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In a pitch clearly aimed at Republicans, the Obama Administration has begun advertising that the Trans-Pacific Partnership includes 18,000 tax cuts.  This is welcome rhetoric—tariffs are taxes and taxes are bad.  Lowering tariffs is the core function of trade agreements, and the positive impact of the TPP will depend in large measure on how deeply and quickly it eliminates these artificial barriers to trade.  

But they’re actually praising the wrong tax cuts. 

The administration’s new “guide” to the TPP notes that the agreement “will cut over 18,000 taxes that other countries impose on American exports,” and claims this is good because it’s “18,000 ways TPP helps American workers, farmers, and businesses win.” 

There’s nothing wrong with touting the elimination of 18,000 foreign tariffs.  It will help U.S. exporters who want to sell more cherries in Vietnam, and it will help foreign consumers, who will benefit from lower prices and greater variety. 

By limiting the number to 18,000 however, the president gave up a genuine opportunity to advocate free trade, choosing instead to rely on mercantilist rhetoric about level playing fields and winning.   

In addition to cutting 18,000 foreign tariffs, the TPP will also eliminate thousands of U.S. tariffs on goods from TPP countries.  Those tariffs are taxes that the U.S. government imposes directly on American consumers and businesses who buy imported products.  The losers from American protectionism are a much larger group than the winners from increased access to foreign markets.

It’s a shame, but not surprising, that the President didn’t include U.S. tariffs in his list of TPP tax cuts.  Lauding the elimination of thousands of U.S. tariffs would require the administration to admit that American protectionism exists and that it harms the U.S. economy.  Unwilling to recognize the true benefits of free trade, the President is forced to sell the TPP to the American public by talking about how good it is for business.

Polychaetes are a class of segmented worms that live under a wide range of oceanic conditions. Often, they are the dominant organisms found living in the sea floor, but they also thrive in the open ocean. According to Ricevuto et al. (2015), although knowledge of the potential response of these organisms to ocean acidification is growing, much remains to be learned, including “how their trophic behavior might change in response to low [less basic, or more acidic] pH.” In an effort to fill this informational void, Ricevuto et al. thus set out to examine food-chain interactions of three polychaete species (Platynereis dumerilii, Polyophthalmus pictus and Syllis prolifera) and their organic matter (food) sources (macroalgae, seagrass and epiphytes) in a naturally acidified region of the Mediterranean Sea.

The location for their study was a shallow water reef area on the north-eastern coast of Ischia, an island off the coast of Italy known for volcanic features, including underwater vents that release copious quantities of CO2. The vents produce a pH gradient in the area that provides “a natural laboratory for ocean acidification studies,” which the researchers further describe as “an ideal model system to conduct experiments investigating the effect of climate changes (particularly ocean acidification) on benthic community composition and structure, as well as on functional aspects, such as tropic interactions,” which was the focus of this study. And what did the study show?

After collecting data and conducting a series of complex analyses, the three Italian researchers report “increased pCO2 did not alter the trophic interactions dramatically,” adding “there seems to be a resilience in the trophic pattern, possibly due to the tolerance of the target species to acidification and potential local acclimatization and/or adaptation (see Calosi et al., 2013).” Such “phenotypic plasticity” (the ability to alter biochemical reactions based on environmental changes such as increasing temperature or acidity) observed in the three polychaete species studied, according to Ricevuto et al., “may allow them to respond well to alterations in the environment and eventually offset near-future ocean acidification scenarios.” Thus, as the researchers ultimately conclude, “for some species, like the ones considered in this study, ocean acidification may not represent a dramatic stress.” And that’s good news worth reporting.



Calosi, P., Rastrick, S.P.S., Lombardi, C., de Guzman, H.J., Davidson, L., Jahnke, M., Giangrande, A., Hardege, J.D., Schulze, A., Spicer, J.I. and Gambi, M.C.  2013.  Adaptation and acclimatization to ocean acidification in marine ectotherms: an in situ transplant experiment with polychaetes at a shallow CO2 vent system. Philosophical Transactions of the Royal Society of London B Biological Sciences 368: 20120444.

Ricevuto, E., Vizzini, S. and Gambi, M.C. 2015. Ocean acidification effects on stable isotope signatures and trophic interactions of polychaete consumers and organic matter sources at a CO2 shallow vent system. Journal of Experimental Marine Biology and Ecology 468: 105-117.

One of the best presentations at the Cato TTIP conference on Monday was given by Michelle Egan, a professor at the American University’s School of International Service. Professor Egan managed to explain (in about 15 minutes) one of the most complex and possibly intractable subjects under negotiation in the Transatlantic trade talks: Standards-related trade barriers.

A major objective of the TTIP (as well as the TPP and other modern trade agreements) is to reduce “non-tariff barriers” (NTBs) of which so-called “technical barriers to trade” (TBTs) are an important subset. It turns out that differing product standards, which can act as TBTs, are more common than any other kind of NTB. According to Egan, “Governments, on average, impose TBTs on 30 percent of products. For firms active in international markets, different national requirements from conformity assessment measures can impede access to foreign markets.”

In her essay, Professor Egan describes the problem and offers some sensible ideas for moving forward.  She concludes:

The United States and European Union have an opportunity to improve the TBT regime through TTIP. In conjunction with trade association, government regulators, and international standards forums, negotiators should focus on how to achieve equivalency. TTIP affords the United States and Europe the opportunity to assert global leadership in setting rules for market access. This can happen only if both sides stop arguing over whose regime is better. 

If the TTIP negotiators fail, other trade and regulatory architecture, authored and agreed in other parts of the world, could emerge to fill the void, putting U.S. and EU producers on the outside looking in.

Other essays related to the conference can be found here.

Cynics, and sometimes realists too, dismiss the power of ideas. Tyrants don’t. The latest evidence comes from today’s New York Times, where we learn that a planned public display of Magna Carta at a museum at Beijing’s Renmin University has Chinese officials “running scared.” Accordingly, “the exhibit was abruptly moved to the British ambassador’s residence, with few tickets available to the public and no explanation given.”

While much of the world is celebrating the 800th anniversary of this muniment of English and American liberties—a cornerstone for constitutional government—“such a system is inimical to China’s leaders, who view ‘constitutionalism’ as a threat to Communist Party rule,” the Times reports. And that it is, as I detailed some time ago in a chapter contrasting the Chinese and American constitutions. Indeed, the very name “Magna Carta” is forbidden in China, the Times notes:

In 2013, the party issued its “seven unmentionables” — taboo topics for its members. The first unmentionable is promoting Western-style constitutional democracy. The Chinese characters for “Magna Carta” are censored in web searches on Sina Weibo, the country’s Twitter-like social media site.

A representative of the British Foreign Office said the decision to display Magna Carta at the residence was “based purely on administrative and logistical practicalities.” As we say on this side of the pond, “Yeah right.” Doubtless, that response too would get you in trouble in today’s China.

