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There’s a new development in the Keystone XL pipeline saga. Recall that last year the Obama administration denied a permit, ostensibly on environmental grounds, to build this pipeline. Now the Canadian company behind the pipeline, TransCanada, has started the process of suing the U.S. government before a NAFTA tribunal, asking for $15 billion in damages. Yes, that’s “b” for billions. (They have also filed a case in U.S. court).

A NAFTA lawsuit on this issue may seem odd, but provisions for claims by foreign investors are a standard feature of today’s trade agreements. I have argued that this feature is unnecessary, and should be abandoned. But as long as it’s in there, companies can use it, and TransCanada seems to have a case.

It’s hard to say, at this point, exactly how strong the case is. The legal obligations are vague, and there’s no international appellate court in the area of investment to bring order to the jurisprudence. Roughly speaking, TransCanada is arguing that the U.S. government has treated it in an arbitrary manner and discriminated against it, in violation of several specific obligations. I don’t like to predict outcomes, but I’m guessing that, based on the facts (and these cases are very fact-intensive), TransCanada’s lawyers are feeling pretty good about things.  But I’m reluctant to express too strong a view until both sides present all of their factual and legal arguments.

Keep in mind, also, that these investment cases are not quick. We’ll have a new president long before the NAFTA case is completed. If the new president is a Republican, he/she will likely approve Keystone (if TransCanada files a new application). That should end the NAFTA lawsuit (although TransCanada could still claim damages from the delay). If it’s President Clinton/Sanders, though, who both oppose Keystone, we could see a ruling in the case.

Beyond the specifics of the pipeline, the case has implications for the public debate over trade agreements more generally. Discussing the trade agreement provisions that give rise to these investment claims was kind of hard without a simple, straightforward, and well-known case. This lawsuit should make clear that foreign investors can sue governments before international tribunals when they feel mistreated.

Now, maybe people will like the idea of such lawsuits, although I have doubts that most will. I still say it is not needed, but at least everyone will understand how the system works and the kinds of cases governments may face.

When Congress passed the REAL ID Act, it hadn’t held a hearing to examine the merits and demerits—or practicalities—of instituting a U.S. national ID. Unworkable, the Chairman of the Senate Homeland Security Committee called it. In the U.S. House, REAL ID was attached to a must-pass military spending bill after the House vote on that bill. REAL ID wasn’t a shining example of democratic deliberation.

But REAL ID requires state cooperation. States must convert their driver licensing bureaus into arms of the U.S. Department of Homeland Security. This means that states may deliberate openly about whether databases of information about their residents should be poured into a national ID system. (This is a clear requirement from the statute. States that commit to REAL ID compliance now eventually must “[p]rovide electronic access to all other States to information contained in the motor vehicle database of the State.”)

Minnesota is a state where Department of Homeland Security bureaucrats have recently pressured elected officials to fall in line. And in Minnesota today a “Legislative Working Group on Real ID Compliance” will meet to discuss “possible compliance measures.” The chair of the group is Rep. Peggy Scott (R) and the alternate chair is Sen. Scott Dibble (DFL).

Now, the Minnesota legislature is moving pretty fast. Their governor appears to have been successfully buffaloed by the Department of Homeland Security. But at least there is an open meeting that Minnesotans and interested advocates can attend to inform the legislature.

So now the question can be joined: Will Minnesota’s elected officials put the state’s residents into a national ID system?

The web page on which this meeting is listed appears as though it will change. Other members of Minnesota’s “Legislative Working Group on REAL ID Compliance”—folks who will have a big say on whether Minnesota becomes a national ID state—are listed below.

House Members
Rep. Peggy Scott (R)
Rep. Abigail Whelan (R)
Rep. Drew Christensen (R)
Rep. Dan Fabian (R)
Rep. Tim Miller (R)
Rep. Bob Vogel (R)
Rep. Dennis Smith (R)
Rep. Brian Daniels (R)
Rep. Brian Johnson (R)
Rep. Duane Quam (R)
Rep. John Petersburg (R)
Rep. Ron Kresha (R)
Rep. Tony Cornish (R)
Rep. Tim Kelly (R)
Rep. Cindy Pugh (R)
Rep. Carlos Mariani (DFL)
Rep. Rick Hansen (DFL)
Rep. Barb Yarusso (DFL)
Rep. Jason Isaacson (DFL)
Rep. Mike Freiberg (DFL)
Rep. Karen Clark (DFL)

Senate Members
Sen. Scott Dibble (DFL)
Sen. Jim Carlson (DFL)
Sen. Greg Clausen (DFL)
Sen. Melisa Franzen (DFL)
Sen. Foung Hawj (DFL)
Sen. Lyle Koenen (DFL)
Sen. Ron Latz (DFL)
Sen. Roger Reinert (DFL)
Sen. Tom Saxhaug (DFL)
Sen. Matt Schmit (DFL)
Sen. Warren Limmer (R)
Sen. David Osmek (R)
Sen. Carla Nelson (R)
Sen. David Senjem (R)
Sen. Julianne Ortman (R)
Sen. Dan Hall (R)
Sen. Karin Housley (R)

You Ought to Have a Look is a feature from the Center for the Study of Science posted by Patrick J. Michaels and Paul C. (“Chip”) Knappenberger.  While this section will feature all of the areas of interest that we are emphasizing, the prominence of the climate issue is driving a tremendous amount of web traffic.  Here we post a few of the best in recent days, along with our color commentary.

Here we highlight a couple of things that we’ve been paying attention to as the new year unfolds.

First is an on-the-ground example of the extensive and invasive power of the federal government’s social cost of carbon. David Roberts, writing for Vox, describes the ongoing situation in a Colorado coal mining region which pits local, near-term coal mining interests (i.e., economic activity) against the federal government’s desire to mitigate potential damages that may result from climate change sometime in the future some place on the globe. So far, the present inhabitants of Colorado are losing out to the yet unborn future inhabitants of some faraway Pacific Island—a loss happily facilitated by the federal government.

Specifically, a federal judge has told the U.S. forest Service (USFS) that it did not adequately consider climate change when granting a special exception for coal mining activities on a protected tract of federal forest around Paonia, Colorado. The judge cited the National Environmental Policy Act (NEPA) as grounds for his decision.  When the USFS came back with its new analysis, it reported a huge, negative net impact of coal mining in the region.

How so? Because under the new federal guidelines for interpreting NEPA, the USFS had to consider not only the local environmental impacts of mining activities when compiling its Environmental Impact Statement, but also the impact that burning the mined coal to produce electricity would engender via the carbon dioxide emitted in the process.

If this sounds absolutely ludicrous, it is. And as you might imagine the locals are a bit flummoxed. “Who would have thought that they would have had to analyze the burning of coal in a power plant somewhere?” says Kathy Welt, a mineworker potentially impacted by the decision.

What’s even more ludicrous is that although the USFS admits that it is “problematic - likely impossible - to link emissions associated with this project to a specific increase in temperature, or changes in precipitation,” it can nevertheless estimate that the future cost of those unquantifiable climate changes may approach $13 billion, which of course swamps any local economic benefits.

This is precisely the kind of thing that we have been warning about, not only through our multitude of comments on the federal government’s development of the social cost of carbon, but on its mandated use and abuse.

David Roberts’ full article is well-worth a read to get into the details, but, it’ll leave you shaking your head, if not your fist.

Next up is commentary from Judy Curry on the argument that the existence of the potential (no matter how small) for calamitous outcomes from climate change makes it worth pursuing climate change mitigation measures. Those that are most risk averse are the ones pushing for a carbon tax or other mitigation measures.

But Judy takes them to task in her commentary on a recent essay “Climate models and precautionary measures”  by noted risk analyst Nassim Taleb.

Judy effectively counters Taleb’s contention that “we should build down CO2 emissions, even regardless of what climate-models tell us,pointing out that Taleb’s application of the precautionary principle isn’t well-suited to address “wicked” problems like climate change.

Judy writes:

While these issues [ozone, sulphur emissions and nuclear bombs] may share some superficial similarities with the climate change problems, they are ‘tame’ problems (complicated, but with defined and achievable end-states), whereas climate change is ‘wicked’ (comprising open, complex and imperfectly understood systems). For wicked problems, effective policy requires profound integration of technical knowledge with understanding of social and natural systems. In a wicked problem, there is no end to causal chains in interacting open systems, and every wicked problem can be considered as a symptom of another problem; if we attempt to simplify the problem, we become risk becoming prisoners of our own assumptions.

Simply put, the current focus on CO2 emissions reductions risks having a massively expensive global solution that is more damaging to societies than the problem of climate change.

Her blog post is rich with links to posts from her large archive of articles on the issue of climate change and risk, countering virtually all of the typical its-too-risky-not-to-act  talking points.  It is well worth a visit and a bookmark.

