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President Trump’s nomination of Jerome Powell as the next chairman of the Federal Reserve System is a bet that he will continue Janet Yellen’s policies and not rock financial markets. The expectation is that Powell will follow the Fed’s already-announced normalization schedule, which calls for slowly reducing the Fed’s $4.2 trillion balance sheet, by rolling off maturing mortgage-backed securities (MBS) and longer-term Treasuries, and gradually increasing the target range for the fed funds rate.[1]

The presidential vote of confidence for Powell reflects the White House and Treasury’s desire for low interest rates to fund the public debt and support high asset prices, as well as the probability that the Senate will quickly confirm the nominee.

Mr. Powell also appears open to revisiting financial regulations, such as the Volcker rule and regulations that discriminate against smaller banks. In testimony, before the Senate Committee on Banking, Housing, and Urban Affairs, on June 22, 2017, Governor Powell set forth “Guiding Principles to Simplify and Reduce Regulatory Burden.” One of the key principles is that Fed policymakers “should assess whether we can adjust regulation in common-sense ways that will simplify rules and reduce unnecessary regulatory burden without compromising safety and soundness.” He emphasized that the Fed’s goal should be “to establish a regulatory framework that helps ensure the resiliency of our financial system, the availability of credit, economic growth, and financial market efficiency.” However, during his tenure on the Fed’s Board of Governors since May 2012, he has consistently voted in favor of tightening the Fed’s grip on financial regulation.[2] Thus, one must remain skeptical about whether he would embrace market-friendly deregulation.

Unconventional Monetary Policy and Uncertainty

Unconventional monetary policy — in the form of quantitative easing (i.e., large-scale asset purchases) and ultra-low interest rates — has misallocated credit, distorted interest rates, encouraged risk taking, inflated asset prices, fueled government deficit spending, and done little to promote long-run private investment.[3]

By purchasing massive amounts of high-risk MBS and long-term government bonds, the Fed helped lower longer-term interest rates but steered credit away from private investment, which was also impeded by stricter macro-prudential regulations. Moreover, by keeping short-run interest rates near zero for more than seven years, paying interest on excess reserves (IOER) above the effective fed funds rate, and convincing markets that rates would stay low for a long time (forward guidance), the Fed has increased the reach for yield and appears more interested in priming Wall Street than in letting markets set interest rates and allocate credit.

The Fed’s current operating procedure is to administer the target range for the fed funds rate using IOER and reverse repos, in contrast to the pre-crisis arrangement whereby the Fed’s open market desk bought or sold short-term Treasuries to increase or decrease bank reserves, and then let market participants determine the effective funds rate.[4] As a result, changes in the monetary base are no longer “high powered” — the money multiplier has collapsed and the monetary transmission mechanism that prevailed prior to 2008 is broken.

Unconventional monetary policy, macro-prudential regulation, and the lack of any monetary rule have increased uncertainty about the future of monetary policy and, thus, have had a negative effect on private investment. To his credit, Mr. Powell has recognized some, but not all, of these problems. In January this year, he told members of the American Finance Association in Chicago that “the current extended period of very low nominal rates calls for a high degree of vigilance against the buildup of risks to the stability of the financial system.” However, he downplayed that risk by saying that “the bottom line is that there has not been an excessive buildup of leverage, maturity transformation, or broadly unsustainable asset prices.”[5]

The Limits of Monetary Policy

The purpose of the Bernanke-Yellen monetary policy has been to lower longer-term rates and pump up asset prices creating a wealth effect to spur spending and real economic growth. But there has been a differential impact favoring the housing and government sectors, while private investment has been sluggish due to regime uncertainty, regulatory costs, and a fall in the private saving rate. From a long-run perspective, the Fed cannot permanently increase wealth by monetary policy. Powell recognizes the limits of monetary policy when he notes that “ultimately, the only way to get sustainably higher interest rates is to improve the broader environment for growth, by adopting policies designed to increase productivity and potential output over the long term — policies that are mainly outside the scope of our work at the Federal Reserve.”[6] Recognition of the limits of monetary policy is an important first step toward sound monetary policy.

The Schizophrenic Nature of Fed Policy

In his January speech, however, Powell is silent on the schizophrenic nature of Fed policy — a policy designed to increase risk taking, allocate credit to favored sectors, and stimulate economic activity but that plugs up the monetary transmission mechanism by paying IOER, and discourages lending to productive ventures by an onerous system of macro-prudential regulation. As market analyst Brian Barnier notes, “Low interest rates don’t help if companies face high risk and uncertainty. Central banks that cause volatility and uncertainty have been defeating their own interest rate actions.”

Normalizing Monetary Policy and Instituting a Rules-Based Regime

Regime uncertainty could be reduced by first normalizing monetary policy by reducing the size of the Fed’s balance sheet and ultimately eliminating IOER and restoring a market-driven fed funds rate. A rule-based monetary regime could then be instituted to guide monetary policy. In the present unconventional regime — with the absence of a competitively determined fed funds rate and a weak link between base money (i.e., currency in circulation plus bank reserves), broad monetary aggregates, and nominal GDP — the implementation of monetary rules such as the Taylor rule and a final demand rule would fail.

Under unconventional monetary policy, we therefore are stuck in a fully discretionary fiat money regime — and, thus, in a fog of uncertainty. Maintaining such a system ignores the institutional uncertainty brought about by not having a credible monetary rule. Such a rule would help depoliticize monetary policy and incentivize the Fed to take a long-run perspective, thereby reducing uncertainty.[7] As Karl Brunner has pointed out regarding the knowledge problem facing monetary policymakers,

We suffer neither under total ignorance nor do we enjoy full knowledge.  Our life moves in a grey zone of partial knowledge and partial ignorance.  More particularly, the products emerging from our professional work reveal a wide range of diffuse uncertainty about the detailed response structure of the economy… . A nonactivist [rules-based] regime emerges under the circumstances … as the safest strategy. It does not assure us that economic fluctuations will be avoided.  But it will assure us that monetary policymaking does not impose additional uncertainties … on the market place.[8]

In a speech at the Forecasters Club of New York in February, Powell argued that monetary rules can help guide policy, but he sees those rules as too simple to take account of the complexity confronting policymakers. He has in mind the Taylor rule, which would set the nominal fed funds rate based on a single equation:

(1) R = r* + π + a (ππLR) + b (gap)

where

R = nominal federal funds rate

r* = neutral real federal funds rate

π = the inflation rate

πLR = 2 percent

gap = percentage deviation of output from its potential level or unemployment from its natural rate.

Taylor, in his 1993 article, set a = 0.5 and b = 0.5.

According to Powell,

I think it’s fair to say that simple policy rules are widely thought to be both interesting and useful, but to represent only a small part of the analysis needed to assess the appropriate path for policy. I am unable to think of any critical, complex human activity that could be safely reduced to a simple summary equation. In particular, no major central bank uses policy rules in a prescriptive way, and it is hard to predict the consequences of requiring the FOMC to do so, as some have proposed. Policy should be systematic, but not automatic.

In fact, complexity is what makes a rules-based regime desirable. No one on the Federal Reserve Board or the Federal Open Market Committee predicted the 2008 financial crisis. The purpose of a systematic, rules-based monetary regime is to keep the economy on track and prevent a sharp decline in final demand. No rule can be perfect; there is always a learning process.  But as Brunner noted, a nonactivist rule would reduce uncertainty inherent in a period-by-period discretionary monetary regime. A long-run strategy based on achieving a stable growth path of nominal final demand would avoid the type of errors associated with a purely discretionary regime.

The Great Moderation and the Case for a Final Demand Rule

During the “Great Moderation” (1987–2006), under Fed chairman Alan Greenspan, the trend rate of growth of final demand, as measured by nominal final sales to domestic purchasers (FSDP), was 5.4 percent per year — split into real growth of 3 percent and inflation of 2.4 percent.[9] Cato’s former chairman Bill Niskanen found that variation around that trend “had significant effects on asset prices and the real economy, and most of this variation was a consequence of the Fed’s response to financial crises.” Figure 1 from his 2006 Cato Journal article is reproduced below.

Figure 1: Nominal Final Sales to Domestic Purchasers

Based on his research, Niskanen concluded that the Greenspan Fed implicitly followed a final demand rule but that it overreacted in increasing demand when faced with financial crises. Niskanen sees the primary duty of the Fed as maintaining “a steady increase in aggregate demand consistent with a low target rate of inflation.”

The Great Moderation was also in line with the Taylor rule but that rule depends on knowledge of r* and the output gap, both of which are difficult to estimate. As Powell noted in his February speech, “The neutral rate changes significantly over time, and estimates of its level entail substantial uncertainty.”  Moreover, “there is particularly high uncertainty about measuring the deviation of output from its potential,” and the values of the coefficients, a and b, in Taylor’s rule need to be specified.

Niskanen prefers a final demand rule over an interest rate rule, in part, because it does not require imputing values to r*, or estimating the output gap.[10]  In the 2009 edition of Cato’s Handbook for Policymakers, he recommended that “Congress should amend the Full Employment and Balanced Growth Act of 1978 to clarify the congressional guidance on the conduct of monetary policy.” In particular, he argued that

Congress is best advised (1) to specify a target rate of increase of final sales and (2) to instruct the Federal Reserve to minimize the variance around this target rate. The target rate of increase of final sales may best be about 5 percent a year, sufficient to finance a realistic rate of economic growth of 3 percent and an acceptable rate of inflation of about 2 percent.[11]

Niskanen saw nominal FSDP as “a feasible target” because it is “almost completely determined by U.S. monetary policy, whereas the rate of economic growth and the inflation rate are separately affected by a variety of domestic and foreign conditions.” The problem is that, under the Fed’s current operating procedure, the link between base money creation and final demand has been severed. Moving to a rules-based regime thus requires normalizing monetary policy and restoring the monetary transmission mechanism as discussed earlier.

Some congressional leaders think it’s time to create a rules-based monetary regime. The Financial CHOICE Act of 2017 (H.R 10), which recently passed the House, would make the Fed responsible for specifying a monetary rule and justifying to Congress any deviations from it.[12]  Whether the CHOICE Act passes or not, it is important to consider alternative monetary rules and to be prepared to make the case for rules over discretion when the opportunity for reform arises.

The Phillips Curve Is a Poor Guide for Monetary Policy

The Phillips Curve model of the economy, which posits an inverse relationship between unemployment and inflation, has been a poor guide for monetary policy, yet the Fed still incorporates that relationship into its thinking.[13] With the rate of unemployment now at 4.1 percent, policymakers are puzzled why inflation hasn’t increased to the Fed’s target of 2 percent. They could look to their own operating procedures used since October 2008. Without IOER and Dodd-Frank type regulations, banks would be lending more, and base money would have a stronger impact on overall money growth and the price level.

Powell’s Challenge

Mr. Powell, no doubt, will be under pressure from the White House and Treasury to keep rates low — even if markets are pushing them upward. Intervening to postpone necessary adjustments, however, would only complicate future policy changes and increase the costs of adjustment.

It is essential that Powell understand the risks involved in the post-2008 operating techniques and the underpricing of risk that unconventional monetary policy has occasioned. His challenge will be making the transformation to a new policy regime that gets the Fed out of the business of allocating credit and pegging interest rates at artificial levels.

Conclusion

Congress has ultimate authority for monetary policy. During the confirmation process, there needs to be a discussion of the limits of monetary policy and how Mr. Powell sees the future of monetary policy, and the steps he would take in a crisis situation. Finally, Congress needs to make the Fed accountable for its mistakes and ensure it abides by the rule of law.

_____________________

[1] See George Selgin, “Operation SNAIL,” Alt-M, September 26, 2017.

[2] See Binyamin Appelbaum, “In Choice of Fed Chairman, Trump Downgrades Deregulation,” New York Times, October 29, 2017.

