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The House Homeland Security Committee will markup and likely pass the Border Security for America Act (H.R. 3548) today. Among the bill’s 95 pages is this:

The Secretary of Homeland Security shall take such actions as may be necessary (including the removal of obstacles to detection of illegal entrants) to construct, install, deploy, operate, and maintain tactical infrastructure and technology in the vicinity of the United States border to deter, impede, and detect illegal activity in high traffic areas.

Media outlets are describing this as codifying Trump’s “border wall.” I have previously detailed the numerous problems with building a border wall, including the fact that it would require huge amounts of private land along the Southern border. This deprivation of the right to private property is serious, but it’s compounded by the fact that the government seizes the land first and only then, many years later in some cases, provides just compensation. Unfortunately, the Supreme Court has long ago signed off on this procedure. It’s a problem that Congress must fix.

The Problem of Seizing Private Land

Figure 1 is a map of the border that shows the federally owned portions in green. Tribal land, which comes with its own restrictions, is green with black stripes. The existing border fencing is in black and yellow. The yellow portions are vehicular barriers, and the bolded black is the pedestrian or “real” fence. The dotted line in Texas is the Rio Grande River. As you can see, most of Texas is without any barriers and is almost entirely privately owned.

Figure 1
Border Fencing and Federal Land

Source: Bloomberg

One reason why Congress built the fences where it did is due to the problems associated with seizing private land. In July 2007, Customs and Border Protection spokesperson Michael Friel explained to The Seattle Times that the fences “were going up first in New Mexico, Arizona and California, where much of the land already belongs to the federal government.” He added, “We realize that in Texas there are folks that own property, that have land on the border. That dynamic is different.”

DHS’s Inspector General (IG) concluded in 2009 that “acquiring non-federal property has delayed the completion of fence construction,” and that “CBP achieved [its] progress primarily in areas where environmental and real estate issues did not cause significant delay.” The IG report again:

For example one landowner in New Mexico refused to allow CBP to acquire his land for the fence. The land ownership predated the Roosevelt easement that provides the federal government with a 60-foot border right-of-way. As a result, construction of fencing was delayed and a 1.2-mile gap in the fence existed for a time in this area. CBP later acquired this land through a negotiated settlement.

The IG found more than 480 cases in which the federal government negotiated the “voluntary” sale of property, and up to 300 cases in which condemnation would be sought through the courts.

Legal Process and Legal Authority to Seize Private Land

Congress has already given the administration authority under a 1996 law and a 2006 law to condemn and seize land using eminent domain to build barriers. One way to address eminent domain along the border is simply to ban it. Rep. Ruben Gallego (D-AZ) has introduced a bill today that would do so. This would be effective, but it may not be politically feasible, given the wall fever that has descended on Congress.

Another approach would address the process. Right now, when Border Patrol wants to take someone’s land, they send them a letter offering them a nominal low sum of money for their land and threatening to file condemnation proceedings against them if they don’t accept it. In 2006, when the Secure Fence Act fences were built, many property owners accepted the low offer because they did not understand their right to negotiate over just compensation in court. Just compensation is a constitutional guarantee. Under the 5th amendment, “private property [cannot] be taken for public use, without just compensation.”

Just compensation refers to the fair market value of the property seized—what you could get for the land if you attempted to sell it—but less than what you would demand to receive in a voluntary sale. But in many cases, the seizure of a single strip of property in the middle of someone’s property can depreciate the value of the entire land. For this reason, it is necessary to present evidence in a court of the total impact of the seizure to the landowner. Other issues that may arise in this process are the exact boundaries of someone’s property and who exactly holds financial interests in the land. These issues also take time to sort out.

Seizures without Just Compensation

Here’s the problem: under the eminent domain statute, the federal government can seize property almost as soon as they file a condemnation proceeding—as soon as the legal authority for the taking is established—then they can haggle over just compensation later. It’s called “quick take.” Quick take eminent domain creates multiple perverse incentives for the government. 1) They can quickly take land, even when they don’t really need it, and 2) they have no real incentive to compromise or work with the land owner on compensation. The land owner’s bargaining power is significantly diminished. The federal government already possesses the property.

This means that for years, people who are subject to a border wall taking go without just compensation. The government is supposed to compensate the landowner for this time by paying interest on the agreed amount. But in the real world, many people cannot survive for years being deprived of income that they might have from the land. According to an NPR analysis of 300 fence cases, the resolved cases took more than three years to resolve. In other cases, the process took seven, eight, or even 10 years. Some cases are still pending a decade on.

Congress could rectify this injustice by requiring the federal government to work out just compensation before the wall is built or, better yet, before the land is taken. That would give the landowner a fair position to negotiate with the government and give the government a reason to respect their rights. That it would slow up a pointless waste of taxpayer dollars is just an added bonus.

E-Verify is the supposed silver-bullet of immigration enforcement. Despite its serious and unsolvable problems, the House Judiciary Committee was going to have a markup today on the Legal Workforce Act (LWA) that would mandate E-Verify for all new hires in the United States. Although they canceled the markup at the last moment, this is still a wonderful opportunity to explore the main reason why E-Verify is ineffective: employers ignore it.

E-Verify is a government system whereby employers enter the identity information of new hires via an online portal. The system compares these data with information held in the Social Security Administration (SSA) and Department of Homeland Security (DHS) databases. The employee is work authorized if the databases decide that the data are valid. A flag raised by either database returns a “tentative non-confirmation,” requiring the employee and employer to sort out whatever error has been flagged. If the employee and employer cannot sort out the errors then the employer must terminate the new employee through a “final non-confirmation.”

The states of Alabama, Arizona, Mississippi, and South Carolina have mandated E-Verify for all new hires in their states. Arizona was the first to mandate it on January 1, 2008, South Carolina mandated it on July 1, 2010, Mississippi on July 1, 2011, and Alabama on April 1, 2012. In those four states, the law demands that every employer must run every new hire’s identity information through the E-Verify system. The response to a Freedom of Information Act (FOIA) request filed by Cato shows that there are far fewer E-Verify cases or queries than there are new hires in these states, which means less than 100 percent of new hires are actually being run through the system (Table 1).

Table 1

Percentage of New Hires Run Through E-Verify by State

  Alabama Arizona Mississippi South Carolina 2008 3.64% 33.57% 11.66% 7.65% 2009 6.99% 43.49% 41.29% 23.73% 2010 13.53% 59.03% 40.41% 57.95% 2011 13.56% 57.06% 40.74% 73.12% 2012 38.69% 54.88% 44.22% 58.46% 2013 48.22% 60.92% 47.54% 69.87% 2014 45.77% 62.63% 41.44% 68.87% 2015 46.44% 73.58% 41.66% 68.64%

Sources: Author’s Calculations of Longitudinal Employer-Household Dynamics of the U.S. Census and Cato FOIA.

The number of E-Verify cases does differ somewhat per year compared to older data but the conclusion is similar: Only 57.6 percent of all new hires were run through E-Verify in 2015 in states where 100 percent of all new hires were supposed to be verified. The best-performing state was Arizona, which saw marked increases in E-Verify usage since its 2008 implementation. In 2014, Arizona had about 1.9 times as many illegal immigrants as Alabama, Mississippi, and South Carolina combined. 

At the very minimum, E-Verify cannot be effective if employers do not use it. And it’s no wonder so many employers ignore E-Verify as it comes with a 17-page memorandum of understanding and 139-page User Manual that employers must understand in order to run the program properly. Few people who are trying to run a business want to take the time to master the details of this complex government system just so they can hire somebody. Even if employers do take the time to master E-Verify, it does not provide a safe harbor from future government audits, as employers across the country have discovered. The 2006 immigration raid of Swift & Company, a Colorado-based meatpacker, found that 10 percent of the firm’s workforce were illegal immigrants even though Swift had used E-Verify since 1998. If E-Verify doesn’t work when it’s used, employers aren’t protected when the system makes errors, and they can still be punished when they rely on that system, the real question is why would any employer would actually use it?

Increasing E-Verify compliance would require worksite visits and remote audits, just like the current I-9 system. If Arizona, Alabama, Mississippi, and South Carolina cannot assure better than 73.6 percent compliance with E-Verify—all states with large political constituencies that demand immigration enforcement—how well will a nation-wide mandate fare in states that don’t have such constituencies? Not well.  

The low E-Verify compliance rate in states that have mandated the system indicates that it will fail to demagnetize the wage magnet if Congress ever mandates the LWA or a similar piece of legislation nationally. At that point, policymakers will demand more expensive and intrusive methods to guarantee that employers hire only legal workers, such as a biometric identity card. The major problems with E-Verify are economic, not technical. E-Verify has many serious problems but the low compliance rates should dampen enthusiasm among its supporters.

The other shoe is about to drop in the Boeing-Bombardier trade row.  But first, some background…

Last week, smack dab in the middle of the third round of the NAFTA renegotiations taking place in Ottawa, the U.S. Department of Commerce issued a preliminary determination in a countervailing duty case brought by the Boeing Company in May. The Countervailing Duty Law provides “relief” (usually in the form of import duties) to domestic industries that can demonstrate that they are “materially injured” or threatened with material injury by reason of sales of subsidized imports.  

In early summer, the U.S. International Trade Commission ruled, preliminarily, that there was a reasonable indication that U.S. manufacturers of large civil aircraft (i.e., Boeing) may be threatened with material injury by reason of prospective sales of aircraft from Bombardier to Delta Airlines, which may be offered at artificially low prices made possible by various government subsidies to the Canadian producer.

Subsequently, Commerce’s investigation turned up 16 different subsidy programs—equity infusions, launch aid, “provision of land for less than adequate remuneration,” various tax credits and incentives, and federal and provincial grants—constituting specific benefits to Bombardier by the governments of Canada, the United Kingdom, and the province of Quebec, which amounted to an aggregate subsidy rate of 219.6 percent ad valorem. 

