin Franklin and other diplomats, which they promptly reported to Congress. Under President Bill Clinton, the Justice Department’s Office of Legal Counsel explained that “those who hold offices under the United States must give the government their unclouded judgment and their uncompromised loyalty… . That judgment might be biased, and that loyalty divided, if they received financial benefits from a foreign government.”

In other words, the Emoluments Clause is a stopgap against the risk that foreign powers will try to curry favor by bribing U.S. officials with gifts and other baubles. (Maybe even titles of nobility, which are prohibited for all Americans by another constitutional provision.) To be sure, a politically motivated decision by a foreign government to give preferential permitting or land acquisition terms to a Trump construction project could be a favor worth millions of dollars. 

But is booking suites at a Trump hotel or holding a conference at another Trump facility really a bribe? So long as payments are made at market rates – not “here’s 100 million dollars for a room with a view” – I don’t see how they could. Whatever the Emoluments Clause protects against, arms-length business transactions ain’t it.

Indeed, to hold to the contrary would be to disqualify businessmen with a diversified portfolio from the White House. That can’t be the case; George Washington himself was a wealthy landholder who engaged in business with foreign nationals. There’s even an academic debate about whether the clause applies to the president in the first place, as distinct from those ambassadors and other officials.

In short, while scholars can disagree on legal and policy grounds about many of the Trump administration’s doings – from the travel ban, to renegotiating trade treaties, to various deregulatory initiatives – no serious person should spend time on this emoluments nonsense. They’re a distraction from the important issues our divided nation faces and the debates over how to solve them.

For an elaboration of my thinking on this matter, see Kyle Sammin’s excellent analysis, which I’ll “incorporate here by reference,” as the lawyers say.

Update: This post has been revised slightly for clarity.

 

According to media reports, President Trump is expected to announce on Friday that his administration will revert some of President Obama’s policies toward Cuba. In particular, it looks like Trump will impose new restrictions on travel, as well as limits on U.S. companies doing business in the island.

The alleged justification for the new policy is that it will pressure the Cuban dictatorship to give concessions on human rights and political liberalization. That seems odd given that the Trump administration is not particularly fond of pursuing that agenda in its foreign policy: there was no mention of human rights and political freedom during his visit to Saudi Arabia, for example.

Is there a clamor for a tougher approach on Cuba? According to surveys by Pew Research Center—the most recent one from December 2016—an increasing majority of Americans (73%) favors ending the trade embargo against Cuba. Trump’s new policy would not reflect the views of nearly three-quarters of U.S. citizens.

What about Cuban-Americans? A 2016 poll by Florida International University among Cuban-Americans in Miami-Dade County found that 63% opposed the continuation of the embargo and 57% supported expanding economic relations between U.S. companies and the island. Imposing new restrictions on trade and travel to Cuba is something that a majority of Cuban-Americans would frown upon.

That still leaves Cubans in Cuba, who are supposedly the ultimate beneficiaries of the changes Washington wants to bring about in the island. According to an April 2015 Washington Post poll, 96% of Cubans support lifting the trade embargo. The same number said that more tourism from the United States would benefit the local economy.

Survey after survey shows that a majority of Americans, Cuban-Americans, and Cubans in the island favor greater economic ties between the United States and Cuba. If Cubans and Americans don’t want new barriers erected between their countries, who is President Trump trying to help?  

The Republican National Committee, in the person of Chairwoman Ronna Romney McDaniel, informs me that I “have been selected to represent the Commonwealth of Virginia as a member of The President’s Club.” I know that this is an important responsibility because it comes with a Priority Mail BRE and a request for $750. There’s a lot of boilerplate in the letter about “fake news” and the Democrats and their “radical left-leaning allies.” (Really, if they’re radical, surely they’re more than “left-leaning.” Why not just come out and say it – they’re left-wingers!)

But I’m particularly struck by this line:

I believe you share President Trump’s objectives of smaller government, fiscal discipline, lower taxes, secure borders, conservative judges, a stronger military and unrestrained freedom.

Seriously – President Trump’s objective is “unrestrained freedom”?

Some of those objectives I can see. Fiscal discipline is a presumptuous claim when you’ve promised not to touch the biggest spending programs. Some of the administration’s programs might make government smaller, but others clearly would not. But seriously, “unrestrained freedom”?

For nearly two years now Donald Trump’s main policy themes have been to close our borders, to deport millions of our neighbors and co-workers, and to stop Americans from buying products made overseas. He has bullied, subsidized, and threatened businesses into making uneconomic decisions. He has also talked at length about his desire to limit freedom of speech, frustrated as he is that “our press is allowed to say whatever they want.” While Republicans and Democrats in Congress and the states work on criminal justice reform Attorney General Jeff Sessions steps up the drug war. Trump’s acceptance speech at the Republican National Convention was described in Reason as “easily the most overt display of authoritarian fear-mongering I can remember seeing in American politics.”

The idea that President Trump’s objectives include “unrestrained freedom” is ludicrous even in the context of political fundraising letters.

In 2012 the U.S. Consumer Product Safety Commission (CPSC) launched a barrage of legal and enforcement actions seeking to ban sales of tiny rare-earth magnet sets, popular under various names as a desk amusement with artistic and scientific applications. While the sets do not cause injury when used as intended by adults, they can cause serious harm to children when swallowed, so a key question was whether they may be sold for adult use with appropriate warnings against letting them into kids’ hands.  As we noted at the time, the leading maker of the sets, which sold them under the name Buckyballs, launched an unusual public campaign criticizing the logic of the ban being sought, even though “it’s rare for a regulated company to mount open and disrespectful resistance to a federal regulatory agency,” let alone in sarcastic Internet memes. The CPSC responded directly and some would say vindictively with an unprecedented recall action naming Buckyballs co-founder personally as well as his company. After expensive ventures in legal defense, Zucker agreed to exit the business, leaving only one leading maker to bid defiance to the commission, Zen Magnets. 

