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The Republican tax framework released yesterday was generally excellent. However, it appears to include a sneaky and invisible tax hike. The framework “envisions the use of a more accurate measure of inflation for purposes of indexing the tax brackets and other tax parameters.”

The individual income tax is indexed for inflation, meaning that the dollar split points between the rate brackets and other parameters are set to rise a bit each year. Without those adjustments, Americans would lose ground to the government over time, as more of their income would be taxed at higher rates due to the general rise in prices.

Current indexing is based on the Consumer Price Index (CPI). The CPI overstates inflation somewhat, so some analysts have suggested switching tax-code indexing to chained CPI, which produces a lower inflation measure.

If Republicans indexed the tax code to chained CPI, the government would receive an automatic tax increase relative to current law every year until the end of time. The Tax Foundation has a brief on the issue here.

Switching tax-code indexing to a lower measure of inflation is a bad idea for two reasons:

  • It would generate a substantial tax increase over time, and it would be an invisible increase because there would be no tax-filing changes for people to notice.
  • It would be an anti-growth tax increase because it would push people into higher brackets more quickly over time, subjecting them to higher marginal tax rates. The chained CPI proposal is essentially a proposal to slowly and steadily increase marginal tax rates.

Some economists may argue that the chained CPI proposal is a good idea because the tax code would more accurately reflect inflation, and it would. However, the tax code already contains a bias that pushes people into higher tax brackets over time, called “real bracket creep.” Real growth in the economy steadily moves taxpayers into higher rate brackets, since the tax code is indexed for inflation but not real growth.

Long-range projections from the Congressional Budget Office reflect substantial increases in taxes over time from real bracket creep. The agency notes:

… if current laws remained generally unchanged, real bracket creep would continue to gradually push up taxes relative to income over the next three decades. That phenomenon occurs because most income tax brackets, exemptions, and other tax thresholds are indexed only to inflation. If income grows faster than inflation, as generally occurs when the economy is growing, tax receipts grow faster than income.

So, I’ve got a better idea than indexing the tax code to a “more accurate measure of inflation,” as Republicans are suggesting: indexing the tax code to nominal GDP growth. That would adjust for the effects of both inflation and real economic growth on tax-code parameters, and it would prevent stealth tax-rate increases under our graduated income tax system.

More on tax reform here, here, here, here, here, and here.

The Economic Freedom of the World: 2017 Annual Report is out today. Co-published in the United States by the Fraser Institute (Canada) and the Cato Institute, it continues to find a strong relationship between economic freedom on the one hand, and prosperity and other indicators of human well-being on the other.

The United States ranks 11 out of 159 countries, indicating a slight improvement recently in its rating, but its economic freedom remains far below what it was in the year 2000, when it began a long decline. Since 1970, the index has typically ranked the United States among the top four countries. The top countries in this year’s report are Hong Kong, Singapore, New Zealand, Switzerland and Ireland. The least economically free countries are the Republic of Congo, the Central African Republic, and Venezuela.

There is an important innovation in this year’s report: it takes into account inequality in the economic freedoms enjoyed by men and women. Some countries don’t afford women the same level of such freedoms as men, so the index, for the first time, adjusts for these disparities. In her chapter, Rosemarie Fike explains the data and methodology that she used to create a gender disparity index, one that was then used to adjust the economic freedom ratings.

Most countries are only slightly affected (or are not at all affected) by the gender adjustment on the index. However, some 20 countries saw notable changes to their scores. Qatar, Bahrain, and the United Arab Emirates, for example, dropped significantly in the index. Over time, the world has seen shifts in the unequal economic freedoms of men and women. The overall level of gender disparity in economic freedom in the world has decreased since 1970. Women are enjoying more economic freedom than before. The locus of inequality has also changed. From 1970 to 1990, African countries dominated the list of nations with the worst gender disparity scores; since 1995, countries in the Middle East and North Africa now dominate that list. Another finding: the greater the level of economic freedom, the more likely that men and women will receive equal legal treatment.

Another chapter looks at the relationship between economic freedom and anti-immigrant populist parties. Although it is often asserted that globalization is causing much of that populist sentiment, authors Krishna Chaitanya Vadlamannati and Indra de Soysa find that countries with lower levels of economic freedom and higher levels of state welfare spending see more support for nativist, populist parties. It appears that some of the policies intended to provide social protection from the market might be encouraging populist politics.

Read about those and other findings in the new report here

The Merchant Marine Act of 1920, commonly known as the Jones Act, is impossible to defend with a straight face. The Act requires that all people and goods travelling from one U.S. port to another be carried on U.S. owned, flagged and crewed ships. The rationale usually offered these days in support of the Act is that it protects American jobs, and that our military needs to have a fleet of ships it can borrow in case of some sort of emergency. Neither can be taken seriously.

For starters, the Jones Act probably costs us jobs. The high shipping costs engendered by the Jones Act encourage businesses to ship more things via rail or truck. Where that’s not possible (as with Puerto Rico), it incentivizes businesses to import goods, rather than buy from a domestic customer and pay the prohibitively expensive toll the Jones Act imposes. In either case, fewer jobs result.

The Act makes it cheaper for U.S. livestock farmers to buy grain from overseas than from American sources, and forces states such as Maryland and Virginia to import their road salt rather than buy it from Ohio. The East Coast of the U.S. cannot afford to get lumber from the Pacific Northwest. And shipping oil from Texas to New England costs about three times as much as shipping it to Europe.

The Jones Act survives because it’s hard for people to see what it costs them. As long as constituents aren’t complaining, politicians are happy with the status quo - especially since ship builders will write big checks to anyone willing to protect the Act. 

The recent relaxation of the Jones Act for Puerto Rico has the potential (albeit slight) to change this calculus, but since it is scheduled to only last for ten days, the residents of this island won’t see how much they could potentially save from not having this burden. 

And those savings would be immense: In a study I recently did with Russ Kashian, we estimated that U.S. consumers would save billions of dollars if we got rid of the Jones Act. And places like Puerto Rico, Hawaii and Alaska would benefit most of all, since they are overly dependent upon shipping prices.

However, as those are only two low population states and a territory with no voting representation, their inconveniences won’t resonate much with Congress. 

In the wake of this month’s hurricanes that pummeled the Gulf states and Puerto Rico, an archaic piece of U.S. corporate welfare is coming under much-needed scrutiny.

The Merchant Marine Act of 1920, better known as the Jones Act, requires that all people and goods transported by water between U.S. ports be transported on U.S.-built ships, with U.S. owners, registered and sailing under the U.S. flag, and crewed by U.S. citizens or permanent residents. The law originally was justified as ensuring a robust U.S. merchant marine in wartime, but it really is (and probably always has been) a cynical sop to American shipbuilders, shipping companies, and (ostensibly) their employees because it gives them an oligopoly that allows them to charge higher prices. Policy analysts have long understood this; for instance, a 1991 Regulation article by Federal Maritime Commission member Rob Quartel chastised the law for creating “America’s Welfare Queen Fleet.”

Traditionally, Jones Act criticism has focused on its financial harm to American consumers. One recent estimate is the law results in higher prices totaling $1.8 billion a year, which is about $5.50 for each American man, woman, or child. But now there’s growing evidence that it also exacts a cost in human lives.