“The rich are getting richer and the poor are getting poorer.” Senator Bernie Sanders first said those words in 1974 and has been repeating them ever since. Senator Sanders is not alone in his belief. Three out of four Americans agree with the statement, “Today it’s really true that the rich just get richer while the poor get poorer.”

Senator Sanders is half right: the rich are getting richer. However, his assertion that the poor are becoming poorer is incorrect. The poor are becoming richer as well.

Economist Gary Burtless of the Brookings Institute showed that between 1979 and 2010, the real (inflation-adjusted) after-tax income of the top 1% of U.S. income-earners grew by an impressive 202%. He also showed that the real after-tax income of the bottom fifth of income-earners grew by 49%. All groups made real income gains. While the rich are making gains at a faster pace, both the rich and the poor are in fact becoming richer.

In addition to these measurable real income gains, decreases in prices have given the poor increased purchasing power, helping to raise living standards for the worst off in society. As a result of falling prices such as for groceries and material goods, along with gains in real income, Americans have more income left after basic expenses.

Technology has also become cheaper, improving our lives in unexpected ways. For example, consider the spread of cell phones. There was a time when only the wealthiest Americans could afford one. Today, over 98% of Americans have a cellular subscription, and the rise of smart phones has made these devices more useful than ever.

Unfortunately, progress has been uneven. In those areas of the economy where competition is hobbled, such as education, housing, and healthcare, prices continue to increase.

Still, the percentage of the population classified as living in relative poverty has decreased over time. Why then do three quarters of Americans, including Senator Sanders, believe that the poor are “getting poorer?”

A simple logical error underlies Sanders’ belief. If we assume that wealth is a fixed pie, then the more slices the rich get, the fewer are left over for the poor. In other words, people can only better themselves at the expense of others. In the world of the fixed pie, if we observe the rich becoming richer, then it must be because other people are becoming poorer. Fortunately, in the real world, the pie is not fixed. U.S. GDP is growing, and it’s growing faster than the population.

Poverty remains a pressing issue, but Senator Sanders is incorrect when he says that the poor are becoming poorer. In the words of advisory board member Professor Deirdre McCloskey,

The rich got richer, true. But millions more have gas heating, cars, smallpox vaccinations, indoor plumbing, cheap travel, rights for women, lower child mortality, adequate nutrition, taller bodies, doubled life expectancy, schooling for their kids, newspapers, a vote, a shot at university, and respect.

Back in August I wrote here about the Federal Reserve Bank of Kansas City’s refusal to grant a master account, and to thereby allow access to the Fed’s payment facilities, to The Fourth Corner Credit Union (TFCCU), a Colorado-based credit union intended to serve as a banker to that state’s marijuana-related businesses. In response TFCCU sued the Kansas City Fed, primarily on the grounds that its refusal was contrary to the 1980 Depository Institutions Deregulation and Monetary Control Act (DIDMCA) requirement that “All Federal Reserve bank services…shall be available to nonmember depository institutions and such services shall be priced at the same schedule applicable to member banks.”

A month ago, on September 10, 2015, the Kansas City Fed filed a motion to dismiss, offering, among other grounds, the claim that the above-mentioned DIDMCA statute “pertain’s only to the ‘principles’ for setting a ‘schedule of fees’,” and that it therefore “does not mandate that FRB-KC grant any entity — let alone TFCCU — a master account.” In other words, according to the Fed’s lawyers, it is illegal for the Kansas City Fed to charge TFCCU more for its services than it charges to other applicants so long as the charge in question is finite, but it is legal for them to refuse the service altogether, that is, to make the charge for it infinite!

According to TFCCU’s own, less twisted reading of the law, as expressed in its counter motion, Congress never intended to delegate to either the Kansas City Fed or to any other Federal Reserve Bank “unbridled discretion to act as gatekeeper of the nation’s central bank,” and the Kansas City Fed is therefore duty-bound to “respect state sovereignty under the Tenth Amendment by not acting to nullify state charters.”

In drawing my attention to the FRB-KC’s motion to dismiss, Mark Mason, TFCCU’s counsel, points out that, when that motion doesn’t rest upon a contorted interpretation of Federal law, it is “hypocritical and illogical”:

It is hypocritical and illogical that FRB-KC would argue in its motion to dismiss that “other financial institutions [are] providing banking services to marijuana-related entities” using Reserve Bank master accounts, but that TFCCU cannot do so on the same terms because TFCCU proposes to do so expressly. …

FRB-KC’s argument is illogical because the only way a financial institution can legally serve an MRB [Marijuana-Related Business] is expressly, as [according to FinCEN guidelines] it has to file Marijuana Limited SARs [Suspicious Activities Reports] for every MRB account. It appears FRB-KC wants to punish TFCCU for being open and transparent about an aspect of its business plan, while at the same time allowing Reserve Bank services to be used to serve MRB’s–so long as the use is covert, not express.

Last week, TFCCU followed-up on its counter-motion by moving for a summary judgment on the claims made in its original complaint. According to that motion’s “Statement of Undisputed Facts,”

Colorado is a sovereign state. Colorado issued a credit union charter to TFCCU. TFCCU, by virtue of its charter, is a depository institution. TFCCU requested that FRB-KC issue a master account to TFCCU so it could thereby access essential Federal Reserve Bank (“FRB”) payments services. FRB payments services give a depository institution the ability to effectuate the electronic transfer of funds. FRB-KC refused to provide payments services to TFCCU. TFCCU asserts FRB-KC is mandated by a clear statutory command to provide all depository institutions with access to FRB payment services pursuant to the MCA, 12 U.S.C. §248a. This is a case of statutory construction.

In further correspondence Mason adds:

It is an important point that Fourth Corner represents a social movement grounded in state’s rights, liberty and wellness. It’s potential membership extends to supporters of the movement and to the licensed marijuana industry as federal law evolves in that aspect. In the case against FRB-KC the issue is equal access.

The main entrance to the Kansas City Fed’s recently-built Memorial Drive headquarters is flanked by twelve-foot high bronze statues representing the Spirits of Industry and Commerce. Alas, in view of what the Kansas City Fed has been up to, one can only wonder whether those great goddesses are standing out there because it has refused to let them in.

[Cross-posted from]

By all accounts (well, at least those conveyed to me), this week’s TTIP conference at the Cato Institute was a resounding success. It featured a diversity of excellent speakers from across the political, ideological, geographic, and professional spectra, and it covered a broad swath of economic, political, geopolitical, and technical issues. Though opinions varied over the numerous substantive issues discussed by the conferees, there was fairly strong agreement that TTIP (at least the TTIP envisioned at the outset of the negotiations) will require an enormous amount of effort, political will, and flexibility to deviate from script to have any chance of coming to fruition.

As if the road to success weren’t daunting enough, many observers worry that success, if not too elusive, might be too costly.  That is, as a large exclusive club, TTIP would hasten the demise of the World Trade Organization and the multilateral trading rules under its auspices, and that it would put third countries–especially developing ones–at disadvantages that reduce their economic prospects.