By historical standards, that is a very large number. If finalized at that rate, the duty would put the U.S. market out of reach to Bombardier and—of greater significance to the U.S. economy—put Bombardier airplanes out of reach to U.S. carriers, reinforcing Boeing’s monopoly power, and ensuring higher costs of air travel and air shipping in perpetuity.

Understandably, many on both sides of the border are upset over these findings. Recriminations and demands for retaliation have been swirling. Canadian Prime Minister Justin Trudeau has threatened to cancel his government’s planned purchases of Boeing fighter jets. Even the UK government, concerned about the future of Bombardier’s manufacturing operation in Northern Ireland, has discussed retaliation.

Many analysts are interpreting Commerce’s announcement of these results as a manifestation of Trump’s “America First” worldview, with its timing intended to secure some leverage for U.S. negotiators in the NAFTA talks. But it is in no way apparent how this finding could or would be used to extract concessions from the Canadians somewhere in the negotiations. Meanwhile, the fact is that determination dates in trade cases are set according to statute (there is some scope for extensions), and this prelim was set well before the NAFTA negotiations were scheduled, which brings us to another unfortunate set of circumstances.

Just as passions are subsiding from last week’s tempest, today the Commerce Department will announce its preliminary finding in a companion antidumping case, which was also filed by Boeing in May. The Antidumping Law provides “relief” (usually in the form of import duties) to domestic industries that can demonstrate that they are “materially injured” or threatened with material injury by reason of “less-than-fair-value” imports (sales made at prices in the United States that are lower than “Normal Value.”). This is a very, very, very, very, very, very, very, very, very, very, very, very bad law, deceptively invoked under the guise of ensuring fair trade and level playing fields, which has no economic justification and is used increasingly by U.S. companies as a weapon of domestic commercial warfare to kneecap U.S. competitors and their own U.S. customers. As was the case with respect to the countervailing duty matter, the U.S. International Trade Commission ruled earlier this summer that there was a reasonable indication that domestic industry was threatened with material injury by reason of less-than-fair-value imports.

Based on the unscrupulous analysis that Commerce seems to have teed up in the AD case (the capricious details of which are described here and here), the results are likely to further inflame the situation and threaten progress in the NAFTA talks, if not North American trade relations writ large.

By the end of this year, Commerce will attempt to verify information on the record, accept new information, and modify its results, accordingly, in these companion cases. But it’s rare that Commerce makes changes favorable to the foreign exporter or U.S. importer between the preliminary and final determinations. Ultimately, the question of whether duty orders will be imposed comes down to the final injury determination rendered by the U.S. International Trade Commission. If the ITC finds that Boeing is not threatened with material injury because, for example, it finds that Boeing doesn’t even produce (nor is it capable of producing over the next few years) the kinds of aircraft that Bombardier is hoping to sell to Delta, then the cases will both terminate and all will be well. That decision is due in February 2018.

Or, if duties orders are imposed, the decisions can be challenged by Bombardier, Delta, or other parties in U.S. court or in a NAFTA dispute panel.  Although the Canadians seem to have a preference for the NAFTA panels, it is highly likely that the U.S. Court of International Trade would find all sorts of overreach by Commerce, if the Commerce analysis is based on the fictitious sales and incomplete cost data that is on the record.

In the meantime, maybe trade analysts, policymakers, and the public can think more deeply about whether these trade laws really serve U.S. interests. The laws, as written, preclude objective analysis at the ITC, forbid consideration of the effects of these punitive duties on downstream U.S. companies and consumers, and give the Commerce Department vast discretion over administrative matters that dramatically affect the bottom line—the duty rates calculated and applied. Pointing the finger at Trump and his America First policies (an understandable impulse that has been on display this past week) instead of focusing on the disruptive effects of these commercial weapons, which are easy to self-administer and operate on statutory auto pilot, wastes an important opportunity to achieve greater awareness and, possibly, some reforms. Why not put these the trade remedy laws on the NAFTA negotiating table? Really, how can one NAFTA country’s producers be dumping in another NAFTA country when nearly all tariffs are zero and there is no protected market from which to cross-subsidze cheap exports?  Let’s make these laws inutile among the NAFTA countries. Or push for a public interest test that could authorize the ITC to actually analyze the adverse impact of duties on downstream industries. Instead of piling on and lazily blaming Trump, let’s figure out how to rein in these unbalanced laws that wreaked commercial havoc during the Obama, Bush, Clinton, Bush, and Reagan adminstrations.

CNBC reports that the burger chain Shake Shack is planning to trial a new restaurant in New York which will not have a traditional cashier’s counter. Instead, “guests will use digital kiosks or their mobile phones to place [and pay for] orders.” Their order will be processed immediately to the kitchen and the guest will receive a text message when their food is ready.

Great, you might think. Shake Shack is investing in innovations which could improve the productivity of remaining workers, increasing wages (indeed, they want to pay the lower relative number of staff in this restaurant at least $15 an hour). Such investments might provide a more efficient and desirable service to customers too. This frees resources and excess labor for other more productive pursuits in the economy.

But the kicker for why Shake Shack is undertaking such investments comes later in the article:

it’s likely that in the next 15 to 20 months that areas like New York, California and D.C., in which there are many Shake Shacks, will transition to a $15 minimum wage…Adopting this payment policy in Astor Place will give the company a chance to work out the kinks before it rolls out a $15 minimum wage in these locations.

Anyone who has been to a McDonald’s in France will know what’s going on here. Shake Shack suspects that the cost of labor will rise due to an increased minimum wage, and given that projection, it’s become economic to consider investments in labor-saving technologies. Higher minimum wages act in effect as a subsidy to automation.

But these investments for productivity improvements don’t come for free. A recent paper by Grace Lordan and David Neumark finds empirical evidence showing that between 1980 and 2015, increasing the minimum wage by $1 decreased the share of low-skilled automatable jobs by 0.43 percent in general and by 0.99 percent in manufacturing. Other jobs might be created of course, but they may well be more demanding or stressful, such as overseeing the running of multiple machines or having to have the skills to deal with technical problems etc. “Regulating to innovate,” subsidizing the rapid introduction of some technologies before they are actually high quality and cost effective, drives up prices for consumers too.

Perhaps more pertinently, low-skilled workers younger than 25 and older than 40, especially women, tend to be particularly affected by the disemployment effects of automation and can find it very difficult to find replacement work given their productivity levels.

As I concluded in a recent Daily Telegraph article:

If we are moving into a period when technological innovations are speeding up, we could be hiking minimum wages dramatically at just the wrong time. It will prove enough of a policy challenge as it is, to equip people with new skills to adapt in a rapidly changing labor market. Making more low-skilled jobs uneconomic by artificially hiking the cost of labor substantially could exacerbate this change at a time before new investments would otherwise make economic sense.

Being worried about this consequence is not to be anti-technology or anti-innovation. We all recognize that mechanization and technological innovation are the only way to sustainably raise living standards. But encouraging new investments by raising business costs and driving out low-skilled jobs is another matter entirely.

Just because Luddite efforts to destroy machines was economically harmful does not mean that destroying low-skilled employment opportunities would be beneficial.

More on the minimum wage here, here, here, and here.

President Trump and his advisors are stressing that they want tax cuts for the middle class, not high earners. Trump said, “the rich will not be gaining at all with this plan,” while Treasury Secretary Steve Munchin said, “Our objective is not to create tax cuts for the wealthy. Our objective is about creating middle-income tax cuts.”

The problem is that high earners, not those in the middle, pay the vast bulk of federal income taxes. As the chart below shows, the share of federal income taxes paid by the highest-earning 10 percent has steadily risen—from 49 percent in 1980 to 71 percent by 2014. Meanwhile, the share paid by everyone else has plunged. (Source: TF based on IRS).

The Trump team is painting itself into a corner with its “tax cuts for the middle-class only” rhetoric. I fear that to satisfy that promise in coming weeks, the administration will seek to expand further the most unproductive parts of the tax plan, such as child credits. In turn, that will reduce budget room for tax reforms that would promote growth and simplify the code.

Cutting the most damaging parts of the tax code—such as our high corporate income tax rate—would benefit all Americans by spurring growth and raising wages. That is what Trump and Republicans should be focusing on.

In a note to my last post, I observed that Liberty Street Economics, the blog of Federal Reserve Bank of New York, promised a follow-up to its post addressing the advantages of the Fed’s interest payments on required reserves. The follow up would address the benefits of paying interest on banks’ excess reserves and of thereby establishing a “reserve-abundant regime.”

That follow-up post has since appeared, under the title “Why Pay Interest on Excess Reserve Balances?” As I’d anticipated, it answers the question it poses by outlining some supposed benefits of having banks sit on immense piles of cash, without so much as hinting at the existence of any countervailing costs. As soon as those costs are considered, the supposed benefits turn out to be largely, if not entirely, fictitious.

Real and Pseudo Reserve Economies

According to the post’s authors, Laura Lipscomb and Heather Wiggins (Board of Governors) and Antoine Martin (FRBNY), a major advantage of paying interest on excess reserves (IOER) is that, by ensuring that banks possess “a relatively abundant supply of [excess] reserves,” it “makes the U.S. payment system more efficient.” Besides no longer having to rely “on intraday and overnight credit from the Fed,” the authors explain, banks made flush with reserves “are more willing to relinquish reserves early and are therefore engaging in less economizing and hoarding of reserves, making the payment system more efficient.”

Less economizing and [less] hoarding”? Usually, when we speak of someone “economizing” on X, we mean that he or she makes do with less of X. To do less economizing of X is therefore to require more of X. So how can banks do “less economizing and hoarding of reserves”? They can’t. They can either economize less and hoard more, or they can economize more and hoard less.

Nor can there be any doubt which of these alternatives IOER encourages. Before that policy was introduced, U.S. banks seldom held more than $2 billion in excess reserves collectively. Today they hold more than $2 trillion. If that isn’t less economizing and more hoarding, I can’t imagine what would qualify. Certainly to claim, as Lipscomb, Martin, and Wiggins do, that it marks an improvement in the efficiency of the payments system, seems on the face of it quite a stretch.