While the CPSC pursued recalls and jawboned retailers to drop the product, the centerpiece of its campaign was to enact a ban on the product itself. Last year, however, the Tenth Circuit struck down the ban, ruling that the commission had improperly stacked its cost-benefit analysis. (Then-Tenth Circuit Judge Neil Gorsuch concurred in throwing out the ban.) The commission has gone back to the drawing board, and perhaps at some future date it will justify a ban to courts’ satisfaction, but for now the products are lawful to sell, and in fact are being sold

None of which, however, has undone the effects of the various allied enforcement actions the CPSC took in its campaign. In one of those actions, a federal judge agreed with the commission that Zen Magnets had improperly ignored a CPSC recall order and ordered it to destroy the remainder of its relevant stock – even though that stock was indistinguishable from other magnets that are sold lawfully. 

The company recently held a “funeral” for the sets it was forced to destroy, $40,000 worth, with a slightly pointed “eulogy” read aloud by company operations director Eric Sigurdson. You can watch it here: 

More at the Denver Post and, on newer developments on the magnet issue at the CPSC, from former commissioner Nancy Nord.   

Several Twitter users blocked by President Trump have threatened to file suit, alleging that his Twitter account constitutes a public forum, rendering their exclusion an unconstitutional content-based restriction of speech. They are represented by Jameel Jaffer, director of the Knight First Amendment Institute at Columbia University, who, in a letter to the White House Counsel, contends that Trump’s decision to block critics “suppresses speech in a number of ways.” Blocked users cannot search for or easily view the president’s tweets without logging out, and are “limited in their ability to participate in comment threads associated with [Trump’s] tweets.”

The question turns upon our understanding of the purpose and character of Trump’s twitter presence. Is @realDonaldTrump simply the private Twitter account of a man who happens to be president, or does it constitute a designated public forum, as asserted by Jaffer? A designated public forum is a government-controlled space set aside for expressive activities. While the government may establish time, place, and manner constraints on speech within a designated public forum, it may not impose content-based restrictions on expression therein.

Public forums are usually imagined as physical spaces in which citizens may express themselves, but this need not be the case. In Rosenberger v. University of Virginia, the Supreme Court determined that, by establishing a policy of funding student newspapers, the University of Virginia had created a public forum from which it could not exclude qualifying publications simply because they expressed religious, rather than secular, opinions.

However, the fact that designated public forums may be non-physical, coupled with Trump’s status as President of the United States, is probably not a sufficient basis to deem his Twitter account a designated public forum. The courts have generally determined that designated public forums must be owned by the government in an official capacity, or used for official government communication.

It is unlikely that Trump’s Twitter account represents a government-controlled property. Twitter is a private company; while Southeastern Promotions, Ltd. v. Conrad established that a privately owned theater leased by the government may be considered a public forum, even as President, Trump is simply a Twitter user, bound by the same terms of service as everyone else. Twitter allows its users to block accounts they’d like to avoid, and one block-happy user happens to be president. In effect, Trump’s becoming president does not nationalize the private Twitter account that he used before ascending to the nation’s highest office, and will likely continue to use when his tenure in the White House ends. A determination that Trump’s account represents a designated public forum would greatly undermine Twitter’s ability to establish rules for the digital pseudo-commons it maintains.

Finally, it is difficult to understand Trump’s tweets as official government communications of the sort that might push his account into designated public forum territory. While Trump often announces decisions via Twitter, these releases are accompanied or followed by official statements from the White House. Furthermore, Trump does not restrict his twitter presence to the conveyance of official policy, often using it to fire back at detractors or criticize members of his own administration. Can we really regard “Who can figure out the true meaning of ‘covfefe’ ??? Enjoy!” as an official government communication?

In any case, do not expect debate regarding extension of the public forum doctrine to Internet properties to subside any time soon. As human communication increasingly moves online, and voters continue to demand authenticity from their representatives in government, the line between official and private digital communications will remain somewhat blurry. Nevertheless, for libertarians, the current legal paradigm suggests a satisfactory balance between the property rights of social media firms and users, and the First Amendment rights of both government officials and their critics. Ultimately, social media users benefit when firms are allowed to manage their digital commons as they see fit, freely experimenting with new features and means of interaction. The nationalization of politicians’ personal social media accounts would stymie this process, needlessly dividing platforms into venues governed by an evolving understanding of what makes for an enjoyable user experience, and state fora held back by crudely applied terrestrial standards.   

Many mainstream economists, perhaps a majority of those who have an opinion, are opposed to tying a central bank’s hands with any explicit monetary rule. A clear majority oppose the gold standard, at least according to an often-cited survey. Why is that?

First some preliminaries. By a “gold standard” I mean a monetary system in which gold is the basic money. So many grains of gold define the unit of account (e.g. the dollar) and gold coins or bullion serve as the medium of redemption for paper currency and deposits. By an “automatic” or “classical” gold standard I mean one in which there is no significant central-bank interference with the functioning of the market production and arbitrage mechanisms that equilibrate the stock of monetary gold with the demand to hold monetary gold. The United States was part of an international classical gold standard between 1879 (the year that the dollar’s redeemability in gold finally resumed following its suspension during the Civil War) and 1914 (the First World War).

Why isn’t the gold standard more popular with current-day economists? Milton Friedman once hypothesized that monetary economists are loath to criticize central banks because central banks are by far their largest employer. Providing some evidence for the hypothesis, I have elsewhere suggested that career incentives give monetary economists a status-quo bias. Most understandably focus their expertise on serving the current regime and disregard alternative regimes that would dispense with their services. They face negative payoffs to considering whether the current regime is the best monetary regime.

Here I want to propose an alternative hypothesis, which complements rather than replaces the employment-incentive hypothesis. I propose that many mainstream economists today instinctively oppose the idea of the self-regulating gold standard because they have been trained as social engineers. They consider the aim of scientific economics, as of engineering, to be prediction and control of phenomena (not just explanation). They are experts, and an automatically self-governing gold standard does not make use of their expertise. They prefer a regime that values them. They avert their eyes from the possibility that they are trying to optimize a Ptolemaic system, and so prefer not to study its alternatives.

The actual track record of the classical gold standard is superior in major respects to that of the modern fiat-money alternative. Compared to fiat standards, classical gold standards kept inflation lower (indeed near zero), made the price level more predictable (deepening financial markets), involved lower gold-extraction costs (when we count the gold extracted to provide coins and bullion to private hedgers under fiat standards), and provided stronger fiscal discipline. The classical gold standard regime in the US (1879-1914), despite a weak banking system, did no worse on cyclical stability, unemployment, or real growth.