[3] There is no doubt that nonmonetary forces have contributed to historically low interest rates. Real rates have been declining for some time, due to slower productivity growth, demographics, and other factors (see Powell’s January 7, 2017 speech). It is hard to deny, however, that Fed policy has not contributed to the low-interest environment and helped fuel selected asset prices. Indeed, Powell, in his January address to the American Finance Association, argued that, with regard to the impact of “highly accommodative monetary policies, … studies generally show that they lowered rates across the curve and moved other asset prices as well.” At the same time, he admitted that “isolating the effects of these policies is challenging.” If Mr. Powell is correct that rates are mostly reflecting nonmonetary factors, then asset prices may be sustainable, but if he is wrong, then there is a strong possibility that as the Fed exits its unconventional polices, there will be a significant market correction.

[4] For a detailed discussion of the Fed’s pre- and post-crisis operating procedures, see George Selgin, “Interest on Reserves and the Fed’s Balance Sheet,” testimony before the House Subcommittee on Monetary Policy and Trade, May 17, 2016. See also Norbert Michel and Selgin, “Fed Must Stop Rewarding Banks for Not Lending,” American Banker, May 30, 2017.

[5] The IMF is less sanguine. In its latest Global Financial Stability Report (October 2017), the IMF raises “concerns about a continuing buildup in debt loads and overstretched asset valuations [that] could have global economic repercussions” (p. 42).

[6] Jerome Powell, “Low Interest Rates and the Financial System,” Speech at the 77th Annual Meeting of the American Finance Association, Chicago, January 7, 2017.

[7] Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corporation and former president of the Federal Reserve Bank of Kansas, has argued “that monetary and regulatory policies have for some time been overly focused on short-run effects at the expense of long-run goals, which has unintentionally served to increase uncertainty and economic fragility.”  See Hoenig, “The Long-Run Imperatives of Monetary Policy and Macroprudential Supervision,” Cato Journal (Spring/Summer 2017), p. 195.

[8] Karl Brunner, “The Control of Monetary Aggregates,” in Controlling Monetary Aggregates III, p. 61. Boston: Federal Reserve Bank of Boston, 1980.

[9] Final sales to domestic producers (FSDP) is defined as “the sum of nominal gross domestic product  plus imports minus exports minus the change in private inventories.” See Niskanen, “Monetary Policy and Financial Regulation,” in Cato Handbook for Policymakers (2009), 7th ed., p. 377.

[10] In his 1992 Cato Journal article, “Political Guidance on Monetary Policy,” Niskanen examined three viable monetary rules: (1) targeting the price of gold or a broad price index, (2) targeting a monetary aggregate, and (3) targeting nominal GDP or domestic final sales. He argued that “any one of these rules would be better than guidance based on interest rates or exchange rates, or on any real variable such as the growth of output or the level of the unemployment rate” (p. 281). His preferred rule, however, is to minimize “the variance around an approved target path of nominal domestic final sales” — an objective that “is probably the most that can be expected of monetary policy” (p. 285).

[11] Market monetarists, such as Scott Sumner and David Beckworth, prefer to target nominal GDP (NGDP) rather than final sales. Their arguments for a final demand rule, however, are similar to Niskanen’s. For example, Beckworth argues that “a NGDP target aims to stabilize total dollar spending. It is one target that has embedded in it both the supply of and the demand for money (i.e. total dollar spending = money supply x velocity of money). The beauty of a NGDP target is that the Fed does not need to know what is exactly happening to the money supply or money demand. All the Fed only needs to worry about is the product of the two components. There is no need to track the money supply or estimate money demand. By focusing on total dollar spending, the Fed will be fostering a stable monetary environment where movements in money supply and money demand are offsetting each other.” Bill Woolsey, in comparing a monetary rule targeting NGDP versus one targeting FSDP, finds no significant difference.

[12] See Title X of H.R. 10: “Fed Oversight Reform and Modernization.” H.R. 10 also calls for a Centennial Monetary Commission to examine the Fed’s history and to recommend reforms.

[13] See, e.g., J. A. Dorn, “It’s Time to Bury the Phillips Curve,” Investor’s Business Daily, September 26, 2017.

[Cross-posted from Alt-M.org]

As Republicans work on details of their tax legislation, many reporters and pundits are painting the effort as slanted in favor of the rich. But that is not what a fair reading of the official data shows. The House bill proposed last week provides the largest percentage cuts to middle-income taxpayers, at least in the early years.

The Joint Committee on Taxation (JCT) has published estimates on the House bill. In the table below, the first three columns show the results for 2019, which is the first year in the JCT analysis.

Column 3 shows that middle-income groups would enjoy somewhat larger percentage tax cuts than higher-income groups under the GOP plan. Those are the raw JCT results.

However, the JCT calculates its results using a denominator that not only includes income taxes, but also payroll and excise taxes, even though Republicans are not changing those taxes. JCT’s inclusion of payroll and excise taxes slants its presentation to exaggerate the benefits to higher groups compared to lower groups.

Columns 4 and 5 include just individual and corporate income taxes since those are the taxes that Republicans are cutting. Column 4 shows my rough estimate (details below) of the 2019 totals of those taxes since the JCT did not provide those figures. In aggregate, households earning less than $40,000 do not pay any income taxes, so they are n/a.

Column 5 shows the GOP tax cuts as a percent of estimated income taxes paid under current law. You can see that using this more sensible denominator, the results show huge percentage tax cuts for middle earners. Households in the $40,000 to $50,000 group would get their income taxes cut almost in half, in aggregate. The House bill would make the tax code substantially more “progressive,” which is not a good idea since the code is already far too progressive or unequal.

Two caveats. The JCT does not include estate tax changes. Also, I focused on 2019, but over time the tax cuts bend more toward the top end. However, my main point is that distribution tables can show the same model results in very different ways, suggesting different messages. To me, the adjusted JCT data reveal that the GOP has moved too far left in designing its tax package.

The most important goal of tax reform is to raise economic output and incomes over the longer term, and the GOP’s business tax reforms will do that. However, because the GOP tilted left on its individual changes, those changes will not spur any economic growth, according to the Tax Foundation. Sadly, that looks like it could be a missed opportunity for tax reform this year.

Data Note: I could not find an estimated breakout of federal taxes between income, payroll, and excise for 2019 on JCT’s website. So I used a recent TPC estimate for 2019 (T17-0045) of the current law breakdown in the same income categories as JCT. Since TPC’s tax and income estimates are somewhat different than JCT’s, I adjusted the TPC data to match the JCT figures.

Since the 1986 Immigration Reform and Control Act (IRCA) came into force, it has been against the law for illegal immigrants to work in the United States. Prior to IRCA, they could be deported if discovered by the Immigration and Naturalization Service (INS), that era’s federal immigration agency, but illegal immigrants were not barred from working. For decades prior to 1986, immigration restrictionists and labor unions had tried to make illegal immigrant employment illegal. Prior to IRCA, the INS even instituted the Texas Proviso whereby they wouldn’t enforce harboring or other statutes against employers of illegal immigrants. IRCA ended this arrangement in 1986.

Since November 6, 1986, everybody seeking a job in the United States must fill out an I-9 form at the point of hire to supposedly prove that they are legally allowed to work in the United States. The new hire must show the employer some documents that corroborate the information on the I-9 form, copies of which the employer must keep on site. This requirement has had multiple negative effects. 

The first is that it has decreased the wages of illegal immigrants relative to similarly skilled native-born Americans and legal immigrants by diminishing employer demand for their labor. While this is the point of the I-9 check, it is disingenuous of immigration restrictionists to complain about slow immigrant wage convergence when the I-9 regulations that they support are slowing down that convergence for lower-skilled immigrants.

The second negative effect of IRCA is its creation of a large-scale black market for legal documents in the United States. The value of document fraud increased after ICRA because false documents became necessary for illegal immigrants to fill out an I-9 form to work. Since working is the main reason immigrants, especially illegal immigrants, come to the United States, a growing cottage industry of black market identity documents rose to serve them.

This is where identity theft enters the immigration debate. Many illegal immigrants in the United States work and fill out I-9 forms which many voters think means that they must have stolen somebody’s identity and committed a felony. That’s not necessarily true. Aggravated identity theft is a felony that requires the user to knowingly use another person’s identity, but falsely using another person’s identity is a misdemeanorMerely purchasing an identity from another person and using that for employment purposes doesn’t count as a felony because the purchaser does not know if it belonged to somebody else because it could be fake. 

In popular terminology, as opposed to legal terminology, anybody who uses somebody else’s identification without the owner’s permission commits identity theft. This makes it complicated for supporters of legalization to argue that illegal immigrants who are otherwise law-abiding should have a path to citizenship because, if they have worked on an I-9, then there is a good chance that they’ve worked using somebody else’s identity.

The Internal Revenue Service (IRS) further complicated this issue by granting Individual Taxpayer Identification Numbers (ITIN) to foreigners ineligible for a Social Security Number (SSN). ITINs are available for foreign investors, spouses of foreign workers, and others so they can pay taxes. Illegal immigrants understandably take advantage of the ITIN. A recent government report suggests that about 1.2 million ITIN filers are also using a name or SSN that does not match their ITIN.

Most illegal immigrant use of other people’s identities is likely for employment purposes. Rarely does it result in truly awful crimes. Virtually all employment-related identity theft would disappear if illegal immigrants were legalized and future immigrant flows were liberalized because immigrants wouldn’t have to steal identities in order to work. The best solution would be to remove the I-9 requirement entirely and shrink, or separate, the SSN or other government-issued identification requirements for employment authorization. If there is no reason to steal SSNs for employment then nobody will steal them for employment. But those arguments only get legalization proponents so far against people who are disgusted by rampant employment-related identity theft.

Many of the so-called instances of employment-related identity theft committed by illegal immigrants are actually identity loans where the owner of a government-issued identity allows the illegal immigrant worker to use that legal identity for work purposes. There are few statistics available to estimate the frequency of identity loans but they appear to be commonplace. One survey-based paper found that immigrant farmworkers estimated that 50 to 70 percent of their coworkers used loaned documents whose procurement is usually arranged by a supervisor, friend, colleague, or a fourth party.

Other family members frequently supply the loaned identities. For example, many unlawful immigrants use the SSNs of parents, children, or other family members who either voluntary lend the information or are not using it – a form of family wealth. Oftentimes, the actual owner of the identity is outside of the country or too young to work. A good example of this is the story of Manuel:

An unauthorized immigrant from Zacatecas, Manuel had first settled in the San Francisco Bay Area and sought work in construction. However, because the construction industry in San Francisco is unionized, Manuel had discovered that potential employers would check his I-9 form with E-Verify, a federal database that matches Social Security cards and names. So Manuel contacted an uncle in Zacatecas who had obtained a Social Security card in the early 1970s when he had first migrated to California—to ask about using his card. His uncle, who had returned to Mexico permanently with no plans to reenter the United States, agreed.

When next applying for work, Manuel presented his uncle’s Social Security card and a fake legal permanent resident card (green card) bearing his uncle’s name—which he had purchased from a local vendor—to the employer. The employer, in turn, was able to verify that the SSN was on file with the Social Security Administration (SSA) and that it matched the uncle’s name. This ploy allowed Manuel the luxury of finding work in a sector of the economy normally closed to the unauthorized. In entering a unionized construction job, Manuel benefited from more comfortable work conditions and employer-provided benefits. Moreover, in contrast to what he had earned in agriculture—typically about $25,000 a year—Manuel was able to earn $60,000 to $80,000 a year in construction.

Some researchers claim that the lending of identity is a form of community-wide mutual assistance or insurance but the family property explanation is better.  

Sometimes, the fourth party identity-loaner will loan his or her own identity so that the taxes paid by the illegal immigrant worker will contribute to welfare fraud. In this scenario, taxes paid by the illegal immigrant identity-borrower count toward government benefits like unemployment or Social Security for the identity owner. Sometimes, the American identity owner even pays the illegal immigrant to work with their identity in order to commit welfare fraud. This brief description explains how the scam works:

Elisabeta remembers that she had just arrived in the United States when her neighbor, Amparo, approached her to ask whether Elisabeta would “work” her papers (trabajar sus papeles). At the time, Elisabeta was barely 15 and was a single girl seeking work in agriculture, an industry dominated by males. She had come to the United States to earn money to send to her recently widowed mother, who lived with Elisabeta’s older sisters on the family farm in rural Jalisco, Mexico. Yet before she could get to work, she needed to procure the identity documents—a fake Social Security card and a “green card” (or resident alien visa)—that would allow her to find a job. She lacked the cash necessary to purchase a set of fake papers at a flea market or from a fly-by-night document mill. Thus, Elisabeta faced the kind of dilemma that plagues many unauthorized new arrivals: Without “papers,” she could not find employment. And yet, without employment, how could she possibly purchase “papers”?

