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There have been many good, if ultimately unconvincing, arguments against allowing younger workers to privately invest a portion of their Social Security taxes through personal accounts.  There have been even more silly ones.  One of the silliest is the one regurgitated Monday by ThinkProgress, that this week’s stock market decline proves that “If Social Security Had Been In Private Accounts The Stock Market Drop Could Have Been A Disaster.”

Few personal account plans would require a retiree to cash out their entire account on the day that the market crashed.  But what if they did?  It is important to understand that someone retiring Monday would have begun paying into their account 40 years ago when the Dow was at 835.34.  After yesterday’s decline, it opened at 15,676 today.  Over those 40 years, the worker would have made roughly 1,040 contributions to their account.  Only 48 of them would have been at a time when the market was higher than today’s open.

Yep, even after Monday’s crash, the worker would have made a tidy profit.  In fact, his return would have been substantially higher than what he could expect to receive from Social Security. 

The last that defenders of the status quo made this argument was 2009, during the market crash that led into the Great Recession.  At that time the market hit a low of 6,547.   Obviously, if workers had been allowed to start investing then, they would have done pretty well.  But more importantly, retirees in 2009 would have done well too, once again better than Social Security.

Cato published this comprehensive study of that downturn and its impact on personal accounts.

Social Security is running nearly $26 trillion in future unfunded liabilities.  It cannot pay promised future benefits to young workers without substantial tax hikes.  We should begin a discussion of how to reform this troubled program.  A start to such a discussion would be to retire the canard about market crashes and personal accounts.

Cross-posted at TannerOnPolicy

KHARTOUM, SUDAN—Ubiquitous American advertising is absent in Sudan. Washington bans most imports and exports to the country. Among the strongest supporters of economic coercion have been American Christians, seeking to punish the Muslim-dominated central government for its brutal conduct in past ethnic conflicts.

While the combat has largely ceased, the embargo remains. And Sudanese Christians with whom I recently spoke said that they suffer when Washington penalizes the Sudanese people for Khartoum’s sins. Rev. Filotheos Farag of Khartoum’s El Shahidein Coptic Church, explained “we want to cancel all the sanctions.”

The Clinton administration first imposed restrictions two decades ago for Sudan’s alleged sponsorship of terrorism. But the Obama administration admits that Khartoum cooperates with the United States today.

Penalties were later strengthened to punish Sudan for its tactics in the civil war in Sudan’s south and subsequent fighting around Darfur. But the first was resolved with the independence of South Sudan, which itself has tragically descended into its own civil war. And the large-scale killings at Darfur also have ended. While some fighting continues elsewhere, it is no worse than many other Third World countries.

Khartoum also is criticized for religious repression, but American allies such as Saudi Arabia are worse. Moreover, Sudanese Christians say they are among those most hurt by sanctions.

I visited a number of churches of different denominations which appeared to operate freely. A consistent message from Christian clerics is that they suffer disproportionately from U.S. sanctions.

Farag said, “Everybody here is affected. From America, we stopped importing necessities we need.” Moreover, “Many businesses here are closed. Taxation is much higher.” In his view “the government is not punished. If officials ask about anything, they can bring it from outside. But we can’t.”

Isaiah Kanani of the Presbyterian Nile Theological College reported that “sanctions are affecting everyone in the community in every corner of the country.” Unfortunately, “the grassroots feel it very harshly.” He pointed to lost jobs and people relocating for work. Moreover, while people believe the government is not responsible for these problems, their “eyes fix on the government to find a solution.”

Hafiz Fassha, an Evangelical Presbyterian pastor at the Evangelical Church of Khartoum North, said the harm is felt in “medical services, even education.” He prays for the lifting of controls, which “are like putting oil on a fire.”

Sanctions “make life very difficult for Christians and their jobs,” reported George Banna, the Patriarchal Vicar in the Greek Melkite Catholic Patriarchate, who heads the Oriental Catholic church. A number of his parishioners are in businesses or professions and “they find difficulties importing what they need.” Over the years “many have left the country for financial reasons.”

As for the church, “we depend on donations. If members don’t work, they don’t have anything to give.” He suffered from prostate cancer and had to go abroad for treatment. “We all oppose sanctions,” he said.

I spoke with two Catholic priests in Port Sudan, E. Luigi Cignolini and Antonio Manganhe Meej. Cignolini said because of the sanctions “we don’t get offerings. Even Europe can’t send them. Of course this hampers our work.”

Meej emphasized that “Poor people feel it more.” When they aren’t able to pay their school fees “it is becoming impossible to run these schools.” In school, he said, they have trouble getting the latest information and can’t upgrade computer programs. “While the U.S. might believe it is punishing the government,” it is “only punishing the people.”

As I point out in Forbes: “There was and remains much about which to criticize Sudan’s government. However, U.S. sanctions have lost any purpose they once may have had.”

Most important for American Christians, the sanctions hurt believers already living and worshipping in difficult circumstances. Fassha said, “We love America. We need America to help Sudan.”

The world has changed since sanctions were first imposed. Washington’s policy toward Sudan should change as well.

Criminal asset forfeiture has the taste of Old Testament justice: an eye for an eye, a tooth for a tooth. The bank robber stole $100,000, so the government takes $100,000 from him. That seems right and fair, but only if we know that the defendant’s guilty.

If the government took $100,000 from someone who was innocent, or whose guilt was ambiguous, it wouldn’t merely be an “unjust” forfeiture, it would be theft—or, to be more politic, an uncompensated and unwarranted taking.

Consider the case of Sila Luis. For several years, Luis ran a healthcare company that provided home nursing services to patients enrolled in Medicare. In 2012, the government accused Luis of fraud, claiming that her company billed Medicare for unnecessary services. In addition to criminal charges, the grand jury indictment included a forfeiture finding, stipulating that if Luis is convicted, up to $45 million of her personal assets would be forfeited, to make up for all of the money her company ever received from Medicare.

Leaving aside the validity of that number—the government hasn’t alleged that all, or even most, of the claims submitted to Medicare were false—the questionable fairness of holding an individual personally responsible for a company’s liabilities, and the fact the Luis doesn’t have anywhere near $45 million, the indictment got one thing right: the government should only be able to confiscate Luis’s property after she’s been convicted. Of course, the government found a loophole: a statute providing that when the government thinks a defendant is going to spend or hide assets before they can be forfeited, prosecutors can ask for a court order “freezing” the assets.

Freezing property is practically the same as confiscating it; the defendant technically remains the owner, but is no longer allowed to sell or even use the property. The government applied for such an order on the same day that Luis was indicted—and three years later, it’s still in effect. Because Luis’s net worth is only a fraction of the $45 million the government claims, the freezing order applies to all of her assets. As a result, Luis can’t afford to pay a lawyer to defend her at trial.