The classical gold standard’s near-zero secular inflation rate was not an accident. It was the systemic result of the slow growth of the monetary gold stock. Hugh Rockoff (1984, p. 621) found that between 1839 and 1929 the annual gold mining output (averaged by decade) ran between 1.07 and 3.79 percent of the existing stock, with the one exception of the 1849-59 decade (6.39 percent growth under the impact of Californian and Australian discoveries). Furthermore, an occasion of high demand for gold (for example a large country joining the international gold standard), by raising the purchasing power of gold, would stimulate gold production and thereby bring the purchasing power back to its flat trend over the longer term.

A recent example of a poorly grounded historical critique is provided by textbook authors Stephen Cecchetti and Kermit Schoenholtz. They imagine that the gold standard determined money growth and inflation in the US until 1933, and so they count against the gold standard the US inflation rate in excess of 20% during the First World War (specifically 1917), followed by deflation in excess of 10% a few years later (1921). These rates were actually produced by the policies of the Federal Reserve System, which began operations in 1914. The classical gold standard had ended during the Great War, abandoned by all the European combatants, and did not constrain the Fed in these years. Cecchetti and Schoenholtz are thus mistaken in condemning “the gold standard” for producing a highly volatile inflation rate. (They do find, but do not emphasize, that average inflation was much lower and real growth slightly higher under gold.) They also mistakenly blame “the gold standard” — not the Federal Reserve policies that prevailed, nor the regulatory restrictions responsible for the weak state of the US banking system — for the US banking panics of 1930, 1931, and 1933. Studies of the Fed’s balance sheet and activities during the 1930s have found that it had plenty of gold (Bordo, Choudhri and Schwartz, 1999; Hsieh and Romer, 2006, Timberlake 2008). The “tight” monetary policies it pursued were not forced on it by lack of more abundant gold reserves.

There are of course serious economic historians who have done valuable research on the performance of the classical gold standard and yet remain critics. Their main lines of criticism are two. First, they too lump the classical gold standard together with the very different interwar period and mistakenly attribute the chaos of the interwar period to the gold standard mechanisms that remained, rather than to central bank interference with those mechanisms. In rebuttal Richard Timberlake has pertinently asked how, if it was the mechanisms of the gold standard (and not central banks’ attempts to manage them) that destabilized the world economy during the interwar period, those same mechanisms managed to maintain stability before the First World War (when central banks intervened less or, as in the United States, did not exist)? Here, I suggest, a strong pre-commitment to expert guidance acts like a pair of blinders. Wearing those blinders, even if it is seen that the prewar system differed from and outperformed the interwar system, it cannot be seen that this was because the former was comparatively self-regulating and the latter was comparatively expert-guided.

Second, it is always possible to argue in defense of expert guidance that even the classical gold standard was second-best to an ideally managed fiat money where experts call the shots. Even if central bankers operated on the wrong theory during the 1920s, during the Great Depression, and under Bretton Woods, not to mention during the Great Inflation and the Great Recession, today they operate (or can be gotten to operate) on the right theory.

In the worldview of economics as social engineering, monetary policy-making by experts must almost by definition be better than a naturally evolved or self-regulating monetary system without top-down guidance. After all, the experts could always choose to mimic the self-regulating system in the unlikely event that it were the best of all options. (In the most recent issue of Gold Investor, Alan Greenspan claims that mimicking the gold standard actually was his policy as Fed chairman.) As experts they sincerely believe that “we can do better” by taking advantage of expert guidance. How can expert guidance do anything but help?

Expert-guided monetary policy can fail in at least three well-known ways to improve on a market-guided monetary system. First, experts can persist in using erroneous models (consider the decades in which the Phillips Curve reigned) or lack the timely information they would need to improve outcomes. These were the reasons Milton Friedman cited to explain why the Fed’s use of discretion has amplified rather than dampened business cycles in practice. Second, policy-makers can set experts to devising policies to meet goals that are not the public’s goals. This is James Buchanan’s case for placing constraints on monetary policy at the constitutional level. Third, where the public understands that the central bank has no pre-commitments, chronically suboptimal outcomes can result even when the central bank has full information and the most benign intentions. This problem was famously emphasized by Finn E. Kydland and Edward C. Prescott (1977).

These lessons have not been fully absorbed. A central bank that announces its own inflation target (as the Fed has), and especially one that retains a “dual mandate” to respond to real variables like the unemployment rate or the estimated output gap, retains discretion. It is free to change or abandon its inflation-rate target, with or without a new announcement. Retaining discretion — the option to change policy in this way – carries a cost. The money-using public, uncertain about what the central bank experts will decide to do, will hedge more and invest less in capital formation than they would with a credibly committed regime. A commodity standard — especially without a central bank to undermine the redemption commitments of currency and deposit issuers — more completely removes policy uncertainty and with it overall uncertainty.

Speculation about the pre-analytic outlook of monetary policy experts could be dismissed as mere armchair psychology if we had no textual evidence about their outlook. Consider, then, a recent speech by Federal Reserve Vice Chairman Stanley Fischer. At a May 5, 2017 conference at the Hoover Institution, Fischer addressed the contrast between “Committee Decisions and Monetary Policy Rules.” Fischer posed the question: Why should we have “monetary policy decisions … made by a committee rather than by a rule?” His reply: “The answer is that opinions — even on monetary policy — differ among experts.” Consequently we “prefer committees in which decisions are made by discussion among the experts” who try to persuade one another. It is taken for granted that a consensus among experts is the best guide to monetary policy-making we can have.

Fischer continued:

Emphasis on a single rule as the basis for monetary policy implies that the truth has been found, despite the record over time of major shifts in monetary policy — from the gold standard, to the Bretton Woods fixed but changeable exchange rate rule, to Keynesian approaches, to monetary targeting, to the modern frameworks of inflation targeting and the dual mandate of the Fed, and more. We should not make our monetary policy decisions based on that assumption. Rather, we need our policymakers to be continually on the lookout for structural changes in the economy and for disturbances to the economy that come from hitherto unexpected sources.

In this passage Fischer suggested that historical shifts in monetary policy fashion warn us against adopting a non-discretionary regime because they indicate that no “true” regime has been found. But how so? That governments during the First World War chose to abandon the gold standard (in order to print money to finance their war efforts), and that they subsequently failed to do what was necessary to return to a sustainable gold parity (devalue or deflate), does not imply that the mechanisms of the gold standard — rather than government policies that overrode them — must have failed. Observed changes in regimes and policies do not imply that each new policy was an improvement over its predecessor — unless we take it for granted that all changes were all wise adaptations to exogenously changing circumstances. Unless, that is, we assume that the experts guiding monetary policies have never yet failed us.

