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“Dean Dad” Matt Reed has responded to my rebuttal to him Tuesday, and I appreciate his engaging me in discussion. His main point now: The student loan default problem is not mainly about big total debts, but smaller debts that are hard to pay off because the students dropped out before getting a degree.

I agree. Indeed, that was pretty much the point of my Wall Street Journal article that kicked off the exchange. As I wrote:

Many dropouts have loans, which are much harder to repay when one fails to finish, or gets a worthless degree. Borrowers on the academic margins, who often attend community colleges and for-profit schools, likely struggle the most to repay even though their debts tend to be relatively small. The Federal Reserve Bank of New York found that 34% of borrowers with debts between $1,000 and $5,000 defaulted, versus only 18% with debts in excess of $100,000, a level of debt associated with advanced degrees.

Where the confusion might lie is that I thought in his response to me Reed was suggesting that a major problem for anyone coming out of community college was that the minimum wage was too low and, connected to that, so were the wages of entry-level jobs. This was based on the following:

Why are former students having a hard time paying debt back? Mostly because entry-level jobs don’t pay very well. But McCluskey never addresses either the supply of entry-level jobs, or the minimum wage. 

Knowing that Reed did not mean to include graduates among “former students” makes his comments about low wages less alarming. Still, his solution – raise low wages instead of requiring evidence of college readiness – seems a broad, slow, and dubious way to deal with the debt problem. “Broad” because it calls for, essentially, overhauling a huge part of the economy as opposed to specifically reforming students loans; “slow” because doing that would take a pretty long time; and “dubious” because there is a lot of evidence that raising the minimum wage has substantial negative effects.

In addition to raising the minimum wage, Reed calls for “free (or much less expensive) community college.”

Free community college would probably solve the problem of community college noncompleters leaving with debt, depending on how one accounted for living expenses, but it comes with its own set of troubles. The first is that we would likely still have lots of people not finishing, only the costs would be borne more by taxpayers and less by students. The second is that, unless “free” were somehow focused on the poor, you would have taxpayers subsidizing well-to-do people. Recent data show about 39 percent of dependent undergraduate students at community colleges, and about 54 percent of independent students, are from the upper half of the income distribution.  About 16 and 28 percent are from the highest income quartile. Then there is the question of how to pay for this, especially if making it free leads to even more people enrolling. And will community colleges be able to handle all of the new students, or will they have to ration spots? What will encourage students to complete their studies as quickly as possible?

Then there is this: Taxpayers would have used the money sent to community colleges for their own ends. Maybe for buying food, employing farmers and truck drivers and lots of other people. Or maybe they’d have invested it in businesses, some of which may have employed low-skill labor. Or maybe they’d have bought cars to get their kids back and forth to school, in the process employing autoworkers. Quite simply, there are major opportunity costs to society when we funnel money into community colleges, and it is not at all clear that the more beneficial use of taxpayer dollars is higher education.

One last critique of Reed’s rebuttal: He attacks my proposal that we put student lending in private hands by writing, “I took offense at the prospect of replacing universal access to higher education with screening done by the same people who caused the mortgage crisis.” I’d suggest he reexamine the mortgage crisis. Government “help” – much like student loans – had a lot to do with it.

Reed is certainly right, though, to ask what to do to help unprepared people now, while the loan qualification debate is mainly about not inflicting more harm. Ultimately, a sustainable college preparation solution must come before people reach higher education – and I have strong opinions on how to do that – but what about for people right now who did not get an adequate K-12 education and want a better future?

I’m not sure what the answers are – I’d love to hear suggestions – or even if there are any that are really satisfactory, especially if we want to avoid major, negative, unintended consequences that might go with them. I suspect viable ones might involve options like apprenticeships and quick, specific-skill programs – perhaps provided by community colleges or for-profit schools – or even remedial learning through outlets like the Khan Academy. Indeed, maybe a relatively quick measure – though it would involve changing law – would be Washington putting limits on loan amounts so that they would only cover a few courses, aimed at getting specific skills, or just remediation. What I am pretty sure are not solutions are spending more on community colleges to make them free to students, raising the minimum wage, or giving out loans to pursue degrees for which students are unprepared.

Introducing their work, Stapleton et al. (2016) write that polar bears (Ursus maritimus) are “considered among the most highly sensitive marine mammals to the projected consequences of climate change,” citing Laidre et al. (2008). Indeed, increased sea ice losses projected for mid-century have led to concerns that “polar bears may be extirpated from or substantially reduced across most of the circumpolar Arctic.” As a result, the Arctic polar bear has become the proverbial canary in the coal mine for those seeking proof of climate change impacts in the far northern latitudes of our planet. Efforts have long been under way to study trends in these northern mammals and relate those trends to changes in climate.

The study of Stapleton et al. is no different in this regard. Their objective was to provide an updated analysis of the polar bear population within the Foxe Basin of Canada, a region that spans 1.1 million square kilometers across the Nunavut territory and northern Quebec. Last inventoried in the early 1990s, the Foxe Basin has been identified as a region of concern as climate conditions over the period 1979-2008 have led to a deterioration of the sea ice habitat (Sahanatien and Derocher, 2012) that has long been thought to engender a stable polar bear population. Against this backdrop of potential decline, Stapleton et al. set out to conduct an updated population survey of polar bears in this region to discern whether or not declining sea ice conditions had indeed affected their numbers as model-based projections claimed it would. And to this end, the three researchers conducted a series of aerial surveys in late summer of 2009 and 2010.

So what did their survey reveal?

Following rigorous statistical analysis of their data Stapleton et al. report a current average estimate of 2,585 polar bears in the Foxe Basin, which is similar to the last estimate of 2,200 obtained in 1994.  This new number, along with evidence of “robust cub production,” in the words of the authors, “suggests a stable and healthy population despite deteriorating sea ice conditions.” “In other words,” as Stapleton et al. emphatically conclude, “the deterioration of sea ice habitat has not resulted in a decline in [polar bear] abundance.” Thus, it would appear that this canary of the north has so far been oblivious to alarmist predictions of its demise.

References

Laidre, K.L., Stirling, I.,Lowry, L.F., Wiig, Ø., Heide-Jørgensen M.P. and Ferguson, S.H. 2008. Quantifying the sensitivity of Arctic marine mammals to climate-induced habitat change. Ecological Applications 18: S97–S125.

Sahanatien, V. and Derocher, A.E. 2012. Monitoring sea ice habitat fragmentation for polar bear conservation. Animal Conservation 15: 397–406.

Stapleton, S., Peacock, E. and Garshelis, D. 2016. Aerial surveys suggest long-term stability in the seasonally ice-free Foxe Basin (Nunavut) polar bear population. Marine Mammal Science 32: 181-201.

Why do countries have different economic policies and political institutions?  One view, oft-expressed, is that people in different countries are different.  For example, back in the early 1990s, many observers believed Russia was not ready for a transition to capitalism because Russians did not understand markets.

Around that time, economists Robert Shiller, Maxim Boycko, and Vladimir Korobov decided to examine this view using surveys of New Yorkers and Moscovites. They found that Russians did have significant misgivings about markets, but so did Americans. In fact, attitudes and understanding were, to a first approximation, the same.

In a recent update, Shiller and Boycko ask whether things have changed:

We repeat a survey we did in the waning days of the Soviet Union … comparing attitudes towards free markets between Moscow and New York. Additional survey questions … are added to compare attitudes towards democracy. Two comparisons are made: between countries, and through time, to explore the existence of international differences in allegiance to democratic free-market institutions, and the stability of these differences. While we find some differences in attitudes towards markets across countries and through time, we do not find most of the differences large or significant. Our evidence does not support a common view that the Russian personality is fundamentally illiberal or non-democratic.

So if underlying differences in attitudes and values do not explain differences in economic policies and political institutions, what does? Many factors presumably play a role, but my bet would be on historical accidents. In some times and places, the indviduals with greatest influence have valued freedom (e.g., the American Revolution), while in others they have cared mainly about their own power (e.g., Putin). 

The broader significance is that claims like, “The citizens of country X will never accept capitlism / democracy,” or “transitions from statism to liberalism must be gradual,” do not seem well-supported by existing evidence.

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.

This week’s collection of not-to-be-missed stories is larger than most—it’s been a busy week!

First up is an examination by Competitive Enterprise Institute’s Marlo Lewis as to whether or not the Paris Climate Agreement is a treaty requiring the assent of two-thirds of the Senate. 

Prior to the U.N.’s climate conference held in Paris last December, President Obama was quick to insist that whatever came out of it would not be considered a “treaty” but rather some sort of “executive agreement.” That’s because it would never get the approval of the Senate that is required under the Constitution in order for it to have the force of law.  

Marlo builds the case why the President was unsuccessful and why the Senate should act—now.

He writes:

Far from being toothless, the Paris Agreement is the framework for a multi-decade global campaign of political pressure directed chiefly against Republican leaders, Red State voters, and the fossil fuel industry. Specifically, the treaty is designed to advance three political objectives:

1. Deter the next president, future Congresses, and even courts from overturning the Environmental Protection Agency’s (EPA) so-called Clean Power Plan (CPP) and other climate regulations, including some not yet proposed, by rebranding those policies as “promises” America has made to the world.

2. Pressure future U.S. policy makers to make increasingly “ambitious” emission-reduction pledges—known as Intended Nationally Determined Contributions (INDCs)—every five years starting in 2020, implement those pledges via ever-more stringent regulations, and pony up untold billions in “climate finance”—foreign aid to subsidize “green energy” ventures in developing countries.

3. Make U.S. energy and climate policy increasingly unaccountable to Congress and to the American people, and increasingly beholden to the demands of foreign leaders, multilateral bureaucrats, international pressure groups, and their media allies.

As a result, he emphatically concludes:

To safeguard America’s economic future and capacity for self-government, congressional leaders must expose Obama’s climate diplomacy as an attempted end-run around the Constitution’s treaty-making process. They should do so before the President signs the Agreement on Earth Day, April 22, at a United Nations ceremony in New York.

The centerpiece of this counteroffensive should be a Sense of Congress resolution emphasizing a clear and simple message: The Paris Agreement is a treaty, and therefore, under Article II, Section 2 of the U.S. Constitution, the United States is not a party, and therefore not bound to its terms, unless the Senate ratifies it. Absent Senate approval, Obama’s climate pledges to the United Nations are just administration proposals, not commitments of the United States.

