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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.



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.


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.



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.

The Environmental Working Group (EWG) has released new data reaffirming the scandal that is federal farm policy. The government pumps out billions of dollars a year in subsidies to farm businesses, and the giveaways mainly benefit the richest farmers.

The EWG found that, “Between 1995 and 2016, the top 10 percent received 77 percent of all ‘covered commodity’ subsidies … The top 1 percent received 26 percent of all subsidies, or $1.7 million per recipient.”

The top subsidy recipient was Deline Farms Partnership, which received more than $4 million in 2016. EWG notes that the median household income in Charleston, Mo., where Deline Farms is based, is just $27,000.

Farm subsidies are not only reverse Robin Hood policies, they also always seem to cost more than Congress promises. EWG notes, “the projected cost to taxpayers of farm subsidy programs from 2016 to 2018 is roughly $7.5 billion more than the CBO predicted when the current farm bill was enacted in 2014.”

What’s the solution? Bipartisan spending cuts. EWG: “Sens. Jeff Flake, R-Ariz., and Jeanne Shaheen, D-N.H., and Reps. Jim Sensenbrenner, R-Wisc., and Ron Kind, D-Wisc., have proposed legislation to cap all farm subsidies, subject all farm subsidies to a means test, and require the USDA to disclose the names of all farm subsidy recipients.”

For a discussion of the history and economics of federal farm subsidies, see this DownsizingGovernment study.

In their tax plan released today, Republicans have abandoned their effort to cut the top individual income tax rate of 40 percent. That is unfortunate, because the highest tax rates do the most economic damage. Apparently, the GOP backtracked on that reform because of revenue concerns, and because of fear of “tax cuts for the rich” complaints from liberal critics. The critics will probably make similar complaints about the new plan.

Liberals always seem to want more taxes on the rich and more redistribution, no matter how much we already have. The United States already has the most “progressive” system of household taxes in the OECD. At least, that is what the OECD found in a 2008 study, Chapter 4. Among the 24 countries they examined, they found that “Taxation is most progressively distributed in the United States.” That is probably still true today.

The table below is a compressed version of one from the OECD report. The column on the left shows the percent of taxes paid by the highest-earning 10 percent of households. The OECD includes individual income taxes and employee social security taxes. At 45 percent, the top 10 percent in the United States pay the highest tax share of any OECD country.

Partly, that is because the top 10 percent of Americans earn a large share of the income, as shown in the second column. But, it is also because our government nails high earners with high rates, which is what the third column reveals. The third column is the ratio of the first and second columns, and is one measure of how “progressive” the tax system is. A ratio of “1.00” would be proportionality, where the top 10 percent of earners pay 10 percent of the taxes, which is the case in Sweden.

The U.S. has the highest third-column ratio at 1.35, which indicates substantially more progressivity than the OECD average of 1.11. “Progressivity” sounds like a nice thing, but it means a system than penalizes people more the harder they work, and it means a system that is unfair to the most productive people in the economy.

Note that the OECD data is a decade old, but the income tax share paid by the top 10 percent is as high as ever in the United States, as shown here. Further note that the top U.S. individual income tax rate is substantially higher than the average of a group of 80 countries, as shown here.

The Cato 2017 Free Speech and Tolerance Survey finds nearly two-thirds (61%) of Clinton voters agree that it’s “hard” to be friends with people who voted for Donald Trump, while 38% disagree. However, Trump voters don’t feel a similar animus toward Clinton voters. Instead, a majority (64%) of Trump voters do not think that it’s hard to be friends with Clinton voters while 34% believe it is difficult.

Full survey results and report found here.


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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. 

Last month, Secretary of Defense James Mattis urged Congress to allow the Pentagon to reduce its excess overhead. Mattis has requested this authority before – as have at least four of his predecessors (Carter, Panetta, Hagel and Gates) – but the latest request accompanies a new Pentagon report that assesses the military’s infrastructure needs based on a much larger force structure than the one it has today. Even if the military, and especially the Army, were to grow back to the levels seen when the United States was actively fighting wars in both Afghanistan and Iraq (2012), the DoD is carrying 19 percent excess capacity. Such waste clearly impacts military effectiveness. As Mattis explained in a letter accompanying the report, “every unnecessary facility we maintain requires us to cut capabilities elsewhere.”

Although the leading Democrat on the House Armed Services Committee, Adam Smith (D-WA), and a handful of other lawmakers, agree with Mattis’s assessment, and would allow the Pentagon to cut such obviously wasteful spending, many others in Congress remain opposed to a new round of base closures. Kay Granger (R-TX), chairwoman of the House Appropriations Subcommittee on Defense said in May that she had “never seen [BRAC] save much money.” Sen. Jim Inhofe (R-OK) called plans for base closure “disappointing” and “dangerous.” “Clearly, base closure rounds,” Inhofe wrote in September, “cost the American taxpayers an exorbitant amount of money upfront and take years to recoup the initial investment.”

This is incorrect. The closure of hundreds of unnecessary military bases in five successive BRAC rounds have saved American taxpayers billions of dollars. Even the much-maligned fifth and final BRAC round, initiated in 2005, is expected to deliver net savings in 2018. Secretary Mattis explained in testimony before the Senate Armed Services Committee in June that a “properly focused base closure effort” could generate $2 billion or more annually.

But we shouldn’t assess the benefits of base closures solely on the basis of possible savings to the Department of Defense; that amounts to looking through the wrong end of the telescope. Although BRAC does generate real savings, the greater economic benefits accrue to communities near affected bases when they put underutilized facilities to more productive uses. In that sense, military bases aren’t closed, they’re opened.

I visited such a place on Wednesday: the former Glenview Naval Air Station, about 20 miles northwest of Chicago. During World War II, the Navy trained pilots to land on aircraft carriers, in this case two converted passenger steamers on Lake Michigan. The Navy didn’t have actual aircraft carriers to spare. More than 17,000 naval aviators underwent training at Glenview, including George H.W. Bush.

But the naval air station was included in the 1993 BRAC list, and Glenview took charge of clearing some 1100 acres, funded infrastructure improvements, and subdivided and sold parcels to private developers. About 400 acres were preserved as open space and parkland.

To the untrained eye, few would realize that there was ever a naval base here. I’ve been aware of Glenview for years, even though I had never visited before. I knew what to look for. The street names betray the area’s storied past. Independence and Constitution Avenues are pretty common, and one even encounters the occasional Patriot Boulevard. But one doesn’t often find Nimitz Drive, Kitty Hawk Lane, or Admiral Court in a typical American subdivision. The beautiful homes, many with three-car garages, and backing to golf courses and open space, command top dollar on the real estate market. A review of a few of the listings for the houses with For Sale signs on their front lawns found asking prices between $760,000 and $875,000. Phoebe Co, a realtor with Berkshire Hathaway, explained that condos in the area go for as low as $300,000, but some of the newer townhomes sell for $800,000 or more. Single family homes selling for more than $1 million are not atypical.   

Glenview is a coveted location not merely for its pleasant neighborhoods, and ample green space with bike and walking paths. It is also in close proximity to the headquarters of a number of Fortune 500 companies (we drove past Allstate’s sprawling campus on the way back to O’Hare), and an easy commute to downtown Chicago – about 40 minutes by train during rush hour.

The centerpiece of Glenview’s redevelopment of the former base property is The Glen Town Center, which includes retail shops at street level, and apartments above them for rent. These properties are ringed by attractive brick rowhomes. Here one finds the most visible remaining remnant of the former base: the air station’s control tower is now home to a Dick’s Sporting Goods, a Carter’s children clothing store, and a Von Maur department store. Three statues – a pilot, a sailor, and a ground crewman – stand around a fountain across the street. Painted plaques by the store fronts celebrate the many units that served at the base.

Jeanne Fields, assistant property manager for the Aloft apartments, explained that renters value the convenience of living so close to shopping and dining.

The Glen is “very unique,” Fields said. “You don’t usually have urban style living in the suburbs.” People who want city living without the city can get it at The Glen. And they’re willing to pay: rentals start at $1600 for a 1 bedroom, and go as high as $5000 for the largest two-bedroom unit. Fields reported that more than 90 percent of the units are currently occupied.

I strolled around The Glen with my colleague Harrison Moar, stopped in at the ubiquitous Starbucks, and ate lunch at the Yard House (allegedly home of the “World’s Largest Selection of Draft Beers”). The sprawling restaurant can accommodate 250 diners, and seemed surprisingly busy for a Tuesday at Noon. The many families with young children probably weren’t there for the 100+ beers on tap, but Harrison and I might have tried one. Alex at the front told us that this was a pretty typical lunchtime crowd, and that the restaurant was even busier later in the week, and on weekends.

Those who believe that base closures will devastate a local economy need to be aware of cases like Glenview (and Philadelphia, and San Francisco, and San Antonio, and Brunswick). To be sure, some places will take longer to recover (e.g. Brooklyn), and a few might never see economic activity comparable to when the nearby bases boomed (e.g. Limestone, Maine).

But those who would keep unnecessary military bases open in order to shield local communities from the possible negative economic impacts are saying, in effect, that their parochial concerns should outweigh the needs of the nation. And elected officials who doubt that their base will ever be successfully converted betray a curious lack of faith in their own constituents’ ability to make productive use of valuable real estate.