Last year in Kaley v. United States (another case where Cato filed a brief), the Supreme Court ruled that there is no Sixth Amendment right to hire counsel with “tainted” money (and even the process due is less before freezing); the robber can’t use the money he stole from the bank to pay his lawyer, because he never actually owned it in the first place. But Luis is arguing that Kaley doesn’t apply to cases like this, where the government admits that none of the frozen property is in any way connected to illegal activity (only that it may be necessary to satisfy an eventual judgment).

While Cato agrees with Luis’s Sixth Amendment argument, we’ve filed an amicus brief, joined by the DKT Liberty Project, challenging the legitimacy of freezing orders on an institutional level. Fifteen years ago, the Supreme Court stopped federal courts from freezing a defendant’s assets where the plaintiff is afraid that the defendant will become bankrupt because the whole point of a trial is to determine what, if anything, the defendant owes. The Court has been adamant that unless and until the plaintiff wins that trial, judges should not interfere with the defendant’s existing rights—unless a court order is the only way to prevent a significant and incurable injury to the plaintiff that substantially outweighs any harm this action would do to the defendant.

The freezing order here isn’t protecting the government from any new loss, while the burden it continues to impose on Luis is grievous, especially since she still faces criminal charges. The Supreme Court was right when it condemned freezing orders as “nuclear weapons.” They are powerful and destructive—and their use is rarely if ever justified.

Oral arguments in Luis v. United States will take place this fall.

Earlier this month, Americans for Prosperity held a “Road to Reform” event in Las Vegas.

I got to be the warm-up speaker and made two simple points.

First, we made a lot of fiscal progress between 2009 and 2014 because various battles over debt limits, shutdowns, and sequestration actually did result in real spending discipline.

Second, I used January’s 10-year forecast from the Congressional Budget Office to explain how easy it would be to balance the budget with a modest amount of future spending restraint.

Here’s my speech:

I realize I sound uncharacteristically optimistic in these remarks, but it is amazing how easy it is to make progress with even semi-effective limits on the growth of government.

Genuine spending cuts would be very desirable, of course, but we move in the right direction so long as government spending grows slower than the private sector.

The challenge, needless to say, is convincing politicians to limit spending.

Well, we now have some new data in that battle. The CBO released its Update this morning, which means the numbers I shared in Nevada are now slightly out of date and that I need to re-do all my calculations based on the new 10-year forecast.

But it doesn’t really make a difference.  As you can see from the chart, we can balance the budget by 2021 if spending is capped so that it grows by 2 percent annually. And even if spending is allowed to grow by 3 percent per year (about 50 percent faster than projected inflation), the budget is balanced by 2024.

At this point, I feel compelled to point out that the goal should be smaller government, not fiscal balance.

But since fiscal policy debates tend to focus on how to eliminate red ink and balance the budget, I may as well take advantage of this misplaced focus to push a policy (spending restraint) that would be desirable even if we had a budget surplus.

And that’s the purpose of this video I narrated for the Center for Freedom and Prosperity back in 2010. The numbers obviously have changed over the past five years, but the underlying argument about the merits and efficacy of spending restraint are exactly the same today.

For more information on the merits of smaller government, here’s my tutorial on government spending.

A new poll by the Peter G. Peterson Foundation finds that 80 percent of Americans think that rising federal debt should be a top priority of policymakers. The poll also finds that:

… an overwhelming majority of voters (85%) are now calling for the President and Congress to spend more time addressing our nation’s long-term fiscal future. More than two-thirds (68%) say their concern about this vital issue has increased over the last few years, including nearly one-half (46%) who say it has increased “a lot.” Majorities of voters across party lines, including 53% of Democrats, 69% of Independents, and 84% of Republicans, say that their concerns about the debt have deepened in recent years.

The spokesman for the Peterson Foundation said that Americans “…want candidates to put forward plans to address our nation’s long-term fiscal challenges … Americans understand that putting our fiscal house in order is vital to ensure a growing, prosperous economy and are calling for more action from their leaders.” I agree with that, and so does the centrist group “First Budget,” which is trying to pin down candidates on fiscal specifics.

Presidential candidates should propose specific plans to cut spending. Spending cuts are good economics, and they are also good politics, at least for Republican candidates. So it is disappointing how few of them have proposed budget plans so far, let alone discussed overspending and rising debt in any detail.

Candidates interested in fiscal reform can start with these proposed cuts. A particularly good target for reforms would be terminations of state aid programs, as Emily Ekins and I discuss here.

The full Peterson poll results are here.

SHENYANG, CHINA—Public space is shrinking in China for discussion of “Western” views. But “contrary to the general crackdown, North Korea policy seems to be an exception,” a U.S. diplomat told me on my recent trip to China. One hears plenty of criticism of Pyongyang.

Even official Beijing’s unhappiness with the Democratic People’s Republic of Korea is evident, though China continues to bankroll the Kim Jong-un regime. It’s a position some Chinese would like to change, including a scholar in Shenyang, a couple hours away from the Yalu by car. My colleague was careful not to directly criticize Beijing policy but advocated a much different approach. He noted that the two nations “still care about each other,” but now there are a “lot of problems between the countries.”

The most important issue, no surprise, is nuclear weapons. China supports denuclearization of the Korean peninsula. This is the “worst disagreement between them.”
Second is economic development. “China insists on reform of the whole economic and political system,” explained my friend. Beijing’s objective is to “transform North Korea.” The DPRK government fears such change.

Issue number three involves bilateral commerce. “China wants to have normal trade with North Korea,” but the DPRK expects to receive goods even if it does not pay. This has “caused great loss for China and for companies in China.”

The fourth concern is refugees. “Many North Koreans have fled to this part of China,” he said, forcing Beijing to “think about how to deal with the issue.” So far, the People’s Republic of China has returned refugees when caught, sparking sharp international criticism.

Coming in at fifth is the Six Party Talks. My interlocutor explained that “China insists on peaceful dialogue among the respective countries” over “the nuclear problem.” On this question the PRC “has had some issues with the U.S. and North Korea not cooperating.”

In his view the U.S. and PRC should focus on solving these matters: “China and the USA have a common understanding greater than their disagreement.” He hoped the PRC and U.S. together would pressure the North. He admitted that “China has its own interests and cares about its national security.” But “China would be a direct victim of ” a nuclear North. 

What to do? There should be dialogue “among the three countries.” Beijing and Washington need to demonstrate that there isn’t “any gap, any room” between them that would allow Pyongyang to develop nuclear weapons.

