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Campaign finance has captured Congress’s attention once again, which rarely bodes well for democracy. Senators Amy Klobuchar, Mark Warner, and (of course) John McCain have introduced the Honest Ads Act. The bill requires “those who purchase and publish [online political advertisements]to disclose information about the advertisements to the public…”

Specifically, the bill requires those who paid for an online ad to disclose their name and additional information in the ad itself or in another fashion that can be easily accessed. The bill takes several pages to specify exactly how these disclosures should look or sound. The bill also requires those who purchase $500 or more of ads to disclose substantial information about themselves; what must be disclosed takes up a page and a half of the bill.

The Federal Election Commission makes disclosed campaign contributions public. With this bill, large Internet companies (that is, platforms with 50 million unique visitors from the United States monthly) are given that task. They are supposed to maintain records about ads that concern “any political matter of national importance.” This category goes well beyond speech seeking to elect or defeat a candidate for office.

Why does the nation need this new law? The bill discusses Russian efforts to affect the 2016 election. It mentions the $100,000 spent by “Russian entities” to purchase 3,000 ads. The bill does not mention that Mark Penn, a former campaign advisor to Bill and Hillary Clinton, has estimated that only $6,500 of the $100,000 actually sought to elect or defeat a candidate for office. It also omits Penn’s sense of perspective:

Hillary Clinton’s total campaign budget, including associated committees, was $1.4 billion. Mr. Trump and his allies had about $1 billion. Even a full $100,000 of Russian ads would have erased just 0.025% of Hillary’s financial advantage. In the last week of the campaign alone, Mrs. Clinton’s super PAC dumped $6 million in ads into Florida, Pennsylvania and Wisconsin.

Still, Congress has criminalized foreign nationals trying to spend any money to influence American elections. You would think the “Russian intervention” would be a matter for the Department of Justice or other federal law enforcement agencies. Instead, everyone has to disclose their political activities, and tech companies have to make “reasonable efforts” to make sure foreign nationals do not buy political ads on any subject whatever. What will constitute “reasonable efforts”? Congress will presumably decide. Meanwhile tech companies will have to guess, and they can hardly be expected to err on the side of free speech. After all, ads that do not appear are hardly a cost to Congress. But unintentionally running an ad by a foreign national could severely damage a tech company. The companies have incentives to make Congress happy. Some protected speech will be excluded.

The bill is not just about Russia and an unexpected election outcome in 2016. It states that “the electorate bears the right to be fully informed” about “political advertisements made online.” What is the source of this right? The Constitution contains no explicit “right to be fully informed.” Perhaps it is a penumbra or emanation of the First Amendment or other parts of the Constitution? Or maybe one of the unenumerated rights alluded to in the Ninth Amendment? No, this is just Congress doing what it wants to do anyway and using the language of the Constitution. The putative “right to be fully informed” is really a sign of how far we have traveled from constitutional government.

Congress finds in this bill that the content of online speech justifies regulation:

Social media platforms…can target portions of the electorate with direct, ephemeral advertisements often on the basis of private information the platform has on individuals, enabling political advertisements that are contradictory, racially or socially inflammatory, or materially false [emphasis added].

Later, the bill laments that information on social media sites is often “uncurated,” “inaccurate,” or “more easily manipulable than in prior eras.”

Those familiar with the struggles over campaign finance in recent decades will recall that Congress often sees regulation of spending as way to improve speech. Unregulated spending supposedly contributed to “negative ads” which in turn harmed our democracy. In truth, negative ads attracted attention and increased voter turnout and knowledge.

The bill’s focus on allegedly “bad speech” raises two issues. First, mandating disclosure of who bought the ad may not improve the speech. Second, and more importantly, the content of speech is protected by the First Amendment. Congress does not have the power to “improve” speech by regulating ad financing or by any other means.

The larger picture here is more disturbing. Congress appears to be using a panic induced by Russian electoral meddling to impose itself on a largely unregulated Internet. Mandated disclosure of ad spending is the first but not the last step toward Facebook and Google becoming public utilities. Anyone who cares about free speech should be skeptical about such disclosure.

Last night, the Senate voted (51-50, with Vice President Pence breaking the tie) to repeal one of the most recent rules issued by the Consumer Financial Protection Bureau (CFPB). The rule would have prevented most financial companies from requiring that disputes between a company and its customers be determined through arbitration and without the use of class actions.

Those who support the rule have noted that the majority of contracts between customers and financial firms include clauses that require disputes to be resolved through arbitration, which means no class actions. This is true. Arbitration clauses are fairly standard in these contracts. But, as I said in an earlier post on the rule, the ubiquity of such clauses might just mean that customers are okay with them. If customers really cared about arbitration clauses, financial firms could distinguish themselves from competition by offering arbitration-free contracts. The lack of such options for customers seems to suggest that customers don’t really care.

The response to such an argument may be that these clauses are hidden in fine print and most customers don’t even know they exist. Okay, let’s say for the moment that’s true; that most customers didn’t know arbitration clauses existed. But that shouldn’t be the case now. Not now we’ve had national news about this rule, lots of debate, ample time for the rule’s supporters to educate the public, breaking news drama involving a late night vote in the Senate, and reports tracking the Vice President’s progress to the Hill to cast his deciding vote. My phone was flashing with news alerts all through the evening. If the public was unaware of arbitration clauses before, they have had plenty of opportunities now to become familiar with them.

So now, if the public really wants to be free of arbitration clauses, the next step is obvious, right? A company should emerge announcing that it is offering arbitration-free contracts for all of its customers. If arbitration harms consumers, as proponents of the rule have argued, consumers should clamor for contracts that allow them to go to court and to join together in class actions. Companies, including financial companies, make their money giving customers what they want. If arbitration-free contracts become popular, we will know that this was what consumers wanted. If they don’t become popular, well, we’ll have an answer then, too. But, either way, consumers will get what they want without a new regulation.

It was on the 16th anniversary of the 9-11 terrorist attack, as it happens, that the Government Accountability Office posted its reply to a request by six members of Congress to review the Transportation Security Commission’s aviation security measures.

The GAO was none too happy with what it found. In particular, it faulted the TSA for failing to set up a coherent system to analyze the cost and effectiveness of its various counterterrorism measures—many of them quite expensive. And it was specifically critical of TSA’s inability to evaluate the degree to which its layers of security deter attacks.

The following day, Elsevier published a book Mark Stewart and I have written, titled Are We Safe Enough? Measuring and Assessing Aviation Security. Among other things, the book tries (successfully, we think) to do exactly what the GAO asked for. A free Google preview of portions of the book is available at the publisher’s website, and further information about the book is posted here.

The TSA, says GAO, has put together a (secret) tool called RTSPA (you don’t want to know what that stands for) to analyze the effectiveness of its security layers. However, the tool only applies to a subset of the layers and is, according to GAO, “resource intensive.”

Ours, by contrast, has a full model of the security system mainly constructed by my co-author, a civil engineer and risk analyst at the University of Newcastle in Australia. It describes the effectiveness, risk reduction, and cost of each layer of security (including a few the TSA doesn’t include), from policing and intelligence, to checkpoint passenger screening, to armed pilots on the flight deck. It is also fully transparent and can be varied and sized-up with just a hand calculator.

Put into action, the model concludes that it is entirely possible to attain the same degree of safety at far lower cost by shifting expenditures from measures that provide little security at high cost to ones that provide more security at lower cost. One modest proposal, for example, would increase security while saving both the taxpayers and the airlines hundreds of millions of dollars every year.

In addition, the model strongly suggests that the PreCheck program not only generates a hundred million dollars a year in efficiency improvement, but billions of dollars of value in passenger satisfaction—all this while actually increasing security slightly.

And the model proves to be extremely robust: you can change the assumptions that make it up substantially without materially altering the conclusions it comes up with.

The book also tackles the deterrence issue—indeed, it is central to the model.

In general, the model is biased to favor the terrorist chances of success. For example, we do not include terrorist amateurishness and incompetence as a security layer—though we do discuss that issue extensively both in this book and in our previous one, Chasing Ghosts: The Policing of Terrorism. But even with that bias in place, a terrorist group’s chance of pulling off a successful on-board bombing is one in 50, while its chances of a successful hijacking are around one in 150.

That is likely to be an effective deterrent—pretty much taking airlines off the terrorists’ target list.

However, it is also important to consider whether there are actually many terrorists out there to deter. As both the GAO and the TSA recognize, terrorists deterred from attacking a hard target like an airliner can only too readily transfer their attention to any one of a nearly infinite number of other potential targets that are anything but secure—congregations of people in restaurants, in offices, at sporting events, or standing in security lines at the airport.

Yet terrorism, however tragic and newsworthy, remains a remarkably rare phenomenon in the United States and in the rest of the developed world—Islamist terrorists have killed a total of six people a year since 9/11 in the United States. If security measures were deterring large numbers of people from attacking airliners we would expect far more mayhem in other places.

Perhaps we are already safe enough.

In the latest edition of the Cato Journal, economist Bryan Roberts argues that immigration enforcement has significantly diminished the flow of illegal immigrants across the Southwest border. Contra Roberts, sociologist Doug Massey argues that border enforcement had virtually no impact on the flow of unlawful immigrants prior to 2010. This post takes a slightly different approach and uses additional sources of data to look at the causes behind the decline of illegal immigration in the aftermath of the Great Recession. This is especially relevant as the House Judiciary Committee is marking up the Agricultural Guest Worker Act (Ag Act) that would increase the flow of temporary visas for workers in farming and related sectors. An increase in visas like those supplied by the Ag Act will likely further diminish unauthorized border crossings. 

Model and Data

This blog is intended to reveal whether the quantity of Mexican legal immigrants (green cards issued overseas and temporary migrants) or border security is responsible for the decline of illegal immigrants from Mexico. Our dependent variable is the estimated gross annual flow of Mexican illegal immigrants. The American unemployment rate, the difference between Mexican and American GDP per capita (PPP), line-watch hours at the Southwest border, and legal Mexican immigration are our independent variables.

We chose a log-linear OLS model to compensate for non-linearity. OLS is a type of regression that helps identify the relationship between independent variables that we anticipate will explain how dependent variables behave. We then ran an autoregressive model (AR (1)) that will help us account for a particular empirical anomaly, the serial dependence between current and immediate past variables that could affect an OLS regression. We then ran a series of regressions with the yearly aggregates beginning in 1960 and ending in 2009. Data limitations prevented us from going beyond 2009 and prior to 1960.

