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In several states around the country, legislators are working to pass legislation that would move their states toward compliance with the REAL ID Act, the U.S. national ID law. Oklahoma state senator David Holt (R), for example, has touted his plan as giving Oklahomans the “liberty” to choose which of two ID types they’ll get. Either one feeds their data into a nationwide system of databases.

If you want a sense of what these legislators are getting their states into, take a look at the eight-page notice the Department of Homeland Security published in the Federal Register today. It’s an entirely ordinary bureaucratic document, which walks through the processes states have to go through to certify themselves as compliant. Its few pages represent hundreds of hours of paperwork that state employees will have to put in complying with federal mandates.

Among them is the requirement that the top official of the DMV and the state Attorney General confirm that their state jumps through all the hoops in federal law. Maybe Oklahoma’s Attorney General, Scott Pruitt (R), thinks his office’s time is well spent on pushing paper for the federal government, but it’s more likely that he wants to be enforcing Oklahoma laws that protect Oklahomans.

REAL ID-compliant states have to recertify to the DHS every three years that they meet DHS’s standards. DHS can and will change these standards, of course. DHS officials get to inspect state facilities and interview state employees and contractors. DHS can issue corrective demands and require the states to follow them before recertification.

It’s all unremarkable—if you’re sanguine about taxpayer dollars burned on bureaucracy, and if you think that states are just administrative arms of the federal government. But if you think of states as constitutionally independent sovereigns, you recognize that this document is out of whack. States do not exist to play second fiddle in bureaucrat-on-bureaucrat bureaucracy.

Whether or not we have a national ID matters. The constitutional design of government matters, including, one hopes, to people in Oklahoma and other states across that land. State officials who are conscious of these things should reject this paperwork and these mandates. If the federal government wants a national ID, the federal government should implement it itself.

Global Science Report is a feature from the Center for the Study of Science, where we highlight one or two important new items in the scientific literature or the popular media. For broader and more technical perspectives, consult our monthly “Current Wisdom.”

Although it’s a favorite headline as people shiver during the coldest parts of the winter, global warming is almost assuredly not behind your suffering (the “warming” part of global warming should have clued you in on this).

But, some folks steadfastly prefer the point of view that all bad weather is caused by climate change.

Consider White House Office of Science and Technology Policy (OSTP) head John Holdren. During the depth of the January 2014 cold outbreak (and the height of the misery) that made “polar vortex” a household name, OSTP released a video featuring Holdren telling us that “the kind of extreme cold being experienced by much of the United States as we speak, is a pattern that we can expect to see with increasing frequency as global warming continues.” 

At the time we said “not so fast,” pointing out that there were as many (if not more) findings in the scientific literature that suggested that either a) no relationship exists between global warming and the weather patterns giving rise to mid-latitude cold outbreaks, or b) the opposite is the case (global warming should lead to fewer and milder cold air outbreaks).

The Competitive Enterprise Institute even went as far as to request a formal correction from the White House. The White House responded by saying that the video represented only Holdren’s “personal opinion” and thus no correction was necessary. CEI filed a FOIA request, and after some hemming and hawing, the White House OSTP finally, after a half-hearted search, produced some documents. Unhappy with this outcome, CEI challenged the effort and just this past Monday, a federal court, questioning whether the OSTP acted in “good faith,” granted CEI’s request for discovery.

In the meantime, the scientific literature on this issue continues to accumulate. When a study finds a link between human-caused global warming and winter misery, it makes headlines somewhere. When it doesn’t, that somewhere is usually reduced to here.

Case in point: Last week, Washington Post’s Capital Weather Gang published a piece by Jason Samenow that highlighted a pair of new findings that suggested that global warming was leading to more blizzards along the East Coast. The mechanism, favored by the global-warming-is-making-cold/blizzards-worse crowd is that Arctic warming, enhanced by melting sea ice there, is causing the curves (i.e., ridges and troughs) in the jet stream to become bigger, and thus slower. This “locks in” a particular weather pattern and can allow cold air to drop further southward as well as set up condition necessary for big snow storms. To us, this seemed more a case of natural variability than global warming, but we suppose beauty is in the eye of the beholder.

But what you haven’t read in the Washington Post (or anywhere else for that matter), is that an even newer paper has just been published by scientists (including Martin Hoerling) at NOAA’s Earth System Research Laboratory  that basically demonstrates that global warming and Arctic sea ice loss should, according to climate models, lead to warmer winter temperatures, less temperature variability, and milder cold air outbreaks. This is basically the opposite conclusion from the one preferred and disseminated by Holdren et al.

From the paper’s abstract:

The emergence of rapid Arctic warming in recent decades has coincided with unusually cold winters over Northern Hemisphere continents. It has been speculated that this “Warm Arctic, Cold Continents” trend pattern is due to sea ice loss. Here we use multiple models to examine whether such a pattern is indeed forced by sea ice loss specifically, and by anthropogenic forcing in general. While we show much of Arctic amplification in surface warming to result from sea ice loss, we find that neither sea ice loss nor anthropogenic forcing overall to yield trends toward colder continental temperatures. An alternate explanation of the cooling is that it represents a strong articulation of internal atmospheric variability, evidence for which is derived from model data, and physical considerations. Sea ice loss impact on weather variability over the high latitude continents is found, however, characterized by reduced daily temperature variability and fewer cold extremes.

They were even more direct in paper’s conclusion:

We…showed that sea ice loss impact on daily weather variability over the high latitude continents consists of reduced daily temperature variability and fewer cold extremes indicating that the enhanced occurrences of cold spells during recent winters (e.g., Cohen et al. 2014) are not caused by sea ice loss.

This is pretty emphatic. Global warming results in warmer, less variable winters in North America (Figure 1).

 

Figure 1. Modeled change in winter mean temperature (left), daily temperature variability (middle), and temperature on the coldest 10 percent of the days (right) as a result of decline in Arctic sea ice. (source: Sun et al., 2016).

Now, if only our government’s “top scientist” were paying attention.

Reference:

Sun, L., J. Perlwitz, and M. Hoerling, 2016. What Caused the Recent “Warm Arctic, Cold Continents” Trend Pattern in Winter Temperatures? Geophysical Research Letters, doi: 10.1002/2016GL069024.

Yesterday the Center for Immigration Studies (CIS) published a report authored by Jason Richwine on the welfare cost of immigration. The CIS headline result, that immigrant-headed households consume more welfare than natives, lacks any kind of reasonable statistical controls.  To CIS’s credit, they do include tables with proper controls buried in their report and its appendix.  Those tables with proper controls undermine many of their headline findings.  In the first section, I will discuss how CIS’ buried results undermine their own headline findings.  In the next section, I will explain some of the other problems with their results and headline findings. 

CIS’s Other Results

The extended tables in the CIS report paint a far more nuanced picture of immigrant welfare use than they advertised.  To sum up the more detailed findings:

“In the no-control scenario, immigrant households cost $1,803 more than native households, which is consistent with Table 2 above. The second row shows that the immigrant-native difference becomes larger — up to $2,323 — when we control for the presence of a worker in the household. The difference then becomes gradually smaller as controls are added for education and number of children. The fourth row shows that immigrant households with the same worker status, education, and number of children as native households cost just $309 more, which is a statistically insignificant difference. The fifth row shows that immigrants use fewer welfare dollars when they are compared to natives of the same race as well as worker status, education, and number of children.” [emphasis added]

All of the tables I reference below are located in CIS’s report.   

Table 5 shows that households headed by an immigrant with less than a high school education consume less welfare than native households with the same education level.  For every other level of education, immigrant-headed households consume more than natives in the same education bracket. 

Table 6 controls for the number of children in native and immigrant households.  Immigrant households with one child, two children, and three or more children all consume fewer welfare benefits that the same sized native households. The only exception is that immigrant households without any children consume more. 

Table 7 has more mixed results. It shows that Hispanic and black immigrant-headed households consume less welfare than Hispanic and black native-headed households.  Immigrant white and Asian immigrants consume more welfare than native households headed by whites and Asians.  Table 8 breaks down their results with numerous different controls.  When controlled for a worker in the household, the number of children, the education of the head of household, and race, immigrant households consume less welfare.        

Table A3 shows that immigrant households with the youngest heads, 29 years old and under, impose a much lower cost than households headed by natives of the same age.  Table A4 shows that immigrants impose the greatest welfare costs in their first five years of residency but it decreases afterward and never again rises to that high initial level.  Table A5 shows that immigrant-headed working households with less than a high school degree consume less welfare than their native household counterparts.  For all other educational groups, the immigrant-headed households consume more than the comparable native-headed household. 

Table A6 shows immigrant headed households with children by race. Households headed by Hispanic, black, and Asian immigrants all consume less welfare than their native counterparts.  Households headed by white immigrants consume more welfare than white natives. 

Table A7 controls for poverty and race.  Overall, immigrant households in poverty consume less welfare than native households in poverty.  Hispanic and black immigrant households both massively under consume compared to native Hispanics and blacks.  White and Asian immigrant-headed households, on the other hand, consume more welfare than native households headed by members of the same race.

Many of the report’s detailed tables that use proper controls undermine their main conclusion. Excluding the bullet points at the beginning, this is a much more careful report than CIS has issued in the past. As a result, the report does come to a more nuanced conclusion than the headlines about it indicate.

Broader Issues

Below I will describe in detail some methodological and other issues with the CIS analysis – some of which expand on CIS’s controlled results that were not headlined. 

Individual Welfare Use or Head of Household

The CIS report compared all immigrant households and all of their inhabitants, including millions of native-born citizen children and U.S.-born spouses, with all households headed by native-born Americans. Richwine admits that the larger family size of immigrant households accounts for much (not all) of their greater welfare use because those born in the United States are eligible for all means-tested welfare benefits – even though Table 6 shows that immigrant households controlled for children consume a lower level of benefits.  A household level analysis does not reveal who receives the benefits, leaving the impression that the immigrants are the intended legal beneficiaries when they are often legally excluded from these programs. 