More controversially, he wanted “to stop giving foreign aid to the North and impose additional sanctions on North Korea.” Penalties should be applied if the Kim government “does not listen to the U.S. and China.”

If these steps failed, at that point “we should know the way.” When asked to explain further, he said “I wouldn’t say it out loud, but Israel would know how to do it.” That is, military action. He didn’t explain whether he envisioned Chinese cooperation in or merely acquiescence to a U.S. strike. But he believed extreme measures could be justified. What would the Chinese government think of his idea? He admitted that the perspective was his own, not that of Beijing. However, if the three steps were followed, beginning with negotiation, then he believed Beijing might “follow his suggestions.” He believed the severity of the threat would drive policy.

In the end, he expected Pyongyang either to reform, open the country, or resist, destroying itself. He hoped for the first.

As I wrote for China-US Focus: “Although there’s no evidence that Beijing government is about to adopt my friend’s proposals, Chinese attachment to North Korea evidentally continues to drain away. While Beijing continues to prop up the Kim dynasty, it does so without enthusiasm. That creates an opportunity for Washington to persuade the PRC to change policy.”

My friend’s proposal offers a possible blueprint: talk with Beijing, address its problems, and suggest a common program. This strategy would offer at least a hope of change.

Whitney Ball was always outraged for the right reasons and could be counted on to add the choicest comments to the latest political or cultural atrocity. She was bright, opinionated, well-informed, and dedicated to human liberty. She also was a great friend. Those who knew her and the liberty movement were made much worse off with her recent passing.

Whitney is one of the largely unknown political activists who did far more than her share to help others. She got into the movement early, working in Washington, D.C. at the National Journalism Center for the late M. Stanton Evans—a grand figure who linked the older, more traditional and newer, more assertive conservative movements. But Whitney never hesitated to take the lone road. She was rare, a libertarian and Christian. We met when she worked at Cato a couple decades ago. She exuded kindness and wit and was impossible to dislike.

She moved on to the Philanthropy Roundtable, a conservative counterpart for the liberal Council on Foundations. Then in 1999 Whitney launched her own venture, Donors Trust. From very modest beginnings—one account—DT turned into a major success. It hit roughly 200 contributors in 2013 and to date has channeled $740 million to the cause of liberty. There is a long history of freedom-minded donors’ money being effectively hijacked by left-wing activists and causes. Money created from the inspiration and sweat of past entrepreneurs now funds some of the organizations most determined to stifle a free economy. It turns out that those most adept at creating wealth often aren’t very good at controlling how it is distributed.

As Whitney later explained: “charitable capital that’s held in a vehicle like a private foundation often drifts away from the intent of its founding donor over time.” This sort of adverse capture almost always works against advocates of a free society, she added. Organizations dedicated to liberty gained enormously from Whitney’s efforts.

Despite her serious endeavors, she had a whimsical streak. She liked cows, for instance, and incorporated them in her home décor. She demonstrated notable self-control in halting at cow kitchenware rather than making the jump, as I did in other areas, to pricier and more serious antiques.

Unfortunately, very serious was the breast cancer which struck in 2001. She accepted the pain, inconvenience, and uncertainty with extraordinary grace and good humor. She joked about her loss of hair and wearing a wig and dispassionately described the side-effects of chemotherapy. But she never quit and emerged victorious. At least, as victorious as one ever can be against that horrid disease.
The cancer returned, more virulent than ever, which she fought with as much tenacity and cheerfulness as before. She was upbeat, funny, and determined to triumph again.
Alas, it was not to be. She fought to the end, dying at a far, far too young age of 52.

As I wrote in American Spectator online: “Whitney’s life is one that truly mattered. The freedom movement was more vibrant because of her efforts. The lives of her friends and family were much enriched because of her presence.”

Her death reminds us how easy it is to take those around us for granted. We only realize how badly we miss them when they leave us. So it is with Whitney.

In its “Free Exchange” column, the Economist recently took up the issue of monetary rules. Provocatively titled “Rule It Out,” the column announced that “setting interest rates according to a fixed formula is a bad idea.”

Reading the column one quickly learns the author doesn’t understand what constitutes a rule, and what the argument for a rule is. The column moves from a general consideration of monetary rules to considering specifically the Taylor Rule. I leave it to Professor Taylor to defend his rule, which he did on his blog. I, however, consider the general case for monetary rules.

“Free Exchange” links the case for rules to the 1977 article by Finn Kydland and Edward Prescott, “Rules Rather than Discretion: The Inconsistency of Optimal Plans.” The title is not cited nor is the article’s central argument addressed: Discretionary economic policy cannot be optimal. Their article undermines the case for discretion over rules that “Free Exchange” attempts to make. “Free Exchange” lamely says that Kydland and Prescott’s argument “helps to explain the high inflation of the 1970s.” It did far more than that. It explains why policymakers cannot credibly commit to future policies. That is known as the time inconsistency problem.

The argument for rules versus discretion in monetary policy goes back at least to Henry C. Simons’ 1936 article, “Rules versus Authorities in Monetary Policy.” The case for a monetary rule was re-argued by Milton Friedman in the 1960s and he anticipated the dynamics developed in Kydland and Prescott.

“Free Exchange” states that “monetary policy based on rules has one major advantage: transparency.” Certainly a rule will likely be more transparent than policy discretion. But it has never been the central argument for a monetary rule. The central argument for a monetary rule is what is known as the knowledge problem in economics and social affairs.

Policymakers cannot in principle possess the knowledge required to devise an optimal (or time consistent) monetary policy. The information required for centralized policymaking is dispersed among the millions of actors in society. It cannot be aggregated or concentrated in one mind. No expert or set of experts can ever know as much as the totality of individuals in society.

Rules are a response to the knowledge problem. Uncertainty generates reliance on rules. Rules are constructed or evolved based on accumulated experience over long periods of time. Rules encapsulate the totality of knowledge and experience not only of all alive today, but also of those who preceded them.

Rules can be formal or informal, and could – but need not – be a formula. (Most rules are not a formula.) When people do not possess the information required to optimize, they rely on rules.

The knowledge problem arises in any attempt to set centralized policy or planning. Even before Simons, F. A. Hayek articulated the knowledge problem in monetary policy and in the debate over centralized economic planning.

“Free Exchange” turns the knowledge problem upside down: “Until the day the economy is fully understood, human judgment has a crucial role to play.” No, actually, it is just the opposite. There would be no need for reliance on a rule if the economy were fully understood. The less we know about the specifics of a situation, the more we must rely on rules. A good rule incorporates the general features of a class of situations, in which the specific features vary unpredictably. If we possess full information, why would we want to rely on a rule?