Student protesters at the College of William and Mary recently shut down a campus speaker from the ACLU invited (ironically) to speak about “Students and the First Amendment.” Students explained their shut down was in retaliation for the ACLU’s defense of white nationalists’ free speech rights in Charlottesville, Virginia where a white nationalist rally recently took place. What motivated the students?

The Black Lives Matter of William and Mary student group wrote on their Facebook page, where they live-streamed their shut down of the event: “We want to reaffirm our position of zero tolerance for white supremacy no matter what form it decides to masquerade in.” From these students’ perspective, the ACLU supporting someone’s right to say racist things was as bad as being a racist organization.

The Cato 2017 Free Speech and Tolerance Survey helps shed light on these students’ reasoning. First, nearly half (49%) of current college and graduate students believe that “supporting someone’s right to say racist things is as bad as holding racist views yourself.” This share rises to nearly two-thirds among African Americans (65%) and Latinos (61%) who agree. Far fewer white Americans (34%) share this view.

Next, a majority (55%) of current students and nearly three-fourths of African Americans (75%) and Latinos (72%) believe that hate speech is an act of violence. Conversely, 53% of whites believe it is not.

In addition, 62% of current students and 7 in 10 African Americans and Latinos believe that “our society can prohibit hate speech and still protect free speech.” White Americans are evenly divided on this question.

Taking these results together, it becomes clearer why the William and Mary students reacted as they did. From the students’ perspective, society is capable of protecting our First Amendment rights and curbing hate speech. If that’s true, why protect hate speech? Next, they believe hate speech is itself a violent act. Why would one want to enable violence against others? Consequently, many may conclude that anyone who tries to protect another’s right to engage in hate speech has nefarious intentions or is at least as bad as those espousing the hate. According to this view, protecting hate speech seems unnecessary and damaging. Thus, such a defense of free speech does not appear to be grounded in principle but rather a lack of empathy or even malice.

Understanding the assumptions behind the students’ logic allows for a more productive conversation. For instance, one might ask these students: is it really true that society can simultaneously ban hate speech and protect free speech? If so, how does society decide what speech is hateful and thus should be banned? Additional results from the survey demonstrate that Americans cannot agree what speech is hateful and offensive, which would make it difficult to regulate. This raises the next question: if society can’t agree what speech should be off limits, who gets to decide what speech is hateful and should be banned?

Answers to these questions are complicated and demonstrate why efforts to censor and regulate speech and expression are significantly problematic.

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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.

When it comes to individual taxes, key Republican legislators seem to think “reform” is mainly about limiting or eliminating certain itemized deductions, rather than about raising revenue in ways that do the least damage to the economy (by minimizing tax distortions and disincentives).

This emphasis on curbing itemized deductions is often compared with the Tax Reform Act of 1986 (TRA86), which supposedly “paid for” cutting the top tax rate from 50% to 28% by slashing several itemized deductions. In reality, however, most extra revenue from repealing itemized deductions after 1986 was devoted to raising the standard deduction, leaving total deductions unchanged. This is apparent in the graph below, which shows total deductions – both itemized and standard – as a percentage of Adjusted Gross Income. 

Deductions averaged 23.1% of AGI from 1976 to 1984, and deductions also averaged 23.1% of AGI from 1989 to 1995. In between, the reform merely shifted the timing of deductions. Deductions were pushed forward into 1985-86 to take advantage of those that were about to expire (e.g., the tax-deduction for credit card interest). Moving deductions forward held down deductions briefly in 1987–88 before they climbed back up again.

Note that total deductions were also unaffected by the fact that the maximum marginal benefit of itemized deductions (the amount saved per dollar) had fallen to 28–31% from 1988 to 1992. President Obama proposed to limit itemized deductions to 28% of the amount spent, but we already tried that in 1988–90, without success. Whatever the effect of the 1986 law eliminating several itemized deductions, plus the deep reduction in the marginal tax benefit, both were overwhelmed by the larger standard deduction.  

Standard deductions doubled – from $151 billion in 1986 to over $309 billion in 1989. The only reason that is called “reform” is that politicians only define itemized deductions as “loopholes,” although the standard deduction obviously has the same effect on taxable income. Tax exemption and tax credits are far more valuable than deductions, yet (like the standard deduction) are commonly not described as “loopholes” as a matter of semantic convention (or confusion).   

If the standard deduction soon rises to $24,000 per couple, as the GOP proposes, even couples with a $100,000 income would automatically have higher than average deductions.

The graph also shows that the ratio of deductions to income is clearly cyclical – rising in recessions like 1975 and 2009 because income fell more than deductions, then falling during the 1997–2000 stock boom as incomes (including capital gains and stock options) grew faster than deductions.  

Reynolds’ Law of Taxes says the individual income tax will always hover around 8% of GDP, give or take one percentage point, regardless whether the top tax rate is 28%, 39.6%, 70% or 92%. Now, let’s add Reynolds’ Law of Deductions: Deductions will always hover around 23% of AGI, give or take one percentage point, regardless of whether itemized deductions are expanded, limited, or repealed.

Laws to limit itemized deductions, unlike booms and busts, have never had a noticeable lasting impact, largely because of Congressional fondness for raising standard deductions (and refundable tax credits, a super-loophole not counted here).

The Bush 41 Pease limitation on deductions was an anti-affluence political stunt making little noticeable difference. Revived in 2013, the Pease limits reduce the value of a taxpayer’s itemized deductions by 3% for every dollar of taxable income above $313,800 on a joint return. This adds about a percentage point to the top two marginal rates (and so does the PEP phase-out of personal exemptions). The Pease limits first began to phase-out itemized deductions of “the rich” in 1991, yet total deductions rose to 23.4–23.6% of AGI in 1991–93. The Pease phase-out was reinstated in 2013, yet total deductions remained the same as in 2012. Itemized deductions went down by $50.1 billion in 2013 and standard deductions went up $51.2 billion.

Doubling the standard deduction to $24,000 per couple appeared to be the primary revenue-losing objective of the GOP Big Six plan (losing $890 billion over 10 years by one estimate).  Meanwhile, there have been reports of backpaddling on trial-balloons about ending property tax deductions and curbing contributions to 401(k) plans.  It is not difficult to imagine the end result being that any revenue gained from limiting deductions barely offsets revenue lost by expanding the standard deduction, leaving deductions still stuck around 22–23% of AGI.

That would be like 1986 but with one big difference. In 1986, the top tax rate was cut by 22 percentage points, leaving a nearly-flat 15–28% rate structure. This year, by contrast, high-income taxpayers are not giving up big deductions and personal exemptions for a lower-rate, since the top rate is apparently to stay at 39.6%. Itemized deductions go down, personal exemptions completely vanish, yet targeted tax credits get larger (e.g., for children under age 17) and the standard deduction goes up. Tax-deferred contributions to retirement savings plans may be deeply slashed.  

By rejiggering exemptions, deductions, and credits with essentially no change in the highest, most damaging tax rates, the individual side of the Republican “tax cut” is shaping up as a sizable tax increase for well-educated two-earner couples with college-age kids living in high-cost metropolitan areas, among others.

A study that examined the effects body worn cameras (BWCs) have on police officers in Washington, D.C. has been making the rounds recently. The study’s findings have reinvigorated discussions about BWCs, not least because of its counterintuitive finding that BWCs did not have a statistically significant effect on officers’ use of force or civilian complaints against the police. This finding is worth considering, but the study shouldn’t deter local officials from mandating police BWCs. Even if they don’t change police officers’ behavior, BWCs can, with the right policies in place, provide a much-needed increase in police accountability and transparency.

During the study, officers with the Metropolitan Police Department of the District of Columbia were randomly assigned BWCs. Researchers with The Lab @DC, a study team in the D.C. mayor’s office, and Yale University examined use of force incidents and complaints against police officers.

The study did not seek to measure the impact of BWCs’ other benefits such as accountability, transparency, and protection for officers, but rather narrowly measured their impact. In addition to examining how often police officers use force and are the subject of complaints, researchers also studied police discretion and the judicial outcomes related to police charges.

You might expect that officers improved their behavior when they were wearing BWCs. After all, if you know that you’re being filmed you have plenty of incentives to be on your best behavior, whether you’re an officer or a resident. And yet, the recent D.C. body camera study showed that BWCs had no statistically significant effect on officers’ behavior.

This may strike many as odd. But we shouldn’t forget the limitations that restrict researchers looking into the effects of BWCs. Researchers cannot, for instance, insist that when an officer wearing a BWC calls for backup that only officers also wearing BWCs respond. In a situation where two officers are interacting with a resident and only one of the officers is wearing a BWC there is a good chance that the BWC will influence the behavior of the officer not wearing the BWC.

The researchers do not think, however, that this spillover effect affected the results of the experiment. The study notes that there was no statistically significant difference between officer behavior pre- and post-BWC deployment, as the two graphs from the study below show:

If officers not wearing BWCs improved their behavior in the presence of other officers wearing BWCs, we’d expect to see a reduction in use of force and complaints filed after the study began. However, Figure 4 and Figure 5 above show no significant difference.

Thus, even given the limitations of the study design, it appears that BWCs do not at a mass scale reduce the amount of force police officers use or the number of complaints officers receive.

The Washington, D.C. study raises an obvious question: if BWCs have no statistically significant effect on officers’ use of force or complaints, should officers be wearing them?

The answer to that question is “yes.”