Be sure to check out the entirety of Marlo’s persuasive essay here.

Next up, we want to draw attention to some (less-than-favorable) opinions about various ideas that are floating around as to how the U.S. may attempt to try to achieve the carbon dioxide emissions limits that President Obama has promised to under the Paris Agreement.

First is an update on Congress’s stance on the EPA’s Clean Power Plan which was stayed by the U.S. Supreme Court earlier this month pending the outcome of a case before the U.S. Court of Appeals in Washington DC. From House Speak Paul Ryan’s blog comes this:

Now that legal fight is heating up. The House and Senate joined together to file an amicus brief to support the states in the State of West Virginia et al v. EPA litigation pending in the U.S. Court of Appeals for the District of Columbia. 

We argue that this regulatory onslaught is an illegal, unconstitutional federal power grab. It twists the Clean Air Act to interpret an expansion of federal authority that the law never intended. It usurps the states’ rightful regulatory regimes to accomplish federal ends.

“This move would have stunned both the writers of the Clean Air Act and the founders of our country,” Speaker Ryan, who signed on to the brief along with 171 representatives and 34 senators, said. “It’s a blatant violation of the law of the land—one that will cause a lot of pain around this country. We will not rest until the War on Affordable Energy is stopped.”

Okay, so if things aren’t looking good for the Clean Power Plan, how about a carbon tax? 

As Terence Corcoran explains in this piece for the Financial Post, what’s elegant in theory goes terribly wrong in practice. He describes the situation with Canada’s carbon tax:

Touted by economists as a wondrous market mechanism that will deliver Canada from the evils of climate change, carbon pricing is emerging out of the political swamps as a regulatory nightmare.

Corcoran continues:

The original claim was that carbon tax revenue was to be revenue neutral and given back to consumers. As Philip Cross notes on an oped today, “cash-strapped governments in Alberta, Ontario and Quebec are simply raising carbon taxes with no offsetting tax cuts elsewhere.”

The new objective of the green state is to manage carbon emissions down. Growth, they say, will come if governments plow the carbon tax cash back into government-planned green development to encourage low-carbon growth. That means government controls the nature of the growth, the technology developed, the future of the energy, the future of the economy.

We can’t help but to think the same would be the case in the U.S. Read his whole piece for a devastating indictment of a carbon tax.

And last but certainly not least, we’d be remiss if we didn’t highlight a couple of significant science stories that broke during the past week. Here is a quick run-down of the headlines (and the backstories):

Headline: “Seas Are Rising at Fastest Rate in Last 28 Centuries.”

Backstory: The scientific paper which generated this headline actually represents a significant backing down from previous extreme sea level rise projections made by the same scientists. The “new” findings are completely consistent with what is already in the most recent report (AR5) from the Intergovernmental Panel on Climate Change (IPCC). Roger Pielke Jr. summed it up with this pithy tweet:

Headline: “Top scientists insist global warming really did slow down in the 2000s.”

Backstory: This is apparently news when it’s reported by “top scientists” who are members of the climate science “mainstream.” But we, and other “skeptics” and “lukewarmers” far and wide, have been saying this for close to a decade. We tweeted

Headline: “Decline in U.S. Greenhouse Gas Emissions Overestimated by More Than a Third.”

Backstory: Okay, actually, that was our headline from a couple of weeks ago. But no one seemed to take notice then. But now comes a report  that EPA Administrator Gina McCarthy told an energy conference this week “methane emissions from existing sources in oil and gas sector are substantially higher than we previously understood.” We can’t help but to wonder whether this applies to the trend in U.S. methane emissions as well. If so, add this to the list of other accounting irregularities (pointedly documented here) that are going to doom the US greenhouse gas reduction commitment made by President Obama in Paris. 

That’s all for now, check in again next week, for more stories of which you ought to have a look. If you can’t wait ‘til then, sometimes you can find a bit of foreshadowing (and a lot of other fun stuff) by following us on Twitter: PCKnappenberger, CatoMichaels, and CatoCSS.

UC-Irvine’s Rick Hasen is undoubtedly the leading law professor who advocates restricting money spent on political speech (well, it’s between him and Harvard’s Lawrence Lessig). In an interview with Ron Collins that was posted on the popular legal-academic blog Concurring Opinions this morning, one of Hasen’s comments stuck out:

I would not allow a self-funded candidate to contribute/spend in the aggregate more than $25,000 on his or her own campaign.

This is remarkable. I mean, Hasen’s general approach of overturning Citizens United and restricting how much anyone can donate to any group that engages in election-related speech is par for the course on that side of the debate. As is, unfortunately, the exemption for “bona fide press entities” – whatever that means: I’m sure Hasen has balancing tests that distinguish Sheldon Adelson-owned Las Vegas Review Journal from the blog of Adelson’s Venetian/Palazzo casino – and government-financed campaigns (yes, the solution to the “money-in-politics problem” is to have the government control the money).

But to say that you can’t spend money on promoting yourself for public office… words fail. (This proposal likely wouldn’t even stop Donald Trump, by the way, depending on the specifics of the relevant legislation: most of his personal “contributions” have come in the form of loans that are supposed to be repaid out of the donations that he takes in.)

If the point of campaign-finance “reform” is to prevent corruption, how is it possibly corrupting to spend your own money on yourself?

Moreover, Hasen goes on to endorse overturning “the part of Buckley [v. Valeo, the 1976 case that heralded the modern camapign-finance regime] that rejected individual spending limits.” That means that campaigns would be limited in how much they could spend, regardless of how much money they raise in whatever increments from however many donors.

Unbelieveable. Wouldn’t it be healthier for our democracy just to remove all campaign-donation limits then have instant disclosure of donations beyond a certain threshold? (There needs to be a threshold because of the potential threat of intimidation and harrassment – see, e.g., the fallout from California’s Prop 8 campaign, where disclosure didn’t even make sense in the first place because a referendum initiative can’t be corrupted.)

Let the voters decide how much they care who gets how much funding from what source.

The New York Times reported last week on some of the details of the Obama Administration’s recovery plan for Puerto Rico, and it does not bode well for investors — or for states and municipalities that borrow money.

The island’s government is $72 billion in debt, with billions more in unfunded pension obligations.  It has been in recession for a decade during which time it has never run a balanced budget, and today it is nearly bankrupt.  The government has appealed to the federal government to help, and the Treasury has drawn up a plan.  A major feature of that plan is that it will ignore the law by putting government employee pensions in front of general obligation bondholders in the hierarchy of credits, despite the provision of Puerto Rico’s Constitution that mandates GO bondholders will be paid before all other government obligations.  The rationale for doing so is, essentially, that public sector pension holders are in greater need of the money than the investors (many of whom are retirees and pensioners themselves), so this ex post change is simply a matter of fairness.

The bondholders, naturally, do not like this. After lending money to the Puerto Rican government under the explicit assurance that they would have the highest priority in all payment scenarios, having this promise revoked seems a tad unfair, as well as blatantly illegal.

It isn’t just the Puerto Rican bondholders that should be angry.  The problems with screwing over bondholders in order to protect government pensioners goes farther than its illegality:  Doing so sets a precedent for dealing with other bankrupt states in the future.  While the Administration avers that this in no way sets a precedent, since the fifty states have recourse to use Chapter 9 of the federal bankruptcy code to reorganize, the reality is otherwise.

The Times correctly notes that Chapter 9 makes no provision for the states extricating themselves from their own general obligation debt.  No out was given for a very good reason:  Foreclosing the possibility of a default up front (at least as much as possible) makes it easier and cheaper for states to borrow money.

The Obama Administration’s proposal threatens to upset this equilibrium.  By upending the law and decades of precedent, the Treasury’s plan threatens to make it more difficult for the states and municipalities to borrow money as well, since their lenders see that they too, might get their promise of being first to be repaid pulled out from under them.

This administration has a long history of picking winners and losers in bankruptcy.  In the Chrysler and GM bankruptcies, the secured bondholders took a major hit being reduced to unsecured status while workers and pensioners were elevated to protected status, and the Detroit bankruptcy did the same thing.

While it may seem “fair” to help little old ladies rather than mean old hedge funds, the investors who lost money in these maneuvers weren’t Wall Street plutocrats — they were regular people who invested their money into assets they thought were safe, because the law explicitly said they were. Many of them are retirees and pensioners themselves, and thousands of them will see a reduction in the value of their retirement funds.  CNN recently reported that 45% of Puerto Rico’s debt is held by “middle class Puerto Ricans” and “average Joe Americans.”  Abrogating bankruptcy law isn’t akin to Robin Hood — it’s transferring money from one group of retirees to another.

A Puerto Rico bailout that punishes secured bondholders would represent a short-term political win for the Treasury but at a long-run cost to the rest of the country in the form of higher borrowing rates.  It would be a terrible precedent.  It is hard to conceive of a reason for a Republican Congress to acquiesce to such a thing, or to allow a control board to do such a thing down the road.

[Cross-posted from Alt-M.org]

With the prospect of a Republican president who could conceivably repeal and replace ObamaCare, it is time for ObamaCare opponents to take a hard look at their “replace” plans. As I have argued elsewhere, expanding health savings accounts – a proposal I call Large HSAs – beats other alternatives like health-insurance tax credits. In short, if opponents succeed in repealing ObamaCare, Large HSAs would take another step in the direction of a market system. Health-insurance tax credits would constitute a step backward, because they would simply resurrect some of ObamaCare’s worst features–including an individual mandate and much of ObamaCare’s government spending and redistribution.

I set off a kerfuffle last week when I wrote that Sen. Marco Rubio’s (R-FL) ObamaCare replacement plan contains an individual mandate in the form of tax credits for health insurance. Rubio supporters and others were none too pleased. 