Technical Note

We also ran numerous OLS, bi-weight, quantile, and AR(1) regressions that we excluded from Table 1 because they did not change the significance or signs of any of the coefficients. We tried sample-specific dummies for the combined datasets that did not change the significance of signs.


Massey and Pren (2012) and Warren and Warren (2013) supply the estimates for the annual gross number of illegal Mexican entries.  Annual Immigration Yearbooks from the Department of Homeland Security and the old Immigration and Naturalization Service supply the number of temporary and permanent visas issued to Mexicans abroad. The Bureau of Labor Statistics supplied the American unemployment rate data and the World Bank supplied the relative U.S.-Mexican GDP per capita PPP.


Table 1 reports results of the OLS regression (with robust standard errors in parentheses) and AR(1) for three datasets: the Massey and Pren (2012) data, the Warren and Warren (2013) data, and a combination of the two. When running AR(1), we included a lagged immigrant flow for the independent variable because immigrant flows tend to be dependent on the flows of the immediate past. We also included a lag of legal visas and GDP per capita PPP where we assume the decision to immigrate is based on the immediate past state of the economy and legal immigration trends. 

Our most robust finding is that more legal visas reduce the flow of illegal immigrants (Table 1). The variable is significant in five out of the six specifications. Line-watch hours are positively correlated with the flow of illegal immigrants in two specifications and negatively so in one. This isn’t surprising as Congress increases border security in response to greater unlawful immigrant flows. A higher unemployment rate is negatively related to illegal immigrant flows in three specifications while the difference between Mexican and U.S. GDP PPP is significant at the 5 percent level in only one.

Table 1

Effects of Legal Visas and Border Security on Gross Illegal Immigrant Flow for Mexicans

  Massey and Pren Combined M&P and Warren & Warren Warren & Warren   OLS AR (1) OLS AR (1) OLS AR (1) Legal visas   














Line-watch hours .76   












Unemployment USA .15   












USA-Mexico GDP (PPP) .28   












Observations 49 48 49 48 28 27  RSQ .59 .98 .67 .95 .59 .88

* significant at 10%; ** significant at 5%; *** significant at 1%.

Standard errors in parentheses.

Figure 1 shows the statistically significant inverse relationship between the number of visas issued to Mexicans and the gross flow of illegal Mexican entries. The early period with a high number of legal entries shows the Bracero program. It is followed by a spike in gross Mexican illegal inflows that occurred when the number of legal entries is very low. The number of gross Mexican illegal entries declines most especially as the number of new entries increases in the 1990s and 2000s. We suspect that this relationship is causal – that more legal immigration reduces the flow of unlawful immigrants.

Figure 1

Annual Flows of Legal and Illegal Mexican Immigrants

Sources: Massey and Pren (2012), USCIS, and INS.


This simple OLS regression analysis shows an inverse relationship between flows of Mexican legal and illegal immigrants. These findings cry out for additional research to test how the number of visas affects illegal immigrant flows, especially by examining other measures of border security such as budgets, the number of agents, or apprehensions. The findings of this blog are broadly consistent with a small empirical literature on how border security affects immigration flows. Other researchers should use a more complicated model to account for the dynamics of illegal immigration, such as feedback effects that occur between border security and illegal flow. Time-series methods are one way to potentially address these effects. Regardless, this is some evidence that supports the theory that immigration liberalization will reduce illegal immigrant flows.

Special thanks to Jen Sidorova for her superb work on this blog post and the empirics that support it.

Today is the 250th anniversary of the birth of Benjamin Constant, a prominent French liberal in the postrevolutionary era, whom Isaiah Berlin called “the most eloquent of all defenders of freedom and privacy.” He is perhaps best known in our time as the author of an essay – actually a speech in 1833 – called “The Liberty of the Ancients Compared with That of the Moderns.” He argued that the ancient concept of liberty as political participation was not suited to modern society, in which people were busy with the production of wealth. Modern people want autonomy, the freedom to live their lives as they choose, more than full-time participation in politics. The essay was enormously influential in the development of Continental liberalism, and in the past few decades has become better known in the English-speaking world thanks to the influence of Berlin. Constant began his speech this way: 

First ask yourselves, Gentlemen, what an Englishman, a Frenchman, and a citizen of the United States of America understand today by the word “liberty.”

For each of them it is the right to be subjected only to the laws, and to be neither arrested, detained, put to death or maltreated in any way by the arbitrary will of one or more individuals. It is the right of everyone to express their opinion, choose a profession and practice it, to dispose of property, and even to abuse it; to come and go without permission, and without having to account for their motives or undertakings.

It is everyone’s right to associate with other individuals, either to discuss their interests, or to profess the religion which they and their associates prefer, or even simply to occupy their days or hours in a way which is most compatible with their inclinations or whims.

Finally it is everyone’s right to exercise some influence on the administration of the government, either by electing all or particular officials, or through representations, petitions, demands to which the authorities are more or less compelled to pay heed. 

By contrast, he said, the liberty of the ancients, meaning Greece and Rome,

consisted in exercising collectively, but directly, several parts of the complete sovereignty; in deliberating, in the public square, over war and peace; in forming alliances with foreign governments; in voting laws, in pronouncing judgements; in examining the accounts, the acts, the stewardship of the magistrates; in calling them to appear in front of the assembled people, in accusing, condemning or absolving them. But if this was what the ancients called liberty, they admitted as compatible with this collective freedom the complete subjection of the individual to the authority of the community. You find among them almost none of the enjoyments which we have just seen form part of the liberty of the moderns. All private actions were submitted to a severe surveillance. No importance was given to individual independence, neither in relation to opinions, nor to labour, nor, above all, to religion. The right to choose one’s own religious affiliation, a right which we regard as one of the most precious, would have seemed to the ancients a crime and a sacrilege. In the domains which seem to us the most useful, the authority of the social body interposed itself and obstructed the will of individuals.

He noted three reasons for the difference: First, that the ancient republics were small enough for individuals to feel influential in public discussions; second, that commerce, the principal activity of moderns, doesn’t leave long periods of idleness as war did; third, that commerce inspires a love of individual independence; and fourth, that in the ancient republics “slaves took care of most of the work. Without the slave population of Athens, 20,000 Athenians could never have spent every day at the public square in discussions.”

He concluded by exhorting his audience to insist that modern governments respect modern liberty and leave individuals free to make their own decisions:

The danger of ancient liberty was that men, exclusively concerned with securing their share of social power, might attach too little value to individual rights and enjoyments.

The danger of modern liberty is that, absorbed in the enjoyment of our private independence, and in the pursuit of our particular interests, we should surrender our right to share in political power too easily.

The holders of authority are only too anxious to encourage us to do so. They are so ready to spare us all sort of troubles, except those of obeying and paying! They will say to us: what, in the end, is the aim of your efforts, the motive of your labours, the object of all your hopes? Is it not happiness? Well, leave this happiness to us and we shall give it to you. No, Sirs, we must not leave it to them. No matter how touching such a tender commitment may be, let us ask the authorities to keep within their limits. Let them confine themselves to being just. We shall assume the responsibility of being happy for ourselves.

Read more of the essay in The Libertarian Reader. Learn more about Constant at the Online Library of Liberty.

Sen. Jeff Flake (R-Arizona) has announced that he will not run for reelection. He announced his decision on the Senate floor in a searing speech about the state of our political culture, especially at the hands of President Trump:

It is time for our complicity and our accommodation of the unacceptable to end.

In this century, a new phrase has entered the language to describe the accommodation of a new and undesirable order – that phrase being “the new normal.” But we must never adjust to the present coarseness of our national dialogue – with the tone set at the top.

We must never regard as “normal” the regular and casual undermining of our democratic norms and ideals. We must never meekly accept the daily sundering of our country - the personal attacks, the threats against principles, freedoms, and institutions, the flagrant disregard for truth or decency, the reckless provocations, most often for the pettiest and most personal reasons, reasons having nothing whatsoever to do with the fortunes of the people that we have all been elected to serve.

Flake was anticipating a rough 2018 in Arizona. In polls a year ahead of the Republican primary, he was running well behind a former state senator who held a town hall on “chemtrails.” And Democrats have a strong candidate in Rep. Kyrsten Sinema, who promptly reached out to Flake supporters and Goldwater Republicans, telling the Arizona Republic, “It’s been an honor to know and serve with Jeff. He is a man of integrity and a statesman who is true to his convictions – an Arizonan through and through.”

Despite his political challenges, it’s disappointing that another of the few Republicans willing to call out President Trump for his misguided positions, his coarseness, and his damage to “our democratic norms and ideals” will be leaving the Senate. This is precisely the moment when clear-eyed senators such as Flake and Sen. Bob Corker (R-Tennessee) are needed. Flake and Corker do have another 14 months in the Senate. If they use their time well, they will deserve a new chapter in Profiles in Courage, John F. Kennedy’s book about senators who suffered criticism and electoral losses after taking a stand on principle.

It’s also unfortunate that Trump and Steve Bannon are seeking to drive out of the Republican party Reaganite leaders and replace them with protectionist populists. As Flake said:

It is clear at this moment that a traditional conservative who believes in limited government and free markets, who is devoted to free trade, and who is pro-immigration, has a narrower and narrower path to nomination in the Republican party – the party that for so long has defined itself by belief in those things. It is also clear to me for the moment we have given in or given up on those core principles in favor of the more viscerally satisfying anger and resentment. To be clear, the anger and resentment that the people feel at the royal mess we have created are justified. But anger and resentment are not a governing philosophy.

He said more on these topics in his recent book with the consciously Goldwateresque title Conscience of a Conservative: A Rejection of Destructive Politics and a Return to Principle, which is well worth reading.

I hope Senator Flake will find ways to serve the cause of limited and republican government over the next 14 months and beyond.

The Trump administration acquiesced to the ethanol lobby in a recent decision on the costly Renewable Fuel Standard (RFS), says the Wall Street Journal. Under a Bush-era 2007 law, the mandated amount of biofuels in your gas tank is increasing, which puts upward pressure on gas and food prices and likely harms the environment.

Rather than supporting repeal of the anti-environmental RFS, the EPA announced it “won’t reduce its proposed 19.24 gallon biofuels quota for 2018, and many even increase it,” said the WSJ. Sadly, the administration “caved under pressure from the ethanol lobby and political extortion from Republican Senators Joni Ernst, Deb Fischer, and Chuck Grassley.”