One of the panel discussions was devoted to consideration of the impact of TTIP on the multilateral trading system, including the impact on developing countries. Two of the speakers in that session were former WTO heavyweights: Joakim Reiter (former Swedish Ambassador to the WTO) and Harsha Singh (former Deputy Director General of the WTO), who are now, respectively, Deputy Secretary-General of the United Nations Conference on Trade and Development and Senior Associate at the International Centre for Trade and Sustainable Development. In their conference essays, each explains how a successful TTIP can be formulated to ensure that it doesn’t subvert the WTO or hurt developing countries.  

Harsha’s essay is TTIP: A Bridge or Gulf for Multilateralizing Plurilaterals.

Joakim’s essay is The Effects of TTIP on Developing Countries.

All of the essays published in conjunction with the conference can be found here.

Aside from repeated promises about “free” college education that are prohibitively expensive and would create perverse incentives, last night’s Democratic presidential debate contained very little talk of education, particularly K-12 education. That’s much to the chagrin of most education policy wonks, but it’s for the best. Constitutionally, the federal government has little to no role in K-12 education nationwide outside of civil rights. Moreover, there’s little evidence that federal involvement in the classroom has improved education. 

One area the feds do have a role in K-12 education is in Washington, D.C., where Congress recently voted to reauthorize the D.C. Opportunity Scholarship Program (OSP), which has significantly higher graduation rates and costs much less per pupil than the district schools. Sadly, though the primary beneficiaries of the school voucher program are members of the Democrats’ base, elected Democrats mostly want to do away with it. President Clinton vetoed the OSP when it was first proposed and President Obama has repeatedly left it out of his proposed budget. The Democratic presidential frontrunner, Hillary Clinton, is not likely to be any more supportive than her predecessors–there is a reason, after all, that she scooped up early endorsements from the nation’s two largest teachers unions, which vociferously oppose educational choice. Indeed, none of the Democratic candidates even want to talk about the role of choice in education, as evidenced by their unanimous refusal to participate in the Seventy Four’s education forum with Campbell Brown.

Educational choice has few champions on the left today, but it was not always so. Ron Matus of redefinED Online has been chronicling the history and status of “the Voucher Left” recently. Civil rights leaders and Berkeley college professor professors, liberal lions like Daniel Patrick Moynihan and leftist radicals like Ivan Illich alike once proudly supported choice policies they believed would empower the powerless, expand access to opportunity, and foster diversity. The 1968 “Proposal for a Poor Children’s Bill of Rights,” coauthored by Harvard Graduate School of Education dean Ted Sizer, was a left-wing, school-choice manifesto. It opened by “condemning America for failing to provide equal opportunity in education” and “ends with a knock on the war in Vietnam”:

Ours is a simple proposal: to use education – vastly improved and powerful education – as the principal vehicle for upward mobility. While a complex of strategies must be designed to accomplish this, we wish here to stress one: a program to give money directly to poor children (through their parents) to assist in paying for their education. By doing so we might both create significant competition among schools serving the poor (and thus improve the schools) and meet in an equitable way the extra costs of teaching the children of the poor.

I have qualms with some of their proposals. Sizer’s proposal called for a federal voucher program but school choice is best left to the states. The proto-education savings accounts that Jack Coons and Stephen Sugarman proposed would have forced participating private schools to “to take all students who applied, unless excess demand required a lottery,” eliminating their freedom to choose their own admissions criteria. Democrats for Education Reform (DFER) support school choice, but they also push for mandatory testing and other regulations that would restrict or even undermine choice. That said, while important, these are merely disagreements over the details. These liberals and leftists agreed with Milton Friedman’s key insights that choice and competition would benefit the poor the most and foster diversity and pluralism

One longs for the day when coalitional politics no longer prevent elected Democrats from embracing greater choice in education.

The first debate among Democratic presidential contenders was more than half over before moderator Anderson Cooper of CNN got around to asking a question about the biggest intelligence scandal in more than 40 years. You can read the full transcript here but the exchanges between Cooper and the candidates on Edward Snowden (via Ars Technica) is what’s worth the read:

COOPER: Governor Chafee, Edward Snowden, is he a traitor or a hero?

CHAFEE: No, I would bring him home. The courts have ruled that what he did—what he did was say the American…


COOPER: Bring him home, no jail time?

CHAFEE: … the American government was acting illegally. That’s what the federal courts have said; what Snowden did showed that the American government was acting illegally for the Fourth Amendment. So I would bring him home.

COOPER: Secretary Clinton, hero or traitor?

CLINTON: He broke the laws of the United States. He could have been a whistleblower. He could have gotten all of the protections of being a whistleblower. He could have raised all the issues that he has raised. And I think there would have been a positive response to that.

COOPER: Should he do jail time?

ClINTON: In addition—in addition, he stole very important information that has unfortunately fallen into a lot of the wrong hands. So I don’t think he should be brought home without facing the music.

COOPER: Governor [Martin] O’Malley, Snowden?


O’MALLEY: Anderson, Snowden put a lot of Americans’ lives at risk. Snowden broke the law. Whistleblowers do not run to Russia and try to get protection from Putin. If he really believes that, he should be back here.

COOPER: Senator Sanders, Edward Snowden?

SANDERS: I think Snowden played a very important role in educating the American people to the degree in which our civil liberties and our constitutional rights are being undermined.

COOPER: Is he a hero?

SANDERS: He did—he did break the law, and I think there should be a penalty to that. But I think what he did in educating us should be taken into consideration before he is (inaudible).

COOPER: Senator [Jim] Webb, Edward Snowden?

WEBB: I—well, I—I would leave his ultimate judgment to the legal system. Here’s what I do believe. We have a serious problem in terms of the collection of personal information in this country. And one of the things that I did during the FISA bill in 2007, the Foreign Intelligence Surveillance Act, was introduce with Russ Feingold two amendments basically saying, “We understand the realities of how you have to collect this broad information in the Internet age, but after a certain period of time, you need to destroy the personal information that you have if people have not been brought—if criminal justice proceedings have not been brought against them.”

We’ve got a vast data bank of information that is ripe for people with bad intentions to be able to use. And they need to be destroyed.

Clinton and O’Malley were wrong that Snowden could have safely reported his concerns. As the Government Accountability Project noted last year:

Moreover, at the behest of the House Intelligence Committee, strengthened whistleblower protections for national security workers were stripped from major pieces of legislation such as the Whistleblower Protection Enhancement Act (for federal employees) and the National Defense Authorization Act of 2013 (for federal contractors). If those protections existed today, Snowden’s disclosures would have stood a greater chance of being addressed effectively from within the organization. 

So in reality, then-House Intelligence Committee Chairman Mike Rogers (R-MI), by opposing whistleblower protections for intelligence community contractors, actually shut down a channel for receiving classified whistleblower complaints from Snowden and those like him.