First, even if body cameras do not reduce the frequency with which police officers use force, they nonetheless help provide accountability for the minority of officers who engage in serious misconduct, such as the Baltimore police officers caught planting drugs and “re-creating” a crime scene.

Second, BWCs are a tool for increased transparency in American law enforcement. Residents deserve to know how police officers behave, whether their behavior is changed by BWCs or not. At a time when cell phones are ubiquitous and BWCs are a regular feature of police misconduct debates, residents will be increasingly skeptical when a contentious fatal police encounter is not filmed. Even if a bird’s eye view of a police department reveals that BWCs don’t have a statistically significantly effect on police officers’ use of force, that doesn’t mean that same department won’t one day hire a bad police officer who will engage in illegal and deadly misconduct.

Third, BWCs can also protect police officers by  minimizing time spent on baseless complaints against officers by providing clear exculpatory evidence, as was the case when a young woman falsely accused an Albuquerque Police Department officer of sexual assault during a 2014 DWI stop.  

All of these BWCs benefits can only be realized with the appropriate policies in place. Without policies that protect privacy and allow residents to view body camera footage of public interest, body cameras could be used as a surveillance tool.

The authors of the Washington, D.C. study state that their results “suggest that we should recalibrate our expectations of BWCs’ ability to induce large-scale behavioral changes in policing.” But even if BWCs don’t prompt significant changes in police officers’ behavior they are worth mandating anyway. A police department with BWCs governed by the right policies will increase transparency and accountability—a welcome result even if it’s not accompanied by better-behaved police officers.

Sayfullo Saipov, an Uzbek national, killed at least eight people with a truck in New York yesterday. Uzbekistan is a central Asian country north of Afghanistan of almost 30 million people88 percent of whom are Muslim. President Trump did not include Uzbeks in his travel ban released last month, but he is already sounding bellicose, writing that he will not allow ISIS to “enter our country” and that he “ordered Homeland Security to step up our already Extreme Vetting Program,” a phrase which he sometimes uses as shorthand for the travel ban.

But adding Uzbekistan to the travel ban would be unwise for a president whose administration has guided him toward adopting a very specific strategy to defend the ban: that the governments of the banned nationalities fail to meet certain criteria relating to identity management, information sharing, and terrorist activity in their country. As I explained in a post last month, the president did not apply the criteria in any objective way, banning some countries that meet the criteria while not banning many other countries that fail them. But adding yet another country that he himself said just a month ago meets the criteria would further expose the travel ban criteria as the sham that they are.

Uzbekistan does not fail the travel ban criteria that the Department of Homeland Security (DHS) created to justify the ban. Here are the nine travel ban criteria grouped into the three DHS categories:

Category 1: Identity management

1) Use of electronic passports embedded with data: Uzbekistan does use an electronic passport. But four travel ban countries—Venezuela, Somalia, Libya, and Iran—also use an e-passport. The president banned Somalia despite its meeting this requirement because some countries fail to recognize Somalia’s electronic data chip. But that’s not the case for Iran’s passport, which meets the International Civil Aviation Organization standards. Uzbekistan’s passport does as well, and it “plans to convert all [older] passports to the new biometric version by July 1, 2018.”

2) Reports lost and stolen passports: INTERPOL reports that only 174 of 190 countries share lost or stolen passport information with its database (on which the United States relies). Unfortunately, it doesn’t report country-by-country compliance. However, INTERPOL praised Uzbekistan this month for cooperating with it on identifying fraudulent and stolen passports. That said, INTERPOL has also called Iranian cooperation on passport theft and abuse “very strong,” and Iranians are banned.

3) Makes available upon request identity-related information: This criterion is vague, but Uzbekistan cooperates with INTERPOL on passport information. According to the U.S. Department of State, Uzbekistan “has actively participated in the C5+1 regional framework of cooperation between the United States and the Central Asian countries (Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan), which includes a program related to countering violent extremism (CVE).”

Category 2: National security information

4) Makes available terrorist and criminal information upon request: Uzbekistan does make available this information. The State Department reports: “Uzbek law enforcement maintains its own terrorist watchlist and contributed to INTERPOL databases.” Further, it reports, “Uzbekistan has worked with multilateral organizations such as the Organization for Security and Cooperation in Europe and the UN Office on Drugs and Crime on security issues.”

5) Provides identity document exemplars: There is no public information on this, but given the evidence on passport cooperation, it seems likely that Uzbekistan do provide documents.

6) Allows U.S. government’s receipt of information about passengers and crew traveling to the United States: Uzbekistan encourages this information sharing. The State Department writes, “state airline collects and disseminates advance passenger information. The U.S. Transportation Security Administration conducted several inspections of the Tashkent airport in 2016.” Compliance by other countries with sharing this information was in 2013 “close to 100 percent.”

Category 3: Risk indicators

7) Is a known or potential terrorist safe haven: According to the U.S. Department of State, Uzbekistan is neither a terrorist safe haven nor has it ever been a terrorist safe haven. Terrorist safe havens are defined by the inability or unwillingness of the country’s government to control its territory to prevent terrorist groups from having a safe space to form. This description does not apply to Uzbekistan, which goes to great lengths to prevent terrorist groups from having safe haven and does control its territory. Chad, North Korea, and Iran are not terrorist safe havens either, but are travel ban countries.

8) Is a participant in the Visa Waiver Program that meets all of its requirements: Uzbekistan is not a participant in the VWP, so this criterion likely does not apply to it. None of the other travel ban countries are participants in the VWP.

9) Regularly fails to receive its nationals subject to final orders of removal from the United States: As of May 2017, Uzbekistan did not regularly refuse to receive its nationals subject to final orders of removal, according to federal Immigration and Customs Enforcement. In September, the U.S. government sanctioned four countries for failure to receive its deportees, but Uzbekistan was not on that list either. Of course, of the travel ban countries, only Iran was on the list from May.

The president could always add additional criteria to try to justify including Uzbeks in the travel ban, but any additional criteria would result in the failure of even more countries—many of whom meet the DHS criteria and are allies of the United States. For example, if President Trump added a requirement that no nationals of the country in question have killed anyone in the United States in a terrorist attack, then at least a dozen other countries would have to be added to the travel ban list. Of course, none of the current travel ban countries have nationals that have committed deadly terrorist attacks in the United States since 1975.

Uzbekistan fails none of the requirements outlined by the Department of Homeland Security. If President Trump chooses to add them to the list, it would further expose the travel ban as an arbitrary exercise of the executive whim, not an objective list.

Early in his presidential tenure, Donald Trump tweeted that the national news media is “fake news” and that it is an enemy of the American people. Nearly two-thirds (64%) of Americans do not agree with President Trump that journalists today are an “enemy of the American people,” finds the Cato 2017 Free Speech and Tolerance Survey. Thirty-five percent (35%) side with the president.

However, nearly two-thirds (63%) of Republicans agree that journalists are an enemy of the American people. Such a charge is highly polarizing: 89% of Democrats and 61% of independents do not think journalists are the enemy.

52% of Democrats Say Media Is Doing a Good Job Holding Government Accountable

While Republicans stand out with their negative view of the media, Democrats have uniquely positive evaluations of it. A slim majority (52%) of Democrats say the national news media is doing a good or even an excellent job “holding government accountable.” In contrast, only 24% of independents and 16% of Republicans agree.

Full survey results and report found here.


Among all Americans, only a third (33%) agree the news media is doing its job holding government accountable. More than two-thirds (67%) say it is not.

The more a person identifies as liberal, the more likely they are to say the media is doing a good job. Among strong liberals, 59% say the national news media is doing a good or excellent job holding government accountable. In contrast, 87% of strong conservatives say it’s doing a poor or fair job.

Most Americans Perceive Media Bias

Why do Republicans lack confidence in the national news media while Democrats view it positively? Perhaps because most Americans perceive a liberal bias among most major news organizations.[1]


Fifty-two percent (52%) of respondents say that the New York Times allows a liberal bias to color its reporting. Fifty percent (50%) feel CNN also succumbs to a liberal media bias. Fifty-nine percent (59%) say that MSNBC also has a liberal bias. Of all the top news organizations included on the survey, only Fox News was perceived to have a conservative bias (56%).

Americans feel their local news stations and broadcast news channels do a better job than cable news in providing balanced reporting. A majority (54%) say their local news station is balanced, without a liberal or a conservative bias. A plurality (42%) also believe that CBS is balanced. Nevertheless, respondents were four times as likely to say CBS has a liberal bias than a conservative bias (40% vs. 10%), and almost twice as likely to say their local station has a liberal bias (23% vs. 14%).

Democrats Believe Media Is Balanced; Republicans See Liberal Bias

Majorities of Democrats believe most major news organizations are balanced in their reporting, including CBS (72%), CNN (55%), the New York Times (55%), as well as their local news station (67%). A plurality (44%) also believe the Wall Street Journal is balanced. The two exceptions are that a plurality (47%) believe MSNBC has a liberal bias (37% believe it’s unbiased) and a strong majority (71%) say Fox has a conservative bias.

Republicans, on the other hand, see things differently. Overwhelming majorities believe liberal bias colors reporting at the New York Times (80%), CNN (81%), CBS (73%), and MSNBC (80%). A plurality also feel the Wall Street Journal (48%) has a liberal tilt. Only when evaluating their local TV news station do most Republicans—but not a majority—perceive balanced reporting (42%). Similar to Democrats’ perceptions of MSNBC, a plurality of Republicans (44%) believe Fox News has a conservative bias; 41% believe it provides unbiased reporting.