At DownsizingGovernment.org, Nicholas Loris explains how the RFS harms consumers, damages the economy, and produces negative environmental effects. The RFS is also a bureaucratic nightmare, and has spawned a complex credit-trading system, which investor Carl Icahn said is a “$15 billion market full of manipulation, speculation and fraud.”

Loris notes that ethanol has only two-thirds the energy content of regular gas, so drivers get fewer miles per gallon the higher the share of ethanol and other biofuels mixed into their tanks.

So the next time you are pumping gas and see that “10% Ethanol” sticker, remember it’s a Big Government swindle perpetrated by the GOP.

For more on ethanol, see here.

The headline of Megan McArdle’s latest Bloomberg View piece stings, at least for a libertarian whose job is to advance educational freedom: “We Libertarians Were Really Wrong About School Vouchers.”

Ouch! But to this I say: Speak for yourself!

To be fair, I don’t know how things work for big-time columnists, but there’s a good chance McArdle didn’t pen her own headline. Pubs need clicks, and the shrewd marketeers at Bloomberg were no doubt well aware that such an inflammatory header would draw in all roughly ten professional libertarian school choicers, boosting readership by huge hundredths of a percent. And it is worth saying: While I’m not sure you would call them libertarians, John Chubb and Terry Moe’s Politics, Markets, and America’s Schools was seminal in launching the modern choice movement, and they did assert that choice would be a “panacea.” If that is what libertarians expected from the tiny choice programs we’ve gotten so far, yes, we were wrong. But that is not what libertarians should have expected.

The fact is we have not even come close to getting what we need—real, broad freedom, which McArdle and lots of libertarians call “the market.” (I’ve decided, by the way, that a “market” is a horrible way to conceptualize what libertarians want, because it implies education is all about efficient financial transactions. What we want is full-on human freedom.) None of the voucher, charter, scholarship tax credit, or education savings account programs we have gotten have even come close to a free market, as many libertarians have been decrying for decades.

How far are we? Thankfully, you don’t have to dig into old books to find out—we give you the lowdown in Educational Freedom: Remembering Andrew Coulson, Debating His Ideas (available in free PDF version or wherever fine books are sold)! Andrew was a leading critic of the kinds of hamstrung programs many choice supporters lauded for years—a few thousand kids with small vouchers here, public charter schools there—and the book contains multiple chapters examining what is needed for a true free market. As the Heartland Institute’s George Clowes lays out:

  • Parental choice of school
  • Direct parental financial responsibility
  • Freedom for educators to establish different types of schools
  • Explicit competition among educators
  • The profit motive for educators (and the need for a reliable revenue stream)
  • Universal access (including low- and high-income families)
  • Per-pupil funding comparable to the public schools, with the funding following the child

Man, are we far from a market! Charter schools cannot teach devotional religion and are part of the same state standards-and-testing accountability regimes as traditional public schools, cramping how meaningful a choice they can be, or how free their educators. Meanwhile, full per-pupil funding rarely makes its way out of traditional public schools and into charters, and establishing a new school can often be an excruciating and ultimately futile effort.

How about private school choice programs? The good news, at least in theory, is “private” means “real choice,” with schools free to teach whatever they want, how they want. And they come closer than charters, with religion allowed, and sometimes no state testing-based accountability. But some programs require state testing and boot schools that don’t get good grades—Indiana has about 35,000 voucher students, and those rules—and others have less stringent requirements, but testing nonetheless. Even more handicapping is that choice programs are usually poorly funded relative to the public schools and have mandated or de facto enrollment caps due to eligibility requirements or funding limits. In DC, for instance, a voucher is worth around a third of what is spent per-pupil in the public schools (and significantly less than charters) while enrollment is capped at about 2,000 students by the program’s budget. And allowing the profit motive to work is seen as the Mark of Cain, even though it is the lynchpin for taking quality and innovation to scale.

As a libertarian it is easy to get depressed, but only because we’ve barely scratched the surface of freedom. Indeed, the evidence even from this sad state of affairs strongly suggests freedom works. For one thing, Andrew Coulson analyzed the “market-ness” of education systems around the world—where school choice is often embraced more warmly than the home of Cowboy Capitalism—and he found that the more market-like a system, the better the outcomes. We have seen that in the U.S., too, where the “gold-standard” research has typically found that choice delivers slightly better test scores, and much higher graduation rates, at a fraction of the cost of traditional public schools. Even the research McArdle cites to help explain why choice has turned out to be a bummer—a study of centrally managed choice among only public high schools in New York City—suggests that the schools people choose produce better academic outcomes. It’s just that parents seem to prefer schools because they have better performing students rather than explicitly greater learning gains. But it turns out that signal works: “We find preferences are positively correlated with both peer quality and causal effects on student outcomes.”

Of course, what should ultimately thrill libertarians—and everyone else—about choice is not test bumps or dollars saved, but that it is the only education system that lets all people pursue what they believe is important in education without having to impose their views on everyone else, or live under the constant threat of having someone else’s values imposed on them. It is the only education system consistent with a truly free and equal society.

Megan McArdle is absolutely right to be disappointed that we are not where we need to be in education. But that is not because libertarian ideas are a bust. It is because we are so far from seeing them fully implemented.

Reversing a trial court, the Third Circuit has ruled (McGann v. Cinemark) that a deaf/blind man is entitled to sue Cinemark under the Americans with Disabilities Act (ADA) demanding that it provide a “tactile interpreter” so that he can experience the movie Gone Girl. Each interpreter — two would be required because of the movie’s feature length — would narrate the film in American Sign Language (ASL) while McGann places his hand in contact with theirs to read the signs. The appellate judges rejected the argument that because of the need for subjective stylistic judgments about how to describe the movie’s action, on-the-fly translation would “fundamentally alter the nature of the good, service, facility, privilege, advantage, or accommodation being offered,” an exception that the law recognizes to its accommodation requirement. It sent the case back for further proceedings on whether the theater can plead “undue hardship,” a narrow defense that is often unavailable to large businesses which (it is argued) can cover even very high costs of accommodation with revenues earned from other patrons.

Like the Berkeley online courses fiasco, and the Main Street shakedown mills, and the emerging industry of web accessibility suit-filing, these are all developments to keep in mind when you hear people say that the courts are capable of working out the problems with the Americans with Disabilities Act by themselves and that Congress need not turn its attention to reform. (cross-posted and adapted from Overlawyered)

One of the big demands of the Trump administration is that trade, and trade agreements, must be “reciprocal.” Their concerns about reciprocity are misplaced, and miss the point about why we open our markets in the first place. Sure it’s great when other countries also open their markets, but there is more to be gained from unilateral opening than no liberalization at all. Frédéric Bastiat explained this peculiar desire for reciprocity in Economic Sophisms, where he wrote:

There are people (a small number, it is true, but there are some) who are beginning to understand that obstacles are no less obstacles for being artificial, and that we have more to gain from free trade than from a policy of protectionism, for precisely the same reason that a canal is more favorable to traffic than a “hilly, sandy, difficult road.” 

But, they say, free trade must be reciprocal. If we lowered the barriers we have erected against the admission of Spanish goods, and if the Spaniards did not lower the barriers they have erected against the admission of ours, we should be victimized. Let us therefore make commercial treaties on the basis of exact reciprocity; let us make concessions in return for concessions; let us make the sacrifice of buying in order to obtain the advantage of selling.

People who reason in this way, I regret to say, are, whether they realize it or not, protectionists in principle; they are merely a little more inconsistent than the pure protectionists, just as the latter are more inconsistent than the advocates of total and absolute exclusion of all foreign products. 

This principle applies not just to border measures such as tariffs, but also to internal measures such as government procurement. Closing our procurement market to foreigners ignores the value of greater choice and competition. Politicians tend to oversell the advantages of selling (exports) over buying (imports), and incorrectly frame imports as a loss and exports as a gain. In fact, increased competition from foreign firms bidding on government contracts can get more value out of taxpayer dollars by increasing efficiency and gains in quality. 

Nonetheless, if people are going to make these demands for reciprocity, they should at least have some reasonable basis for determining whether there is, in fact, reciprocity. To paraphrase a famous line from the Princess Bride: They keep using that word, but it does not mean what they think it means. A recent demand from the Trump administration in the NAFTA renegotiation, related to government procurement, distorts the concept of reciprocity beyond recognition.  Here’s a Politico report on Commerce Secretary Wilbur Ross’ remarks on the subject: 

Ross was pressed on whether he thought the U.S. proposal on government procurement access was fair, given that it might result in less market access for Canada and Mexico than is granted to other countries through the WTO.

The U.S. proposal would cap Mexican and Canadian access to U.S. government projects at the combined total access those two countries provide to U.S. firms.

“It’s very good faith, our market is 10 times the size of either of those markets, so if you gave equal percentage market share we’d be giving them 10 for one, how is that good arithmetic?” Ross said. “It is actually to the benefit of the parties because it is the cumulative total of two economies rather than the individual one.”

Ross said the proposal helps address “one of the fundamental flaws, the president feels and I agree, that exists in NAFTA to begin with.”

“The fact is we think it was absurd in general to give away 10 times as much market access as you are getting back,” he said.

Ross’ view appears to be that, in order for there to be reciprocity, the Canadian, Mexican, and U.S. procurement markets should all be open to foreign competition in the same nominal amounts. So, to take an illustrative example, if $10 billion of U.S. procurement is open to foreign competition, $10 billion of Canadian procurement and $10 billion of Mexican procurement should also be open. In his view, that is fair. And just to be nice, he says the U.S. will offer the combined amount that Canada and Mexico offer, so the U.S. will offer $20 billion. See, more than fair, right?

No, not at all! What he leaves out is that the differing size of the economies has an impact on outcomes. The share of the procurement market that each country has open to foreign competition is much different when the nominal amounts are the same, with a far smaller portion of the U.S. market open. And because the U.S. economy is much bigger, the United States has more companies that can compete for contracts.  So, if Canada opens up $10 billion of procurement to foreign competition, the U.S. is going to grab a big chunk of that. By contrast, if the U.S. opens up $10 billion (or even $20 billion) to foreign competition, Canada won’t take very much. The result is that the approach Ross is pushing won’t lead to reciprocity. Rather, with the nominal amount of market access the same, and the U.S. economy so much bigger, there will almost certainly be more sales by U.S. companies than by Canadian companies.