Amparo drew on her knowledge of Elisabeta’s situation when she made the case for the loan. “Why don’t you just work my papers?” she had proposed. “Because being recién llegada (recently arrived) and all, where will you possibly get them otherwise?”

Amparo herself was in her midfifties. She walked slowly and stiffly. As she grew older, she told Elisabeta, working in the fields made her back hurt. So Amparo offered Elisabeta what seemed to the latter like a bargain. If Elisabeta used Amparo’s mica (green card) and seguro (Social Security number) to find work, Amparo would pay her an additional $100 for every $1,000 that she earned.

The “tip” that Amparo offered to entice Elisabeta to “work” her documents is the kind of financial incentive that often accompanies document exchange in California’s Central Valley. While the exchange appeared advantageous to Elisabeta, Amparo herself also stood to benefit. A person’s unemployment payments are based on the calendar quarter within the previous 12-month period during which he or she earned the highest amount. Thus, while Elisabeta would gain identity documents that would allow her to find work, her work history would fatten Amparo’s unemployment checks at the end of the season.

A preliminary analysis of law enforcement press releases, far from a precise measure, reveals a few patterns that should be the basis for future research. For instance, when non-citizen immigrants commit identity theft, they mostly do so for employment purposes. When American citizens commit identity theft, they usually do so in order to commit welfare fraud, financial fraud, or in order to sell identities to illegal immigrants either on their own or as part of a conspiracy that involves the immigrants themselves. For example, some of the instances of identity theft committed by U.S. citizens were committed to steal wages, create fake schools to supply “student” visas, marriage fraud, H1-B visa fraud, visa fraud and harboring, manufacturing and selling fraudulent identities, EB-5 visa fraud, defrauding migrant clients, bribery, and illegal issuing of driver’s licenses, among others. In many of these cases, immigrants would purchase the identities but U.S. citizen intermediaries initially stole them.

Borrowing another person’s identity with the owner’s permission for employment purposes can still be a crime but it is a lot less egregious than taking somebody’s identity without their permission. Working in the United States is extremely valuable but government immigration laws make it very difficult for foreigners to do so lawfully. Most illegal immigrants have to work on a legal or false identity in order to earn a wage, which incentivizes identity loans and identity theft. Although researchers need to conduct more detailed quantitative and qualitative work on identity loans borrowed and identity theft committed by illegal immigrants, it is a more nuanced issue with fewer and different victims than many commentators realize.

Special thanks to Jen Sidorova for her help on this blog post. 

An overwhelming majority (82%) of Americans agree that “it would be hard to ban hate speech because people can’t agree what speech is hateful,” the Cato 2017 Free Speech and Tolerance Survey finds. Seventeen percent (17%) disagree. Majorities across partisan and demographic groups alike agree that hate speech is hard to define and thus may be hard to regulate.

Full survey results and report found here.

How Do Americans Define Hate Speech?

When presented with specific statements and ideas, Americans can’t agree on what speech is hateful, offensive, or simply a political opinion

Besides slurs and biological racism, Americans are strikingly at odds over what speech and ideas constitute hate.[1] For instance, a majority of Democrats (52%) believe saying that transgender people have a mental disorder is hate speech. Only 17% of Republicans agree. On the other hand, 42% of Republicans believe it’s hateful to say that the police are racist, while only 19% of Democrats agree.

Among all Americans, majorities agree that calling a racial minority a racial slur (61%), saying one race is genetically superior to another (57%), or calling gays and lesbians vulgar names (56%) is not just offensive, but is hate speech. Interestingly a majority do not think calling a woman a vulgar name is hateful (43%), but most would say it’s offensive (51%). Less than half believe it’s hateful to say that all white people are racist (40%), transgender people have a mental disorder (35%), America is an evil country (34%), homosexuality is a sin (28%), the police are racist (27%), or illegal immigrants should be deported (24%). Less than a fifth believe it’s hateful to say Islam is taking over Europe (18%) or that women should not fight in military combat roles (15%).

Liberals and Conservatives Define Hate Speech Differently

Liberals and conservatives significantly diverge over what speech they define as hateful, offensive, or simply an opinion.

Majorities of liberals say that slurs against racial minorities (81%) and LGBT people (73%), saying that one race is genetically superior to others (75%), or saying transgender people have a mental disorder (59%) are hateful. Strikingly, majorities of conservatives don’t think any of these ideas are “hateful” although most consider them “offensive” or hateful.[2] In fact, conservatives are about 40 points less likely than liberals to think that saying transgender people have a mental disorder (17% vs. 59%) or saying racial slurs (43% vs. 81%) are hateful. While strong majorities of conservatives agree these are at least offensive or hateful, they are less likely to equate these phrases and ideas with hate specifically.

Although majorities of conservatives did not find any of the statements included on the survey hateful, they were more likely than liberals to find several statements hateful. First, conservatives are about twice as likely as liberals to think it’s hateful to say the police are racist (39% vs. 17%). Second, conservatives are somewhat more likely to believe it’s hateful to say that America is an evil country (39% vs. 29%). Third, conservatives are somewhat more likely than liberals to think it’s hateful to say that all white people are racist (44% vs. 35%).

Liberals are more likely than conservatives to view a variety of political opinions and speech as either offensive or hateful.

Liberals are more than 40 points more likely than conservatives to think it is offensive or hateful for a person to say that homosexuality is a sin (90% vs. 47%), women shouldn’t fight in military combat roles (87% vs. 47%), illegal immigrants should be deported (80% vs. 36%), or Islam is taking over Europe (79% vs. 33%). Not even a majority of conservatives find these statements to be offensive or hateful.

Notice that two of these, women fighting in combat roles and deporting illegal immigrants, are policy positions that a substantial number of Americans hold. For instance, a Quinnipiac survey found 22% of Americans believe unauthorized immigrants should be “required to leave” the United States. A Fox News poll found 26% don’t think women should fight in military combat roles. Furthermore, the perception that the police allow racial bias to impact their jobs is also a view held by about a quarter (26%) of Americans, according to a Quinnipiac survey.

Yet, to merely express these as political positions or perceptions would also be viewed as highly offensive to a large share of the population.

Implications

These data demonstrate why it would be difficult to regulate hateful or offensive speech—Americans can’t agree what speech is hateful or offensive. Across a variety of statements, liberals and conservatives varied dramatically in the speech they found hateful, offensive, or neither hateful nor offensive.

Furthermore, what may be a policy preference or an assessment of public policy for one person, such as deporting unauthorized immigrants or perceiving a racial bias in policing, may be highly offensive and hateful to another. Thus, attempts to regulate offensive speech would have the effect of shutting down dialogue and erect barriers to public policy debate.

Full survey results and report found here.

Sign up here to receive forthcoming Cato Institute survey reports.

The Cato Institute 2017 Free Speech and Tolerance Survey was designed and conducted by the Cato Institute in collaboration with YouGov. YouGov collected responses online August 15–23, 2017 from a national sample of 2,300 Americans 18 years of age and older. The margin of error for the survey is +/- 3.00 percentage points at the 95% level of confidence.

[1] In this report, biological racism refers to a belief that some races are genetically superior or inferior to one another.

[2] 

The Obama administration ramped-up and sustained interior immigration enforcement operations through the end of FY2013, which was the longest such period of sustained enforcement in U.S. history. President Obama inherited an expanding immigration enforcement apparatus and built on it further by making “Secure Communities” mandatory in near every county of the United States, appointing immigration enforcer and former-Arizona governor Janet Napolitano as the head of DHS, and treating Central American asylum-seekers in a heartless fashion.     

Immigration restrictionist groups and some of President Obama’s supporters hid or excused the fact that President Obama’s interior enforcement operations were so extensive. The restrictionists argued that President Obama’s deportation numbers were puffed up to include those captured at the border. Their argument contained just enough truth to pass a 10-second investigation but ignored the fact that ICE removals from the interior of the United States were higher for a longer period under Obama than for any other President (Figure 1). 

Figure 1

ICE Removals from the Interior of the United States

 

Source: ICE FOIA Library.

Although the Obama administration did sustain a high number of removals, it also focused more on criminals (Figure 2). The latter category included those who committed victimless crimes, like immigration violations, as well as real crimes like violent and property offenses. In January 2016, 53 percent of those removed by ICE were criminals compared to just 33 percent when Obama first took office in January 2009 (Figure 3). In March 2017, the last month for which I have full data, criminals were 59 percent of all removed immigrants. Trump’s deportation priorities haven’t affected that yet.

Figure 2

ICE Removals from Interior of the United States by Criminality

 

Source: ICE FOIA Library.

Figure 3

Criminal ICE Removals from the Interior of the United States

 

Source: ICE FOIA Library, author’s calculations.

It is difficult to judge the Trump administration’s removal record after less than a year in office.  After all, reorienting the enforcement priorities of a bureaucracy as large as the Department of Homeland Security takes time.  However, a few facts do stand out. 

First, ICE arrests are up dramatically during the Trump administration. 

Second, ICE removals from the interior of the United States are down since February 2017. Obama’s ICE deported 21,705 people per month from the interior of the United States from October 2016 through the end of January 2017, before Trump took office. However, President Trump has managed, so far, to deport an average of only 17,142 people per month – 21 percent below Obama’s record for the first four months of the fiscal year. The February-September 2017 removal number is 14.6 percent lower than for the same period in 2016 (Figure 4). 

Figure 4

ICE Removals from the Interior of the United States, Monthly Average from April-October 2017.

 

Sources: ICE FOIAs, Washington Post, and Author’s Calculations.

The number in Figure 4 is estimated from the number of deportations by September 9, 2017, extended for an additional three weeks until the end of the fiscal year. That simple exercise estimates that ICE will deport about 223,953 people by the end of the fiscal year. Interior removal numbers are publicly known for the months of October 2016 through March 2017 thanks to FOIAs, so estimating the average number of monthly deportations after March was simply based on the total number of deportations that year.  

Third, the immigration court backlog is getting worse. The extension of due process rights to immigrants, an insufficient number of judges, and executive actions have all certainly contributed to the slowdown. Regardless, the number of new arrests and Trump administration efforts to clear the backlog will lead to a substantial rise in deportations from the interior of the United States. Indeed, it may already be occurring but the numbers are hidden by the monthly averages from April through October 2017.    

The Cato 2017 Free Speech and Tolerance Survey finds only 20% of current college and graduate students believe their college or university faculty has a balanced mix of political views. A plurality (39%) say most college and university professors are liberal, 27% believe most are politically moderate, and 12% believe most are conservative.

College Democrats Less Likely Than Republicans to Think Faculty Is Liberal

Democratic and Republican students see their college campuses very differently. A majority (59%) of Republican college students believe that most faculty members are liberal. In contrast, only 35% of Democratic college students agree most professors are liberal. Democratic students are also about twice as likely as Republican students to think their professors are moderate (32% vs. 16%) or conservative (14% vs. 9%).

Full survey results and report found here.

College Students Agree Student Body is Liberal

Current students believe that most of their campus’ student body is liberal. Fifty-percent (50%) believe that most students at their college or university are liberal, 21% believe most are moderate, 8% believe most are conservative, and 19% believe there is a balanced mix of political views.

Democratic and Republican students largely agree on the ideological composition of their campus student body.

Consequences of Campus Political Climate

These perceptions of ideological homogeneity on college campuses may explain why 72% of Republican college students say the political climate prevents them from saying things they believe because others might find them offensive. About a quarter (26%) of Republican college students feel they can share their political views.