The CIS report should have compared immigrant individuals to native-born individuals for three reasons.  First, the number of people in an individual does not vary but the number of people in a household can vary tremendously.  The greater number of children in the immigrant household, rather than any different level of individual welfare use, is what largely drove the report’s results. 

Second, Medicaid and SSI benefit levels and eligibility are determined on an individual basis, not a household one.  Many immigrants are legally ineligible for those programs but their U.S.-born spouses and children do have access.  Thus, CIS counts the benefits received by the U.S.-born children even though the immigrants themselves are often ineligible.  This gives an inflated picture of immigrant welfare use. 

Third, it’s a lot easier and more accurate to compute the immigrant and native welfare costs when they are individuals than it is to work backward from the Survey of Income and Program Participation (SIPP), budgetary data, and imputations of program costs necessary due to a household analysis.   

Cato published an analysis of poor immigrant welfare use that compares individuals.  As a result, we can see the immigration or citizenship status, within limits, of the actual welfare users and the amount they consume.  The immigrants themselves are almost always less likely to use welfare and consume a lower dollar value of benefits than similar natives – as CIS corroborates in Table A7 of their report. 

The immigrant-headed household unit of analysis used in the CIS report presents other problems.  As a unit, it is just not as meaningful as it once was.  Professor Leighton Ku, director of the Center for Health Policy Research at George Washington University and a nationally recognized expert on these issues, wrote:

“Another problem is the ambiguous nature of what it means to be an ‘immigrant-headed household.’ In the CPS, a head of household is often assigned by the parent who is completing the survey: it could be the husband or wife. Consider an example of a five-person household, consisting of an immigrant male, a native-born wife, two native-born children, and a native-born unrelated person (such as someone renting a room). If the male has been deemed the head of household, this is an immigrant-headed household despite the fact that only one of five members is an immigrant and one (the renter) is not financially dependent on the immigrant. But if the wife was deemed the head of household, this would be a native-headed household, even though one member is an immigrant. Given that many families today have dual incomes and that the wife’s income often exceeds the husband’s, it is not clear if being assigned the ‘head of household’ in the Census form has much social meaning.”

The CIS report included the welfare cost of all the people living in the immigrant-headed household.  They make the defensible case that those U.S.-born children should be included because they would not exist in the United States and, therefore, would not consume welfare without the immigrant being here.  That’s a fair point, but it also leads to the defensible claim that the welfare consumed by the grandchildren, great-grandchildren, and every subsequent generation of an immigrant should also be included in the welfare calculation.  After all, without the initial immigrant, those subsequent welfare consuming native-born Americans wouldn’t be here either. 

The choice of researchers is to count just the immigrants and their welfare usage or to count the welfare consumed by the immigrants and all of their subsequent descendants.  Influenced by the Texas Office of the Comptroller, Cato decided to measure the welfare consumption of the immigrants themselves and excluded all of the subsequent generations.  CIS just counted the immigrants and their U.S.-born children and excluded their subsequent descendants (there are many grandchildren and great-grandchildren of immigrants alive today consuming welfare).     

Medicaid and Obamacare 

Differing Medicaid use rates and consumption levels account for over two-thirds of the entire gap between native and immigrant households in their headline results (table 2 of the CIS report).  That result is an artifact of the welfare system prior to the implementation of Obamacare’s Medicaid expansion. This difference will shrink or reverse when native enrollment and use rates rise in response to Obamacare’s mandated 2014 Medicaid expansion and rollout of exchange subsidies.

Reform Welfare or Restrict Legal Immigration – Which is Easier?

CIS seeks to use immigrant welfare use as an argument for cutting legal immigration.  Cato, on the other hand, has sought to build a wall around the welfare state and restrict non-citizen access rather than to more strictly regulate the international labor market.  When I suggested that CIS concentrate on reforming welfare over further restricting immigration, Richwine said, “[welfare reform is] not a policy change likely to occur in the near future.”  That may be true, but legally restricting legal immigration to the United States is even less likely to occur. 

Richwine’s explanation for focusing on immigration cuts rather than welfare reform doesn’t stand to scrutiny.  Congress has continually increased legal immigration levels since 1965. Congress considered a more restrictive immigration reform in 1996–and it was defeated handily.  In the mid-1990s, a high of 65 percent of Americans wanted to decrease immigration and Congress still couldn’t pass such a reform.  By mid-2015, only 34 percent of Americans wanted to decrease immigration.  The last time the anti-immigration opinion was this unpopular was in 1965 – on the eve of a transformative liberalization.   

Welfare, on the other hand, was reformed and restricted in 1996.  Furthermore, the public wants more reforms that limit welfare access and place more restrictions on welfare users. Historical trends and public opinion indicate that welfare reform is more likely and more popular than a severe reduction in legal immigration.  Regardless, CIS should join Cato and focus its efforts on restricting immigrant access to welfare rather than spin its wheels in a quixotic quest for a more restrictive immigration policy. 

Excluding the Big Welfare Programs

The CIS report only includes some means-tested welfare programs but excludes the rest of the welfare state.  Their report includes all immigrants and natives divided by households so it should include all of the welfare state – including the largest portions of Social Security and Medicare.  Immigrants pay large surpluses into Medicare and Social Security.  Richwine might object to including these programs because age and work history determine eligibility for the programs, so he might want to control for those factors.  That is a defensible argument, but it appears CIS thought that such a correction was not appropriate for the report’s headline results because they do not control for the eligibility of the programs.  Tables with proper controls are buried later in the paper and the appendix. CIS should at least add Medicare and Social Security to the tables in its appendix.  

One of the explanations Richwine gave for this report was “[w]ith the nation facing a long-term budgetary deficit, this study helps illuminate immigration’s impact on that problem.”  As the OECD makes clear in its fiscal analysis, it makes little sense to exclude immigrant consumption and contribution to the old-age entitlement programs that are actually driving the long-term debt.  If CIS wishes to grapple with the fiscal issues surrounding immigration, there is vast empirical literature on the topic that they should consult.   

As a final point, CIS’s headline result should have compared poor immigrant welfare use to poor American welfare use instead of comparing all American households to all native households.  The welfare benefit programs analyzed here are all intended for the poor.  It adds little to include Americans and immigrants who are too wealthy to receive much welfare. 

Net Fiscal Effects

Richwine includes a section in this CIS report where he attempts to defend his 2013 Heritage Foundation fiscal cost estimate that was roundly criticized by economists on the left and right.  He makes a lot of confused statements concerning how to measure the fiscal impact of immigration.  Instead of rehashing those arguments, here’s one small criticism of his 2013 Heritage paper: It was a 50-year fiscal cost analysis without a discount rate.             

Conclusion

When they use appropriate controls in the later parts of their paper and their appendix, CIS reaches much less negative and sometimes even positive results than their messaging indicates. Many of the issues raised in this post may be too wonky for general consumption, but they are important for producing excellent research. Cato has published two working papers, a bulletin, a policy analysis, and a book chapter on immigrant welfare use and the broader fiscal effects in which we explain our methods and defend them against criticisms.  We even include a literature survey on the topic that discusses the different results from the National Research Council.  I invite anybody more interested in these issues to read them.      

Special thanks to Charles Hughes for his excellent comments and suggestions on an earlier draft of this blog post.

In the Food and Drug Administration’s crackdown on what is now a thriving market for vaping products (nicotine and flavorings delivered without tobacco through a vaporizing device), Trevor Burrus has identified one group that is likely to emerge as winners from the regulations, namely large tobacco companies, which have lost many smoking customers to the vaping market without being notably successful at playing in it themselves. Another set of winners? Governments whose treasuries are enriched by conventional cigarette sales. Under the 1998 tobacco settlement, which I and others at Cato have criticized at length, a large chunk of revenue from these conventional sales goes to state governments. But this revenue source has been eroded badly as smokers switch to vaping, a trend the new rules are well calculated to slow or reverse.

As often happens with bad regulations, the winners will not be nearly so numerous as the losers, some of which I identify in a new piece at Ricochet. Not to be forgotten are thousands of small businesses; independent vaping shops and small vaping suppliers have both become common in recent years, and face ruin. But the real target of restrictions on consumer choice are consumers, and in this case what is at risk is not flavors and gimmicks but lives and health. While the FDA (and its sister Centers for Disease Control under Obama appointee Thomas Frieden) are dismissive of the benefits of vaping as harm reduction for established smokers, many others in the public health field take it seriously. An evidence review published last year by Public Health England found that “the current best estimate is that e-cigarettes are around 95% less harmful than smoking,” and that while there was plenty of evidence that the vaping option had led to a lot of successful switching away from cigarettes, there was “no evidence so far” to bolster counter-fears that vaping posed a countervailing menace as a gateway for novices destined to graduate into cigarette smoking.  I conclude my piece

If Congress chooses, it can do something about this. An amendment approved by the House Appropriations Committee last month would grandfather in products now available, applying the prohibitive rules only to products introduced in the future. Whether Washington acts on this sensible idea will depend in part on whether it is listening to the voices of ex-smokers and young consumers around the country who feel competent to run their own lives and make their own choices.

As I note at Overlawyered, the FDA at the same time announced stringent regulations restricting the sale of cigars, which former Catoite Jacob Grier writes about here (““The market for cigars is about to become a lot less diverse and a lot more boring.”) 

A few years ago President Barack Obama urged members of the European Union to admit Turkey. Now he wants the United Kingdom to stay in the EU. Even when the U.S. isn’t a member of the club the president has an opinion on who should be included

Should the British people vote for or against the EU? But Britons might learn from America’s experience.

What began as the Common Market was a clear positive for European peoples. It created what the name implied, a large free trade zone, promoting commerce among its members. Unfortunately, however, in recent years the EU has become more concerned about regulating than expanding commerce.

We see much the same process in America. The surge in the regulatory Leviathan has been particularly marked under the Obama administration. Moreover, the EU exacerbated the problem by creating the Euro, which unified monetary systems without a common continental budget. The UK stayed out, but most EU members joined the currency union.

At the same time, European policymakers have been pressing for greater EU political control over national budgets. Britain’s Westminster, the fount of parliamentary democracy worldwide for centuries, would end up subservient to a largely unaccountable continental bureaucracy across the British Channel. In fact, what thoughtful observers have call the “democratic deficit”—the European Parliament is even more disconnected from voters than the U.S. Congress—has helped spawn populist parties across the continent, including the United Kingdom Independence Party.