If you want to get somewhere close to reciprocity (again, not that we’re advocating it), the way to do so is to open up a percentage of the procurement market to foreign competition. For example, each country could open up 10% of its procurement contracts. This is roughly the approach governments usually take now. Opening up procurement markets on a percentage basis is the best way to get us to a result where roughly the same amount of procurement contracts flow in both directions.

Ross doesn’t like the current approach, saying that the U.S. has given away “10 times as much.” But we haven’t, for the reasons noted: There are fewer Canadian and Mexican companies, so they don’t have the same ability to compete for procurement contracts. 

Adding additional restrictions to the government procurement market, which is valued at $4.4 trillion annually, will be a step in the wrong direction. If the U.S. undertakes measures to further restrict its procurement market, it will be equivalent to a self-inflicted wound. It may also be inevitable that other countries will follow suit, reducing international business opportunities for both foreign and U.S. firms around the world. 

While Congress is rightly concerned about providing a pathway to citizenship for immigrant Dreamers without legal status, thousands of legal immigrants who are in the same position are being left behind. This decision to exclude legal immigrant Dreamers is not just inequitable. It is costly.

H-1B high-skilled foreign workers can bring their spouses and minor children with them to the United States on H-4 visas. The H-4 is a temporary visa that is valid for as long as the H-1B is. Once the child turns 21, however, the H-4 is canceled. Most employers also sponsor their H-1B employees for permanent residency (a “green card”), and their minor children can receive green cards with them. But again, if their children turn 21 while they are waiting, the law boots them from the line.

In a functioning immigration system, these situations would happen rarely, if ever. But because Congress has failed to update the limits on permanent residency since 1990 and because it discriminates against immigrants from populous countries, H-1B workers from India have to wait at least several decades for green cards. During this time, their children grow up as Americans, but then “age out,” losing both their H-4 status and their place in the green card line on their 21st birthday.

These kids are in almost the exact same position as those in the DACA program right now. Their parents brought them to the United States as young children; they grew up here; they have a temporary status now, but they will lose it if Congress fails to change the law. Yet the DREAM Act and other legislative solutions for immigrant Dreamers expressly and inexplicably exclude these legal immigrants. It is not hyperbole to say that the DREAM Act requires applicants to violate the law to qualify.

Why? Legal immigrant Dreamers would certainly qualify under the bill’s other requirements. Virtually all graduate U.S. high schools and enroll in U.S. colleges, and virtually none have criminal records that would disqualify them. Children of H-1Bs are some of the highest achieving children in American society today. In fact, 75 percent of the 2016 finalists for the Intel Science Talent Search—the leading science competition for U.S. high schoolers—had parents who were at one time on an H-1B visa.

This talent is a gigantic economic asset to the United States. According to the National Academy of Science’s 2016 report (NAS) on the fiscal effects of immigration, immigrants who enter as children and who have at least one college graduate parent—as all H-1B workers do—create a massive fiscal surplus. The NAS estimates that each H-4 child would have a 75-year net fiscal present value of between $143,000 and $316,000 to all levels of the U.S. government—federal, state, and local. Averaging NAS’s estimates from Table 8-14 for kids with college grad parents or parents with advanced degrees yields an estimated $252,000 net present value for each legal immigrant Dreamer.

Net present value estimates apply a discount rate to future costs and benefits on the (correct) theory that money today is more valuable than the same amount of money received three decades from now. One way to understand the net present value concept is to envision each one of these kids cutting a check to the government for $252,000 when they arrive in the country that would then be invested at 3 percent per year for the next 75 years.

The DREAM Act is already a big fiscal boost to the United States, but including the legal immigrant Dreamers would increase its fiscal benefits. The government doesn’t produce estimates of the number of children with H-4 status or how many are waiting in the backlog for green cards who could potentially qualify. However, DHS did estimate that 125,000 spouses of H-1Bs on H-4 visas had resided in the United States for at least 6 years as of 2015. Conservatively estimating that each married couple brought an average of one child with them, that’s a population of 125,000 kids. $252,000 multiplied by 125,000 kids is $31.4 billion in net fiscal benefits.

This number is likely low because it only counts H-4s. There are some, albeit fewer, legal immigrant Dreamers on the whole range of alphabet soup visas (E, O, J, L, P, etc.). All of these kids are children of skilled professionals in the United States, so their impacts are probably similar. The country likely will receive some of these benefits whether legal immigrants are included in the DREAM Act or not, as some kids will find a way to stay on their own, but to fully realize all of them, Congress needs to provide them with permanent residency.

The United States gains nothing from kicking legal immigrant Dreamers out or forcing them to maneuver America’s impossible immigration system to find other temporary statuses to stay in the country that is their home. And here’s the thing: the sponsors of the DREAM Act or any other proposal don’t need to add legal immigrant Dreamers or do anything special for them. They just need to not exclude them or go out of their way to treat them worse than other immigrants, as they have right now. All they need to do is strike the requirement that DREAM Act applicants break the law. Few changes so simple could benefit the United States so much.

Critics are saying that the Republican tax plan would give high earners the largest cuts. There has been a flood of news stories with that theme since the Tax Policy Center (TPC) released its analysis of the plan.

The TPC summary says, “Those with the very highest incomes would receive the biggest tax cuts,” and tables in the report encourage readers to come to that conclusion.

However, my parsing of TPC’s data reveals something different: the GOP plan would give the largest relative cuts to people in the middle. On average, middle-income earners would receive larger percentage tax cuts than higher-income earners.

The table shows data from TPC’s analysis and from its current law estimates released in March. Households are split into quintiles, or fifths, by income level. The columns titled “change” present the effects of the GOP cuts in different ways.


Columns 1 and 2. These results from TPC’s report suggest that high earners would receive the largest cuts.

Column 3. These figures from TPC in March include all federal taxes—income, payroll, estate, and excise. Note that the higher quintiles have higher tax rates, so if we cut everyone’s taxes an equal percent, then the higher quintiles would receive the largest cuts.

Column 4. These results from TPC’s study show the GOP cuts as a percent of all current taxes paid. The top and bottom quintiles get the biggest cuts, and the middle and fourth quintiles the smallest. But there is a problem with TPC’s presentation—Congress is reforming income and estate taxes, but TPC includes payroll and excise taxes in these calculations, which slants the results. (My column 4 data are slightly different from data shown in TPC’s study because of rounding issues).

Column 5. This column shows current individual income, corporate income, and estate taxes, based on TPC’s March data. These are the taxes that Congress is reforming. Current tax payments are hugely tilted toward the top end. The bottom two quintiles do not pay any of these taxes, on average. If we cut everyone’s taxes an equal percent, then higher earners would get—and should get—the largest cuts.

Column 6. This column provides the best answer—in my view—to the question of which group gets the largest cuts under the GOP plan (at least the GOP plan as interpreted by TPC). The middle quintile gets a huge 20 percent tax cut, on average, which is much larger than the 12.0 and 12.7 percent cuts for the top two quintiles. Looked at this way, the middle-class would get the largest tax cuts under the GOP plan.

I have assumed so far that TPC’s underlying analysis is sound, but actually there are problems with it. The TPC analysis is not dynamic, and thus overstates revenue losses, particularly from corporate tax cuts. That factor combines with the TPC assumption (erroneous in my view) that the corporate tax burden mainly falls on shareholders, not workers. The result of those two factors is that TPC exaggerates the tax cuts going to the top end.

TPC has fine analysts and it produces an impressive stream of reports, but I wish they would present their results in a more even-handed way. As an example, when they publish a table showing that the top quintile would get income/estate tax cuts of $8,470 and the middle quintile would get $660 in 2018, on average, they should show that the former group will currently pay $66,701 of those taxes and the latter group will pay just $3,300, on average.

By the way, I do not think that the middle class should receive the largest tax cuts, so I do not agree with the rhetoric of either party on that issue. High earners should receive the largest cuts because they pay the highest rates, and reducing their rates would generate the most economic growth.

# # #

For more on the GOP tax plan, see here, here, and here. For a discussion of distribution tables, see this study by Jason Fichtner.

This continues Part 1 and Part 2 of my critique of the arguments for aggressive antitrust activism offered in Steven Pearlstein’s Washington Post article, “Is Amazon Getting Too Big,” which is largely based on a loquacious law review article by Lina Kahn of the Google-funded “New America” think tank. 

My previous blogs found no factual evidence to support claims of Pearlstein and Kahn that many markets (which must include imported goods and services) are becoming dominated by near-monopolies who profit from overcharging and under-serving consumers.  

Yet the wordiest Kahn-Pearlstein arguments for more antitrust suits against large tech companies are not about facts at all, but about theories and predictions.

Kahn makes a plea for preemptive punishment based on omniscient futurism. “The current market is not always a good indication of competitive harm,” she writes.  Antitrust enforcers “have to ask what the future market will look like.” But how could antitrust enforcers’ predictions about what might or might not happen in the future be deemed a crime or a cause for civil damages?  If the law allowed courts to levy huge fines or break-up companies on the basis of prosecutors’ predictions of the future, the potential for whimsical damages and political corruption would be almost limitless.

We have already experienced extremely costly federal (and European) antitrust cases based largely on incredible predictions about “what the future market will look like” – mostly obviously in the cases against IBM and Microsoft.

IBM was the subject of 13 years of antitrust “investigation” (harassment) before the suit was finally dismissed “without merit” in 1982.  My first article about antitrust was a 1974 critique of the IBM case in Reason magazine which remains the best explanation (aside from this book) of what I mean about antitrust being “for fun and profit.”

Pearlstein imagines “it was the government’s aborted prosecution of IBM … that made Microsoft possible.”  But IBM’s decision to offer three operating systems for the PC and allow Microsoft to sell MS-DOS to Compaq had nothing to do with the government’s antitrust crusade against IBM.  That crusade was a well-funded project of Control Data, Honeywell, NCR and Sperry Rand – competitors of IBM’s who hoped to do better in court than they had with customers.

 “In May 1998,” notes Pearlstein, “U.S. attorneys general filed an antitrust suit against Microsoft, which lurks in the background of the current debate” (about Amazon, Google and Apple).  Microsoft was said to have a supposedly invincible monopoly of “Intel-based” personal computers (inexcusably excluding Apple, Sun, Palm, Linux and others from the market), but the prosecutors could not deny that this dominance was achieved legally by consumer preference. The essence of the antitrust allegations was that Microsoft was accused of extending its legal dominance in PCs to achieve a monopoly of Internet browsers and assorted “middleware” (media players, email clients and instant messaging) that could supposedly serve as “alternative platforms” to Windows (or iOS) in some totally incomprehensible fashion.  In reality, the Internet was the alternative platform, and it is platform-independent. Online services also don’t know or care which media player you use to watch movies or listen to music. Online tax return services don’t care either.