For those who are interested, here’s my short response to Capretta’s well-taken argument that Large HSAs also involve a mandate:

  1. Unlike tax credits or a standard deduction for health insurance, Large HSAs would consolidate and reduce the burden of all existing health-related tax preferences (i.e., mandates). So while a mandate would remain, it would only be a mandate to contribute to an HSA, where the money could only be saved or spent on health insurance or medical care, or passed on to one’s heirs. Thus, at worst, it would be a mandate to save one’s own money.
  2. The tax preference/mandate that would exist under Large HSAs would therefore be far less restrictive than either the existing smorgasbord of health-care mandates in the tax code, or that smorgasbord with a health-insurance tax credit layered on top.
  3. My preference is to eliminate all health-related tax preferences/mandates in the tax code, because doing so would lead to better health care, particularly for the most vulnerable. Large HSAs would take a huge step in that direction. They would deliver an effective tax cut of nearly $1 trillion per year, and in so doing would greatly facilitate a transition to a tax code with no health-related tax preferences/mandates, because that tax cut would remove the greatest obstacle to that transition.

There’s a lot more to say about tax credits vs. Large HSAs, and I will return to this question soon.

Although it doesn’t get nearly as much attention as it warrants, one of the greatest threats to liberty and prosperity is the potential curtailment and elimination of cash.

As I’ve previously noted, there are two reasons why statists don’t like cash and instead would prefer all of us to use digital money (under their rules, of course, not something outside their control like bitcoin).

First, tax collectors can’t easily monitor all cash transactions, so they want a system that would allow them to track and tax every possible penny of our income and purchases.

Second, Keynesian central planners would like to force us to spend more money by imposing negative interest rates (i.e., taxes) on our savings, but that can’t be done if people can hold cash.

To provide some background, a report in the Wall Street Journal looks at both government incentives to get rid of high-value bills and to abolish currency altogether.

Some economists and bankers are demanding a ban on large denomination bills as one way to fight the organized criminals and terrorists who mainly use these notes. But the desire to ditch big bills is also being fueled from unexpected quarter: central bank’s use of negative interest rates. …if a central bank drives interest rates into negative territory, it’ll struggle to manage with physical cash. When a bank balance starts being eaten away by a sub-zero interest rate, cash starts to look inviting. That’s a particular problem for an economy that issues high-denomination banknotes like the eurozone, because it’s easier for a citizen to withdraw and hoard any money they have got in the bank.

Now let’s take a closer look at what folks on the left are saying to the public. In general, they don’t talk about taxing our savings with government-imposed negative interest rates. Instead, they make it seem like their goal is to fight crime.

Larry Summers, a former Obama Administration official, writes in the Washington Post that this is the reason governments should agree on a global pact to eliminate high-denomination notes.

…analysis is totally convincing on the linkage between high denomination notes and crime. …technology is obviating whatever need there may ever have been for high denomination notes in legal commerce. …The €500 is almost six times as valuable as the $100. Some actors in Europe, notably the European Commission, have shown sympathy for the idea and European Central Bank chief Mario Draghi has shown interest as well.  If Europe moved, pressure could likely be brought on others, notably Switzerland. …Even better than unilateral measures in Europe would be a global agreement to stop issuing notes worth more than say $50 or $100.  Such an agreement would be as significant as anything else the G7 or G20 has done in years. …a global agreement to stop issuing high denomination notes would also show that the global financial groupings can stand up against “big money” and for the interests of ordinary citizens.

Summers cites a working paper by Peter Sands of the Kennedy School, so let’s look at that argument for why governments should get rid of all large-denomination currencies.

Illegal money flows pose a massive challenge to all societies, rich and poor. Tax evasion undercuts the financing of public services and distorts the economy. Financial crime fuels and facilitates criminal activities from drug trafficking and human smuggling to theft and fraud. Corruption corrodes public institutions and warps decision-making. Terrorist finance sustains organisations that spread death and fear. The scale of such illicit money flows is staggering. …Our proposal is to eliminate high denomination, high value currency notes, such as the €500 note, the $100 bill, the CHF1,000 note and the £50 note. …Without being able to use high denomination notes, those engaged in illicit activities – the “bad guys” of our title – would face higher costs and greater risks of detection. Eliminating high denomination notes would disrupt their “business models”.

Are these compelling arguments? Should law-abiding citizens be forced to give up cash in hopes of making life harder for crooks? In other words, should we trade liberty for security?

From a moral and philosophical perspective, the answer is no. Our Founders would be rolling in their graves at the mere thought.

But let’s address this issue solely from a practical, utilitarian perspective.

The first thing to understand is that the bad guys won’t really be impacted. The head the The American Anti-Corruption Institute, L. Burke Files, explains to the Financial Times why restricting cash is pointless and misguided.

Peter Sands…has claimed that removal of high-denomination bank notes will deter crime. This is nonsense. After more than 25 years of investigating fraudsters and now corrupt persons in more than 90 countries, I can tell you that only in the extreme minority of cases was cash ever used — even in corruption cases. A vast majority of the funds moved involved bank wires, or the purchase and sale of valuable items such as art, antiquities, vessels or jewellery. …Removal of high denomination bank notes is a fruitless gesture akin to curing the common cold by forbidding use of the term “cold”.

In other words, our statist friends are being disingenuous. They’re trying to exploit the populace’s desire for crime fighting as a means of achieving a policy that actually is designed for other purposes.

The good news, is that they still have a long way to go before achieving their goals. Notwithstanding agitation to get rid of “Benjamins” in the United States, that doesn’t appear to be an immediate threat. Additionally, according to SwissInfo, is that the Swiss government has little interest in getting rid of the CHF1,000 note.

The European police agency Europol, EU finance ministers and now the European Central Bank, have recently made noises about pulling the €500 note, which has been described as the “currency of choice” for criminals. …But Switzerland has no plans to follow suit. “The CHF1,000 note remains a useful tool for payment transactions and for storing value,” Swiss National Bank spokesman Walter Meier told swissinfo.ch.

This resistance is good news, and not just because we want to control rapacious government in North America and Europe.

A column for Yahoo mentions the important value of large-denomination dollars and euros in less developed nations.

Cash also has the added benefit of providing emergency reserves for people “with unstable exchange rates, repressive governments, capital controls or a history of banking collapses,” as the Financial Times noted.

Amen. Indeed, this is one of the reasons why I like bitcoin. People need options to protect themselves from the consequences of bad government policy, regardless of where they live.

By the way, if you’ll allow me a slight diversion, Bill Poole of the University of Delaware (and also a Cato Fellow) adds a very important point in a Wall Street Journal column. He warns that a fixation on monetary policy is misguided, not only because we don’t want reckless easy-money policy, but also because we don’t want our attention diverted from the reforms that actually could boost economic performance.

Negative central-bank interest rates will not create growth any more than the Federal Reserve’s near-zero interest rates did in the U.S. And it will divert attention from the structural problems that have plagued growth here, as well as in Europe and Japan, and how these problems can be solved. …Where central banks can help is by identifying the structural impediments to growth and recommending a way forward. …It is terribly important that advocates of limited government understand what is at stake. …calls for a return to near-zero or even negative interest rates…will do little in the short run to boost growth, but it will dig the federal government into a deeper fiscal hole, further damaging long-run prospects. It needs to be repeated: Monetary policy today has little to offer to raise growth in the developed world.

Let’s close by returning to the core issue of whether it is wise to allow government the sweeping powers that would accompany the elimination of physical currency.

Here are excerpts from four superb articles on the topic.

First, writing for The American Thinker, Mike Konrad argues that eliminating cash will empower government and reduce liberty.

Governments will rise to the occasion and soon will be making cash illegal.  People will be forced to put their money in banks or the market, thus rescuing the central governments and the central banks that are incestuously intertwined with them. …cash is probably the last arena of personal autonomy left. …It has power that the government cannot control; and that is why it has to go. Of course, governments will not tell us the real reasons.  …We will be told it is for our own “good,” however one defines that. …What won’t be reported will be that hacking will shoot up.  Bank fraud will skyrocket. …Going cashless may ironically streamline drug smuggling since suitcases of money weigh too much. …The real purpose of a cashless society will be total control: Absolute Total Control. The real victims will be the public who will be forced to put all their wealth in a centralized system backed up by the good faith and credit of their respective governments.  Their life savings will be eaten away yearly with negative rates. …The end result will be the loss of all autonomy.  This will be the darkest of all tyrannies.  From cradle to grave one will not only be tracked in location, but on purchases.  Liberty will be non-existent. However, it will be sold to us as expedient simplicity itself, freeing us from crime: Fascism with a friendly face.

Second, the invaluable Allister Heath of the U.K.-based Telegraph warns that the desire for Keynesian monetary policy is creating a slippery slope that eventually will give governments an excuse to try to completely banish cash.

…the fact that interest rates of -0.5pc or so are manageable doesn’t mean that interest rates of -4pc would be. At some point, the cost of holding cash in a bank account would become prohibitive: savers would eventually rediscover the virtues of stuffed mattresses (or buying equities, or housing, or anything with less of a negative rate). The problem is that this will embolden those officials who wish to abolish cash altogether, and switch entirely to electronic and digital money. If savers were forced to keep their money in the bank, the argument goes, then they would be forced to put up with even huge negative rates. …But abolishing cash wouldn’t actually work, and would come with terrible side-effects. For a start, people would begin to treat highly negative interest rates as a form of confiscatory taxation: they would be very angry indeed, especially if rates were significantly more negative than inflation. …Criminals who wished to evade tax or engage in illegal activities would still be able to bypass the system: they would start using foreign currencies, precious metals or other commodities as a means of exchange and store of value… The last thing we now need is harebrained schemes to abolish cash. It wouldn’t work, and the public rightly wouldn’t tolerate it.

The Wall Street Journal has opined on the issue as well.