But let’s allow the authors to elaborate:

When reserves are scarce, banks are more reliant on the reserves they receive from other banks to make their own payments than when reserves are more abundant. So reserve scarcity exposes the payment system to a greater risk that a disruption at one bank could spill over and affect the system as a whole. Also, having a larger share of payments settled early reduces the potential consequences of a late day operational disruption.

Furthermore,

the amount of intraday credit the Fed needs to extend to banks to cover daylight overdrafts … is much lower when the supply of reserves is high. … A large supply of reserves gives banks a sizable buffer to make payments throughout the day without needing to wait for the receipt of other payments or relying on daylight credit from the Fed or other counterparties.

Finally,

In addition to needing less daylight credit, banks require less overnight credit in the form of discount window loans when reserves are abundant. The relatively abundant reserve environment means that fewer banks are caught short of balances at the end of the day, or at the end of a reserve maintenance period, which can lead to a scramble for funds, a spike in the federal funds rate, and banks occasionally accessing the discount window.

What’s wrong with that? The terminology, for starters. In the absence of IOER, although excess reserves are certainly “scarce” in the sense of being valuable, and therefore unlike salt water to a sailor or sand to a Bedouin, they are not usually “scarce” in the sense of being in short supply. The difference matters because, despite the impression conveyed in the above passages, the “scarcity” of reserves, properly understood, is not a problem with which bankers must cope, like so many farmers coping with a drought. Rather, the degree to which reserves are “scarce” is one normally chosen by the banks themselves. In econ lingo, it is itself the solution to an optimization problem, involving the weighing of private benefits and costs, including the costs of having to rely on occasional intraday and overnight loans.

The economics of the problem in question are actually pretty simple — so simple that, over the course of three decades, I taught them to several thousand undergraduates. As it happens, I still have a copy of my class notes.  Here is the relevant page:

For “prudential” read “excess,” and never mind the typos. The point is that the mere fact that banks can avoid having to borrow if they hold more reserves hardly suffices to establish that getting them to do so makes either the banks themselves or the public better off.

An Inefficient Reserve Market?

Am I then claiming that, without IOER, the market for bank reserves would be perfectly efficient, with banks holding just the right amount of excess reserves? Not at all. Without IOER, the market for excess reserves might be inefficient for several reasons. It might be so because the Fed doesn’t charge banks the right price for daylight overdrafts or overnight loans. And it might be so because the Fed doesn’t reward them sufficiently for holding excess reserves.

Setting aside the problem of routinely mispriced Fed credit, which was once very serious but has since been somewhat rectified, many economists, myself included, have long understood that there’s a case for reducing banks’ opportunity cost of reserve holding by paying a positive return on reserves. But that hardly means that banks can’t be overcompensated for their reserve holdings, or that they can’t thereby be encouraged to hold inefficiently large quantities of excess reserves.

The well-known arguments for paying interest on bank reserves are in fact arguments for paying a rate of interest reflecting the true opportunity cost of reserve holding. That means a “Friedman rule” rate not lower but also no higher than market rates on other liquid and risk-free assets.

Furthermore, because the Friedman rule applies to a hypothetical economy free of nominal rigidities and other frictions, even that rate is likely to be too high in practice. In their recently published study devoted to determining an optimal IOER rate in light of real-world frictions, Matthew Conzoneri, Robert Cumby, and Behzad Diba arrive at an optimal steady state tax on excess reserves of 20 to 40 basis points, implying an optimal IOER rate equal to the Friedman rate minus that optimal tax. Allowing for what the authors’ refer to as a “bank lending externality” pushes the optimal IOER rate down even more, and can even make it negative.

Yet almost since IOER was first introduced, in October 2008, the Fed’s practice has been to set its IOER rate above, if not substantially above, corresponding market rates, and to thereby encourage banks, not merely to fine-tune their reserve holdings to equate marginal (social) benefits and costs, but to pile-up as many reserves as the Fed sends their way.

In short, slice and dice it however you like, there is no way to make sense of Liberty Street Economics’ claim that the Fed’s interest payments on excess reserves serve to achieve an optimal quantity of bank reserves, or to otherwise make our payments system more efficient.

There’s No Such Thing as a Free (Liquid) Lunch

But hold on: can’t the Fed produce reserves costlessly? And doesn’t that mean that, even if there are more than enough of them, their presence can’t possibly be wasteful?

No, and no. Even if it didn’t cost a thing for the Fed to increase the nominal quantity of reserves, it costs plenty to get banks to increase their excess reserve holdings, which is what the Fed does by paying interest on excess reserves. Every dollar that banks keep in the form of excess reserves is a dollar they might instead have traded (along with some others) for a security, or lent. (And if you think that banks don’t lend reserves, you need to read this Nick Rowe post.)

As the chart below shows, in the good-old, pre-IOER days, when U.S. commercial banks hardly held any excess reserves, their total loans and leases amounted to about 100 percent of their deposits. Today, in contrast, banks hold excess reserves equal to about 20 percent of their deposits, and loans and leases equal to about 80 percent of their deposits. That change is a truer index of the cost of IOER.

None of this would matter if the Fed acted as an efficient savings-investment intermediary, as commercial banks are able to do, at least in principle. But the Fed isn’t a commercial bank, and it doesn’t employ funds at its disposal the way commercial banks do. It makes loans to other banks, but not to businesses or consumers. And its investments are typically confined to Treasury and some agency securities.

High-Tech Financial Repression

When central banks of less-developed countries impose high reserve requirements on their nations’ banks, for the sake of steering more of their citizens’ savings onto their own balance sheets, and thence to their governments’ coffers, economists call it “financial repression.” And they condemn it.

How come? Because ever since Adam Smith wrote his eloquent chapter (No. 2 of Book 2) on the subject, they’ve understood the crucial role bank lending plays in boosting economic productivity and otherwise spurring growth. In recent decades that understanding has been reinforced by a vast crop of writings on the topic, both theoretical and empirical.

When, on the other hand, the Federal Reserve gets banks to accumulate trillions of dollars in excess reserves, and to thereby fund its acquisition of an equivalent amount of government and mortgage-backed securities (where by “vast” I again refer not just to nominal but to real quantities), Federal Reserve economists call it “making the payments system more efficient”!

Call it what they will, the Fed’s policy is also financially repressive. By diverting savings to the government and its agencies and to whatever endeavors they favor, it denies that much funding to other prospective borrowers, many of whom — and small business owners especially — would employ the funds in question more productively.

According to a recent working paper by Brian Chen, Samuel Hanson, and Jeremy Stein, all of Harvard, overall bank lending to small businesses has yet to fully recover the ground it lost in 2008, and has hardly recovered at all at the top 4 banks. The evidence suggests, furthermore, that this sustained decline, which may have played a part in “the weak productivity growth in the decade since the crises,” reflects “a systematic and sustained supply-side shift.” Although Chen, Hanson, and Stein don’t investigate the cause of the shift, and don’t mention IOER as a possible culprit, it is certainly a likely suspect. Among other things it’s well-known that the biggest banks have also been among the chief accumulators of excess reserves.

But surely, you may be thinking, there’s a difference between forcing banks to hold more reserves, as some less-enlightened central banks have done, and rewarding them for doing so. There is, but it doesn’t make the Fed’s policy much less financially repressive. The difference is that, instead of imposing a “reserve tax” on banks and their depositors, the Fed’s above-market IOER rate grants them a subsidy proportional to the difference between the actual IOER rate and its optimal counterpart. Although the subsidy serves to somewhat enhance rather than to reduce the attractiveness of bank deposits, that slight gain is more than offset by the diversion of deposited savings to less productive uses.

Who, then, foots the bill for the subsidy? Taxpayers do. That becomes evident once one considers that the Fed, being a relatively inefficient intermediary, can afford to pay above-market rates on banks’ reserves only by either (1) sacrificing some of the revenue it would ordinarily remit to the Treasury or (2) taking extraordinary risks in order to earn more revenue than usual. As Deborah Lucas explained at a recent Shadow Open Market Committee meeting, the Fed has taken the latter course by using bank reserves, which are short-term assets, to fund longer-term Treasuries and MBS. “There is,” she adds, “no free lunch from that transaction.” Instead, the Fed’s extra earnings reflect increased risk, which

ultimately falls on taxpayers, who serve as (conscripted) equity holders for any risky government investment. When the budget treats cash flows generated from a market risk premium as revenues but does not recognize an offsetting cost, it is arguably equivalent to levying a hidden tax that confiscates the risk premium to pay for additional spending.

Off Balance

In fairness to the authors of the Liberty Street Economics post, they never actually claim to be offering an objective assessment of the the Fed’s practice of paying interest on banks’ excess reserves. Instead, they state their intent is to review some “potential benefits” of that practice. So perhaps it is unfair of me to suggest that their review is misleading.

But I don’t think so. First of all, when economists refer to a policy’s “benefits,”  they often mean its net benefits. So when that’s not what they mean, they should be clear about it, by at least noting that the policy also has costs that they have chosen not to consider. They should also make it clear that, because they are considering only the benefit side of a full cost-beneft reckoning, their assessment should not be understood as implying that the policy is a good idea. Instead of taking such precautions, Lipscomb, Martin, and Wiggens make it all too easy for readers of their article to assume that the “benefits” it describes do in fact suffice to justify the Fed’s IOER policy.

Yet all is not lost, for our authors can easily make up for any misunderstanding their post may have caused. To do so, they need only publish a companion piece, which they could call  “Why Not Pay Interest on Excess Reserve Balances?,” addressing all the disadvantages of paying interest on banks’ excess reserves, and especially of paying it at above-market rates. The piece should of course address the drag on productive investments that comes from stuffing banks with reserves they don’t need. But it needn’t stop there. It could also point out how above-market IOER undermines monetary control, and how (by severing balance-sheet management from monetary control) it makes it all too easy for the Fed to  play the part of a fiscal fairy godmother. Needless to say, the essay should studiously avoid even a whisper concerning any potential benefits to be expected from the policy.