We close this issue of You Ought to Have Look with a suggestion to check out a tweet storm from energy analyst Jesse Jenkins explaining why energy efficiency measures are not a particularly effective way at reducing carbon dioxide emissions (contrary to the aspirations of many of the INDCs approved at the U.N.’s Paris Conference). Hint: the Rebound Effect.

It’s a quick, easy, and effective read. You can find it here.

You really ought to have a look.

On Tuesday President Obama announced a series of executive actions to reduce access to firearms in efforts to improve public safety. Consequently it might come as a surprise that one of the president’s core constituencies—the millennial cohort—is not overly enthusiastic about gun control.

The Pew Research center has consistently found that millennials are no more likely than older generations to agree that its more important to control ownership than protect the right of Americans to own guns.

In fact, a Reason-Rupe poll, that I helped conduct in 2013, found that millennials were the least likely to say that government should prohibit people from owning assault weapons: 63% of 18-34 year olds thought people should be allowed to own assault weapons, compared to 54% of 35-54 year olds and 36% of those 55 and over.

Furthermore, Gallup found that millennials were slightly less likely than older Americans to support stricter laws “covering the sale of firearms” (49% versus 56% of those over 55).

These results may seem puzzling since young Americans are less Republican than older cohorts, but it’s Republicans who tend to be less supportive of gun control measures.

In addition, millennials are less likely to own a firearm; Reason-Rupe found millennials were half as likely to report owning a firearm as those over 55 (11% versus 22%). However, people who don’t own firearms are more likely to support gun control measures. For instance, in the same poll a majority of gun owners opposed an assault weapons ban while a majority of non-gun owners supported a ban.

Furthermore, copious research on this cohort finds their social liberalism stands apart from older generations. In other words, millennials are more tolerant and accepting of difference, LGBT rights, racial inclusivity, marijuana legalization, immigration, etc. (see GallupPew, Reason-Rupe).

Nevertheless, their social liberalism hasn’t translated into their being liberal across the board. They are not significantly different from older cohorts on a number of issues, including attitudes toward business, the social safety net, and they are more supportive of entitlement reform (see here, and here). Furthermore, they take a more laissez faire approach to allowing products and activities that many have sought to ban or restrict.

Despite their Democratic sympathies, millennials’ more permissive approach to lifestyle choices and access to products and activities might at least in part explain why they are not more enthusiastic about gun control.  

Phosphorus (P) is an important macronutrient necessary for plant photosynthesis. When present in sufficient quantities, it has been shown to benefit plants by stimulating the formation of oils, sugars and starches, fostering rapid tissue growth and development, increasing stalk and stem strength, improving resistance to disease, enhancing crop quality, aiding flower and seed production, and benefiting a host of other growth- and development-related factors and processes. Out in the real world, however, P availability is often limited. Consequently, plants have developed multiple adaptive mechanisms (morphological, physiological and molecular) to help them cope with P insufficiency (Pi).

Despite such adaptive mechanisms, there are concerns that Pi will increase in the future as atmospheric CO2 concentrations rise. This hypothesis is based upon the recognition that elevated CO2 stimulates plant photosynthesis and growth. Such stimulation, however, is expected to require additional amounts of P in order for plants to sustain the projected CO2-induced growth enhancements. Otherwise, if P is limiting in the growth medium, or if plant adaptive mechanisms cannot compensate for the increased P demand, the growth benefits of CO2 enrichment may be reduced, and possibly wholly overcome, by Pi.

In a test of this hypothesis, Pandey et al. (2015) investigated the interactive effects of elevated CO2 and P nutrition on the growth response of three cereals: two wheat varieties (Triticum aestivum L. cv. PBW-396 and Triticum durum L. cv. PDW-233) and rye (Secale cereal L. cv. WSP 540-2). These three cereal species were grown in controlled environment chambers at the National Phytotron Facility, Indian Agricultural Research Institute, New Delhi, under conditions of 22°C/12°C day/night temperatures, a 10-hour photoperiod (450 µmol m-2 s-1 PAR) and relative humidity of 90 percent. Atmospheric CO2 concentrations were maintained at either ambient (380 ppm) or elevated (700 ppm) and supplied P levels were either low (2 µM) or sufficient (500 µM). And, after 15 days post germination various growth and biochemical analyses were performed. So what did the authors’ analysis reveal?

First off, Pandey et al. note that elevated CO2 increased the total plant dry weight of all three cereal species by an average of approximately one-third, regardless of P treatment level. In addition, they write the “total plant dry matter accumulated in plants grown with low-P under elevated CO2 was equivalent to those grown with sufficient P under ambient CO2” (emphasis added), which, they say, “indicates efficient utilization of tissue P under higher CO2.” Thus, elevated CO2 was able to completely compensate for the reduction in total plant dry weight that was induced by the low P treatment.

Elevated CO2 was also shown to benefit whole plant leaf area, which increased by 15 percent in low-P conditions, and by a much larger 43 percent under sufficient P. It also altered the partitioning of plant dry matter; under elevated CO2, both P treatments experienced a higher number of lateral roots per plant, greater root length and increased root surface area, which led to an increase in plant root/shoot ratio of approximately 20 percent in both P treatments.

Nutrient uptake per unit root mass and total P content per plant were also enhanced under elevated CO2. Under P-sufficient conditions these parameters increased by 19 and 49 percent respectively, whereas under low P conditions they were stimulated by 55 and 26 percent. Lastly, Pandey et al. report that these several benefits of elevated CO2 combined to induce a whopping 59 percent average increase in plant phosphorus use efficiency (PUE, defined as a unit of dry matter produced per unit of P uptake) among the three studied cereals when grown under P-limiting conditions.

Given the above findings, it is clear that elevated CO2 was able to sufficiently compensate for an increased P demand by (1) stimulating the cereals’ root systems, which allowed the plants to acquire greater amounts of P from the growth medium, and (2) by improving the ability of Pi-compensating mechanisms within the plants to utilize P, as evidenced by the large increase of PUE observed under low P conditions. And that is news worth celebrating.



Pandey, R., Dubey, K.K., Ahmad, A., Nilofar, R., Verma, R., Jain, V., Zinta, G. and Kumar, V. 2015. Elevated CO2 improves growth and phosphorus utilization efficiency in cereal species under sub-optimal phosphorus supply. Journal of Plant Nutrition 38: 1196-1217.

Yesterday, President Obama delivered a 35-minute address on gun control (I have seen several references to Obama’s “press conference,” but reporters were not invited to the White House east room for the event and the president did not take any questions). Cato associate policy analyst David Kopel discussed Obama’s “executive actions” last night on PBS Newshour.

By way of background, Cato published a paper by Kopel titled, “The Costs and Consequences of Gun Control,” and we are in the process of getting it into the hands of both federal and state policymakers.

Back to Obama.  According to the Washington Post, Obama and the ATF are merely clarifying existing law with respect to who must obtain a federal license to sell guns and conduct background checks.  There is no “executive order” that changes existing law.  Persons “engaged in the business” of selling arms must obtain a license.  Persons who just sell once in a while do not need a license.  So, for example, if someone loses interest in hunting and wants to sell his shotgun to a friend or neighbor, no license is needed for that transaction.  An ATF pamphlet released yesterday makes it a bit clearer who it considers “engaged in the business” for persons who fall in the gray area.  That non-change has been hailed as the big change.

The media is mostly right that all the executive actions are modest–and it is true that some of the GOP presidential candidates have overreacted by suggesting that whatever Obama has done must be reversed just as soon as they get into the Oval Office.  However, it must be noted that Obama points to the gun control policies of other countries, such as Australia and Great Britain, as models for the USA.  Kopel’s paper points out those countries have confiscated the weapons of citizens.  Obama also admits we’ll see more shooting sprees and that more gun control regulations are desirable.  Indeed, Hillary Clinton is making gun control a centerpiece of her promised domestic agenda if elected.  Add that up, and it seems safe to say that the gun control debate is not going away.  

For additional background, go here, here, and here

Poland’s new government wants a deal with Great Britain. Help us get a NATO (meaning American) garrison, and we’ll agree to limit European migrant flows to Britain.

British Prime Minister David Cameron was rebuffed when he sought Warsaw’s support for his European Union reform plan. However, over the holidays, Foreign Minister Witold Waszczykowski said, “Of course, Britain could offer something to Poland in terms of international security.” He went on to complain that “there aren’t, aside from a token presence, any significant allied forces or defense installations, which gives the Russians an excuse to play this region.”

Indeed, as host of the July NATO Summit, Polish President Andrzej Duda will make the issue a priority: “We need a greater presence of NATO in this part of Europe.” He called for allied bases in Poland and said: “We need more guarantees from NATO, not only we as Poland but the whole of central and eastern Europe in the current difficult geopolitical situation.”

No one seriously expects the Dutch, Italians, or Spanish to provide permanent garrisons for Poland. The Germans, who publicly oppose the idea, won’t be coming.

Only Britain and France are realistic candidates, and both reluctantly halted further cuts in their military budget. They aren’t likely to tie up significant combat units in Poland.