Lincoln Chafee of Rhode Island showed political courage not simply in defending Snowden, but in pointing out that Snowden exposed mass surveillance that several non-FISA court judges believe violated the Constitution. Chafee could also have pointed out that none of those officials–including former President George W. Bush, his Attorney General, and his NSA director–have been investigated by either an independent counsel or even the Congressional committees of jurisdiction for their actions. The tutorial on recent surveillance scandal history would have been  even more powerful if Chafee or another candidate had noted that the federal government wants to charge Snowden under the Espionage Act (normally used to prosecute actual spies who pass classified information to foreign governments) even though it gave former CIA Director David Petraeus an incredibly lenient plea deal after Petraeus passed documents containing Top Secret/Sensitive Compartmented Information (TS/SCI) to his then-mistress, Paula Broadwell. The contrast in treatment between the two is telling.

Another important exchange between Cooper and Clinton involved her vote on the 2001 PATRIOT Act:

COOPER: Secretary Clinton, do you regret your vote on the Patriot Act?

CLINTON: No, I don’t. I think that it was necessary to make sure that we were able after 9/11 to put in place the security that we needed. And it is true that it did require that there be a process. What happened, however, is that the Bush administration began to chip away at that process. And I began to speak out about their use of warrantless surveillance and the other behavior that they engaged in.

We always have to keep the balance of civil liberties, privacy and security. It’s not easy in a democracy, but we have to keep it in mind.

In fact, by the time the PATRIOT Act was up for renewal in 2006, two national investigations–one by the Congressional Joint Inquiry, the other by the 9/11 Commission–found that it was not a lack of intelligence collection that led to the success of the 9/11 attacks, but a failure of the FBI, NSA, and CIA to share among each other the information they had on the terrorists. And as the New York Times’ Charlie Savage has found in his research, an Intelligence Community Inspector General investigation into the STELLAR WIND warrantless surveillance program initiated after 9/11 found that it prevented no attacks on the United States. The same is true of the PATRIOT Act Sec. 215 telephone metadata program

The only candidate who seemed to have learned the correct lesson from this history was Sanders:

COOPER: … and the reauthorization votes. Let me ask you, if elected, would you shut down the NSA surveillance program?

SANDERS: I’m sorry?

COOPER: Would you shut down the NSA surveillance program?

SANDERS: Absolutely. Of course.

COOPER: You would, point blank.

SANDERS: Well, I would shut down - make - I’d shut down what exists right now is that virtually every telephone call in this country ends up in a file at the NSA. That is unacceptable to me. But it’s not just government surveillance. I think the government is involved in our e-mails; is involved in our websites. Corporate America is doing it as well.

If we are a free country, we have the right to be free. Yes, we have to defend ourselves against terrorism, but there are ways to do that without impinging on our constitutional rights and our privacy rights.


Yesterday, in a case called Hassan v. The City of New York, the Third Circuit Court of Appeals reinstated a lawsuit accusing New York City of violating the 1st and 14th Amendment rights of Muslim-Americans in New Jersey under a sprawling and ineffective NYPD surveillance dragnet.

The ruling overturns a decision by the United States District Court for the District of New Jersey dismissing the suit for lack of standing and for failing to state a claim.

In layman’s terms: the district court, without a trial or the presentation of evidence, ruled that the plaintiffs weren’t harmed unjustifiably, that they hadn’t alleged sufficient wrongdoing by the police, and that they had no right to sue.  The Third Circuit ruling rejects those determinations and the case will now move forward at the district court.

An Associated Press investigation uncovered the NYPD program in 2011 and detailed the immense breadth of the NYPD’s surveillance efforts against the Muslim community in several states.  Police officers and informants infiltrated dozens of mosques. Police installed surveillance cameras so that Muslim-owned businesses, places of worship, and residences in New Jersey could be surveilled remotely. The NYPD even sent undercover officers to infiltrate Muslim student organizations at out-of-state universities such as Yale and the University of Pennsylvania, including one field trip to go whitewater rafting.  Those agents recorded the names of the students, how often they prayed, and what they talked about.  The NYPD is alleged to have “generated reports on every mosque within 100 miles of New York City.”

Despite the cost and the seemingly boundless geographic and jurisdictional scope of the spying program, there is little evidence of success.  In fact, the now-defunct “Demographics Unit,” a central component of the program, generated no convictions or, according to one agent deposition, even any tangible leads in more than a decade of operation.

In reinstating the suit, the court offered some rather stirring commentary on the need to adhere to the Constitution most dearly when it comes to serious issues such as national security, invoking Franklin Roosevelt’s internment of Japanese-Americans and the Supreme Court’s (now widely considered odius) endorsement of it in Korematsu:

No matter how tempting it might be to do otherwise, we must apply the same rigorous standards even where national security is at stake. We have learned from experience that it is often where the asserted interest appears most compelling that we must be most vigilant in protecting constitutional rights. “[H]istory teaches that grave threats to liberty often come in times of urgency, when constitutional rights seem too extravagant to endure.”


Today it is acknowledged, for instance, that the F.D.R. Administration and military authorities infringed the constitutional rights of Japanese-Americans during World War II by placing them under curfew and removing them from their West Coast homes and into internment camps. Yet when these citizens pleaded with the courts to uphold their constitutional rights, we passively accepted the Government’s representations that the use of such classifications was necessary to the national interest. […] In doing so, we failed to recognize that the discriminatory treatment of approximately 120,000 persons of Japanese ancestry was fueled not by military necessity but unfounded fears.

The court also strongly defended the principle that the fundamental unit in our system is the individual, rather than the collective:

We “can apply only law, and must abide by the Constitution, or [we] cease to be civil courts and become instruments of [police] policy.” Korematsu, 323 U.S. at 247 (Jackson, J., dissenting).

 We believe that statement of Justice Jackson to be on the right side of history, and for a majority of us in quiet times it remains so … until the next time there is the fear of a few who cannot be sorted out easily from the many. Even when we narrow the many to a class or group, that narrowing—here to those affiliated with a major worldwide religion—is not near enough under our Constitution. “[T]o infer that examples of individual disloyalty prove group disloyalty and justify discriminatory action against the entire group is to deny that under our system of law individual guilt is the sole basis for deprivation of rights.” Id. at 240 (Murphy, J., dissenting).

Lastly, the court admonished the legal system for often only recognizing government misconduct in retrospect rather than stopping it in action:

What occurs here in one guise is not new. We have been down similar roads before. Jewish-Americans during the Red Scare, African-Americans during the Civil Rights Movement, and Japanese-Americans during World War II are examples that readily spring to mind. We are left to wonder why we cannot see with foresight what we see so clearly with hindsight – that “[l]oyalty is a matter of the heart and mind[,] not race, creed or color.”

It’s important to remember that this ruling only reinstates the lawsuit by finding that the plaintiffs have standing and have stated a cognizable claim.  The case now returns to the district court for a determination of the merits.

Even so, the admonitions from the court toward the NYPD and the court’s overt appeal to regard people as individuals rather than as part of some demonized collective are heartening. The post-9/11 security and police states only rarely suffer courtroom losses regarding even the most expansive aspects of their policies.

The government has a legitimate interest in providing security, but not at the cost of collective punishment or overt discrimination against people based solely on their race or religion. 