…we shouldn’t be surprised that politicians and central bankers are now waging a war on cash. That’s right, policy makers in Europe and the U.S. want to make it harder for the hoi polloi to hold actual currency. …the European Central Bank would like to ban €500 notes. …Limits on cash transactions have been spreading in Europe… Italy has made it illegal to pay cash for anything worth more than €1,000 ($1,116), while France cut its limit to €1,000 from €3,000 last year. British merchants accepting more than €15,000 in cash per transaction must first register with the tax authorities. …Germany’s Deputy Finance Minister Michael Meister recently proposed a €5,000 cap on cash transactions. …The enemies of cash claim that only crooks and cranks need large-denomination bills. They want large transactions to be made electronically so government can follow them. Yet…Criminals will find a way, large bills or not. The real reason the war on cash is gearing up now is political: Politicians and central bankers fear that holders of currency could undermine their brave new monetary world of negative interest rates. …Negative rates are a tax on deposits with banks, with the goal of prodding depositors to remove their cash and spend it… But that goal will be undermined if citizens hoard cash. …So, presto, ban cash. …If the benighted peasants won’t spend on their own, well, make it that much harder for them to save money even in their own mattresses. All of which ignores the virtues of cash for law-abiding citizens. Cash allows legitimate transactions to be executed quickly, without either party paying fees to a bank or credit-card processor. Cash also lets millions of low-income people participate in the economy without maintaining a bank account, the costs of which are mounting as post-2008 regulations drop the ax on fee-free retail banking. While there’s always a risk of being mugged on the way to the store, digital transactions are subject to hacking and computer theft. …the reason gray markets exist is because high taxes and regulatory costs drive otherwise honest businesses off the books. Politicians may want to think twice about cracking down on the cash economy in a way that might destroy businesses and add millions to the jobless rolls. …it’s hard to avoid the conclusion that the politicians want to bar cash as one more infringement on economic liberty. They may go after the big bills now, but does anyone think they’d stop there? …Beware politicians trying to limit the ways you can conduct private economic business. It never turns out well.

Last, but not least, Glenn Reynolds, a law professor at the University of Tennessee, explores the downsides of banning cash in a column for USA Today.

…we need to restore the $500 and $1000 bills. And the reason is that people like Larry Summers have done a horrible job. …What is a $100 bill worth now, compared to 1969? According to the U.S. Inflation Calculator online, a $100 bill today has the equivalent purchasing power of $15.49 in 1969 dollars. …And although inflation isn’t running very high at the moment, this trend will only continue. If the next few decades are like the last few, paper money in current denominations will become basically useless. …to our ruling class this isn’t a bug, but a feature. Governments want to get rid of cash… But at a time when, almost no matter where you look in the world, the parts of it controlled by the experts and technocrats (like Larry Summers) seem to be doing badly, it seems reasonable to ask: Why give them still more control over the economy? What reason is there to think that they’ll use that control fairly, or even competently? Their track record isn’t very impressive. Cash has a lot of virtues. One of them is that it allows people to engage in voluntary transactions without the knowledge or permission of anyone else. Governments call this suspicious, but the rest of us call it something else: Freedom.

Amen. Glenn nails it.

Banning cash is a scheme concocted by politicians and bureaucrats who already have demonstrated that they are incapable of competently administering the bloated public sector that already exists.

The idea that they should be given added power to extract more of our money and manipulate our spending is absurd. Laughably absurd if you read Mark Steyn.

P.S. I actually wouldn’t mind getting rid of the government’s physical currency, but only if the result was a system that actually enhanced liberty and prosperity. Unfortunately, I don’t expect that to happen in the near future.

“Dean Dad” is angry with me. A blogger for Inside Higher Ed and a community college dean, Matt Reed found my argument in yesterday’s Wall Street Journal that the federal government should stop giving student loans to people without regard to their demonstrated ability to do college-level work “as offensive an argument as I’ve seen in major media in a long, long time.”

As I wrote in my piece, I absolutely understand the impetus to give anyone who wants it access to college. Apparently, though, you must be utterly heartless to say maybe we should be concerned about the unintended consequences of related policies, which we see with throngs of unprepared people entering college and never finishing, many with loans they struggle to pay off because they don’t have the necessary credentials to increase their earnings.

Mr. Reed thinks that my view is about “getting tough on the poor and badly prepared.” I suppose that’s one way to spin it. But it is not really about “getting tough” with anyone – it is about first doing no harm by providing an external check on people’s potentially damaging borrowing plans. And it is not about “targeting” the poor or anyone else, but protecting the unprepared. Of course, the poor are disproportionately the ones who are inadequately prepared, and that is something we need to deal with. As I wrote, though, that is something we should do at the K-12 level, not compound the problem with debt and no degree.

Reed next delves a bit into caricature, stating, “When someone in the Wall Street Journal suggests getting tough with the poor for their own good, it is worth asking some questions.”  I’d say it’s worth asking questions whenever people propose things in any outlet, but I would also suggest we assume people have good motives. I don’t doubt that Dean Dad has fine motives – he no doubt does work he finds morally fulfilling – but if he is going to suggest extra suspicion of me because I wrote in the Journal, it is perhaps worth a reminder that he is a community college officer, writing in a higher education outlet, calling, among other things, for more money to go to community colleges.

Thankfully, in the second half of his piece Reed gets into some substantive arguments. For instance, he writes, “Why is student debt increasing? Is it because students abruptly became much less capable around 2008? That’s when debt loads exploded, and yet, McCluskey offers no evidence to suggest that academic ability suddenly nosedived then.” What else happened in 2008? Reed writes that there was a big drop in “state and local appropriations for public higher education.”

I don’t doubt for a moment that cuts in public funding for colleges have had effects on prices, as have lots of factors. And there is certainly a lot more that can be written on this topic than I could fit in the 700-or-fewer words allotted for my piece. Indeed, writing more is happening right now!

Let’s, though, look at some data. According to the first graph below, student debt levels have been rising pretty steadily since well before 2008, and there is no especially severe kink in 2008. And the big increase in the percentage of students with debt, as illustrated in the second graph, seemed to start in the early 1990s. Probably not coincidentally, the federal government hugely expanded student lending in the Higher Education Amendments of 1992.

 

How about the theory that state and local cutbacks explain tuition increases? They no doubt have an effect, but as I have shown repeatedly, public colleges have raised their prices in both good public funding times and bad. And what, likely, has enabled that? The data and research suggest it is in large part increased availability of student aid, including loans!

Reed next argues that many debts are hard to repay because “entry-level jobs don’t pay very well,” and he laments that “McCluskey never addresses either the supply of entry-level jobs, or the minimum wage.”  Again, you only get so many words in an op-ed, so you simply can’t tackle everything. But Reed’s argument shines a negative light not on me, but what he apparently thinks college prepares many people for: entry-level jobs often paying, he implies, minimum wage. If that’s the case, what is the point, at least economically, of getting a degree? And if it is the case that you now need a degree to get a minimum-wage, entry-level job, does that not at least suggest – even to a non-heartless person – that we are suffering from massive credential inflation spurred by too many people going to college? And is allowing someone to take on substantial debt not a very dangerous proposition if their likely destination is minimum-wage employment?

Alas, Mr. Reed then accuses me of not considering the “aspirations” of low-income students “important.” He concludes, “That’s a moral question, and that’s why I chose the word ‘offensive’ rather than ‘incorrect’” when characterizing my views. But suppose there are lower-income people – or any others – whose aspirations include not entering programs they are unprepared to complete and, in the process, incurring burdensome debt? Is it moral to hand them big bucks and just say “good luck paying that back”?

Yes, Mr. Reed, there can be competing moral goods.

Reed next takes offense at the possible baseline requirements for federal loans I offer in my piece: “To enroll in an associate degree program or higher, perhaps a minimum GPA of 3.0 on a 4.0 scale, and an SAT or ACT score equal to the national average, should be required.” He suggests that by not mentioning that such measures skew against “students of color and low-income students” I am being “dishonest.”

Again, I had limited space, so I could not explore every consequence or consideration stemming from my proposal. But Mr. Reed is absolutely right to question these suggestions. Indeed, I wrote “perhaps” they would be good measures, and in the next paragraph, wrote:

There are, of course, problems with this. Are a 3.0 GPA and 1000 SAT score the right threshold? And it is troubling to have government give some people loans while refusing others, especially since “objective” measures may not tell us everything important about individual borrowers.

Sadly, Reed ends his piece with more caricature – literally – saying that I ultimately call for “tough-minded bankers” to “crack down on the poor,” and he rails that, “Telling the poor they’re too risky to bother educating is not what a civilized society would do,” but instead “sounds like a Dickensian caricature.”

Does that really fit with what I wrote? It is correct that I think truly private lending is part of the solution to the college completion and debt problem, but did I really argue that the poor should be kept out of college “for their own good” and we shouldn’t “bother” educating them? It doesn’t seem that way to me. It seems like I specifically called not for treating the poor as some monolithic group, but as individuals:

All of this is why lending should be in private hands. Private lenders would have strong incentive to work with even the financially poorest, when college-ready, based on the likelihood they will succeed and repay their loans. Private lenders also would be using their own dollars, and so would have a powerful incentive to be honest with unprepared students, telling them, “The loan you want does not make sense for me…or you.” This would all be coupled with the flexibility to consider multiple measures of postsecondary readiness, as well as differing loan terms, and thus to treat potential borrowers as the unique people they are.

The good news, perhaps, is that Mr. Reed does not see me as a lost cause…I think. He concludes, “If your only message to the poor is that lifelong poverty is for their own good, I have nothing to say to you.”

Obviously, Mr. Reed had a lot to say to me. And, of course, I do not think “lifelong poverty” is good for the poor. Indeed, that is a major reason that we should think hard about handing debt to people who will likely not finish the programs they start and will then struggle to pay back their loans. As for what we should do to help the poor – as opposed to not hurt them further – I’d love to discuss solutions with Mr. Reed. But that will take a lot of back-and-forth, and probably a little less caricature.

Over at the Brookings Institution’s education blog, Paul Bruno offers a thoughtful critique of Overregulation Theory (OT), the idea that government regulations on school choice programs can undermine their positive effects. Bruno argues that although OT is “one of the most plausible explanations” of the negative results that two studies of Louisiana’s voucher program recently found, it is not “entirely consistent with the available evidence” and “does not by itself explain substantial negative effects from vouchers.”

I agree with Bruno–and have stated repeatedly–that the studies’ findings do not conclusively prove OT. That said, I believe both that OT is consistent with the available evidence and that it could explain the substantial negative effects (though I think it’s likely there are other factors at play as well). I’ll explain why below, but first, a shameless plug:

On Friday, March 4th at noon, the Cato Institute will be hosting a debate over the impact of regulations on school choice programs featuring Patrick Wolf, Douglas Harris, Michael Petrilli, and yours truly, moderated by Cato’s own Neal McCluskey. If you’re in the D.C. area, please RSVP at this link and join us! Come for the policy discussion, stay for the sponsored lunch!