Far fewer Democratic college students feel they can’t share their beliefs. College Democrats (51%) are 21 points less likely than Republican students (72%) to feel they can’t share their views. Nevertheless over half of Democratic students also feel the need to self-censor. Interestingly, college students who identify as independents (70%) are about as likely as Republicans (72%) to say they feel uncomfortable sharing their opinions as well.

Only current students who identify as “very liberal” do not feel the need to self-censor (74%). However, liberal college students (55%) instead feel that they have to hide some of their political views, as well as 69% of moderates, 71% of conservatives, and 83% of strongly conservative students.

In sum, there is a widespread perception that most faculty and students at American colleges and universities are liberal. But it’s not just perception. Empirical studies of faculty ideology confirm what most students observe. Surveys conducted by sociologist Neil Gross and others find that, indeed, most of the professoriate is liberal. Sam Abrams at Heterodoxacademy.org summarizes some of this data to show that as of 2014 about 12% of professors are conservative while about 60% are liberal. Further, the Cato Free Speech and Tolerance Survey finds that nearly half (46%) of current college and graduate students identify as Democrats or independents who lean Democratic. About a quarter identify as Republican (27%).

These results matter because if universities become political echo chambers, it could lead to the exclusion of non-conforming political views, self-censorship, and less rigorous academic inquiry. Without a free exchange of ideas, there may be less thorough checking of academic work and the quality of research may decline. By extension, the public may lose confidence in the process of academic inquiry and become skeptical of its results.

Full survey results and report found here.

Sign up here to receive forthcoming Cato Institute survey reports.

The Cato Institute 2017 Free Speech and Tolerance Survey was designed and conducted by the Cato Institute in collaboration with YouGov. YouGov collected responses online August 15-23, 2017 from a national sample of 2,300 Americans 18 years of age and older. The margin of error for the survey is +/- 3.00 percentage points at the 95% level of confidence.

A main goal of the House Republican tax plan is to reduce marginal tax rates, which are the rates that affect economic decisionmaking. Cutting marginal rates reduces the harm caused by many of the special-interest breaks in the tax code, while reducing the value of those breaks to recipients. That is why even some supporters of breaks that the House plan would not repeal are not pleased with the rate-cutting reforms.

As an example, the House tax plan does not repeal the Low-Income Housing Tax Credit (LIHTC), but supporters of the subsidy program are not happy. The credit is taken by big banks on their corporate tax returns, and it has spawned an industry of real estate, financial, and services firms, as well as state and local housing bureaucracies.

In an upcoming Cato study, Vanessa Brown Calder and I describe the flaws in the LIHTC and recommend its repeal. We discuss some of the flaws in this op-ed.

The House tax plan would affect the LIHTC in three ways:

  • Cutting the corporate tax rate from 35 to 20 percent would reduce the value to corporations of investing in LIHTC properties because the tax-loss benefits would be smaller.
  • Eliminating tax-free private activity bonds would end subsidies that are often paired with LIHTC subsidies on housing projects.
  • Changing the LIHTC inflation factor would slow the growth of the $9 billion credit over time.

Those would be good changes, but as the tax debate moves to the Senate, it would be nice to see some members push for LIHTC elimination. That would free up $9 billion a year to offset a further reduction in the corporate tax rate.

President Trump said, “tax reform must dramatically simplify the tax code [and] eliminate special-interest loopholes.” And yesterday, House Speaker Paul Ryan said he wanted to “clean out the special interest loopholes in the tax code.”

Great! You folks should add the LIHTC to the clean-out list. It is a complex corporate giveaway that provides limited benefits and suffers critical flaws.

Look for our forthcoming study, “Low-Income Housing Tax Credit: Costly, Complex, and Corruption-Prone.”

A year ago, voters made Massachusetts one of eight states (plus D.C.) to legalize recreational marijuana. For all its predecessors, the prospect of legal marijuana for both medical and recreational use has meant increased tax revenue, new jobs, and a reduction in black market sales. Technical issues inevitably arise—how to tax different products and concentrations? what constitutes impaired driving?—but with another nine months to go before the initiative takes full effect, there should be plenty of time to implement this reform.

The Bay State does face one unique issue: how to transport marijuana from the mainland to surrounding islands like Nantucket and Martha’s Vineyard. The problem is that transporting marijuana by sea or air—across waters under federal jurisdiction—is illegal.

If distributors were to ferry marijuana across Nantucket Sound, the Coast Guard would have full authority to seize and enforce the federal prohibition. Flying cannabis to the island is just as risky a proposition because federal law prohibits pilots from knowingly flying planes that contain illegal substances on board. Curiously, however, the applicable regulation says that it “does not apply to any carriage of narcotic drugs, marihuana, and depressant or stimulant drugs or substances authorized by or under any Federal or State statute or by any Federal or State agency.” This raises the obvious question of whether state-legalized marijuana is actually allowed to be transported by air.

The language of this regulation is ambiguous regarding what I’ve taken to calling “Schroedinger’s Weed”—both legal and illegal at the same time —and the FAA hasn’t provided any guidance on the matter. Even without such guidance, marijuana businesses in Alaska have been taking advantage of the regulatory language in a different way, specifically the part about “knowing” transport. Alaskan businesses simply inform airport police that they are transporting marijuana, while also providing their proper (state) Marijuana Control Board documentation. None of the parties inform the airplane owner or pilots, keeping them unaware of the marijuana.

This type of plausible deniability is likely not viable long-term or on a large scale because the room for error is high and, after all, it remains a legal grey area. A possible alternative would be to narrowly tailor state laws that expressly makes legal the transportation of marijuana within and between any state territory—whether in Alaska, Massachusetts, or anywhere else. That would create a bona fide “authorized” use by state statute and explicitly invoke the regulatory safe harbor without ambiguity—and it’s hard to imagine congressional will to close the alleged loophole. 

If the Massachusetts legislature declines to enact such a law, then the only completely secure legal option would be to grow and sell all marijuana on the islands themselves rather than transporting it in. Even there, however, there would have to be an initial import of marijuana seeds, which may trigger the same federal air and maritime laws (but may be easier to conceal).

Moreover, under regulations being developed for the Massachusetts market, all marijuana must first be tested in a certified lab before being introduced for consumer consumption. The establishment of such testing facilities on the individual islands would make Nantucket or Martha’s Vineyard weed considerably more expensive. These islands are known as being playgrounds for the rich, to be sure, but such impediments may still make marijuana commercially unfeasible, particularly in competition with the black market.

Still, the Cannabis Control Commission, a Massachusetts state agency, is determining ways to ensure that Nantucket and other state islands have access to marijuana—and there have been moves for statutory reform in the state legislature. Meanwhile, Mass Medi-Spa Inc., a marijuana dispensary, is planning on opening in Nantucket within the next year regardless of the state of the laws.

Let’s hope that their vision for pro-federalism, pro-liberty policy reform doesn’t go up in smoke.

Thanks to Cato legal intern Addison Hosner for his research assistance on this post.

Under the U.S. Global Change Research Act of 1990, the federal government has been charged with producing large National Climate Assessments (NCA), and today the most recent iteration has arrived. It is typical of these sorts of documents–much about how the future of mankind is doomed to suffer through increasingly erratic weather and other tribulations. It’s also missing a few tidbits of information that convincingly argue that everything in it with regard to upcoming 21st century climate needs to be taken with a mountain of salt.

The projections in the NCA are all based upon climate models. If there is something big that is systematically wrong with them, then the projections aren’t worth making or believing. 

Here’s the first bit of missing information:

The chart shows predicted and observed tropical (20⁰N-20⁰S) temperatures in the middle of the earth’s active weather zone—technically the mid-troposphere, roughly from 5,000ft to 30,000ft elevation. The predicted values are from the 102 climate model realizations from 32 different base model groups. These models are from the most recent science compendium of the UN’s Intergovernmental Panel on Climate Change (IPCC), and is the most comprehensive set available. Data for the chart were recently published in the Bulleting of the American Meteorological Society.

The squares are the average of the three extant datasets for satellite-sensed global temperatures in the same zone, the circles are the average of the four weather balloon records, and the diamonds are the fancy new “reanalysis” data, which uses a physical model to compensate for the fact that not all three-dimensional “soundings” of the atmosphere are from the same stations every day.

The difference between the predicted changes and observed is striking, with only one model, the Russian INCM4, appearing realistic. In its latest iteration, its climate sensitivity (the net warming calculated for a doubling of the atmosphere’s carbon dioxide concentration) is 1.4⁰C (2.5⁰F) compared to the average of 3.2⁰C (5.8⁰F) in the family of models used in the National Climate Assessment. In fact, the temperature trajectory the earth is on, along with an expected large-scale shift from coal to gas for electrical generation (already underway in the U.S. and Canada) will keep total human-caused warming to less than 2.0⁰C (3.6⁰F) between 1950 and 2100, which is the goal of the Paris Climate Agreement.1

That’s a far cry from the extremism of the National Assessment.

The second bit of missing information is sufficient to invalidate most of the Assessment’s predictions. It’s a bit more complicated than the first one.

The vertical axis is height (as measured by barometric pressure) and the horizontal axis is temperature change, in degrees C per decade. The solid green line is the observed average of our four sets of vertical sounding data from balloons. You can see that the observed warming rate at the surface (given as the “1000 hPa” on the left axis) is a bit above 0.1⁰C/decade, while the predicted value (1979-2016) is smidge below 0.2⁰C. In other words, in this region, which is extremely important to global climate, almost twice as much warming is being predicted compared to what is measured. This is figure S-2 in the recent Bulleting of the American Meteorological Society report on the climate of 2016.

But the situation gets truly horrific as one goes up in the atmosphere. The models predict that there should have been a huge “hot spot” over the entire tropics, which is a bit less than 40% of the globe’s surface. Halfway up through the atmosphere (by pressure), or at 500 hPa, the predicted warming is also twice what is being observed, and further up, the prediction is for seven times more warming than is being observed.

The importance of this is paramount. The vertical distribution of temperature in the tropics is central to the formation of precipitation. When the difference between the surface and the upper layers is large, surface air is more buoyant, billowing upwards as the cumulonimbus cloud of a heavy thunderstorm. When the difference is less, storm activity is suppressed. As shown on the chart, the difference is supposed to be becoming less and less, which would result in a general tendency for tropical drying. In reality, the opposite is occurring over much of the tropics, which should result in an increase in precipitation, rather than the decrease forecast by the climate models. 

Missing the tropical hot spot provokes an additional cascade of errors. A vast amount of the moisture that forms precipitation here originates in the tropics. Getting that wrong trashes the precipitation forecast, with additional downstream consequences, this time for temperature.

When the sun shines over a wet surface, the vast majority of its incoming energy is shunted towards the evaporation of water rather than direct heating of the surface. This is why in the hottest month in Manaus, Brazil, in the middle of the tropical rainforest and only three degrees from the equator, high temperatures average only 91⁰F (not appreciably different than humid Washington, DC’s 88⁰F). To appreciate the effect of water on surface heating of land areas, high temperatures in July in bone-dry Death Valley average 117⁰F.

Getting the surface temperature wrong will have additional consequences for vegetation and agriculture. In general, a wetter U.S. is one of bumper crops and good water supplies out west from winter snows, hardly the picture painted in the National Assessment.

So this one, like its predecessors, suffers from a serious and obvious flaws that are simply ignored. As first documented in our 2004 book Meltdown, the first Assessment used models that were worse than a table of random numbers when applied to 20th century coterminous U.S. temperatures, and the chief scientist for the report knew it and went ahead anyway! The last (third) one engendered book-length filed public comments, all with our eye for climate humor, and the second one was so bad that we published an entire palimpsest, or mirror-image document.

Ignoring the massive and critical errors noted above—along with a whole other emerging story on the arbitrary nature of the climate models—is certainly going to lead for some to call for a re-examiation of EPA’s “Endangerment Finding” from carbon dioxide, which is the basis for regulation of greenhouse gases.

1 Michaels, Patrick J. “Finding Common Ground on Climate Change Mitigations and Adaptation.” 2017.

Debating the implications of the GOP tax plan, most analysts speak past each other. That’s because there are 3 prisms through which changes can be assessed: the implications for efficiency and growth, the impact on the public finances, and the distributional impact across income groups.