This is a case to watch as it moves forward.

In a recent commentary published on the World Post, Niall Ferguson criticizes President Obama for “Playing Patience While Syria Burns.”  In his view, the Obama administration has chosen to kick the can down the road because the president “naturally prefers the path of least resistance.” 

The problem with Ferguson’s argument (and many similar articles) is that it criticizes Obama for dithering over Syria without elaborating a viable alternative policy.  Ferguson quite rightly points out that the choice is not simply between doing nothing and plunging into another Iraq—“there are many degrees of intervention in a war like the one raging in Syria.”  Yet he never explains what type of intervention would actually help resolve the conflict in Syria. He seems to imply that Obama should have armed the Syrian rebels,but he fails to explain how that would end the conflict.  Could the rebels have toppled Assad if they had American arms (and maybe air support like in Libya)?  Is such an approach still viable following Russia’s intervention?  And even if the rebels were to succeed in toppling Assad, then what?  There are more than forty different rebel groups operating in Syria.  Are they all going to cooperate in forming a national unity government?  Or will they simply start carving out their own little fiefdoms, and perhaps begin fighting each other?  These are the types of questions that need to be addressed before the United States intervenes—and they’re surely questions that the Obama administration has been wrestling with. 

Ultimately, Ferguson’s article demonstrates that it’s a lot easier to criticize President Obama for doing too little than to devise a positive strategy that would accomplish much in Syria.  The fact that the situation in Syria is currently so abysmal does not necessarily mean that a more proactive approach would improve the situation.  U.S. intervention could easily make a bad situation worse.  Since the Syrian conflict is such a complex problem, as Ferguson acknowledges, we should remain wary of calls for the United States to do more until the proponents of greater intervention are able to explicate a clear, detailed strategy—a strategy that explains specific actions the United States can implement, and, more importantly, how those actions will actually facilitate a resolution of the conflict.

How Bernie Sanders and Ron Paul are alike:

    1. Both ran for president in their 70s, without any encouragement from pundits, politicians, or political operatives.
    2. Both were far more interested in talking about ideas and policies than in criticizing their opponents. (Though I don’t recall Paul taking valuable debate time to defend his chief opponent on her most vulnerable point. Sanders not only drew applause for saying there was no point in talking about Hillary Clinton’s private email server, he raised more than a million dollars during the debate by sending out an email with video of his grant of absolution.)
    3. Both Ron Paul and Bernie Sanders exploded on the internet during an early debate. Google searches for Ron Paul shot up when he and Rudy Giuliani had a heated confrontation over the causes of the 9/11 attacks in the May 15, 2007, Republican debate. Sanders gained three times as many Twitter followers as Clinton during last night’s debate.
    4. Each was the most noninterventionist and least prohibitionist candidate on their respective stages – though that’s a low bar. Sanders sounded pretty noninterventionist, but then continued: “When our country is threatened, or when our allies are threatened, I believe that we need coalitions to come together to address the major crises of this country. I do not support the United States getting involved in unilateral action.” The United States has alliances across the world, so that’s a fairly open-ended commitment. And imprudent intervention is not made much more prudent by having a coalition.

How Bernie Sanders and Ron Paul are different:

    1. Capitalism vs. socialism.

It came up again at last night’s Democratic debate, so it’s worth repeating: Bernie Sanders and more than 60 other Democrats in Congress were right to support the 2005 Protection of Lawful Commerce in Arms Act (PLCAA), and Hillary Clinton was wrong to oppose it.

Congress had both good practical reason and Constitutional authority to enact PLCAA. Its purpose and effect was to call a halt to the campaign (backed by the administration of Bill Clinton, Hillary’s husband) to launch financially ruinous litigation against firearms makers and dealers – most of them thinly capitalized firms unable to withstand massive legal bills – and apply the resulting leverage to extract promises of gun control without the bother of seeking approval for those measures from a then-skeptical U.S. Congress. It was a campaign rightly decried as undemocratic even by such figures of the Left as former cabinet secretary Robert Reich. It was also a travesty of legal ethics, employing litigation as a pure weapon; thus then-HUD secretary Andrew Cuomo warned gunmakers that unless they cooperated they’d suffer “death by a thousand cuts”, while then-New York Attorney General Eliot Spitzer reportedly warned Glock: “If you do not sign, your bankruptcy lawyers will be knocking at your door.”

It is not the place of the U.S. Congress to rectify every ill of litigation that may arise in state courts, but the Constitution specifically contemplates that federal lawmakers will oversee the doings of state courts when those courts assert power over transactions and residents of other states. Thus Article IV, Section 1 grants Congress the power “by general Laws [to] prescribe the …Effect” of state law in other states. These powers are peculiarly relevant when employed to safeguard a Constitutionally specified right that is (purposely) put in jeopardy by tactical abuse of interstate lawsuits. 

Despite the claims of some opponents, Congress’s formula for resolving litigation amounted in essence to restoring, not overturning, the traditional common-law bounds of gun liability. It left open a few exceptions for instances where liability might have been found with some warrant in the older common law, as when a gun explodes or is knowingly sold to a person intent on harm. Otherwise, it codifies the same common-law rule that Cuomo, Clinton et al were hoping to get the courts to abandon: if an otherwise lawful firearm has performed as it was designed and intended to do, its maker and seller are not liable for its misuse.

I’ve written more about PLCAA and its critics here, here, and here

For those of you who did not watch the Democratic Party presidential debate last night, Senator Bernie Sanders says he wants America to be more like Denmark. In some ways, that is an excellent idea. Denmark, it turns out, has freer trade and better business environment than the United States. Its overall economic freedom is almost identical to that of the United States, as is its well-being index. But, don’t take my word for it. Look at the United Nations and World Bank data brought to you courtesy of 

The one area where the United States might not want to copy Denmark is the size of government, which is a proxy measure of taxation and redistribution. 


1. Free trade

2. Business environment

3. Overall economic freedom

4. Human development index

5. Size of government


Most everyone believes that government is an essential institution, necessary to do what people cannot do on their own. And that sounds like a pretty good justification for the state. But it rarely describes what government actually does.

For instance, late last year Rachel Kennedy wanted to bring a Cuban food truck to North Kansas City, Missouri, a town of four square miles and 4500 people. The city agreed to allow the trucks to operate during lunch time and several other operators came too. What could possibly go wrong?

The restaurant owners might lobby to expel the food trucks, that’s what! Complained Monte Martello, a local Dairy Queen operator: “They bring the truck in, they compete against us for four hours, and then they drive away.”

Worse, Martello went on, “They don’t actually contribute to the community in any way.” All the food trucks do is provide hungry people with lunch! Asked city councilman Gene Bruns, “Why are we trying to rob our local businesses with vendors that come in from outside?” Once the protest got going city officials ran for cover. 

Most Americans take for granted the opportunity to drive into a gas station, fuel their auto, and get back on the road. But not in New Jersey and Oregon. These two states ban self-service stations.

Earlier this year legislation was introduced into both states to end the prohibition. In Oregon the state house voted for repeal in rural counties. In New Jersey legislative leaders announced that members would not be allowed to cast a vote.