The government’s technologically illiterate case against Microsoft became a decade-long, ever-changing battle waged by prosecutors and judges who were unable to even contemplate that (1) Apple, Amazon and Google could ever be competitive rivals of Microsoft in hardware, software or services, or that (2) cellphones and tablets could possibly serve as handy computers.  The Microsoft settlement “barred Microsoft from entering into Windows agreements that excluded competitors from [offering software installed on] new computers, and forced the company to make Windows interoperable with non-Microsoft software.” But Windows had always been far more welcoming to outside software than Apple.  And the browsers, search engines or media players preloaded on new computers became a non-issue once broadband made it easy to install any or all of them on PCs, tablets and phones.  Open-source VLC soon became a popular media player, and open-source Firefox is a popular browser. Instant messaging is dominated by Facebook, Snapchat and Skype.

Google’s Android, Apple’s IOS and Amazon’s Kindle (which is not counted in those shares) have greatly eroded Microsoft’s share of all relevant markets without help from antitrust cops.  By July 2017, Windows had only a 26.8% share of platforms used to access the Internet, and IE/Edge had an 8% share of browsers

Ms. Kahn now worries that antitrust must now shift focus toward Microsoft’s (previously unnoticed) rivals lest they prove to be just as firmly entrenched as DOJ wrongly predicted that Windows and IE would now be.  “Google, Apple and Amazon have created disruptive technologies that changed the world,” says Kahn. “But the opportunity to compete must remain open for new entrants and smaller competitors that want their chance to change the world.”  Sure, but the opportunity to compete was always open and still is.  New entrants explain why IBM gave up making PCs, and why few people use Microsoft’s capable Edge browser or Bing search engine. 

Rather than offer any evidence that new entrants are somehow excluded from [undefined] markets supposedly dominated by Google, Apple and Amazon, Kahn offers theoretical conjecture.  Paraphrasing her, Pearlstein says, “Chicago antitrust theory is ill equipped to deal with high-tech industries, which naturally tend toward winner-take-all competition. In these, most of the expenses are in the form of upfront investments, such as software (think Apple and Microsoft), meaning that the cost of serving additional customers is close to zero… What this “post-Chicago” economics shows [asserts?] is that in such industries, firms that jump into an early lead can gain such an overwhelming advantage that new rivals find it nearly impossible to enter the market… [emphasis added].”  

Tim Muris and Bruce Kobyashi, by contrast, find Post-Chicago economics is all about “stylized theoretical models, producing possibility theorems that largely eschew empirical testing.  [The] lack of empirical verification of these theories likely has limited the impact of Post-Chicago School economics on U.S. antitrust law.”

Consider the possibility theorem that early entrants into high-tech gained “such an overwhelming advantage that new rivals [found] it nearly impossible to enter the market.”  Anything might be possible in theory, but that claim has not been true in fact.  

  • In personal computers, Apple, Commodore and Sinclair were first, followed by Apollo and the IBM PC in 1981, Osborne and Sun in 1982, Compaq in 1983.  Contrary to what trustbusters predicted, IBM gave up the ThinkPad business in 2005.
  • Netscape had an overwhelming dominance of Internet browsing in 1995, but that not deter Opera and Internet Explorer from entering the market that year, nor Firefox in 2002, Safari in 2003, or Google Chrome in 2008. 
  • AOL was the dominant Internet portal in 1993 until challenged by Netscape in 1994, Yahoo in 1995 and later by Comcast, Google, Facebook and many more. 
  • AltaVista, Lycos and Yahoo were meta-search engines that “jumped into an early lead,” yet were soon trumped by Google, Bing and numerous specialized “vertical” search engines (Amazon, Yelp, eBay, Trip Advisor, Expedia…) and Comparative Shopping Engines (Nextag, Shopzilla… ) which lobbied for “the absurd EU antitrust case against Google.”
  • Palm, Nokia and Motorola jumped into an early lead in cellphones, yet were shoved aside by Blackberry, which in turn was shoved aside (for the moment) by Samsung and iPhone.
  •  Friendster, Linked-in and My Space jumped into an early lead in social networking in 2002-03, yet Facebook did not find it impossible to jump into that market in 2004, nor did Twitter in 2006, followed by Google+, Snapchat, Instagram, and others.

Ms. Khan would not only have antitrust czars prosecuting cases based on their technological predictions, but would have them “overseeing concentrations of power that risk precluding real competition.” This “structural” approach removes all annoying requirements for evidence that competition is impeded in any way.  All that would be needed is a prosecutor’s perception that apparent concentration of undefinable “power” might someday risk some undefinable vision of “real competition” or otherwise harm some undefinable “public interest.” 

Pearlstein quotes former antitrust authorities who view Ms. Kahn’s proposed carte blanche antitrust mandate as an invitation to “political and ideological mischief.”  President Trump, for example, threatened Jeff Bezos with “a huge antitrust problem” because Amazon owns The Washington Post “and he’s using that as a tool for political power against me.” 

Mr. Pearlstein began his piece by noting that, “Democrats cited stepped-up antitrust enforcement as a centerpiece of their plan to deliver ‘a better deal’ for Americans should they regain control of Congress and the White House.”  If such stepped-up enforcement follows the advice of Pearlstein and Kahn, it would add paralyzing uncertainty to business plans and decisions.  The Kahn-Pearlstein vision of stepped-up antitrust activism is a recipe for judicial fiat.  It would encourage interest group meddling in business planning and pricing, invite political corruption, and largely replace the rule of law with the rule of lawyers. 

The media’s favorite analysis of the Big Six tax reform framework comes from the Urban-Brookings Tax Policy Center (TPC), which purports to estimate that the plan would increase individual income taxes by $471 billion over a decade (by slashing exemptions and deductions), while cutting business taxes by $2.6 trillion.  Predictably, this generated a tidal wave of outraged editorials and TV ads claiming the plan would do nothing for economic growth and benefit only “big corporations and the top 1%” (which is redundant, because individual taxes aren’t cut and the TPC wrongly attributes nearly all corporate tax cuts to the top 1%).

The Wall Street Journal has offered a powerful corrective to the TPC’s concealed analysis in “Where Critics of Tax Reform Go Wrong”, by Larry Kotlikoff of Boston College. It draws on his working paper with Seth Benzell of MIT and Guillermo Lagarda of the Inter-American Development Bank, which found “The [corporate] tax reform produces enough additional revenues to permit a reduction in personal income tax rates.”

The Tax Policy Center opines there will be “little macroeconomic feedback effect on revenues,” Kotlikoff explains, because they rely on an antique closed-economy model in which (1) investment can only be financed from some domestic “pool” of savings, and (2) higher taxes are equivalent to more savings because they supposedly reduce government deficits without reducing private savings. If government borrows more, this supposedly raises interest rates and “crowds out” private investment.

In reality, U.S. interest rates do not rise and fall with budget deficits, partly because arbitrage ensures the global bond yields move in tandem. Japan ran large chronic budget deficits for decades with super-low interest rates.  

The TPC nevertheless claims that lower corporate tax rates must add to the deficit because they will not raise investment and economic growth. And the reason lower corporate tax rates will not raise economic growth is because they will add to the deficit. Run those two sentences back and forth a few times to appreciate the magnificent circularity of this rhetorical trap for the unwary.

Unfortunately, Kotlikoff’s policy advice is not quite as careful as his analysis. He and his co-authors apparently “share critics concerns that [some unspecified aspect of] the plan would disproportionately benefit the top 1%. One way to rectify the fairness problem and address the country’s long-term fiscal gap would be to add, as the framework foresees, a fourth personal tax bracket for those with very high incomes.”   

Congress might take a clue from the Clinton-Gore campaign, for example, and add a 10% surtax on taxable income above $1 million. That would leave us with a 38.5% tax rate on income reported on individual income tax returns and a 20% tax rate on income reported on corporate tax returns. Contrary to Kotlikoff, that would not raise more revenue (to “address the fiscal gap”) for reasons explained by Kotlikoff himself: “If corporate tax rates are lower than personal income tax rates, people have an incentive to shelter their self-employment income (lower their personal tax bill) by incorporating.”  

In the 1980s, as the top tax rate on individual income fell from 70% to 28%, professionals and owners of closely-held businesses shifted en masse from reporting most of their income on corporate tax forms to reporting it on individual tax returns, as pass-through partnerships, proprietorships, Subchapter S corporations and LLCs.

A 2015 study by five Treasury economists and two Chicago scholars finds, “’Pass-through’ businesses like partnerships and S-corporations now generate over half of U.S. business income and account for [41%] of the post-1980 rise in the top- 1% income share.” If we now slam that process into reverse – by cutting corporate tax rate to 20% while leaving top individual rates of 35-40% – that would soon result in massive income-shifting out of pass-through entities back into C-corporations that pay no dividends and compensate owners with tax-free perks, company cars and condos, and lavish expense accounts rather than large salaries.  

In short, the wider the gap between top tax rates on individual and business income (including self-defined pass-through income on Schedule C) the more futile it would become to raise top tax rates on income reported on individual tax returns above 30% much less 38-40%. The fourth tax bracket is a really bad idea based on really bad estimates of who wins and loses from a lower corporate tax rate.

Kotlikoff, Benzell and Lagarda have no basis for evaluating the “fairness” of proposed tax changes for individuals because they explicitly “do not model” such changes – they are exclusively concerned with the corporate tax. But, their model estimates that cutting the corporate tax raises tax revenue and also raises real wages by about 8 percent.

Kotlikoff’s endorsement of a fourth individual tax rate higher than 35% is not because he believes the GOP Framework adds much to budget deficits, but because he apparently accepts the Tax Policy Commission’s static estimates that the top 1% benefits most, as shown in the Table.

TPC Estimated Static Change in Federal Taxes by Income Group from Republican Framework Tax Plan

Lowest Quintile


Second Quintile


Middle Quintile


Fourth Quintile


Top Quintile


      Top 1%  


The reason the top 1% appears to get the largest tax cut is not because of the plan’s trivial rejiggering of individual deductions and taxes (which go up rather than down), but because the Tax Policy Center arbitrarily “assumes” that owners of capital bear 80% of the corporate tax, and most capital is owned by people with high incomes.