Britons today face a similar dilemma to that which divided Federalists and Anti-Federalists debating the U.S. Constitution. As I argued in American Conservative: “Unity enlarges an economic market and creates a stronger state to resist foreign dangers. But unity also creates domestic threats against liberty and community. At its worst an engorged state absorbs all beneath it.”

In America the Federalists were better organized and made the more effective public case. In retrospect the Anti-Federalists appear to have been more correct in their predictions of the ultimate impact on Americans’ lives and liberties. This lesson, not President Obama’s preferences, is what the British should take from the U.S. when considering how to vote on the EU.

The decision is up to the British people alone. They should peer across the Atlantic and ponder if they like what has developed.

Few people would, I think, take exception to the claim that, in a well-functioning monetary system, the quantity of money supplied should seldom differ, and should never differ very much, from the quantity demanded.  What’s controversial isn’t that claim itself, but the suggestion that it supplies a reason for preferring some path of money supply adjustments over others, or some monetary arrangements over others.

Why the controversy?  As we saw in the last installment, the demand for money ultimately consists, not of a demand for any particular number of money units, but of a demand for a particular amount of monetary purchasing power.  Whatever amount of purchasing X units of money might accomplish, when the general level of prices given by P, ½X units might accomplish equally well, were the level of prices ½P.  It follows that changes in the general level of prices might, in theory at least, serve just as well as changes in the available quantity of money units as a means for keeping the quantity of money supplied in line with the quantity demanded.

But then it follows as well that, if our world is one in which prices are “perfectly flexible,” meaning that they always adjust instantly to a level that eliminates any monetary shortage or surplus, any pattern of money supply changes will avoid money supply-demand discrepancies, or “monetary disequilibrium,” as well as any other.  The goal of avoiding bouts of monetary disequilibrium would in that case supply no grounds for preferring one monetary system or policy over another, or for preferring a stable level of spending over an unstable level.  Any such preference would instead have to be justified on other grounds.

So, a decision: we can either adopt the view that prices are indeed perfectly flexible, and proceed to ponder why, despite that view, we might prefer some monetary arrangements to others; or we can subscribe to the view that prices are generally not perfectly flexible, and then proceed to assess alternative monetary arrangements according to their capacity to avoid a non-trivial risk of monetary disequilibrium.

Your guide does not hesitate for a moment to recommend the latter course.  For while some prices do indeed appear to be quite flexible, even adjusting almost continually, at least during business hours (prices of goods and financial assets traded on organized exchanges come immediately to mind), in order for the general level of prices to instantly accommodate changes to either the quantity of money supplied or the quantity demanded, it must be the case, not merely that some or many prices are quite flexible, but that all of them are.  If, for example, the nominal stock of money were to double arbitrarily and independently of any change in demand, prices would generally have to double in order for equilibrium to be restored.  (Recall: twice as many units of money will command the same purchasing power as the original amount only when each unit commands half as much purchasing power as before.)  It follows that, so long as any prices are slow to adjust, the price level must be slow to adjust as well.  Put another way, an economy’s price level is only as flexible as its least flexible prices.

And only a purblind observer can fail to notice that some prices are far from fully flexible. The reason for this isn’t hard to grasp: changing prices is sometimes costly; and when it is, sellers have reason to avoid doing it often.  Economists use the expression “menu costs” to refer generally to the costs of changing prices, conjuring up thereby the image of a restaurateur paying a printer for a batch of new menus, for the sake of accommodating the rising costs of beef, fish, vegetables, wait staff, cooks, and so forth, or the restaurants’ growing popularity, or both.  In fact both the restaurants’ operating costs and the demand for its output change constantly.  Nevertheless it usually wouldn’t make sense to have new menus printed every day, let alone several times a day, to reflect all these fluctuations!  Electronic menus would help, of course, and now it is easy to conceive of them (though it wasn’t not long ago).  But those are costly as well, which is why (or one reason why) most restaurants don’t use them.

The cost of printing menus is, however, trivial compared to that of changing many other prices. The prices paid for workers, whether wage or salaried, are notoriously difficult to change, except perhaps according to a prearranged schedule, which can’t itself accommodate unexpected change.  Renegotiating wages or salaries can be an extremely costly business, as well as a time-consuming one.

“Menu costs” can account for prices being sticky even when the nature of underlying changes in supply or demand conditions is well understood.  Suppose, for example, that a restaurant’s popularity is growing at a steady and known rate.  That fact still wouldn’t justify having new menus printed every day, or every hour, or perhaps even every week.  But add the possibility that a perceived increase in demand may not last, and the restaurateur has that much more reason to delay ordering new menus: after all, if demand subsides again, the new menus may cost more than turning a few customers away would have.  (The menus might also annoy customers who would dislike not being able to anticipate what their meal will cost.)  Now imagine an employer asking his workers to take a wage rate cut because business was slack last quarter.  Get the idea?  If not, there’s a vast body of writings you can refer to for more examples and evidence.

These days it is common for economists who insist on the “stickiness” of the price level to be referred to, or to refer to themselves, as “New Keynesians.”  But the label is misleading.  Although John Maynard Keynes had plenty of innovative ideas, the idea that prices aren’t perfectly flexible wasn’t one of them.  Instead, by 1936, when Keynes published his General Theory, the idea that prices aren’t fully flexible was old-hat: no economists worth his or her salt thought otherwise.[1]  The assumption that prices are fully flexible, or “continuously market clearing,” is in contrast a relatively recent innovation, having first become prominent in the 1980s with the rise of the “New Classical” school of economists, who subscribe to it, not on empirical grounds, but because they confuse the economists’ construct of an all-knowing central auctioneer, who adjusts prices costlessly and continually to their market-clearing levels, with the means by which prices are determined and changed in real economies.

Let New Classical economists ruminate on the challenge of justifying any particular monetary regime in a world of perfectly flexible prices.  The rest of us needn’t bother.  Instead, we can accept the reality of “sticky” prices, and let that reality inform our conclusions concerning which sorts of monetary regimes are more likely, and which ones less likely, to avoid temporary surpluses and shortages of money and their harmful consequences.

What consequences are those?  The question is best answered by first recognizing the crucial economic insight that a shortage of money must have as its counterpart a surplus of goods and services and vice versa.  When money, the means of exchange, is in short supply, exchange itself, meaning spending of all sorts, suffers, leaving sellers disappointed.  In contrast, when money is superabundant, spending grows excessively, depleting inventories and creating shortages.  Yet these are only the most obvious consequences of monetary disequilibrium.  Other consequences follow from the fact that, owing to different prices’ varying degrees of stickiness, the process of moving from a defunct level of equilibrium prices to a new one necessarily involves some temporary distortion of relative price signals, and associated economic waste.  A price system has work enough to do in coming to grips with ongoing changes in consumer tastes and technology, among many other non-monetary factors that influence supply and demand for particular goods and services, without also having to reckon with monetary disturbances that call for scaling all prices up or down.  The more it must cope with the need to re-scale prices, the less capable it becomes at fine-tuning them to reflect changing conditions within particular markets.

Hyperinflations offer an extreme case in point, for during them sellers often resort to “indexing” local-currency prices to the local currency’s exchange rate with respect to some relatively stable foreign currency.  That is, they cease referring altogether to the specific conditions in the markets for particular goods, and settle instead for keeping their prices roughly consistent with rapidly changing monetary conditions.  In light of this tendency it’s hardly surprising that hyperinflations lead to all sorts of waste, if not to the utter collapse of the economies they afflict.  If relative prices can become so distorted during hyperinflations as to cease entirely to be meaningful indicators of goods’ and services’ relative scarcity, it’s also true that the usefulness of price signals in promoting the efficient use of scarce resources declines to a more modest extent during less severe bouts of  monetary disequilibrium.

What sort of monetary policy or regime best avoids the costs of having too much or too little money?  In an earlier post, I’ve suggested that keeping the supply of money in line with the demand for it, without depending on help in the shape of adjustments to the price level,  is mainly a matter of achieving a steady and predictable overall flow of spending.  But why spending?  Why not maintain a stable price level, or a stable and predictable rate of inflation?  If, as I’ve claimed, changes in the general level of prices are an economy’s way of coping, however imperfectly, with monetary shortages and surpluses, then surely an economy in which the price level remains constant, or roughly so, must be one in which such surpluses and shortages aren’t occurring.  Right?

No, actually.  Despite everything I’ve said here, monetary order, instead of going hand-in-hand with a stable level of prices or rate of inflation, is sometimes best achieved by tolerating price level or inflation rate changes.  A paradox?  Not really.  But as this post is already too long, I must put off explaining why until next time.
______________________
[1] For details see Leland Yeager’s essay, “New Keynesians and Old Monetarists,” reprinted in The Fluttering Veil.

[Cross-posted from Alt-M.org]

The ridesharing companies Uber and Lyft have withdrawn from Austin, Texas after voters there failed to pass Proposition 1, which would have repealed regulations requiring Uber and Lyft to include fingerprints as part of their driver background checks. This is a disappointing result, especially given that fingerprinting is, despite its sexy portrayal in forensic TV shows, not a perfect background check process and needlessly burdens rideshare companies.

Austin’s ordinances require rideshare companies to implement fingerprints as part of their background check system by February 2017. Under the rules the fingerprints would be submitted to the Texas Department of Public Safety, which would then send the records to the Federal Bureau of Investigation (FBI). As I pointed out in my Cato paper on ridesharing safety, the FBI fingerprint data are hardly comprehensive: 

Some have faulted Uber and Lyft for not including fingerprint scans as part of their background checks. However, fingerprint databases do not contain a full case history of the individual being investigated, and in some instances an FBI fingerprint check may unfairly prevent a qualified taxicab driver applicant from being approved. The FBI fingerprint database relies on reporting from police departments, and other local sources, as well as other federal departments and is not a complete collection of fingerprints in the United States.