I should think that a month would be more than enough time for three experts to prepare the essay in question. So let’s give them a deadline: November 1st. If they come through, we can all celebrate the general gain in understanding to which their two-part assessment is bound to contribute. And if not, we will still have learned something, to wit: that the Fed’s own assessments of the merits of its policies are best taken with a grain of salt.

[Cross-posted from Alt-M.org]

As the rankings in the recently-released Economic Freedom of the World: 2017 Annual Report make clear, the United States and China find themselves in very different places on the matter of trade policy. Occupying the somewhat middling overall position of number 63 (of the 159 jurisdictions ranked) in the “Freedom to Trade Internationally” category, the U.S. is nonetheless significantly ahead of China at number 108. 

Worth noting, however, are incipient signs that the two countries may be trending in different directions. Traditionally a relatively closed and protectionist economy, China through its words and even some of its actions has shown encouraging signs of moving towards greater openness (a topic I explore in a new policy analysis). In depressing contrast, trade policy under the Trump administration may be headed for a different track. A number of developments this year serve to illustrate this nascent divergence:

Rhetoric: Chinese President Xi Jinping offered a surprising but sorely-needed defense of free trade at the World Economic Forum in January. Likening the pursuit of protectionism to “locking oneself in a dark room” in his keynote address, Xi added that “While wind and rain may be kept outside, that dark room will also block light and air.” Similar sentiment has also been voiced in subsequent speeches by other senior leaders including Premier Li Keqiang and Vice Premier Zhang Gaoli.

President Donald Trump, meanwhile, said in his February speech to Congress that “I believe strongly in free trade but it also has to be fair trade”—language suggesting a less than full-throated embrace of the concept (Notably, in Premier’s Li’s own speech he reversed this formulation, stating that “In fact, free trade…is the prerequisite for fair trade.”). Privately, the President is reported to have told his chief of staff, “I want tariffs…bring me some tariffs.” 

New trade agreements: China continues to play a leading role in efforts to conclude the 16-member Regional Comprehensive Economic Partnership, a trade deal with a potential payoff estimated to be at least $260 billion over ten years. The country also has several other free trade agreements (FTAs) under negotiation, including a trilateral agreement with Japan and South Korea, and this year began exploring the possibility of a bilateral deal with Canada.

President Trump, in contrast, used his first week in office to withdraw from the 12-member Trans-Pacific Partnership, an agreement whose income gains were calculated at $131 billion through 2030 for the U.S. alone. While talk has been floated of a free trade agreement (FTA) with the United Kingdom, no formal efforts to begin negotiations have been undertaken with the U.K. or any other country.

Existing trade agreementsPresident Trump earlier this year expressed his desire to renegotiate the bilateral FTA with South Korea and more recently has threatened to withdraw from the agreement altogether. Negotiations have also begun on revising NAFTA—the subject of similar withdrawal threats by Trump—with early indications suggesting the Trump administration’s desire to take the deal in a more protectionist direction

China and New Zealand, meanwhile, announced in March their intention to further expand an existing FTA between the two countries.

The odds of China becoming a free trade paragon in the near future are admittedly remote.  Even marginal progress in that direction, however, would be most welcome, delivering benefits to China such as greater economic efficiency and access by Chinese consumers to higher-quality imports. Gains would accrue outside of China as well, with its resulting growth contributing to higher living standards among its trading partners.

On the other side of the Pacific, the Trump administration’s flirtations with protectionism are an ongoing concern. Although thus far mostly constrained to rhetorical flourishes, the White House’s decision to withdraw from the TPP has inflicted a real opportunity cost on the US economy, and further protectionist backsliding must be avoided. As President Trump seeks to Make America Great Again, he should remember that openness to trade has been a key ingredient in making the country the superpower it is today.

Ike Brannon’s recent post on the Jones Act is excellent, and those who have not done so already should give it a read. He notes some of the many economic hardships imposed by the law, which are shielded from proper scrutiny because its large costs are spread across the population and benefits concentrated among a relatively limited number of entities such as shipbuilders. 

Brannon’s concluding sentences, however, may be too kind to the political process:

[P]laces like Puerto Rico, Hawaii and Alaska would benefit most of all [from getting rid of the Jones Act], since they are overly dependent upon shipping prices.

However, as those are only two low population states and a territory with no voting representation, their inconveniences won’t resonate much with Congress.

Such language implies that the elected representatives of Alaska and Hawaii are fully cognizant of the burdens imposed by the Jones Act, but are prevented from making headway toward its removal due to insufficient political sway. The truth is far worse. As I noted yesterday at USAToday.com, all four members of Hawaii’s congressional delegation—Sen. Brian Schatz, Sen. Mazie Hirono, Rep. Colleen Hanabusa, and Rep. Tulsi Gabbard—stand foursquare in support of the law. Among the three members of Alaska’s delegation, both Sen. Lisa Murkowski and Rep. Don Young have touted their backing of the Jones Act (I have been unable to determine the position of Sen. Dan Sullivan, who has only held his current position since 2015). 

Why is this? While the definitive motivations of these politicians are known only to themselves, a reasonable guess can nonetheless be hazarded.

We can first dispense with partisan explanations, as Hawaii’s congressional delegation is comprised of all Democrats while Murkowski and Young are both Republicans. More relevant is the fact that according to the American Maritime Partnership, Alaska is ranked #3 among the 50 states for maritime jobs per capita. Hawaii, being the lone U.S. state comprised of an island chain which imports as much as 90% of its food, presumably has a significant maritime sector as well. Those engaged in such employment, and who profit most from the Jones Act’s concentrated benefits, are much more invested in its future than the consumers forced to bear its significant but relatively small individual costs. Commensurate pressures from constituents then win out over economic sense when politicians set their positions.

Further food for thought is to be found in the fact that the Senate’s most committed Jones Act critic, Sen. John McCain, hails from the landlocked state of Arizona. McCain’s legislation to grant Puerto Rico a permanent exemption from the Jones Act enjoys co-sponsorships from Sen. Mike Lee of Utah and Sen. James Lankford of Oklahoma, also of landlocked states. As a result, these Senators are more likely attuned to the Jones Act’s net economic drag than benefits to maritime special interests. This may all be coincidence, but it fits perfectly with the public choice model of special interests

When it comes to protectionist U.S. policy, bitter experience has shown that the truth is often worse than we think. 

As Republicans unveiled their tax reform plan last week, President Trump said, “We will cut taxes tremendously for the middle class.” Trump advisor Gary Cohn said, “We are giving tax cuts to middle- and lower-income Americans.” And House Speaker Paul Ryan said, “The entire purpose of this is to lower middle-class taxes.”

The problem is that “middle-class” Americans pay little in federal income taxes, while “lower-income” Americans pay virtually nothing. So Republican leaders are making promises that will be difficult to keep, and they are distracting themselves from the better message of growth and prosperity for all.

The chart below, based on CBO data for 2013, shows average federal income tax rates by income quintile. The highest-earning fifth of households paid 15.5 percent of their income to taxes, on average. The bottom two groups paid less than nothing, on average, because the refundable EITC and child credit wiped out their liabilities and gave them a subsidy. And the middle-income group that Trump, Cohn, and Ryan are talking about paid just 2.6 percent, on average.

The CBO uses a broad definition of “income” in these calculations, which inflates the denominators here and reduces the measured tax rates. Nonetheless, the data indicate who needs income-tax relief, and it is not the bottom three groups.

More important, dividing Americans into “classes” is the wrong way to go. Instead, Republicans should focus their tax reform talking points on economic expansion, business investment, entrepreneurship, job opportunities, wage growth, simplification, and international competitiveness. The Republican tax framework would advance all those goals, and thus benefit every American.

GOP leaders should leave the class struggle to the other party, and focus on how tax reform would support durable economic growth for the nation and broad-based prosperity.

Round 3 of the NAFTA renegotiation wrapped up last Wednesday. Round 4 is scheduled for October 11-15 in the Washington, DC area. How have things been going so far? Here’s one assessment:

The United States, Canada and Mexico said at the end of a five-day session in Ottawa there had been progress made in the talks but acknowledged that much work remained to conclude the negotiations by the end of the year.

The next round might be a big one. Inside US Trade notes that “controversial ideas for investor-state dispute settlement and a sunset clause tied to the trade deficit” will be “finalized and proposed at the fourth round.”

The original plan was to do the renegotiation over 7 rounds in total, concluding this year. However, the idea of the three NAFTA countries reaching an agreement by the end of the year was always a bit unrealistic and now seems even more so. If all goes perfectly, perhaps they could do it by the spring or summer of next year, but it won’t be easy.

On October 26, we will have a full day conference here at Cato talking about a wide range of issues in the negotiations. You can register here. The full details are at the link, but here’s a brief rundown.

We’ll start with a panel made up of some of the original negotiators to explain why we had a NAFTA in the first place. What was the pre-NAFTA situation, and how did NAFTA improve things? We’ll then have a discussion panel that delves into the various criticisms of NAFTA over the years. Next, we’ll talk a bit of politics, focusing on the United States and Mexico, which are the places where the political process could present a hurdle to domestic ratification of a new NAFTA. We’ll then have a session on how to “modernize” NAFTA, that is, how to incorporate provisions that have been developed in other trade agreements over the 20+ years since NAFTA was signed (such as on e-commerce and trade in services). Finally, we’ll have two breakout sessions, one on dispute settlement (a particularly contentious issue in the NAFTA renegotiation) and one on various product-specific issues that are being fought outside of NAFTA but could have an impact on the negotiations (trade in lumber, dairy, and aircraft).

We hope you can join us!

Richard Cohen’s latest column is sillier than usual, which is really saying something. (Hat tip to Jason Kuznicki, who sums up Cohen’s argument as “Trump is SO bad that we must not impeach him.”)

In purple, paid-by-the-metaphor prose, Cohen calls our 45th president “a dust storm of lies and diversions with the bellows of a bully and the greasy ethics of a street-corner hustler,” someone whose “possible crimes line up like boxcars being assembled for a freight train.” And yet, “we would impeach Trump at our peril.” 