In a paper that I will present at Cato’s annual monetary conference on November 12th, I develop in more depth the case for rules in monetary policy. I attribute the central argument to Hayek. But I note that Friedman also adduced an argument based on the knowledge problem in support of his monetary rule.

Monetary rules and policy rules more generally are a subset of behavioral rules. The case for a monetary rule is ultimately the same as the case for the rule of law in society. For those would like to see that argument in print, along with the philosophical tradition undergirding it, see my recent article in the Journal of Private Enterprise, “Hayek and the Scots on Liberty.”

[Cross-posted from Alt-M.org}

Our hyperactive, grasping federal government has inserted its wasteful, probing fingers into just about everything these days.

I hadn’t been to an eye doctor in a while, and so when I went recently I was surprised to be presented with these two forms:

The first form claims that electronic transmission of prescriptions “helps protect the privacy of your personal information.” That strikes me as plainly false—an old-fashioned piece of paper with my eye information couldn’t get hacked on the Internet or wouldn’t be sent to the government. The form lists the supposed benefits of e-prescribing to the patient. On net, the benefits may indeed outweigh the costs—but then we wouldn’t need a federal mandate to bring it about.

Like many Americans, I find the second form regarding race rather offensive. It would be one thing if university researchers were surveying a sample of patients for such information in order to study eye diseases that may vary by personal characteristics. But reading between the lines on this form, the government appears to be collecting the information not for medical research, but essentially for socialist planning purposes.

Obamacare imposes a requirement that employers provide insurance that covers “preventive care” for women, but does not specify what that entails. The Department of Health & Human Services (HHS) determined that “preventive care” includes all FDA-approved contraceptives, from condoms to the morning-after pill.

While houses of worship were exempted outright from the mandate, other religious orders were not. (And, as we know from the Hobby Lobby case, for-profit employers who object to certain forms of contraceptive don’t have to pay to cover them.) Instead, under an “accommodation” created by HHS and the Departments of Labor and Treasury, an objecting religious organization isn’t required to pay for the offending contraceptives, but they do have to notify HHS, which then modifies their insurance contracts so their insurers cover the objected-to items.

Even though the religious organizations are not paying for the contraceptives, groups like the Little Sisters of the Poor—an order of nuns who provide various kinds of social services—still feel complicit in sin and claim that their free exercise of religion has been burdened.

Cato and law professor Josh Blackman (who recently became a Cato adjunct scholar) have filed an amicus brief supporting the Little Sisters’ request that the Supreme Court hear their case. The Little Sisters raise claims under the First Amendment and the Religious Freedom Restoration Act. Our brief asks the Court to consider a supplemental question: Whether the Departments have the interpretive authority and “expertise” to resolve this “major question” of profound social, “economic and political significance”—to quote Chief Justice Roberts’s majority opinion in King v. Burwell (where he said that courts couldn’t simply defer to the IRS on the important question presented there).

Congress gave absolutely no indication that it delegated to federal agencies the authority to decide which religious groups would be exempted and which could have their religious liberty burdened under an accommodation, or for that matter, how agencies were to design any accommodations. To quote another recent case where the Court refused to defer to an administrative agency, UARG v. EPA (2014), here the agencies are “laying claim to an extravagant statutory power” affecting fundamental religious liberty interests—a power that the ACA “is not designed to grant.”

If the Departments lack the interpretive authority to craft accommodations, then Hobby Lobby provides the rule of decision and the Little Sisters must be exempted from the mandate. Accordingly, the Supreme Court should consider this additional question and conclude that the Departments’ regulatory incompetence prevents them from forcing the Little Sisters to be complicit in what they view as sin.

Each year, since 1978, the Federal Reserve Bank of Kansas City hosts central bankers from around the globe at Jackson Hole, Wyoming, to assess monetary policy.  The conference is closed to the public and the Kansas City Fed does not make its program available to the public until the day of the event.  Here’s what one can find when going to their website:

“The 2015 Economic Symposium, “Inflation Dynamics and Monetary Policy,” will take place Aug. 27-29, 2015. (The program will be available at 6 p.m., MT, Aug. 27, 2015).”

This information is treated as if it’s “top secret.”

But it’s not a top secret that the Federal Reserve lacks transparency, is not bound by any monetary rule, has more power than ever before (as a result of the unconventional monetary policies pursued since the 2008 financial crisis), and opposes a congressional audit—even though the Constitution gives Congress the power to regulate the value of money. 

Luckily, the American Principles Project will be holding a parallel conference near the Fed’s site in Jackson Hole to evaluate the Fed’s performance after more than 100 years and offer alternatives to a regime of pure discretionary government fiat money.

The topic of the APP conference—“Is Central Banking the Problem or the Solution?”—will give participants the opportunity to offer advice on how to improve the monetary regime, not just monetary policy. (On the same topic, see the Spring/Summer 2015 issue of the Cato Journal: “Alternatives to Central Banking: Toward Free-Market Money”)

Mark Calabria, director of Cato’s Financial Regulation Studies, within Cato’s newly established Center for Monetary and Financial Alternatives, will be speaking at the APP conference on Friday, August 28. His topic is “Regulatory Failure at the Fed.” Tune in.

According to Gallup, more Americans think of themselves as “have-nots” today than at any point since Gallup began posing the question almost thirty years ago, while fewer Americans see themselves as “haves.” (Please see Emily Ekins’s earlier post for an in-depth analysis from a different angle). But do Americans actually have less in 2015 than in 1988? Let’s dig into the data to see whether Americans might have more than they realize.

2015 is the first year when Americans spent more money dining out than they spent on groceries. Let’s examine why that might be. In 2015, U.S. GDP per person (adjusted for inflation) reached an all-time high. At the same time that average personal wealth is rising, many necessities like food are going down in price. As a result, spending on the basics takes up a smaller and smaller share of an American’s personal disposable income—dropping from 39% in 1988 to 32% in 2013. This means that Americans have more money left at the end of the day, which they can then choose to save, invest, or spend on luxuries like dining out.

Not only are Americans wealthier on average, but they are also working less. The average American worker in 2015 works 30 fewer hours in a year than her counterpart in 1988, and yet is almost $18,000 dollars richer in real terms.

HumanProgress.org advisory board member Mark Perry recently pointed out that today’s young Americans may actually be the luckiest generation in history, based on what they can buy with earnings from a summer job. And increases in real wealth do not capture technological advances, which also contribute to rising living standards. The quality and variety of available goods is improving across the board. Almost no one had a cell phone in the United States back in 1990, but today they’re ubiquitous—and more useful, with an app for just about everything.