In the new issue of Regulation, North Carolina State University economist Thomas Grennes argues that, because American-built vessels are significantly more expensive than comparable ships built elsewhere, American shipping companies operating under the Jones Act delay replacing their older vessels. As a result, American-flagged vessels are nearly three times older on average than comparable foreign vessels. International data show that as ships age, they become more dangerous for their crew. Indeed, the 2015 sinking of the El Faro, a Jones Act vessel, raised troubling questions about the law’s role in the deaths of the ship’s 33-member crew.

Now, the Gulf hurricanes are showing another deadly aspect of the Jones Act.

As President Trump recently noted, “you can’t just drive” truckloads of emergency and rebuilding supplies and workers to Puerto Rico; they must be transported by plane and boat. That desperately needed relief is dramatically slowed and made more expensive by the Jones Act’s artificial barrier on what ships can move supplies from the U.S. mainland to the stricken island—and what ships do carry those supplies must be diverted from other transport work between U.S. ports.

The White House recently temporarily suspended the Jones Act for emergency supplies heading to the ravaged Gulf states, using a provision intended for national defense purposes. Now the Trump administration is being asked to do the same for Puerto Rico.

But instead of temporarily suspending the law under a dubious “defense” claim, Congress and the White House could simply repeal it. After all, pointless corporate welfare shouldn’t be opposed just during emergencies.

Legislation to end the Jones Act could be drafted quickly and easily; for a rough draft, lawmakers could use Sen. John McCain’s 2015 effort to repeal the law. The new bill could then be brought directly to the floors of the House and Senate for approval, and then taken to the president for his signature. 

Given congressional leaders’ statements of concern for the people of Puerto Rico, and given the Trump White House’s vows to pare back unjustified regulations and “drain the swamp,” repeal of this harmful piece of corporate welfare should be a slam dunk. Unless, of course, lawmakers have different priorities than helping consumers, protecting sailors, and aiding the desperate people of Puerto Rico.

Dormant for a while, the debate over India’s demonetization program of last fall has been revived by new evidence. The new evidence on note returns and GDP vindicates the critics, and has the defenders in strategic retreat.

To recap: On November 8, 2016, India’s Prime Minister Narendra Modi shocked the nation by announcing the immediate “demonetization” of the two largest rupee currency notes (Rs 500, worth about $7.50, and Rs 1000, worth about $15). Noteholders would have only 50 days to turn them in for new Rs 500 and Rs 2000 notes. The move, Modi promised, would sharply penalize holders of unaccounted “black money,” namely tax evaders, bribe-takers, professional criminals, and terrorists. Their currency hoards would become worthless — a welcome one-time wealth loss — or they would expose themselves to detection by trying to swap or deposit large batches. Anyone depositing a large sum in old notes would face scrutiny by tax authorities.

In order to keep the move a surprise (the better to catch the black money holders), new notes to replace all the discontinued notes had not been printed in advance. The cancelled notes represented 86% of the currency in circulation, and more than half of M1 (currency plus checking deposits), India having a highly cash-intensive economy with half the population unbanked. As criminals were far from the main users of currency, the impact was unavoidably felt well beyond the black-money set. A serious currency shortage immediately arose, with predictable consequences. Honest wage laborers in the huge cash economy went unpaid, honest construction projects came to a standstill, honest shopkeepers saw sales dry up, and honest businesses failed. Honest people wasted billions of hours waiting in queues to exchange old notes for the trickle of new notes.

As Shruti Rajagopalan and I noted in November last year, there was also a fiscal angle: for every billion of old rupee notes not turned in (for fear of being scrutinized), the government could issue a replacement billion and pocket it as one-time seigniorage revenue. For example:

if 20% of the old notes are never turned in, the government’s revenue windfall is up to Rs 2.9 trillion ($42.5 billion).

The destruction of the private wealth of non-redeeming old-note holders, combined with the revenue windfall to the government, makes the currency policy effectively a large capital levy, a massive one-shot transfer of wealth from the private to the public sector.

We speculated: “The wealth transfer to government may help to explain Prime Minister Modi’s enthusiasm for the currency cancellation and re-issue, despite its likely ineffectuality against black money.”

Economically literate defenders of demonetization have been fewer than critics. The most prominent defenders have been the well-known trade economist Jagdish Bhagwati of Columbia University together with his former students Vivek Dehejia and Pravin Krishna, and with his Columbia colleague Suresh Sundaresan.

In a December 2017 piece in the prominent Times of India, Bhagwati, Krishna, and Sundaresan (hereafter BKS) praised the demonetization program as “a courageous and substantive economic reform that, despite the significant transition costs, has the potential to generate large future benefits.” BKS recognized that “the process is inconvenient, and subjects many households to hardships,” but thought it worthwhile for “potentially increasing transparency and expanding the tax base and revenues to the government from taxes and surcharges.” The fiscal angle was foremost: since “unaccounted deposits will be taxed, this will yield a windfall for the government permitting large increases in social expenditures.” In addition, it would promote a “switch into digital transactions” and “put a major dent in counterfeiting.”

In an Op-Ed published on December 27, Bhagwati, Dehejia, and Krishna (hereafter BDK) defended the demonetization program entirely on the grounds that it would impose an effective capital levy. It was, they wrote, “a policy designed, in effect, as a one-time tax on black money.” They noted that the government’s revenue gain would not come just from replacing unreturned notes. Under “voluntary disclosure” rules promulgated after the initial announcement, depositors of old notes who acknowledged their holdings as illegitimate would also pay: “deposits of unaccounted money will be taxed at 50% — with a further 25% taken by the government … as an interest-free loan for a period of four years.” Thus there would be a one-time fiscal gain to the government not only from notes never returned, but also from notes returned under such terms.

BDK proposed the size of the revenue gain as a sufficient criterion for judging the success of the program: “at least from the perspective of its effectiveness in dealing with the black money issue, success has to be measured by the sum of tax revenue generated [from the 50% tax on acknowledged black deposits] and black money destroyed [i.e. revenue from replacing unreturned notes].” For the sake of illustration, they supposed (calling it an “estimate”) “that one-third [Rs5 trillion] of the approximately Rs15 trillion in demonetised notes is black money.” Then if by the end of the turn-in period “Rs1 trillion is unreturned, as is believed, and we further assume that only half of the remaining Rs4 trillion of black money that is returned falls within the tax net, the net gain works out to Rs1 trillion of black money destroyed and 50% times 2 trillion = Rs1 trillion in tax revenue.” With such a total fiscal gain of Rs2 trillion, “the government could reasonably claim this as a successful outcome.”

In a commentary on the BDK piece, Rajagopalan and I pointed out that, from the economist’s point of view, the costs of any measure must be taken into account before judging it worthwhile or efficient. What matters is effectiveness per unit cost. Unlike the earlier BKS piece, BDK had simply neglected the costs incurred in collecting revenue or suppressing black money through demonetization. We noted a think tank’s estimate of Rs. 1.28 trillion in losses during the transitional period from expenses of printing new notes, lost income of those waiting in queues, additional costs to banks tied up with exchanging currency, and (the largest item) lost business sales due to the currency shortage. It was then too early to replace the estimate of lost business with measured effects on GDP, but we noted that one percentage point of lost annual growth equals Rs1.45 trillion. These costs need to be set against the revenue. Even if the revenue were as high as Rs2 trillion, collecting it at a deadweight cost of 64% or more would be a very bad bargain.

Doesn’t it matter that the transfer in this case is coming from bad actors whose welfare one may disregard? No. In the above reckoning, as in standard tax analysis, the pure wealth-transfer losses of taxpayers don’t figure in the deadweight loss calculation, which only counts the costs associated with extracting the transfer.