The media tends to focus on the latter, but this is the least interesting. Distributional analysis tends to put the status quo on a pedestal (see how “progressive” sources now defend the state and local income tax deduction), tends to be static in its thinking, and in the case of this tax reform, ignores the potential for significant corporate income tax rate cuts to raise wages. Added to that, a lot of the results are simply not surprising. Given a large proportion of people do not pay income taxes, it is hardly shocking that their after-tax income doesn’t increase following income tax rate cuts, though this can be influenced of course by credits.

As my colleague Chris Edwards has written before, the GOP open themselves up to these distributional critiques by talking about how their changes represent a “middle class tax cut” rather than focusing on the supply-side case for lowering marginal rates. As a result, this morning’s tax discussions on Twitter have been dominated by the sharing of blogs saying, in essence, that “the tax cut is actually a tax increase for much of the middle-class because the new credit is set to expire in 2022.” I am struggling to find blogs or comment pieces which used the same logic to explain why George W Bush’s temporary tax cuts weren’t really tax cuts at all, but hey, who expects consistency in politics!

On the efficiency and growth front, there is in fact lots to like in the House GOP plan. The changes to the income tax code stripped away a whole host of small deductions and made significant inroads into some big ones too (curtailing the mortgage interest deduction and eliminating the state and local income tax deduction), as well as abolishing the AMT. Of course, to make this politically palatable, the GOP near-doubled the standard deduction, expanded the child credit and added a new personal credit too. These will do little for growth, especially compared with purely lowering marginal rates, but they do help compensate losers from other changes.

The long-term consequence of the package of these reforms though (assuming they pass Congress without being further diluted) will be a combination of lower rates, fewer deductions and fewer people itemizing. This will significantly reduce deadweight costs associated with taxation. A key variable to watch out for to assess the broader economic impact of the income tax changes is the proportion of people who will face lower or higher marginal rates as a result of all the changes. One reason why this must be seen in the round is that linking tax thresholds to chained CPI rather than CPI will see slower threshold increases, meaning people being dragged into higher bands more quickly as nominal wages rise over time.

The most important policy goal was of course a large permanent cut in the corporate income tax rate, and this plan (if it passes) would achieve that. There is good reason to think this will raise the level of GDP and wages. Even though non-corporate businesses were already favored in the tax code once you include taxes on dividends, the GOP wanted to cut all business tax rates and broadly maintain differentials. They therefore introduced a new pass-through business tax rate at 25 percent. But this necessitates complex anti-avoidance rules to stop people restructuring their affairs to earn less wages and more business income.

The other, final change of note is the welcome planned repeal of the estate tax. This will not set be fully implemented until 2024, however, by which time the political landscape may have changed significantly.

Overall then, critics of the plan were wrong to say this was just about tax cuts without reform. In fact, the plan was a lot bolder on making changes to deductions and the structure of the code than many expected. Sure, other less growth-oriented measures were included to compensate some of the losers from broader reform, but overall the tax code is made more coherent.

The real debate for conservative economists should be weighing these efficiency gains against the consequences for the public finances. The plan is projected to add $1.5 trillion to the debt over 10 years, but even this is predicated on full expensing and the new income tax credits expiring after 5 years, which is debatable to say the least. The problem is that absent spending cuts, net tax cuts ultimately become tax shifting, leading to higher taxes in future.

A few weeks ago, I wrote that tax cuts which raised borrowing were worth it if they were used to grease the wheels of pro-growth tax reform or if they were a precursor to restraining spending. The latter looks unlikely. Whether the specific tax changes the GOP have planned got enough “bang for the buck” from the extra borrowing is an open question. Certainly, the priorities as this develops into legislation must be to keep the most economically beneficial measures: the corporate rate cut, the marginal income tax rate cuts, and the elimination and constriction of deductions.

As you may or may not know (I hope it is the former) Cato’s Center for Educational Freedom maintains the Public Schooling Battle Map, an interactive database of values and identity-based battles—potentially the most wrenching of all conflicts—in public schools. To get a sense for specific topics that appear to be roiling people not just in particular districts, but perhaps across the country, we at CEF thought it might be worthwhile putting out a little summary of what we’ve observed each month.

Keep in mind that the Battle Map is primarily populated with events reported in major media, so there are likely lots of fights we never find out about. (If you know of one, email it!) Based on what we found reported, here were the big conflicts in October:

  • To Kill A Mockingbird: Tussles over the propriety of books on reading lists or in school libraries are constant, but a Biloxi, Mississippi school ending an 8th grade reading of Mockingbird over a family’s concerns over the frequent appearance of the N-word created a national sensation. The family found the use of the word—and some students’ reactions to it—inappropriate and disturbing, while the book’s defenders said it is precisely Mockingbird’s unsettling portrayal of injustice that makes it not just an important read, but maybe one that should be mandatory. It is not, however, just one family in Biloxi that has objected to Mockingbird in public schools—it is one of the most challenged classic books on record.
  • Anthem and Pledge: With National Football League players, Donald Trump, and lots of other people sniping back-and-forth over kneeling during the National Anthem, it is not surprising that fights over standing for the Anthem and Pledge of Allegiance have also been fought in the schools. Indeed, standing for the Pledge is a seemingly timeless battleground. Ultimately, the conflict is one of freedom of speech we’re all supposed to have against the unity and love of country that, historically, public schools were supposed to inculcate. In October we saw such conflicts in Iowa, Oklahoma, and Texas.
  • Halloween: This holiday tends to generate fights because of its connection to religion, and the potential dangers of costumes offending or even threatening others. We found conflicts over what costumes, if any, kids could wear in California, Massachusetts, New York, Oregon, and Wisconsin.
  • “Immersion” Assignments: I made up the term “immersion” for this, but there was an unusual spate of conflicts over assignments that basically asked students to immerse themselves in something historical in order to get a deeper understanding of it, but that seemed to many people to either trivialize, glorify, or impose something evil or disturbing. These included an assignment to create a Nazi mascot in Georgia; a Civil War dress-up day, also in Georgia; and a Pilgrim dress-up day in Massachusetts.

There were other battles begun or continued in October, of course—conflicts over President Trump, dress codes, and offensive expression—but these are the ones that stuck out as either constituting trends or attracting significant national attention.

For daily updates on conflicts in the public schools for which all, diverse people must pay, but only those with the most political power control, follow the Battle Map Twitter feed, Facebook page, and, of course, dive into the Battle Map itself

Is violence an appropriate response to hate speech? The Cato 2017 Free Speech and Tolernace Survey finds most Americans say no. More than two-thirds (68%) of Americans say it is not morally acceptable to punch a Nazi in the face. About a third (32%), however, say it is morally acceptable.[1] 

Strong liberals stand out with a slim majority (51%) who say it’s moral to punch Nazis. Only 21% of strong conservatives agree.

Full survey results and report found here.

Strong liberals’ approval of Nazi-punching is not representative of Democrats as a whole. A majority (56%) of Democrats believe it is not morally acceptable to punch a Nazi. Thus, tolerance of violence as a response to offensive speech and ideas is found primarily on the far Left.

The survey found liberals were more likely to consider upsetting and controversial ideas “hateful” rather than simply “offensive.” This may help partially explain why staunch liberals are more comfortable than the average American with using violence against Nazis.

Approval for punching Nazis also varies with age and race. Millennials (42%) are nearly twice as likely as people over 55 (24%) to say such violence is morally justified. African Americans (45%) are also more likely than whites (28%) and Latinos (35%) to say punching Nazis is morally acceptable. Nevertheless, majorities of each of these groups say physical force is not justified, even against a Nazi.

Full survey results and report found here.

Sign up here to receive forthcoming Cato Institute survey reports.

The Cato Institute 2017 Free Speech and Tolerance Survey was designed and conducted by the Cato Institute in collaboration with YouGov. YouGov collected responses online August 15-23, 2017 from a national sample of 2,300 Americans 18 years of age and older. The margin of error for the survey is +/- 3.00 percentage points at the 95% level of confidence.

 

 

[1] Data on punching Nazis in this section come from a Cato Institute/YouGov survey conducted August 21 to 22, 2017 (N=1,141). Question wording: “Is it morally acceptable or unacceptable to punch a Nazi?” See Survey Methodology for further details.

Has America become a nation of homebodies? Yale law professor David Schleicher claims it has in a study published last week.  In Stuck! The Law and Economics of Residential Stagnation, Schleicher outlines some of the legal and economic barriers to geographic mobility, like land use laws, homeownership subsidies, and occupational licensing. He goes on to argue that government policies depress geographic mobility rates. 

Indeed, in 2016 the U.S. had the lowest relocation rate in seventy years. This is a problem, because low geographic mobility means some Americans are being left in the dust. 

But in order to examine relocation trends, it is useful to understand why Americans relocate to begin with. U.S. Census data describes those reasons. Not surprisingly, the majority of Americans relocate for housing, job, and family.

 

Data source: U.S. Census Bureau, Geographical Mobility: 2015-2016

 

Schleicher reasons that many more Americans would move for housing and job-related reasons if it weren’t for existing government policies. That’s because a variety of policies make relocation more costly and remaining in place artificially attractive. Land use laws, homeownership subsidies, occupational licensing, and location-based subsidies distort individual’s decision calculus in harmful ways.

The impacts are not limited to the individual. For example, recent research on land use regulations suggests that when low-skill workers are deterred from relocating to high productivity areas, the whole economy suffers. Enrico Moretti and Chiang Hsieh argue that if just three U.S. cities – San Jose, San Francisco, and New York – adopted regulation typical of the median U.S. city, U.S. economic output would increase by 8.9 percent. If the estimate is correct, then the impact of reducing regulation in all restrictively regulated localities across the U.S. would be enormous.

But government policy doesn’t only make it difficult or impossible for Americans to relocate, it also can make it hard for cities to adapt in the face of decline. For example, housing stock and government operations need to be reduced, capital reallocated, and city’s geographic footprint(s) compressed. Resources should be used for something more productive than policing abandoned neighborhoods in a declining place. 

Regulations get in the way here, too. Cities frequently prohibit citizens from living in mobile homes, tiny homes, and small or cheap housing. But this type of housing is the easiest to move, leave, or eliminate if abandoned. Meanwhile, environmental and land-use regulations make it hard to dismantle abandoned structures.

This leaves cities with the futile job of policing and providing city services in places that aren’t being used. The burden falls to remaining residents, and able residents flee as the costs of city maintenance rise and benefits of city living fall. Remaining residents are left to watch as their city’s decline accelerates. 

The fact is, many Americans feel marginalized and left behind in the Trump era. Government policies exacerbate the situation and ensure they are. Schleicher’s article is a must-read reminder that much can be done to change that. 

For more information on how government policies curtail opportunity, see Cato Policy Analysis paper Zoning, Land-Use Planning, and Housing Affordability. 

President Trump’s arrival in Japan on November 5th will mark the start of a nine-day visit to Asia where trade and other economic issues, along with security concerns regarding North Korea, stand to figure prominently. Those hoping for the unveiling of any new bold trade initiatives, however, will almost surely find themselves disappointed. More probable is that the trip will serve as a bitter reminder of Trump’s ill-advised move only days after taking office to withdraw from the Trans-Pacific Partnership (TPP)—a decision whose reverberations are likely to be felt during many of his stops. The following is a closer look at some of the issues the president will likely encounter:

Japan: Had Trump used his political capital as a newly-elected president to push the TPP through a Republican-held Congress, his visit to Tokyo could have been an occasion to celebrate the agreement’s ratification in both countries (Japan has already done so). Instead, his trade discussions with Prime Minister Abe are likely to mirror those held between Vice President Pence and Deputy Prime Minister Aso last month, where Pence is said to have expressed “strong interest” in a U.S.-Japan bilateral trade deal while senior Japanese officials grumbled over U.S. withdrawal from the TPP. Given this disparity in views, it was no surprise when the two sides settled for a list of deliverables whose highlights included an agreement to lift U.S. restrictions on the import of Japanese persimmons and for Japan to allow imports of Idaho potatoes.