Is the evidence consistent with Overregulation Theory?

Bruno notes that the differences in enrollment trends between participating and non-participating private schools is consistent with OT. Participating schools had been experiencing declining enrollment in the decade before the voucher program was enacted whereas non-participating schools had slightly increasing enrollment on average. This is consistent with the OT’s prediction that better schools (which were able to maintain their enrollment or grow) would be more likely eschew the vouchers due to the significant regulatory burden, while the lower-performing schools (which were losing students) were more desperate for students and funding, and were therefore more willing to jump through the voucher program’s regulatory hoops. However, Bruno calls this evidence into question:

For one thing, the authors of the Louisiana study specifically check to see if learning outcomes vary significantly between schools experiencing greater or lesser prior enrollment declines, and find that they do not. (Bedrick acknowledges this, but doubts there was enough variation in the enrollment trends of participating schools to identify differences.)

We should be skeptical of the explanatory value of the study’s enrollment check. There is no good reason to assume that the correlation between enrollment growth or decline among the small sample of participating schools (which had significantly negative growth, on average) is the same as among all private schools in the state. Making such an assumption is like a blind man holding onto the truck of an elephant and assuming that he’s holding a snake.

The study does not show the variation in enrollment trends among the participating and non-participating schools, but we could imagine a scenario where the enrollment trend among participating schools ranged, say, from -25% to +5% while the range at non-participating schools was -5% to +25%. As shown in the following charts (which use hypothetical data), there may be a strong correlation between enrollment trends and outcomes among the entire population, while there is little correlation in the subset of participating schools.

Enrollment Growth and Performance, Participating Private Schools (Hypothetical)

Enrollment Growth and Performance, All Private Schools (Hypothetical)

In short, looking at the relationship between enrollment growth and performance in the narrow subset of participating schools doesn’t necessarily tell us anything about the relationship between enrollment growth and performance generally. Hence the study’s “check” that Bruno cites does not provide evidence against OT.

Is there evidence that regulations improve performance?

Bruno also cites evidence that regulations can have a positive impact on student outcomes:

Joshua Cowen of Michigan State University also points out that there is previous evidence of positive effects from accountability rules on voucher program outcomes in other states (though regulations may differ in Louisiana).

The Cowen article considers the impact of high-stakes testing imposed on the Milwaukee voucher program during a multi-year study of that program. The “results indicate substantial growth for voucher students in the first high-stakes testing year, particularly in mathematics, and for students with higher levels of earlier academic achievement.” But is this strong evidence that regulations improve performance? One of the authors of both the original Milwaukee study and the cited article, Patrick Wolf of the University of Arkansas (who will be on our panel this Friday), cautions against over-interpreting these results:

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.

It’s certainly possible that the high-stakes test improved actual learning. But it’s also possible–and, I would argue, more probable–that changing the stakes just meant that the schools responded to the new incentive by focusing more on test-taking strategies to boost their scores.

For that matter, even if it were true that the regulations actually improved student learning, that does not contradict Overregulation Theory. Both advocates and skeptics of the regulations believe that schools respond to incentives. Those of us who are concerned about the impact of the regulations don’t believe that they can’t improve performance. Rather, our concern is that regulations imposed from above are less effective at improving performance than the incentives created by direct accountability to parents in a robust market in education, and may have adverse unintended consequences.

To explain: We’re concerned that regulations forbidding the use of a school’s preferred admissions standards or requiring the state test (which is aligned to the state curriculum) might drive away better-performing schools, leaving parents to choose only among the lower-performing schools. We’re concerned that price controls will inhibit growth, providing schools with an incentive only to fill empty seats rather than to scale up. We’re concerned that mandatory state tests will inhibit innovation and induce conformity. None of these concerns rule out the possibility (or, indeed, the likelihood) that over time, requiring private schools to administer the state test and report the results and/or face sanctions based on test performance will improve the participating schools’ performance on that test.

Again: we agree that schools respond to incentives. We just think the results of top-down incentives are likely to be inferior to the results of bottom-up choice and competition, which have proved to be powerful tools in so many other fields for spurring innovation and improving quality.

Can Overregulation Theory alone explain the negative results in Louisiana?

Finally, Bruno questions whether OT alone explains the Louisiana results:

[E]ven if regulation prevented all but the worst private schools from participating, this would explain why students did not benefit from transferring into them, but not why students would transfer into them in the first place.

So Overregulation Theory might be part of the story in explaining negative voucher effects in Louisiana, but it is not by itself sufficient. To explain the results we see in the study, it is necessary to tell an additional story about why families would sort into these apparently inferior schools.

Bruno offers a few possible stories–that parents select schools “that provide unobserved benefits,” that the voucher program “induced families to select inferior schools,” or that parents merely “assume any private school must be superior to their available public schools”–but any of these can be consistent with OT.  Indeed, the second story Bruno offers is practically an extension of OT: if the voucher regulations truncate supply so that it is dominated by low-quality schools, and the government gives false assurances that they have vetted those schools, then it is likely that we will see parents lured into choosing inferior schools.

That’s not to say that there are no other factors causing the negative results. It’s likely that there are. (I find Douglas Harris’s argument that the private schools’ curricula did not align with the state test in the first year particularly compelling, though I don’t think it entirely explains the magnitude of the negative results.) We just don’t have any compelling evidence that OT is wrong, and OT can suffice to explain the negative results.

I will conclude as I began: expressing agreement. I concur with Bruno’s assessment that “it is likely that the existing evidence will not allow us to fully adjudicate between competing hypotheses.” Indeed, it’s likely that future evidence won’t be conclusive either (it rarely is), but I hope that further research will shed more light on this important question. Bruno concludes by calling for greater efforts to “understand how families determine where their children will be educated,” noting that by understanding how and why parents might make “sub-optimal — or even harmful” decisions will help “maximize the benefits of school choice while mitigating its risks.” These are noble goals and I share Bruno’s desire to pursue them. I just hope that policymakers will approach what we learn with a spirit of humility about what they can accomplish.

[A version of this blog post originally appeared at Jay P. Greene’s blog.]

You may recall from my last post that in August 2008 the failure of Lehman Brothers caused sizable losses to a large money-market mutual fund, The Reserve Primary Fund, which held hundreds of millions in Lehman IOUs.  These losses reduced the fund’s asset portfolio value below its total share value at the pegged redemption rate of $1 per share.  For about 24 hours the fund’s management dithered, neither reducing the share claims nor injecting capital to restore the assets.  Alert institutional shareholders saw that there wasn’t enough asset value to pay everyone $1 per share, but the first to redeem could get that much, and so quite rationally ran to redeem.  Belatedly, Reserve Primary “broke the buck” and liquidated at 97 cents on the dollar.  Other “prime” mutual funds experienced heavy redemptions that day and over the next two days, although none broke the buck.  (Many received capital injections from their sponsoring firms.)  On the third day the Treasury stepped in to guarantee the $1 share price of all money market mutual funds.

Many regulators and economic analysts have inferred from these events that money-market mutual funds (MMMFs) are inherently run-prone.  The fact that this was the first run in MMMF history, however, should give us pause.  There is a more plausible reading of the evidence.  Although the Reserve Primary Fund did invite a run by letting its total shareholder claims exceed its total assets in value for a day, MMMFs can be structured and managed so that this never happens.

In a nutshell, the stage is set for a run on a bank or mutual fund when claims can be redeemed on demand, and claimants have reason to believe that their total claims exceed total assets (plus any off-balance-sheet funds) available for paying them.  Bank deposits are debt claims to fixed dollar sums, so a sudden drop in the market value of assets can trigger a run if the bank is so thinly capitalized that market net worth becomes negative.  Mutual fund shares are not fixed-dollar debts, but equity claims to percentages of the asset portfolio, such that total claims are supposed to add up to 100% of the asset portfolio and no more.  (Neglect of the distinction between debt and equity funding, by the way, is embodied in the obfuscatory language according to which MMMFs and hedge funds are part of a “shadow banking” system.)  When assets drop in value, share accounts are to be marked down correspondingly, so that they never over-claim the assets.

Ordinary open-end mutual funds accomplish this by continuously adjusting the “net asset value” or NAV, the dollar price at which one share in the portfolio can be purchased or redeemed.  Money-market mutual funds typically operate with the accounting convention of a fixed $1 NAV.  To keep $1 shares from over-claiming the assets in the event of asset losses, such a MMMF needs only to continuously adjust the total number of shares.  That is, its contractual arrangement with shareholders provides that a proportional number of shares will be immediately subtracted from account balances.

As J. P. Koning has pointed out, this arrangement is not just a conceptual possibility, it has been put in place by some MMMFs in Europe under the rubric of a “reverse distribution” or “share-reduction” mechanism.  In September 2014 Bloomberg.com reported that “the world’s biggest money manager,” BlackRock Inc., was adopting a share-reduction mechanism as a way of coping with negative yields on money-market instruments.  Or, as a spokesman put it, BlackRock “determined that it is in the best interests of shareholders to implement a form of share-reduction mechanism, which enables a stable NAV to be maintained on days when the net yield on the fund is negative.”

Neglecting this practicable method for run-proofing stable-NAV mutual fund claims, many would-be reformers after 2008 arrived at a diagnosis of inherent run-proneness with systemic negative spillovers, and were inspired to propose additional legal restrictions on MMMFs to make them less fragile.  (“Additional” restrictions because mutual funds were already regulated by the SEC under the Investment Company Act of 1940.)  In a useful recent review of this literature on run-proofing proposals, Harvard finance professors Hanson, Sharfstein, and Sunderam accordingly declare that “MMF regulation should attempt to both reduce the ex ante incentives of MMFs to take excessive risks and increase the ex post ability of MMFs to absorb losses without setting off runs.”  They emphasize three proposals popular in the literature:

  • “requiring MMFs to adopt a floating NAV structure,” that is, outlawing the fixed $1 share value (they oddly characterize this as a way “to subject MMFs more fully to market forces,” it is unclear why they do not recognize a conflict between market forces and legal restrictions);
  • “requiring MMFs to have a 1% capital buffer combined with a “Minimum Balance at Risk” (MBR) provision whereby investors cannot immediately redeem all of their shares,” a proposal from four economists at the Federal Reserve Board and FRB New York; and
  • “requiring MMFs to have a 3% subordinated capital buffer.”