In many ways, Americans have more today than ever before: more leisure time away from work, more disposable income left after basic expenses,  more choice in what they buy, and more advanced technologies at their fingertips.  Of course, there are still people who live in genuine need. The Great Recession and various growth-retarding policy decisions have done great harm, especially to the poor. Still, if the many positive trends that we are seeing continue, then hopefully more Americans will come to count themselves among the haves instead of the have-nots. To learn more about improving living standards in the United States and beyond, pay a visit to HumanProgress.org.

Last week I dissected the annual Education Next poll a bit, and today the newest Phil Delta Kappa/Gallup poll on the state of education is out. Let’s take a look at several of the same topics we examined in the EdNext poll, shall we?

Common Core

Last week’s survey featured questions with several different wordings about Core backing, and while they all showed the Core hemorrhaging support over the last few years, percentages approving ranged from 49 percent to 39 percent. PDK/Gallup asked just one question about Core support, and it had very different wording from any used by EdNext, focusing not on the intention of the Core – “accountability” – or describing the Core as “standards for reading and math that are the same across states,” but asking if respondents approve of “having the teachers in your community use the Common Core State Standards to guide what they teach.” In response, 54 percent appeared to oppose the Core and only 24 percent supported it. It’s an odd way to ask about Core support – how about just ask if people “support or oppose the Common Core” – but it is unquestionably true both that an intended effect of the Core is to guide what is taught, and that this is more bad news for the Core.

Federal Role

EdNext found what I thought was unexpectedly (and discouragingly) high support for having Washington in charge of “setting educational standards for what children should know,” but still very low approval of federal direction over labeling schools as “failing” and dictating how to fix such schools. PDK/Gallup did not ask directly about setting standards, but did ask which level of government should be “holding schools accountable” and “determining the right amount of testing.” What they found was in line with what EdNext found: Only about 1 in 5 respondents want Washington in charge, with most wanting states and districts in control. Maybe the Constitution does still count.

Opting Out

Constant standardized testing, the Common Core, federal strong-arming, and possibly numerous other irritants have seemingly spurred a revolt against standardized testing, most visibly seen in the “opt-out” movement in New York and elsewhere. Both the EdNext and PDK/Gallup polls suggest this movement comprises a minority – though a pretty large and vocal one – with around a third of parents in the PDK-Gallup poll saying they would “excuse” their child from “one or more standardized tests,” and almost the exact same percentage of EdNext parents saying they support allowing parents to opt their kids out of standardized math and reading tests. Obviously these are somewhat different questions – would you exempt your kids, versus allowing other parents to exempt theirs – but I’m guessing the one-third in both polls are basically the same group of people.   

School Choice

Interestingly, the PDK/Gallup pollsters prominently conclude that “Americans endorse choice,” but the only question they ask about private school choice is the one they love to use that consistently gets the most negative response: “Do you favor or oppose allowing students and parents to choose a private school to attend at public expense?” This and a somewhat similarly worded question used by EdNext found about 58 percent of people in opposition and about 30 percent in support. But EdNext asked several other questions, including some stating a goal to provide people with “a wider choice” which polled much better. And PDK/Gallup didn’t ask at all about the reigning choice champ, scholarship tax credits, which are quite popular, perhaps because they are about providing wider choice and, unlike the connotation of “at public expense,” taxpayers get to choose whether or not they fund them. PDK/Gallup found higher support for charter schools than did EdNext, with question wording again likely heavily at play, but both found robust approval, from 51 percent to 64 percent of respondents.

Much More

In addition to these topics, the PDK/Gallup poll delves into school grades, approval of President Obama’s “support” for public schools, and more. So just as I asked for Education Next, why are you still here? Go read the PDK/Gallup poll!

When most Americans learn about the Thirteenth Amendment in high school, the teacher will cursorily remark that “the Thirteenth Amendment ended slavery in the United States,” and move on to the Fourteenth Amendment. This oversimplification is a fiction. Slavery is still legal in the United States, so long as it is pursuant to a criminal conviction and if it is limited to compulsory uncompensated labor—and indeed that is precisely the system America maintains today.

The Thirteenth Amendment, as enacted, reads “Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.” Slavery is neither a cruel nor unusual punishment according to the Supreme Law of the Land, nor historically has it been considered that. In the 1700s and early 1800s, Americans viewed compulsory labor was viewed as a way to fight vagrancy and to rehabilitate such idleness.

However, the states began to understand the potential for revenue generation from prisons in the 1800s—compulsory labor and the sale of prison products became a means to offset state costs. To be sure, the Virginia Supreme Court in Ruffin v. Commonwealth (1871) declared that prisoners were the “slaves of the State” within a compulsory labor system.

This “Punishments” Clause allowed for the birth of the “convict-lease” system in the South after the War. Many southern states passed anti-vagrancy “black codes,” criminalizing the status of being unemployed. Citing cost reasons, states would then lease out their prisoners to private persons to work under slave-like conditions. As Frederick Douglass noted, “companies assume charge of the convicts, work them as cheap labor and pay the states a handsome revenue for their labor. Nine[-]tenths of these convicts are Negroes.”

Since the 1860s, courts have interpreted the Thirteenth Amendment as it plainly reads. “Once individuals have been duly tried, convicted, sentenced, and imprisoned, courts will not find Thirteenth Amendment violations where prison rules require inmates to work.” For example, in Mikeska v. Collins (1990), the Fifth Circuit Court of Appeals held that “Any unjustified refusal to follow the established work regime is an invitation to sanctions.”

The compensation of prison labor today reflects this history. In Georgia and Texas, the maximum wage in dollars per day is $0. In Nevada, prisoners make $0.13 an hour. The average wage is between $0.93 a day and $4.93 a day—less than an hour of work at minimum wage. Conservative estimates put the value of output from prison labor at $2 billion annually.

Indeed, much like the southern states claimed after the Civil War, “States facing growing budget deficits are increasingly turning to inmate labor to produce additional revenue, or at a minimum, offset the cost of imprisonment.” “At least 37 states have legalized the contracting of prison labor by private corporations that mount their operations inside state prisons.”

While amending the Constitution to fix a $2 billion a year compulsory labor industry is politically unlikely, Congress may take measures to ensure that rehabilitative compulsory labor is not uncompensated, like compelling the payment of a federal minimum wage. State legislatures also could apply minimum wage rules to prisoners.

Prisoners are often indigent upon release; allowing them to save money for their transition back to society seems only logical if the goal is the reduce recidivism. Paying prisoners fair wages allows them to afford housing and sustenance while transitioning back to being a productive member of society. Additionally, the availability of compulsory, cheap labor to private companies undercuts domestic industry itself.

America must change its practice of not compensating prisoners for their labor. While work has rehabilitative benefits, rehabilitation of the wards of the state should not convert them to the “slaves of the State.” Fair wages should follow compelled work.