Critics of the FBI fingerprint database point to its incomplete or inaccurate information. In July 2013 the National Employment Law Project (NELP) released a study on the FBI’s employment background checks and found that “FBI records are routinely flawed.” Also, while law enforcement agencies are diligent when it comes to adding fingerprint data of arrested or detained persons to the federal data, they are “far less vigilant about submitting the follow-up information on the disposition or final outcome of the arrest.”

This lack of vigilance is significant because, as the NELP study goes on to point out, “About one-third of felony arrests never lead to a conviction. Furthermore, of those initially charged with a felony offense and later convicted, nearly 30 percent were convicted of a different offense than the one for which they were originally charged, often a lesser misdemeanor conviction. In addition to cases where individuals are initially overcharged and later convicted of lesser offenses, other cases are overturned on appeal, expunged, or otherwise resolved in favor of the worker without ever being reflected on the FBI rap sheet.”

A Wall Street Journal article from 2014 made similar findings:

Many people who have never faced charges, or have had charges dropped, find that a lingering arrest record can ruin their chance to secure employment, loans and housing. Even in cases of a mistaken arrest, the damaging documents aren’t automatically removed. In other instances, arrest information is forwarded to the FBI but not necessarily updated there when a case is thrown out locally. Only half of the records with the FBI have fully up-to-date information.

“There is a myth that if you are arrested and cleared that it has no impact,” says Paul Butler, professor of law at Georgetown Law. “It’s not like the arrest never happened.”

Relying on fingerprints to paint an accurate picture of a driver applicant’s criminal history is misguided. Uber and Lyft do carry out background checks via third parties that look at court records and sex offender registries in order to determine whether a driver applicant meets their criminal background requirements, which are often stricter than those that govern taxi driver applicants. In fact, Austin is one of the cities where Uber’s and Lyft’s safety requirements are more stringent than those imposed on taxi drivers.

As R Street Institute’s Josiah Neeley has explained, Austin doesn’t prohibit taxi driver applicants who have been convicted of “a criminal homicide offense; fraud or theft; unauthorized use of a motor vehicle; prostitution or promotion of prostitution; sexual assault; sexual abuse or indecency; state or federal law regulating firearms; violence to a person; use, sale or possession of drugs; or driving while intoxicated” to work as taxi drivers provided that they have “maintained a record of good conduct and steady employment since release.” 

In contrast, Uber and Lyft disqualify driver applicants if they have been convicted of a felony in the last seven years. Uber and Lyft also include features that make drivers and passengers safer than they would be in traditional taxis.

Rideshare transactions are cashless. This removes an incentive for thieves to target rideshare drivers. Taxi drivers, who make a living out of picking up strangers, on the other hand can be more reliably assumed to be carrying cash than rideshare drivers. 

In addition, both the rideshare driver and passenger have profiles and ratings. The rating system provides an incentive for riders and passengers to be on their best behavior, and the profiles make it comparatively easy for investigators to determine who was at the scene of an alleged crime in a rideshare vehicle. It would be very stupid for an Uber passenger to try and get away with robbing an Uber driver, just as it would be unwise for an Uber driver to assault an Uber passenger. This, of course, doesn’t mean that rideshare background checks and safety features will deter all criminals, but they do compare very favorably to the safety procedures in place for taxis.

Perhaps too many Austin residents have watched CSI:Crime Scene Investigation and exhibited something similar to the “CSI effect” in the voting booth last weekend. The FBI fingerprint database may sound like a sensible resource to use for background checks, but it is not up-to-date and could result in otherwise qualified driver applicants being denied the opportunity to use Uber or Lyft.

North Carolina governor Pat McCrory (R) has just responded to the federal government’s threat to punish the state over its law prohibiting local governments from allowing transgendered people to choose their bathrooms: We’re suing!

Central to the nation’s bathroom war – which is one among sundry, seemingly endless culture wars – are the public schools. They are mentioned specifically in the Tar Heel State’s embattled law, and schools have been the sites of several lawsuits across the country over who gets to decide where students go to the bathroom or change their clothes. Of course, as Cato’s Public Schooling Battle Map reveals in stark detail, just like the nation, our schools are constant battlegrounds in the culture wars, and our children are essentially innocent civilians with political, social, and cultural bombs going off all around them.

At issue in North Carolina are really two things directly applicable to education: level of public school control, and private rights.

The immediate issue is whether a state should be able to make its own laws without the federal government overruling them. The feds have a legitimate claim, under the Fourteenth Amendment, to do what they are doing – attempting to prevent discrimination by state or local governments – but there is also a good case to be made that there are competing rights at stake – privacy versus nondiscrimination – and perhaps neither should take clear-cut precedence. Moreover, even if it has the authority to intervene, it may be best if Washington allowed social evolution to occur gradually rather than imposing it as people deal with what is, it seems, a pretty new idea: a person should choose which restroom or locker room to use. Of course, North Carolina’s law applies one rule to all municipalities, also potentially curbing natural societal evolution.

Private action versus government rule is also in play, but probably should not be. While government-imposed discrimination cannot be escaped, far less compelling is prohibiting private choice of policies or practices. If a public school has discriminatory policies you are stuck. If a private school does, in a school-choice program you can seek out something else without leaving all your tax dollars behind.

As important, if not more so, is that allowing private entities to choose their own policies is consistent with individual liberty, including freedom of association and religion, while it is much better suited to enabling people with competing values to peacefully co-exist. There is no zero-sum contest: Those who want an open bathroom policy could choose schools in which all the staff and families also embraced it, while those feeling more comfortable with bathrooms and locker rooms restricted by biological sex could go to schools with like-minded people.

Perhaps the best examples of educational choice helping to bring peace and balance rights have been in many European countries, where religious conflicts in schools abated as governments decided to fund choices of Protestant, Catholic, nonsectarian, or other institutions. Getting to the place of greater peace requires something difficult – accepting that all people should be able to live as they want as long as they do not force themselves on others, and even if we do not like the choices they make – but living and letting live is the foundation of a free society.

Want peace in North Carolina? Allowing state and local decision making may help. But letting people freely choose is the ultimate key.

The rise of new business models in online platforms and the sharing economy have inevitably been met with calls for more regulations. In his most recent budget, President Obama proposed to expand funding for efforts to “crac[k] down on the illegal misclassification of some employees as independent contractors.” Policymakers at the state and local levels have also called for more stringent regulations on these new business models.

Over the weekend, voters in Austin failed to overturn the city council’s ordinance that would impose a series of new regulations on ride-hailing companies operating in the city, from requiring drivers to go through fingerprint-based background checks, to restrictions detailing where drivers can stop for drop-offs and pickups. In response, Uber and Lyft announced that they had suspended operations in the city. In light of this rush to regulate, it is important to consider the people who rely on the opportunities made available by the new online platform economy. People utilize these platforms in different ways. Some participants offset fluctuations in traditional income to maintain their standard of living, while others use the platforms to rent out assets to supplement earnings from their traditional jobs. People from every age cohort and across the income distribution earn money through these new business models. New regulations that obstruct the development of the online platform economy could harm the many different people who choose to utilize those opportunities.

In one report from the JPMorgan Chase Institute, the authors analyzed anonymized data from 260,000 customers with earnings from any of 30 established online platforms and found that a growing number of people are participating, but that their reliance on these platforms has not increased. In other words, more people are using these new models, but not as full-time jobs. Earnings represented 33 percent of monthly income in labor platforms, in which participants are connected directly to customers, like Uber or Lyft. In the capital platforms where participants rent or sell to customers, like Airbnb, earnings represented only 20 percent of monthly income. So in neither component are most participants relying on earnings from these platforms as the majority of their income, for most people these aren’t full-time jobs.

Participating in the labor platform allows people to weather variations in their monthly income, as they can choose to work more hours to offset dips in other earnings. In months participants actively used the labor platform, those earnings accounted for an additional 15 percent of income, offsetting the 14 percent shortfall in non-platform income in those same months. As the authors note, this is in most cases a more attractive option than the old ones: look for a supplemental traditional job, reduce spending, or take on more credit. The capital platform is slightly different, in that those earnings tended to supplement traditional income, rather than replace it. So participants generally used the capital platform to try to increase their monthly income and raise their standard of living by utilizing the assets available to them. 

In a related report released last week, the authors find that while the percentage of adults with earnings from the online platform economy is fairly consistent across income quintiles, participants in the lower income quintiles are more reliant on these earnings, at least in the labor platform. Labor platform earnings account for more than 28 percent of total annual income for participants in the lowest quintile, compared to roughly 20 percent in the highest. Capital platform earnings, on the other hand, represent between 10.5 and 11 percent of annual total income across all quintiles.  

Percentage of Annual Income Earned Through Open Platform Economy, by Income Quintile and Type of Platform

Source: JPMorgan Chase Institute

Somewhat surprisingly, the authors find that while young people 18-24 were most likely to participate (5.2 percent), participants 55 and older are actually the group that derived the largest share of total income from these earnings. This suggests that workers in or near retirement could also be turning to these new business models as a supplemental source of income in lieu of continuing traditional work.

People of all ages and across the income distribution participate in the online platform economy. These business models have given these people new options and opportunities: some people use these platforms to replace unexpected reductions in other income that could otherwise cause serious problems. Older participants are turning to these platforms as a way to supplement their earnings and maintain their standard of living as they transition out of the workforce. Imposing more regulations on the online platform economy could limit or take away these opportunities.

 

America’s international position is distinguished by its alliance networks. Presidential candidates fear today’s dangerous world, but the United States is allied with every major industrialized power, save China and Russia. It is a position that Washington’s few potential adversaries must envy.

Yet as I pointed out in National Interest: “littering the globe with security commitments is costly. The U.S. must create a much bigger military to project force abroad to protect countries that often matter little for this nation’s security. Moreover, while policymakers hope to prevent war with treaty guarantees, the resulting tripwires ensure involvement if deterrence fails.”

Equally important, America’s involvement tends to turn friends and allies into dependents. The principle is the same as domestic welfare: Why should they do for themselves if they can get someone else to do so?

In his recent interview in the Atlantic, President Barack Obama complained: “Free-riders aggravate me.” Unfortunately, Washington has created a world filled with free- or at least cheap-riders.