The trouble is, the TPC assumption that labor bears only 20% of the burden of the corporate tax is totally inconsistent with Kotlikoff’s model predicting an 8% rise in real wages from cutting the corporate tax.  It is also totally inconsistent with all recent empirical studies on that issue. Congressional Budget Office economist William C. Randolph, for example, estimated U.S. labor bears 70% of the corporate tax, once we drop the TPC closed-economy fiction and allow capital to gravitate to countries with lower marginal tax rates. For tax-friendly countries attracting U.S. business and investment, Randolph explains, “Foreign workers benefit because an increased foreign stock of capital raises their productivity and their wages. Domestic workers lose because their productivity falls and they cannot emigrate to take advantage of higher foreign wages.”

A Tax Policy Center survey of the evidence likewise concluded that “Recent empirical studies… all conclude that wage earners bear most of the ultimate burden of the corporate tax.”  That means everything you have been reading about “Trump Plan Delivers Massive Tax Cuts to the 1%” is just made-up fiction – based on a key assumption the source (the Tax Policy Center) knows to be false.


Last month, the Supreme Court’s agreed to review Janus v. American Federation of State, County, and Municipal Employees, Council 31 (Cato filed a brief in support of the plaintiffs). The case is a First Amendment challenge to the “agency fees” that must be paid to a public-sector union by non-members. As a matter of existing First Amendment law, no employee may be compelled to join a union or contribute money to fund a union’s direct political activities, such as political ads. In roughly 22 states (the 28 “right-to-work” states outlaw agency fees), unions may compel non-members to pay agency fees that (ostensibly) only reflect the cost of the union’s representational activities, such as bargaining over wages and working conditions. The agency fee is the product of the Supreme Court’s decision in Abood v. Detroit Board of Education (1977), in which the Court prohibited public-sector unions from compelling non-members to support political speech, but allowed for the compelled support of the union’s other “non-political” activities.    The plaintiff in Janus—like the 2015 Friedrichs case that stalemated after Justice Scalia’s death (in which Cato also filed a brief)—claims that, for public employees, the distinction in Abood between “political” and “non-political” is illusory because the terms and conditions of public employment are inherently a matter of public concern. A teachers union negotiates with a school system over salaries and benefits packages, merit pay versus seniority, the standards for teacher evaluation, and the controversial “tenure” provisions that in some states make it nearly impossible to fire even serial abusers. Each of these represents a core, political issue in education policy, and a teacher who believes that, say, merit-based pay systems would improve the quality of teaching in the school system (where perhaps her own children may attend) can currently be forced to fund negotiations against it.   Abood upheld the agency fee based, in part, on the “free rider” rationale. The Court reasoned that, since unions are required expend resources for dissenters’ benefit, dissenters may be required to cover that expense because otherwise they would get a free ride on the supposed union gravy train. Recently, in Slate, attorney Daniel Horwitz—drawing on the argument of a pair of law professors—took the issue a step further, claiming that forcing unions to represent free riders is unconstitutional. Horwitz argues that unions should not have to abide by the duty of fair representation—meaning they have to fairly represent the interests of both members and non-members—if non-members are not made to pay (that is, if Mr. Janus wins). But unions aren’t compelled to abide by the duty of fair representation; they choose to.   Currently, a union that receives a majority of the votes of the relevant group of employees in an election may be certified as an “exclusive bargaining representative.” This provides the union certain rights, including imposing a duty on the employer to bargain in good faith with the certified union, and excluding competing unions and dissenting individual employees from the bargaining table. In return the union must shoulder a “duty of fair representation,” which requires the union act as a fiduciary to protect the interests of both members and non-members.   But unions can be members only, thus eliminating all the problems that come with forcing people to contribute to a union. In the words of two prominent labor scholars (one of whom is cited by Mr. Horwitz): Nothing in section 7 [of the National Labor Relations Act]—which grants employees the rights “to self-organization” and “to bargain collectively through representatives of their own choosing”—limits these rights to workplaces where a majority of employees choose one union. Moreover, nothing in section 9 (which provides a mechanism for choosing a union that enjoys the power of exclusive representation) limits the ability of a group to bargain on a members-only basis. The law currently allows members-only representation. Unions don’t usually pursue members-only representation because becoming the exclusive bargaining representative of all employees grants special privileges, namely an employer’s affirmative duty to bargain. Only a union that is certified as the exclusive bargaining representative must shoulder the burden of non-members. This makes sense. A member of Congress could be thought of as the “exclusive bargaining representative” of his constituency, which means he has a duty to represent both those who voted for him and those who did not. Non-members of a union are like those who voted for the other guy.   However, nothing compels a union to become the exclusive bargaining representative. In fact, the “exclusive bargaining” model is an American peculiarity, born of the particular zeitgeist of the 1930s. In Europe, unions are members only, with multiple unions in a given workplace, often tied to a particular political party or identity. Workers therefore gain the opportunity to associate with a union that represents all their interests, and champions the causes they value. And, as any American who has traveled Europe and encountered a transportation strike knows, European unions are pretty powerful.   For many workers who dislike unions, compelled support is often their biggest objection. Also, for many libertarians and First Amendment devotees, unions are only objectionable when they’re coercive and non-voluntary. In the long run, a decision for Mr. Janus could help unions move towards a potentially more popular members-only model.   

As negotiations on the North American Free Trade Agreement (NAFTA) continue, many proposals seem to run counter to the goal of modernizing the deal, and some industry groups are taking the opportunity to advance their protectionist agenda. A recent op-ed by Mike Schultz, Vice President of R-CALF USA and COOL Chairman, and Martin Rosas, President of United and Food and Commercial Workers (UFCW) Local 2 in Kansas City, argued for the reinstatement of U.S. legislation that required meat products to bear a label that identifies the country of origin of the product, so-called COOL (country of origin labeling) rules. Supporters of this type of labeling scheme argue that it helps inform consumers of the products they are buying, and that consumers are willing to pay more for this information. In addition, supporters tend to claim that NAFTA hurt the U.S. beef industry.  All of these arguments are incorrect.

First, the COOL scheme that was established by the United States in 2008 was a complex set of requirements that set out when particular muscle-cuts of meat would require a label that identifies where the product was “born, raised, and slaughtered.” On its face, this may seem benign, but the way the legislation was crafted discourages U.S. meat producers from sourcing foreign meat because of the costs of tracing every step of the production process, including segregating herds by nationality.

Tracing of a piece of meat’s “nationality” is complicated by the fact that there is a lot of back and forth trade in the beef industry between Canada, Mexico and the United States. And there are additional barriers to tracing, like the fact that Alaska and Hawaii transship their cattle through Canada to get to the U.S. market to avoid the high costs of shipping imposed by the Jones Act.

Furthermore, the claim that consumers are willing to pay more for a country of origin label is not supported by the evidence. A 2013 study in the Journal of Agriculture and Resource Economics found an “absence of an increase in demand by U.S. consumers” for products covered by the COOL scheme, which “suggests that any attempt to maintain [COOL] would result in aggregate welfare loss not only within the United States but also with key trading partners.” Furthermore, a 2004 report by the U.S. Department of Agriculture found that “[t]he infrequency of “Made in USA” labels on food suggests suppliers do not believe domestic origin is an attribute that can attract much consumer interest.”

Finally, supporters of this protectionist measure sometimes claim (as the op-ed mentioned above does) that NAFTA hurt the U.S. beef industry. This is false. First off, barriers to the beef and cattle trade have been very low for a long time and this predates NAFTA. Second, while Canada is a top supplier of imported beef to the United States, it makes up 18.6% of the total share of imports, and just 2.5% of U.S. beef and veal consumption. Third, the U.S. beef industry is actually doing quite well, and expected to grow in 2018. In 2016, the U.S. was the top producer of beef and veal (by thousands of metric tons), totaling 11,507 metric tons, with Brazil coming in second with 9,284 metric tons. It is important to note that the U.S. is also the top importer of beef and veal because it is also the top consumer—Americans like their beef, so we need to purchase foreign beef to meet our domestic demand.

This country of origin labeling issue was brought to the World Trade Organization (WTO) by both Canada and Mexico in 2008. In November 2011, a WTO panel concluded that the COOL measure violated the United States’ obligations because it discriminated against imported livestock. This finding was upheld on appeal. Congress eventually repealed the legislation in December 2015 through H.R. 2029. Asking for this legislation would guarantee another dispute, and also disrupt the cattle and beef market again. Using the NAFTA negotiations to ramp up support for this legislation also runs counter to the reality of the beef and cattle trade in North America. Congress should not allow itself to fall prey to this form of regulatory protectionism yet again. 

Today, the Los Angeles Police Department (LAPD) civilian police commission voted to approve proposed guidelines for a one-year unmanned aerial vehicles (UAVs) pilot program. According to the LAPD’s guidelines, UAVs will not be equipped with lethal or nonlethal weapons and will only be deployed in a narrow set of circumstances. The guideline also requires officers to obtain a warrant before using a UAV “when required under the Fourth Amendment or other provision of the law.” This looks all well and good, except that the Fourth Amendment and California law provide little protection when it comes to aerial surveillance.

The Fourth Amendment protects “persons, houses, papers, and effects” from “unreasonable searches and seizures.” Many Americans could be forgiven for thinking that this constitutional provision would act as a shield against warrantless aerial surveillance. Sadly, this is not the case. California law is similarly of little help. California is not one of the states that require law enforcement to obtain a warrant before using a UAV, with Gov. Jerry Brown in 2014 vetoing a bill that would have imposed such a requirement.  

To the LAPD’s credit, routine surveillance is not included in its list of approved UAV operations. However, the LAPD has a history of using new surveillance gadgets, and it’s reasonable to be wary of UAVs being regularly used for surveillance as they become an everyday feature of police departments’ toolboxes.

Although the Supreme Court has yet to take up the issue of UAV surveillance, it did address aerial surveillance in a few cases in the 1980s. In Dow Chemical Co v. United States (1986) the Supreme Court ruled that the Environmental Protection Agency did not need an administrative warrant when it hired a commercial photographer using a mapping camera to inspect a 2,000 acre Dow Chemical plant from an aircraft.