Fischer further suggested that a monetary regime is not to be evaluated just by the economy’s performance, but by how policy is made: a regime is per se better the more it incorporates the latest scientific findings of experts about the current structure of the economy and the latest models of how policy can best respond to disturbances. If we accept this as true, then we need not pay much if any attention to the gold standard’s actual performance record. But if instead we are going to judge regimes largely by their performance, then replacing the automatic gold standard by the Federal Reserve’s ever-increasing discretion cannot simply be presumed a good thing. We need to consult the evidence. And the evidence since 1914 suggests otherwise.

Contrary to Fischer, there is no good reason to presume that expert-guided monetary regimes get progressively better over time, because there is no filter for replacing mistaken experts with better experts. We have no test of the successful exercise of expertise in monetary policy (meaning, superiority at correctly diagnosing and treating exogenous monetary disturbances, while avoiding the introduction of money-supply disturbances) apart from ex post evaluation of performance. The Fed’s performance does not show continuous improvement. As previously noted, it doesn’t even show improvement over the pre-Fed regime in the US.

A fair explanation for the Fed’s poor track record is Milton Friedman’s: the information necessary for successful expert guidance of monetary policy is simply not available in a timely fashion. Those who recognize this point will be open to considering the merits of moving, to quote the title a highly pertinent article by Leland B. Yeager, “toward forecast-free monetary institutions.” Experts who firmly believe in expert guidance of monetary policy, of course, will not recognize the point. They will accordingly overlook the successful track record of the automatic gold standard (without central bank management) as a forecast-free monetary institution.

[Cross-postefd from Alt-M.org]

A lengthy New York Times article over the weekend touches on a contradiction in the U.S. strategy against the Islamic State in Iraq and Syria (ISIS). Even as the United States cooperates in a de facto tactical alliance with Iran against ISIS, we’re engaged in a longer-term strategy against Iranian influence in the Middle East. U.S. and Iranian-backed forces have even clashed in battlefield skirmishes in recent weeks.

Picking a fight with an implicit ally is problematic for many reasons. Perhaps most worryingly, such clashes risk sucking U.S. forces deeper into Syria’s civil war.

The article quotes Lebanese scholar Kamel Wazne’s argument that the Trump administration, with encouragement from Saudi Arabia and other Gulf States, is “turning up the heat against Iran,” and eager to prevent it from establishing “’Shiite crescent’ of influence from Iran to Lebanon” when the Islamic State is defeated. This stance, we’re told, “puts the United States at loggerheads with the pro-government alliance in Syria.”

The stated concern is that Shiite-controlled territory provides a land route for supplying Iranian allies and proxies. But, according to Ilan Goldenberg and Nicholas Heras, writing in The Atlantic, “moving large amounts of weaponry across a 1,000-mile stretch of difficult territory in Iraq and Syria isn’t exactly an ideal logistics plan. Plus, Iran already has the ability to fly supplies into Damascus, and, from there, move them to Hezbollah in Lebanon.”

One suspects what is really driving the U.S. approach here is fealty to existing alliances. Some of this boils down to a kind of compulsive status quo bias. The Sunni Arab Gulf states have been U.S. partners for many years, despite evidence that they act in ways that undermine U.S. interests. With oil sales, lobbying largesse, flattery, and avoidance of direct challenges to top U.S. priorities, they dissuade policymakers from reevaluating that posture.

But there is a more practical rationale. The Sunni Arab Gulf states host U.S. military bases and enable American power projection in the Middle East. If relationships sour, we could lose that access. In the minds of U.S. policymakers, that would damage American leadership and influence. Washington therefore tends to side with the Gulf states.

The problem with having huge overseas military bases, however, is that we tend to use them. Permanently maintaining tens of thousands of U.S. troops throughout the Gulf region can enhance the temptation for policymakers to intervene for bad reasons. As should be clear from the past 25 years of habitual interventionism in the Middle East, “power projection” can be more a liability than an asset.

Don’t we need bases in the Gulf to protect the free flow of oil? Actually, no. Much academic research demonstrates that threats to the flow of Gulf oil are remote and don’t require forward deployment to mitigate. According to Joshua Rovner and Caitlin Talmadge, the policy of “large, permanent peacetime land forces in the Gulf” is not particularly useful for oil security and has often been “just as counterproductive as the vacuums created by hegemonic absence.” Eugene Gholz and Daryl Press similarly argue, “the day-to-day peacetime presence of U.S. military forces in the Persian Gulf region is not merely ineffective; it is probably counterproductive for protecting U.S. oil interests.”

Another justification for America’s permanent military presence is managing local disputes between regional players. But U.S. backing may encourage clients to heighten conflict. The recent Saudi-Qatari split is a case in point.

Neither are U.S. bases necessary for counterterrorism missions. In any case, military action in the post-9/11 era, as Micah Zenko of the Council on Foreign Relations points out, has created more enemies than it has eliminated and destabilized the region seemingly beyond repair.

Long-term American interests aren’t served by placating traditional Sunni allies that host U.S. military bases. Rather than trying to protect the future of power projection, Washington should be looking for ways to extricate itself from the Middle East.

Fifty years ago today the Supreme Court struck down Virginia’s ban on interracial marriage.

Mildred Jeter, a black woman (though she also had Native American heritage and may have preferred to think of herself as Indian), married Richard Loving, a white man, in the District of Columbia in 1958. When they returned to their home in Caroline County, Virginia, they were arrested under Virginia’s anti-miscegenation statute, which dated to colonial times and had been reaffirmed in the Racial Integrity Act of 1924. The Lovings were indicted and pled guilty. They were sentenced to a year in jail; the state’s law didn’t just ban interracial marriage, it made such marriage a criminal offense. However, the trial judge suspended the sentence on the condition that they leave Virginia and not return together for 25 years. In his opinion, the judge stated:

Almighty God created the races white, black, yellow, malay, and red, and he placed them on separate continents. And but for the interference with his arrangement there would be no cause for such marriages. The fact that he separated the races shows that he did not intend for the races to mix.