The president recently visited one of the targets of his ire: Saudi Arabia. The royals long ago assumed the U.S. military would act as their de facto bodyguard. The first Gulf War was more about the Kingdom of Saudi Arabia than Kuwait. More recently, the “alliance” has dragged the U.S. into the KSA’s war in Yemen, which has gone from local civil war to regional sectarian conflict.

Content to spend barely one percent of its GDP on the military throughout the Cold War while facing the Soviet Union and Maoist China, Japan has started to do a bit more. It appears Tokyo is worried that Washington might not go to war with Beijing over the Senkakyu/Diaoyu Islands. Japan only recently passed legislation allowing its military to aid U.S. forces under attack. For decades, Japan’s only responsibility as an ally was to be defended.

Since the Korean War, the Republic of Korea has raced ahead of the North, with an economy as much as 40 times as large, a population twice as big, and a dramatic lead in technological prowess, international influence, and most every other measure of national power. Yet the ROK, facing a supposed existential threat, spends a lower percent of its GDP on the military than does America.

Then there are the Europeans. Foreign policy should be based on circumstances. After World War II, Western Europe was prostrate and Eastern Europe had been swallowed by the Soviet Union. Today the Europeans not only vastly outmatch Russia, their only potential antagonist, but they possess a larger economy and population than America.

Yet Washington’s desperate, even humiliating pleas for its allies to do more continue to fall on deaf ears. In fact, in all of these cases, the United States has variously insisted, demanded, and requested that its friends do more. When they did not, it often turned to begging and whining, with no greater success.

One could at least argue during the Cold War that it was in America’s interest to defend countries even if they would not protect themselves. No longer.

Yet the alliances commit America to go to war in defense of other nations’ interests. At the same time, such guarantees dissuade friendly states from doing more on their own behalf. If deterrence fails, as it often has throughout history, the good times will come to a dramatic and bloody end.

Washington has tolerated allied free-riding for far too long. It’s time for America to engage in burden-shedding rather than hope for burden-sharing. In its quest to maximize its number of allies, the United States has needlessly created a gaggle of dependents.

Should a federal court in Washington be guessing what common-law property rights a person has in New York, when there is a procedure in place that allows the federal court to ask the state’s highest court what the state law actually is? In Romanoff Equities v. United States, that’s exactly what the Court of Federal Claims (CFC, a special court that deals with monetary claims against the federal government) did, a “guess” that was subsequently affirmed on appeal.

The Romanoff family, as predecessors-in-title to a 1932 common-law right-of-way easement, had granted New York Central Railroad the right to “construct, operate and maintain” an elevated viaduct for the purpose of removing trains from pedestrian traffic in New York City. By the 1980s, however, the railroad no longer maintained the structure and, under the terms of the easement, the land and title were to revert to the Romanoff family. But the City of New York—wanting to convert the abandoned railroad viaduct into a recreational area (the High Line) that now includes taco trucks, salsa dancing, stargazing, retail shops, and other activities entirely unrelated to operating a railroad—asked the federal government to invoke the National Trails System Act and convert the easement into a public park.

The federal government granted the request, so the Romanoffs filed a lawsuit, arguing that converting the railroad right-of-way into a public park is a compensable taking under the Fifth Amendment. The Justice Department argued, and the CFC agreed, that the government’s conversion of the easement was not a taking because New York property law recognizes an “easement for anything” (!), allowing the City to use the property however it liked in perpetuity.

The Romanoffs took their case to the U.S. Court of Appeals for the Federal Circuit—a court of national jurisdiction that handles certain special appeals, including from the CFC—asking for “certification” to the New York Court of Appeals (the state’s highest court) for a proper interpretation of the easement. They argued that New York courts have never recognized an “easement for anything” and federal courts shouldn’t be inferring one. The Federal Circuit’s three-judge panel ignored the Romanoffs’ request that the court send the question to the state judiciary and instead upheld the CFC’s guess as to how a New York court would construe the easement.

The Romanoffs have now petitioned the Federal Circuit to hear the case en banc (all the judges on the court). In an amicus brief supporting that petition, Cato argues that novel or unsettled questions of state law, as in this case, should indeed be sent to a state’s highest court. When the Federal Circuit refused to certify the legal issue here, it made new law for the state of New York, violating principles of judicial federalism.

This case also has enormous consequences for property owners who have to litigate their constitutional claims in the CFC, a court of national jurisdiction. There are vast differences in how individual states treat property rights. Federal judges in Washington—who (understandably) have little familiarity with this varied jurisprudence—should not be fashioning state law with no basis in state-court precedent.  

Thanks to legal intern (soon to be legal associate) Frank Garrison for help with this blogpost, and our brief in the case.

[Reprinted with permission from Alan Reynolds, “What Do We Know about the Great Crash?National Review, November 9, 1979]

 Many scholars have long agreed that the Smoot-Hawley tariff had disastrous economic effects, but most of them have  felt  that  it could  not have caused the stock market collapse of  October  1929, since the tariff was not signed into law  until the following June. Today we know that market participants do not wait for a major law to pass, but instead try to anticipate whether or not it will pass and what its effects will be.

 Consider the following sequence of events:

 The Smoot-Hawley tariff passes the House on May   28, 1929.  Stock prices in New   York   (1926=100) drop   from 196 in March to 191   in June.   On June   19, Republicans   on the Senate Finance Committee   meet   to   rewrite   the   bill. Hoping for improvement, the market rallies,  but  industrial production  ( 1967 = 100)  peaks  in  July,  and  dips  very  slightly through  September.  Stocks  rise  to  216  by  September,  hit­ting their peak on  the  third  of  the  month.  The  full  Senate Finance Committee goes to   work  on  the  tariff  the  following day,  moving  it  to  the  Senate  floor  later  in  the   month.

 On October 21, the Senate rejects, 64 to 10, a move to limit tariff increases to agriculture. “A weakening of the Democratic-Progressive Coalition was evidenced on October 23,” notes the Commercial and Financial Chronicle. In this first test vote, 16 members of the anti-tariff coalition switch sides and vote to double the tariff on calcium carbide from Canada. Stocks collapse in the last hour of trading; the following morning is christened Black Thursday.   On  October 28,  a  delegation   of   senators   appeals   to   President   Hoover to help push a tariff  bill  through  quickly  (which  he  does  on the 31st). The Chronicle  headlines  news  about  broker  loans on  the  same  day:  “Recall  of  Foreign  Money  Grows  Heavier-All Europe  Withdrawing  Capital.” The following day is stalemate. Stocks begin to rally after November 14, rising steadily from 145 in November to 171 in April. Industrial production stops falling and hovers around the December level through March.

On March 24, 1930, the Senate passes the Smoot-Hawley tariff, 222 to 153. Debate now centers on whether or not President Hoover will veto. Still, stocks drop 11 points, to 160, in May. On June 17, 1930, despite the vigorous protests of a thousand economists, Hoover signs the bill into law, noting that it fulfills a campaign promise he had made, and stocks drop to 140 in July.

 The Commercial and Financial Chronicle dated June 21, 1930 led off  with  the major  events  of  the  week –”the signing by the President of  the  Smoot-Hawley  tariff  bill” and “a renewed violent collapse of the stock market.” Without ever quite linking the two events, the Chronicle did observe that “if the foreigner cannot sell his goods to us he cannot obtain the wherewithal to buy our goods.” Other sections noted  that  international  stocks  were  particularly hard hit, that 35 nations had vigorously  protested  the tariff and threatened retaliation, and that Canada and other  nations had already hiked their own tariffs “in view of the likelihood of such legislation in the United States.”

 It may be hard to realize how international trade could have so much impact on the domestic economy.  For years, in explaining income movements in the Thirties, attention has instead been focused on federal spending and deficits. Yet on the face of it, trade was far more important: exports fell from $7 billion in 1929 to $2.5 billion in 1932; federal spending was only $2.6 billion in 1929 and $3.2 billion in 1932. In 1929, exports accounted for nearly seven percent of our national production, and a much larger share of the production of goods (as opposed to services). Trade also accounted for 15 to 17 percent of farm income in 1926-29, and farm exports were slashed to a third of their 1929 level by 1933.

 Even these numbers, however, understate the significance of trade. Critical portions of the U.S. production process can be crippled by a high tax on imported materials. Other key industries are heavily dependent on exports.  Disruptions in trade patterns then ripple throughout the economy.  A tariff on linseed oil hurt the U.S. paint industry, a tariff on tungsten hurt steel, a tariff on casein hurt paper, a tariff on mica hurt electrical equipment, and so on. Over eight hundred things used in making automobiles were taxed by Smoot-Hawley. There were five hundred U.S. plants employing sixty thousand people to make cheap clothing out of imported wool rags; the tariff on wool rags rose by 140 per cent.

 Foreign countries were flattened by higher U.S. tariffs on things like olive oil (Italy), sugar and cigars (Cuba), silk (Japan), wheat and butter (Canada).  The impoverishment of foreign producers reduced their purchases of, say, U.S. cotton, thus bankrupting both farmers and the farmers’ banks.

It should be obvious that an effective limit on imports also reduces exports. Without the dollars obtained by selling here, foreign countries could not afford to buy our goods (or to repay their debts). From 1929 to 1932, U.S. imports from Germany fell by $181 million; U.S. exports to Germany fell by $277 million. Americans also had little use for foreign currency, since foreign goods were subject to prohibitive tariffs, so the dollar was artificially costly in terms of other currencies. That too depressed our exports, which turned out to be particularly devastating to farmers-the group that was supposed to benefit from the tariffs.

 There had already been some damage done (particularly to farm exports) by the tariff legislation of 1921 and 1922. As Princeton historian Arthur Link points out, however, “its only important changes were increased protection for aluminum, chemical products, and agricultural commodities.” Smoot-Hawley broadened the list to include 3,218 items (including sauerkraut), and 887 tariffs were sharply in­creased, on everything from Brazil nuts to strychnine. Clocks had faced a tariff of 45 percent; Smoot-Hawley raised that to 55 percent, plus up to $4.50 apiece. Tariffs on corn, butter, and unimproved wools were roughly doubled. A shrinking list of tariff-free goods no longer included “junk,” though leeches and skeletons were still exempt.