Why? Because the president’s hardcore supporters would view impeachment and removal as the reversal of a democratic election. Worse, some of them—possibly with Trump’s encouragement—might resort to violence. We could see “a lot of angry people causing a lot of mayhem” if Trump is impeached and removed for an offense falling “short of a triple ax murder,” Cohen warns. 

Put aside the notion—itself anti-democratic—that a violent minority should enjoy a sort of heckler’s veto on a legitimate constitutional process: Cohen’s vision of Weimar-era street brawls is almost certainly overblown. The political science blog hosted by Cohen’s own paper recently poured some cold water on the Trumpist-insurrection scenario here.

Still, Cohen’s trepidation about any impeachment effort—even against a president he believes wholly corrupt and dangerous—is all too common. What other constitutional provision is considered so near-blasphemous to merit its own sanitized euphemism? Treason’s a big deal, but you don’t hear people calling it the “’T’-word.”

Yet on the rare occasions that the “‘I’-word” becomes a live issue—once a generation at best—the commentariat adopts a funereal tone, insisting that such a dire remedy should only be approached in fear and trembling. We can be almost certain that something horrible will happen.

It’s not just workaday columnists, but leading constitutional scholars who hyperbolize about impeachment. Charles Black, in his classic 1973 primer Impeachment: A Handbook, writes of the “the dreadfulness of the step of removal… the deep wounding such a step must inflict on the country.” It should, Black wrote, be looked on as “high-risk major surgery.” Actually, it’s a “constitutional nuclear weapon,” legal scholar Ronald Dworkin argued during the Clinton affair, to be used only in the “gravest emergencies,” lest it “shatter the most fundamental principles of our constitutional structure.”

More recently, Lawfare’s Jane Chong wrote a valuable essay on impeachment’s scope, in which she warns that “when the president has proven himself unfit for the office,” shrinking from removal “is no less a partisan dereliction of duty than unduly clamoring for [it].” But, she insists, impeachment is “nothing to celebrate and no better than a crime against our collective vessel, an act of barratry, when pursued for the wrong reasons…. It also involves a measure of violence from which our constitutional democracy can only slowly and by no means inevitably recover.”

Is impeachment really as grave as all that?

To be sure, you can find some of the Framers waxing solemn and sober about it: in Federalist 65, Hamilton writes of “the awful discretion, which a court of impeachments must necessarily have, to doom [the accused] to honor or to infamy.” He also believed that discretion to be necessary, periodically, as “an essential check in the hands of [the legislative] body upon the encroachments of the executive.”

Other Framers weren’t quite so dramatic. At the Philadelphia Convention, Massachusetts’ Eldridge Gerry insisted: “A good magistrate will not fear [impeachments]. A bad one ought to be kept in fear of them.” North Carolina’s Hugh Williamson thought there was “more danger of too much lenity than of too much rigour towards the President.” He was more right than he knew.

Contemporary impeachment-phobia seems to rest on two related notions; the first is one Cohen gropes for: that there’s something democratically illegitimate—even coup-like—about removing a duly elected chief executive before his term is up. The second reflects a fear that removal is uniquely destabilizing. Neither idea is particularly persuasive.  

There’s no denying that impeachment is in tension with pure democracy. Like other features of our system—judicial review, for example—it’s counter-majoritarian. In fact, the Framers, with their healthy fear of demagogues, made it possible not only to eject, but disqualify them from any future “Office of honor, Trust or Profit under the United States,” permanently barring the election of figures popular enough to win, but too dangerous to be trusted with power.

But impeachment isn’t a “coup”: It’s a lawful, “indispensable” method for “displacing an unfit magistrate” when necessary. And it doesn’t “reverse an election.” The 12th and 25th amendments have all but ensured that any president who’s removed will be replaced by a member of his own party and usually his own ticket. In the as-yet unlikely event of Donald Trump’s impeachment and removal, he’d be replaced by his hand-picked, lawfully elected running mate, Mike Pence. Some “coup.”

Nor is there much evidence for the fear that impeachment attempts court “constitutional crisis” and threaten to upend or “shatter” our constitutional structure. In his testimony opposing the Clinton impeachment, Lawrence Tribe described the remedy as “truly the political equivalent of capital punishment,” “empowering the Congress essentially to decapitate the executive branch in a single stroke.” Cass Sunstein warned that, given the presidency’s growth in power and importance, “the great risk of the impeachment mechanism is that it is destabilizing in a way that threatens to punish the Nation as much as, or perhaps far more than, the President himself. Since the purpose of impeachment is not to punish officials but to protect the Nation, this is a cruel irony.”

Of the two, Sunstein has remained admirably consistent and cautious into the Trump years; Tribe is now ready to man the guillotine himself. But our all-too-rare experience with presidential impeachment suggests their fears were overblown. The post-Watergate “crisis of confidence” in our institutions was actually good for us: it led to new checks and scrutiny on executive abuse. Weakening the presidency only “punish[es] the Nation” if you’re convinced eight decades of executive branch metastasization hasn’t gone far enough. Besides, the attempt to oust Clinton didn’t weaken the presidency in any way you’d notice (more’s the pity). The principal effect it seems to have had on executive power was forging a consensus to let the independent counsel statute lapse. Nor was the episode particularly destabilizing; late-90s prosperity rolled on, and the markets barely noticed it was happening.

A better argument for not impeaching any misbehaving president too eagerly is that we may only get one bite at the apple. As the legal scholar Michael Gerhardt warns: “if not done properly the first time, you might not get a second chance.” The constitutional structure makes it that difficult: “The framers set the bar appropriately high,” Cohen writes, “a majority of the House, two-thirds of the Senate — so high, in fact, that it has never happened.” Is “never” (or once, if you count Nixon) in 230 years is the correct rate of presidential removals? If not, you might be forgiven for wondering if they set the bar too high. In any case, when we conjure up specters of wounded democracy and constitutional collapse, we make it harder than it needs to be.

And there’s a cost to never, or almost never, invoking the remedy. Princeton’s Keith Whittington writes that “If Congress tolerates officers who commit high crimes and misdemeanors, it sends a signal to other officers that those crimes are not beyond the pale.” Tolerate bad behavior, you’ll get more of it. Right now, that seems at least as worthy a concern as the fear that we’ll resort to impeachment too frequently.

On September 25, 2017, Iraqi Kurds voted in favor of independence from Iraq in a historic referendum. Out of the 3.3 million Kurds and non-Kurds who voted, 92% voted in favor of independence, which is not surprising. The international community’s reaction is also not surprising: Iraq, Turkey, Iran, Russia, France,  and the United States were all against the referendum, cautioning the Kurdish leadership about the regional impact from various strategic angles. In its quest to secure more non-Arab allies, Israel is the only country that has backed the referendum. The international community’s lack of support is seen as hypocritical by the Kurds, and may very well be. The United States in particular is wary of the creation of new states and their regional impact that tends to increase instability rather than reduce it, like in the case of South Sudan. While discouraging a population from seeking self-determination is thorny—even illiberal—the Kurdish referendum has two important outcomes that should not, be ignored.

First, the referendum has sent a dangerous mixed signal to other populations seeking independence and territorial sovereignty. Currently there are no administrative channels in place that will facilitate Kurdistan’s secession from Iraq—and it certainly cannot be called Kexit in the same vain as Brexit, the nickname for the UK’s vote to exit the EU. For example, Iraq still controls the Kurdistan Region of Iraq’s (KRI) air space and immediately following the referendum, instituted a flight ban from the region’s two international airports. KRI is not economically independent, and the referendum may have actually decreased its chances of becoming so. Even though Kurdistan has been producing 600,000 barrels of oil per day, an impressive feat for a landlocked region surrounded by hostile neighbors, low oil prices gravely impacted the development of its public sector that continues to remain weak and corrupt. Also, Kurds still hold Iraqi passports, and will most likely continue to be Iraqis officially for years to come, if not decades. So how exactly secession will happen is not clear. Therefore, it would be beneficial for other independence-seeking populations like Palestinians, Kashmiris, and Catalonians to pay close attention to how Kurdish independence unfolds, if at all. So then why was the referendum done now? There is speculation that the Kurdistan region’s president, Masoud Barzani of the Kurdistan Democratic Party, wanted his legacy to be putting Kurds on an internationally mandated path to independence. But Kurds are divided; while a majority of them want independence, many feel that is was not the right time, such as the “No for Now” campaign. In the presence of strong criticism from the international community, the referendum’s claim of providing a mandate for Kurdish independence is also questionable.

Second, the referendum has backed the United States in a corner. U.S. foreign policy has been driven by the idea that a unified Iraq is a better regional and counterterrorism partner than a divided one. In its quest to counter the Islamic State, the United States has often sided with Baghdad over Erbil. Yet, the Peshmerga, the KRI’s military force, has been one of the most effective fighting groups against ISIS, and played a crucial role during the battle of Mosul in 2016. But supporting Kurdish independence would have two negative consequences for the United States: 1) it would create a rift with Turkey, a key NATO ally at a time when the U.S.–Turkish relationship is already strained, and 2) U.S.–Iraq relations could weaken, which would be detrimental not only for Iraq’s stability but also for the region’s. Instead, this is a time for the U.S. to thread with caution and practice restraint. Whether or not the Trump administration will heed this advice will become apparent in the upcoming weeks. 

To the relief of many Democrats and the consternation of many Republicans, Congress will not be repealing ObamaCare this month. But that doesn’t mean Democrats are riding high or that ObamaCare is doing well. Premiums are still rising rapidly (Miami Herald: ”Obamacare Premiums in Florida to Rise 45 Percent on Average Next Year”), insurers are still leaving the Exchanges (Healthcare Marketplace: “Nearly Half of the Country Left with One Carrier Option in 2018”), and ObamaCare coverage is still becoming a worse and worse deal for the sick (Wall Street Journal/yours truly: “How ObamaCare Punishes the Sick”). 