Which leaves you-know-who. The United States will be cajoled to continue defending a continent which doesn’t see much need to defend itself.

Last year, NATO-Europe collectively spent about 1.5 percent of GDP, well short of the two percent member objective. Only Estonia, Greece (to confront Turkey), Poland (first time ever), and the United Kingdom made that level.

Even two percent isn’t much if you believe your country is threatened by the authoritarian, aggressive power next door. And Latvia and Lithuania can’t be bothered to spend that much. Turkey also fails the two percent test, despite threatening fellow NATO member Greece, whining about the impact of the Syrian civil war, and shooting down a Russian plane over Syria.

Everyone simply assumes America will do whatever is necessary.

Of course, Russian threats are not as great as the Poles would have others believe. Poland appears secure. Moscow is unpleasantly aggressive, yet its ambitions appear bounded, largely limited to preventing further NATO expansion up to Russia’s borders. Nothing suggests that Vladimir Putin wants Russia to try to digest millions or tens of millions of Georgians and Ukrainians, let alone troublesome Poles living in historically Polish territory. Despite Russian threats against central and eastern Europeans, Moscow lacks the military and economic capability to make those threats credible.

The Baltics, with varying populations of ethnic Russians, also don’t appear to be of much concern to Russia. Attempting to grab a majority-Russian city or other territory would offer few benefits at high cost.

Washington should stop being complicit in the European game of playing the United States. America no longer can afford to defend its populous and prosperous allies.

However, Europe will do nothing so long as America does almost everything. Washington must do less.

If London supports Polish plans for a NATO garrison at the Warsaw Summit, let Britain offer the first troops for that purpose. Anyone else voting yes should be invited to join in too.

As I note in National Interest online: “U.S. officials should note that America remains a bit busy elsewhere—fighting in Afghanistan and the Middle East, garrisoning Japan and South Korea, patrolling the world’s oceans, and maintaining troops all over ‘Old Europe.’ Washington will allow the Europeans to take the lead in their continent’s defense.”

The case for a U.S.-dominated NATO disappeared years ago. The Europeans should discuss how they will defend themselves in the future.

Poland wants to make a deal putting a NATO tripwire on its territory. Washington should make clear that, irrespective of what other nations want, the Americans won’t be coming.

Dr. Ben Ho’s piece in Tuesday’s New York Times entitled “The Conservative Case for Solar Subsidies” is certain to raise a few eyebrows amongst the conservative crowd. But Ho asks a valid question that I’m not sure conservatives have seen fit to fully address in the last few years: What, precisely, should free market denizens hold true about energy policy?

The facile response–that there should simply be no government role–doesn’t quite work here. To be fair, few conservatives suggest such a thing. Ho points out that when there are negative externalities to the production of a good or service the economically efficient policy response requires a tax, and our carbon-based fuels emit a variety of pollutants when burned. This holds true regardless of one’s opinion about the verities of carbon emissions and climate change: Smog–which results mainly from automobile emissions–remains a key contributor to myriad health problems in the United States, and particulate matter resulting from coal burning bedevils asthmatics.

But the libertarian solution is not quite as simple as imposing a tax that covers the socialized pollution costs of burning fossil fuels. We have a nationwide energy grid, one that the federal government played an integral role in conceiving and constructing. Without eminent domain, such a thing would have been all but impossible. The federal government’s regulatory apparatus also has an integral role in regulating power providers, and since the provision of power is a natural monopoly, it’s hard to conceive of an alternative, at least for the moment.

One victory libertarians managed to achieve in the last twenty years has been to convince regulators that the inherent natural monopoly lies solely in the distribution and not the production of energy, so the two have been disconnected in most states. These days, most utility customers can choose from where to get their power, which is a good thing, but it still leaves us with a fundamental economic problem: How do we get a natural monopoly–the operators of the energy grid–to behave as if it were subject to competition?

The basic regulatory solution is to allow the utilities to charge a price to recoup their costs plus some incremental profit. This may sound reasonable, but it creates lousy incentives–namely, the utility has zero incentive to control costs under such a scheme. In fact, they have an incentive to increase their costs and capital investments, since this boosts their attendant profits.

Dr. Ho alluded to the profound potential impact that solar energy could have on this monopoly in the future.  With the advent of Tesla’s home battery, it is possible that within the next decade (provided the batteries continue to improve–far from a sure thing) we could see some houses begin to go off the grid entirely, with solar energy producing all the energy they need. If this were to occur at a large scale, we might see utilities being forced to act as if they were a competitive firm and strive to boost efficiency where possible in order to distribute energy at the lowest possible costs to keep customers from cutting the power cord.

The other possibility in such an environment is a downward spiral: as people leave the grid, the costs of maintaining it gets spread over fewer people, boosting the cost and, in turn, nudging more people to get off the grid until only those without any other viable energy option are left holding the bag and paying sharply higher costs for energy.

The answer to such a potentiality is to embrace technology and apply a modicum of foresight to regulatory activities. While the utilities would prefer that home solar just go away, Ho points out that its costs are now competitive with gas and coal, and prices seem poised to drop further in the future. The potential of solar energy–and solar energy that can be stored–is that it can allow utilities to dramatically reduce their investments. If energy storage were to allow utilities to close marginal power plants that produce only at the peak demand each day, the savings to power companies would be enormous. What’s more, having distributed power across the grid would also allow utilities to reduce their own capital investment along the grid by smoothing out the fluctuations in power distribution: in essence, doing one of the utilities’ jobs for them.

We are entering a brave new world in energy production, one that threatens to upend the century-old regulated utilities monopoly and replace it with something that could be much less expensive to run–but only if we get the right policies in place to let it develop. The one worry is that the biggest player in this market has absolutely no incentive for these changes to happen, and its regulator more often than not takes its cues thusly.  This is the conservative’s task for the next decade–keep a watch on regulators to act in the long-term interests of the customers and not the utilities. It’s easier said than done.


North Korea has grabbed international headlines. Again. Pyongyang staged its 4th nuclear test, supposedly a thermonuclear device.

Proposals for more sanctions and further isolation likely will grow. However, the test dramatically demonstrated that the U.S. attempt to build a cordon sanitaire around the Democratic People’s Republic of Korea has failed.

Washington instead should develop a new policy focused on engagement, not denuclearization. The latter should remain an objective, but even if it remains out of reach the U.S. might be able to reduce military threats on the peninsula.

As always, North Korean foreign policy reflects domestic politics. The test also gives Pyongyang greater leverage in its attempt to engage both South Korea and the U.S.

Talks with the Republic of Korea recently ended without result. The North also long has sought to draw the U.S. into bilateral discussions. However, the Obama administration set as a precondition for any talks that Pyongyang take steps toward dismantling its nuclear program, a non-starter.

In dealing with the North there are only second-best options which might ameliorate the threat otherwise posed by a famously enigmatic, persistently paranoid, and potentially unstable nuclear-armed state viewing itself in a perpetual state of war with America and its allies, South Korea and Japan.

The possibility of Pyongyang amassing not only a sizeable nuclear arsenal, but a thermonuclear arsenal, should help concentrate minds in Washington.

Current policy has failed. But more military threats would merely reinforce the case for nuclear weapons to North Korea. Moreover, the North recognizes that Washington has little stomach for a real war with mass casualties.

Additional sanctions aren’t likely to work without Beijing’s support. Xinhua News Agency ran an editorial criticizing the test, but urging “various parties” to “exercise restraint to prevent conflicts from escalating.”

Even if Beijing allows passage of a new UN Security Council resolution condemning the North, China is likely to limit the impact of any new sanctions. The PRC wants neither a messy national implosion on its border nor a united Korea hosting U.S. troops that could become part of an American containment network directed against the PRC.

Moreover, the DPRK has reopened channels to Russia. Although Moscow condemned the test, growing North Korea-Russia ties will discourage China acting against the DPRK.

The status quo has nothing to recommend it. North Korea will expand its nuclear and missile programs. Tensions will steadily rise. Any conflict will become more destructive.

Which leaves engagement.

Demanding denuclearization first ensures failure. As I wrote for Forbes: “Pyongyang is unlikely to abandon its weapon that best deters a U.S. attempt at regime change on the Korean peninsula. A nuclear arsenal has the additional advantages of preserving independence amidst other major powers (China, Japan, Russia), winning international stature for an otherwise minor, impoverished state, and offering abundant opportunities to extort economic and other benefits from fearful neighbors.”

In contrast, engagement at least creates the possibility, though admittedly small, of future denuclearization. First, negotiating with the North is the best way to reduce its fear of an American preventative war and detail the potential economic and diplomatic benefits of abandoning nukes.

Second, reducing U.S. threats against the DPRK would satisfy China’s standard response when urged to apply greater pressure on Pyongyang. Fair or not, the PRC long has blamed Washington for driving the North toward nuclear weapons.

Talking with the DPRK might achieve nothing. But Washington might be pleasantly surprised. Even if Pyongyang refused to eliminate its existing arsenal, the Kim regime might make other concessions, such as limiting future nuclear activity and reducing conventional threats.