 A crucial consideration is that many tariffs were a specific amount of money per unit rather than a percentage of the price. As prices of many traded goods fell by half (or more) from 1929 to 1933, the effective rate of tariff doubled. If imported  felt  hats  sold  for  $5,  including  a tariff  of  $2.50, a fall in  price to $2.50 would confiscate the entire revenue from selling in the U.S. market. Without the dollars from selling in the U.S. market, the foreign hat manufacturer couldn’t buy anything here.

A number of seemingly separate explanations of the Great Crash fit together quite well once the importance of anticipated tariffs is acknowledged.  Charles  Kindleberger, in Manias,  Panics,  and  Crashes,  describes  some  structural collapse in the financial system: “Lending on  import,  for example, seems to have come to a  complete  stop.” But refusal to finance imports makes perfect sense if lenders were correctly anticipating steep tariffs ahead. There were early cancellations of import orders in 1929 that likewise reflected rational expectations, and import prices were among the first to fall.

A lot of stock was being bought on margin-that is, the buyer put up 25 to 50 per cent of the price and his broker went to the bank to borrow enough to cover the rest temporarily. The chairman of the Federal Reserve Board had warned the banks to curb these broker or “call” loans as early as February 1929, and the Fed nearly doubled the discount rate from 1927 to August 1929, partly in the hope of curbing stock market “speculation.” Most of the  broker loans in  1928-29 were not from the banks themselves,  how- ever, but were instead re-lent to brokers  on  behalf  of  domestic business and  foreign  banks,  businesses,  and  individuals.

 The massive withdrawal of foreign lenders from the broker-loan market in early October probably   reflected the correctly anticipated decline in the value of the collateral for those loans (stocks), and the fear among foreign capitalists that they would have to liquidate such assets to stay solvent in a world of high tariffs.  The process contributed to the crash as both cause and effect. There was a scramble for liquidity by both the lenders and the owners of stocks. As stock prices fell, brokers required that their customers put up more money to meet the margin requirement. If stockholders couldn’t come up with the cash, brokers could sell the securities to raise the money.  Either way, owners and brokers were pressed to unload stocks, thus perhaps accelerating (but not causing) the stock market decline.

The market suffered continual policy assaults after 1930. In early April of 1932, the Commercial  and  Financial Chronicle  reports  “the  market  fell  into  a complete  collapse . .  .  owing  to  the  approval  by  the  House  of  Representatives of an increased tax on stock  sales.”  The  Dow  bottomed  on July 8, when (as  the  Chronicle  of  the  following  day  reported)  there  had  been  some  good   news –the  Tariff   Commission  had  trimmed  18   tariffs,   and   a   House   subcommittee was looking into ways to cut  taxes  by  eliminating  duplication with states.  On  Tuesday,  September  19,  candidate Roosevelt  called   the  tariff  “the  road   to  ruin”  and  pledged to negotiate reductions in tariffs  as  soon  as  he  took  office. The following Saturday, the Chronicle was   astounded  that the “market again sharply reversed its course, and on Wednesday prices suddenly surged upward in a most sensational fashion.”

 

 

 

 

“A deeper reason for the failure of progressives to unite ideologically in the 1920’s was what might be called a substantial paralysis of the progressive mind… .[They] fought so hard all through the 1920’s against Andrew Mellon’s proposals to abolish the inheritance tax and to make drastic reductions in the taxes on large incomes. [Yet] the progressives were hard pressed to justify the continuation of nearly confiscatory tax levels.”

–Arthur S. Link, “What Happened to the Progressive Movement in the 1920s?” American Historical Review 64 (1959): 851-883. http://www.jstor.org/stable/1905118

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.

We sign in this week with a look at how this year’s global temperature is evolving as the big Pacific El Niño begins to wane. The temporary rise in global temperature that accompanies El Niño events is timed differently at the surface than it is in the lower atmosphere. Thus, while El Niño-boosted warmth led to a record high value in the 2015 global average surface temperature record, it did not fully manifest itself in the lower atmosphere (where the 2015 temperatures remained well below record levels).

But now that warmth is being fully felt aloft. The figure below is the satellite-measured global average temperature history of the lower atmosphere as compiled from the University of Alabama-Huntsville (UAH). The El Niño-spiked temperatures are clearly obvious in the first four months of 2016 (the rightmost points in the graph).

Figure 1. Global average satellite-based temperatures of the lower atmosphere from January 1979 through April 2016, as compiled by researchers at the University of Alabama-Huntsville.

Dr. Roy Spencer, who along with Dr. John Christy, curates the UAH satellite temperature record, has this to say on his blog regarding what to expect for the rest of the year and how the 2016 annual temperatures may ultimately rank:

I expect average cooling to continue throughout the year as El Nino weakens and is replaced with La Nina, now expected by mid-summer or early fall. Nevertheless, 2016 could still end up as a record warm year in the satellite record…it all depends upon how fast the warmth from the El Nino dissipates and La Nina sets in.

Early indications are also that global average surface temperature are continuing to feel the effect of the big, but dying, El Niño, and remain elevated into record territory.

So, it won’t be too surprising to be reading headlines the end of the year screaming “2016 Hottest Year Ever”—but it’s probably too much to hope that the authors of the underlying story correctly attribute the cause. But, we’re sure their memory will be jogged, and they’ll be full of excuses, when the La Nina cooling sets in and post-El Nino temperatures drop below record levels in 2017 (and likely many years thereafter).

Next up is a quick look at the updated numbers from the United Nations in regards to just how much global greenhouse gas emissions will be impacted if all nations of the world abide by the emissions reductions scheduled promised in their Intended Nationally Determined Contributions (INDC) that they submitted under the Paris Climate Agreement. There is only a slim possibility that these schedules will be adhered to—for instance, in the U.S., all indications are that we overpromised. Unkept promises aside, the U.N. reports that total global emissions of greenhouse gases will be 55.0 Gt (Metric gigatons) CO2eq (equivalent emissions scaling all greenhouse gas absorption to the value for carbon dioxide) in 2025 and 56.2 GtCO2eq in 2030. 

In the figure below, we superimpose those expectations on the U.N.’s Intergovernmental Panel on Climate Change (IPCC) depictions of business-as-usual (“baseline”) projections described by the IPCC as “projections of GHG [greenhouse gas] emissions and their key drivers as they might evolve in a future in which no explicit actions are taken to reduce GHG emissions.” It should be clear from this graph, that, as we have been fond of saying all along, the sum total of all the INDCs under the Paris Climate Agreement amounts to little more than business-as-usual expectations. But now, to make it look like everyone is “doing something” about climate change, the expected evolution of economic systems is being rebranded as “climate action.” Maybe that makes everyone feel better.  In reality, only the US and the EU have proposed significant (and significantly expensive) reductions.

Figure 2. Greenhouse gas emissions expected under the Paris Climate Agreement (red) superimposed upon IPCC business-as-usual expectations.

 

Next we turn to an enlightening piece by a team of analysts at the Mercatus Center at George Mason University examining the cumulative cost of government regulations—and it isn’t pretty. They calculate that that federal regulations retard economic growth in the U.S. by about 0.8% per year—or to the tune of a GDP that is $4 trillion less in 2012 than it would have been absent new regulation imposed since 1980, adding that “[i]f the cost of regulatory accumulation were a country, it could have the 4th largest GDP in the world.” Here is an excerpt from the summary: 

Using a 22-industry dataset that covers 1977 through 2012, the study finds that regulation—by distorting the investment choices that lead to innovation—has created a considerable drag on the economy, amounting to an average reduction in the annual growth rate of the US gross domestic product (GDP) of 0.8 percent.

Federal regulations have accumulated over many decades, piling up over time. When regulators add more rules to the pile, analysts often consider the likely benefits and compliance costs of the additional rules.

But regulations have a greater effect on the economy than analysis of a single rule in isolation can convey. The buildup of regulations over time leads to duplicative, obsolete, conflicting, and even contradictory rules, and the multiplicity of regulatory constraints complicates and distorts the decision-making processes of firms operating in the economy. Firms respond to both individual regulations and regulatory accumulation by altering their plans for research and development, for expansion, and for updating equipment and processes. Because of the important role innovation and productivity growth play in an economy, these distortions have consequences for the growth of the economy in the long run.

Economic growth in the United States has, on average, been slowed by 0.8 percent per year since 1980 owing to the cumulative effects of regulation:

● If regulation had been held constant at levels observed in 1980, the US economy would have been about 25 percent larger than it actually was as of 2012.

● This means that in 2012, the economy was $4 trillion smaller than it would have been in the absence of regulatory growth since 1980.

● This amounts to a loss of approximately $13,000 per capita, a significant amount of money for most American workers.

The gory details are provided in the full report authored by Bentley Coffey, Patrick A. McLaughlin, and Pietro Peretto.

And, finally, before signing off, we want to make sure that if you are looking for rational looks at the allegations of climate change-driven catastrophes in the news this week, you’ll know where to find them. Here is a good story from the A Chemist in Langley blog that throws water on the claims that anthropogenic climate change is behind Canada’s Ft. McMurray fire, and here’s some good background from the New Orleans Geological Society on the myriad of non-climate forces behind the drowning Isle de Jean Charles (telling the story that the New York Times didn’t).

You ought to have a look!

It’s legacy-polishing season for the Obama administration, with the president making himself available for “articles that will allow [him] to showcase his major achievements,” the New York Times reports. Over at Time.com, I have a piece on what I think will turn out to be Obama’s lasting legacy: the evisceration of virtually any remaining legal limits on the president’s power to wage war abroad.

As I note in the column, it’s unlikely that “history” will judge our 44th president harshly because of that. After all, “when it comes to presidential legacies, ‘history’ has lousy judgment.”