Recent Gallup polling finds that 58% of Americans view themselves as “haves” while 38% say they are “have nots.” Nevertheless, most Americans (54%) reject the premise that the United States is a rigid economic hierarchy, while 45% say it’s a fair depiction.

When asked to choose, 58% of Americans view themselves as “haves,” a share fairly constant since 2003, and similar to 59% found in 1989. (There was a blip in the late 1990s when 60-67% said they were “haves.”) However, the share who say they are “have nots” has more than doubled from 17% in 1989 to 38% in 2015, as fewer Americans say they “don’t know.” In line with this trend, more Americans view the United States as a society divided into “haves” and “have nots” increasing from 39% in 1998 to 45% in 2015.* Similarly the share who say the US is not divided has declined rom 59% in 1998 to 54% today.

These data suggest that Americans have begun to focus more on economic status with increasing debate over rising income inequality.

Interestingly, while Hispanics are more likely (51%) to say they are a “have not” when pressed, a fully 60% reject the premise that America is “divided into haves and have nots.” This suggests that Hispanic Americans believe in upward income mobility. While some may not view themselves as a “have” today they or their children could be eventually.

While African-Americans are about equally likely as Hispanics to say they personally are a “have not” (48%), 69% view the country as divided between “haves” and “have nots,” 32 points higher than Hispanics.

White Americans tend to agree (57%) with Hispanics that America is not a divided land of “have” and “have nots,” however, they are about 20 points less likely to say, when pressed, they personally are a “have not.”

The share of Americans who think they are winners of the economic system has remained fairly constant over the past decade. However, more Americans are beginning to think the overall system is rigged in favor of economic division, but this view is not necessarily a product of their own experience. Instead, passionate public discourse over income inequality has likely played a key role in changing Americans’ perceptions about how the system works for others.

Read the full Gallup post here.

For more public opinion analysis sign up here for Cato’s weekly digest of Public Opinion Insights.

* Note: Gallup found in 1998 that 71% of Americans rejected the idea that America is divided into two economic groups while 26% accepted the premise. However by 1998 59% rejected and 39% accepted the idea. It’s unclear if the decline between 1988 to 1998 is a a trend, or if 1988 registered an unusual response.

According to a report circulating this week “Indiana is not the only state facing a teacher shortage. It is a national and global issue.” This is said to be proven by a Google search returning blog posts and news stories in which some people claim there is a teacher shortage. But is that true? The claimants could be uninformed, misinformed, or could even have incentives to cry “shortage!” when there isn’t one. For instance, consider this U.S. government program for cancelling teachers’ loans:

34 CFR 674.53(c) enables Federal Perkins Loan borrowers who are full-time teachers of mathematics, science, foreign languages, bilingual education or any other field of expertise where the State educational agency determined there is a shortage of qualified teachers to qualify for cancellation of up to 100 percent of their loan repayment.

Hmm. But let’s not speculate. The federal government’s National Center for Education Statistics compiles data on public school enrollment and teacher employment. To verify the claims of teacher shortages in Indiana and nationally, I charted those data in the figure below.

For the United States as a whole, we see that there are fewer pupils per teacher today than at almost any time in the past 50 years. Put the other way, we currently have more teachers per pupil that we’ve had in the past—with the exception of a brief period last decade.

In the case of Indiana, the pupil/teacher ratio is about the same as it was in 1982. The difference between Indiana’s ratio and that of the nation as a whole is currently less than one student/teacher.

Clearly, the nation has been on a very long teacher-hiring binge. Since 1970, the number of teachers has grown six times faster than the number of students. Enrollment grew about 8 percent from 1970 to 2010, but the teaching workforce grew 50 percent. There are a LOT more public school teachers per child today, so how can districts and states still claim to be facing “teacher shortages?”

In some areas, the shortages are said to be restricted to teachers of certain subjects or grade levels. But if that is so, it only begs the question: why did the system hire so many teachers in the other subjects where there were not shortages—decade after decade? Wouldn’t it have been wiser not to hire so many new teachers over the last 50 years in the other subjects that were not facing shortages? Had the nation not gone on what seems to be an across-the-board teacher hiring binge since 1970, districts would have more money at their disposal today to offer teachers in truly hard-to-fill positions.

As my erstwhile colleague Marie Gryphon noted there are:

large differences among teachers in their impacts on achievement and … high quality instruction throughout primary school could substantially offset disadvantages associated with low socioeconomic background [….] The group noted that good teachers matter more than smaller class sizes. Rivkin and his colleagues found that raising teacher quality by one standard deviation would improve student achievement more than a very expensive class-size reduction of 10 students per class.

 And not only have U.S. public schools favored quantity over quality in their long-term hiring behavior, they have been found to make systematically poor choices among the available candidates:

Ballou found that administrators were no more likely to hire high-ability teaching candidates than candidates of lower tested ability. He writes: “Applicants from better colleges do not fare better in the [public school teacher] job market. Indeed, remarkably, they do somewhat worse.” That was the case despite substantial evidence that higher tested ability of teachers is one of the most reliable indicators of superior classroom performance. [Gryphon 2006, italics added]

Research shows that the brighter candidates are likely to become better teachers, but that they are less likely to be hired by public school districts in the first place.

Another respect in which the nation’s public school systems invite teacher shortages upon themselves in high-demand subjects is their erection of barriers to entering the teaching profession. States generally require candidate teachers to obtain a 4-year degree from a state-accredited teachers’ college. These credentials tend not to be portable between states. Nor, as Gryphon reported, have state teacher credentials been shown to confer a meaningful benefit on students.

The desire to drive up teacher quality is worthy, but there are more empirically supported ways of doing so. One is competition. Gryphon writes that “schools subjected to competition hire more teachers who have the specific qualities that have been tied to performance by past research: high tested ability and experience with math and science.”

Of course, that sort experience is concentrated in students and professionals in math, science, and engineering fields, not among students in teachers’ colleges. With that in mind, many states adopted so-called “alternative certification” programs, in an effort to be more welcoming of non-ed-school graduates. But a Fordham Foundation report reveals that “alternative certification programs have come to mimic standard-issue pre-service college-of-education programs.” Which is perhaps explained by the fact that about two-thirds of “alternate” route programs are run by the very education schools to which they are meant to be alternatives.   

So does America have a “teacher shortage” writ large? No. We had 22.3 pupils/teacher in 1970 and 16 p/t in 2012. Compared to the past, we are rolling in teachers. If we have too few in some fields and too many in others, it is for the reasons described above–mistakes in policy and/or execution. In Indiana, the ratio went from 17.5 to 17.4 over the past 30 years. If there are subject-specific shortages they are the result, again, of policy and execution.