So far nothing has stopped Pyongyang from developing nuclear weapons. Continued attempts at coercion aren’t likely to yield a better result.

As has oft been said, a good definition of insanity is doing the same thing while expecting a different result. Which leaves engagement as the best option for dealing with North Korea.

RealClearPolitics provides a useful tool to compare the Republican and Democratic nomination races today to similar points during the 2012 and 2008 primary cycles. Those nominating contests show that the candidates ahead at this point in the election cycle did not take home the nomination. This suggests that despite Donald Trump and Hillary Clinton’s persistent leads throughout the summer and fall of 2015, their primary victories remain uncertain.

Averaging across recent December polls, Donald Trump holds the lead among national Republican voters (not necessarily likely primary voters), at 35 percent. Trump holds a 15-point lead over Sen. Ted Cruz (R-TX) in second place at 19.5 percent and an over 20-point lead over Sen. Marco Rubio (R-FL) in third place with 11.5 percent. Trump’s support took-off in July and, for the most part, he’s remained ahead and increased momentum. 

Does Trump’s lead entering into 2016 portend his eventual win? Not necessarily.

At this point in the 2008 primary election cycle, former New York City mayor Rudy Giuliani led the pack with 23.6 percent. Former Arkansas Governor Mike Huckabee garnered 16.8 percent in second place while the eventual GOP nominee Sen. John McCain (R-AZ) was in third with 13.6 percent. Like Trump, Giuliani consistently remained ahead throughout the summer and fall of 2007. 

Similarly, in 2012, RCP shows that former House Speaker Newt Gingrich held the top slot at this point in the cycle with 31 percent, while the eventual nominee Mitt Romney was in second with 20.5 percent. Herman Cain was in third with 13 percent.



As for the Democrats, Secretary Clinton has maintained a solid polling lead throughout this cycle for the nomination. Averaging over the same period as the 2016 GOP candidates, Clinton garners an average of 53.8 percent of the Democratic vote. Trailing by over 20 points, Sen. Bernie Sanders (D-VT) averaged 31.2 percent in December and O’Malley came in a distant third at 4.6 percent.


Source: Real Clear Politics

Hillary Clinton seems certain to clinch the nomination with little trouble, and she likely will. But it’s worth pointing out that Clinton found herself in a similar–albeit not identical–polling position heading into the January 2008 primary. As she did in this cycle, Clinton had held a persistent lead over her rivals throughout 2007,  Sens. Barack Obama and John Edwards. Analysts were all but certain she would be the party’s nominee.


Source: Real Clear Politics

Average polling throughout December 2007 found Clinton with 45 percent of the Democratic vote. Barack Obama trailed by 20 points with 24.6 percent and John Edwards garnered 13 percent. Fast-forward a few weeks: Obama won the Iowa Caucuses and his numbers soared past Clinton, eventually securing the nomination. Similar to the Republicans in 2012, the eventual winner of the Democratic nomination was polling second at the start of the new year in 2008.

Source: Real Clear Politics


Even candidates consistently ahead in the polls entering into a presidential election year can still falter. Similar to Trump’s persistent lead throughout the fall of 2015, Giuliani and Clinton maintained a consistent lead throughout the summer and fall of 2007. They eventually lost to their third and second place rivals, respectively. Throughout the summer and fall of 2011, Mitt Romney trailed Texas Governor Rick Perry, former Godfather Pizza CEO Herman Cain, and Newt Gingrich.

Despite these similarities across the last three nominating seasons, there are important differences between the candidates and campaigns. First, Trump has attracted more enthusiastic support with (thus far) enduring momentum and has activated a new base of supporters who have traditionally not voted in Republican primaries. Giuliani did not attract the growing momentum that Trump has, but rather maintained a consistent lead in 2007. In 2012, Republican voters cycled throughout a number of different contenders before they settled on Romney.

Second, there are far more Republican contenders vying for the nomination in 2016 than in 2012 or 2008.

Third, Hillary Clinton’s primary rival is Bernie Sanders, not Barack Obama. Polling of Sanders supporters reveals they comprise a much narrower demographic and ideological base than Obama’s coalition. Consequently, it’s difficult to conceive of a situation where Sanders wins an early primary and convinces enough strategic Clinton voters who actually prefer Sanders that he is, in fact, electable.

Fourth, Sanders has failed to make headway in terms of the “endorsement primary,” which research shows is highly predictive of successful candidates (see Cohen, et al 2008, The Party Decides). That said, Clinton led Obama in endorsements leading up to the Iowa Caucus in 2007, but by a smaller margin.

It’s anyone’s guess what could happen after the 2016 Iowa Caucuses and first few primaries. Nevertheless, based on 2008 and 2012 there is reason to expect changes in today’s polling lineup.

In an earlier post, I argued that addiction per se such should not be regarded as a negative of drug use.  And I discussed recent concern from policymakers and public health officials about Kratom, a plant that allegedly has medicinal properties but that is also allegedly addictive.

In response, I received this email (quoted with permission):

Thank you so much for this article.  I discovered kratom almost three years ago, and have been using it ever since to control the symptoms of severe restless leg syndrome.  I’m a 71-year-old woman, and before finding kratom I couldn’t take plane flights to visit my grandchildren, or sleep longer than two or three hours at night.  Kratom gave me back my life. 

I don’t understand the push to make it illegal.  Kratom doesn’t even seem to be dangerous.  The only thing I feel when I take it is a blessed relief from the squirmy, torturous feeling of severe restless leg syndrome.   

The weird thing is that the prescription drugs prescribed for severe RLS (Usually the dopamine agonist drugs)  really ARE dangerous.  Their side effects are scary (obsessive compulsive behaviors like gambling, nausea, and the showstopper:  the RLS eventually gets worse and the drugs no longer work.  They call it augmentation). 

So thank you.  I really hope it remains legal.  I don’t want to be the grandmother standing out on street corners looking for kratom drug dealers.

Well said.

If you ask just about anyone at Cato what is the biggest problem we face, they will say big government, particularly the vastly overgrown federal government. Gallup finds that many Americans agree with us.

GovExec reports:

The country’s No. 1 problem in the year that just passed was its government, according to a new survey. The Gallup poll found for the second consecutive year, more Americans identified Uncle Sam as the “most important problem facing the United States” than any other issue. An average of 16 percent of respondents selected government, followed by 13 percent who said the economy, 8 percent who chose unemployment and 8 percent who selected immigration.

Aside from having a dim view of the president and Congress, people are presumably responding to the fact that Uncle Sam is so damn dysfunctional. While we are overloaded with news on ISIS and the economy, Americans may also be aware that the Secret Service has been making a joke of itself, Veterans Administration officials have been lying and cheating regarding the agency’s long wait lists, and the IRS director has been so dishonest and derelict in his duties that even mild-mannered George Will called for impeachment.

Those are some of the recent scandals, but federal government dysfunction goes much deeper. I describe the five fundamental reasons for federal failure in this recent study. And I discuss dysfunction in numerous federal agencies here.

Here are the Gallup results, courtesy of GovExec:

Yesterday, NBER released the first random-assignment study of a school choice program ever to find a negative result. Students who received a voucher through the Louisiana Scholarship Program (LSP) during the 2012-13 school year were 50 percent more likely to receive a failing score on the state math test than students who applied for but did not receive a voucher. The study also found negative effects on reading, science, and social studies tests.

The previous research on school choice had been almost unanimously positive. Out of a dozen previous random-assignment studies, 11 found positive results overall or for some subgroups, and only one found no statistically significant impact. Until now, none found any harm.

So what happened this time? As I explain at Education Next today:

Although not conclusive, there is considerable evidence that problem stemmed from poor program design. Regulations intended to guarantee quality might well have had the opposite effect. The [Louisiana Scholarship Program]’s high level of private-school regulation appears to have driven away better schools while attracting primarily lower-performing schools with declining enrollments that were desperate for more funding. 

Louisiana has one of the most highly regulated school choice programs in the nation. Private schools accepting voucher students may not use their own admissions criteria, may not charge more than the amount of the voucher, and must administer the state test. It’s no wonder then that two-thirds of Louisiana private schools do not accept voucher students. Worse, as I explained two months ago, the schools that choose to accept the vouchers along with all their attached strings are likely to be of a lower quality:

Better quality private schools that have little trouble filling their seats are less likely to accept vouchers if they decide — as two-thirds of Louisiana’s private schools did — that the regulations are too burdensome. By impeding the proper functioning of the market, regulations intended to raise quality may have the unintended consequence of lowering it.

Indeed, as Professor Jay P. Greene warned, the few schools “willing to do whatever the state tells them” to receive vouchers are those that are “most desperate for money.” According to the NBER study, “LSP schools open in both 2000 and 2012 experienced an average enrollment loss of 13 percent over this time period, while other private schools grew 3 percent on average.” The authors note that this “indicat[es] that the LSP may attract private schools struggling to maintain enrollment,” and they conclude that these results “suggest caution in the design of voucher systems aimed at expanding school choice for disadvantaged students.”