BDK had noted in passing the argument “that the short- to medium-run economic impact post 8 November will be contractionary” due to a “temporary liquidity shortage induced by an insufficiently fast replacement of old notes with new notes.” But they dismissed on theoretical grounds that “this is not necessarily the only outcome possible.” Government could avoid a currency shortage by promptly providing new notes, they reckoned. This was a very odd line to take seven weeks into demonetization, given that the government was not in fact providing new notes sufficiently fast, and when the evidence of currency shortage was plain to see. Alternatively, they proposed, hoarded currency could come out from under mattresses, be deposited in banks, and actually expand M1 “via the classical money multiplier.” This was an odd line to take given that expansion of deposits (even should it happen) would not remedy the currency shortage being suffered by the unbanked half of India’s population.

In March 2017, Bhagwati was quoted by the Indian newspaper Firstpost making the surprising claim in an email interview that demonetization had actually promoted economic growth: “On the effects of demonetisation on growth, I should say that I was the one economist who had argued (with my co-authors), from first principles, that demonetisation would increase, not diminish, growth. And that is exactly what appears to have happened.” The factual basis for saying that it appeared to have happened was not clear.

In a March 30 piece, BDK cited a new 2016Q4 GDP report as showing that GDP had suffered “only a modest dip … of roughly half of a percentage point” below pre-demonetization projections. This was not an increase in growth. But they counted it a victory compared to “the economic disaster that the critics had imagined.”

The debate over demonetization was revived this month (September 2017) after the Reserve Bank of India finally announced the count of returned currency. It announced that 99 percent of the discontinued notes, Rs 15.28 trillion out of Rs 15.44 trillion, had been returned. As Vivek Kaul has noted, “The conventional explanation for this is that most people who had black money found other people, who did not have black money, to deposit their savings into the banking system for them.”

The trivial size of unreturned currency of course obliterates BDK’s projection of a government seigniorage windfall.

What about BDK’s other projected source of revenue, the 50% tax on acknowledged black deposits? Whereas in BDK’s scenario, black currency holders would make Rs2 trillion in voluntary-disclosure deposits, which would yield Rs 1 trillion in revenue, the actual collections under the scheme were reported in April at Rs 23 billion, or 2.3% of the BDK-imagined sum. Such paltry revenues mean that demonetization, from the fiscal perspective, was all pain and no gain.

The accumulating evidence on economic growth, meanwhile, has become damning. Between July and September 2016, India’s GDP grew 7.53 percent. Between January and March 2017 it grew 5.72 percent. Former head of the Reserve Bank of India Raghuram Rajan, now returned to the University of Chicago, links the drop to demonetization: “Let us not mince words about it — GDP has suffered. The estimates I have seen range from 1 to 2 percentage points, and that’s a lot of money — over Rs2 lakh crore [i.e. trillion] and maybe approaching Rs2.5 lakh crore.” Kaul adds that GDP does not well capture the size of the informal cash sector, where the losses from demonetization were greatest.

In response to the RBI report and GDP data, and to their credit, BDK have substantially retreated from claims of success to what can be regarded as the claim that there is still a chance to break even. They have recently written:

First off, it must be conceded that if demonetisation is to be judged narrowly on the basis of the triple rationale originally advanced … , it would at best be unclear if it could be accounted a success. For, little black money was literally “destroyed” and there is scant evidence that the policy had much if any impact on counterfeiting or terror finance.

Although they acknowledge that they “overestimated the quantum of black money that would ultimately be unreturned” and thus overestimated the seigniorage gain, they still contend that the “money deposited into bank accounts can also generate fiscal gain, as these will invite the scrutiny of tax officials.” For about two-thirds of the deposits of old currency by value, even though no admission was made and thus no 50% tax was paid, the sums deposited were large and “are mostly open to scrutiny by tax officials.” Thus it is conceivable that tax investigators may eventually squeeze taxes and fines out of them, and it is premature to rule this out.

Conceivable, but unlikely. The investigatory capacity of the tax authority is finite and it already has its hands full, as Vivek Kaul spells out in detail.

BDK concede: “Should, however, the government fail in identifying and taxing black money deposits in any significant quantity, we can all conclude that demonetisation will have failed in achieving its primary goal.” Welcome as this reasonable concession is, the converse does not follow: whether even significant eventual revenue counts as success depends on how it compares to the sizable costs of demonetization. A deadweight burden of less than 100% seems highly unlikely.

BDK add an odd coda. They acknowledge transition costs in the program actually followed, but suggest that it could have been otherwise:

in principle, had demonetisation occurred without transition costs — for instance, if old notes could have been seamlessly converted or deposited within a few days after 8 November, or if demonetisation had been pre-announced to occur with a lag, allowing time for an orderly remonetisation — there could only have been largely upside gain without any downside cost.

It is hard to square this with BDK’s earlier statements that demonetization without secrecy would have been pointless because it would not have caught out the black money holders. Are BDK saying that if the aim had been merely to introduce new notes with better anti-counterfeiting features, the Modi government’s demonetization program was an unnecessarily costly way of doing it? Well yes, the critics have said that all along. High transition costs were a feature and not a bug of the dramatic scheme to penalize black money by surprise.

[Cross-posted from Alt-M.org]

One federal statute says that Rony Estuardo Perez-Guzman, who claims refugee status, isn’t eligible for asylum. Another one says that he is. Whose duty is it to reconcile this glaring legislative contradiction, and how should it be remedied?

Mr. Perez-Guzman fled to the United States to escape violence and persecution in Guatemala. He was stopped by border patrol agents and deported, but reentered the United States because he still feared for his life. The asylum statute (8 U.S.C. § 1158) guarantees the right of “any alien … physically present in the United States … irrespective of such alien’s status” to apply for asylum. The reinstatement statute (8 U.S.C. § 1231) states that an individual who has previously been removed from the United States “may not apply for any relief under this chapter” (which includes asylum). The U.S. Court of Appeals for the Ninth Circuit held that the two statutes conflict—so far so good—and are therefore are ambiguous, which is where the judicial mischief starts. A finding of statutory ambiguity often leads courts to simply defer to administrative agency interpreting the statute, which here means the Justice Department refused to let Perez-Guzman apply for asylum.

Perez-Guzman has petitioned the Supreme Court to review his case. Cato has filed an amicus brief supporting that petition and challenging the lower-court holding that statutory conflict triggers Chevron deference (named after the 1984 Supreme Court case that created the doctrine).

Chevron deference provides that courts must defer to administrative agency interpretations of the authority granted to them by Congress (1) where the intent of Congress is intentionally ambiguous and (2) where the interpretation is reasonable or permissible. The Court has curtailed Chevron by carving out important limitations, which mean that Chevron deference will not apply without an implicit congressional delegation for an agency to “fill in the gaps” in ambiguous statutory language.

The notion that Congress intentionally drafts ambiguous language so an agency may interpret that language as it sees fit is itself suspect as a matter of the separation of powers: our Constitution doesn’t allow a delegation of legislative power to the executive. But the notion that Congress commits that same folly by drafting directly conflicting statutory language is ludicrous.

The Administrative Procedure Act mandates that courts interpret statutory provisions and determine the applicability of agency actions; it attempts to reinforce the importance of the separation of powers. Chevron asks us to forget all about it. Expanding the doctrine further, to incorporate not just ambiguous statutes but conflicting ones will further erode the rule of law.