Prohibitionists argue that self-serve stations are bad for the elderly, handicapped, and, yes, those of limited height. But then why does New Jersey allow “self-serve” restaurants (buffets), supermarkets (fill your own cart), retail stores (try on clothes yourself), doctors (go to his or her office), and much more? Shouldn’t these businesses also have to ensure that every special need is met?

Of course, there are those other 48 states in which people seem to get by without a ban on self-serve pumps. State Senate President Stephen Sweeney, one of the chief obstacles to getting New Jersey out of the gas pumping business, argued: “In New Jersey, we grew up with it. People have gotten used to it. We like it.”

Who wouldn’t prefer to have someone else pump gas for you, all other things being equal. However, do they really want to pay from 8 to 20 cents extra per gallon?

Even if the great majority of people prefer full-service pumps, there’s no need for legislation. Businesses gain from catering to consumer demand. If people are willing to pay more for someone to provide “full-service” gas, stations will offer that option.

With little ability to push legislation through Congress, President Barack Obama is attempting to unilaterally reward his chief backers. He recently expanded mandatory overtime.

Another measure would force government contractors to provide paid sick leave. Some legislators would mandate that, plus paid parental leave, for all employers.

All of these steps only appear to help employees. As Milton Friedman once said, there ain’t no such thing as a free lunch.

Government can only rearrange the compensation paid workers. More money in fringe benefits means less money in salaries. More money to parents means less money to the childless. More money in government mandated benefits for people as staff members means less money in pay for people as free-lancers—as well as fewer people hired and fewer hours worked. 

As I explained in the Freeman: “Examples like these demonstrate how often government serves clamorous interest groups before the public. Such abuses don’t eliminate the justification for government. But we should be far more skeptical of those lobbying on behalf of programs and regulations.”

Politicians and bureaucrats routinely come to us claiming that they want to help us. Far too often they do much more harm than good. That’s another great reason to shrink government.

Tonight, starting at 8:30 p.m. EDT, CNN will host the first Democratic presidential primary debate of the 2016 campaign season, to be held at the Wynn Las Vegas and broadcast nationwide.

Cato scholars will be using #Cato2016 to live-tweet the debate, bringing insightful commentary and hard-hitting policy analysis to the discussion.



Tonight will kick off a series of six total scheduled Democratic primary debates to occur roughly once per month. Though a grassroots movement to increase the number of debates has been gaining momentum, the Democratic National Committee has remained firm about their proposed schedule.

 “ Voters will have ample opportunities to hear our candidates discuss their visions for our country’s future,” wrote DNC Chairwoman Debbie Wasserman Schultz in an August 6th post on Medium.

She further clarified her position at a September breakfast sponsored by The Christian Science Monitor, stating “We’re not changing the process. We’re having six debates…The candidates will be uninvited from subsequent debates if they accept an invitation to anything outside of the six sanctioned debates.”

Similar to the earlier GOP debates hosted by Fox & CNN, candidates had to average at least one percent support in a combination of three recognized national polls released between August 1st and October 10th to be invited to participate tonight.

Lincoln Chafee, Hillary Clinton, Martin O’Malley, Bernie Sanders, and Jim Webb will all be taking the stage, while Lawrence Lessig was unable to meet the cutoff.

While CNN has also extended an invitation to Vice President Joe Biden, provided he declares his intention to seek the Democratic nomination sometime today, he is expected to make his decision depending on what he sees on stage tonight.

The debate will primarily be anchored by Anderson Cooper of CNN’s Anderson Cooper 360°, with Chief Political Correspondent Dana Bash and CNN en Español Anchor Juan Carlos Lopez asking additional questions. Don Lemon of CNN Tonight with Don Lemon will be presenting questions submitted through Facebook.

Tuning into the debate (or simply wondering how it might impact the policy debate)? Follow tonight’s live-tweeters and join the conversation on Twitter using #Cato2016.

There’s an old joke about a drunk looking for his keys under a lamp post. A police officer comes along and helps with the search for a while, then asks if it’s certain that the keys were lost in that area.

“Oh no,” the drunk says. “I lost them on the other side of the road.”

“Why are we looking here?!”

“Because the light is better!”

In a way, the joke captures the situation with public oversight of politics and public policy. The field overall is poorly illuminated, but the best light shines on campaign finance. There’s more data there, so we hear a lot about how legislators get into office. We don’t keep especially close tabs on what elected officials do once they’re in office, even though that’s what matters most.

(That’s my opinion, anyway, animated by the vision of an informed populace keeping tabs on legislation and government spending as closely as they track, y’know, baseball, the stock market, and the weather.)

Our Deepbills project just might help improve things. As I announced in late August, we recently achieved the milestone of marking up every version of every bill in the 113th Congress with semantically rich XML. That means that computers can automatically discover references in federal legislation to existing laws in every citation format, to agencies and bureaus, and to budget authorities (both authorizations of appropriations and appropriations).

Machine-readable bills can tell stories that we hadn’t heard before, and Deepbills has interesting information about the 113th Congress. The image above is of a visualization showing partisan interest in existing laws during the 113th Congress.

What laws were Republican members of Congress trying to amend the most in 2013 and 2014? What about Democrats? The visualization has your answers. Click to see it. As far as I know, it’s the first time this information has been available.

Yes, your expectation of a Republican fixation on Obamacare is generally confirmed (as the Patient Protection and Affordable Care Act). And you won’t be surprised to see Democratic interest in the Family and Medical Leave Act. Democrats legislate more than Republicans; that jibes with expectations.

The new information here, for many people, is the relative numerosity and bipartisan interest in amendments to the Internal Revenue Code and Social Security Act. These two laws are vastly more important to Congress than pretty much anything else, by this imperfect metric.

Is the public spending its time focused on partisan issues, not realizing where their representatives are spending their time? Knowing this may change the behavior of all actors.

This data is hard to produce, and I live in fear of gross errors in the data or the creation of the visualization. Happily, a more authoritative source—Congress—has committed itself to providing data like this in the future. They’ll do a much better job originating bills as data than we could possibly do with post-processing. Early this year, aware of our work, the House amended its rules, asking the Committee on House Administration, the House Clerk, and others to “broaden the availability of legislative documents in machine readable formats.”

I look forward to better data giving political scientists more skillful than me the chance to formulate and test theses about congressional behavior. It will be especially interesting when we have time series data so we can see if it’s really true that senators get magically interested in home-state issues during the year-and-a-half before election time. And—oh yeah—won’t it be neat when the public can oversee Congress directly and clearly through hundreds of web sites, information services, and apps? Yes, it will.

Thanks go to Sam Corcos for producing this visualization, and to the Democracy Fund for supporting the Deepbills work that made it possible.

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.

A couple of interesting pieces have come recently to our attention that deal with the serious issue of “publication bias” in science.

In our Cato Working Paper No. 29, we describe “publication bias” as an underreporting of negative results from scientific experiments—a practice which can bias science in the direction of supporting existing hypotheses, even highly questionable ones.