The results, said Matthew Ladner of the Foundation Excellence in Education, constitute “a very bitter lesson”:

If you are a low-income student attending low-rated schools in one of the lowest performing states, you got the short end of the stick in life. The very good people who designed this program had every intention of this program being a path out. Tragically in designing to keep bad schools out, they ironically kept the good schools out and invited the bad schools in. The road to this hell was built out of the cobblestones of good intentions, but it still led straight to this debacle.

The results are sobering but they shouldn’t be surprising. For years, factions within the school choice movement have argued over the effectiveness and wisdom of numerous regulations. For example, when the Fordham Institute released a “policy toolkit” praising Louisiana for mandating the state test, among other regulations, it launched a vigorous debate. Andrew Coulson and I argued that, while well-intentioned, uniform testing mandates would stifle diversity and innovation. Matt Ladner warned that Fordham failed to recognize the “natural limitations of technocrats” in their overconfidence about the ability of policymakers to guard against the “risk of self-defeating homogenization of the school offerings available.” Robert Enlow of the Friedman Foundation for Educational Choice cautioned that governments are “prone to politicial decisions and special interests,” and that accountability should be primarily to parents, not bureaucrats. Jay Greene noted that “testing requirements hurt choice because test results fail to capture most of the benefits produced by choice schools,” and that “highlighting a measure that severely under-states performance puts those programs in jeopardy.” AEI’s Rick Hess expressed skepticism that “policymakers have a Goldilocks-like ability to find the ‘just right’ solution” and called the Fordham report “surprisingly naïve about the realities of the legislative process and regulatory creep.”

Ultimately, the Fordhamites dismissed these concerns. Future Fordham president Michael Petrilli waved them away as mere “hypotheticals” whereas his concerns—such as parents making bad decisions and the long-term impact of crummy schools on kids—were “all playing out, right now, in the real world.” Noting that “we have to work hard to get the policy design right,” Petrilli “applaud[ed] Louisiana and Indiana policymakers for doing a darn good job on this front with their statewide voucher programs.” Then-president of Fordham Chester Finn, went further, arguing that “it’s insane to expect [the] marketplace to yield quality control, efficiency, and accountability for educational outcomes.”

(Ironically, Petrilli also expressed his fear that “bad private schools will get lots of media attention, which will drive down public support for school choice and strengthen the hand of those who opposed such programs in the first place.” Sadly, the negative findings in the NBER study stemming from Petrilli’s preferred policies are likely to do more damage to the public support for school choice than any one bad school could ever do.)

Petrilli’s concerns about crummy schools are perfectly reasonable. Indeed, all his interlocutors share them. In this debate among friends, everyone wants what is best for children. Where they differ is over the best means to improve educational quality. Given that there is no perfect system, the question is what sort of system is most likely to produce the best outcomes. 

Our friends at Fordham rested their case for test-based accountability on a single piece of evidence: according to a longitudinal study of Milwaukee’s voucher program, test scores rose in the year after the state mandated that voucher students take the high-stakes state test. However, Patrick Wolf, one of the study’s authors, cautioned Fordham against reading too much into that finding:

Ours is one study of what happened in one year for one school choice program that switched from low-stakes testing to high-stakes testing.  As we point out in the report, it is entirely possible that the surge in the test scores of the voucher students was a “one-off” due to a greater focus of the voucher schools on test preparation and test-taking strategies that year.  In other words, by taking the standardized testing seriously in that final year, the schools simply may have produced a truer measure of student’s actual (better) performance all along, not necessarily a signal that they actually learned a lot more in the one year under the new accountability regime.

If we had had another year to examine the trend in scores in our study we might have been able to tease out a possible test-prep bump from an effect of actually higher rates of learning due to accountability.  Our research mandate ended in 2010-11, sadly, and we had to leave it there – a finding that is enticing and suggestive but hardly conclusive.

In other words, Fordham’s case rested on a rather thin reed. Indeed, with the publication of the recent NBER study, the evidence now leans strongly against the technocratic approach.

In the wake of the criticism of Fordham’s policy toolkit, Petrilli expressed an admirable willingness to change course based on the evidence:

Maybe the tests that voucher students take need not be the state tests so long as they’re solid measures of achievement. Perhaps we need to let schools point to alternative measures of student outcomes before they are kicked out of choice programs. Possibly we need an accountability regime that’s completely separate from that which governs the public schools. 

Given the latest evidence, perhaps Fordham will rethink its support for the technocratic approach altogether. 

Presidential candidate Ben Carson released a three-page tax plan yesterday. Based on the limited information the plan includes, it looks like the best GOP plan so far.

Individuals and businesses would be subject to a simple 14.9 percent flat tax. The tax base appears to be of the Hall-Rabushka (HR) design, which is the gold standard of simple and pro-growth tax structures. I say “appears to be” because the Carson three-pager gives some hints, but not full details.

The defining feature of HR is that income is taxed once and only once. The current double taxation of savings and investment would be ended. Capital income would be taxed at the business level under HR, while labor income would be taxed at the individual level. Robert Hall and Alvin Rabushka proposed the HR tax structure back in 1981, as I discuss here. Rabushka, by the way, is a Cato adjunct scholar.

Ben Carson seems to have avoided the dangerous business VAT structure of the Ted Cruz and Rand Paul tax plans. He appears to be critiquing Cruz and Paul in this passage:

Unlike proposals advanced by other candidates, my tax plan does not compromise with special interests on deductions or waffle on tax shelters and loopholes.

Nor does it falsely claim to be a flat tax while still deriving the bulk of its revenues through higher business flat taxes that amount to a European-style value-added tax (VAT).

Adding a VAT on top of the income tax would not only impose an immense tax increase on the American people, but also become a burdensome drag on the U.S. economy.

I elaborate on Carson’s concerns about a GOP VAT here. My hope is that Cruz and Paul go back to the drawing board, drop their VATs, and release 2.0 versions of their plans. Carson’s plan appears to show a keener understanding of the big government risks of broadening the business tax base.  

Without details, I don’t know how close the Carson plan is to the HR model. But his three-pager indicates that he plans to abolish just about all special deductions and credits. And I like the fact that he makes both an economic and a moral case for flat and equal taxation on all Americans above a low-income threshold.

With low rates and an apparently neutral tax base, the Carson flat tax would be strongly pro-growth. American businesses would have increased incentives to build factories and buy capital equipment. Domestic production would expand, companies would hire more workers, and wages would be bid up. U.S. companies would become more competitive globally, and multinational corporate headquarters would move back to America.

That is all good news. But Carson and the other candidates should pair their tax-cut plans with spending-cut plans. Without spending cuts, the next president will have a hard time getting tax cuts through Congress because of deficit fears. Besides, both tax cuts and spending cuts stimulate private-sector economic growth.

In sum, kudos to Carson for his strongly pro-growth tax plan, and for apparently avoiding the VAT trap. The next step should be for Carson to provide full details to the modelers at Tax Foundation to examine the plan’s revenue and growth effects.

Politicians typically try to win votes by giving away money. Being a political Santa Claus usually is seen as more rewarding than being a federal Ebenezer Scrooge. Which is why there’s now a $1.2 trillion federal student loan program which, the New York Times politely observed, “has been removed from the norms and values of prudent lending.”

Federally subsidized student loans have become a political favorite, as Uncle Sam added $82 billion to his loan portfolio in 2015. An incredible 42 million Americans have outstanding debt; 6100 schools have collected subsidized loans. Congress has created an educational “entitlement” akin to Medicare and Social Security, only for the young.

A lot of that cash will never be repaid. As of 2014, 28 percent of those whose loans became due in 2009 were in default. Anticipated lifetime default rates for cohorts 2007 through 2011 steadily increase from 15.9 percent to 18.4 percent. The Huffington Post’s Shahien Nasiripour warned: “Federal student loans made in recent years resemble the toxic subprime mortgage loans that helped cause the Great Recession.”

After shoveling out money to people with little credit to attend schools unlikely to prepare them for work that pays, Uncle Sam provides multiple outs from having to repay the loans. For instance, people are entitled to three periods of forbearance.

The federal government also forgives loans for students who it believes to have been scammed in some sense by poor quality, typically for-profit, schools. But even in the case of flagrant fraud, why are the taxpayers responsible?

As Megan McArdle pointed out, “People get taken by scams every day, often with the help of government money. Should Fannie Mae forgive the mortgages of people if the buyer misrepresented the condition of the house?”

A multitude of public institutions underwrite what turn out to be very bad ideas. People may need relief but, McArdle observed, that’s what bankruptcy is for.

Congress also has created a forgiveness program for “public service,” which, of course, mostly means public, not service. Private jobs typically offer plenty of “service,” and the government often pays more—along with far greater job security—than private employers for similar “service.” Yet so far some 300,000 people have taken advantage of the program.