The same year that Supreme Court ruled in Dow Chemical Co v. United States it also decided another case, California v. Ciraolo (1986). In that case police acting on an anonymous tip took to an airplane and without a warrant used naked eye surveillance to snoop on Dante Ciraolo’s backyard, which was unobservable from street level thanks to a couple of fences. The police spotted marijuana growing in Ciraolo’s backyard and arrested him. Ciraolo claimed that the police’s aerial inspection of his backyard violated the Fourth Amendment, but the Supreme Court ruled that such warrantless surveillance is constitutional.

In 1989, the Supreme Court dealt with another case involving police looking for marijuana from the sky. In Florida v. Riley (1989), the Supreme Court considered whether police had conducted a Fourth Amendment search when they looked into Michael Riley’s greenhouse from a helicopter at 400 feet without a warrant. A plurality on the Court found that Ciraolo controlled and that police had not conducted a Fourth Amendment search.

While those outside of courts and law schools might think that the government agents’ behavior at issue in DowCiraolo, and Riley, could reasonably be described as “searches,” the unfortunate reality is that for fifty years the word “search” has been defined by courts in a very particular way.  

Fifty years ago, in Katz. v. United States (1967), the Supreme Court ruled that the warrantless use of an eavesdropping device on the exterior of a public phone booth violated the Fourth Amendment. In his majority opinion, Justice Potter Stewart wrote that the Fourth Amendment “protects people, not places.”

Katz is notable not only because of Stewart’s opinion, but also because of a solo concurrence written by Justice John Harlan II. In his concurrence, Justice Harlan codified the two-pronged “reasonable expectation of privacy test.” According to the test, police have conducted a Fourth Amendment “search” if they 1) violate someone’s reasonable expectation of privacy and 2) that expectation is one that society is prepared to accept as reasonable.

Thanks to current Fourth Amendment doctrine the LAPD’s declaration that police will seek a warrant for UAVs “when required under the Fourth Amendment” is hardly reassuring.

In his Florida v. Riley dissent Justice William Brennan took the Court’s reasoning to its logical conclusion, using a “miraculous tool” that at the time was a hypothetical but now resembles a tool that will soon be in the hands of the LAPD and other police departments:

Imagine a helicopter capable of hovering just above an enclosed courtyard or patio without generating any noise, wind, or dust at all - and, for good measure, without posing any threat of injury. Suppose the police employed this miraculous tool to discover not only what crops people were growing in their greenhouses, but also what books they were reading and who their dinner guests were. Suppose, finally, that the FAA regulations remained unchanged, so that the police were undeniably “where they had a right to be.” Would today’s plurality continue to assert that “[t]he right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures” was not infringed by such surveillance?

The LAPD’s UAV guidance does include some praiseworthy provisions, including the ban on UAVs being equipped with weapons. However, the guidance doesn’t provide the privacy protections needed to prevent warrantless UAV snooping.

Later this week the Communist Party of China (CPC) will hold the 19th Party Congress, a major political event that happens just once every five years. Domestic issues will take center stage at the Party Congress, and China watchers will watch closely for news on the composition of a new Politburo Standing Committee, the likely inclusion of Xi Jinping Thought into the CPC’s constitution, and the future of economic development.

International relations will take a back seat to internal issues during the 19th Party Congress, but it will not disappear from the agenda entirely. Three important issue areas to follow are the progress of China’s military reforms, Taiwan, and North Korea. All three could come up during the congress, and all have important implications for U.S. strategy in East Asia and the U.S.-China relationship.


Military Reforms

Xi Jinping kicked off a massive reform of the Chinese military in late 2015 by cutting 300,000 personnel from the People’s Liberation Army (PLA) and changing its command and control system. Additional notable reforms over the past two years include changing from military regions to theater commands, the creation of a Strategic Support Force for space, cyber, and electronic warfare, and the growing prominence of the PLA Air Force and PLA Navy relative to the army. The overarching goal of Xi’s military reforms is to turn the PLA into a lean, mean fighting machine capable of winning wars on the modern battlefield.  

Some general information about military reform should be mentioned in the work report produced at the beginning of the 19th Party Congress, but before the report is released congress-watchers should pay attention to promotions and demotions within the PLA and Central Military Commission (CMC). In the weeks and months leading up to the Party Congress, Xi removed several high-ranking PLA generals from their posts and replaced them with new commanders. Changes to the CMC could include a reduction in the number of individuals on the commission and new members that are loyal to Xi and want to improve the PLA’s joint warfare capabilities.

The PLA reforms have two important and competing implications for the United States. On the one hand, once the reforms are completed and internalized the PLA should be a much more effective fighting force, which in turn raises the costs of U.S. military commitments in East Asia. On the other hand, these reforms are a massive and difficult undertaking that will take many years to fully implement. American policymakers should not inflate the threat posed by China in the short term, but it would be unwise to ignore the long-term political implications of a more capable PLA.



Relations across the Taiwan Strait have been relatively stable since the election of Tsai Ing-wen as president of Taiwan in January 2016. China is steadily applying pressure on Taiwan in response to Tsai’s “incomplete answer” on the 1992 Consensus, but the pressure has not been unusually onerous and it has not significantly escalated since Tsai’s election almost two years ago. Taiwan will be mentioned in the 19th Party Congress’s work report, but this will likely amount to a restatement of long-held CPC positions on eventual reunification and opposition to Taiwanese independence. The work report’s language could end up being more aggressive and it deserves close observation, but Taiwan is a relatively low priority for the Chinese leadership at the moment.

If the Party Congress produces a “steady as she goes” approach to Taiwan, it would behoove the United States to avoid taking high-profile actions that would damage the US-China relationship. One example of a counterproductive U.S. action is language in the 2017 National Defense Authorization Act allowing U.S. Navy ships to make port calls in Taiwan. Advocates for the port calls, which haven’t happened in Taiwan since 1979, argue that the action is essential for shoring up the U.S.-Taiwan relationship and preventing China from coercing Taiwan. However, Beijing will likely see this break with decades of past practice as a major event that worsens U.S.-China relations.

There are better ways to preserve peace in the Taiwan Strait than adopting a high-profile, precedence-breaking policy of restarting U.S. Navy port calls. For example, U.S. arms sales to Taiwan may lead to angry Chinese press statements, but because they are a continuation of long-standing U.S. policy they reinforce the status quo. Restarting port calls to Taiwan would be a high-profile departure from past U.S. policy, which represents a break in status quo behavior that is worse for the U.S.-China relationship than continuing arms sales.


North Korea

The final major international relations issue that may come up at the 19th Party Congress is the ongoing nuclear crisis on the Korean peninsula. The growing tension between the United States and North Korea is China’s most pressing foreign policy problem. A war would prompt a massive influx of refugees into China and have serious implications for the security order in East Asia. Moreover, the Trump administration appears convinced that China needs to do more to pressure North Korea and has levied secondary sanctions against Chinese companies to convince Beijing to do more.

While North Korea looms large for China, it probably won’t get much attention in the 19th Party Congress’s work report. Domestic issues will take precedence at the Party Congress, and while military reforms and cross-strait relations have international implications the CPC views both as domestic concerns. However, a dramatic action by Pyongyang during the Party Congress, such as an ICBM test or an above-ground nuclear detonation, could prompt the CPC to issue a statement on North Korea.

Discussion on the North Korea problem will probably happen during the Party Congress, but absent a significant escalation on the peninsula North Korea will likely not be featured prominently in the official documents produced by the congress. Instead, Xi and the Chinese leadership will likely wait until Trump’s visit to Asia in early November to issue any adjustments to China’s policy toward North Korea.

Welcome news from the Environmental Protection Agency: Administrator Scott Pruitt is curbing often-collusive deals (“sue and settle”) by which the agency, sued by outside groups, agrees to adopt new policies or enact new regulations. (It also usually agrees to pay the outside groups handsomely in legal fees.)  As The Hill puts it, the new policy (full EPA release here) focuses especially on transparency:

“We will no longer go behind closed doors and use consent decrees and settlement agreements to resolve lawsuits filed against the agency by special interest groups where doing so would circumvent the regulatory process set forth by Congress,” Pruitt said, adding that he is also cracking down on attorneys’ fees paid to litigants.

Under Pruitt’s new directive, the agency will post all lawsuits online, reach out to affected states and industries and seek their input on any potential settlements.

The EPA is pledging to avoid settlements that would make for a rushed regulatory process, or that obligate the agency to take actions that the federal courts do not have the authority to force.

Cato adjunct scholar Andrew Grossman discussed the issue in 2015 Senate and 2017 House testimony, noting that “The EPA alone entered into more than sixty such settlements between 2009 and 2012, committing it to publish more than one hundred new regulations, at a cost to the economy of tens of billions of dollars.”  He observed that judicially enforceable consent decrees create “artificial urgency” for bulldozing through new regulations quickly, give favored outside organizations an added channel of influence not available to many of those directly regulated, and tie the hands of later administrations. And as I pointed out in this space a few years back, the issue is by no means confined to the EPA or environmental regulation, but serves as a way to expand government agency power while seeming to constrain it in education, social services, and many other areas.

But the next administration’s EPA chief could reverse Pruitt’s directive with the stroke of a pen. That’s one reason the U.S. Department of Justice – which has been doing its own welcome housecleaning of settlement practices lately – should continue to monitor and regularize litigation practices of this sort, and why Congress should proceed to consider legislation to curb sweetheart pacts on a more lasting basis. 

During the Western Han Dynasty (206 B.C. – A.D. 9), the question of monetary freedom was vigorously debated. There were as yet no banks or paper money in China — money consisted solely of coin.  Private mints competed with government mints, either in the shadow market or legally. In 81 B.C., the issue of whether the state or the market would be the best guardian of sound money came to a head in the famous “Discourses on Salt and Iron,” which were compiled by Huan Kuan in his book Yantie lun. The relevant chapter for our study is chapter 4, “Cuobi” (“Discordant Currencies”).

In this article, I provide some background for the debate between the Confucian scholars who favored private (competitive) coinage and the statesmen, particularly Sang Hongyang, who defended the government’s monopoly on coinage. I then consider the arguments of those engaged in the 81 B.C. debate over the role of government in coinage and the lessons learned.


The first emperor of the Western Han Dynasty, Gaozu (202–195 B.C.), banned   government minting, legalized private mints — most likely because of the severe shortage of coins that impeded trade — and adopted the Qin Dynasty’s standardized bronze coin, the banliang (or “half ounce” = 12 zhu).[1] Its relatively heavy weight (about 8 grams) made it unsuitable for widespread use. The demand for lighter coins to facilitate trade led private mints to produce a large quantity of lighter “elm-seed” coins that weighed 0.2 to 1.5 grams. Those coins retained the conventional banliang inscription, making their face value much greater than their intrinsic value.[2]  Of course, merchants would not accept them at face value.