In 1980, heated water from a nuclear power plant in Forsmark, Sweden (60.42°N, 18.17°E) began to be discharged into Biotest Lake, an artificial semi-enclosed lake in the Baltic Sea created in 1977 that is adjacent to the power plant and covers an area of 0.9 km2 with a mean depth of 2.5 m. The heated water has raised the temperature of the lake by 6-10°C compared to the surrounding Baltic Sea, but aside from this temperature difference, the physical conditions between the lake and the sea are very similar.

A few years after the power plant began operation, scientists conducted a study to determine the effect of the lake’s increased temperatures on the host-parasite dynamics between a fish parasite, the eyefluke (Diplostomum baeri), and its intermediate host, European perch (Perca fluviatilis). That analysis, performed in 1986 and 1987, revealed that perch in Biotest Lake experienced a higher degree of parasite infection compared to perch living in the cooler confines of the surrounding Baltic Sea (Höglund and Thulin, 1990), which finding is consistent with climate alarmist concerns that rising temperatures may lead to an increase in infectious diseases.

Fast forward to the present, however, and a much different ending to the story is observed.

Nearly three decades later, Mateos-Gonzales et al. (2015) returned to Biotest Lake and reexamined the very same host-parasite dynamic to learn what, if anything, had changed in the intervening time period. According to the team of researchers, Biotest Lake “provides an excellent opportunity to study the effect of a drastically changed environmental factor, water temperature, on the evolution of host-parasite interactions, in a single population recently split into two.” Specifically, it was their aim “to examine if the altered conditions have produced a change in prevalence and/or intensity of infection, and if these potential variations in infection have led to (or might have been caused by) a difference in parasite resistance.”

To accomplish their objective, Mateos-Gonzales et al. compared the prevalence and intensity of parasitic infection in perch populations growing in warmer Biotest Lake versus the natural population from the surrounding cooler Baltic Sea in 2013 and 2014. They also conducted a controlled laboratory experiment in which they exposed perch from both locations to D. baeri, comparing their infection rates.

The field results indicated that fish from the warmed Biotest Lake had a much lower parasite infection rate than fish from the Baltic Sea. In fact, the authors report that the “intensity of infection in Baltic fish was on average 7.2 times higher than in the corresponding Biotest fish” (italics added, see figure below). In addition, Baltic fish were found to acquire “slightly more parasites as they age,” whereas Biotest fish did not.

With respect to the laboratory tests, Mateos-Gonzales et al. report that exposure to parasites “did not have an effect in fish from the Biotest Lake, but it did in fish from the Baltic Sea,” increasing their intensity of infection by nearly 40 percent.

Infection intensity of the parasite D. baeri in juvenile perch from the Baltic Sea (left panel) and Biotest Lake (right panel). The line indicates best-fit and the shaded area represents the 95% confidence interval. Adapted from Mateos-Gonzales et al. (2015).

In discussing their findings, Mateos-Gonzales et al. write they present “a dramatic contrast” to those reported nearly three decades earlier when Biotest fish were infected at a rate of “almost twice” that of Baltic fish. Compared to 1986/87, the intensity of parasitic infection in Biotest fish has fallen almost 80%, whereas it has decreased only slightly in Baltic fish. Consequently, the authors conclude their results illustrate “how an increased temperature has potentially aided a dramatic change in host-parasite dynamics,” and that change, it might be added, has clearly been for the better. Furthermore, Mateos-Gonzales et al. note this rapid and surprising reversal of fortunes has “direct implications for consequences of global climate change, as they show that fast environmental changes can lead to equally rapid evolutionary responses.” Indeed they can; and such responses need to be included in predictive models that “highlight the importance of empirical research in order to validate future projections” of host-parasite interactions in a world of rising temperatures. Clearly, the future outlook on host-parasite interactions has the potential to be much more favorable than climate alarmists often make it out to be.

References Höglund, J. and Thulin, J. 1990. The epidemiology of the metacercariae of Diplostomum baeri and D. spathaceum in perch (Perca fluviatilis) from the warm water effluent of a nuclear power station. J Helminthol. 64: 139-150.

Mateos-Gonzalez, F., Sundström, L.F., Schmid, M. and Björklund, M. 2015. Rapid evolution of parasite resistance in a warmer environment: Insights from a large scale field experiment. PLOS ONE 10: e0128860, doi:10.1371/journal.pone.0128860.

Several recent news stories report information that was hardly surprising to anyone who has studied economics or read Cato at Liberty. We talk a lot about unintended or unanticipated consequences around here, but in these cases the consequences were anticipated and even predicted by a lot of people.

First, consider this front-page story from the Washington Post on Monday:

The [fast-food] industry could be ready for another jolt as a ballot initiative to raise the minimum wage to $15 an hour nears in the District and as other campaigns to boost wages gain traction around the country. About 30 percent of the restaurant industry’s costs come from salaries, so burger-flipping robots — or at least super-fast ovens that expedite the process — become that much more cost-competitive if the current federal minimum wage of $7.25 an hour is doubled….

Many chains are already at work looking for ingenious ways to take humans out of the picture, threatening workers in an industry that employs 2.4 million wait staffers, nearly 3 million cooks and food preparers and many of the nation’s 3.3 million cashiers….

The labor-saving technology that has so far been rolled out most extensively — kiosk and ­tablet-based ordering — could be used to replace cashiers and the part of the wait staff’s job that involves taking orders and bringing checks. 

Who could have predicted that? Well, Cato vice president Jim Dorn in his 2014 testimony to the Maryland legislature. Or Bill Gates around the same time.

Then there’s this all-too-typical AP story out of California:

California lawmakers from both parties are calling for more stringent oversight of a clean jobs initiative after an Associated Press report found that a fraction of the promised jobs have been created. 

The report also found that the state has no comprehensive list to show much work has been done or energy saved, three years after voters approved a ballot measure to raise taxes on corporations and generate clean-energy jobs….

The AP reported that three years after voters passed Proposition 39, money is trickling in at a slower-than-anticipated rate, and more than half of the $297 million given to schools so far has gone to consultants and energy auditors. 

Well, you might have seen that coming if you’d read Cato’s 2011 book The False Promise of Green EnergyOr Thomas Hemphill and Mark Perry in 2012. Or Dan Mitchell in 2008 on government job creation. Or indeed Henry Hazlitt in 1946.

And finally this recent study from the Federal Reserve finding, as reported by Bloomberg:

The surging cost of U.S. college tuition has an unlikely culprit: the generosity of the government’s student-aid program, a report by the Federal Reserve Bank of New York said.

Increases in federal loans, meant to help students cope with rising costs, are quickly eaten up by schools in higher prices, wrote David O. Lucca, Karen Shen and Taylor Nadauld.