The news outlets that Republicans find most objective are their local news station (42%), Fox (41%), and the Wall Street Journal (28%). The media organizations Democrats find most objective include CBS (72%), their local news station (67%), CNN (55%), and the New York Times (55%).

70% Say Government Should Not Be Able to Shut Down News Stories

Despite Democrats and Republicans’ different perceptions of news media, they agree that government should not shut down news stories—even if biased or inaccurate.

Strong majorities of Republicans (63%), independents (71%), and Democrats (76%) agree that “government should not be able to stop a news media outlet from publishing a story that government officials say is biased or inaccurate.”

Among all Americans, 70% say government should not shut down news stories regardless of whether officials think the story is inaccurate. A little more than a quarter (29%) think government should have the authority to stifle stories authorities say are inaccurate or biased.

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] Percentages in this section have been calculated among Americans with an opinion of the news source. The following were not familiar with each of these news sources: CNN: 16%, Fox: 13%, MSNBC: 22%, CBS: 19%, Local TV News Station: 18%, New York Times: 24%, Wall Street Journal: 29%.

As Republicans press ahead with major tax reforms, politicians and pundits are debating the effects of tax cuts on economic growth. This 2012 study by the former Tax Foundation chief economist took a detailed look at the academic literature on the issue.

Here is what Will McBride found:

So what does the academic literature say about the empirical relationship between taxes and economic growth? While there are a variety of methods and data sources, the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy.

In this review of the literature, I find twenty-six such studies going back to 1983, and all but three of those studies, and every study in the last fifteen years, find a negative effect of taxes on growth. Of those studies that distinguish between types of taxes, corporate income taxes are found to be most harmful, followed by personal income taxes, consumption taxes and property taxes.”

These results support the neo-classical view that income and wealth must first be produced and then consumed, meaning that taxes on the factors of production, i.e., capital and labor, are particularly disruptive of wealth creation. Corporate and shareholder taxes reduce the incentive to invest and to build capital. Less investment means fewer productive workers and correspondingly lower wages. Taxes on income and wages reduce the incentive to work. Progressive income taxes, where higher income is taxed at higher rates, reduce the returns to education, since high incomes are associated with high levels of education, and so reduce the incentive to build human capital. Progressive taxation also reduces investment, risk taking, and entrepreneurial activity since a disproportionately large share of these activities is done by high income earners.”

This review of empirical studies also establishes some standards by which a tax system may be judged. If we apply these standards to our national tax system, the U.S. has probably the most inefficient tax mix in the developed world. We have the highest corporate tax rate in the industrialized world. If it came down 10 points—still higher than most of our trading partners—it would add 1 to 2 points to GDP growth and likely not lose tax revenue, because the tax base would expand from in-flows of foreign capital as well increased domestic investment, hiring, and work effort.

McBride’s study, with a nice summary table, is here.

On Halloween, Uzbek-born Sayfullo Habibullaevic Saipov allegedly murdered eight people and injured 12 with a rented truck in New York City.  The details of the attack, the number of victims, and Saipov’s personal information could change over the next few days.  However, based on the information that we have so far, Saipov entered the United States in 2010 as a lawful permanent resident with a green card.  He obtained his green card through the Diversity Immigrant Visa Program, which awards 50,000 green cards annually to those who enter the running from select countries. 

Uzbekistan has not been a major source of terrorists.  From 1975 through the end of 2016, three terrorists born in Uzbekistan attempted attacks on U.S. soil.  They killed or injured zero people in their attempted or threatened attacks.  Ulugbek Kodirov was convicted in 2012 of threatening to assassinate President Obama after entering on a student visa.  Abdurasul Hasanovich Juraboev entered on a green card that he won in a diversity lottery and also threatened to kill President Obama.  Fazliddin Kurbanov entered as a refugee and was convicted of possessing an unregistered explosive device.  Threats to assassinate the president are farfetched, but we count assassinations of politicians as terrorism just as the Global Terrorism Database does. 

If the death toll from the New York attack doesn’t rise, a total of 3,037 people have been murdered on U.S. soil by 182 foreign-born terrorists from 1975 through October 31, 2017.  Of those 182 foreign-born terrorists, 63 initially entered with green cards.  Including Tuesday’s attack, those who entered on a green card killed 16 people, or about 0.53 percent of all people murdered in terror attacks on U.S. soil committed by a foreigner.  If the number of injuries stays at 12, terrorists who entered on green cards have injured about 203 people during this period in attacks.  

The annual chance of being murdered in a terror attack on U.S. soil committed by a foreign-born person stands at 1 in 3,808,094 per year from 1975 through October 31, 2017. 

Saipov’s alleged attack stands apart from other Uzbek terrorists in terms of its brutal effectiveness and the tragedy of so many innocent lives murdered.  The 50 foreign-born terrorists who murdered somebody in a terrorist attack on U.S. soil from 1975 through October 31, 2017, including the 9/11 attackers, killed an average of 61 people each.  Excluding the 9/11 hijackers and their victims, 54 people were murdered in attacks for an average of about 1.7 murders per attacker.  Tuesday’s vehicular attack killed more people than the 1993 World Trade Center bombing that used a 1,336 pound bomb

Vehicle attacks are not the norm in the United States where firearms are more readily available, but they are rising in frequency, as we saw in Charlottesville earlier this year.  ISIS recently encouraged its followers to use trucks in lone wolf terrorist attacks and Saipov allegedly left a note declaring allegiance to that wannabe-Caliphate. 

RAND Corporation terrorism expert Brian Michael Jenkins remarked that airplane hijackings were the norm for 1970s terrorist attacks while suicide bombers were the norm for the 1980s.  Today, vehicle attacks are increasingly common around the world.  Jenkins identified approximately 40 vehicle attacks around the world from 2000 through 2016 that resulted in 167 deaths, approximately four per attack.  That total also includes the terrorists who died carrying them out. 

Automobiles are ubiquitous in a modern society and our lives would be unrecognizable without them.  Vehicle barriers can defend against vehicular attacks in crowded areas, but they’d more commonly be used to prevent accidents.  Simply put, there are too many roads, sidewalks, pedestrians, and automobiles to make defenses against these types of terror attacks feasible or cost effective.  Furthermore, the foreign-born terrorist threat is difficult to predict, largely because there are so few of them who successfully attack U.S. soil. 

More details will unfold surrounding this terrible attack in coming days.    


If you have followed the tax debate, you know that the United States has one of the highest corporate tax rates in the world. Most other nations have slashed their rates to attract investment, while U.S. policymakers have been in denial about global tax competition until recently.

You may be less familiar with the cuts to top individual income tax rates around the world since the 1980s. Those reforms have been driven by international competition for skilled workers, and by growing recognition of the damage caused by penalizing the highly productive people who are top earners.

How much have top individual tax rates been cut? The Economic Freedom of the World report publishes tax rate data for more than 100 countries as far back as the 1970s, but with numerous data points missing. I found 80 countries that had data back to 1985, and below I chart the average top individual income tax rate for that group. For countries with subnational income taxation, the EFW report includes a range of rates reflecting the varying taxes in states and provinces. For the chart, I chose the highest subnational rates for those countries. For the United States, the U.S. rate for 2015 is the federal rate plus California.

The average top individual tax rate for 80 nations plunged from 60 percent in 1985 to 35 percent by 2010, and then edged up to 36 percent in 2015. The U.S. federal-state rate was slashed sharply in the 1980s, falling from 59 percent in 1985 to 42 percent in 1990.

Our top rate went back up in the 1990s, then down in the 2000s, then up again in recent years reaching 51 percent by 2015, as both the federal and California rates increased. Meanwhile, rates continued to fall around the world in the 1990s and 2000s until the tax-cutting trend tapered off in recent years.      



Note: The EFW dataset has 159 countries with individual income tax data for 2015. The overall average top rate was just 30 percent for those countries. For the subset of 80 countries, I took out countries with zero rates, such as Bahamas, and countries that did not have data for 1985.

There is no more powerful person in the federal legal system than the federal prosecutor. Charging decisions and plea bargains effectively remove judges and juries from decisionmaking in most cases, and electing to fight a prosecutor rather than take the plea bargain most often results in dramatically longer sentences. This is how our system operates, and even if all the prosecutors are acting lawfully, defendants are at a massive disadvantage.

But what if the prosecutor cheats a system that’s already rigged in his favor?

This is not a hypothetical question. The U.S. Department of Justice (DOJ) has proven itself incapable of holding prosecutors accountable for misconduct. Regardless of which party is in power, the DOJ has let prosecutors get away with inexcusable behavior that costs people their livelihoods, their reputations, and their freedom. Next week, we’re holding an event to look at several high-profile cases in which the DOJ ran roughshod over individual rights, violated legal obligations and ethical norms, and ultimately held no one to account for their misdeeds.

Join us Tuesday, November 7 at 4 p.m. for Prosecutor Fallibility and Accountability, featuring Rob Cary, author of Not Guilty: The Unlawful Prosecution of U.S. Senator Ted Stevens; Howard Root, author of Cardiac Arrest: Five Heart-Stopping Years as a CEO on the Feds’ Hit-List; and Michael J. Daugherty, author of The Devil Inside the Beltway: The Shocking Exposé of the U.S. Government’s Surveillance and Overreach into Cybersecurity, Medicine and Small Business. The event will be hosted by my colleague Clark Neily.