As a result, noted the Wall Street Journal, the program is yet another to spiral out of control, “encompassing far more workers than envisioned, many of them well-paid. Thousands of workers with graduate degrees are on track to discharge five-and six-figure debts on their way to typically lucrative careers.”

Next year the “Pay As You Earn” program, passed by Congress but expanded via executive order, will cost Uncle Sam $22 billion in lost loan repayments. PAYE limits monthly payments to ten percent of income and forgives the remaining debt after 20 years.

Sen. Elizabeth Warren (D-Mass.) has pushed a $60 billion refinancing plan to reduce borrowers’ interest payments. We’re all already helping middle class kids attend college. Shouldn’t they at least pay what they promised on their loans?

Publicly subsidized student loans make no policy sense. The “social” benefit from education is greatest at the lowest levels, when people learn to read and write.

College is viewed as the ticket to professional success and attending college yields a large wage premium. But that benefits the individual, not society. Which is precisely why individuals should pay for school, rather than government.

The “social” benefit of piling up bachelor degrees—especially in the soft social sciences—isn’t obvious. Even more so, advanced degrees primarily benefit individuals. It is perverse to force lower income people to finance professional degrees for those destined to be part of the one percent.

As I note for the Freeman: “The federal student loan program illustrates how in Washington the taxpayers always lose. It’s time someone in government began to act in the interests of those who work and pay for everyone else.”

Saudi Arabia and Iran continue to turn their national struggle into a religious conflict. The first is dangerous. The second could be catastrophic.

Yet Riyadh, America’s nominal ally, just demonstrated that it is the more reckless of the two states by executing Shia cleric Nimr al-Nimr.

There is much bad to say about Tehran’s authoritarian and interventionist Islamic regime. But even worse is Saudi Arabia, considered by Washington to be a valued ally.

The Kingdom of Saudi Arabia is essentially a totalitarian state. Last year Human Rights Watch reported that Saudi Arabia continued “to try, convict, and imprison political dissidents and human rights activists solely on account of their peaceful activities.”

Freedom House rated the kingdom at the bottom in terms of both civil liberties and political rights. Purported “antiterrorism” legislation allowed the “authorities to press terrorism charges against anyone who demands reform, exposes corruption or otherwise engages in dissent.”

The U.S. State Department devoted 57 pages to the Saudi monarchy’s human rights (mal)practices. Noted State: “The most important human rights problems reported included citizens’ lack of the ability and legal means to change their government; pervasive restrictions on universal rights such as freedom of expression, including on the internet, and freedom of assembly, association, movement, and religion; and a lack of equal rights for women, children, and noncitizen workers.”

The Saudi royals are, if anything, even more repressive when it comes to matters of faith. The U.S. Commission on International Religious Freedom reported that the regime “remains unique in the extent to which it restricts the public expression of any religion other than Islam.”

In its latest assessment State noted that citizens are required to be Muslims and that apostasy may be punished by death. Obviously, “freedom of religion is not protected under the law.”

Essentially, Saudi Arabia is an early version of the Islamic State which won social acceptance in the West.

Unfortunately, Riyadh doesn’t limit religious repression to home. The licentious royals propagate fundamentalist Wahhabist Islam abroad. The KSA backed the Taliban regime, which shared Riyadh’s enthusiasm for brutal implementation of 7th century Islam. Some wealthy Saudis supported al-Qaeda before 9/11.

According to Wikileaks, Secretary of State Hillary Clinton confirmed that Saudi money continues to flow to terrorists. And the monarchy has generously supported extremist Syrian rebels.

Turning the American military into the Saudi royals’ bodyguard also spurred attacks on Americans The first Gulf War was directed more to safeguard Saudi Arabia than liberate Kuwait; the U.S. garrison left in Saudi Arabia stoked Osama bin-Laden’s anger and was later targeted in the 1996 Khobar Towers bombing.  Finally, attacking Iraq created the murderous al-Qaeda in Iraq, which became a prolific employer of suicide bombers and morphed into the Islamic State.

Saudi Arabia sells the West oil, but out of necessity, not friendship. Any successor regime would do the same. Anyway, the transformation of the international energy marketplace means Washington need not worry about reduced Saudi oil exports.

On foreign policy, Riyadh is as problematic as Iran. Killing a Shiite cleric for standing up to the oppressive Sunni monarchy moved the region closer to multinational sectarian conflict. The royals have made a political settlement in Syria far harder, if not impossible.

Saudi Arabia also is ruthless in suppressing democracy and human rights elsewhere. For instance, Riyadh intervened militarily to back Bahrain’s Sunni monarchy and subsidized Egypt’s brutal al-Sisi dictatorship.

Even worse has been the KSA’s intervention in Yemen. The long-running civil war was tribal more than sectarian, but Saudi Arabia turned it into another sectarian proxy fight. The humanitarian consequences have been horrific.

Instead of being treated as an ally, Saudi Arabia “should be a pariah,” argued Freedom House President Mark Lagon. As I point out in Forbes, “at the very least, U.S. officials should drop the faux intimacy. .”

Of the many bemusing chapters of the whole interest-on-reserves tragicomedy, none is more jaw-droppingly so than that in which the strategies’ apologists endeavored to show that paying interest on reserves did not, after all, discourage banks from lending, or contribute to the vast accumulation of excess reserves.

Apart from resting on logic that’s bound to bring a smile to the face of anyone reasonably conversant with the rudiments of Money and Banking 101, these demonstrations fly in the face, both of the original justification for IOR, as offered by Federal Reserve officials themselves, and of the Fed’s recent decision to double IOR (and, with it, the upper-bound of the Fed’s federal funds rate target range) so as to prevent inflation from rising above the Fed’s 2 percent target.

Now, unless general understanding of basic monetary economics has deteriorated even more than I suspect it has over the course of the crisis and recovery, that understanding still sees inflation as a consequence of “too much money chasing too few goods.” But money can either chase after goods, or rest in bank vaults (or in the virtual vaults consisting of deposits at the Fed). It can’t do both. Thus the logic (and for once it is logical logic) behind the Fed’s decision, both in October 2008 and last month, to check inflation by raising the interest return on bank reserves.

Now on to the exhibits. I start with another passage from the Richmond Fed article by Walter and Courtois referred to in my earlier post. There I noted how these authors shared Bernanke’s own understanding of the Fed’s decision to introduce IOR in October 2008. “Once banks began earning interest on the excess reserves they held,” Walter and Courtois write, “they would be more willing to hold on to excess reserves instead of attempting to purge them from their balance sheets via loans made in the fed funds market.”

Perfectly correct. Nor do Walter and Courtois suggest that there was anything wrong with the Fed’s understanding of what it was up to. Yet, some paragraphs later, the same authors declare that banks’ subsequent accumulation of excess reserves

has mistakenly been viewed by some as a sign that the Fed’s lending facilities — the goal of which has been to maintain the flow of credit between banks, and therefore from the banking sector to firms and households — have not worked.

Now, this is already rather confusing, for as we’ve seen, according to these authors themselves, the whole point of IOR was, not to “maintain the flow of credit” in the sense of keeping it from shrinking — for shrink it most certainly did — but to make sure that the Fed’s additions to the total stock of reserves did not increase that flow, which is to say, did not serve to arrest the flow’s decline.

But let us set our befuddlement aside, in order to allow our authors to dispute the view that the vast post-IOR accumulation of excess reserves was evidence that the Fed’s emergency loans and asset purchases weren’t serving to “maintain” an adequate flow of credit:

To the contrary, the level of reserves in the banking system is almost entirely unaffected by bank lending. By virtue of simple accounting, transactions by one bank that reduce the amount of reserves it holds will necessarily be met with an equal increase in reserves held at other banks, and vice versa. As described in detail in a 2009 paper by New York Fed economists Todd Keister and James McAndrews, nearly all of the total quantity of reserves in the banking system is determined solely by the amount provided by Federal Reserve. Thus, the level of total reserves in the banking system is not an appropriate metric for the success of the Fed’s lending programs.

A gold star to all who spot the fallacy here. For those who can’t, it’s simple: “reserves” and “excess reserves” aren’t the same thing. Banks can’t collectively get rid of “reserves” by lending them — the reserves just get shifted around, exactly as Walter and Courtois suggest. But banks most certainly can get rid of excess reserves by lending them, because as banks acquire new assets, they also create new liabilities, including deposits. As the nominal quantity of deposits increases, so do banks’ required reserves. As required reserves increase, excess reserves decline correspondingly. It follows that an extraordinarily large quantity of excess reserves is proof, not only of a large supply of reserves, but of a heightened real demand for such, and of an equivalently reduced flow of credit.