Private colleges raise their tuition 65 cents for every dollar increase in federal subsidized loans and 55 cents for Pell grants given to low-income students, according to the report. College tuition has outstripped U.S. inflation for decades.

Who would have guessed? Certainly not Hillary Clinton. But Gary Wolfram, author of this 2005 Cato study, understood what was going on. So did Neal McCluskey in 2009 and Jason Bedrick in 2012 and Steven Pearlstein in 2004. Clinton and other political leaders may not read the Cato website diligently. But you’d think they’d have seen Pearlstein’s article in the, um, widely read Washington Post.

Understanding basic economics can make it fairly easy to predict the results of price floors, price ceilings, subsidies, job creation schemes, and other efforts in economic discoordination. It’s too bad that the widespread availability of economic knowledge doesn’t seem to do much to improve public policy.

A Michigan-based supermarket trying to expand into Wisconsin has come up against an absurd law against selling products at “unfairly low” prices.  As reported by MLive, the Meijer grocery store chain is facing complaints that its grand opening sales violated Wisconsin law for offering products at prices below cost. Why is that bad?

The official rationale behind Wisconsin’s Unfair Sales Act of 1939 is revealing:

The practice of selling certain items of merchandise below cost in order to attract patronage is generally a form of deceptive advertising and an unfair method of competition in commerce. Such practice causes commercial dislocations, misleads the consumer, works back against the farmer, directly burdens and obstructs commerce, and diverts business from dealers who maintain a fair price policy. Bankruptcies among merchants who fail because of the competition of those who use such methods result in unemployment, disruption of leases, and nonpayment of taxes and loans, and contribute to an inevitable train of undesirable consequences, including economic depression.

Some of these are simply a consequence of any market competition, a process that inevitably results in some companies failing.  But the idea that there is something uniquely harmful called “unfair competition” that occurs once a product is sold below cost is just false.  There are many reasons companies sell certain products at certain times for less than the cost of production.  For example, grand opening sales and seasonal sales are ordinary forms of competition.  It’s common in many retail sectors to use a low-priced “loss leader” product to draw customers into your store hoping they will buy other high-priced items as well.  

In short, the existence of regular below-cost sales is in fact a sign of a healthy, competitive market that serves consumers and suppliers. 

It’s tempting to see Wisconsin’s law as a relic of the New Deal era’s now widely discredited interventionist economics.  But this sort of rhetoric is still quite common among people who want the government to prevent their competitors from being too competitive. 

The head of the Wisconsin Grocer’s Association warns that without the law, competition would (paradoxically) lead to monopoly.

“You would have massive, massive disruption in the marketplace… . You would have competitors trying to meet those prices and you would have others who simply could not do it.”

While state laws like Wisconsin’s Unfair Sales Act are relatively rare, the federal government relies on the same bad economics to justify the U.S. antidumping law, which imposes punitive tariffs on imports sold below “fair value.”  And just like the Wisconsin Grocer’s Association, the beneficiaries of antidumping tariffs claim such protections are needed to ensure a competitive market.

The entire institution of antidumping is based on bad economies and crony politics.  It keeps prices high for consumers and businesses while frustrating U.S. foreign relations.  I urge you to take a look at some of the extensive work Cato scholars have done and continue to do to address the myths that keep the protectionist U.S. antidumping law alive.

I don’t think anyone likes the idea of responding to all of the various statements that Donald Trump makes, but when he says something vaguely – emphasis on vaguely – substantive on an issue, a short response might be of value. In a recent interview with Chris Cuomo, Trump talked about trade policy, and had this to say (starting around the 7:00 mark) about Ford doing some of its manufacturing in Mexico:

Trump: … Ford is building a $2.5 billion … manufacturing plant for cars, trucks, and parts in Mexico.

Cuomo: How do you keep them?

Trump: Uh you keep them by…

Cuomo: … ‘cause the labor’s cheap that’s why they go.

Trump: For one thing, you keep them by talking to them. But I would say you keep them … if they go there, you know… they’ll make cars, and they’ll sell them to the United States no tax, no nothing. Just come right across the border. …

Cuomo: …and they say the labor’s cheaper over there.

Trump: And you know what, then we’ll say that’s fine. If the labor’s cheaper over there that’s good, but you know what, you’re gonna have to pay a tax to get those cars back in. You’re gonna have to pay a penalty. And if you put a… a penalty on, a tariff or whatever you call it … 

My sense is that Trump’s conception of Ford as a company is rooted in the 1950s, or maybe even the 1920s. In his mind, Ford is owned by Americans, produces in America, and sells to Americans. In reality, though, Ford has long been a global company. Here’s something I wrote about Ford a while back in the context of a paper on international investment:

Total U.S. employment for Ford in the manufacturing sector is about 43,000, but Ford employs 123,000 people worldwide in 51 different production facilities. Ford has factories in North America, Africa, South America, Australia, Europe, and Asia. In South America (26,000 employees), production is centered in Brazil and Argentina. Within Europe (38,000 employees), production is concentrated in Belgium, Germany, Romania, and Spain. And in Asia (45,000 employees), Ford plants are located in China, India, Thailand, and Turkey.

Thus, the truth is, Ford makes (and sells) cars all around the world. And it’s not just Ford, it’s most of the major car companies. Here’s what I said about Toyota:

While there are 16 Japanese production facilities and about 70,000 Japanese employees, Toyota has overseas employment of about 166,000. It has factories in North America, Latin America, Europe, Africa, Asia, Australia, and the Middle East. Within the United States, manufacturing employment is concentrated in Kentucky, Indiana, and Texas. In Europe, manufacturing employment is in the Czech Republic, France, Turkey, and the United Kingdom. And in Asia, manufacturing is concentrated in China, Taiwan, India, Indonesia, and Thailand. 

That’s how much of large-scale manufacturing works these days, and it’s good that it does, because it improves quality and lowers costs. Globalized production is more efficient in many ways, and actually helps companies like Ford stay competitive.

That’s a general point. There is also a more specific point related to how production in Mexico and the United States operate together: “A full 40% of the content in U.S. imports from Mexico is actually produced in the United States … . This means that forty cents of every dollar spent on imports from Mexico comes back to the U.S. …”  So, if you are taxing “Mexican” imports, you are also taxing the substantial value added by Americans earlier in the production process. Integrated value chains such as this make life difficult for economic nationalists, but that’s the world we live in, and they are going to need to adjust.

Trump is right that we need companies to invest in America. But the answer is not to threaten trade wars when companies act in ways that are both profit maximizing and make consumers better off. Rather, the way to attract investment is, as my colleague Dan Ikenson has written, to adopt good domestic policies that investors find attractive.