You can sign up for the event here. You can also stream it online at cato.org/live and join the conversation on Twitter with #CatoCJ

Last week, President Trump issued a new executive order (EO) that restarts the refugee system with new “enhanced” vetting procedures.  The new procedures will subject the follow-on family members of refugees to about the same level of vetting as the original refugee sponsors who have already been settled in the United States.  This extension of the current refugee vetting system will cover about 2,500 additional follow-on refugees per year.  The EO also forward-deploys specially trained Fraud Detection and National Security officers at refugee processing locations to help identify potential fraud, national security, and public safety issues earlier in the screening process.  Additional actions of the EO are enhanced questions to identify fraud and other inadmissible characteristics as well as upgrades to databases to detect potential fraud or changes in refugee information at different interview stages.  The EO also directs the Secretary of the Department of Homeland Security, in consultation with the Secretary of State and the Director of National Intelligence, to review and reform refugee vetting procedures on an annual basis. 

The EO justifies these new measures by stating that, “It is the policy of the United States to protect its people from terrorist attacks and other public-safety threats … Those procedures enhance our ability to detect foreign nationals who might commit, aid, or support acts of terrorism, or otherwise pose a threat to the national security or public safety of the United States, and they bolster our efforts to prevent such individuals from entering the country.”  

All in all, these new vetting procedures are modest additions to the already intensive refugee screening that occurs.  If these new enhanced screening procedures are supposed to be the “extreme vetting” that President Trump proposed then they show just how extreme and secure the refugee program already was.  Furthermore, they are unnecessary.

Terrorists by Refugee-Restricted Countries

The EO also places additional scrutiny on refugees from Egypt, Iran, Iraq, Libya, Mali, North Korea, Somalia, South Sudan, Sudan, Syria, and Yemen.  Those eleven nations represent supposed security threats identified on the Security Advisory Opinion (SAO) – a government list of nations established in the 1990s whose nationals are supposed to be more closely scrutinized for particular national security threats.  The government has updated and expanded the SAO criteria as well as the nations on the list multiple times since 9/11.    

The government may have an excellent rationale for designating nationals from these eleven countries as serious threats that require more refugee vetting but those reasons and the evidence supporting them are not available for the public to examine.  Publicly available information points to a small refugee threat from refugees from these nations that does not justify additional screening.  Since 1975, zero Americans have been murdered on U.S. soil in a terror attack committed by refugees from any of the eleven countries.    

In a departure from previous EOs, nationals from one of these countries have killed people on U.S. soil in terrorist attacks but none of the attackers have been refugees.  Four terrorists from Egypt did manage to kill a total of 162 people in attacks on U.S. soil (Table 1).  They were Mohammad Atta who participated in the 9/11 attacks, Hesham Mohamed Hadayet who murdered two in a shooting at LAX in 2002, and El Sayyid Nosair and Mahmud Abouhalima who both were involved in the 1993 World Trade Center bombing.  All four Egyptians entered on tourist visas.  Only six Iranians (four of them in the 1970s), six Sudanese (all six in 1993 or before), two Iraqis, two Somalis, and one Yemeni carried out attacks on U.S. soil or were convicted of doing so (Table 1).  The two Iraqis did enter as refugees although one might not be a terrorist and the other was arrested in a sting operation.  The rest entered on student visas, tourist visas, green cards, or under the visa waiver program as they had dual Canadian-Iranian citizenship.

Table 1

Murders and Number of Terrorists by Country of Origin, 1975-2015

Country Terrorists Murders Percent of All Terrorists Percent of All Murders in Terror Attacks Egypt

























North Korea










South Sudan

























John Mueller, ed., Terrorism Since 9/11: The American Cases; RAND Database of Worldwide Terrorism Incidents; National Consortium for the Study of Terrorism and Responses to Terrorism Global Terrorism Database; Center on National Security; Charles Kurzman, “Spreadsheet of Muslim-American Terrorism Cases from 9/11 through the End of 2015,” University of North Carolina–Chapel Hill; Department of Justice; Federal Bureau of Investigation; New America Foundation; Mother Jones; Senator Jeff Sessions; Various news sources; Court documents.

De Facto Restrictions on Muslim Refugees

From January 1, 2002 through October 20, 2017, a total of 921,760 refugees entered the United States.  A total of 338,831 of them, or 37 percent, came from the 11 countries that are the subject of the new restrictions.  However, 76 percent of all Muslim refugees who entered the United States during that time came from those 11 countries that will have new restrictions placed on them.  President Trump said on at least a dozen occasions that his proposed travel bans and restrictions were Muslim bans but his defenders always correctly pointed out that not all Muslim-majority countries made the list.  It looks like those nations that sent more than three-quarters of all Muslim refugees did make the list for extra scrutiny though.   

Crime by Country of Origin

The administration has broadened its justification for these EOs from just terrorist attacks to include “other public-safety threats.”  As far as we can tell, that specifically refers to crime rates.  One common way to measure the criminality of a particular population is that population’s incarceration rates relative to other groups.  Although not perfect, this is one of a handful of measures available given the low-quality of American crime data.  The incarceration rates for immigrants from the eleven countries on the new list are all below that of native-born Americans except for Somalis who are within the statistical margin of error (which means that Somalis and natives have about the same incarceration rate).  Syrian-born immigrants, the most feared in this debate over immigrant vetting, have the lowest incarceration rate of any national group (Figure 1).  The rate for all 11 countries is 0.37 percent, about one-fourth that of the native-born rate of 1.54 percent. 


Figure 1

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.

Note: The numbers are too small to show for Libya, Mali, and North Korea.  South Sudan is not separated in the American Community Survey data.


The national security justifications for the choice of countries in the first, second, and third EOs rang hollow.  Those countries initially selected had not sent any deadly terrorists to the United States since 1975.  The government supposedly selected them based on a complex review of security and vetting vulnerabilities but the selection still makes no sense and is likely basic on executive whim.  Now, the government has widened its justification from terrorism and national security to the nebulous “public safety of the United States” – a justification that can only mean crime.  Just as the national security justification for additional vetting rang hollow, so does the “public-safety threat” justification. 


The enhanced vetting procedures for refugees are modest extensions of current vetting procedures.  Before President Trump took office, refugee vetting was already extreme and difficult to further enhance.  The eleven countries singled out for intensive new refugee scrutiny make little sense from a national security perspective and even less sense if the goal is to secure the public safety of Americans.  No refugee from any of those nations has murdered an American in a terrorist attack on U.S. soil and their incarceration rates, except for Somalis, are all well below those of native-born Americans. 

Two years ago at Yale, a controversy erupted over a series of emails about offensive Halloween costumes. A resident advisor and Yale lecturer pushed back against an email from college administrators advising students not to wear offensive Halloween costumes. The advisor emailed her students and expressed confidence in students’ capacity to discuss offensive Halloween costumes among themselves without administrators getting involved. Many students interpreted her email as an endorsement of offensive costumes, rather than of freedom of expression and the ability of people to discuss and resolve offense without oversight. What do Americans think?

The newly released Cato 2017 Free Speech and Tolerance Survey finds that nearly two-thirds (65%) of Americans agree that “college students should discuss offensive costumes among themselves without administrators getting involved.” A third (33%) say “college administrators have a responsibility to advise college students not to wear Halloween costumes that stereotype certain racial or ethnic groups at off-campus parties.”

Full survey results and report found here.

A significant racial divide emerges about how to handle offensive Halloween costumes. A majority (56%) of African Americans feel college administrators should intervene and advise students against offensive costumes. Conversely, a strong majority (71%) of white Americans and a majority of Latinos (56%) believe that college students should discuss offensive Halloween costumes among themselves without administrator intervention.

A majority (54%) of college and graduate students agree that students should discuss offensive costumes without intervention from school authorities. However, students (45%) are 12 points more supportive than Americans overall (33%) of administrators advising about offensive costumes.

You can learn more about public attitudes about free speech, campus speech, and tolerance of political expression from the full survey 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.


This primer is supposed to introduce readers to the workings of the present U.S. monetary system. So it’s only natural that it should take established monetary arrangements for granted, including an official, “fiat” dollar currency managed by the Federal Reserve System.

And while I haven’t hesitated to point out shortcomings in the Fed’s management of the dollar, and have even dared to suggest some ways in which that management might be improved upon, I haven’t questioned the fact that, whether it does so competently or not, the Fed is indeed ultimately “in charge” of the U.S. monetary system. That is, I’ve assumed, that the U.S. dollar is the only important domestic currency unit, and that the total quantity of dollar-denominated exchange media, the behavior of the general level of prices, U.S. dollar exchange rates, and the periodic flow of domestic dollar-denominated payments, remain under the discretionary control of the FOMC.

Monetary Policy, Broadly Understood

But while a monetary policy primer must generally deal with existing monetary arrangements, it doesn’t follow that it should overlook others altogether. “Policy,” according to Webster, is “a high-level overall plan embracing the general goals and acceptable procedures especially of a governmental body.” And though, within the set of possible plans, the most readily-implemented ones take existing institutional arrangements for granted, there are always other, more radical options that involve either replacing established arrangements or confronting them with rival ones with which they must compete.