And what about Keister and McAndrew’s 2009 paper, which Walter and Courtois refer to as the locus classicus of their argument? As Jamie McAndrews has generously contributed, in the course of several recent email exchanges and also in his published works, to my own understanding of the whole IOR business, I’m pleased to report that a careful reading of that paper does not support the conclusion that Walter and Courtois draw from it. On the contrary: Keister and McAndrews understand that, unlike the total quantity of reserves, the quantity of excess reserves is a function of banks’ willingness to lend. Moreover, they remind their readers that the Fed began paying interest on reserves “to prevent the increase in reserves from driving market interest rates below the level it deemed appropriate given macroeconomic conditions,” and that it was only owing to IOR that banks willingly held on to so many excess reserves instead of lending them away.

But while the 2009 paper by Keister and McAndrews cannot be said to confuse the determinants of banks’ excess reserve holdings with those of banks’ total reserves holdings, the same cannot be said of an August 27, 2012 Liberty Street Economics post by Keister and Gaetano Antinolfi. Antinolfi and Keister explicitly deny that the Fed, by lowering the interest return on excess reserves, might encourage banks to “lend out some of these ‘idle’ balances.” Why not? Because, according to their reasoning, “lowering the interest rate paid on reserves wouldn’t change the quantity of assets held by the Fed.” Since lowering the rate of IOR is also unlikely to increase the share of the monetary base consisting of currency rather than bank reserves, it follows that it “will not have any meaningful effect on the quantity of balances banks hold on deposit at the Fed.”

Here is that silly fallacy again: for the question isn’t whether a lower rate of IOR can reduce banks’ total reserve balances. It is whether it can reduce their excess (“idle”) balances by inducing them to lend more. For while such lending wouldn’t serve to reduce the aggregate stock of reserves, it would lead to an increase in the nominal quantity of bank deposits, and a proportional increase in banks’ required reserves. So, even as they caution their readers that “Language Matters,” Antinolfi and Keister blunder badly by neglecting to heed the crucial distinction between the total quantity of bank reserves, which no amount of bank lending can alter, and the quantity of excess reserves, which, by means of sufficient bank lending, might always be reduced to zero.

Speaking of language, one of the peculiarities of how it evolves, according to my own (admittedly inexpert) observations, is the particular tendency of bad language memes to go viral. Once upon a time, some moron imagined that “incentivise” was a word, and the next thing you knew every other moron couldn’t wait to slip it into a sentence.

In the same way, bad monetary analysis has a way of spreading like a wildfire. So I suppose it was only to be expected that Antinolfi and Keister’s “proof” that lowering IOR wouldn’t promote bank lending would be cited approvingly (or at least not disapprovingly) by numerous other commentators. Jon Hilsenrath reported favorably on Antinolfi and Keister’s argument for the Wall Street Journal’s Real Time Economics blog, as did Jonathan Spicer for Reuters, while Mark Thoma included a large chunk of their post in a post of his own, without expressly endorsing it, but also without suggesting that there was anything wrong with it.

The mistaken understanding of Keister and McAndrews (or, as now seems more likely, the correct understanding of Keister’s own contribution to that work) likewise became, in some quarters at least, the popular understanding. Thus, according to Frances Coppola, writing for Forbes,

The volume of excess reserves in the system is what it is, and banks cannot reduce it by lending. They could reduce excess reserves by converting them to physical cash, but that would simply exchange one safe asset (reserves) for another (cash). It would make no difference whatsoever to their ability to lend. Only the Fed can reduce the amount of base money (cash + reserves) in circulation. While it continues to buy assets from private sector investors, excess reserves will continue to increase and the gap between loans and deposits will continue to widen.

Nor, according to Ms. Coppola (writing in another Forbes column), has IOR anything to do with it:

Banks are not being paid not to make loans. They don’t lend out reserves to customers. They only lend reserves to each other. By competing with banks in the market for reserves, the Fed controls the price at which they lend reserves to each other. It has nothing whatsoever to do with customer lending.

There you have it: banks can hold on to reserves, and yet lend all they wish to (though not, for some reason, overnight). Such a marvelous business! Whoever said that one can’t have one’s cake and eat it, too?

Well, banking would indeed be a marvelous business if it worked as our expert at Forbes assumes. Alas, it is not so marvelous at all in fact. For despite what Ms. Coppola claims, banks do, in effect, lend “reserves” to customers no less than to other banks. The lending of “reserves” is more apparent in the overnight market simply because it is reserves per se that borrowers in the market are after, for they need extra reserves to avoid shortfalls that would otherwise subject them to penalties, or to what amounts to the same thing: a visit to the Fed’s discount window.

If, on the other hand, a businessman borrows $500,000 from a bank, it isn’t cash itself that the businessman wants, but other things that can be got for the cash. But as soon as the proceeds of the loan, originally received as a deposit balance, are drawn upon for the sake of acquiring these other things, the withdrawals, whether by check or draft, lead quickly to redeposits in other banks, and thence to a $500,000 adjustment to the pattern of interbank clearings and settlements at the expense of the lending bank and in favor of rival institutions compared to what would have been the case had it not made the loan.

All this is entirely elementary. Yet it is not just the folks at Forbes that don’t get it. Here is what The Economist had to say back in December 2009 about the piling-up of excess reserves:

The point is that the Fed is not trying to increase lending by increasing reserves; it is trying to increase lending by lowering long-term rates and directly supplying credit to borrowers who can’t get it elsewhere. Higher reserves are the unintended byproduct. Well, unintended or not, couldn’t all those excess reserves spur credit growth and inflation? No. Reserves have not been a relevant constraint on bank lending for decades, if ever. Bank lending is constrained by customer demand and by capital. Right now, loan demand is moribund (in spite of a zero federal funds rate) and capital is in short supply.

Although it is certainly true that the Fed wasn’t trying to get banks to lend more, it did not itself believe that reserves were not a “relevant constraint on bank lending.” If it had thought so, it would not have bothered sterilizing its pre-Lehman lending, and it would not have resorted post-Lehman to paying interest on excess reserves. Jose Berrospide has it right when he says that, once that policy was in place,

banks sold assets worth selling, such as treasuries and [other] government securities, because the return on those assets was almost zero. Banks accumulated cash and excess reserves at the central bank because of the interest earned on reserves balances.

The Fed’s creation of vast quantities of fresh reserves did not result in a like increase in bank lending, not because reserves had ceased to be a relevant constraint on lending “decades before,” but because, thanks to IOR, “the marginal return on loans [was] smaller than the opportunity cost of making a loan” (ibid.).

Nor, as I pointed out in my previous post, was bank lending capital constrained except for a brief time during 2009. After that, many banks held both excess reserves and excess capital. As for lending being “constrained by customer demand,” oh puh-lease! The quantity of loans demanded, which is what the writer ought to be talking about, depends on the rate charged. The problem is that no bank was willing to lend for, or to buy assets yielding, less than the rate paid on reserves themselves.

Economists seem lately to have built a little cottage industry around the notion that those old-fashioned accounts of bank lending, what with their reserve multipliers and clearing losses and all that, are passé. To subscribe to them is to be hopelessly out of fashion. Well, call me an old fogey if you must, but I say, show me some au courant writings on the matter, and I will show you some fashionable nonsense.

[Cross-posted from]

The more I read about the case of Dwight and Steven Hammond, the more convinced I am that their prison sentences are a gross miscarriage of justice. After conducting prescribed fires on their own land that crossed onto a few acres of federal grasslands, they were convicted of arson on federal lands, which under a 1996 anti-terrorism law carries a five-year mandatory minimum sentence.

The law says, “Whoever maliciously damages or destroys … by means of fire or an explosive, any … real property in whole or in part owned or possessed by, or leased to, the United States … shall be imprisoned for not less than 5 years.” The key word is “maliciously”: there is nothing malicious about starting a prescribed fire, something that is regularly practiced by thousands of landowners as well as the government itself.

In its opinion on the case, the Ninth Circuit concluded that a 2001 fire (which the Hammonds started on their own land but which escaped to federal land) was malicious because Dwight Hammond’s grandson and Steven’s nephew, who was a 13 years old in 2001, “testified that Steven had instructed him to drop lit matches on the ground so as to ‘light up the whole country on fire.’” This betrays a divide between urban and rural cultures. To urbanites such as the judges on the Ninth Circuit, “the whole country” means the entire United States.

This obviously makes no sense; no one would think that a teenager with a few matches could light the whole nation on fire. This is probably why some press accounts reported that Steven told the teenager to “light the whole county on fire,” but even that makes little sense: Harney County, in which the Hammonds live, is the largest county in Oregon and bigger than the entire state of New Jersey.

Ruralites use the word “country” to mean something other than “United States.” Instead, it means what urbanites would call “land” or “countryside” (another word used in some press accounts). Steven Hammond’s instruction to the teenager probably was intended to mean, “burn this entire field.”

The court also noted that the fire “took the acreage out of production for two growing seasons.” Again, this indicates urbanite ignorance of rural processes. Fire is a natural component of many ecosystems, and burning can produce long-run increases in ecosystem productivity that justify short-term losses. In any case, grazing rights on the land in question were leased by the Hammonds, so they, more than anyone else, would pay for any declines in productivity.