Five years later they filed suit to have their conviction overturned. The case eventually reached the Supreme Court, which struck down Virginia’s law unanimously. Chief Justice Earl Warren wrote for the court,

The freedom to marry has long been recognized as one of the vital personal rights essential to the orderly pursuit of happiness by free men. Marriage is one of the “basic civil rights of man,” fundamental to our very existence and survival.

Here’s how ABC News reported the case on June 12, 1967:

The Loving case was a milestone in the progress toward a country that truly guarantees every citizen life, liberty, and the pursuit of happiness and equal protection of the laws. The story of the case has been told in a documentary, a feature films, books, and many a law school symposium. And of course it played a key role four decades later in the legal recognition of same-sex marriage.

David Boies and Ted Olson, the two lawyers who led the challenge to California’s Proposition 8, which outlawed same-sex marriage in 2008, connected the Loving case to the case of Perry v. Schwarzenegger here:

In 2011, as their case proceeded through the federal courts, Boies and Olson spoke at the Cato Institute, joined by John Podesta, then president of the Center for American Progress, and Robert A. Levy, chairman of Cato. Podesta and Levy served as co-chairs of the advisory committee of the American Foundation for Equal Rights, the nonprofit group that brought the Perry case. They wrote in the Washington Post in 2010:

Now, 43 years after Loving, the courts are once again grappling with denial of equal marriage rights — this time to gay couples. We believe that a society respectful of individual liberty must end this unequal treatment under the law….

Over more than two centuries, minorities in America have gradually experienced greater freedom and been subjected to fewer discriminatory laws. But that process unfolded with great difficulty.

As the country evolved, the meaning of one small word — “all” — has evolved as well. Our nation’s Founders reaffirmed in the Declaration of Independence the self-evident truth that “all Men are created equal,” and our Pledge of Allegiance concludes with the simple and definitive words “liberty and justice for all.” Still, we have struggled mightily since our independence, often through our courts, to ensure that liberty and justice is truly available to all Americans.

Thanks to the genius of our Framers, who separated power among three branches of government, our courts have been able to take the lead — standing up to enforce equal protection, as demanded by the Constitution — even when the executive and legislative branches, and often the public as well, were unwilling to confront wrongful discrimination.

In his remarks at Cato, and in this newspaper column, Levy argued that it would be best to get the government out of marriage entirely—let marriage be a private contract and a religious ceremony, but not a government institution, a point that I have also made. For some, that’s a libertarian argument against laws and court decisions that would extend marriage to gay couples: it would be better to privatize marriage. But Levy goes on to say:

Whenever government imposes obligations or dispenses benefits, it may not “deny to any person within its jurisdiction the equal protection of the laws.” That provision is explicit in the 14th Amendment to the U.S. Constitution, applicable to the states, and implicit in the Fifth Amendment, applicable to the federal government.

In the end the Supreme Court did find in 2015 that same-sex couples have a right to marry, in the case of Obergefell v. HodgesI rather wished the Court had made the parallel case of Love v. Beshear (or better yet Love v. Kentucky) the main case, so that the Loving decision could be followed by the Love decision.

As those cases proceeded through the courts, there were legitimate objections based on federalist and democratic principles. One might say that marriage law has always been a matter for the states, and it should stay that way. Let the people of each state decide what marriage will be in their state. Leave the federal courts out of it. Federalism is an important basis for liberty, and that’s a strong argument. There’s also a discomfiting argument that a Supreme Court decision striking down bans on gay marriage is undemocratic, that it would be better to let the political process work through the issue. Some people, even supporters of gay marriage, warned that a court decision could be another Roe v. Wade, with decades of cultural war over an imposed decision.

Those are valid objections. Not all issues have an obvious right side. In this case, I always ask critics of the federal court decisions striking down gay marriage bans, How do you feel about the Loving case? Do you think the Court should have declined to strike down state bans on interracial marriage (which were still highly popular in 1967, according to the Gallup poll)? And if you do support the Loving decision, then how are these cases different? The Cato Institute urged the Court, in an amicus brief, to find that bans on same-sex marriage violate the equal protection clause of the Constitution.

Here is one more video, featuring the speakers from the Cato forum on Perry v. Schwarzenegger (plus me):

Going forward, I believe we will recognize both Loving and Obergefell as landmark decisions that extended liberty and justice—and the freedom to marry—to all. Today we celebrate the late Richard and Mildred Loving, and their lawyers, and the victory that they won for all Americans.

During the presidential campaign, Donald Trump delighted in waving to packed crowds while the Rolling Stones’ “You can’t always get what you want” played.  At the time, the song seemed like a repudiation of the Republican elites who had failed to support his campaign. Today, as his Middle East policy careens off the rails, it’s a concept the President himself should learn to grasp.

Mere hours after Secretary of State Rex Tillerson announced that tensions between Qatar, Saudi Arabia and other regional states were negatively impacting the fight against ISIS and calling for all sides to defuse tensions, the President contradicted him, publicly castigating Qatar for terrorist financing, and backing the Saudis in their campaign against Doha. In this, as in other things, Trump appears not to understand the trade-offs inherent in his own Middle East policies.

Certainly, the rift between Qatar and other Gulf states predates Donald Trump. Tensions have been high for years, particularly during the Arab Spring, when the Gulf states often backed different sides in the political struggles and wars that convulsed the region. As I described in a Cato Policy Analysis in 2014:

“As early as June 2012, media sources reported that Saudi Arabia, Qatar, and Turkey were arming anti-regime rebels [in Syria] with both light and heavy weapons… The vast quantities of money and arms they have provided during the past three years have driven competition among Syria’s rebel groups. This competition has increased the conflict’s duration and has reduced the likelihood that the rebels will eventually triumph.”

This competition was mirrored in other regional states. In Egypt, Qatari money and friendly coverage from their Al Jazeera network helped to propel Mohammed Morsi to power, with Saudi money later propping up the Sisi regime which replaced him. In Libya, Qatar and the United Arab Emirates backed distinct rebel factions, undermining hopes of a settlement and tipping the country back into civil war.