Like Pence, Trump may once again push for Japan to start negotiations on a bilateral free trade agreement. If so, it is doubtful he will receive the commitment he’s looking for, with Japan likely to prefer focusing on other aspects of a busy trade agenda which includes the finalizing of agreements with the TPP’s eleven remaining members and the European Union. Rather, any trade deliverables reached are likely to focus on more minor issues such as Japan’s decision in August to raise tariffs on imports of frozen beef from the United States and other countries from 38.5% to 50% as part of a “safeguard” mechanism to protect domestic farmers.

South Korea: Under a TPP passage scenario, Trump’s stop in Seoul could have been an opportunity to discuss South Korea’s accession to the agreement. Indeed, the country had previously made clear its interest in becoming the thirteenth TPP member, and the addition of the world’s eleventh-largest economy certainly would have increased the TPP’s benefits to its members. Instead, trade discussions between U.S. and South Korean officials are sure to center around a renegotiation of the U.S.-South Korea Free Trade Agreement (KORUS) demanded by President Trump which remains in its early stages. Indeed, just this week the renegotiation’s stakes were raised when South Korea’s trade minister is reported to have requested authority to terminate KORUS if he determines that the renegotiation’s result harm national interests.

It is worth pointing out that had Trump secured TPP ratification, South Korea’s accession could have served as a de facto renegotiation, thus eliminating what has become a noted sore point in bilateral ties. 

China: The atmospherics around Trump’s visit to Beijing appear inauspicious, with recent days featuring talk from the U.S. side about “predatory” trade practices by China—an apparent reference to long-standing irritants such as alleged forced technology transfers and intellectual property theft—and Chinese anger over the U.S. refusal this week to classify China as a market economy for anti-dumping purposes. Chinese officials will also no doubt take an interest in developments regarding the section 232 investigation into foreign steel imports initiated by the Trump administration and its section 301 investigation specifically directed at China.

While there is much the two sides have to talk about, it is unclear how the “significant outcomes on the economic and trade fronts” recently promised by China’s U.S. ambassador will be achieved. Given Trump’s comments this week about the “horrible” bilateral trade deficit with China, as well as other remarks by China’s ambassador that the country “do[es] not want a trade surplus” which “in the long run, will not help China’s economy,” a statement including vague promises to bring the trade relationship more into balance seems a likely outcome. Regardless, we are certainly a long way from the waning days of the Obama administration when the conclusion of a bilateral investment treaty appeared to be within sight

Vietnam/APEC: Stopping in Da Nang, Vietnam for the Asia-Pacific Economic Cooperation (APEC) Economic Leaders’ Meeting, President Trump will deliver a speech at the gathering’s CEO Summit. Had the United States passed the TPP this stop could have effectively been a victory lap for the president, and a chance to receive accolades for his leadership and ability to deliver on such a key trade initiative. Indeed, APEC would have been an ideal venue to begin discussions around the agreement’s enlargement or even to serve as the basis of a Free Trade Area of the Asia-Pacific.

Based on a State Department briefing this week, we are instead likely to be treated to cliché and self-contradictory calls for “free and fair trade” and a misguided insistence on balanced trade which can only be managed through significant government intervention—all the while insisting that openness and market principles serve as guiding principles for APEC members. The ghost of TPP is once again sure to lurk in the background, with any talk regarding open economies and free trade surely undermined by the action of Trump’s withdrawal from the Asia-Pacific trade deal. Sadly, the leader of a country typically known for its free trade leadership will arrive at APEC will little moral authority on the subject.

We will find out what happens soon enough. Initial signs, however, provide little reason for encouragement.

The Federal Communications Commission, at least under previous chairmen, desperately wanted to control the internet. To further this objective, the FCC reversed its prior determination that providing broadband internet access was an “information service,” rather than a “telecommunications service,” under Title II of the Communications Act of 1934, thereby granting itself more power. The commission also determined that Section 706 of the Telecommunications Act of 1996 constituted an independent grant of regulatory authority over the internet. Relying on both these interpretations, the FCC then sought to outlaw paid prioritization—to institute “net neutrality”—by issuing a new policy cloaked in an Orwellian title; the “Open Internet Order.”

Despite its label, the order actually had the practical effect of closing the internet to Daniel Berninger’s new start-up, Hello Digital, a social media platform designed to allow users to discuss issues featured on the site in real time. The website’s high-definition voice feature would require that its content be prioritized to function properly, so when the FCC’s order prevented Berninger from paying for that priority, he was left with little choice but to sue. In deciding the case, the U.S. Court of Appeals for the D.C. Circuit ruled for the commission after granting so-called Chevron deference to the FCC’s statutory interpretations. (Under Chevron U.S.A. v. Natural Resources Defense Council, if an agency is charged with administering an ambiguous statute, courts will defer to that agency’s interpretation as long as it is deemed a “permissible construction.”)

But when Congress passed the 1996 Act, it directed that only some of that law’s provisions be inserted into the FCC-administered Communications Act of 1934. One such addition was Section 230, which specifically said that “[i]t is the policy of the United States … to preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services, unfettered by Federal or State regulation.” Section 706, however, was noticeably absent from congressional inclusion into the original 1934 Act. Furthermore, there’s no evidence that Congress meant to give the FCC regulatory authority over Section 706, a fact that the FCC itself recognized until 2010. Finally, the FCC’s purported limitations on its own regulatory authority under the provision are practically meaningless. These illusory limits basically amount to: (1) we will only regulate communications by radio or wire (but the internet uses wires); (2) we will only issue rules designed to encourage broadband deployment (but courts should just take our word for it when we claim this is our purpose); and (3) we will not create rules that conflict with the 1934 Act (even though Congress decided not to make Section 706 part of that law in the first place).

Because Section 706 was never meant to be administered by the FCC and the agency believes its authority is subject to virtually no practical constraints, Cato has joined the Competitive Enterprise Institute, Reason Foundation, and Individual Rights Foundation on an amicus brief urging the Supreme Court to place the task of interpreting these statutory provisions where it rightfully belongs: in an independent judiciary. Or the new FCC could rescind its previous order and save the Court the trouble.

It sounds like school choice fans are pretty happy to see the GOP tax plan allowing up to $10,000 per year from tax-favored 529 savings plans to be used for elementary and secondary expenses (though the much smaller Coverdell would go away). Previously, 529 funds were just applicable to postsecondary education. But happy or not, for several reason this is probably bad policy. Here’s a quick list:

  1. Regulation: Current 529 plans allow earnings to be used tax free only if spent on accredited institutions. But accreditation has been a backdoor way through which the federal government has regulated colleges. We don’t want to see private K-12 schools similarly subjected to federal control, greatly constricting the extent to which they can be real choices.
  2. Complication: A complicated federal tax code is an efficiency drain on the economy, but wealthier people able to pay for financial advisors, or who have the time to become well versed in the code, can game the system. Ditto student aid. Not so much the poor or average person. The 529 thumb-on-the-scale for education would seem to favor the wealthy who already have choice. Much better would be to just get rid of this kind of distorting, complicating incentive.
  3. Price: The evidence is powerful that student aid programs—including, though not primarily, tax incentives—help to fuel extraordinary price inflation in higher education. Better to not have the feds inject this further into K-12 education.
  4. Constitution: Outside of prohibiting discrimination by state and local governments, the Constitution gives the federal government no authority to meddle in education. This includes through the tax code.

Worse things, certainly, could have come from Washington. School choice is, after all, generally a policy well worth pursuing. But so is federalism, and states have been doing pretty nice work expanding choice by themselves. Why introduce these unconstitutional dangers?  

The president just announced his pick to chair the Federal Reserve System. Subject to Senate confirmation, current Fed governor Jerome “Jay” Powell will succeed Janet Yellen as Fed chair in February 2018. Market reaction to this announcement has been sanguine, with commentators describing Powell as the “continuity candidate.”

It is perhaps strange that Powell should be so-described, when Janet Yellen was still in the running for a second term until very recently. The point, though, is that Powell’s views are much closer to Yellen’s than the other candidates interviewed by the president — former Fed governor Kevin Warsh and Stanford economist John B. Taylor — either of whom might have heralded a departure from the status quo.

Powell is often characterized as a moderate dove or neutral on the path of interest rates. He is seen to mirror Chair Yellen in many respects, having supported every move made by the Fed since his appointment to the Fed Board in 2012. What’s more, Powell has already been confirmed by the Senate twice: once to complete Frederic Mishkin’s term as Fed governor, and again in 2014 for his own 14-year term. This fact surely wasn’t lost on an administration desperate for policy wins: a twice-confirmed Fed governor, who is a Republican, is likely to face the easiest confirmation process.

As chair, it is unlikely that Powell will make significant changes to the Fed’s normalization plan. The Fed has been painstakingly deliberate in communicating its intentions about interest rates and the balance sheet; Powell, who supports “forward guidance” as a policy tool, will not want to disrupt that. And with historically low volatility in financial markets right now, Powell won’t want to risk another “Taper Tantrum” that would mar the beginning of his tenure as Fed chair.

None of this means there won’t be any changes at the Fed once Powell is in charge. For one thing, Powell is skeptical about some post-crisis financial regulations. He testified recently that there is room for relaxing or even eliminating elements of newly-imposed regulations stemming from Dodd-Frank. Powell has been particularly outspoken on the need to exempt small banks from regulations designed to apply to large financial institutions. In private, Powell has also voiced concerns that even the most well-intentioned regulations can have unseen, adverse effects.

One worry about Powell is how he would handle a recession, or — even worse — another financial crisis. He is a lawyer by training and was a partner at private equity firm The Carlyle Group before coming to the Fed. Nevertheless, his former colleagues note that he devoted himself to learning macroeconomics and was quick to come to grips with the intricacies of monetary policy. Powell is also known to lean on the Fed’s staff for guidance — a detail that suggests he will lead by consensus.

That said, Powell has gone further than many of his colleagues on the subject of monetary policy rules. In a speech last February, Powell closed by discussing the usefulness of such rules. He highlighted the Cleveland Fed’s rules-based dashboard, and suggested it was the type of analytical tool the FOMC ought to use to guide monetary policy. In short, Powell sees value in using rules as benchmarks that can improve the analysis performed by the central bank. John Taylor, the father of the most famous monetary rule, has expressed support for such a strategy.

Powell ended that February speech by saying, “Policy should be systematic, but not automatic.”  If the Fed delivers on that promise under his leadership, it will be taking a step in the right direction.

[Cross-posted from Alt-M.org]

Insider trading law makes no sense.  As I have argued, the current rules are incredibly convoluted and make it difficult for individuals to be sure they are on the right side of the law.  This is a problem given the fact that an insider trading conviction can carry up to ten years in prison (and potentially more).  But one of the difficulties that leads to such convoluted lawmaking is the fact that there is no unifying justification for why some trades are permitted and others are not.  Many people have a gut reaction to insider trading, feeling that it is somehow wrong or dishonest.  And there may be something to that, but current law fails to adequately address the “why.”  Why is this trade based on material nonpublic information criminal while this other one, also based on material nonpublic information, is not? The result is a bizarre patchwork of “dos” and “don’ts.”

This confusion is illustrated beautifully by new research suggesting that an SEC rule intended to prevent conflicts of interest among staff has actually had the perverse effect of causing staff to profit from their knowledge as insiders of the SEC.  Specifically, SEC staff are required to divest themselves of holdings in companies before they begin investigations of those companies.  At first glance, this makes sense.  It is clearly unseemly for a government official to have a financial stake in a company she is investigating. 


But news of an SEC investigation can have a huge impact on stock price.  As seen in a few examples in the graphs below, regardless of what an investigation might find, the mere fact that one has been started can significantly lower the value of a company’s shares.  An undisclosed impending investigation is clearly material nonpublic information.