If the Court wants a way to resolve these conflicting statutes, it should look to the “rule of lenity.” It provides that in construing ambiguous criminal statutes, courts should resolve the ambiguity in favor of the defendant. The rule is also applied in deportation statutes. It reflects the fundamental principle that Congress must speak clearly if it wants to impose on an individual an especially severe deprivation of liberty—which deportation most assuredly is. When removal from the country is at stake, courts shouldn’t defer to an agency interpretation that commands a greater infringement on liberty than a statute requires (however restrictive or expansive that statute may be).

The Supreme Court should review Perez-Guzman v. Sessions, restore the balance of constitutional power, and reclaim the judiciary’s authority to say what the law is.

The Trump administration and Republicans in Congress have released a framework for tax reform legislation that they hope to pass in coming months.

There were few surprises in the framework. The pro-growth elements that party leaders have championed for months are there, including: 

  • Cutting the corporate tax rate from 35 to 20 percent.
  • Cutting the top rate for businesses that pay under the individual code from 40 to 25 percent.
  • Expensing business equipment purchases.
  • Replacing the worldwide corporate tax system with a territorial system.
  • Repealing the estate or death tax.
  • Repealing the individual and corporate alternative minimum taxes.
  • Simplifying the individual tax rate structure to 12, 25, and 35 percent.

The other main tax cut in the plan is a doubling of the standard deduction, which would not do much for growth but would simplify the system.  

The framework suggests that reforms may impose a higher individual rate than 35 percent “to ensure that the wealthy do not contribute a lower share of taxes paid than they do today.” But why shouldn’t high-earners pay less tax? They pay a hugely disproportionate share of federal income taxes today, and they generally have the most dynamic responses to tax cuts.

High-earners generally add more to economic growth than other taxpayers. They are investors, executives, doctors, and other highly skilled individuals. Basic theory indicates that it is the highest tax rates that do the most economic damage. Indeed, tax damage rises rapidly as tax rates rise. If Congress is going to cut any individual tax rates, it should cut the highest rates.

That said, the most important goal for tax reform right now is to cut the corporate tax rate, and the GOP framework moves boldly in that direction. High corporate tax rates reduce capital investment, and that ultimately suppresses wages and opportunities for U.S. workers.

On the whole, the GOP is on the right track. Now they need to really hustle and move specific legislation through Congress and finally deliver a reform plan to the president’s desk.

Some recent comments on tax reform are here, here, here, here, and here.

A week ago Walter Olson noted, quoting the Washington Post, that

D.C. lawmakers are preparing to take a break from further beefing up labor standards [in] an abrupt shift for a city whose leaders have been in the vanguard of the national campaign for workers’ rights….

“Businesses like certainty, and if we’re constantly changing the tax burden or the tax environments, or constantly changing the regulatory burden, then it becomes more difficult to do business in the District,” said D.C. Council Chairman Phil Mendelson (D), who has proposed a moratorium through the end of 2018 on bills that would negatively affect businesses.

Meanwhile, at the very moment that councilmembers are promising to stop adding new burdens to businesses and job creation, the Council is debating a new rule that would require employers who offer their workers free parking to offer that same benefit—in cash—to workers who want to walk, bike, or ride public transit to work instead.

“This bill would be easy to implement,” says one bike commuter, “because it builds on DC’s Commuter Benefits Law, which requires all employers with 20 or more employees to provide them with the option to use their own pre-tax money to pay for transit.” Easy for the regulators, anyway. Maybe even easy for business HR departments, since “the systems employers already have to make” for other mandated benefits can be adjusted. But each new mandate requires some new learning for HR officers, some effort to notify employees, some adjustment to the payroll software. Those burdens add up.

Not to worry, though! Businesses might even save money under this proposed new mandate:

Proponents point out that the bill could even wind up benefiting employers in the long run. According to the World Resource Institute, converting a non-active employee into a bike commuter saves $3,000 in employer health care costs and reduced absenteeism.

Critics insist that corporations are greedy, crafty, always focused on the bottom line. And yet they believe that there are all these free lunches—these $20 bills lying on the sidewalk waiting to be picked up, as economists say—that businesses are just missing. Just maybe, when businesses oppose new regulations, they have a better sense of their costs and opportunities than councilmembers and activists do.

D.C. currently has an unemployment rate of 5.9 percent, higher than the national average of 4.4 and much higher than the D.C. metropolitan area rate of 3.9 percent. If the Council would like to see some of those suburban jobs move into the District, it might consider reducing the burdens on business. 

Want to increase college-going while saving some dough? Scholarship tax credit programs may be for you, or so indicates a new report from the Urban Institute.

The report, from co-authors Matthew Chingos and Daniel Kuehn, finds that the low-income students who enrolled in private schools via the Florida Tax Credit scholarship program were about 15 percent—or 6 percentage points—more likely to enroll in college than statistically matched public school students. The effect was greater the longer kids were in the program. There was also a small, more tenuous positive effect on associate degree attainment for scholarship users. Topping it all off, while cost was not the focus of the report, the authors note that the superior outcomes were achieved at a saving to the state: “The positive effects are noteworthy in light of the evidence that the FTC program more than covers the foregone tax revenue through reduced spending on the public schools many participants would have attended.”

There are, of course, important caveats to the findings. First, this was not a random assignment study, so unobserved characteristics such as differing degrees of motivation between scholarship users and matched public school students could not be well controlled for. Next, the study only looked at students entering Florida public colleges, though this might have underestimated the program’s positive effects due to low-income private school students tending more to attend private or out-of-state colleges than their public school peers. Finally, there is good reason to question whether credentials represent much increase in real, useful, learning.

Even with these caveats, this is clearly encouraging evidence for school choice. Alas, some of the early media reports about the study seem to want to temper it with mentions of a few recent choice evaluations, focused on standardized test scores, that have not been so hot. Of course, those studies have important caveats too, but more important, the articles I have seen about the Urban report have mentioned the recent spate of negative reports while ignoring the many positive studies that preceded them. Fortunately, the Urban authors give readers one more useful nugget, noting, “Until recently, this research showed neutral to positive effects of private school choice on student achievement.”

The choice debate will continue, but most of the evidence remains on the side of freedom.

The “big news” from Janet Yellen’s recent press conference, which was hardly news at all to those who have followed the Fed’s past announcements, was that Fed officials, having long promised to eventually undo much if not all of the vast balance sheet growth brought about by the Fed’s various QE operations, and having delayed paying the piper for as long as pressure from without permitted, are finally about to get started.

But don’t imagine that Fed staff have been idle during the long delay. On the contrary: they spent much of it developing their highly scientific balance-sheet reduction strategy, first revealed back in June. As the Fed doesn’t seem to have given that highly scientific plan a name, I hope I may take the liberty of proposing one. Let’s call it “Operation SNAIL.”

In case you haven’t guessed, the acronym stands for “Stall Now And Inch-along Later.” For if there’s any clear point to the strategy the Fed has chosen, it’s to shrink as slowly as possible — more slowly, even, than it would if it merely allowed maturing assets to passively roll-off its balance sheet.

A purely passive unwind would, to be sure, have been problematic, for it would have meant slimming down at a very uneven pace, with bunches of assets rolling off the Fed’s balance sheet during some intervals, and relatively few rolling off in others.