The authors favor the third type of restriction as a way to “reduce ex ante incentives for risk-taking” while also allowing a MMMF to “maintain the current fixed NAV structure for ordinary MMF investors and thus preserve any transactional benefits those investors reap from the existing system.”  Like most contributors to the literature (an exception is a chapter by Agapova), they do not consider a contractual share-reduction mechanism, let alone note that it allows the transactional benefits of a fixed $1 NAV to be combined with 100% capital financing.  Possibly this oversight is the result of the mechanism having disappeared from use in the United States, simultaneously with American MMMFs (though not European MMMFs) replacing mark-to-market accounting of short-term assets by amortized cost valuation, and mark-to-market accounting of total share value by “penny-rounding” (not until book-value NAV falls below 99.5 cents does the MMMF have to inject capital or break the buck).

Somewhat surprisingly, proposals for these kinds of legal restrictions have come even from some sources that ostensibly favor greater reliance on free markets.  For example, the Shadow Financial Regulatory Committee in February 2012 and again in September 2012 issued a statement that called for outlawing the $1 fixed NAV for MMMFs, with the exception of retail funds whose sponsors provide “an explicit contractual guarantee” to inject enough capital to redeem at par whenever necessary and who meet new “capital and liquidity requirements.”

The SEC has adopted many of the proposals for new restrictions on MMMFs, including one of the least popular.  In the name of reducing liquidity, credit, and interest-rate risks, a set of restrictions adopted in February 2010 imposes a minimum liquidity ratio (cash or Treasuries to total assets), a AAA rating requirement for 97% of assets, a shorter average portfolio maturity than previously required, and periodic stress tests.  In July 2014, the SEC announced additional restrictions, to be phased in over two years.  A few months from now, the new rules will be fully in place.  The most important two new rules are:

  • Institutional prime and tax-free funds, but not institutional government funds, will be required to adopt a variable NAV.  (As a reminder, “prime” funds hold mostly paper issued by multinational banks and other financial firms, but also some short-term Treasuries.  Tax-free funds hold tax-exempt state and municipal bonds; government funds hold only US Treasury and agency bonds.  All three types are divided between retail and institutional versions.  The former are now limited by SEC rules to natural persons.  The latter have higher minimum investments and lower expense per share ratios and thus are favored by institutional investors and cash managers at large corporations.)  There is no good rationale for this requirement given the equally run-proof alternative of a fixed NAV combined with a share-reduction mechanism.
  • Funds are given the discretion, whether they want it or not (they cannot contractually bind themselves not to use it), “to impose liquidity fees or to suspend redemptions temporarily, also known as ‘gate,’ if a fund’s level of weekly liquid assets falls below a certain threshold.” Hanson, Sharfstein, and Sunderam, and many other analysts, rightly reject such “gating rules” as means to diminish runs.  Inability to precommit not to impose a gate can be expected to weaken a MMMF.  Knowing that a gate might be imposed, especially if another fund has just done so, investors will likely become more anxious to redeem now rather than wait and see.

In recent years more than half of the MMMF industry’s assets ($3.085 trillion at the end of 2015) has been held in prime funds.  But the mix is now changing and the total is falling because institutional investors who prefer a fixed NAV free of gates are now compelled to switch out of prime to lower-yielding government funds.  Mutual fund providers have begun to respond to institutional investor preferences by converting entire funds.  For example, in December 2015 the Fidelity group, “to assure shareholders that they will have daily access to funds used primarily for transactions,” converted three funds with shareholder approval.  The Fidelity Cash Reserves fund became Fidelity Government Cash Reserves; VIP Money Market became VIP Government Money Market; and Fidelity Retirement Money Market became Fidelity Retirement Government Money Market II.  Institutional investors are being limited to options they consider inferior, as shown by the drop in the size of institutional prime funds exceeding the gain in institutional government funds.

To criticize most generally the reform strategy of seeking to improve financial institutions by imposing restrictions on them, I suggest that reformers and policy-makers who seek what Cecchetti and Schoenholtz call “the optimal mechanism for securing the safety and soundness of MMMFs” need to consider that we can approach optimal arrangements only through a wide-open market competition among alternatives.  To think that we can derive optimal financial institutions (those that most fully exhaust gains from voluntary trade) by theorizing about them is an unwarranted pretense.  We need to allow different strategies for providing prime MMMFs that are safe (and have other desirable features, which we may trade off against safety) to compete head to head.  To affirm that a “subordinated capital buffer,” for example, is the optimal or efficient arrangement, for example, we must see it pass the market test by out-competing share-reduction mechanisms with fixed $1 share values, and other arrangements, for the favor of investors.  Quite likely, there is no single type of prime MMMF that best serves all potential users, but rather a variety of types would attract customers.  If some well-informed investors prefer a fixed-NAV fund that is not run-proof, because it offers them other advantages, there is a heavy burden of proof to show that such a fund should not be allowed.  The goal of a robust financial system calls for a diverse ecosystem of mutual funds, not a monoculture that is susceptible to a single disease.  Top-down restrictions promote a monoculture.

A case for not allowing free competition among a variety of contractual MMMF arrangements must presumably appeal not just to theoretically possible non-pecuniary externalities from allowing run-prone funds, but to evidence of serious non-pecuniary externalities.  This burden has not been met.  First, it has not been shown that the run on The Reserve Primary Fund was the shock that prompted heavy redemptions at other funds, rather than both being consequences of a common shock, namely the failure of Lehman Brothers and the associated decline in the market value of short-term claims on other financial institutions.  We will never know, because the Treasury quickly intervened, how long the redemptions at other funds would have continued. Second, it is far from clear that run-prone funds, like Reserve Primary under its atypically poor management (the main owner was on vacation, leaving his inexperienced son in charge), would be dangerously common in the financial marketplace emerging from unrestricted institutional competition.

Some proponents of restrictions on MMMFs have argued that the possibility of declining asset prices due to heavy redemptions makes even floating-NAV funds vulnerable to me-first runs. Thus Hanson, Sharfstein, and Sunderam speak of an “impetus to Diamond-Dybvig style runs” arising from the possibility that “MMFs forced to liquidate [illiquid] assets may have to sell them at heavily discounted, ‘fire-sale’ prices.”  Those who wait to redeem will face a lower NAV because early redemptions will push down the value of the fund’s assets.  The Diamond-Dybvig model of a self-justifying bank run, however, depicts an intermediary issuing debt claims whose total always exceeds the liquidation (“fire-sale”) value of its assets during the middle period of its three-period life.  It is not surprising that an insolvent bank is run-prone.  It is hard to see how this scenario is relevant to a MMMF that promptly marks down its total claims to the market value of its portfolio.  As a matter of fact, “Diamond-Dybvig style runs” among uninsured banks (prompted by mutually-validating fears that others will run, causing insolvency via fire-sale losses), as distinct from “bad-news” runs prompted by pre-run insolvency, are very hard to find in the historical record.

If me-first runs due to feared fire-sale losses were an actual problem among MMMFs, a fund could provide safety against over-claiming by valuing the fund’s assets (and correspondingly investor account balances) using its own actually realized sale prices, not observed transaction prices elsewhere.  Thus if selling assets to replenish the fund’s cash buffer after settling a $1000 check costs the fund more than $1000 in book value of assets, it could reduce the customer’s remaining balance accordingly.  This would eliminate any beat-the-crowd dynamic in which shareholder rush to sell because they rationally anticipate declining payoffs from fire-sale losses as other shareholders liquidate.  Whether this mechanism would have more-than-offsetting disadvantages in the eyes of customers, the financial market would show us – provided we leave the market free to operate.

[Cross-posted from Alt-M.org]

New IRS reporting requirements force U.S. banks to disclose interest-earning accounts of non-resident aliens to the government. (Apparently this is tax-authority mutual back-scratching: foreign nations are expected to reciprocally report this type of information about U.S. citizens with accounts abroad.) Under this regulation, refusing to disclose non-resident alien accounts results in a fine.

The Florida and Texas Bankers Associations are trying to challenge this regulation, but are being frustrated by interpretative jiggery-pokery that prevents their serious legal arguments from even being heard. While the federal district court allowed this lawsuit to proceed, the U.S. Court of Appeals for the D.C. Circuit reversed course and held that the associations couldn’t challenge the regulation because, under the Anti-Injunction Act (AIA), one can’t challenge a tax until the government has attempted to enforce the allegedly improper law and collect the attendant tax. The D.C. Circuit—seemingly imitating Chief Justice Roberts’s reasoning in NFIB v. Sebelius—held that the penalty triggered by failing to follow the new reporting requirements was a tax, thus subjecting the lawsuit to the AIA.

Cato has banded together with the National Federation of Independent Business to file an amicus brief in support of Supreme Court review. The AIA’s statutory language should be interpreted as the Supreme Court has interpreted the Tax Injunction Act (TIA)—confusing, but not the same law—because they contain almost exactly the same language. Under the TIA, one cannot challenge a regulation that deals with either the “assessment” or “collection” of taxes. Similarly, the AIA only prohibits challenges that have the “purpose” to “restrain” “assessment” or “collection” of a tax. Since the fine at issue is a penalty for regulatory non-compliance, not a tax as properly understood, the AIA shouldn’t bar judicial challenges.

Moreover, with the way in which the D.C. Circuit read the “penaltax,” it created an issue under the Administrative Procedure Act (APA). The APA contains a “strong presumption” of judicial review prior to enforcement of substantive regulations like the one at issue here. Congress intended that all agencies’ substantive regulations would be subject to such review under the APA—not that the IRS would have no accountability before federal courts. People have a right to be sure of a regulation’s meaning before engaging in costly compliance efforts—and that’s exactly what pre-enforcement judicial review provides.

Finally, the APA contains stringent procedural requirements for how regulations are to be promulgated. For example, there must be an adequate explanation of the rule, notice and an opportunity for comment, and publication of proposed rules in the Federal Register. The Treasury Department and IRS frequently ignore these requirements—recall the various Obamacare delays, waivers, rewrites, and suspensions—and these agencies must be reigned in.

The Supreme Court should take up Florida Bankers Association v. U.S. Department of Treasury and reverse the lower court’s dangerous precedent. You shouldn’t need to wait until the government attempts to enforce a penalty against you before being able to challenge it.