Nor is the President wrong in his assertion that Qatar has a longstanding problem with terrorist financing. The state itself openly supports Hamas, and has long been one of the more ‘permissive’ jurisdictions for private citizens to finance extremist groups throughout the region. As David Cohen, former Undersecretary for Terrorism and Financial Intelligence at the Treasury Department noted in 2014:

“Qatar has become such a permissive terrorist financing environment, that several major Qatar-based fundraisers act as local representatives for larger terrorist fundraising networks…”

But today’s anti-Qatar coalition is less concerned about this. Indeed, Saudi Arabia and the United Arab Emirates have themselves backed extremist groups in regional conflicts; Kuwait is a key center of regional terrorist financing. Instead, these states are concerned primarily with Qatar’s relatively independent foreign policy, and its willingness to back political groups like the Muslim Brotherhood which can pose a domestic political threat to them.

The crisis has resulted in closed borders and airspace, and created the potential for food and supply shortages in Qatar. For the United States, these restrictions have a real and negative impact on America’s anti-ISIS campaign, which is largely based out of Qatar’s Al Udeid airbase. The approximately 10,000 U.S. troops based in Qatar are also a major concern, though one the President has yet to mention.

Indeed, despite these concerns – and despite the efforts of Tillerson, Mattis and others to mediate the dispute, and to walk back the President’s rash tweets – Trump himself appears determined to publicly take the Saudi side in this dispute and force unity within the GCC. In doing so, he risks raising regional tensions, and complicating the anti-ISIS campaign that was the cornerstone of his campaign.

Foreign policy often requires trade-offs. It is no doubt possible that long-term pressure from regional states may induce Qatar to scale back the scope of its foreign policy. But this will come at the cost of other U.S. foreign policy objectives in the region. As the President will eventually learn, in foreign policy, you really can’t always get everything you want.

Ever since President Trump and budget director Mick Mulvaney released a proposed federal budget that includes cuts in some programs, the Washington Post has been full of articles and letters about current and former officials and program beneficiaries who don’t want their budgets cut. Not exactly breaking news, you’d think. And not exactly a balanced discussion of pros and cons, costs and benefits. Consider just today’s examples:

[O]ver 100,000 former Fulbright scholars, among them several members of Congress, are being asked to lobby for not only full funding but also a small increase.

As a former Federal Aviation Administration senior executive with more than 30 years of experience in air traffic control, I believe it is a very big mistake to privatize such an important government function. 

On Thursday, all seven former Senate-confirmed heads of the Energy Department’s renewables office — including three former Republican administration officials – told Congress and the Trump administration that the deep budget cut proposed for that office would cripple its ability to function.

This is nothing new. Every time a president proposes to cut anything in the $4 trillion federal budget — up from $1.8 trillion in Bill Clinton’s last budget — reporters race to find “victims.” And of course no one wants to lose his or her job or subsidy, so there are plenty of people ready to defend the value of each and every government check. As I wrote at the Britannica Blog in 2011, when one very small program was being vigorously defended:

Every government program is “well worth the money” to its beneficiaries. And the beneficiaries are typically the ones who lobby to create, expand, and protect it. When a program is threatened with cuts, newspapers go out and ask the people “who will be most affected” by the possible cut. They interview farmers about whether farm programs should be cut, library patrons about library cutbacks, train riders about rail subsidy cuts. And guess what: all the beneficiaries oppose cuts to the programs that benefit them. You could write those stories without going out in the August heat to do the actual interviews.

Economists call this the problem of concentrated benefits and diffuse costs. The benefits of any government program — Medicare, teachers’ pensions, a new highway, a tariff — are concentrated on a relatively small number of people. But the costs are diffused over millions of consumers or taxpayers. So the beneficiaries, who stand to gain a great deal from a new program or lose a great deal from the elimination of a program, have a strong incentive to monitor the news, write their legislator, make political contributions, attend town halls, and otherwise work to protect the program. But each taxpayer, who pays little for each program, has much less incentive to get involved in the political process or even to vote.

A $4 trillion annual budget is about $12,500 for every man, woman, and child in the United States. If the budget could be cut by, say, $1 trillion — taking it back to the 2008 level — how much good could that money do in the hands of families and businesses? How many jobs could be created? How many families could afford a new car, a better school, a down payment on a home? Reporters should ask those questions when they ask subsidy recipients, How do you feel about losing your subsidy?

Several prominent East Asia experts declared South Korean president Moon Jae-in’s decision to suspend the deployment of the Terminal High Altitude Area Defense (THAAD) antimissile system a big win for China.

Ely Ratner, a former advisor to Vice President Joe Biden, tweeted “China successfully coerces U.S. ally while U.S. has no ambassador, and no assistant secretary of Defense or State.” Tweets by Mira Rapp-Hooper, Abraham Denmark, and Kelly Magsamen echo Ratner’s view that Chinese pressure on South Korea is tied to Moon’s suspension decision. Such assessments are rooted in well-document evidence of China’s opposition to the THAAD deployment and its campaign of economic pressure against South Korea.

The argument that the THAAD suspension is a result of Chinese coercion is not without merit, but this emerging consensus ignores an alternative explanation for Moon’s decision based on domestic politics in South Korea. It is important to take domestic factors surrounding the THAAD deployment and current suspension into account as they may paint a more accurate picture of the decision to suspend the deployment.

The proximate cause of the suspension was a decision by South Korea’s Ministry of National Defense (MND) to withhold information about the delivery of four THAAD launchers from President Moon. A THAAD battery consists of six truck-mounted launchers, an X-band TPY-2 radar unit, and fire control units. Two launchers, the radar, and fire control systems are already deployed in South Korea. China is trying to pressure South Korea to remove THAAD, but the decision to suspend THAAD deployment was spurred by the MND shooting itself in the foot.

Moon’s decision to suspend THAAD deployment may be unpopular with American Asia-watchers, but it will likely enjoy higher popularity with his constituents. THAAD is a very divisive issue in South Korea. Support for THAAD deployment was closely linked with support for former president, Park Geun-hye, who was impeached in March 2017. According to a report by the Asan Institute, “President Park’s impeachment and public distrust of her administration appear to be influencing how Koreans view the issue of THAAD,” with younger people increasingly seeing THAAD in a negative light. Moon’s opposition to THAAD, which moderated somewhat over the course of his campaign, has a domestic politics rationale.