More specifically, the academics charged with evaluating presidential legacies have lousy judgment. A look at the presidential rankings reveals that the scholars who fill out the scorecards hardly subscribe to the historian-as-“hanging-judge” theory. Bill Kauffman’s arch description of the rankings is more accurate: “polls by which court historians reward warmarkers and punish the peaceful.” The odious Woodrow Wilson is a perennial top 10 favorite, while his normalcy-securing successor, Warren Harding, is nearly always dead last. Say what you will about Wilson’s brutality and contempt for civil liberties at home, his senseless waste of life abroad–at least the man dreamed big! Teapot Dome, however? Unforgivable. 

During the last presidential election cycle, CNN asked some leading presidential historians to opine on the theme “What is ‘presidential greatness’?” Their answers reveal a perverse favoritism toward activist, warrior presidents.

 

  • “In good times or bad, a president is expected to do something!” says presidential biographer Richard Reeves: sometimes, as with the Cuban Missile Crisis, “he does the right thing and becomes great for it.” The “right thing” in this case, apparently, was bringing the world to the brink of thermonuclear war over a missile deployment that Kennedy knew had no strategic consequence, but would have made him look bad politically.

 

  • Aida Donald, author of Lion in the White House: A Life of Theodore Roosevelt, informs us that “Harry Truman was also a great president, because he was commander in chief in a great war.” That would be Truman’s “police action” in Korea, launched without congressional authorization, in which over 33,000 U.S. servicemen died.

 

  • And historian H.W. Brands, while noting that “being a good president” should be “good enough,” squelches that sensible point with another atrocious example: “James Polk broke the impasse over expansion to the Pacific.” Polk did that by “unnecessarily and unconstitutionally” launching a war—as a young congressman named Abraham Lincoln pointed out—to steal land from Mexico.

 

Presidential scholars tend to wax messianic when they mull “presidential greatness.” In their book on the subject, the scholars Marc Landy and Sidney Milkis write that the great ones demonstrate the wherewithal “to engage the nation in a struggle for its constitutional soul.” 

The president described in the Federalist Papers is a humbler figure, possessing “no particle of spiritual jurisdiction.” His actual job description, contained in Article II’s oath of office, is to “preserve, protect and defend” the nation’s fundamental law.

If historians used that metric, Obama would have reason to worry about his legacy. As it stands, though, he’ll probably do just fine. 

Writing for FT.com’s “The Exchange” blog, economists Diane Coyle and Jonathan Haskel suggestthat Britain’s regulators — namely, the Competition and Markets Authority and the Bank of England — have got it wrong on competition in banking.  The authors argue that “the CMA and the BoE” have overlooked “the ruinous effect on competition of the ‘too big to fail’ subsidy” in their recent reports and policy announcements, and that, if anything, it is becoming “harder than ever for new entrants to gain a foothold” in the banking market.

In my view, Coyle and Haskel are right, but their argument doesn’t go far enough.

Let’s start with the basics: what is the too-big-to-fail subsidy, and how does it affect competition in banking?  The fundamental idea is that the bigger a bank is, the more likely it is to be bailed out if it runs into trouble.  The events of the 2008 financial crisis seem to confirm this, as do the assumptions of government assistance that some rating agencies build into their “support” ratings.  And as the 2011 report of Britain’s Independent Commission on Banking points out:

If one bank is seen as more likely to receive government support than another this will give it an unwarranted competitive advantage.  As creditors are assumed to be less likely to take losses, the bank will be able to fund itself more cheaply and so will have a lower cost base than its rival for a reason nothing to do with superior underlying efficiency.

The result is that small banks struggle to compete against larger rivals, while market entrants have difficulty establishing themselves against privileged incumbents.  All of this makes the banking sector less dynamic — and more comprehensively dominated by large, established firms — than it might otherwise be.

As Coyle and Haskel see it, however, Britain’s CMA thinks the problem has already been solved: that the competitive playing field has been leveled by the Bank of England’s proposed “systemic risk buffer,” according to which larger banks must hold more equity capital against their risk-weighted assets than smaller competitors.  In consequence, the CMA’s October 2015 provisional report on Britain’s retail banking market mostly ignored the too-big-to-fail problem, focusing instead on the rather more mundane question of how consumers can be encouraged to switch bank accounts more often.

Yet the CMA’s position is mistaken, say Coyle and Haskel, for three reasons.  First, switching bank accounts doesn’t always make sense for consumers: in the UK, at least, one bank account is pretty much the same as another, so consumers’ status quo bias is often quite rational.  Second, the level of additional capital big banks must hold as a systemic risk buffer is not high enough to outweigh the funding benefits that accrue from being too-big-to-fail.  Third, the stepped schedule of systemic risk buffer requirements outlined by the Bank of England might make big banks less likely to compete with each other, by effectively creating high marginal tax rates when banks move from one “systemic risk buffer” tier to another.  As Coyle and Haskel say, “This might restrain the emergence of gargantuan banks, but the purpose of competition is to promote rivalry, not hold up expansion at arbitrary regulator-determined thresholds.”

So far, so good.  But there’s a bigger picture here that Coyle and Haskel don’t see, or at least fail to mention.  For one thing, it isn’t just lower funding costs that make too-big-to-fail such an anti-competitive doctrine.  In fact, the very act of bailing out a failing institution itself constitutes a powerful strike against market competition.  As Europe Economics’ Andrew Lilico has put it, “company failure is an essential and ineliminable part of the competition process.  One of the most important obstacles to new entry in the banking sector, impeding competition, is that failing banks are saved by the government.”  If you want smaller banks to grow, and new banks to prosper, in other words, you can’t keep saving their bigger rivals from the consequences of bad investments.

More important still are the grounds upon which banks compete.  And it’s here that our financial regulatory authorities have the most to answer for.  Yes—of course—banks should compete with one another to provide the best possible service at the best possible price.  In an ideal world, however, banks would compete on something else as well: namely, their safety, stability, and reliability.  That banks do not tend to compete on these grounds today is testament to the fact that their depositors, bondholders, and shareholders do not see the need to pay attention to such things.  “Regulatory badging,” that illusory sense that banks must be safe because they are subject to regulators’ oversight, means that people seldom ask how highly-leveraged their banks really are.  Deposit insurance means they might not care about the answer, even if they ask the question.  And too-big-to-fail compounds the problem: if your bank is going to be bailed out, why worry about its risk profile?  No amount of regulatory oversight can compensate for this loss of competitive market discipline.

Ultimately, then, Coyle and Haskel are right to stress the importance of competition: if financial stability is the goal, then competition must be central to any banking reform agenda worthy of the name.  But before regulators can be part of the solution, they must understand the ways in which they are part of the problem.  And that, alas, has yet to happen.

[Cross-posted from Alt-M.org]

On the heels of a National Transportation Safety Board (NTSB) report that found that Washington Metro “has failed to learn safety lessons” from previous accidents, Metro general manager Paul Wiedefeld will announce a plan today that promises to disrupt service for months in an effort to get the lines safely running again. While ordinary maintenance can take place during the few hours the system isn’t running every night, Wiedefeld says past officials have let the system decline so much that individual rail lines will have to be taken off line for days or weeks at a time to get them back into shape.

The Washington Post blames the problems on “generations of executives and government-appointed Metro board members, along with Washington-area politicians who ultimately dictated Metro’s spending.” That’s partially true, but there are really two problems with Metro, and different parties are to blame for each.

First is the problem with deferred maintenance. The Metro board recognized that maintenance costs would have to increase as long ago as 2002, when they developed a plan to spend $10 billion to $12 billion rehabilitating the system. This plan was ignored by the “Washington-area politicians who ultimately dictated Metro’s spending” and who decided to fund the Silver and Purple lines instead of repairing what they already had.

Second is the problem with the agency’s safety culture, or lack of one. According to the NTSB report, in violation of its own procedures, Metro used loaded passenger trains to search for the sources of smoke in the tunnels. Metro at first denied doing so, then said it wouldn’t do it any more. But Metro’s past actions sent a signal to employees that passenger safety isn’t important.

The safety problem can be blamed on the executives and board. So it’s no surprise that Secretary of Transportation Anthony Foxx has replaced three board members with people who, he hopes, will place a higher priority on safety than the board members he fired.

Transit unions, meanwhile, deny that they are responsible for any of the problems. Yet demands for high pay, sorting of employees into different categories that sometimes rival one another, and other union-led practices probably contributed to both the safety problems and the funding shortages. Four track workers were killed by trains in 2005 and another in 2009, suggesting that train operators were careless with the lives of fellow employees, which probably discouraged track workers from effectively doing their jobs.

Ultimately, both the safety and maintenance problems can be traced to the fundamental flaws of socialized transportation. Where systems funded out of user fees would build no more than people are willing to pay for, political decisions led Washington and other regions to build hundreds of miles of expensive rail lines they can’t afford to maintain.

Where managers of systems funded out of user fees tend to do a better job at maintenance, political decisions failed to provide Metro with the money it needed to keep trains operating. Where user-fee driven systems learn quickly to motivate their employees to work safely and efficiently, political decisions put people on the Metro board who were more in love with their transit fantasies than the reality of managing more than 10,000 employees.

General manager Wiedefeld may be able to correct some of the maintenance problems by disrupting service over the next year, but it is unlikely that he will have the funds to fix all of them. Even if he had all the money he needed, it will take more than money to create a system that is more responsive to user needs than to contractors, unions, and politicians.

Contrary to the judiciary’s reputation as the least dangerous branch, judges exercise almost every executive and legislative power other than going to war. This is why the battle over Antonin Scalia’s successor is so bitter.

That wasn’t the Constitution’s original plan. The courts were important but were not to supplant the other branches. Rather, judges were expected to constrain the executive and legislative branches.

Alexander Hamilton expected the judiciary to play a “peculiarly essential” role to safeguard liberties and act as an “excellent barrier to the encroachments and oppressions of the representative body.” Judges were to “guard the Constitution and the rights of individuals” from “the people themselves.”

James Madison, intimately involved in drafting the Constitution, explained that: “independent tribunals of justice will consider themselves in a peculiar manner the guardians of [Bill of Rights guarantees]; they will be an impenetrable bulwark against every assumption of power in the legislative or executive; they are will be naturally led to resist every encroachment upon rights expressly stipulated for in the constitution by the declaration of rights.”