 

Boeing shares closed down 6.8% on news of the SEC investigation. (Chart: Yahoo Finance)

 

CBL & Associates shares fell 12.1% on news of the SEC investigation. (Chart: Yahoo Finance)

 

Hain Celestial Group shares opened down >13%, closing down 8% after news of SEC investigation. (Chart: Yahoo Finance)

For this reason, if an actual company insider dumped shares before an investigation became public, it is likely that insider would be accused of insider trading.  While there may be an argument that, for example, the CEO of a company guilty of wrongdoing should not be able to run up profits before the company goes off a cliff, it’s important to note that many “insiders” are not in control of the company at all.  For example, a lawyer can be considered to be an “insider” for the purposes of insider trading law and therefore barred from using confidential information to trade in a client’s securities.

As I have discussed elsewhere, the rationale for criminalizing insider trading is often that it undermines confidence in the market.  If investors suspect they are trading with people who have unique and otherwise unavailable information, they will be wary of entering the market at all.  But from the buyer’s perspective, what is the difference between buying from an insider who knows of an impending investigation and buying from an SEC official who is leading that investigation?

To be clear, I don’t think that any SEC staff member who divests herself of stock pursuant to this rule is doing anything wrong.  I also believe the rule itself was written with the best intentions.  At this point, I don’t even have a firm recommendation for how the SEC should handle staff stock holdings.  It’s possible that the best solution is for SEC staff to be barred from holding individual securities.  But there are other considerations at play that may weigh against such a rule.

My point is simply that the result of this SEC rule highlights the muddiness of insider trading law and its underlying rationale (or lack thereof).  I find it difficult to distinguish the effect on the market of an insider selling stock ahead of an unannounced investigation and an SEC staffer doing the same.  Our laws should criminalize only that behavior that causes a clear and substantial harm.  Unless the effects of this SEC rule can be distinguished from the effects of similar behavior by a company insider, neither should trigger criminal liability.

The alleged attacker in Tuesday’s Halloween terrorist attack in New York City that murdered eight people and injured 12 was Sayfullo Habibullaevic Saipov, an immigrant from Uzbekistan.  Saipov entered the United States in 2010 on a green card he won through the Diversity Immigrant Visa Program (also known as the diversity visa or green card lottery).  Many commenters on the attack, including President Trump, have partially blamed the diversity visa for this terrorist attack.  This post will explain some of the basics of the diversity visa, the countries-of-origin for those who enter on it, their incarceration rates, and terrorism risks.

The Diversity Visa

Congress created the diversity visa as part of the Immigration Act of 1990, in order to provide lawful immigration opportunities for Irish immigrants who were fleeing an economic crisis in their home country.  Then-Congressman Chuck Schumer (D-NY) was important in pushing for the idea to be included in the bi-partisan 1990 Immigration Act, which Congress passed by huge majorities and President George H.W. Bush signed. 

Fifty thousand green cards are awarded through the diversity lottery each year, which is run in early May.  Principal applicants for the diversity visa must have at least a high school education, two years of work experience, and not be inadmissible under U.S. immigration law in order to receive a diversity visa.  The principal applicants may bring their spouse and minor unmarried children with them, but they do not count against the 50,000 cap.  Those who enter the running for the diversity visa lottery may only be from certain countries that sent fewer than 50,000 non-diversity visa immigrants to the United States in the five years prior to the lottery.

Countries of Origin for the Diversity Visa

In 2015, about 9.4 million people entered the lottery for those 50,000 green cards.  They had about five million minor unmarried children and spouses.  Citizens from countries other than Bangladesh, Brazil, Canada, China (mainland-born), Colombia, Dominican Republic, El Salvador, Haiti, India, Jamaica, Mexico, Nigeria, Pakistan, Peru, Philippines, South Korea, United Kingdom (except Northern Ireland) and its dependent territories, and Vietnam were eligible to apply for the 2018 diversity visa.

About one million people gained lawful permanent residency status through diversity visas from 1993 through 2015 (Table 1 at end of post).  Saipov is from Uzbekistan, which has sent 29,665 immigrants on the diversity visa, which accounts for about 43 percent of the total number of green cards issued to Uzbeks since 1993.  Only Algerian, Bulgarian, and Albanian immigrants were more likely to enter on a diversity visa.  Ethiopia, Nigeria, Egypt, Ukraine, Albania, Bangladesh, Ghana, Bulgaria, and Morocco all sent more diversity visa immigrants to the United States than Uzbekistan.

Like other immigration liberalizations that Congress intended to apply to only Europeans, the composition of the diversity visa quickly morphed when it contacted reality.  Europeans won a full 91 percent of all diversity visas in 1993, the first year the program was in operation (Figure 1).  In 2015, only 24 percent of diversity immigrants came from Europe while 30 percent came from Asia and 41 percent from Africa (Figure 2).  As for the Irish, only 12,221 won the lottery in 1993 while 45 won in 2015.

Figure 1

Diversity Visa Admissions by Continent of Origin, 1993

Sources: State Department and Department of Homeland Security.

 

Figure 2

Diversity Visa Admissions by Continent of Origin, 2015

Sources: State Department and Department of Homeland Security.

The share of diversity visas issued to Europeans fell precipitously after 1994 when the Irish economy started to recover (Figure 3).

Figure 3

European Share of Diversity Visa

Sources: State Department and Department of Homeland Security.

 

Terrorism

Many immigrants to the United States initially enter on one type of visa and then adjust their status to a green card or lawful permanent residency.  A foreigner who is lawfully present on U.S. soil can apply for the diversity visa if they are otherwise eligible.  That is exactly what the wife of Egyptian-born Hesham Mohamed Hedayet did.  He originally entered on a tourist visa, later applied for asylum, and only gained a green card when his wife won the diversity visa.  Hedayet murdered two and injured four in a terrorist attack at Los Angeles International Airport in 2002.  If he intended to carry out an attack prior to entering the United States, the diversity visa did not give him the opportunity because he was already here.  Assuming he intended to carry out an attack before arriving, and there is no evidence of that as he was here for a decade before he murdered two people, the diversity visa was not the potential weak link in the vetting system.  

Syed Harris Ahmed from Pakistan and Abdurasul Juraboev from Uzbekistan entered with diversity visas and were also convicted of planning terrorist attacks on U.S. soil.  A handful of immigrants who had diversity visas at one point were convicted of material support for terrorism or other offenses aimed at supporting foreign terrorists.  Hedayet is the only deadly terrorist who had a diversity visa at some point in his immigration history, although he did not enter on it – he murdered 2 people, or about 0.07 percent of all those killed by a foreign-born terrorist in an attack on U.S. soil from 1975-Halloween 2017.

The diversity visa is not an efficient way for terrorists to enter the country.  As mentioned above, about 9.4 million people entered the lottery for 50,000 green cards in 2015.  If a terrorist lives in a country whose nationals can apply, he or she would have had a 1 in 188 chance of winning the lottery in 2015.  The terrorist would then have to get through the normal procedures applied to every green card applicant.  Those are not attractive odds for a terrorist intent on attacking U.S. soil.  Furthermore, there is no indication that Saipov intended to commit a terrorist attack before coming to the United States.  Officials said that Saipov began planning his attack a year ago and then decided to use a truck two months ago, long after he entered in 2010.

The diversity visa is not a wise choice for foreign-born terrorists who concoct their plans overseas.  The small number of people murdered by foreign-born terrorists who actually entered on the visa, eight out of 3,037 since 1975, shows just how rarely it is used for such purposes.  Even then, betting vetting would have stopped Saipov as his terrorism plans were recent.  Based entirely on the New York Halloween terrorist attack, about 177,394 diversity visas have been granted for each person murdered in a terrorist attack on U.S. soil by someone who entered on such a visa.

Crime

Public safety also includes crime.  The American Community Survey reports the number of people incarcerated by their country of birth but not the particular visa they entered on.  The 2015 incarceration rates for immigrants from the 20 countries that sent the greatest number of diversity immigrants from 1993 to 2015 are all lower than the incarceration rate for native-born Americans (Figure 4).  The number of Uzbeks incarcerated is so small that it is statistically indistinguishable from zero.  The 2015 incarceration rate for immigrants from these 20 countries is 0.28 percent – about one-fifth of the native incarceration rate. 

Figure 4

Incarceration Rates by Country of Birth, Ages 18-54.  

Source: Author’s analysis of the 2015 1-year American Community Survey data. Special thanks to Michelangelo Landgrave for assembling these numbers.

Immigrants from the top 20 diversity visa dominant sending countries are less likely to be incarcerated than native-born Americans (Figure 5).  All of these 20 countries together have an incarceration rate of 0.20 percent – about one-eighth that of native-born Americans.  Figure 5 shows the 2015 incarceration rates for immigrants from the top 20 countries that sent the highest percentage of diversity visa immigrants relative to all who earned a green card.  Benin and the Democratic Republic of the Congo sent a higher proportion of diversity visa immigrants, relative to all immigrants they sent, than two of the countries in Figure 5, but their U.S. populations are so small that they aren’t counted in the American Community Survey.  I filled that gap by choosing countries with the next highest percentage of diversity immigrants relative to all immigrants.

Figure 5

Incarceration Rates by Country of Birth for Diversity Visa Dominant Countries, Ages 18-54

Source: Author’s analysis of the 2015 1-year American Community Survey data. Special thanks to Michelangelo Landgrave for assembling these numbers.

 

Conclusion

The diversity visa is a relatively small green card category that has allowed in about a million legal immigrant principals since 1993, or about 5 percent of the total.  As far as we know, immigrants who entered on the diversity visa are responsible for committing one terrorist attack on U.S. soil that murdered eight people.  Foreign-born people from countries that have sent many diversity visa immigrants to the United States have lower incarceration rates than native-born Americans.  Calls to end the diversity visa based on a single deadly terrorist attack are premature. 

 