Finally, it is important to note that suspending THAAD deployment is not the same as cancelling it. The Moon administration clearly stated that the two interceptors and TPY-2 radar will remain in operation at their deployment site. Temporarily suspending the deployment of additional interceptors is not a victory for China because it is much more concerned about the THAAD’s radar than its interceptors. The TPY-2 radar’s ability to “peer deep into Chinese territory” and collect data on missile testing is seen as a serious threat to China’s relatively small nuclear arsenal. The legitimacy of these concerns may be up for debate, but Beijing will likely not view a scenario where the system’s radar remains in South Korea as a win.

Correlation is not causation. China does have an interest in rolling back THAAD deployment, it benefits from the suspension, and it is applying economic pressure to achieve its aims, but that does not mean that such pressure resulted in Moon’s decision. Unforced errors by the MND and the politically controversial nature of THAAD among the South Korean public provide an alternative lens for explaining Moon’s decision. The fact that the TPY-2 radar, the THAAD component that most worries the Chinese, will stay in place weakens the argument that Beijing successfully coerced Seoul. Chinese pressure may have influenced Moon’s decision to suspend THAAD deployment, but it is important not to overlook the domestic components of the suspension. 

At next week’s FOMC meeting, the state of the labor market will play a key role in policy deliberations. But there’s a lot more going on underneath top line unemployment numbers that make them a bad tool for monetary policy decision-making.

The May employment report is a conundrum. Employment growth and the unemployment rate sent opposing signals about labor market conditions — much like they have been doing throughout the recovery. The economy added 138,000 jobs last month, with the three-month average only at 121,000 jobs, suggesting labor market weakness.

By contrast, the unemployment rate fell to 4.3 percent — the lowest reading in 16 years. Additionally, job openings are near an all-time high. And voluntary quit rates are up. These data all suggest tight labor market conditions.

The weak employment growth is consistent with the sub-par economic growth we have experienced since the recession. But deep recessions, like the one we just experienced, are normally followed by a stronger than average recovery, not a weak one. There has been no calendar year during the recovery in which real GDP grew at three percent — a desultory performance.

The week recovery has managed a fairly steady, if very gradual, fall in unemployment, bringing it to a 16-year low. As a result, many observers declare we are at full employment. But unemployment is so low because of the length of the recovery, not overall economic strength. We have had a long-lived, weak expansion — with unemployment statistics themselves masking weaknesses in the labor market.

Unemployment” is a term of art and does not mean simply the number of people not working. It comprises the number of people not working and who are looking for a job. The unemployment rate is the number of people unemployed (in the technical sense) divided by the labor force. If people cease looking for a job, they are removed from both the unemployment measure and the labor force. They are subtracted from both the numerator and denominator; the numerator is always a smaller number. That causes the unemployment rate to fall, even if no one is getting a new job. The unemployment rate is therefore not a clear indicator of the state of the labor markets.

There is a cyclical pattern of people leaving the labor force in recessions because they are “discouraged workers” and give up looking for work. When economic recovery begins, many discouraged workers return to the labor force and secure employment. In this recovery, however, the pattern has not held up as usual.

Because of the decline in labor force participation a significant portion of the drop in the unemployment rate reflects not strength but something entirely different: a decline in the willingness to work.

Numerous causes have been offered up for the decline, with demographics frequently mentioned. The labor force includes those aged 16-64. So, with more people staying in school longer and baby boomers retiring, the labor force participation rate declines for these demographic reasons.

Demographics have much less explanatory power for people aged 25-54, the prime-aged workforce. Movement out of the labor force has been concentrated among men, with nearly 7 million from the prime-aged cohort. Nicholas Eberstadt describes them as the “vast army of jobless men who are no longer even looking for work.” Fifty years ago, the percentage of men in the prime-age category not looking for work was 6 percent. In 2015, it was two and half times larger, at 15 percent.

Millions more would be employed today if the labor-force participation rate were as high as it was in 2000. This undercuts the claim that we are at the cusp of full employment.

What is driving this?

Economic policy certainly influences work decisions. With a substantial growth in those claiming disability since the recession, Social Security Disability Insurance (SSDI) may be viewed as an alternative to rejoining the work force. Early retirement under Social Security at age 62 is also a factor. In this last recession, jobless benefits were extended to as long as 99 weeks. Coming off nearly two years of not working, lost skills and the need to retool to seek new employment make it much harder to reenter the job market.

Charles Murray emphasizes cultural and value changes in Coming Apart. It is a story of cultural and economic decline in which blue collar, white men have lost the work ethic. A more popular rendition of the story appears in J. D. Vance’s Hillbilly Elegy.

My purpose here is not to assign weights to the various explanations for men dropping out of the labor force. My goal, as stated from the outset, is to gauge the state of the labor market. What I hope to have shown is that the unemployment rate, whatever its merits at one time, is now a misleading measure. It can no longer reliably indicate what is going on in the labor market. It certainly should not be used by the Federal Reserve as either a target or indicator of monetary policy. Monetary policy is impotent in the face of declining willingness to work.

There are profound consequences to declining male participation in the work force. Economically, it is a drag on employment growth and GDP growth. The social costs are even higher. Men without work are men without dignity. That leads to substance abuse and other ills

There are certainly policy steps that can be taken to address these issues (for example, addressing SSDI benefits). Monetary policy is not one of them.

Ultimately, weak employment growth is the consequence, not of weak demand as some suppose, but tight supply — caused largely by a declining willingness to work among men. We are a long way from full employment in any meaningful sense. But we may be at the fullest employment possible given underlying social trends and existing economic entitlements.

Whatever the FOMC decides at its meeting next week, it should not be influenced by a number — the unemployment rate — whose movements no longer provide clear signals of labor market conditions. That conclusion follows regardless of one’s views on the dual mandate for the Federal Reserve.

[Cross-posted from Alt-M.org]

Goldman Sachs CEO Lloyd Blankfein tweeted Tuesday: “Arrived in China, as always impressed by condition of airport, roads, cell service, etc. US needs to invest in infrastructure to keep up.”

This raises an interesting question which I consider in my recently released paper: how do we know how much infrastructure investment is needed in the US?

From an economic perspective, the answer is certainly not “invest to the point where our airports feel as high quality as China’s.” But absent real markets, the amount “needed” is difficult to quantify - an example of the “knowledge problem” associated with central planning.

What level of congestion would drivers tolerate before they were willing to finance road expansion, for example? Eliminating all congestion would be prohibitively expensive. So how far should expansion go? How often should a road be repaired? How much transportation should be by train?