The judges who assert these vast powers enjoy lifelong immunity from accountability. This means that whoever succeeds Scalia still could be writing opinions at mid-century.

Unfortunately, actuarial accident determines who serves. Scalia’s death gave President Barack Obama an opportunity to shift the Supreme Court leftward, unless the Senate stops him. The Constitution gives the Senate the power to advise and consent. That body is empowered to say no.

The most important qualification for judicial office is philosophical. Put simply: does the nominee believe the Constitution means anything apart from the jurists’ personal preferences? If not, then the Senate should reject the nomination.

Of course, Democrats are demanding Senate approval of Judge Merrick Garland, despite some disquiet among left-wing activists. Yet, as a senator, Barack Obama opposed (and backed a filibuster against) George W. Bush’s nominees. Sen. Chuck Schumer (D-NY) advocated refusal to accept any Bush II nominee.

Nevertheless, no one really benefits from politicizing judicial nominations and refusing to fill vacancies for partisan reasons. There is an obvious answer: appoint jurists for a set term in office, perhaps ten years. No longer would the state of American medicine typically determine which president gets to fill the high court.

Jurists still would be independent. And bad justices could be gone in ten years. Set terms also would ensure a steady stream of new justices. That likely would result in a more diverse membership in terms of career, background, and perspective.

Most important, there might be more philosophical variety. Unfortunately, “mainstream” justices generally back the steady expansion of the state, treating the Constitution as creating only small islands of liberty in the midst of a vast ocean of government power.

While term limits would not guarantee better jurisprudence, a larger number of appointees would increase the likelihood of at least a few advocates of an active court dedicated to enforcing the Constitution’s liberty guarantees.

Finally, fixed terms would moderate battles over Supreme Court appointments. Losing the fight over Scalia’s replacement would not mean the possibility of 30 or more years of hostile decisions.

Appointees also might improve. Today, presidents look for safe and confirmable choices with nondescript views or no paper trail. With limited tenure, presidents could take greater risks in who they nominate.

Judicial terms would require a constitutional amendment. However, the issue could unite right and left. As I argued on American Spectator: “Fixed terms for jurists is the best way to both preserve independence and impose accountability.”

Today the FDA issued new rules regarding the sale and production of e-cigarettes and e-cigarette “juice” (the nicotine solution that e-cigs vaporize). The regulations will severely hamper a thriving and highly competitive market, and “big tobacco” is jumping for joy.

It is often difficult to explain to non-free-market types how and why big business loves big government. The song is always the same: we need big government to stop and control big business. Today’s rule offers a great lesson in why that isn’t always the case.

Like most big companies, big tobacco is stuck in a rut–namely, traditional tobacco. When billions of dollars are invested in infrastructure to produce a single product, it is very difficult to shift that behemoth to a new line of production when the product becomes obsolete or unpopular. Thus, small businesses are often, if not usually, the first movers when it comes to innovation. Blockbuster Video, with a costly commitment to brick and mortar video stores, could hardly have been expected to change its entire business model to rental-by-mail or streaming. By the time the threat of  Netflix became existential, it was too late. Many times, when big businesses are in such a situation, one of their last ditch efforts will be to use government to prohibit or hamstring their competitors.

Big tobacco has had a similar problem for some time now. They’ve seen smoking rates fall precipitously, and all future projections show smoking rates continuing to fall. Imagine running a business where the demand to “grow, grow, grow” is belied by an inevitable and irresistible decline. So what do you do? Well, you try to expand into new products such as snus and e-cigarettes.

Yet big tobacco had the same problem that Blockbuster had with Netflix. They weren’t the first movers on e-cigarettes. As they continued to try to plow a field that had grown barren, small companies began to produce e-cigarettes, and people began to use them.

Full disclosure: I’m one of those e-cigarette smokers. What some have pejoratively called a “wild west” situation in desperate need of top-down regulation is actually a thriving market concerned with safety, innovation, and satisfying rapidly changing consumer preferences. There are sub-ohm vapes (huge clouds of smoke), vaporizers that look like lightsabers, vaporizers with variable voltages, and many others, not to mention the proliferation of juice flavors. My preferred vaporizer company, Halo Cigs, is constantly altering its products for better consumer satisfaction and safety.

There are more companies than I can even name. “Vapers” compare their gear, discuss battery life, trade flavors, mix flavors, and generally engage in a highly informed and oddly passionate consumer market.

With today’s rule, that will almost assuredly stop. We will be telling our kids stories about how people used to be “allowed” to just vaporize “anything.” They will look at us quizzically and laugh, unable to comprehend such a silly thing because the FDA–starting today–will begin building up an apparatus of control and prohibition that will make it nearly impossible for future generations to imagine what it was like. “Doctors used to make house calls,” my grandma once told me, and I didn’t believe her.

But big tobacco is jumping for joy. Like many big businesses, they were slow to see the wave of change that was coming. But once they saw it, they jumped on it. Altria (Philip Morris) only recently purchased a prominent e-cig manufacturer, and they’ve long supported the FDA’s regulation of “tobacco products” because “an increasing number of scientists and public health officials are advocating for more clear communications about the relative risks of tobacco products so adult tobacco consumers can make informed choices about them.”

Language like that is just an anti-competitive catechism. They say “consumer choice and confidence,” but it is really about putting competitors out of business through onerous regulations and requirements that only big tobacco has the resources to satisfy. According to the American Vaping Association, under the new rules “submitting an application to get a product approved would take more than 1,700 hours and cost more than $1 million.” With the stroke of a pen, the FDA will eventually put hundreds of e-cigarette producers out of business. 

What we’ve seen is a traditional bootleggers and Baptist coalition: anti-smoking crusaders team up with big tobacco to heavily regulate an emerging market. As Jonathan H. Adler, Roger E. Meiners, Andrew P. Morriss, and Bruce Yandle recently wrote in Regulation magazine:

A Bootleggers and Baptists coalition favors the regulation of e-cigs. The coalition is composed of the tobacco companies (Bootleggers) that see their market threatened by a new product, health advocates (Baptists) who oppose e-cigs and wish to see them strictly regulated or prohibited, and state governments (Bootleggers) that have sold bonds backed by tobacco tax revenue that are threatened by the decline in cigarette sales.

In addition, as Jacob Sullum at Reason writes, e-cigarettes are harm-reducers, and making them harder to get could likely result in more cigarette smokers. Personally, I’ve reduced my traditional smoking by about 90 percent with e-cigarettes. I’ve crafted a flavor and become fond of a vaporizer that meets my needs. Yet my preferred company, and hundreds others, are unlikely to weather this storm.

Welcome back, big tobacco.     

Two years ago Russia detached Crimea from Ukraine. Since then the Western allies have imposed economic sanctions, but to little effect. No one believes Crimea, Russian until six decades ago, is going back to Ukraine.

Yet the European Union called on other countries to join its ineffective boycott. However, most nations have avoided the controversy. They aren’t going to declare economic war on a faraway nation which has done nothing against them.

Although Washington, with less commerce at stake, remains among the most fervent advocates of sanctions, Europe is divided over the issue. Opposition has emerged to routine renewal in July of restrictions on Russia’s banking, energy, and military industries. Particularly skeptical of continued economic war are Cyprus, Greece, Hungary, and Italy.

Sanctions supporters insist that Russia more fully comply with the Minsk peace process and end support for the separatist campaign in Ukraine’s east. “Today Russia faces a choice between the continuation of economically damaging sanctions and fully meeting its obligations under Minsk,” contended Secretary of State John Kerry.

Yet the armed conflict has ebbed, political crisis fills Kiev and some Ukrainians aren’t sure they want the separatists back. Indeed, Oksana Syroyid, Deputy Speaker of Ukraine’s Rada, has blocked passage of a constitutional amendment providing autonomy for the Donbas region, explaining: “We need to stop thinking of how to counter Putin, or how to please all our partners.”

Brussels faces the unpleasant possibility of Russia fulfilling its responsibilities while Ukraine breaks the deal. “Both sides need to perform,” complained Germany Foreign Minister Frank-Walter Steinmeier.

Targeted sanctions against named individuals and concerns have a certain appeal. However, there is little evidence that they are more effective than broader measures.

The latter have hurt the Russian public without turning many of them against their government. Moreover, Western penalties have discouraged, even reversed, liberalization of the Russian economy, as businesses have grown even more dependent on government support.

The belief that imposing sanctions a little longer will force Moscow to capitulate reflects the triumph of hope over experience. Rather than reflexively continue sanctions, the Western states should rethink their policy toward Russia.

Vladimir Putin isn’t a nice guy, but that hardly sets him apart from other authoritarians. Geopolitically Ukraine matters far more to Moscow than to Europe or America. Russia always will spend and risk more to protect its perceived security interests next door.

And the West did much to challenge Moscow, including encourage a street revolt against a democratically elected president. That still didn’t justify Russia’s brutal actions to dismember its neighbor, but Putin acted predictably and rationally. He is neither Hitler nor Stalin reincarnated, but a traditional Tsar. Putin has never demonstrated a desire to swallow non-Russian peoples.

Thus, I argued in Forbes, “the allies should negotiate their way out of the sanctions box in which they are stuck. They could drop economic war, promise to stop expanding NATO along Russia’s border (most importantly, to Ukraine), reduce military support for Kiev, and encourage Ukraine to look both ways economically. Moscow could drop support for Ukrainian separatists, cooperate with restructuring Kiev’s unsustainable debts, accept Ukrainian economic ties with the EU, hold an internationally monitored status referendum in Crimea, and accept whatever outcomes emerge from the messy Ukrainian political system.”

Of course, Kiev is independent and free to decide its own future. But Ukrainians should choose their own course while fully aware that no one in the West is prepared to initiate all-out economic war, let along military conflict, with nuclear-armed Russia over Kiev’s status.

The U.S. and Europe shouldn’t allow the perfect to be the enemy of the good in policy toward Russia. At most economic sanctions act as a moral statement, but one better made through other means.

At the same time, there are many important issues in which the West would benefit from Russian assistance. After two years, it’s time to make a deal with Moscow.

 

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