Radical policy alternatives are, inevitably, controversial ones as well; so a primer is hardly the place for any detailed consideration, let alone a defense, of any of them. Instead, we must settle for a quick glance at several especially prominent or intriguing possibilities, all of which involve moving away from the present, discretionary system and towards a more-or-less “automatic” alternative.

Back to Gold?

Among various proposals for reforming the present U.S. dollar, none are more controversial than those for re-instating an official gold standard, meaning an arrangements in which official paper U.S. dollars are once again made fully convertible into a fixed quantity of gold, as they had been until 1933. The proposal is controversial in no small part because, so far as many economists are concerned, the historic gold standard was itself a disastrous failure, the passing of which calls, not for tears of regret, but for cries of “good riddance!”

How to account, then, for the gold standard’s enduring appeal, especially among conservatives and libertarians? Part of the answer is that, whatever its shortcomings, a gold standard has the indisputable merit of serving to automatically stabilize the long-run purchasing power of any money tied to it. That property, far from being mysterious, stems from the simple fact that under a gold standard the profitability of gold prospecting and mining increases, other things equal, as prices generally fall, and declines as prices generally rise. Consequently although the general level of prices can fluctuate, it tends to revert over time to a fixed mean.

Another part of the answer is that the gold standard’s critics often exaggerate its shortcomings, especially relative to those of actual (as opposed to idealized) fiat standards. On a blackboard, of course, a fiat standard can readily be shown to outperform a gold standard in the long-run perhaps, but certainly in the short-run. But that’s true only because, on a blackboard, a fiat standard can be made to do whatever the chalk-wielder likes. In practice, on the other hand, fiat standards can and often do behave very badly indeed. What self-respecting economist, right now, would relish the opportunity to lecture a roomful of Venezuelans on the theoretical advantages of irredeemable paper money?

Moreover, while the international gold “exchange” standard that was cobbled together after World War I was a  disaster waiting to happen, the prewar “classical” gold standard’s commerce-invigorating combination of generally fixed exchange rates and reasonable (if less than perfect) price-level stability has never been matched since.

But the most important reason why gold still commands such a following is, if you ask me, more prosaic: it’s simply that, for those who distrust bureaucratic control, whether of money alone or of economic activity more generally, the gold standard is simply the most salient alternative. Gold was the last, the most universally embraced, and the most successful of all commodity standards, as well as the one that coincided with a period of remarkable economic progress concerning which even John Maynard Keynes — that arch critic of the “barbarous” gold standard — waxed eloquent:

What an extraordinary episode in the economic progress of man that age was which came to an end in August, 1914! The greater part of the population, it is true, worked hard and lived at a low standard of comfort…  But escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with the least trouble, conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages. The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages… He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could dispatch his servant to the neighboring office of a bank or such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable.

Nostalgia versus Expediency

But however much one may regret the passing of the classical gold standard, it doesn’t follow that we can do no better than to try and restore it. “In commerce,” the great William Stanley Jevons famously said, “bygones are forever bygones”; and what Jevons says of commerce goes for money as well. Gold may have served as a relatively successful monetary standard in the past. But it doesn’t follow that there’s anything sacrosanct about gold today, or that a gold standard is still the best of all possible options for fundamental monetary reform.

On the contrary: an official attempt to once again make paper dollars convertible into gold today would be a step no less arbitrary or “constructivist” (in F.A. Hayek’s sense of the term), than an attempt to make them convertible into silver, palladium, or Japanese yen. To be sure, gold has a nostalgic appeal lacking in the rest. But allowing that consideration to be decisive would be like deciding to replace an aging fleet of jet aircraft, not with newer jets, but with as many propeller-driven biplanes. Don’t get me wrong: I’m not saying that gold convertibility couldn’t possibly be a good idea. I’m just saying that it wouldn’t qualify as a great idea simply by virtue of its historical preeminence. The only real test ought to be whether a revived gold standard would deliver better results than any equally practical (and not merely theoretical) alternative.

Finally, even if no new system could beat a restored classical gold standard, it doesn’t follow that such a restoration is possible. If getting one nation alone to return to gold is bound to be extremely difficult, getting a large number of advanced nations to do so simultaneously, so as to have a truly “classical” set-up like the one that existed before 1914, would be a truly Herculean challenge.

Furthermore, official gold standards can survive only if citizens trust their governments and central banks to generally keep promises to trade gold for paper. Such trust, having been dealt a severe blow by World War I, died a slow and painful death in the decades that followed it. A new gold standard commitment by the Fed, or by any other central bank, today, is bound to run afoul of this reality, especially by becoming the object of attacks by skeptical speculators. If history is any guide, sooner or later those attacks would force even the most well-meaning central bankers to break their gold-standard promises all over again, though perhaps not on time to avoid leaving their economies in shambles.

Self-Regulating Fiat Money

If trying to revive the classical gold standard, or something close to it, is like trying to piece Humpty-Dumpty back together, that doesn’t mean that we have no choice but to settle for a paper dollar managed by a committee of fallible (and occasionally fumbling) bureaucrats. In particular, the difficulties inherent in trying to tame the dollar by once again making it convertible into a scarce commodity can be avoided by relying instead on a quantity-based monetary rule. Because such a rule provides for automatic adjustments in the quantity of standard money without allowing people to convert that money into something else, it can’t fall victim to a speculative attack, and is that much more likely to endure.

As we’ve already reviewed some general arguments in favor of having a monetary rule, there’s no need to review those arguments again here. Instead, I’d like to consider a radical variation on the old theme, consisting of a quantity rule that’s enforced, not by a committee, either voluntarily or with the help of sanctions imposed whenever the rule is breached, but by means of some sort of automatic, fail-safe mechanism.

The general idea is one Milton Friedman entertained for many years. “We don’t need the Fed,” he said (in one of many similar interviews he gave in the 1990s). “I have, for many years, been in favor of replacing the Fed with a computer” programmed to “print out a specified number of paper dollars…month after month, week after week, year after year.”

Although the constant (“k-percent”) money growth rate rule that Friedman once favored has itself fallen out of fashion, his idea for a computer-driven money supply couldn’t be more à la mode. Computers are, for one thing, capable of doing a lot more than they were back in the 90s. And even in the 90s they might have been capable of managing the money supply so as to maintain, not a stable growth rate for B or M1 or M2 or some other monetary aggregate, but a stable level of nominal spending. The smooth growth of spending would in turn supply, for reasons we’ve considered previously, robust protection against severe economic fluctuations.

Indeed, while it’s easy to imagine a circumstance in which a constant money growth rule could turn out to be a recipe for macroeconomic chaos, it’s darn difficult to imagine a situation in which there’d be much to gain, and little to lose, by sacrificing a stable and customary overall growth rate of spending growth for some other monetary policy objective. A bout of exceptionally rapid spending? A fine way to boost asset prices, no doubt, until one considers the inevitable denouement!  Slower spending than usual? Tell it to your average businessman, or employee! Those (mainly Fed insiders) who rail against what they like to characterize as “inflexible” rules (as if a “rule” could be anything but inflexible!) forget — or pretend not to know — that while some rules would indeed prevent the Fed from having the flexibility to do the right thing, others would mainly serve to deny it the flexibility to do wrong things. A stable spending rule, including one that’s “rigidly” enforced by a computer, though it would rule out many bad monetary policy options, would also “rule in” the good ones.

NGDP Futures

Scott Sumner has come up with an alternative plan for targeting nominal spending, which relies not on a computer but on trading in futures to keep spending on target. The plan, called “NGDP Futures Targeting ,” starts with the Fed settling on an NGDP growth-rate target — say, 4 percent — and then offering to enter into NGDP futures contracts, with payoffs depending on the future level of NGDP, to anyone who expects it to either exceed or fall short of target. Traders who expect NGDP to come in above target will go long on the futures, while those expecting it to fall short will go short.

How, then, does the Fed manage to actually achieve its target? The answer becomes evident when one considers the link between the futures contracts it enters into for its monetary policy operations. When the Fed sells futures to investors who are betting on excessive NGDP growth, it is withdrawing base dollars from the economy, just as it might by engaging in open-market asset sales. In contrast, when it buys contracts from short sellers, it expands the monetary base. In other words, the very persons who are betting that the Fed will miss its target are also driving it to adjust its policy in a direction calculated to make them lose their bets! As a means for further reinforcing this built-in feedback mechanism, Sumner would also have the Fed engage in “parallel” open-market operations for each NGDP contract purchase or sale. In short, by offering to “peg” the price of its futures by engaging in as many contracts as it takes to keep the price on target, the Fed essentially stands ready to expand or contract the monetary base by whatever it takes to keep expected NGDP on target.

That, at least, must suffice for the barest of summaries of a plan that has since appeared in several, subtly-distinct versions, each of which has spawned its share of subtle (and not-so-subtle) controversy, with some critics claiming that Sumner’s scheme, or some versions of it, unworkable. Do those critics have a point? Perhaps they do, but that’s not our concern. We’re here neither to praise nor to bury, but only to have a gander at, this and other intriguing future possibilities for monetary policy.