Now that repeal is no longer an immediate threat, the conversation has naturally turned to who’s to blame for ObamaCare’s failings. Democrats claim everything was going swimmingly until the Trump administration came along and began sabotaging the law. The funny thing about that line of attack is that’s if it were true, then Democrats’ real complaint would be that voters are sabotaging ObamaCare.

But it’s not true—and reporters should stop repeating this partisan line of attack as if it were. Here are five crucial points:

  • The Trump administration is not causing the instability we are seeing in the Exchanges—ObamaCare is. Specifically, ObamaCare’s community rating price controls have both unleashed adverse selection (sick people enroll, healthy people don’t) and are making coverage worse for the sick (as insurers use plan design to deter the sickest from choosing their plans). There are only two ways to deal with that instability: eliminate community rating, or subsidize the heck out of insurers (either explicitly, or implicitly by encouraging healthy people to enroll).
  • The Trump administration is not stoking the instability ObamaCare is creating in the Exchanges. Democrats claim that by not ending the uncertainty surrounding cost-sharing subsidies to insurers, and by not investing in enrollment activities as much as the Obama administration did, it is in fact the Trump administration that is creating or exacerbating that instability. That is false. As noted above, it is ObamaCare’s community-rating price controls that are creating this instability, not the Trump administration’s actions. The administration is not even adding to the instability. To do so, it would have to make ObamaCare’s community-rating price controls even more binding, which would exacerbate adverse selection. The worst you can say about those actions is that the Trump administration is failing to mitigate the instability ObamaCare creates, which brings us to our next point. 
  • The Trump administration does not have a duty to reduce the instability ObamaCare creates, or to reduce the uncertainty ObamaCare creates, or to make ObamaCare “work.” The Trump administration’s only duty is to execute the law faithfully. So long as it does, it has the prerogative to pursue its political goals however it wants. I’m not aware of anyone accusing the Trump administration of not following the law in its handling of ObamaCare. 
  • Reporters who say the Trump administration is causing or stoking instability in the Exchanges are simply regurgitating partisan talking points. Embedded in that claim is the normative, disputed, and ultimately false premise that the Trump administration somehow has an obligation not just to follow the law, but to make ObamaCare “work.” That is a pretty radical notion, because it implies ObamaCare opponents don’t have a right to use lawful means to press their views through the political process. 

If Democrats or the media want to get angry at someone for sabotaging ObamaCare, there are plenty of targets. They can start with the Democratic politicans who – though they now clamor for bipartisanship now – enacted ObamaCare in 2010 on a purely partisan basis, spent seven years refusing to compromise, and as a result sowed the seeds for the GOP’s electoral gains. Then there’s the Democratic president who – and this was perhaps the sole exception to Democrats’ general refusal to compromise – himself sabotaged the law by agreeing to limit so-called “risk-corridor” subsidies to ObamaCare carriers. Then there was the time when ObamaCare was making voters so angry, that same Democratic president even violated the ACA by allowing people to keep non-ACA-compliant plans. That decision counts as an act of double-sabotage, because it continues to make Exchange premiums higher than they otherwise would be. 

In short, ObamaCare still doesn’t work well; it isn’t popular enough for Congress to paper over all its problems with more taxpayer dollars; Democrats did this to themselves; and they deserve nearly all, if not all, of the blame.

Now stop making me defend the Trump administration, people. Sheesh.

Donald Trump announced a mini-surge of U.S. forces into Afghanistan a month ago. This week the Long War Journal reported the Taliban now control or contest 45 percent of Afghanistan’s districts, up from 40 percent three months prior, which was an increase from 34 percent a year earlier, and you get the idea. The Taliban control more territory today than at any point since 2001, and they have the momentum.

Sixteen years after invading Afghanistan, toppling the Taliban, and routing Al Qaeda elements there, U.S. goals remain as far out of reach as ever.

However, rather than surge additional forces and fall victim to the “sunk cost” fallacy, the U.S. should withdraw military forces and re-align objectives to the threat and national interests. During his August speech, Donald Trump defended the surge by saying, “our nation must seek an honorable and enduring outcome worthy of the tremendous sacrifices that have been made, especially the sacrifices of lives.” His emotional appeal implied that grieving Gold Star families should be the nation’s impetus for continued involvement in the Afghan war (which would also lead to more families who would experience that ultimate loss).

Instead of defending a surge on the basis of efforts already spent, U.S. policy towards Afghanistan should rely on the 16 years of data available since initiation of the war on terror. All of that data strongly communicates two points: 1) the terror threat to Americans remains low and 2) a strategy that emphasizes military power will continue to fail.

The terror threat to Americans remains low as compared to virtually all other threats. Islamist-inspired terrorists have conducted less than one attack per year over the past three decades. In each of those 30 years, though, “regular” Americans murdered between 15,000 and 20,000 of their fellow Americans. Even the horrible attacks of 9/11 represented just a fraction of the Americans murdered that year.

Quite likely, the memory of 9/11 continues to inflate the terror threat, yet September 11th was an outlier. The world never experienced a similar attack prior or since, and for good reason: significant terror attacks almost always take place in failed or war-torn states. America’s second worst attack occurred in 1995, when Timothy McVeigh killed 168 in Oklahoma City. And few Americans can probably even identify North America’s second worst attack. It took place in 1985 on an Air India flight from Toronto, Canada. Three hundred and twenty-nine died at the hands of Sikh extremists.

In 2001, our homeland security was much different than it is today. The 9/11 hijackers received their pilot training in plain sight. They entered the country legally, using their real names. One lived with his flight instructors, and two even argued their way back into the country by assuring border and customs agents that they were, in fact, students—pilot training students—authorized to be here.

If save havens are a concern, the most important one has been eliminated. Even though terrorists may seek to harm Americans, post-9/11 homeland security efforts have severely reduced their opportunity.

America’s overseas war on terror, though, has not made Americans more secure. Instead, the number of Islamist-inspired terror groups and terrorists has grown substantially. In 2001, the Department of State identified Al Qaeda and 12 other similar groups. Today, that list includes ISIS, Al Qaeda, and another 42 like-minded organizations.

The proliferation of terror groups, terrorists, and attacks appears to have only occurred in response to U.S. military action. As the chart below suggests, terror activity spiked after the U.S. initiated its war on terror in those seven countries, not before.

 

Source: Global Terrorism Database

And the research supports the point: militaries rarely defeat terror groups. Scholars such as Audrey Kurth Cronin, Seth Jones, and Martin Libicki have concluded that instead of military defeat, most terror groups end by entering the political process, being marginalized, or through active policing. Each of those three options represents a line of operation that the U.S. has little control over.

Despite 16 years of assistance, Afghanistan’s government remains more corrupt than 96 percent of all countries, and its security force of 382,000 cannot halt Taliban gains. As Trevor Thrall and I concluded in a recent policy analysis, it’s time for America to “step back.” Eventually the Afghan government will decide whether competency and transparency matter enough, and Afghans will determine whether the Taliban ends by entering the political process, becoming irrelevant, or at the hands of a capable police force. Until then, the U.S. cannot do it for them. 

——–

Please join us October 10th as Cato hosts a policy forum on the future of U.S. strategy in Afghanistan. Stephen Biddle of George Washington University, Michael O’Hanlon of Brookings, and I will debate the merits of the primary options: surge, negotiate, and withdraw, and a young Army officer with two deployments to Afghanistan will open the forum with his “boots on the ground” perspective. Register here.

The Federation for American Immigration Reform (FAIR) is devoted to reducing legal and illegal immigration. Its recent report, “The Fiscal Burden of Illegal Immigration on United States Taxpayers (2017)” by Matthew O’Brien, Spencer Raley, and Jack Martin, estimates that the net fiscal costs of illegal immigration to U.S. taxpayers is $116 billion. FAIR’s report reaches that conclusion by vastly overstating the costs of illegal immigration, undercounting the tax revenue they generate, inflating the number of illegal immigrants, counting millions of U.S. citizens as illegal immigrants, and by concocting a method of estimating the fiscal costs that is rejected by all economists who work on this subject. 

FAIR’s Errors

Merely using the correct numbers when it comes to the actual size of the illegal immigrant population, the correct tax rates, and the effect of immigrants on property values lowers the net fiscal cost by 87 percent to 97 percent, down to $15.6 billion or $3.3 billion, respectively.  Below is a list of FAIR’s errors and how the correct numbers affect the results:

  1. FAIR assumes that there are 12.5 million illegal immigrants, over a million more than other organizations estimate (FAIR is inconsistent here as the number of illegal immigrants they report on page 34 is 12.6 million).  Pew estimates there are 11.3 million illegal immigrants, the Center for Migration Studies (CMS) estimates that there are 11 million illegal immigrants, and the Center for Immigration Studies (CIS) estimates there are 11.43 million illegal immigrants.  FAIR’s estimate of the number of illegal immigrants is more than a million more than that of their sister organization, the Center for Immigration Studies, that also shares their goal of reducing immigration.  Using the average number of illegal immigrants as estimated by Pew, CMS, and CIS instead of FAIR’s number lowers their report’s estimated cost by $11.6 billion.
  2. FAIR counts the benefits consumed by the U.S. born American citizen children of illegal immigrants.  This means that FAIR also doesn’t count the taxes paid by these U.S. born citizens when they start working.  Counting the benefits consumed but ignoring the tax revenue they pay (or will do so in the future) is one way FAIR gets such a negative result for this report.  If FAIR counts the welfare consumed by the U.S. born children of illegal immigrants then it must also count the taxes that that cohort pays, but it does not.  In this way, the FAIR report biases its results to increase the value of benefits received and diminish the value of taxes paid. Workers with higher education earn more money and pay more in tax dollars.  Counting education entirely as a cost without any effort to actually measure the boosted tax revenue that should result from such a system counts only the fiscal costs.  FAIR argues that those U.S. citizen children should be counted as illegal immigrants for their fiscal cost analysis because they would not be here without their illegal immigrant parents.  It’s a mystery, then, why FAIR does not count the fiscal costs incurred and taxes paid by all of the descendants of illegal immigrants back to when the Federal government first created immigration restrictions in 1875.  Furthermore, does this mean that FAIR will seek to count the fiscal costs and tax revenue of the grandchildren of the illegal immigrants as well?  If they decide to do that then they should use a dynamic generational accounting model rather than their flawed static model.  Using the actual number of illegal immigrant children who are in school lowers FAIR’s estimated education costs borne on the state and local level by $31.7 billion.
  3. FAIR blames the cost of immigration enforcement on illegal immigrants.  FAIR’s argument here comes down to “The U.S. needs to enforce our immigration laws better because the cost of enforcing immigration laws is so high.”  We suggest an easy remedy to this problem – cut immigration enforcement.  In all seriousness, this is silly.  If FAIR was serious about this argument, they would estimate how many illegal immigrants are deterred by immigration enforcement programs and compare that to their bogus budget figures to see the fiscal return on enforcement.  Excluding the costs of immigration enforcement, with the exception of the amount spent on incarceration, lowers FAIR’s estimate by $11.9 billion.
  4. FAIR overcounts welfare benefits consumed by illegal immigrants by including benefits consumed by their U.S. citizen children.  They especially overstate Medicaid benefits by counting U.S. citizen children.  FAIR also relies on old data for the amount claimed by illegal immigrants in Child Tax Credits that overstates the 2015 number by $800 million.  Adjusting downward welfare benefits consumed by eligibility rules reduces FAIR’s estimate by $12.3 billion.
  5. On healthcare issues besides Medicaid benefits, FAIR estimates that illegal immigrants consume an amount of healthcare proportional to their share of the population.  This is a vast overstatement in costs.  Overall, all immigrants consume 55 percent less in healthcare dollars per capita than natives.  According to the National Academy of Sciences report on the integration and assimilation of immigrants, illegal immigrants are “less likely than native-born or other immigrants to have a usual source of care, visit a medical professional in an outpatient setting, use mental health services, or receive dental care. (Derose et al., 2009; Pourat et al., 2014; Rodriguez et al., 2009). Per capita health care spending has been found to be lower for all immigrants, including the undocumented, than it was for the native-born (Derose et al., 2009; DuBard and Massing, 2007; Stimpson et al., 2010).”  Adjusting for lower immigrant per capita health care spending by 55 percent lowers FAIR’s estimate of the uncompensated hospital expenditures, Medicaid births, and Medicaid fraud costs on all levels of government by $13.9 billion.
  6. FAIR also undercounts the tax revenue generated by illegal immigrants.  The first and most egregious undercount is that they ignore how increased housing demand raises the value of all real estate per county which also raises property tax revenue.  According to research by economist Jacob Vigdor, each immigrant raises the value of all homes in their county by 11.5 cents.  The average immigrant also lives in a county with 800,000 housing units.  The locations of illegal and legal immigrants are closely correlated so we can assume that the typical illegal immigrant also lives in a county with 800,000 housing units.  If the typical illegal immigrant increases the value of all housing unit prices by 11.5 cents, then illegal immigrants increase nationwide housing values by about $1 trillion.  Using the 1.15 percent average annual property tax rate, the increase in housing values created by illegal immigrants results in $12.2 billion in additional tax revenue.  Adjusting for the extra property taxes paid by property owners as a result of illegal immigration boosting housing values increases tax revenue by $11.2 billion over FAIR’s estimate.
  7. FAIR also ignores the incidence of taxation when it comes to calculating their Social Security and Medicare contributions.  In law, employers and employees are supposed to evenly split Social Security and Medicare contributions but the reality is more complicated.  A recent literature survey on the incidence of taxation for social programs found that workers pay for 66 percent of all Social Security and Medicare taxes through lower salaries.  Thus, 66 percent of all contributions to those programs are actually paid by the workers.  FAIR also made a mistake.  They claimed that the worker and employer each pay a 2.9 percent tax rate for Medicare when, in reality, the worker and the employer each pay 1.45 percent.  Correcting for FAIR’s error, adjusting for the actual tax rate for Medicare, and including the incidence of taxation boosts illegal immigrant tax revenue by $6.2 billion.  If you include all of Social Security and Medicare taxes paid as a result of illegal immigrant employment, even if employers do pay the actual cost, then it would increase their tax contributions by $18.5 billion
  8. FAIR probably undercounts sales tax revenue.  I write “probably” because one of the sentences on page 54 of their report does not make any sense grammatically or mathematically.  About 30 percent of personal income is spent on sales-taxable goods.  The average combined state and local sales tax rate was 6.44 percent in 2016 but adjusting for states where illegal immigrant live according to FAIR’s estimate, it is 7.6 percent.  FAIR claims that illegal immigrants keep $28,800 in pay after remittances.  Adjusting sales tax revenue for the tax rate and the amount of income spent on taxable goods increases illegal immigrant sales tax revenue by $1.6 billion over  FAIR’s estimate.

Merely using the actual numbers in a correct way reduces FAIR’s estimates fiscal cost of illegal immigrants from $116 billion to $3.3 to $15.6 billion – and that doesn’t even touch their flawed static approach to counting how illegal immigrants impact the economy. 

FAIR’s Methodological Errors

FAIR’s biggest methodological error is that it does not consider the extra economic activity generated by illegal immigrants that would not occur otherwise.  The tax revenue collected through that extra activity cannot be adequately measured by looking at IRS forms but must include the taxes paid by U.S. citizens who also have higher incomes as a result.  Since the economy is not a fixed pie, removing millions of illegal immigrant workers, consumers, and business owners would leave a gaping economic hole that would reduce tax revenue.  The authors of the FAIR study concocted their own methodology that is uninfluenced by the vast empirical, theoretical, and peer-reviewed economics literature that estimates the fiscal cost of immigration. 

The authors in that literature find that there are three main ways to estimate the fiscal impact of immigration. The first method is by using macroeconomic models—variants of general equilibrium models—to predict the economic effects of immigration relative to a pre-immigration trend line, additional tax revenue, and additional government expenditure. The second is through generational accounting that pays particular attention to the government’s intertemporal budget constraints. The third is through a net transfer profile that starts with a static accounting model in a base year and then builds a lifecycle net transfer profile for individual immigrants. These are only quasi-rigid categories with the possibility of mixing and matching certain characteristics of each methodology, but each one has its own benefits, drawbacks, and several studies that employ each method, sometimes mixing them.  FAIR does not use any of these approaches in constructing their fiscal cost estimate.

The recent National Academy of Science (NAS) study on the fiscal and economic cost of immigrants accounts for the temporal nature of tax revenue and government benefits (people pay taxes at certain parts of their lives and consume more in benefits in others).  In order to properly account for the temporal nature of taxes and expenditures requires reducing the lifetime value of both and discounting it to the present value.  NAS table 8-14 does just that for federal, state, and local governments (displayed in Figure 1).  That Figure does not include public goods like national defense which is unaffected by illegal immigrants (the U.S. states does not require another aircraft carrier if there are 50 million more immigrants here). 

Based on the age of arrival and education, immigrants with less than a high school degree who entered before their 24th birthday pay more in taxes than they receive in benefits.  Illegal immigrants are potentially even better for public budgets in the short run because their consumption of government benefits is more curtailed than their tax payments (including the incidence of taxation) due to their legal status.  Illegal immigrants do not likely consume more in tax benefits than they pay in taxes but, if they do, the figure is small. 

Figure 1:  NPV Fiscal Impact on Federal, State, and Local Government, CBO Long-Term Budget Outlook, by Age at Entry and Eventual Education.  Source: NAS Table 8-14.

Age at Entry Less than HS HS Only Some College Bach More than Bachelors 0-24 $35,000 $239,000 $401,000 $495,000 $446,000 25-64 -$225,000 -$42,000 $157,000 $504,000 $994,000 65+ -$257,000 -$164,000 -$155,000 -$160,000 -$100,000

 

Conclusion

FAIR’s report argues for increased immigration restrictions as a way to address the federal budget deficit.  However, it relies on poor methodology and contains numerous errors that undermine its credibility.  Many years ago, I wrote a criticism of an earlier version this report by FAIR.  It’s disheartening to see that this later version written by different authors is even more sloppy and makes more errors than the older version.  The immigration debate deserves higher quality research than this recent FAIR report.      

We hear a lot about book “banning,” especially when “we” maintain Cato’s Public Schooling Battle Map, but probably lots of other people hear it, too. Indeed, it just so happens that we are in Banned Books Week right now, an event that highlights challenges to books stocked by public libraries, including in public schools. But what is suddenly getting attention is not the Week, but a Cambridge, Massachusetts public school librarian rejecting a bunch of Dr. Seuss books that First Lady Melania Trump selected the district to win. Which raises two questions: Is it not just as much “banning” when public librarians choose not to stock books as when parents or citizens ask that those already stocked be removed? And isn’t it a threat to basic freedom to have librarians or anyone else decide for taxpayer-funded institutions—government institutions—what constitutes acceptable art or thought?

The first answer is of course it is just as much “banning” for public institutions to reject books in the first place as to remove them later on. The ultimate result is the same: not making a book available for the public to borrow. Of course, this is not really banning, which would be to prohibit people from reading a book at all—making it illegal to purchase or possess—not refusing to let people borrow it for free. But if people want to misapply the term, they should misapply it equally.

Which takes us to the root problem: Public institutions force all taxpayers to fund decisions by other people about what books are valuable, or age appropriate, or just plain morally upright. We are forcing them to fund someone else’s speech and opinions, even if they find that speech or those opinions offensive, or just wrong, and even if their views are rejected.

Look at the Cambridge situation. Librarian Liz Phipps Soeiro’s letter rejecting the haul of Seuss books was intensely political—itself a huge problem for someone speaking in an official capacity—but she also condemned the Seuss books themselves. “Another fact that many people are unaware of is that Dr. Seuss’s illustrations are steeped in racist propaganda, caricatures, and harmful stereotypes,” she wrote. “Open one of his books (If I Ran a Zoo or And to Think That I Saw It On Mulberry Street, for example), and you’ll see the racist mockery in his art.”