The Fed has chosen to address only the first of these problems, by placing varying limits or “caps” on the value of assets it will allow to roll-off its balance sheet during any particular month. Starting in October with maximum roll-offs of $6 billion in Treasuries and $4 billion in MBS, it plans to increase the caps by those same amounts every three months for a year, after which they’ll remain fixed at $30 billion for Treasury securities and $20 billion for MBS. Whenever the value of maturing assets of either sort exceeds its assigned cap, the Fed plans to reinvest the difference.

Following this plan it will take until sometime in 2020 for the Fed to slim-down from its current $4.5 trillion in assets to a bit more than $3 trillion, or well over three times its (not exactly svelte) size before the crisis. It’s a diet of sorts, to be sure. But then, so is skipping the cheesecake now and then.

In his Econbrowser blog post on the subject, James Hamilton illustrates the progress of the Fed’s unwind in several nice charts, including the one reproduced below.  Besides showing the slow pace of the unwind, the chart also shows that $3 trillion or so is as low as the Fed is likely to go: by the end of 2020, it’s balance sheet will start swelling once again.

In comparison, were the Fed committed to getting its balance sheet back on its pre-crisis trajectory by the end of 2020,  it would be planning on slimming down by at least another $500 billion, and perhaps by as much as another $1 trillion.

Why So Slow? Why So Little?

Were the Fed’s plan the only way for it to achieve a smooth unwind, its snail-like pace might be justified. But it isn’t: the Fed might easily have provided for a smooth unwind, at a faster pace, by combining higher roll-off caps with occasional active asset sales during low roll-off periods.

And what about the limited extent of its planned diet? Hamilton argues, correctly, that so long as the Fed sticks to its present operating framework, the volume of reverse repos it conducts, as well as the value of Treasury balances held with it, will remain highly volatile, and that it will take “a lot of reserves sloshing around the system to cover that kind of variation.” However, as Hamilton also notes, such changes as would make all that extra cash unnecessary are neither revolutionary nor difficult to implement. Instead, they consist of things like “changing the way it conducts reverse repos, using temporary open-market operations to add or withdraw reserves as needed to offset changes in the Treasury balance, or moving to a true corridor system for controlling interest rates” (my emphasis).

Hamilton’s last suggestion brings us to the true crux of the matter, which is that, despite all its talk of “normalization,” which to the general public means getting back to its pre-crisis ways, the Fed has no intention of normalizing its operating procedures. That is, it doesn’t plan to return to its pre-crisis, zero-IOER “corridor” system, or to any other sort of corridor arrangement. Instead, it wants to keep the (leaky) “floor”-type system it introduced in October 2008. In a floor system, banks are kept flush with excess reserves, and monetary control is exercised, not be adjusting the quantity of reserves so as to achieve a particular equilibrium federal funds rate, but by manipulating the interest rate the Fed pays on banks’ required and excess reserves holdings, alone or along with the Fed’s overnight reverse-repo (ON-RRP) rate. Because an abundant supply of excess bank reserves is a necessary feature of any floor-type operating system, the Fed’s decision to retain such a system is the proximate reason why it’s planning to stay pudgy.

Budget Maximizing Bureaucrats

I wrote “proximate” because the question remains: why is the Fed so hung-up on its post-crisis floor system? If you think the answer is “Because it allows for improved monetary control,” kindly let me know your address and hat size so I can mail you a dunce cap. For far from it being the case that the Fed’s new operating system has proven its worth as a means of overall monetary control, it is largely owing to that system that the Fed has failed for the better part of six years now to hit its two-percent inflation target.

If that failure strikes you as inconsequential, or even desirable, consider that its cause — a flawed monetary transmission mechanism that lacks the usual link between growth in the stock of bank reserves on one hand and growth in the broad money stock on the other — poses the grave risk of a far more spectacular failure the next time we face a substantial decline in the velocity of broad money like the one that struck in 2008. And if you don’t believe that, consider that the Fed’s moneyless (“Portfoli-O-Matic”) transmission mechanism has already had one “stress test” — the one administered between late 2008 and 2015, which it failed miserably, by proving incapable of transforming $3.5 trillion in fresh reserves into more than a few percentage points of NGDP growth, or far fewer than were required to restore that growth to its pre-crisis path.

If successful monetary control isn’t the Fed’s first priority, what is? In a word, fatness itself. That is, the Fed likes having a big balance sheet for the same reason that bureaucracies generally like having big budgets to play with. A big budget translates into more generous salaries, lavish facilities, and, other perks. Most importantly, it enhances to the Fed’s prestige.

And if you don’t think Fed officials care about prestige, you may be entitled to a second dunce cap, because they care very much indeed. According to someone I know who was part of the Fed’s deliberations at the time (but who prefers to remain anonymous for now), “the prestige of the central bank” was the answer he was given when he wondered out loud, before a gaggle of top Fed officials in the 1990s, what the Fed had to lose by dispensing with reserve requirements, as central banks in most other advanced economies had already done by then. It was chiefly owing to this desire to maintain its prestige that the Fed sought then, and has sought ever since, to come up with various schemes for making up for the erosion of demand for its liabilities caused by banks’ resort to sweep accounts.

Because it allows a central bank to expand its balance sheet arbitrarily without unduly altering its overall monetary policy stance, a floor system is a central bank bureaucrat’s dream-come-true. It allows the central bank to vastly increase its size and earnings, ergo its prestige. It also makes it easier than ever for the central bank to effectively buy-off two powerful interests that might otherwise look askance at its aggrandizement, namely, (1) the U.S. Treasury and (2) the banking industry. That the biggest banks and most politically influential banks receive a disproportionate share of the Fed’s interest payments only adds to the scheme’s overall efficacy.

Since the late 2000s, seigniorage passed along from the Fed to the Treasury has almost tripled in real terms. At the same time, the Fed’s expenses, which account for that portion of its earnings that it doesn’t pass on to the Treasury, have also grown substantially, mostly owing to its interest payments on bank reserves. According to The Economist, and as can be seen from the chart reproduced from it below, the Fed will pay out $27 billion in interest this year, and is expected to pay out $50 billion in 2019. Once its planned unwind is complete, the Fed expects to continue paying out about $10 billion a year in interest, which is still a tidy bit of baksheesh.


Source: “Is the Federal Reserve Giving Banks a $12bn Subsidy?” The Economist, March 18, 2017

Cracking Yellen’s Code

If the Fed’s unwinding plan is really based on its determination to maintain its current, bureaucratically advantageous operating system, how did Yellen manage to avoid revealing any hint of this in her recent press conference?  The answer is that she didn’t: the hints are there, as they were in some of Yellen’s past press conferences. Only the hints were so cleverly ciphered that Yellen could be understood to being saying just the opposite of what she was really saying!

Specifically, in reply to questions about the Fed’s future plans for monetary control, Yellen says that the Fed intends to use changes in “the fed funds rate” rather than adjustments to its balance sheet as its chief means of monetary control. This reply could be taken to mean that it won’t be engaging again in Quantitative Easing, and that it plans to return eventually to pre-2008 style fed funds rate targeting. The interpretation squares well, after all, with the Fed’s claim that it is intent on “normalizing” monetary policy.

But that interpretation is wrong. What Yellen’s words really mean is that the Fed plans to keep its current IOER-based operating system going. The changes in the “fed funds rate” to which Yellen refers are really changes to the Fed’s IOER and ON-RRP rates, which define the upper and lower bounds, respectively, of the Fed’s current fed funds rate “target range.” It follows that when Yellen says that the Fed won’t be implementing monetary policy by means of balance sheet changes, she doesn’t just mean that it will no longer engage in post-2008 style Quantitative Easing. She also means that it won’t be making use of conventional (that is, pre-2008 style) open-market operations to influence an otherwise market-determined federal funds rate. All this in turn requires that banks be kept flush with excess reserves, and that the Fed maintain a correspondingly enlarged balance sheet.