Bitcoin and All That

Of these possibilities none are more intriguing than those held out by so-called cryptocurrencies, including Bitcoin and its various “altcoin” offshoots. As I observed some years ago (and as Tim Sablik explains in this Richmond Fed piece), when it was just starting to gain economists’ attention, Bitcoin has properties in common with both gold and other commodity monies on the one hand and deliberately managed fiat monies on the other. Like gold, Bitcoin is unalterably scarce: just as there is only so much gold on the planet, whether mined or as-yet unmined, there are only so many bitcoins to be had — 21 million, to be precise — of which not quite 17 million have been mined as of this writing. And like gold mining, bitcoin “mining,” which involves the use of computer-power to solve a mathematical puzzle, is costly. Since bitcoin “miners” compete for the privilege of being responsible for some share of any periods’ bitcoin output, the marginal resource costs of mining a batch (or “block”) of bitcoin tends to equal the market value of the coins produced.

Yet unlike gold, and like a fiat money, both the maximum possible output of bitcoin and the number of coins mined in any given period is controlled, not by mother nature, but by a protocol programmed into Bitcoin’s open-source software. The protocol adjusts the difficulty of the puzzle bitcoin miners must solve so as to keep total bitcoin output on a predetermined schedule, according to which bitcoin output gradually tapers off, asymptotically approaching, but never quite reaching, its 21 million coin limit. The decentralized nature of Bitcoin’s software means that no one is either “in charge” of the protocol or capable of altering it. A majority of miners can, however, agree to form themselves into a new branch network or “fork” that uses a modified copy of Bitcoin’s original protocol, as happened on August 1, 2017, when “Bitcoin Cash” split-off from what became known thereafter as “Bitcoin Core.” Although the fork created as many new “Bitcoin Cash” coins as there had been Bitcoin Core coins beforehand, it left the Bitcoin Core protocol itself unchanged.

Bitcoin’s odd blend of commodity- and fiat-money properties led me to dub it a “synthetic commodity money” some years ago. But the exciting thing about Bitcoin and its various spinoffs and rivals isn’t merely that they comprise a distinct sort of basic money, but that their combination of commodity- and fiat-money features is capable, in principle at least, of combining the best properties, while avoiding the worst, of each of those more traditional alternatives.

One of the more common complaints against a commodity standard is that it exposes the value of money to shocks stemming from either new commodity discoveries or from changes in the non-monetary demand for the standard commodity. Bitcoin and other such “synthetic” commodity monies are, on the other hand, not subject to similar shocks, because the amount miners can extract is strictly pre-programmed, and because they have no non-monetary (e.g. ornamental or industrial) value.

The big beef against fiat money, on the other hand, is that its quantity can be altered by the authorities placed in charge of it, not only for the sake of promoting economic stability, but for other reasons, if not arbitrarily.

It doesn’t follow, of course, that any old  cryptocurrency would be a hands-down winner in a race against any established fiat money. Despite its ultimate limit of 21 million coins and skyrocketing transactions fees, Bitcoin might still seem a safer gamble than, say, the Venezuelan Bolivar. But would it really supply a better or more durable monetary standard than the present U.S. dollar?

But the question isn’t whether Bitcoin can beat the present fiat dollar. It’s whether the basic technology pioneered by Bitcoin might allow some other self-regulating cryptocurrency to do so. Besides giving rise to its own “Cash” spinoff, Bitcoin has already spawned dozens of “altcoin” rivals, with others yet to come. It’s at least conceivable some one or more of these might harbor such properties as would make it a worthy opponent to the present dollar, if not something clearly superior. Consider, if you will, the immense variety of ordinary commodities that either have served as money in the past, or that might have done so, from cowrie shells and tobacco to silver, gold, and even (as more than one prominent economist once proposed) common bricks. Each had its merits and its drawbacks; and every one of them was imperfect. But now consider that the cryptocurrency revolution presents us with a whole new universe of new, albeit synthetic, options to draw upon, each of which has been deliberately endowed with properties calculated to make it an attractive medium of exchange. Call me an optimist, but it seems to me only natural to suppose that one of these innovative products might someday prove just the thing to give even the best discretion-wielding central bankers a run for their (that is, our) money.

Choice in Currencies

For an upstart currency to make inroads on an established fiat money requires, at very least, that established and would-be monies compete on a reasonably level playing field. That means having rules and regulations that make it relatively easy for persons to either partly or entirely “opt out” of an official currency network, and to “opt in” to one or more alternative networks. I say “relatively easy” because it’s inevitably costly to switch from one currency network to another, and especially so when the switch is from a bigger network to a smaller one. A level playing field therefore means, not one where rivals are necessarily well-matched, but one where the game isn’t rigged in the home team’s favor. In other words, the laws should not themselves favor official money over other alternatives.

It was with that intent in mind that F.A. Hayek, in making his now-famous 1976 case for “Choice in Currency,” called upon

all the members of the European Economic Community, or, better still, all the governments of the Atlantic Community, to bind themselves mutually not to place any restrictions on the free use within their territories of one another’s — or any other — currencies, including their purchase and sale at any price the parties decide upon, or on their use as accounting units in which to keep books.

“There is no reason whatever,” Hayek went on to argue,

why people should not be free to make contracts, including ordinary purchases and sales, in any kind of money they choose, or why they should be obliged to sell against any particular kind of money. There could be no more effective check against the abuse of money by the government than if people were free to refuse any money they distrusted and to prefer money in which they had confidence. Nor could there be a stronger inducement to governments to ensure the stability of their money than the knowledge that, so long as they kept the supply below the demand for it, that demand would tend to grow. Therefore, let us deprive governments (or their monetary authorities) of all power to protect their money against competition: if they can no longer conceal that their money is becoming bad, they will have to restrict the issue.

Although Hayek’s advice seems perfectly reasonable, putting it into practice turns out to be a lot harder than he seemed to think, and not just because governments’ would rather keep currency playing fields slanted their way. Consider the case of Bitcoin. In March 2014, the IRS classified it and other cryptocurrencies as capital assets (“intangible property”) rather than as currency, making any trade involving them the basis for either a short- or a long-term capital gains tax, depending on how long the coins were held before being disposed of. As the folks in the Coin Center (a non-profit cryptocurrency advocacy group) explain, this tax treatment puts cryptocurrencies at a disadvantage, not just relative to the U.S. dollar, but relative to official foreign currencies, which enjoy an exemption when it comes to relatively small transactions:

Say you buy 100 euros for 100 dollars because you’re spending the week in France. Before you get to France, the exchange rate of the Euro rises so that the €100 you bought are now worth $105. When you buy a baguette with your euros, you experience a gain, but the tax code has a de minimis exemption for personal foreign currency transactions, so you don’t have to report this gain on your taxes. As long as your gains per transaction are $200 or less, you’re good to go.

Such an exemption does not exist for non-currency property transactions. This means that every time you buy a cup of coffee, or an MP3 download, or anything else with bitcoin, it counts as a taxable event. If you’ve experienced a gain because the price of Bitcoin has appreciated between the time you acquired the bitcoin and the time you used it, you have to report it to the IRS at the end of the year, no matter how small the gain. Obviously this creates a lot of friction and discourages the use of Bitcoin or any cryptocurrency as an everyday payment method.

The obvious solution, the Coin Center goes on to suggest, is “to simply create a de minimis exemption for cryptocurrency the way it exists for foreign currency.” But hold on: to really achieve Hayek’s ideal, it won’t do to level the capital gains tax portion of the currency playing field for cryptocurrencies only, rather than for all potential, unofficial dollar substitutes. But then, just what shouldn’t count as such a potential substitute? Surely gold qualifies. But why not silver, or cigarettes, or… the point, as we know from experience, is that all sorts of things are “potential” exchange media, and therefore potential currencies. So, to really allow them all to compete on equal terms, one would at very least have to exempt all of them — from taxes to which official dollar trades aren’t subject.

In short, Hayek’s ideal is just that: something to have governments strive for, rather than something they can be expected to fully achieve in practice.

What’s more, Hayek was far too optimistic regarding the likely consequence of making it easier for people to choose among rival currencies. “Make it merely legal” for them to switch to something else, he wrote, “and people will be very quick indeed to refuse to use the national currency once it depreciates noticeably.” But would they? Unlike, say, shoes or soda water, money is a “network” good, meaning that one of the most important, if not the most important, determinant of the attractiveness of any particular money is the size of the network of persons prepared to accept it. You might think gold an ideal monetary commodity, and I might hold that Bitcoin is to the dollar what sliced bread is to bread of the old-fashioned sort. Yet when it comes to going shopping, what either of us must first consider is, not what sort of money we like, but what the shopkeepers are prepared to take in exchange for their goods.

It follows that, even if official and unofficial currencies really could have a level playing field to compete on, that field would still be one on which official money would generally enjoy a huge “home team” advantage. For this reason, the mere fact that an official currency is depreciating “noticeably” isn’t enough to incite people to abandon it in droves. Instead, it might take a very substantial rate of depreciation, or some like cataclysm, to bring about rapid change. Cataclysms aside, upstart currencies are more likely to have to start by clawing their way into established currency markets one painful inch at a time, though with each becoming easier than the last as their own, initially tiny networks begin to blossom.

Free Banking

The alternatives I’ve considered so far have all consisted either of potential replacements for the U.S. dollar or of novel means for regulating the stock of official (that is, Fed-created) U.S. dollars themselves. Emphasizing such alternatives makes sense, after all, in a primer concerned with “monetary policy,” where the most fundamental choices are those concerning what type or types of basic money to employ, and how best to regulate the supply of basic money, assuming that it doesn’t adequately regulate itself.