Perhaps this is a unanimous opinion among people in the Cambridge school district—we know it wouldn’t be if expanded to Springfield, MA—and if so, okay. But if there is just one taxpaying dissenter who does not believe that Seuss’s work is racist, or who believes that his or her kids should grapple with racist works, or who just thinks Seuss is good literature worth reading, this person has essentially been rendered unequal under the law. He or she is forced to pay, someone else decides what is moral or appropriate.

Of course, barring the invention of infinite shelf space—actually, we call that the “Internet”—someone has to decide what is or is not stocked in libraries. At least for education, that is a reason that school choice is essential, especially through tax credit programs in which people choose whether, and for whom, to fund scholarships. With such programs no one is forced to fund or be subject to other people’s decisions about what is moral or age appropriate. It ends the government gatekeeper role, and lets no one impose a “ban” on anyone. It is exactly what justice and freedom demand.

The Republican tax framework released yesterday was generally excellent. However, it appears to include a sneaky and invisible tax hike. The framework “envisions the use of a more accurate measure of inflation for purposes of indexing the tax brackets and other tax parameters.”

The individual income tax is indexed for inflation, meaning that the dollar split points between the rate brackets and other parameters are set to rise a bit each year. Without those adjustments, Americans would lose ground to the government over time, as more of their income would be taxed at higher rates due to the general rise in prices.

Current indexing is based on the Consumer Price Index (CPI). The CPI overstates inflation somewhat, so some analysts have suggested switching tax-code indexing to chained CPI, which produces a lower inflation measure.

If Republicans indexed the tax code to chained CPI, the government would receive an automatic tax increase relative to current law every year until the end of time. The Tax Foundation has a brief on the issue here.

Switching tax-code indexing to a lower measure of inflation is a bad idea for two reasons:

  • It would generate a substantial tax increase over time, and it would be an invisible increase because there would be no tax-filing changes for people to notice.
  • It would be an anti-growth tax increase because it would push people into higher brackets more quickly over time, subjecting them to higher marginal tax rates. The chained CPI proposal is essentially a proposal to slowly and steadily increase marginal tax rates.

Some economists may argue that the chained CPI proposal is a good idea because the tax code would more accurately reflect inflation, and it would. However, the tax code already contains a bias that pushes people into higher tax brackets over time, called “real bracket creep.” Real growth in the economy steadily moves taxpayers into higher rate brackets, since the tax code is indexed for inflation but not real growth.

Long-range projections from the Congressional Budget Office reflect substantial increases in taxes over time from real bracket creep. The agency notes:

… if current laws remained generally unchanged, real bracket creep would continue to gradually push up taxes relative to income over the next three decades. That phenomenon occurs because most income tax brackets, exemptions, and other tax thresholds are indexed only to inflation. If income grows faster than inflation, as generally occurs when the economy is growing, tax receipts grow faster than income.

So, I’ve got a better idea than indexing the tax code to a “more accurate measure of inflation,” as Republicans are suggesting: indexing the tax code to nominal GDP growth. That would adjust for the effects of both inflation and real economic growth on tax-code parameters, and it would prevent stealth tax-rate increases under our graduated income tax system.

More on tax reform here, here, here, here, here, and here.

The Economic Freedom of the World: 2017 Annual Report is out today. Co-published in the United States by the Fraser Institute (Canada) and the Cato Institute, it continues to find a strong relationship between economic freedom on the one hand, and prosperity and other indicators of human well-being on the other.

The United States ranks 11 out of 159 countries, indicating a slight improvement recently in its rating, but its economic freedom remains far below what it was in the year 2000, when it began a long decline. Since 1970, the index has typically ranked the United States among the top four countries. The top countries in this year’s report are Hong Kong, Singapore, New Zealand, Switzerland and Ireland. The least economically free countries are the Republic of Congo, the Central African Republic, and Venezuela.

There is an important innovation in this year’s report: it takes into account inequality in the economic freedoms enjoyed by men and women. Some countries don’t afford women the same level of such freedoms as men, so the index, for the first time, adjusts for these disparities. In her chapter, Rosemarie Fike explains the data and methodology that she used to create a gender disparity index, one that was then used to adjust the economic freedom ratings.

Most countries are only slightly affected (or are not at all affected) by the gender adjustment on the index. However, some 20 countries saw notable changes to their scores. Qatar, Bahrain, and the United Arab Emirates, for example, dropped significantly in the index. Over time, the world has seen shifts in the unequal economic freedoms of men and women. The overall level of gender disparity in economic freedom in the world has decreased since 1970. Women are enjoying more economic freedom than before. The locus of inequality has also changed. From 1970 to 1990, African countries dominated the list of nations with the worst gender disparity scores; since 1995, countries in the Middle East and North Africa now dominate that list. Another finding: the greater the level of economic freedom, the more likely that men and women will receive equal legal treatment.

Another chapter looks at the relationship between economic freedom and anti-immigrant populist parties. Although it is often asserted that globalization is causing much of that populist sentiment, authors Krishna Chaitanya Vadlamannati and Indra de Soysa find that countries with lower levels of economic freedom and higher levels of state welfare spending see more support for nativist, populist parties. It appears that some of the policies intended to provide social protection from the market might be encouraging populist politics.

Read about those and other findings in the new report here

The Merchant Marine Act of 1920, commonly known as the Jones Act, is impossible to defend with a straight face. The Act requires that all people and goods travelling from one U.S. port to another be carried on U.S. owned, flagged and crewed ships. The rationale usually offered these days in support of the Act is that it protects American jobs, and that our military needs to have a fleet of ships it can borrow in case of some sort of emergency. Neither can be taken seriously.

For starters, the Jones Act probably costs us jobs. The high shipping costs engendered by the Jones Act encourage businesses to ship more things via rail or truck. Where that’s not possible (as with Puerto Rico), it incentivizes businesses to import goods, rather than buy from a domestic customer and pay the prohibitively expensive toll the Jones Act imposes. In either case, fewer jobs result.

The Act makes it cheaper for U.S. livestock farmers to buy grain from overseas than from American sources, and forces states such as Maryland and Virginia to import their road salt rather than buy it from Ohio. The East Coast of the U.S. cannot afford to get lumber from the Pacific Northwest. And shipping oil from Texas to New England costs about three times as much as shipping it to Europe.

The Jones Act survives because it’s hard for people to see what it costs them. As long as constituents aren’t complaining, politicians are happy with the status quo - especially since ship builders will write big checks to anyone willing to protect the Act. 

The recent relaxation of the Jones Act for Puerto Rico has the potential (albeit slight) to change this calculus, but since it is scheduled to only last for ten days, the residents of this island won’t see how much they could potentially save from not having this burden. 

And those savings would be immense: In a study I recently did with Russ Kashian, we estimated that U.S. consumers would save billions of dollars if we got rid of the Jones Act. And places like Puerto Rico, Hawaii and Alaska would benefit most of all, since they are overly dependent upon shipping prices.

However, as those are only two low population states and a territory with no voting representation, their inconveniences won’t resonate much with Congress. 

In the wake of this month’s hurricanes that pummeled the Gulf states and Puerto Rico, an archaic piece of U.S. corporate welfare is coming under much-needed scrutiny.

The Merchant Marine Act of 1920, better known as the Jones Act, requires that all people and goods transported by water between U.S. ports be transported on U.S.-built ships, with U.S. owners, registered and sailing under the U.S. flag, and crewed by U.S. citizens or permanent residents. The law originally was justified as ensuring a robust U.S. merchant marine in wartime, but it really is (and probably always has been) a cynical sop to American shipbuilders, shipping companies, and (ostensibly) their employees because it gives them an oligopoly that allows them to charge higher prices. Policy analysts have long understood this; for instance, a 1991 Regulation article by Federal Maritime Commission member Rob Quartel chastised the law for creating “America’s Welfare Queen Fleet.”

Traditionally, Jones Act criticism has focused on its financial harm to American consumers. One recent estimate is the law results in higher prices totaling $1.8 billion a year, which is about $5.50 for each American man, woman, or child. But now there’s growing evidence that it also exacts a cost in human lives.

In the new issue of Regulation, North Carolina State University economist Thomas Grennes argues that, because American-built vessels are significantly more expensive than comparable ships built elsewhere, American shipping companies operating under the Jones Act delay replacing their older vessels. As a result, American-flagged vessels are nearly three times older on average than comparable foreign vessels. International data show that as ships age, they become more dangerous for their crew. Indeed, the 2015 sinking of the El Faro, a Jones Act vessel, raised troubling questions about the law’s role in the deaths of the ship’s 33-member crew.

Now, the Gulf hurricanes are showing another deadly aspect of the Jones Act.

As President Trump recently noted, “you can’t just drive” truckloads of emergency and rebuilding supplies and workers to Puerto Rico; they must be transported by plane and boat. That desperately needed relief is dramatically slowed and made more expensive by the Jones Act’s artificial barrier on what ships can move supplies from the U.S. mainland to the stricken island—and what ships do carry those supplies must be diverted from other transport work between U.S. ports.

The White House recently temporarily suspended the Jones Act for emergency supplies heading to the ravaged Gulf states, using a provision intended for national defense purposes. Now the Trump administration is being asked to do the same for Puerto Rico.

But instead of temporarily suspending the law under a dubious “defense” claim, Congress and the White House could simply repeal it. After all, pointless corporate welfare shouldn’t be opposed just during emergencies.

Legislation to end the Jones Act could be drafted quickly and easily; for a rough draft, lawmakers could use Sen. John McCain’s 2015 effort to repeal the law. The new bill could then be brought directly to the floors of the House and Senate for approval, and then taken to the president for his signature. 

Given congressional leaders’ statements of concern for the people of Puerto Rico, and given the Trump White House’s vows to pare back unjustified regulations and “drain the swamp,” repeal of this harmful piece of corporate welfare should be a slam dunk. Unless, of course, lawmakers have different priorities than helping consumers, protecting sailors, and aiding the desperate people of Puerto Rico.

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