How do I know this? Do I have a specially-made Enigma-type machine designed to crack Fed code? I do not. But I have talked to Fed officials, and kept up with Fed publications, and all indications from those support my understanding, as does the theory of bureaucratic behavior to which I referred previously.*

In other words, I might be wrong. But who wants to bet on it?

_________________________

* For example, the New York Fed just recently published a Liberty Street post defending the Fed’s interest payments on required reserves, and promising a follow-up post that will address “the payment of interest on excess reserve balances and discuss some of the benefits to the financial system of operating in a reserve-abundant regime.” The lack of any reference to the costs of operating a “reserve-abundant” regime gives the game away.

[Cross-posted from Alt-M.org]

Today is the 60th anniversary of the desegregation of public schools in Little Rock, Arkansas, a deeply disturbing event for the explosive racism it revealed, but also an inspiring episode for the courage displayed by the children who braved it.

One thing for which it serves as a reminder is that it was public schooling and government generally that for decades forced segregation. Recent attacks against school choice have glossed over this fact, as well as that the absence of choice meant even those who wanted something different were almost certainly hard-pressed to get it.

The anniversary also reminds us that repairing race relations that have been poisoned by centuries of slavery, Jim Crow, and still-present hate, racism, and racial suspicion, is not likely something that will happen quickly—would it were otherwise—including with any kind of public policy panacea. Too much history, too many emotions, and increasingly, diversity that makes race relations more than black and white, are all in play. Which may be another argument for school choice: we need to let myriad educational arrangements be offered because no solution might be right for any two people, much less the entire country. Different individuals—and that is what we are, though race is an often crucial component of our identities—may desire different discipline policies, or curricula, and by allowing numerous arrangements to proliferate we can discover which ideas work best, for whom, without education being a zero-sum, winner-take-all contest.

Alas, the Little Rock 60th anniversary has been eclipsed by President Donald Trump’s remark that National Football League owners should fire players who refuse to stand for the national anthem, resulting, in a few cases, in entire teams this weekend refusing to come out of locker rooms for the singing of the Star Spangled Banner. Perhaps this too offers a lesson in the dangers to race relations posed by government, in this case highlighting how politics can amplify divisions and animosity. What had been an ongoing but relatively calm national debate about some players taking a knee during the anthem to protest what they see as racial injustice in the country exploded into a massive, headline-dominating demonstration by players and owners. This is partly because the current president seems to revel in aggravating people. But anytime a politician comments on something it almost inherently becomes a more political—and politicized—issue, and politics by its nature tends to make people act in ugly and divisive ways.

This, too, suggests that the nation would be better off if we looked not for sweeping government solutions to racial divides, but to the maximum extent possible left it to individual people and communities—to civil society—to do the complex, highly personal work of healing and uniting.

President Trump extended, expanded, and made some important alterations to his earlier executive travel ban. However, the national security justification for the new order is just as weak as for the original order because it could only have prevented nine terrorists who planned domestic attacks, at the maximum, from entering. Since four of the nine terrorists were Iranian students in 1979 who would not have been banned under this order, it’s likely that it would have stopped only five terrorists from entering and saved zero lives if it was applied backward in time.

The Number of Immigrants, Migrants, and Travelers Impacted

Gauging the impact of this new executive order requires looking at the number of foreigners blocked by it. The following calculations are based on the number of visas issued at Foreign Service posts by the State Department in 2016. The number of visas issued by the State Department under this metric is different from the number of those who actually enter and yet still different from the number of actual admissions. The new regulations for Venezuelans only apply to tourists who are related to government officials. There is not a good way to estimate that so Table 1 leaves that category blank for Venezuela. Still, this gives a decent approximation of how President Trump’s new travel ban will impact the flows of immigrants, migrants, and travelers. 

If this new proclamation was active in 2016, it would have halted the travel, migration, or immigration of roughly 66,000 people from these eight countries (Table 1). That’s equal to about 0.6 percent of all visas issued by the State Department at Foreign Service posts in that year. About 58 percent of those blocked would have entered on tourist visas while about 39 percent were immigrants. 

Table 1

Visas Issued by Category/Type that are Banned under the New Executive Proclamation

Country Immigrant Visas Nonimmigrant Visas Total Visas in Banned Categories Chad

40

900

940

Iran

7,727

25,036

32,763

Libya

383

1,445

1,828

North Korea

9

100

109

Somalia

1,797

0

1,797

Syria

2,633

9,096

11,729

Venezuela

0

?

?

Yemen

12,998

3,933

16,931

Total

25,587

40,510

66,097

Source: 2016 Visas Issued by the State Department.

The other way of measuring this is the number of admissions as calculated by the Department of Homeland Security. As a percentage of all admissions in 2015, the last year for which data is available that was not affected by President Trump’s previous executive orders, this new executive order would have stopped 0.04 percent of all admissions—or about 81,306 out of approximately 181,300,000 admissions. In relation to the number of visas issued and admissions, this new order will have a small impact.

Economic Effects

This section uses a simple method to estimate the economic effects of this executive order over the next decade. This method specifically calculates the immigration surplus which is the wage benefits that accrue to native-born Americans as a result of immigration.This only counts the new green card holders and ignores the tourists and economic effects of nonimmigrants. George Borjas estimates the immigration surplus at 0.24 percent of America’s $18.57 trillion GDP, which works out to an average of $1,018.95 in positive wage spillovers per immigrant in 2016.

If the ban continues to block 25,587 green cards each year for ten years then the total loss in wages to native-born Americans would be equal to about $1.4 billion. That’s a small percentage of GDP but it still does not pass a cost-benefit test. Blocking that many immigrants would have to save about 96 lives in thwarted terrorist attacks to be equal to the expected economic damage borne entirely by native-born Americans based on a high $15 million per statistical life saved valuation

Conclusions

President Trump’s new executive proclamation would not pass a cost-benefit test. Foreigners from those countries have killed zero people on American soil in terrorist attacks from 1975 through the end of 2015 and the 96 deaths that would have to be prevented are more than all of the non-9/11 domestic victims of foreign-born terrorism from 1975 through 2015. There are other costs associated with this new iteration of the travel ban such as the continuation of the cut in refugees that also impacts American wages negatively, fewer nonimmigrants, and a falloff in tourism as a result. It’s near-impossible for this to pass a cost-benefit test even when the welfare of immigrants, foreigners, and their American families are taken into account beyond the economic effects.

 

 

 

Senators Tillis (R-NC), Lankford (R-OK), and Hatch (R-UT) today introduced the Solution for Undocumented Children through Careers, Employment, Education, and Defending our Nation (SUCCEED) Act to legalize some DREAMers. After analyzing this bill and performing a residual statistical analysis to isolate DREAMers in the American Community Survey (ACS), this blog estimates that SUCCEED would allow approximately 1.5 million unlawful immigrants eventually to earn citizenship. Our population estimates are close to those of the Migration Policy Institute.

SUCCEED allows DREAMers to legalize if they earn an associate’s degree or higher, enlist in the military, or work for a period. We assume that about half of those with a high school degree and below eventually earn citizenship. 