Markets are good at finding the optimal mix of infrastructure spending over time and rewarding those that are better at satisfying demand. Governments, even with the best of intentions, lack the necessary knowledge to find that mix.

Cost–benefit analysis of new projects can be undertaken to decide where scarce resources deliver the highest returns. But that is a very imperfect methodology, and does not tell us anything about “how much” should be invested overall.

In this vacuum, different proxies for how much “should” be invested are cited:

  • The American Society of Civil Engineers estimates how much it would cost to improve the infrastructure to a set standard as measured by eight different criteria
  • Public investment levels are compared with other countries, or to previous periods of US history
  • International surveys of infrastructure quality or capacity are compared
  • Quality indicators are tracked over time

But all of these measures have problems from an economic perspective.

There is an obvious self-interested component to the estimates of engineers. But more importantly, sub-measures on quality tell us little about demands and future needs for infrastructure. Part of the survey may be associated with improving the quality of transit systems, for example. But what if driverless cars render them obsolete?

Public investment levels across countries or historically likewise tell us little about what we need to invest today in this country in particular. And international surveys tend to ignore important considerations: many cross-country comparisons of transport infrastructure, such as the World Economic Forum’s Global Competitiveness Report, involve subjective survey answers across countries, meaning that results are shaped by expectations. More objective indices, such as the capacity measures examined by the Kiel Institute (where the US ranks very highly), ignore the quality of that infrastructure.

Of course, you can track quality measures over time too. We know, for example, that the proportion of bridges which are structurally deficient has been falling over the past two decades, but measures of congestion have been rising. This could be highly indicative and used to inform spending decisions. But in some situations allowing physical infrastructure to age or deteriorate may be sensible given the falling demand for its use. As I outline in detail in my new paper, there are many examples of politicians prioritizing things other than economic growth in deciding levels and distribution of transport funds too.

No, in order to really get more responsive infrastructure investment to need, we need more markets in infrastructure provision and to remove the artificial barriers which prevent private investments. A greater use of user fees, such as tolling and congestion pricing, for example, could lead to a greater link between demands and funding.

Read more about all this in my paper here.

 

Education reporters such as Chalkbeat’s Matt Barnum continue to cling to the idea that pouring exorbitant resources into an inefficient school system can make a sustainable difference in the lives of America’s children. To support the claim, Barnum points to a couple of recent studies examining the association between court-ordered education spending increases and student outcomes.

Jackson, Johnson, and Perisco (2016) conclude that an annual 10% increase in per pupil spending for all 12 years of schooling leads to an increase of about a third of a year of completed education. Similarly, Lafortune, Rothstein, and Schanzenbach (2016) find that court-ordered spending increases improve test scores for the least-advantaged students by a little under a hundredth of a standard deviation per year.

However, both of these studies suffer from important methodological issues that limit their ability to identify a strong causal relationship between education dollars and student outcomes.

Methodological Problems

Obviously, court-ordered spending reforms are not random events, so using them to predict educational expenditures still results in biased estimates. The public’s desire to improve education in a given location likely leads simultaneously to court-ordered spending increases and political pressures to improve school quality.

Perhaps more concerning is that event studies like the ones Barnum cites capture an entire package of educational reforms during a particular period. For some reason, authors of these types of studies have chosen to point to spending as the cause of the altered outcomes. However, other reforms such as testing accountability, pay-for-performance, and educational choice happened during the study timeframes.

Costs vs. Benefits

For the sake of argument, let’s assume that the detected effects could actually be attributed to educational dollars.

The study by Lafortune, Rothstein, and Schanzenbach finds that a large court-ordered spending increase only raises test scores by seven-thousandths of a standard deviation per year. For the most-advantaged students, the effects are zero. The fact that the detected impacts are trivial suggests that authors are simply picking up the bias generated by their empirical techniques.

However, even if court-ordered spending decisions were indeed random, another important question arises: do the benefits justify the additional costs? In theory, pouring billions of educational dollars into systems designed to improve test scores should do just that, even if schools are not particularly efficient. Certainly, if researchers found that a million dollars per student per year increased their test scores by a couple of points, we would be neither surprised nor enthusiastic.

Defining Benefits

Further, even if traditional public schools were efficient in allocating resources towards student achievement, it still is not clear whether test scores actually matter. Allocating more resources towards increasing test scores may actually harm students if educators consequently focus less on molding nearly unmeasurable character skills such as morality and determination.

If we really want educational dollars to matter, we ought to allow children to take their public funds to the schools that are best for them. Only in that scenario will educational institutions have a strong incentive to shape the skills that individual children actually need for lifelong success.

Since President Trump announced the U.S. withdrawal from the Paris Accord there has been talk of other countries imposing “carbon tariffs” in response. The politics of this are hard to predict. I think (and hope) that such tariffs are unlikely, although if the United States starts imposing tariffs for “national security” reasons, the chances of other countries imposing carbon tariffs on us may go up.

But there is also an international legal question here: Wouldn’t carbon tariffs violate international trade obligations under the World Trade Organization or other trade agreements? There is some dense legal analysis of this question out there already (back when it was people in the U.S. talking about imposing these measures on others, Cato’s Sallie James published a good Policy Analysis of the issue). What I’m going to offer here is a short, non-legalistic explanation, which basically amounts to:  It depends on how exactly the other countries go about formulating these “tariffs.”

At one extreme, you can imagine some government somewhere being so angry with the U.S. withdrawal that it imposes an across-the-board import tariff on all U.S. imported products as a response. This blunt approach would almost certainly violate trade agreement rules.

At the other extreme, you can also imagine a more measured approach, under which a government comes up with objective criteria to assess each country’s climate policies and carbon emissions. Carbon taxes would then be imposed on products, both domestic and foreign, in a way that corresponds to these measurable criteria.  This non-discriminatory approach might not violate trade rules, especially if its focus is on environmental impact, rather than “competitiveness.”

The actual approach is likely to be somewhere in between, and is hard to assess in the abstract.  But in general terms, here is my view:  In theory, some form of “carbon tariff” could be done consistently with trade rules.  However, in practice such a measure is likely to violate, as governments generally aren’t very good at being precise, objective, and non-discriminatory in their laws and regulations.  But hopefully everyone will decide not to impose such measures, and the subject will remain an obscure academic one.

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