In “Is the Government Buying Science or Support?” we lay out a framework for detecting whether federal funding of scientific research is perpetuating publication bias through expectations of results supporting existing federal science interests. We suspect it has.

A few years back, we looked into whether evidence of publication bias was present in the reporting of climate change results that were being published in the Science and Nature, the most influential science periodicals on earth. Not surprisingly, we found strong evidence that findings that anthropogenic climate change being “worse than expected” was disproportionately reported, compared to findings that climate change impacts would not as great as predicted. In an unbiased condition, each event should be equally likely. We concluded:

“This [finding] has considerable implications for the popular perception of global warming science, for the nature of “compendia” of climate change research, such as the reports of the United Nations’ Intergovernmental Panel on Climate change, and for the political process that uses those compendia as the basis for policy.”

Rather than being uncommon, publication bias is probably closer to the norm.

Two recent reports highlight its occurrence in two other major scientific research areas—the social cost of carbon and psychotherapy.

The social cost of carbon (SCC) is on its way to becoming perhaps the strongest influence on public policy both nationally and internationally. It represents the current value of the cost of all future damages wrought by the emission of each new ton of carbon dioxide into the atmosphere from human activities. It currently factors into virtually all newly-proposed regulations from the federal government and will no doubt be the center of focus at the international climate negotiation to take place in Paris this December. If the SCC  is low (or negative) there is no need to regulation carbon dioxide emissions; the higher the SCC is, the greater the sense of urgency.

But nobody know what the true value the SCC is—and, if fact, it is probably unknowable. That doesn’t stop a whole lot of people from trying to assign a value to it. The more extreme you think climate change is going to be and the less confidence that you have in the ability of mankind to adapt to changing conditions, the higher your estimates of the SCC.

Since you probably only bother to study the SCC if you think there is going to be a major problem with climate change, SCC researchers are probably somewhat preconditioned to pursing methodologies which lead to high SCC estimates, and eschew those that don’t. This is a situation ripe for publication bias. And a research team led by Dr. Tomáš Havránek of the Institute of Economic Studies at Charles University in Prague set out to see if they could find one.


From the abstract of their paper:

We examine potential selective reporting in the literature on the social cost of carbon (SCC) by conducting a meta-analysis of 809 estimates of the SCC reported in 101 studies. Our results indicate that estimates for which the 95% confidence interval includes zero are less likely to be reported than estimates excluding negative values of the SCC, which might [how about the word will—eds] create an upward bias in the literature. The evidence for selective reporting is stronger for studies published in peer-reviewed journals than for unpublished papers.

Additionally, and rather importantly, Havránek and colleagues also note that selective reporting likely plagues other aspects of the climate change literature which further leads to an inflated SCC estimates:

Moreover, other studies suggest that some of the parameters used for the calibration of integrated assessment models [used to determine the SCC], such as climate sensitivity or the elasticity of intertemporal substitution in consumption, are likely to be exaggerated themselves because of selective reporting, which might further contribute to the exaggeration of the SCC reported in individual studies—including the results of the [U.S.] Interagency Working Group [responsible for establishing a SCC value used in federal cost/benefit analyses].

You really ought to have a look at the Havránek study in its entirety to see the nature and depth of the problem. It is available here.

Another example of publication bias infiltrating a major field of science—psychotherapy—has just  been published by a team led by Ellen Driessen of VU University Amsterdam.

An excellent article in Vox by Julia Belluz laid out the implications of what Driessen and colleagues found:

For years, doctors have had two main strategies for treating depression: antidepressants and psychotherapy. These practices, according to the published research, can be fairly effective.

Or at least that’s what we thought. But recent research now suggests that we’ve actually been overestimating the effectiveness of our best treatments for depression — in part because published studies were giving a biased picture of the medical evidence.

The reason has to do with something called publication bias. Often there are lots of different scientists conducting studies on whether, say, a particular drug or therapy can alleviate the symptoms of depression. Not all of those studies, however, get published. Journal editors tend to be more interested in papers finding that a particular treatment had a big effect instead of studies showing little or no effect.

Driessen’s paper comes to this unsettling conclusion:

The efficacy of psychological interventions for depression has been overestimated in the published literature, just as it has been for pharmacotherapy. Both are efficacious but not to the extent that the published literature would suggest. Funding agencies and journals should archive both original protocols and raw data from treatment trials to allow the detection and correction of outcome reporting bias. Clinicians, guidelines developers, and decision makers should be aware that the published literature overestimates the effects of the predominant treatments for depression.

While few even realize it exists, publication bias has serious real-world implications, from environmental policy to mental health.



Driessen, E., et al., 2015 Does Publication Bias Inflate the Apparent Efficacy of Psychological Treatment for Major Depressive Disorder? A Systematic Review and Meta-Analysis of US National Institutes of Health-Funded Trials.  PLOS One. DOI: 10.1371/journal.pone.0137864

Havranek, T., et al., 2015.  Selective Reporting and the Social Cost of Carbon.  CERGI Working Paper Series No. 533.  Center for Economic Research and Graduate Education—Economics Institute.  Charles University, Prague.  42 pp.  

The store of human knowledge continues to expand and so do the incremental improvements of our lives. Here are some of the stories that caught my eye last week:

Deleting genes could boost lifespan by 60 percent, say scientists

Scientists believe that making small tweaks to our genes could dramatically increase our lifespans. Experiments on yeast cells have identified 238 genes that increased lifespan when silenced. Since we share many of same genes, the next important task will be to identify similar genes in human beings. One of the candidates for future research is LOS1 – a gene linked to calorie restriction that could increase our lifespans up to 60 percent.

Pioneering surgical technique enabled surgeons to restore hand, arm movement to quadriplegic patients

A new surgical technique has restored hand and arm movement to patients paralyzed by spinal cord injuries in the neck. By redirecting peripheral nerves in a quadriplegic’s arms and hands to healthy nerves, conversation between the brain and muscles can be restored. While this technique is only effective for injuries on the lowest two vertebrae on the neck and physical improvements were often small, the psychological benefits were often profound.

3D printing saved a 5-year-old’s life

For many years Mia Gonzalez was told that she had asthma. However, a team from Nicklaus Children’s Hospital eventually diagnosed Mia with a rare form of double aortic arch. This heart defect caused a vascular ring to wrap around her trachea, making it difficult to breathe. Because it’s a rare condition, Dr. Redmond Burke used a technological breakthrough in order to help his team practice and visualize the surgery before they even got into the operating room. This new technology is 3D printing that allows doctors to print models of a patient’s heart. Doctors can print both rigid and clear models, which allow them to view the internal structure of the heart, and flexible and opaque models, which allow the doctors to test different surgical techniques. By using these techniques, Dr. Burke was able to successfully perform surgery on Mia, who is now doing fine. Since then, the Nicklaus Children’s Hospital has acquired its own 3D printer and has used it to help save the lives of 20 more patients.