Using the National Academy of Sciences (NAS) Table 8-14 as a framework, we find that that SUCCEED will boost revenues by about $94.7 billion above expenditures, in net present value, relative to keeping the DREAMers in illegal status along with a steady rate of deportation. These extra revenues would accrue to the federal, state, and local governments. They are 75-year projections discounted at 3 percent as the NAS recommends. This long-term projection and discounting guarantees that the future fiscal costs of entitlements and the descendants of the DREAMers are included. Our estimate is similar to another conducted by the Niskanen Center.

Methods

This figure is calculated by weighting the findings in Table 8-14 of the NAS by the age of entry and eventual education level of DREAMers who would be legalized under SUCCEED. A general finding of the NAS is that the fiscal impact of an immigrant is more positive when he or she is more educated and younger. The NPV fiscal estimate in Table 8-14 is positive for immigrants who arrive between ages 0 and 24 regardless of eventual education level. All DREAMers must have entered the United States before their 16th birthday under the SUCCEED Act so they are fiscally positive. According to the NAS findings.

We estimated the eventual level of education for DREAMers using the ACS by assuming that all those under the age of 25 would eventually be as educated as those aged 25 years or older. This likely undercounts their eventual education level and, hence, their net contribution to the federal budget. We assumed that unlawful immigrants consumed 35.7 percent fewer benefits and paid 10 percent lower taxes than other workers of the same age until 40 years old, based on estimates from Figure 8-21 of the NAS. We picked age 40 as we assumed it would take 15 years for DREAMers to earn citizenship because their current average age is 25 according to our ACS sample.

Conclusion

There are many reasons to legalize the DREAMers. This is their home, they did not intentionally violate American immigration laws when they entered, and they are culturally American. But, the argument for economic self-interest is also compelling. Only a few commentators doubt that there is a positive economic effect from immigration in general. However, the welfare state could turn those economic benefits negative and actually cost Americans more than they gain in boosted income. Fortunately, the American welfare state is not so far gone and DREAMers came at young enough ages, earned enough education, and worked to an extent to make up for the expensive deficiencies of our bloated government. 

Today we’re releasing one question from the forthcoming national Cato 2017 Free Speech and Tolerance Survey of 2,300 Americans conducted by the Cato Institute in collaboration with YouGov.

The national survey finds that a solid majority, 61%, of Americans oppose firing NFL (National Football League) players who refuse to stand for the national anthem before football games in order to make a political statement. These results stand in contrast to President Trump’s remarks over the weekend and his urging NFL teams to fire players who refuse to stand for the anthem. A little more than a third (38%) of Americans align with Trump and support firing these players. 

Conservative Republicans stand out in their support for firing NFL players who refuse to stand for the national anthem. Nearly two-thirds (65%) of Republicans say NFL players should be fired for this reason. Only 19% of Democrats and 35% of independents agree. Punishing NFL players for their political speech distinguishes political Conservatives from Libertarians. Using a political typology method to identify these ideological groups, the survey finds that Conservatives (62%) are the only political group to support firing NFL players. Conversely, 60% of Libertarians, 85% of Liberals, and 62% of Communitarians (social conservatives who support larger government) all oppose punishing players.

People who are older, with less education, and living in smaller towns and rural communities are most likely to support punishing NFL players who kneel during the national anthem in political protest.

A majority (57%) of Americans over 65 think such players should be fired while 71% of Americans under 30 think they should not. Those without college degrees (44%) are more likely than college graduates (32%) and those with post-graduate degrees (26%) to similarly support punishing NFL players who engage in this form of political protest. Americans living in rural communities are divided in half over whether teams should fire NFL players who refuse to stand for the national anthem. Conversely, those living in large urban centers solidly oppose (69%) such firings.

Majorities across racial groups oppose firing NFL players who kneel during the national anthem before football games. However, African Americans (88%) are about 30 points more likely than Hispanics (60%) and whites (55%) to oppose. 

Not wanting to fire NFL players because of their political speech doesn’t mean that most Americans agree with the content of this speech. Surveys have long shown, as well as this one, that most oppose burning, desecrating, or disrespecting the American flag. Thus, Americans appear to make a distinction between allowing a person to express (even controversial) political opinions and endorsing the content of their speech. The public can be tolerant of players’ refusing to stand for the national anthem, even while many disagree with what the players are doing.

In sum, Americans don’t want to strip people of their livelihoods and ruin their careers over refusing to stand for the national anthem. Even if they don’t agree with the content of the speech, that doesn’t mean they support punishing people who do.

Topline results and methodology can be found here.

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

President Trump signed a new proclamation this weekend that bans or restricts the travel and immigration of nationals from eight countries. This order drops the pretext of being a temporary measure and includes no end date. In our amicus brief for the Supreme Court case challenging his prior executive order banning travel from six countries, we criticized the ban as lacking a basis in the evidence regarding terrorism threats and terrorism vetting failures. This new order fares no better. It is even further divorced from threats of terrorism to the United States than the prior order.

The new targets are the nationals of the following eight countries: Chad, Iran, Libya, North Korea, Syria, Venezuela, and Yemen. Like prior orders, it justifies the restrictions based on the false premise that the government needs certain information to adjudicate visas. In reality, because the visa applicant bears the burden of proof to prove his claim, the lack of information hurts the applicant, not the government. In any case, very few visa vetting failures have allowed terrorists to enter since 9/11 from these countries. Here are the facts:

  • Only one nationality (Somalia) of the eight targets has had any immigration vetting failures for terrorism offenders since 9/11. This compares to two nationalities under the second executive order, and three nationalities under the first executive order.
  • The three vetting failures of terrorism offenders from Somalia were refugees who the new proclamation does not exclude. The other executive order covered refugees.
  • This new travel ban would have prevented no terrorists—that is, people who planned to attack the United States—from entering the United States since 9/11. The only offender whose entry would have been prevented by the new order radicalized after entry—and so was not a vetting failure—and did not attempt an attack in the United States. He played a “minimal role” in sending a small amount of money to a terrorist group overseas.

In a prior post, I identified just 34 individuals who entered through the U.S. immigration system legally since 9/11—when the visa vetting system was revamped—and who went on to be killed or convicted of terrorism offenses as of March 2017 when the president signed the second executive order. Of these, I could plausibly describe only 18 as likely vetting failures—people who the government determined radicalized prior to entry or people who committed attacks soon after entry (see here for a longer explanation). Just half of these planned attacks in the United States, and only one killed anyone.

As seen in the table below, the 34 offenders who entered after 9/11 came from 22 different countries and the 18 vetting failures from 13 countries. Only two nationalities (Somalia and Iran) of the seven targeted in the new executive order had any terrorism offenders who entered since 9/11 at all. Only one (Somalia) had any terrorism vetting failures. Critically, as my colleague Alex Nowrasteh points out, no person of a designated country has killed anyone in the United States in a terrorist attack in over 40 years.