Seattle’s $15 minimum-wage law has received plenty of attention from those on both sides of the issue. What has received less attention is the way in which this ordinance distinguishes between businesses—and discriminates against interstate commerce.

The ordinance separates employers into two categories, those with 500 or more employees (Schedule One) and those with fewer (Schedule Two), and mandates that the first category implement wage increases more quickly than the second. But the law creates a special rule for Seattle franchises, placing them into the first category if the total number of employees in the franchise network is 500 or more.

A group of franchise owners, led by the International Franchise Association, challenged the ordinance, to no success in the lower courts. Cato is now supporting their petition to the Supreme Court. Seattle insists that this categorization is neutral as between in-state and interstate commerce, because a franchise network could be entirely within Washington. The reality is that all Seattle franchises that are in Schedule One have either an out-of-state franchisor or are associated with out-of-state franchises of the same brand. The law thus discriminates against interstate commerce in precisely the way the Commerce Clause was intended to prevent.

When the delegates met in Philadelphia in 1787 to revise the Articles of Confederation, one of their main concerns was the protectionism the states exhibited under the Articles. As James Madison said at the time, “Most of our political evils may be traced to our commercial ones.” The Constitutional Convention debated many things between May and September 1787, but there seems to have been general agreement that the new Constitution would give Congress power to regulate—“make regular”—interstate commerce.

Although today’s federal government has far exceeded the positive Commerce Clause power the Framers intended to give it—in terms of federal programs and regulations—the principle that states and local governments may not enact laws that discriminate against interstate commerce dates back to Chief Justice Marshall’s opinion in Gibbons v. Ogden (1824), and indeed all the way to the animating purpose of the Convention. That principle—known as the negative or Dormant Commerce Clause—applies both when Congress has passed legislation in the area and when it hasn’t. See Case of the State Freight Tax (1873).

One scholar has remarked that, under the Articles, the states were “marvelously ingenious” at designing protectionist measures. Seattle’s franchise categorization is just one such measure, which discriminates against interstate commerce in a subtler way than most of the protectionism that courts have considered.

While arguing that its law is constitutional, Seattle points to the fact that the burden of the law will fall on in-state actors (the Seattle franchises). Where the burden falls, however, is irrelevant to whether a law discriminates against interstate commerce. Just last term, in Comptroller of the Treasury of Maryland v. Wynne, the Supreme Court held that Maryland’s income tax scheme violated the Commerce Clause by taxing residents on income they earned out-of-state—even though, by definition, the burden of the income tax law fell on Maryland residents. Seattle’s franchise categorization also violates the Dormant Commerce Clause’s extraterritoriality principle because it makes the wage burden placed on Seattle franchisees dependent on the hiring decisions of independent (and most likely unknown) franchises in other states.

The Supreme Court should take up International Franchise Association v. City of Seattle and consider not the economic wisdom of minimum-wage requirements generally but the effect of this particular law on interstate commerce.

Washington, DC opened its long-delayed streetcar for business on Saturday. Actually, it’s a stretch to say it is open “for business,” as the city hasn’t figured out how to collect fares for it, so they won’t be charging any.

Exuberant but arithmetically challenged city officials bragged that the streetcar would traverse its 2.2-mile route at an average speed of 12 to 15 miles per hour, taking a half hour to get from one end to the other (which is 4.4 miles per hour). If there were no traffic and it didn’t have to stop for passengers or run in to any automobiles along the way, they admitted, it would still take 22 minutes (which is 6 miles per hour).

“After more than $200 million and a decade of delays and missteps,” observed the Washington Post, “it took the streetcar 26 minutes to make its way end-to-end on the two-mile line. It took 27 minutes to walk the same route on Saturday, 19 minutes on the bus, 10 minutes to bike and just seven minutes in a Uber.” After all the costs are counted, the Uber trip probably cost less.

The streetcar opening caught the attention of the Economist, which called it “pointless” because it follows a route that is already served by a bus that is faster, can get around parked cars that are slightly sticking into the right of way, and actually goes somewhere beyond the already gentrifying H Street neighborhood. Despite the problems and criticisms, DC officials were already talking about extending the line another 5 miles. 

Washington isn’t the only city caught up in the streetcar fad. Following Portland’s example, Atlanta, CharlotteCincinnati, Kansas City, and several other cities have opened or are building streetcar lines. Most of these lines are about two miles long, are no faster than walking, and cost $50 million or more per mile while buying the same number of buses would cost a couple million, at most.

Portland wants to build 140 miles of streetcar lines. At the average cost of its most recent line, this would require as much money as it would take to repave every street in the city–streets that are falling apart because the city doesn’t have enough money to maintain them. According to the latest census, seven times as many downtown Portland employees bicycle to work as take the streetcar, but another survey found that two out of three Portland cyclists “have experienced a bike crash on tracks.” 

New York’s Mayor de Blasio wants to spend $2.5 billion on a 16-mile streetcar between Brooklyn and Queens. Apparently that city is so flush with cash that it doesn’t have anything better to spend its money on than a slow transit line that won’t even stop near a subway station.

These cities argue that streetcars stimulate economic development. Yet a recent study sponsored by the Federal Transit Administration found that not only was there no evidence of such stimuli, none of the cities that had built streetcars were systematically measuring such impacts. Instead, most were busy subsidizing or coercing (through prescriptive zoning) new development along the streetcar routes.

In fact, there is no reason to think that a slow, congestion-causing, bicycle-accident-inducing rail line would promote new development. Streetcars were technologically perfected in the 1880s, so for Washington to subsidize the construction of a streetcar line today is roughly equal to New York City subsidizing the opening and operation of a factory in Manhattan that would make non-QWERTY typewriters, or Los Angeles subsidizing the manufacture of zoopraxiscopes. Rather than build five more miles of obsolete line, the best thing Washington can do is shut down its new line and fill the gaps between the rails with tar.

For the last 20 years, Ohio has had its own kind of “Ministry of Truth,” otherwise known as the Ohio Elections Commission (OEC). Anyone who claimed that someone – typically a political opponent – was lying to advance or defeat a politician could file a complaint such that a panel of bureaucrats would determine the “truth.”

What will go down as the abuse of the “political statement law” was in 2010 when Rep. Steven Driehaus complained that a pro-life advocacy group accused him of supporting “taxpayer-funded abortions” by voting for the Affordable Care Act. The OEC determined that there was probable cause that the statement was false. The ruling was widely publicized in the media less than a month before the election. Then discovery started on the formal prosecution, requiring disclosure of all of the targeted group’s communications with allied organizations, political parties, and members of Congress.

Imagine just the time and money required to respond to this kind of complaint in the last month before an election – not to mention the PR fallout – such that the damage is done regardless of the result of the legal process. Accordingly, Susan B. Anthony List brought a lawsuit challenging the Ohio law (a version of which existed in about a dozen states). But after the election, Driehaus withdrew his complaint, the prosecution was shuttered, and so the OEC claimed that no harm was ultimately done and so the lawsuit had to be dismissed as moot. 

The Cato Institute filed an amicus brief before the Supreme Court mocking the absurdity of the law, joined by America’s leading political satirist P.J. O’Rourke (also an H.L. Mencken Research Fellow at Cato). Using humor to illustrate absurdity, we showed the silliness (and danger) of allowing potential criminal penalties for “false” statements like “Read my lips: no new taxes!” or “If you like your healthcare plan, you can keep it.” The brief generated a great response, so much so that it was reprinted in Politico and the Pennsylvania Journal of Constitutional Law, and The Green Bag gave it one of its “Exemplary Legal Writing” honors for 2014. Ultimately, the Supreme Court unanimously held that the statute could indeed be challenged.

On remand, the federal district court quickly enjoined the Ohio statute as violating the First Amendment. Then last week, the U.S. Court of Appeals for the Sixth Circuit affirmed that ruling, effectively killing the “False statement” law. The court described many good reasons for its decision, including the timing and resource-draining issues noted above. However, even if these problems were solved, the government still should not be in the business of evaluating core political speech prior to an election. The result was a victory for the freedom of speech.

While Donald Trump may wish to eviscerate the First Amendment, the state of Ohio (and effectively any state government) can no longer threaten their political candidates and advocates into silence.

Presidential candidate Donald Trump, speaking Friday: “We’re going to open up those libel laws. So when The New York Times writes a hit piece which is a total disgrace or when The Washington Post, which is there for other reasons, writes a hit piece, we can sue them and win money instead of having no chance of winning because they’re totally protected.” Trump also said of Amazon, whose Jeff Bezos owns the Washington Post, a newspaper that just ran an editorial seeking to rally opposition to Trump: “If I become president, oh do they have problems. They’re going to have such problems.”

The President has no direct power to change libel law, which consists of state law constrained by constitutional law as laid out by the Supreme Court in New York Times v. Sullivan. A President could appoint Justices intent on overturning the press protections of Sullivan or promote a constitutional amendment to overturn it. Assuming one or the other eventually was made to happen, further changes in libel law would probably require action at the state level, short of some novel attempt to create a federal cause of action for defamation.

But although Trump is unlikely to obtain the exact set of changes he outlines, the outburst is psychologically revealing. Donald Trump has been filing and threatening lawsuits to shut up critics and adversaries over the whole course of his career. He dragged reporter Tim O’Brien through years of litigation over a relatively favorable Trump biography that assigned a lower valuation to his net worth than he thought it should have. He sued the Chicago Tribune’s architecture critic over a piece arguing that a planned Trump skyscraper in lower Manhattan would be “one of the silliest things” that could be built in the city. He used the threat of litigation to get an investment firm to fire an analyst who correctly predicted that the Taj Mahal casino would not be a financial success. He sued comedian Bill Maher over a joke.

I have been writing about the evils of litigation for something like 30 years, and following the litigious exploits of Donald Trump for very nearly that long. I think it very plausible to expect that if he were elected President, he would bring to the White House the same spirit of litigiousness he has so often shown as a public figure.

[cross-posted from Overlawyered]

 

 

The RAND Corporation has published the second report in its “Strategic Rethink” series, this one entitled “America’s Security Deficit: Addressing the Imbalance between Strategy and Resources in a Turbulent World.” It is a noble undertaking, conducted by well-respected scholars and analysts. But I’m not particularly optimistic that conditions are ripe for the strategic rethink that they seek, and that the country desperately needs.