Prescribed fire has been controversial within federal agencies for decades. As described in Ashley Schiff’s classic bureaucratic study, Fire and Water, the Forest Service long opposed prescribed burnings. During the 1920s and 1930s, it included such fires in their annual counts of total acres burned by wildfire, which greatly inflated those numbers. It wasn’t until the 1950s that the agency begrudgingly accepted the use of prescribed fire, though it still resisted its use on its own lands in the West until very recently. I remember in the 1980s hearing an agency official calling people who burned their own lands “vandals.”

The Hammonds have apparently been at odds with the Bureau of Land Management (BLM) over fire before, as a 1999 fire that they lit on their own land crossed over to BLM land, which led the BLM to warn the Hammonds not to do so again without a permit. They failed to get a permit for the 2001 fire, which burned 139 acres of federal land and probably improved its long-term productivity. The fire cost the federal government nothing as the Hammonds themselves put it out.

Nor did they get a permit for the 2006 fire, which was set to defend against a wildfire on BLM lands near their ranch. Such a backfire is standard procedure, but–probably because there wasn’t time–the Hammonds didn’t get either a permit or a waiver of a fire ban that was then in effect due to dry conditions. The fire burned just one acre of federal land, and the Hammonds paid $400,000 of federal fire suppression costs, though I suspect most of that money had been used fighting the wildfire, not the Hammond’s back fire.

The Hammond precedent could severely inhibit prescribed burning anywhere near federal land, which means practically anywhere in the West. While such burning should theoretically be okay so long as people get the appropriate permits, if they fail to follow every single rule to the letter, they could be imprisoned for five years for a “terrorist” act. Even a lightning-caused that starts on private land could be labeled “malicious” if the landowner does not make every possible effort to insure that the fire does not cross over onto federal land.

In chapter 23 of Roughing It, Samuel Clemons tells how, in the early 1860s, he lit a campfire near Lake Tahoe. When he “went back to the boat to get a frying pan… , I heard a shout from Johnny, and looking up I saw that my fire was galloping all over the premises!” They got in their boat for safety, and “Within half an hour all before us was a tossing, blinding tempest of flame!” Clemons could get away with this because there was no one other than his party for miles around. Today, the world is different, something that the Hammonds apparently failed to recognize.

Defense attorneys for the Hammonds submitted character references arguing they “have done wonderful things for their community.” But the defense brief to the Supreme Court also indicates that they have alienated numerous people.

  • A private hunting guide who testified against the Hammonds about the 2001 fire “had a great deal of animosity to the Hammonds,” probably due to conflicts between cattle and wildlife;
  • The teenager who said Steven told him to “burn the whole country” was estranged from his uncle because Steven had taken sandpaper to the boys skin to remove a self-applied tattoo;
  • One BLM official claimed that Steven had threatened to expose the official’s own careless prescribed fires to get him to change his testimony (an accusation for which the court concluded there was insufficient evidence);
  • In addition, in a classic Western conflict, the BLM and Fish & Wildlife Service were apparently upset that Hammonds had legally obtained water rights for their land and unsuccessfully challenged those rights in court.

Like a Western film noir, it seems that the Hammond’s real crimes are that they live in the past, may be somewhat hot-headed, and have made too many enemies. They’ve more than paid for those crimes with (in Steven’s case) a year in jail and a $400,000 fine. President Obama should grant their plea for clemency.

Unfortunately, their “friends” the Bundys have probably made it politically impossible for Obama to do so. It would be one thing if the Bundys and their friends had conducted an unarmed sit-in, saying they wouldn’t leave a federal office until the Hammonds were freed. Instead, they took up arms and have threatened to shoot anyone who tries to remove them, adding that they’ve invited other people to come and live on and take over the wildlife refuge. Though they clearly have a completely different axe to grind, politicians will be wary that helping the Hammonds would appear to also support the Bundys.

Our recent policy analysis criticizing E-Verify drew a response from NumbersUSA that we did not notice until recently. Most of the NumbersUSA piece is about how well E-Verify polls, which has nothing to do with the system’s failures or how it will harm Americans. NumbersUSA does take an issue with the data set we used for showing that E-Verify is largely ineffective at identifying unauthorized immigrants. As the piece reads:

According to Nowrasteh and Harper, the “the most damning indictment of E-Verify as a tool to force unlawful immigrants out of the labor market” is it’s [sic] susceptibility for identity theft. The authors write that “E-Verify cannot tell the employer, for instance, that the SSN handed to him by a Hispanic job applicant in 2015 in Texas actually belongs to an 11-year old girl who died in Minnesota decades ago.” To be sure, E-Verify was not created to catch identity thieves. And the authors report that “an estimated 54 percent of unauthorized workers submitted to E-Verify were incorrectly found to be work authorized because of rampant document fraud.” That was the finding of a 2009 report that studied statistics from April to June of 2008. The authors present it as if it was a recent discovery applicable to 2015.

The 2009 dataset is older but more reliable and detailed than more recent sets. Also, the NumbersUSA critic acknowledges in his next paragraph that  identity-theft still plagues E-Verify in 2015.  He blasts the Social Security Administration (SSA) for “failing to crack down” on identity thieves and demands further integration with the DHS.

We are glad that NumbersUSA at least shares our concerns over E-Verify’s problematic identity theft issues. However, the problem with E-Verify is economic and won’t be solved by sharing data with DHS. Our immigration laws try to separate willing workers from willing employers where large mutual gains exist. E-Verify is just one of the latest tools to attempt that. Spending more taxpayer dollars to keep these workers and employers apart with ever fancier gadgets like E-Verify won’t work. Liberalizing the law to allow more lawful immigration will. 

Thanks to Scott Platton for his excellent research assistance.

Nowhere is China’s growing reach more obvious than in Africa. President Xi Jinping just returned from a trip during which he promised African officials $60 billion in new investment. Beijing also has grown more active culturally, educationally, and even militarily.

The PRC’s increasing role has created unease in Washington. But China has run into many of the same sort of problems which faced America in the past.

The U.S. obviously fears losing business: African trade with China surpassed that with America in 2009. Beijing undermines Western pressure to improve democracy and human rights.

Yet the ultimate results of President Xi’s visit remain to be seen. The photo ops were impressive, but both the pictures and promises may fade over time.

Dealing with the continent remains a challenge. Many African nations remain in crisis. The November terrorist attack in Mali killed three Chinese citizens.

The PRC appears willing to ignore some risks which deter Western countries and companies. However, no money put into Zimbabwe—a large destination of Chinese investment—is likely to turn out well.

Osadebe Osakwe, managing director of North China Construction Nigeria, argued that “Unless the West changes its risk assessment, the Chinese will beat them to the African market.” But the market is not worth dominating at any price. Observed the New York Times:  “Nigeria is a particularly shaky bet for China.”

African countries also have discovered that Beijing desires what the U.S. demanded in the past: political loyalty, resource control, investment return. For instance, most of the $60 billion will be concessional loans. Assuming the money is forthcoming. Observed Claire Provost and Rich Harris in the Guardian, many past projects announced with great fanfare “never make it past the ceremonial pledges.”

Moreover, Africa long has been awash in “aid” from multilateral development banks, but much of that has been stolen or wasted. Beijing’s experience so far is no different.

For instance, more than a $1 billion essentially vanished, noted the Economist magazine, after being invested in a palm oil plantation in a region where “there were no roads, the river was barely navigable and villagers were hostile.” Because of the lack of conditionality, observed Brad Parks of the research lab AidData, “African officials know that they have more leeway with Beijng’s money, and they use it.”

Even cheap loans may become a significant burden to repay. Observed the Times: “Infrastructure projects in Nigeria have been fueled by the same manic lending that has also created mountains of debt for China’s economy at home.”

The PRC also often demands concessions for land, minerals, or other commodities in return. Moreover, Beijing often requires use of Chinese firms, even bringing laborers from the PRC. This is seen as a new version of neocolonialism.

In fact, the “Ugly Chinese” looks a lot like the “Ugly American” before. Explained a recent Rand Corporation report: “Labor unions, civil society groups, and other segments of African society criticize Chinese enterprises for their poor labor conditions, unsustainable environmental practices, and job displacement.”

Both sides must worry about declining growth rates. As China’s economy has slowed, demand for African commodities—food, minerals, and energy, in particular—has weakened. Another problem is that Chinese products have gained a reputation for being shoddy and counterfeit.

Thus, Western fears of Chinese domination in Africa appear overblown. Although Beijing has attempted to adapt to criticism, “African perceptions of China include a mix of approval, apathy, and contempt,” reported the Rand Corporation.

While America’s role has shrunk, I argue on China-US Focus that “the U.S. remains the largest, most productive, and most attractive economic partner for African nations. American enterprises also have a reputation for offering better working conditions, purchasing local products, and transferring more technologies.”

The U.S. has lost economic primacy in Africa, as in Asia, to China. But America likely will do just fine as long as they compete rather than whine about a changing world.