Table 1

Diversity Visa Admissions by Country of Origin, 1993-2015

  All Green Cards Diversity Percent of Immigrants on Diversity Percent of Diversity Immigrants Relative to All Diversity Visas Algeria 21,728 11,175 51.43% 1.18% Bulgaria 70,332 33,898 48.20% 3.59% Albania 90,121 42,419 47.07% 4.50% Uzbekistan 68,364 29,665 43.39% 3.15% Togo 22,931 9,857 42.99% 1.05% Lithuania 26,674 11,107 41.64% 1.18% Benin 4,774 1,954 40.93% 0.21% Morocco 76,112 30,398 39.94% 3.22% Cameroon 47,951 16,297 33.99% 1.73% Tajikistan 4,867 1,644 33.78% 0.17% Congo, Democratic Republic 26,873 8,852 32.94% 0.94% Egypt 148,609 48,178 32.42% 5.11% Ethiopia 200,417 60,194 30.03% 6.38% Nepal 94,466 28,025 29.67% 2.97% Turkmenistan 3,171 915 28.86% 0.10% Congo, Republic 14,611 4,026 27.55% 0.43% Armenia 52,321 14,297 27.33% 1.52% Kenya 103,303 27,094 26.23% 2.87% Ghana 132,664 34,755 26.20% 3.69% Nigeria 214,372 56,049 26.15% 5.94% Romania 100,436 25,845 25.73% 2.74% Turkey 77,644 19,148 24.66% 2.03% Fiji 26,759 6,475 24.20% 0.69% Sierra Leone 38,890 8,969 23.06% 0.95% Belarus 45,388 10,314 22.72% 1.09% Georgia 20,966 4,583 21.86% 0.49% Kyrgyzstan 9,643 2,099 21.77% 0.22% Niger 4,845 994 20.52% 0.11% Sudan 53,311 10,695 20.06% 1.13% Burkina Faso 4,727 917 19.40% 0.10% Moldova 37,510 7,236 19.29% 0.77% Ukraine 253,865 47,554 18.73% 5.04% Sri Lanka 32,408 6,061 18.70% 0.64% Liberia 73,123 13,377 18.29% 1.42% Bangladesh 217,098 38,833 17.89% 4.12% Macedonia 17,042 2,842 16.68% 0.30% Mongolia 7,640 1,232 16.13% 0.13% Azerbaijan 19,451 3,077 15.82% 0.33% Cote d’Ivoire 20,631 3,013 14.60% 0.32% Kazakhstan 27,516 4,013 14.58% 0.43% Madagascar 1,124 161 14.32% 0.02% Eritrea 23,113 3,143 13.60% 0.33% Guinea-Bissau 1,580 211 13.35% 0.02% Switzerland 16,845 2,169 12.88% 0.23% Kosovo 4,218 538 12.75% 0.06% Libya 5,133 632 12.31% 0.07% Latvia 9,532 1,131 11.87% 0.12% Serbia 4,255 488 11.47% 0.05% Uganda 17,215 1,969 11.44% 0.21% Rwanda 6,752 762 11.29% 0.08% Ireland 29,032 3,250 11.19% 0.34% Saudi Arabia 25,323 2,831 11.18% 0.30% Tunisia 7,368 822 11.16% 0.09% Poland 202,289 22,484 11.11% 2.38% Germany 138,880 15,271 11.00% 1.62% Czechoslovakia (former) 12,752 1,327 10.41% 0.14% Qatar 2,592 267 10.30% 0.03% Mauritius 1,428 147 10.29% 0.02% South Africa 57,953 5,761 9.94% 0.61% Guinea 15,483 1,537 9.93% 0.16% New Zealand 18,383 1,797 9.78% 0.19% Russia 256,770 25,041 9.75% 2.66% Papua New Guinea 418 40 9.57% 0.00% Hungary 22,723 2,171 9.55% 0.23% Soviet Union (former) 195,502 18,299 9.36% 1.94% Gabon 1,684 156 9.26% 0.02% Iran 232,402 21,057 9.06% 2.23% Malawi 2,064 186 9.01% 0.02% Tanzania 16,922 1,524 9.01% 0.16% Senegal 17,942 1,578 8.80% 0.17% Oman 1,378 121 8.78% 0.01% United Arab Emirates 13,215 1,155 8.74% 0.12% Australia 48,126 4,167 8.66% 0.44% Austria 8,784 758 8.63% 0.08% Estonia 4,847 403 8.31% 0.04% Czech Republic 6,402 517 8.08% 0.05% Greece 20,343 1,612 7.92% 0.17% Iceland 2,005 152 7.58% 0.02% Botswana 791 59 7.46% 0.01% Chad 1,405 103 7.33% 0.01% Zambia 8,201 594 7.24% 0.06% Finland 7,022 498 7.09% 0.05% Sweden 22,971 1,622 7.06% 0.17% Djibouti 1,190 82 6.89% 0.01% Zimbabwe 13,314 893 6.71% 0.09% France 74,745 4,993 6.68% 0.53% Slovakia 3,757 247 6.57% 0.03% Indonesia 50,330 3,164 6.29% 0.34% Italy 52,046 3,197 6.14% 0.34% Curacao 49 3 6.12% 0.00% Cyprus 2,532 154 6.08% 0.02% Belgium 11,467 660 5.76% 0.07% Mali 6,722 365 5.43% 0.04% Netherlands 25,919 1,396 5.39% 0.15% Tonga 6,040 286 4.74% 0.03% Japan 133,350 5,749 4.31% 0.61% Burundi 5,842 244 4.18% 0.03% Spain 34,765 1,439 4.14% 0.15% Kuwait 20,340 831 4.09% 0.09% Burma 121,428 4,865 4.01% 0.52% Denmark 9,771 387 3.96% 0.04% Angola 2,545 100 3.93% 0.01% Namibia 872 34 3.90% 0.00% Croatia 17,749 679 3.83% 0.07% Macau 3,470 128 3.69% 0.01% Palau 136 5 3.68% 0.00% Israel 79,216 2,902 3.66% 0.31% Cambodia 55,809 2,026 3.63% 0.21% Venezuela 147,742 5,337 3.61% 0.57% Norway 6,651 226 3.40% 0.02% Peru 257,629 8,650 3.36% 0.92% Pakistan 304,020 10,179 3.35% 1.08% Luxembourg 471 15 3.18% 0.00% Slovenia 1,605 48 2.99% 0.01% Taiwan 161,568 4,639 2.87% 0.49% Montenegro 1,394 40 2.87% 0.00% Portugal 23,851 679 2.85% 0.07% Yemen 49,556 1,358 2.74% 0.14% Monaco 78 2 2.56% 0.00% Singapore 14,626 370 2.53% 0.04% Lesotho 251 6 2.39% 0.00% Somalia 99,780 2,342 2.35% 0.25% Bahrain 1,954 45 2.30% 0.00% Malta 1,001 23 2.30% 0.00% Hong Kong 83,306 1,889 2.27% 0.20% Malaysia 39,194 810 2.07% 0.09% Seychelles 195 4 2.05% 0.00% Unknown 28,065 535 1.91% 0.06% Bolivia 40,859 783 1.92% 0.08% Argentina 81,114 1,521 1.88% 0.16% Mozambique 1,112 20 1.80% 0.00% Aruba 668 11 1.65% 0.00% Brunei 429 7 1.63% 0.00% Gambia 10,282 167 1.62% 0.02% Syria 54,920 871 1.59% 0.09% Swaziland 318 5 1.57% 0.00% Jordan 73,909 1,125 1.52% 0.12% Equatorial Guinea 211 3 1.42% 0.00% Mauritania 6,089 85 1.40% 0.01% Afghanistan 52,579 732 1.39% 0.08% Lebanon 72,017 992 1.38% 0.11% Paraguay 7,584 94 1.24% 0.01% United Kingdom 234,161 2,866 1.22% 0.30% Cuba 630,056 7,571 1.20% 0.80% Brazil 205,681 2,446 1.19% 0.26% Ecuador 204,339 2,372 1.16% 0.25% Central African Republic 1,335 15 1.12% 0.00% Trinidad and Tobago 85,419 953 1.12% 0.10% South Sudan 277 3 1.08% 0.00% Suriname 3,705 37 1.00% 0.00% Bahamas 7,664 76 0.99% 0.01% Chile 36,196 343 0.95% 0.04% Cape Verde 26,687 250 0.94% 0.03% Thailand 127,313 1,004 0.79% 0.11% Canada 298,671 2,316 0.78% 0.25% Uruguay 18,691 128 0.68% 0.01% Bosnia-Herzegovina 121,026 801 0.66% 0.08% United States 3,193 20 0.63% 0.00% Costa Rica 37,479 231 0.62% 0.02% Barbados 13,235 81 0.61% 0.01% Samoa 3,753 22 0.59% 0.00% Panama 33,178 192 0.58% 0.02% Dominica 8,194 42 0.51% 0.00% Iraq 174,316 805 0.46% 0.09% Grenada 13,818 56 0.41% 0.01% Belize 16,526 66 0.40% 0.01% Saint Lucia 9,957 38 0.38% 0.00% Saint Vincent and the Grenadines 6,046 20 0.33% 0.00% Nicaragua 131,175 432 0.33% 0.05% Honduras 135,484 435 0.32% 0.05% Guyana 135,606 411 0.30% 0.04% French Polynesia 337 1 0.30% 0.00% Antigua-Barbuda 7,117 21 0.30% 0.00% British Virgin Islands 878 2 0.23% 0.00% Saint Kitts-Nevis 3,564 8 0.22% 0.00% Anguilla 463 1 0.22% 0.00% Guatemala 255,110 437 0.17% 0.05% Laos 28,649 36 0.13% 0.00% India 1,198,749 1,421 0.12% 0.15% Bermuda 1,717 2 0.12% 0.00% Haiti 396,924 292 0.07% 0.03% Bhutan 49,881 34 0.07% 0.00% China, People’s Republic 1,206,575 793 0.07% 0.08% Colombia 414,973 248 0.06% 0.03% Korea, South 152,483 68 0.04% 0.01% Dominican Republic 648,938 168 0.03% 0.02% Philippines 1,074,811 162 0.02% 0.02% Jamaica 359,859 53 0.01% 0.01% Vietnam 600,992 38 0.01% 0.00% Mexico 3,175,771 183 0.01% 0.02% El Salvador 432,535 20 0.00% 0.00% All other countries1 73 0 0.00% 0.00% Cayman Islands 704 0 0.00% 0.00% Korea, North 432 0 0.00% 0.00% Marshall Islands 586 0 0.00% 0.00% Montserrat 834 0 0.00% 0.00% Netherlands Antilles (former) 67 0 0.00% 0.00% Serbia and Montenegro (former) 232 0 0.00% 0.00% Sint Maarten 90 0 0.00% 0.00% Turks and Caicos Islands 38 0 0.00% 0.00% Total 19,101,716 943,049    

 Sources: State Department and Department of Homeland Security.

In Holland, Michigan, Susan Gray wants to house homeless teen boys in a church she bought. She bought the property first, and only later discovered there weren’t adequate support services for the vulnerable homeless teen population in her area: the closest alternative homeless shelter is around 30 miles away.

But Gray’s plan to use the church to house homeless kids is receiving pushback from the local Planning Commission, because the zoning ordinance doesn’t permit group homes in this location.

Gray’s experience is far from unusual. Just last week, in Harvard, Illinois, the city zoning commission roundly rejected a plan to build housing for elderly residents. And in St. Cloud, Minnesota, a church has undergone a lengthy legal battle because the city takes issue with its strategy of using tiny homes on church property to house the homeless.

Land use regulations might seem benign, but they affect lives in countless ways. Zoning regulations, the most common form of land use regulations, invest broad discretionary power in municipalities. But those same municipalities are subject to intense interest group pressure. It shouldn’t be surprising, then, that municipalities often use zoning and land use regulations as a weapon to block housing for low and middle income residents.

This problem continues to grow. My studies show that the quantity of annually generated land use regulations more than doubled in the United States between 1980 and 2010 alone, as measured by related appellate court cases. The quantity of zoning regulation nearly doubled during the same three-decade period. The national population only grew 37 percent during this timeframe, so regulatory growth far outpaces population growth.

Of course, this only matters if zoning and land use regulations have a negative impact on key outcomes. The general academic consensus is that they do: whether it is racial and economic segregation or geographic mobility and economic growth, restrictive zoning and land use regulation create a problem or significantly exacerbate it. For example, a recent National Bureau of Economic Research study suggests that if just San Jose, San Francisco, and New York City adopted the median level of land use regulation, U.S. GDP would increase by 8.9%. Another study suggests that over 50 percent of the difference in levels of segregation between strictly-zoned Boston and lenient Houston can be attributed to zoning regulations.

Restrictive zoning is also associated with a reduction in multi-family housing permits, similar to the kind sought by Susan Gray in her homeless boys’ shelter. Fewer multi-family housing permits means a reduction in housing supply.

Basic economic theory suggests that constraining housing supply increases home prices. And indeed, my research indicates that zoning and land use regulation do that. The relationship between zoning and land use regulations and home prices is highly statistically significant, or in other words unlikely to occur based on random chance alone.

The academic literature on zoning and land use regulation support this view. Harvard economist Edward Glaeser estimated the cost of the regulatory burden associated with zoning regulation in markets like Manhattan, Los Angeles, and San Francisco is between 30-50% of the cost of the price of housing there. Another study indicates that each additional regulatory measure in California is associated with a 4.5% increase in the cost of owner-occupied housing.

But sometimes, the data and associated jargon obscure the true human cost of the problem: zoning regulation and discretionary permitting processes result in fewer safe houses for homeless teens, less housing for seniors and the elderly, and barriers to economic opportunity for low-skill workers.

There is hope for addressing the problem, at least if legislators and activists are willing to push for radical reform rather than middling changes. This can be done in a variety of ways, probably most effectively at the state level. For example, states can curtail their State Zoning Enabling Acts, which grant cities nearly unlimited jurisdiction over land use regulation. States can make local government responsible for compensating property owners for regulatory takings associated with zoning land for low-value economic uses, such as single-family homes.

These problems are not easy to solve, which is partly why politicians tend to look for easier solutions in addressing housing problems, like increasing housing subsidies. And in fact, twice as many federal housing subsidies per capita are concentrated in the most restrictively zoned states as compared with the least restrictively zoned states. But the human cost of zoning can’t simply be wished away with  a Band-Aid solution.

Surely homeless teens, seniors, and low-skill workers deserve our attention in addressing the problem. For them, half-measures haven’t cut it and never will.

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