Banliang 4 Zhu Coin

In 186 B.C., Empress Lü reinstituted the Imperial Mint with the hope of gaining control over the monetary system. The first coin brought out by the government was a banliang coin weighing 8 zhu. Next, in 182 B.C., a new banliang coin called the wufen, which weighed only 2.4 zhu, was circulated. The demonetization of the 8 zhu coins, which allowed bronze to be restruck into a much larger nominal stock of money, led to inflation.  Consequently, in 175 B.C., Emperor Wen of Han increased the metallic content of the banliang to 4 zhu, and once again allowed private mints the freedom to coin money provided they complied with the standard weight of 4 zhu and produced only bronze coins. The see-saw between government and private mints continued when, in 144 B.C., Emperor Jing of Han ended competitive coinage and reinstituted the government’s monopoly. Private coining was made a crime and those convicted could face the death penalty.[3]

The substantial difference between the face value and intrinsic value of banliang coins during the early Han period provided fertile ground for counterfeiting.  However, money exchanges developed to discover the true value of banliang coins, adjusting their nominal value to reflect their weight (or intrinsic value), rather than passively accepting the fictitious value of 12 zhu. Eventually, in 120 B.C., a new bronze coin, the 3 zhu cash coin, replaced the old 4 zhu banliang coin — and its face value was made equal to its intrinsic value. Finally, in 119 B.C., Emperor Wu of Han introduced the wuzhu (or 5 zhu) bronze coin, which was extensively used until the 7th century.

At first, the wuzhu was minted by both the central government and the prefectures, but in 113 B.C. minting became the sole responsibility of the Imperial Mint.[4]

The 81 B.C. Debate Over Monetary Freedom

When Emperor Wen of Han legalized private mints in 175 B.C., Jia Yi, a former official, argued that competitive coinage would lead to debasement, a plethora of cash coins that would confuse the public, and result in the manipulation of money exchanges. He therefore recommended restoring the state monopoly on coinage and controlling the supply of copper.[5]  His advice was rejected but the debate over private coinage reemerged in 81 B.C.

The Main Arguments

Sang Hongyang, a statesman who had been a key advisor to Emperor Wu, took the lead role in arguing against private coinage and in support of government monopoly.  Meanwhile, more than 60 Confucian scholars (literati) from across China made the case for monetary freedom as the best way to provide sound coinage.

In his argument against monetary freedom, Sang Hongyang contended: “If the currency system is unified under the emperor’s control, the people will not serve two masters [the state and the market].  If coin issues from the ruler, the people will have no doubts about whether it is genuine or not.”[6]

The literati, who favored economic freedom, as opposed to the interventionist policies initiated by Emperor Wu, disputed that argument:

In high antiquity, numerous forms of currency existed, wealth circulated, and the people were happy.  Later, when the old types of currency were replaced with silver coins inscribed with tortoises and dragons, the people became deeply suspicious of the new coins. The more often the currency system changes, the more suspicious the people become.

Subsequently, all the old currencies circulating throughout the realm were demonetized and sole authority to mint coin was vested in the Three Officers of the Intendancy of Natural Resources. Officials and artisans alike steal from the profits of the mint. Moreover, they fail to ensure that coins are made to exact standards; some coins are too thin or too thick, too heavy or too light. Farmers are not expert at perceiving the qualitative differences between different coins. When comparing one coin to another, they trust the old coins but harbor suspicions about the new ones, without really knowing which is genuine and which is false. Merchants and shopkeepers pass off bad coins in exchange for good, taking in coins worth double their face value while fobbing off debased ones.  … If people must discriminate between different types of coin, then trade will be harmed, and consumers in particular will suffer.

Therefore, the sovereign provides for the people’s welfare by not restricting the use of natural resources … [and] he facilitates the use of currency by not prohibiting people from freely minting coins.[7]

It is clear from these passages that the literati based their case for monetary freedom on sound economics and the positive consequences competitive coinage was expected to have on human welfare.  As Richard von Glahn, an eminent historian of Chinese monetary history, notes,

The Confucian scholars arrayed in opposition to Emperor Wu’s policies of state intervention in the economy rejected the contention that a state monopoly on coinage is the best defense of sound money.  The market, they suggested, will compel private coiners to maintain proper standards of size, weight, and purity.  A state monopoly on coinage, in contrast, allowed the state to debase its own coin with impunity.[8]

They also thought that, from an ethical view point, a government monopoly is unjust, because it prevents free competition and allows officials to use their power to debase the currency for personal gain.

Although the literati had ethics, history, and logic on their side, they were unable to end the state monopoly on coinage.  Government officials’ inclination to abuse their power by manipulating the monetary system for fiscal purposes and their own profit was simply too strong. Consequently, “the court debate in 81 B.C. marked the last serious challenge to the principle of a [monopoly] sovereign currency.”[9]

A Catallactic View of Money

The proponents of competitive coinage held a catallactic (i.e., exchange) view of money. They held that money, as a medium of exchange, evolved from commodities that had an exchange value in barter economies. The literati argued: “The ancients had marketplaces but no coinage.  Everyone exchanged what they had for what they lacked … .  In later ages, tortoise and cowrie shells, gold, and bronze coins emerged as the media of exchange.”[10] They did so because those commodities had a nonmonetary value, were scarce enough and durable enough to serve as money, and engendered the people’s trust—not because the sovereign mandated their use as money. In Mengerian terms , they had wide “marketability” — not just personal use value.[11]

Knife-shaped money Spade-shaped money

The Confucian scholars who participated in the 81 B.C. debate over coinage no doubt were familiar with the writings of Sima Qian (c. 145–86 B.C.), the “Grand Historian,” who wrote: “When farmers, artisans, and merchants first began to exchange articles among themselves, manifold forms of currency — tortoise and cowrie shells, gold and bronze coin, and knife-shaped and spade-shaped money — came into being.”[12]

Sima Qian, the Grand Historian

According to von Glahn, Sima Qian and Confucian scholars “evoked an image of a spontaneous emergence of the market as a reproof of meddlesome rulers who manipulated the currency system for their own profit.”[13]  However, while Sima Qian criticized government intervention, he did not favor private coinage, which he thought could be disruptive.[14]

The catallactic (market-based) doctrine of the origin of money was not widely shared. Most authorities rejected it in favor of the long-held chartalist view that money originated from rulers who sought to improve the welfare of their people. As expressed in the Guanzi (a book by Guan Zhong, a 7th century B.C. statesman): “Tang [mythical founder of the Shang Dynasty] used the metal of Mount Zhuang, and Yu [founder of the Xia Dynasty] took the metal of Mount Li, to cast money, which they employed to redeem the children from bondage.”[15]


A study of the monetary history of the Western Han Dynasty is instructive in showing the tension between state power and private initiative in meeting the demand for currency as the economy and population grow.  Government officials’ inclination to abuse their power when they have a monopoly on coinage is evident during the early Han Dynasty, as is the monetary chaos that can occur when there is a lack of a genuine rule of law.

The court debate in 81 B.C. shows that there was support for competitive coinage and that the literati from across China believed that, under just laws that were enforced, private mints could bring about monetary harmony. The debate also shed light on the importance of market forces in understanding the origin (or early history) of money. They thus give us another bit of evidence in the long-standing controversy over the state theory of money (chartalism) and the exchange (catallactic) theory of money, also known as “metallism”.[16]


[1] Nishijima Sadao, “The Economic and Social History of Former Han,” p. 586; in The Cambridge History of China: Volume 1, The Ch’in [Qin] and Han Empires, 221 B.C.–A.D. 220, edited by Denis Twichett and Michael Loewe, New York: Cambridge University Press, 1986.

The Han banliang was effectively a monetary unit, the actual metallic equivalent for which tended to change over time, while the zhu was a stable weight unit, equivalent to so many grams. Thus coins that bore a banliang value were given a nominal rating equal to12 zhu/banliang. The difference between the nominal and actual value was the difference between that rating and the coins actual weight in zhu.  For an excellent history of coinage during the Qin and Western Han Dynasties, see http://www.calgarycoin.com/reference/china/china2.htm.

[2] Nishijima, p. 586.

[3] Ibid.; see also Richard von Glahn, Fountain of Fortune: Money and Monetary Policy in China, 1000–1700, p. 35, Los Angeles: University of California Press, 1996.

[4] Nishijima, p. 587; Walter Scheidel, “The Monetary Systems of the Han and Roman Empires,” Princeton/Stanford Working Papers in Classics, Paper No. 110505 (February 2008), p. 8.

[5] Jia Yi’s commentary was preserved in the Hanshu (History of the Former Han) compiled by Ban Biao,  Ban Gu, and Ban Zhao. It appeared in 111 A.D.  See Scheidel, p. 8.

[6] Huan Kuan, Yantie lun, 4, “Cuobi,” p. 16; English translation in von Glahn, p. 36.

[7] Yantie lun, pp. 16–17; in von Glahn, pp. 36–37. “Currency” refers to so-called cash coins, not to paper currency.

[8] Von Glahn, Fountain of Fortune, p. 36.

[9] Ibid., p. 37.

[10] Yantie lun, p. 16.; in von Glahn, p. 27.

[11] See Carl Menger, Principles of Economics (1871), chap. 8, “The Theory of Money.” Translated by J. Dingwall and B. F. Hoselitz, with an introduction by Friedrich A. Hayek. New York: New York University Press, 1981.

[12] Sima Qian, Shiji (Records of the Grand Historian), 30.1442. Beijing ed.; von Glahn, p. 26.

[13] Von Glahn, p. 27.

[14] Ibid., p. 35.

[15] Guanzi, 75, “Shanquanshu,” III: 73 (Guoxue jiben congshu edition); in von Glahn, p. 26.  Accordingly, von Glahn (p. 28) notes: “By the late imperial times, the Guanzi version of the origin of money prevailed over catallactic theories.”

[16] On the case against chartalism (also known as cartelism), see Lawrence H. White, “Why the ‘State Theory of Money’ Doesn’t Explain the Coinage of Precious Metals,” Alt-M (August 24, 2017), and George Selgin, “‘Lord Keynes’ Contra White on the Beginnings of Coinage,” Alt-M (August 30, 2017).

[Cross-posted from Alt-M.org]