But what about alternatives consisting  of banks’ readily convertible IOUs, like most bank deposits today that, by virtue of their instant convertibility into official dollars, are very close substitutes for them? Because such bank-created substitutes necessarily “piggy back” on the basic monies into which they can be converted, their presence can’t generally make up for misbehavior or mismanagement of the quantity of basic money itself, and might even aggravate that misbehavior. A fiat money stock that’s allowed to grow so rapidly that it would result in a 20 percent annual rate of inflation in a pure fiat money system will, for example, produce the exact same rate of inflation in an economy in which payments are made exclusively by means of bank IOUs backed by a fixed fractional reserve of the same basic money.

Moreover there’s nothing at all radical about having banks supply such alternatives, at least to a limited extent. Today and for some time past bank deposits of various kinds have served, with the aid of checks and, more recently, debit cards, as close substitutes for official monies, to the point of being far more extensively employed in exchange than official monies themselves.

It would, nevertheless, be wrong to suppose that there’s no scope for a potential beneficial radical reform involving bank-supplied alternatives to basic money. On the contrary: plenty of scope exists for expanding the role of such alternatives, particularly by doing away with long-standing restrictions on commercial banks’ ability to challenge central banks’ monopoly of circulating (or hand-to-hand) payments media.

Once upon a time commercial banks routinely issued their own circulating paper notes; indeed, until the latter half of the 19th century bank notes were the most important liability on banks’ balance sheets, which were far more commonly employed in making payments than either checks or coins. Nor did central bank notes, which themselves started out as mere IOUs redeemable in gold or silver, only to be transformed into inconvertible fiat money later on, come to generally displace notes of commercial banks until the last decades of the 19th century, and the opening ones of the 20th, when the proliferation of central banks typically went hand-in-hand with laws forcing commercial banks out of the paper currency business.

Received opinion has it that commercial bank notes had to go because central bank currency was better. But now and then received opinion is nothing but hokum, and this happens to be one of those instances. Had central bank notes been better than their commercial counterparts, it shouldn’t have been necessary for governments to suppress the latter. Instead, the mere availability of official alternatives should have sounded the death knell of the commercial stuff. Yet instead of that having been the case, in every instance the commercial bank notes had to be snuffed-out, leaving people no choice but to employ official paper money. Nor did the commercial bank currency go down without a fight, in which prominent economists often took part, with many of the most prominent (and most better ones, if I may say so) challenging governments’ efforts to establish official currency monopolies, and championing the alternative of free trade in banking, or “free banking,” for short.

Strictly speaking, “free banking” means more than just allowing ordinary banks to issue paper currency. It also means leaving them free of other restrictions, including restrictions upon their ability to establish branch networks, lend to whomever they wish, charge whatever rates they wish, and hold whatever levels of cash reserves and capital they wish to. Freedom of note issue is only the most controversial of these many aspects of freedom in banking, in part because allowing it would make it possible for the public to rely exclusively on privately-supplied exchange media, with official dollars playing their part only behind the scenes, as bank reserves. Furthermore, in times past, when official money consisted, not of any central bank’s inconvertible “liabilities,” but of gold or silver coin, not having to rely on a central bank as a source of paper money meant not having to have a central bank at all !

Could a monetary system lacking a central bank possibly have been any good? Darn tootin’!

Of all relatively modern monetary systems, none have earned more kudos than the two that most closely approximated the free-banking ideal, namely, the systems of Scotland between the latter 18th century and 1845 and Canada from 1870 and 1914. In both of these, bank-supplied notes and deposits commanded such a high degree of confidence that gold and silver coin hardly circulated. The public’s disdain for precious metal money in turn allowed Scottish and Canadian banks to operate on reserve cushions that were slim even by today’s standards. That in turn made Scottish and Canadian banks highly efficient intermediaries, with almost all of their clients’ savings going to fund relatively productive bank loans and investments. Yet despite this high degree of efficiency, bank runs were extremely rare in both systems, while banking crises, involving simultaneous problems at many banks at once, were almost unheard of.

Why, in that case, does free banking, and especially the idea of letting banks issue their own currency, seem so far-fetched today?

Partly it’s because the Fed and other central banks, upon which we’re now all too inclined to turn to for information about monetary history, have underplayed such success stories as those of Scotland and Canada whilst sugarcoating their own records. But in the U.S. case it’s also due to confusion about the meaning of “free banking.” Whereas that phrase can refer to genuinely free banking systems like those of Scotland and Canada, it can also refer to any of the systems established through so-called “Free Banking” laws passed by eighteen states between 1837 and 1860. Despite their names the later laws didn’t come close to allowing genuine freedom in banking. Instead, they all imposed important restrictions upon the banks established under them, including the requirements that those banks refrain from establishing branches, and that they back their notes entirely with specific securities — usually consisting of state government bonds. In several instances such restrictions, far from guaranteeing the soundness of the banks that were forced to abide by them, led to notorious abuses and failures, including episodes of “wildcat” banking. All in all, the misnamed “Free Banking” era proved to be one of the most unfortunate chapters in U.S. monetary history, because of the direct damage done by bank failures, of course, but also because those failures gave freedom in banking a bad name it didn’t deserve.

But what relevance has free (that is, genuinely free) banking today? It’s relevant, first of all, because an understanding of its workings suggests that freedom in banking isn’t necessarily inimical to soundness in banking, and that the wrong sort of regulations can in fact be worse than no regulations at all. It also suggests that, even if we are determined to rely on a fiat-money issuing Fed as our ultimate source of monetary control, we need not rely upon them to supply hand-to-hand currency. Instead, we might let commercial banks back into that business, while limiting the Fed’s ordinary involvement in the market for money to the “wholesale” part of that market — that is, to supplying banks with reserves. Commercial banks that could issue their own notes would presumably also be free to experiment with other forms of non-deposit money, including “smart” stored value cards, that might eventually replace paper money altogether, except on rare occasions when people lost confidence in the private stuff. I dare say, indeed, that had commercial banks been left in charge of supplying currency all along, paper money would some time ago have gone the way of horses, buggies, spittoons, and slide-rules. What else save a bunch of government monopolists could have managed to keep such low-tech stuff as paper currency in play for so long?

Should We, Can We, “End the Fed”?

While in times past free banking was an alternative to central banking, that’s no longer so. Today’s commercial bank deposits are claims, not to gold or silver coin, but to central bank issued fiat money; and were commercial banks able to supply their own notes or stored value cards to take the place of central bank notes in payments that don’t involve drawing upon bank deposits, those notes and cards would also represent claims to central bank money.

In short, so long as we stick to the present fiat dollar standard, instead of replacing it with either a natural or a synthetic commodity standard, no amount of freedom in commercial banking will suffice to render the Fed entirely otiose. No wonder that, when former U.S. Representative Ron Paul and his many devotees campaign to “End the Fed,” they have in mind, not just letting bulldozers loose on the Eccles Building, but once again making official dollars claims to some fixed quantity of gold.

Whether one is a hard-core libertarian or not, it’s interesting to ponder the extent to which the Fed’s role might be reduced, with the help of various more-or-less radical reforms, without either abandoning the present, inconvertible U.S. dollar or sacrificing its integrity.

We’ve already considered how a carefully-programmed computer, or having the Fed peg the price of NGDP futures, could render the FOMC redundant — in so far at least as that body’s challenge can be boiled down to one of maintaining a stable level of overall spending. We’ve also seen how letting commercial banks issue circulating currency would make it unnecessary for the Fed to be in the currency business, though it would still require keeping plenty of Federal Reserve notes on hand in case a banking panic should break out. Finally, in an earlier chapter we’ve seen how allowing “flexible” open-market operations could make it unnecessary for the Fed to ever make any direct loans to troubled financial institutions.

Yet these are far from being the only possibilities for having a leaner, if not a meaner, Fed. The Fed’s reduced involvement in currency provision and last-resort lending would mean a corresponding decline in the importance of the regional Fed banks, apart from the New York Fed, which handles the system’s open-market operations. The Fed’s involvement in check clearing could also be reduced, by returning that activity to the private sector, which handled it perfectly well until the Fed muscled its way in after 1913. Finally, most of the vast army of economists and other staff personnel presently employed at the Fed, who even now are mainly busy performing tasks that have nothing much to do with fulfilling the Fed’s mandate, could be made to seek more productive employment elsewhere.

In short, sticking to a fiat dollar doesn’t rule out reforms that would dramatically reduce the Fed’s role in the monetary system. Instead of the present, Leviathan Fed, one might have what might be called a “Nightwatchman” Fed, capable of doing those things that any responsible fiat money issuing central bank ought to do, but incapable of doing many of the things that irresponsible central banks do all too often.

A Concluding Plea for Open-Mindedness

By surveying some more radical options for monetary reform, I don’t pretend to have made a compelling case for any of them. My only goal has been to suggest that all sorts of alternatives exist, and that each of them has its merits. Will any of them really help? Is one better than the rest? Are there others not mentioned that deserve our consideration? The correct answer to all these questions, and others like them, is “Maybe.” In other words, such alternatives are, or ought to be, worth thinking about, even if some might ultimately be judged unattractive. Allowing ourselves to think outside the established monetary policy box can never do us any harm. Nothing could be more dangerous, on the other hand, than for all of us to assume that, despite its obvious faults, ours happens to be the best of all possible monetary systems.

[Cross-posted from Alt-M.org]