This creature could hold the key to eternal life

Professor Rokhsar of the University of California Berkeley has been studying an interesting animal called a sea anemone. These creatures have a miraculous tendency to regrow cells very rapidly, meaning that they stay in a constant state of youth. The rapid cell regeneration allows them to escape tumors and other conditions caused by old age. Thus, if they are protected from predators and have a stable food supply, they could theoretically live forever. Professor Rokhsar does not know how they are able to produce cells so quickly, but if the secret is uncovered, the secret to eternal life could be revealed.

Scientists grow organic semiconductor crystals vertically

During the 21st century, organic or carbon-based semiconductors have become popular among researches because they are cheap and lightweight. Now scientists from the California NanoSystems Institute have found a way to make them more powerful and efficient. They do this by growing tetraaniline crystals vertically (the same technique can also grow the crystals into a variety of other shapes), which allows them to be placed more efficiently into a single space. This breakthrough makes solar cells that capture the sun’s energy from all possible directions, while also creating the possibility of placing them into phones or other electronic devices.

Juan Ramón Rallo has thoughtfully replied (in English) to my earlier Alt-M post that discussed two versions of the real-bills doctrine and what I took to be his defense of a prudent-banking version of the doctrine. Here I offer a few comments on his reply.

  1. One topic under discussion is the common banking practice of borrowing short and lending long (aka maturity transformation). The practice is remunerative to the bank when short-term interest rates are lower than long rates, but it exposes the bank to risks that I previously discussed.

    In his latest piece Rallo suggests a categorical condemnation of the practice: “The banks that transform the maturities of their assets and liabilities are causing a discoordination between savers and investors. They are promising savers to redeem their liabilities much sooner than the moment when their assets will be paid by investors, i.e., they are promising savers the availability of some future goods before they are provided by the investors’ projects they are financing.” In my view, by contrast, whether there is a “discoordination” does not depend so much on the promises or contract terms, or what we may call the de jure maturities, as on the de facto maturities.

    As Rallo recognizes, holders of short-term liabilities have the option to roll them over. This is especially obvious for demand deposits that remain in the bank for longer than one instant. A one-year certificate of deposit that is renewed at an unchanged interest rate can be considered de facto a two-year (or longer, if renewed again) deposit. This means that a profit-seeking bank faces the challenge of estimating the distribution of actual times-to-withdrawal-or-repricing of its liabilities, which are longer than the de jure maturities.

    On the asset side of the balance sheet a similar consideration arises. When loan contracts allow customers to prepay without penalty (as US home mortgages typically do), the bank must estimate the distribution of times-to-repayment under various interest rate scenarios, which are shorter than the de jure maturities, to properly estimate its risk and reward from maturity transformation. If the bank’s estimates are approximately correct, then there is coordination all along, despite the de jure maturity transformation. When depositors roll over their deposits and prepay loans in the expected frequencies, the bank’s plans are fulfilled because it has made good estimates. This is not a case (contrary to what Rallo seems to suggest) in which the bank is luckily saved ex post by a favorable exogenous change in depositor preferences.

  2. To motivate the prudent-banking real-bills doctrine, Rallo asks: “What is the proper kind of asset … that allows banks to preserve their liquidity while issuing demand liabilities?”

    What any individual bank needs to hold to maintain its liquidity in the face of stochastic adverse clearings, in addition of course to reserves of outside money, is not one specific type of earning asset, but a portfolio that includes enough liquid assets, meaning assets that can be sold on short notice with negligible losses from bid-ask spreads. Stochastic clearings are not a problem for the banking system as a whole, because banks with unexpectedly large adverse clearings (which leave them with smaller reserves than desired) can sell assets to or borrow from banks that experience positive clearings and reserves greater than desired.

    Historical banking systems with private note-issue saw seasonal variations in the public’s holding of banknotes. But these variations posed no liquidity problem in a free banking system where, as in 19th century Canada, notes were withdrawn from and redeposited into demand deposit accounts so that total demandable bank liabilities were steady. Total reserves were not threatened by such a switch in the form of demandable bank liabilities.

    The system as a whole would face a liquidity challenge if there were (say) a predictable seasonal decline in the public’s desired holdings of outside money, leading to mass cashing of demandable bank liabilities, across all banks. (I don’t know any historical examples of seasonal variations of this sort.) In such a case a bank having loans or securities that will mature in a timely manner would be safer than counting on selling longer-term assets with negligible losses at a time when many other banks will also be selling. By not replacing the maturing loans or securities, the bank could shrink its assets simultaneously with its no-longer-wanted liabilities. What the bank needs in such an (imagined) episode is a set of assets with the right maturities, not assets with a particular backing.

    Against an unpredicted mass public attempt to convert bank liabilities into outside money — an internal drain or generalized runs on the banks — neither a portfolio of real bills due in zero to ninety days nor any other asset portfolio would obviate the system’s liquidity problem. Thus I cannot see the relevance of Rallo’s statement that an individual who holds a demand liability against a bank that in turn holds real-bills assets only, or an individual who holds a real bill directly, holds a claim “whose realization just depends on the fulfillment of the strongest present demands for consumption goods.” Planned realization in ninety days does not provide outside money today. Even a bank with a portfolio entirely of immediately callable loans, as Rallo notes citing Mises, would face the problem that many borrowers would default on sudden calls to repay.

  3. This is something of an aside, but Rallo cites a 1936 essay by Melchior Palyi entitled “Liquidity” for its definition of liquidity. I had not seen it before. It is noteworthy that Palyi explicitly rejects free banking (“in view of the violent fluctuations of trade which it implies”) in favor of a central bank that will “set and enforce liquidity standards.” I think that Palyi, under the influence of the money-issuing version of the real-bills doctrine, exhibits a very imperfect understanding of how free banking and central banking actually work.

  4. In his concluding section, Rallo imagines that free banking theorists might make the following argument: “free money and free banking can provide the optimal amount of prudent banking on its own, so there is no need to theorize about what prudent banking really means (i.e., there is no need to theorize about the Real Bills Doctrine and we can just stay comfortable with the free banking theory).” In fact I agree that free banking theory needs to examine what prudent banking involves.

    At a minimum, as I wrote in my previous piece, “prudence includes adequate liquidity and adequate capital.” The claim that free banking brings about prudent banking does need specification of what prudent banking means, and what portfolio management policies prudence requires, in order to be more than the empty statement that the banks that best survive free competition are those best suited to survive. As economic historians, we want to be able to explainwhich kinds of banks survive and which kinds of banking systems flourish better than others. Unlike Rallo, however, I don’t think that a sensible account of prudent banking can give us any prescription so simple as his summary of the doctrine he wants to defend, namely that “banks should only discount real bills.”

    I entirely agree with Rallo’s concluding paragraph, except for the last half-sentence. Monetary economists do indeed need to inquire into “what kind of institutional framework” tends most strongly “to produce prudent banking and macroeconomic coordination.” But we need not and cannot “rely on the tradition of the Real Bills Doctrine” in that undertaking. That tradition is too fraught with misconceptions.

[Cross-posted from]