The strategy-resources gap should be corrected by adopting a new strategy, one that pares down the United States’ permanent overseas presence, and compels other countries to take on more responsibilities for their own defense (as Japan shows signs of doing). Instead, U.S. policymakers seem willing to undertake merely incremental changes at the margins, retaining U.S. primacy, and trying to cover the strategy-resources gap with wishful thinking and unrealistic assumptions.

RAND’s summary of the report explains “currently projected levels of defense spending are insufficient to meet the demands of an ambitious national security strategy.” And its Key Finding reads as follows:

Limitations on defense spending in the context of emerging threats are creating a “security deficit.”

  • Fielding military capabilities sufficient, in conjunction with those of our allies and partners, to deal with the disparate challenges faced by the United States will require substantial and sustained investments in a wide range of programs and initiatives well beyond what would be feasible under the terms of the Budget Control Act.

Advocates for higher military spending have been saying this since the BCA was first passed. Those who also claim to care about the nation’s persistent fiscal imbalance typically note that the Pentagon’s budget is not the primary driver of the nation’s debt, and they would focus, first, on so-called mandatory spending (Social Security, Medicare, and Medicaid) which accounts for a far higher share of total federal expenditures, in order to find the additional money needed to close the security gap.

They are correct on the first point, the need to reform entitlements, but not on the need for more military spending.

We should be clear about what that entitlement solution would look like, and why it hasn’t yet occurred. As a practical matter, it entails telling people to accept cuts in benefits that they have been told (falsely) are theirs by right. Millions of American retirees actually believe that the money that they receive every month under Social Security, or the health care funded by Medicare, is actually their money, the money that they paid into the system during their working years.

Of course, it isn’t “their” money. The benefits for current retirees are paid by taxes on current workers.

But, leaving that aside, under the necessary overhaul, entitlement benefits will be cut, but not enough to cover the difference. Thus, higher payroll taxes, too. Bitter pills all around.

Unsurprisingly, very few American politicians have actually proposed such measures, and the few who have done so have mostly focused on reducing payments to future beneficiaries, not to those already in the system, or nearing retirement. As my colleague Dan Mitchell points out, in a moment of uncharacteristic optimism, such half-measures would be better than doing nothing at all, but it will take a major political shift before any such proposal ever becomes law.

Remember where the current anxiety over supposedly inadequate spending levels for the military all started: the Super Committee, and the hoped-for Grand Bargain of tax and entitlement reform. Then there was the failure to reach any agreement, and the BCA-imposed caps on discretionary spending (divided evenly between defense and non-defense).

But Congress has managed to work around the caps through special legislation in nearly every fiscal year since they first passed the budget-capping law in 2011. Which suggests that they weren’t all that serious about controlling costs in the first place.

So, we are back to where we started: a mismatch between our strategic ends, and the resources available to execute that strategy. And this represents a particularly difficult challenge for people like Marco Rubio and Ted Cruz who have called for huge increases in the military’s budget. Where will they find the money?

There are alternatives for solving America’s security deficit, besides simply spending more. We could adjust our strategy to our fiscal reality, and stop pretending that our money problems will magically sort themselves out.

The Obama administration hasn’t considered those alternatives, however, in part because choosing among competing strategic priorities is difficult, but mostly because Congress’s repeated evasions of the BCA have convinced the administration that actually aligning our strategy with our resources isn’t really necessary. Only serious spending discipline, enforced by a Congress committed to resolving our long-term fiscal imbalance, will prompt the strategic rethink that is long overdue. 

Yesterday, a dispute settlement panel at the World Trade Organization released an official report finding that local content requirements in India’s solar power scheme violate global trade rules.  The ruling condemns a particular protectionist policy that dilutes the effectiveness of solar subsidies by diverting them to inefficient domestic manufacturers.  The case is one more example of how global trade rules help to prevent green energy initiatives from becoming expensive crony boondoggles.

Although the report was just released, we’ve known what the outcome would be since last September.  At the time, I wrote about how India’s local content requirement harms its own green energy initiative:

The ruling ought to be celebrated by advocates of solar power.  The local content requirement acts as a drag on the program by making solar power plants more expensive to build.  Allowing solar energy producers to purchase panels on the global market not only reduces prices for those producers, it also furthers the development of efficient supply chains for solar panel production.

Predictably, however, some green groups are not happy with the decision.  According to the Sierra Club, “the WTO has officially asserted that antiquated trade rules trump climate imperatives.”  They’re fully committed to the idea that—contrary to the lessons of history and economics—full-fledged green industrial policy will lead to a future of “100 percent clean energy.”  They believe filling the economy with “green jobs” is politically and economically necessary to achieve their environmental goals.

But this policy approach is self-defeating, and I’ve pointed out its shortcomings on this blog before:

The inconvenient truth is that green industrial policy isn’t going to lead to a future of renewable energy, but it does benefit cronies and politicians.  Bureaucrats who don’t make decisions based on market realities still respond to incentives, making them susceptible to capture by special interests at public expense (see Solyndra).  Even if bureaucrats are enlightened saints, the centralization of decision-making benefits large firms at the expense of entrepreneurs and other innovative competitors.  Over time, the relationship between commercial success and political acumen leads businesses to invest more in lobbying and leads to a culture of rent-seeking and privilege

But the Sierra Club does rightly note that the U.S. government is being somewhat hypocritical in going after India’s solar subsidies at the WTO.

Bringing this case is a perverse move for the United States.  Nearly half of U.S. states have renewable energy programs that, like India’s solar program, include “buy-local” rules that create local, green jobs.

And the United States doesn’t just include protectionist local content requirements in its subsidies.  Like India and Europe, the U.S. government also imposes import tariffs in the form of antidumping and anti-subsidy duties on solar panels and wind turbines.  Simon Lester and I have argued that these sorts of tariffs should also be prohibited.

Taxing the same products you subsidize is inherently counterproductive.  The same is true when you condition subsidies on the use of domestic products.  Unless, of course, you are a domestic manufacturer that gets all the money and faces no competition. 

The “Bootleggers and Baptists” dynamic of green energy cronyism is a powerful driver of public policy.  International trade rules and dispute settlement can help to counteract that.

Watching the Presidential primary debates, there are numerous instances where I – and no doubt many others here at Cato and elsewhere – think, “I should really correct that inaccuracy in a blog post tomorrow.”  But sometimes you wake up and find someone else has already done the job for you.  Here are Washington Post fact checkers Glenn Kessler and Michelle Ye Hee Lee skillfully taking down one of Donald Trump’s ridiculous statements on trade:

“I don’t mind trade wars when we’re losing $58 billion a year [to Mexico], you want to know the truth. We’re losing so much. We’re losing so much with Mexico and China — with China, we’re losing $500 billion a year.”

— Trump

Trump has the numbers right on the trade deficit with Mexico and overstates them with China — but he gets the economics very wrong in both cases. A trade deficit means that people in one country are buying more goods from another country than people in the second country are buying from the first country.

So in Mexico’s case, Americans in 2015 purchased $294 billion in goods from Mexico, while Mexico purchased $236 billion in goods from the United States. That results in a trade deficit of $58 billion. In the case of China, Americans in 2015 bought $482 billion in goods from China, while Chinese purchased $116 billion from the U.S., for a trade deficit of $366 billion.

But that money is not “lost.” Americans wanted to buy those products. If Trump sparked a trade war and tariffs were increased on those Chinese goods, then it would raise the cost of those goods to Americans. Perhaps that would reduce the purchases of those goods, and thus reduce the trade deficit — but that would not mean the United States would “gain” money that had been lost.

Trump frequently suggests, as he did in the debate, that Mexico could pay for the wall out of the $58 billion trade deficit. But that is nonsensical. The trade deficit does not go to the government; it just indicates that Americans are buying more goods from Mexico than the other way around.

It’s been nearly two weeks since we heard about Justice Antonin Scalia’s untimely passing. Given the demands of the news cycle, I found myself on CBS radio about 20 minutes after I got wind (in a phone call from the ubiquitous Josh Blackman) of this tragic development that would upend the holiday weekend.  And then it was into the media maelstrom for the next 72 hours or so, the waves from which continue with no end in sight.

That week was one of the most difficult of my professional life. Not because churning out op-eds, delving into a jurist’s work, and responding to the political narrative is particularly new or challenging – to use the line from the GEICO ads: if you’re a think tank scholar, it’s what you do – but because, like most in the originalist legal community, I was in mourning. Scalia wasn’t a libertarian, but he helped our movement immensely (and was typically in dissent where we disagreed). Besides, for lawyers under 50 or so, it’s impossible to imagine a Supreme Court without him. 

Unlike Roger Pilon and Walter Olson, however, I didn’t know him personally. In fact, I only met him a few times, essentially just for a quick handshake or book-signing. The only meeting of note was when a Federalist Society officer introduced me at the 2012 lawyers convention, describing me as coordinator of the amicus-brief effort in NFIB v. Sebelius (the first Obamacare case). Justice Scalia nodded, sighed, and said, “yeah, sorry about that.”

And yet, when his funeral rolled around this past Saturday, I was shaken. I had thought about attending, but didn’t want to be out of place among people who truly knew him. Besides, I was doing some more media commentary before the ceremony started and then needed to get home to help care for my seven-week-old son. So I watched the funeral on TV, mesmerized and misty-eyed. In retrospect, I probably should’ve directed the car from CBS studios to head up to the Basilica of the National Shrine of the Immaculate Conception – I would’ve arrived maybe 15 minutes after the funeral started – but I wasn’t really thinking straight.

At least there will be a memorial at the Supreme Court at some point later this winter or spring. (I had stood in line last Friday to pay my respects when Justice Scalia was lying in state, but ultimately abandoned that effort when the line stopped for President Obama’s arrival and I started freezing after foolishly neglecting to bring my coat – so alas it would not be a repeat of my experience waiting overnight to say goodbye to President Reagan.) Hopefully I will have regained my bearings by then.

In the meantime, Justice Scalia’s absence – while a huge loss for the nation – hardly hampers the functioning of the Supreme Court even if his seat remains vacant until after the election, as it should.

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