Table 1
Foreign Terrorism Offenders Killed or Convicted Who Entered Through the Immigration System After 9/11

  Country of Birth All Terrorism Offenders Who Entered Since 9/11 Likely Vetting Failures

1

Somalia

4

11.4%

3

16.7%

2

Iraq

3

8.6%

2

11.1%

3

Pakistan

3

8.6%

2

11.1%

4

Uzbekistan

3

8.6%

2

11.1%

5

Sudan

2

5.7%

1

5.6%

6

Albania

1

2.9%

1

5.6%

7

Bangladesh

1

2.9%

1

5.6%

8

Jordan

1

2.9%

1

5.6%

9

Kuwait

1

2.9%

1

5.6%

10

Lebanon

1

2.9%

1

5.6%

11

Nigeria

1

2.9%

1

5.6%

12

Saudi Arabia

1

2.9%

1

5.6%

13

United Kingdom

1

2.9%

1

5.6%

14

Kyrgyzstan

2

5.7%

0

0.0%

15

Mexico

2

5.7%

0

0.0%

16

Cuba

1

2.9%

0

0.0%

17

Ethiopia

1

2.9%

0

0.0%

18

India

1

2.9%

0

0.0%

19

Iran

1

2.9%

0

0.0%

20

Kenya

1

2.9%

0

0.0%

21

Kazakhstan

1

2.9%

0

0.0%

22

Nicaragua

1

2.9%

0

0.0%

23

Philippines

1

2.9%

0

0.0%

24

Libya

0

0.0%

0

0.0%

25

Syria

0

0.0%

0

0.0%

26

Chad

0

0.0%

0

0.0%

27

North Korea

0

0.0%

0

0.0%

28

Venezuela

0

0.0%

0

0.0%

  Total

35

100%

18

100%

Sources: Author’s Calculations Based on Global Terrorism Database; Department of Justice National Security Division; Department of Justice; New America Foundation; George Washington University Project on Extremism

Here are the five terrorism offenders from the two nationalities that entered through the U.S. immigration system since 9/11:

Not vetting failures

  • Ahmed Nasir Taalil Mohamud, 2004 entry, was a Somali national who, at the age of 28, won a green card through the diversity visa lottery. He lived in the United States for seven years before he committed his terrorism offense in 2011. He played what prosecutors described as a “minimal role” in a scheme to send money to a terrorist organization overseas. He deposited money into an account for the conspirators. The federal judge described him as a “law-abiding and productive” member of U.S. society before falling in with the conspirators who he only met years after his entry.
  • Adnan Fazeli, 2009 entry, was an Iranian national who, at the age of 31, entered the United States as a refugee. After his entry, he converted from Shia Islam to radical Wahhabism. Government investigators established that he radicalized after his entry to the United States. He was killed in 2015 in Lebanon as part of an Islamic State attack on the Lebanese army.

Possible Vetting Failures

  • Abdinasir Ibrahim, 2008 entry, committed immigration fraud by claiming that he was a member of a persecuted minority clan in Somalia in order to obtain refugee status in fiscal year 2008. In fact, he was a member of a clan persecuting other clans. He attempted to send material support to the al-Shabaab terrorist organization in Somalia in 2014.
  • Amina Esse, 2009 entry, entered the United States as a refugee from Somalia. She played a small role in sending $850 to al-Shabaab in 2011 and 2012. Her abusive husband who she married in the U.S. was an al-Shabaab supporter gave her the money to send, and her conspirators in Somalia initially told her that the money was for war orphans. She voluntarily cut off support soon after she discovered the truth. She chose to testify against her co-conspirators, and prosecutors asked for no jail time for her. It seems likely that she was not a vetting failure, but the government did not make a determination one way or another.
  • Adul Razak Artan, 2014 entry, came to the United States as a refugee in 2014. In 2016, he attempted to run over students at Ohio State University with his car and then stab them. He failed to kill any and was killed himself. While investigators never discovered any evidence of pre-entry radicalization, the timing of the attack after just two years in the United States suggests that he may have been radicalized at the time of his entry.

Only one of the five terrorism offenders attempted to carry out an attack in the United States. None of the refugees on the list above would have been stopped by this proclamation, which targets only people traveling on visas (refugees receive special status to enter without a visa). Thus, only Ahmed Mohamud who won his immigrant visa in the diversity visa lottery would have been subject to the ban, and he did not attempt an attack against the United States.

President Trump has now issued three different orders targeting terrorist travel, each replacing the prior order. The first singled out Iraq, Iran, Somalia, Sudan, Syria, Libya, and Yemen. The second removed Iraq, and the third removed Sudan and added North Korea, Chad, and Venezuela. Table 2 compares the three executive orders. As it shows, each successive order has actually become less targeted toward nationalities that have a history of evading screening procedures in order to commit acts of terrorism. The share of targeted nationalities which have, at least in one case, evaded screening and committed terrorism offenses since 9/11 has shrunk as well—from 38 percent (3/8) to just 13 percent (1/8).

Table 2
Executive Orders Targeting Terrorist Travel

  Targeted Nationalities Targeted Nationalities With Offenders Entering Since 9/11 Targeted Nationalities With a Post-9/11 Vetting Failure Share of All Vetting Failures First

7

4

3

33.4%

Second

6

3

2

27.8%

Third

8

2

1

16.7%

Sources: Author’s Calculations Based on Global Terrorism Database; Department of Justice National Security Division; Department of Justice; New America Foundation; George Washington University Project on Extremism

This exercise shows the inherent difficulty with blanket discrimination based on national origin. Even if the executive order was perfectly aligned with past incidents, the fact that it is dealing with such rare, low probability, and low-risk events inevitably means that the past will be a poor predictor of the future. But the administration has consistently relied on past events as justification for the restrictions, and yet it fails to match its policies with these events.

President Trump issued a new proclamation that expanded a list of the so-called “travel ban” countries that were the subject of an executive order he issued early in his administration. His first order temporarily banned the entry of nationals from six countries for dubious national security reasons. His new order expands the list to eight countries (as I somewhat predicted). They include Chad, Iran, Libya, North Korea, Somalia, Syria, Venezuela, and Yemen. From the original six, he subtracted Sudan and added Chad, North Korea, and Venezuela. The new executive order is also not a complete ban for all of those countries. All North Koreans and Syrians are barred from obtaining visas while nationals from the other six countries face varying degrees of additional security checks on specific visas or broader categories (such as nonimmigrant or immigrant).

President Trump issued an executive order earlier this year that temporarily banned the entry of all nationals from six foreign countries in order to “protect the nation from terrorist activities by foreign nationals admitted to the United States.” The six (originally seven) Muslim-majority countries were targeted because of the supposed inability of those governments and the United States to sufficiently vet nationals from there for terrorist intent. The order is currently tied up in the courts.

From 1975 through the end of 2015, zero Americans have been killed by foreign-born terrorists on U.S. soil who hail from any of the eight countries on the new executive order (Figure 1). Only nine terrorists from those countries have carried out an attack or actually been convicted of planning an attack on U.S. soil during that time.  About 42 percent of all convictions for terrorism-related offenses are for non-terrorist crimes and very few of them could even be considered vetting failures.

Figure 1

Terrorists and Murders by Country

 

Terrorists

Murders

Chad

0

0

Iran

6

0

Libya

0

0

North Korea

0

0

Somalia

2

0

Syria

0

0

Venezuela

0

0

Yemen

1

0

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

Executive Orders like these have big and guaranteed economic costs with negligible and unlikely boosts to security. The risk of being murdered in a terrorist attack committed by a foreigner on U.S. soil from 1975 through 2015 was about 1 in 3.6 million per year. Four of the Iranian terrorists (44 percent of the total domestic terrorists from all eight countries) attempted to kidnap the governor of Minnesota in 1979. This list of eight countries is not a list of nations whose citizens are the most likely to kill Americans in domestic terrorist attacks. Due to the high guaranteed cost of Executive Orders like these and the small potential security benefits, the administration should supply an excellent reason for this order along with sufficient evidence to demonstrate their claim. It speaks volumes that they have not done so.

 

 

One of the original arguments for establishing a system of common schools was that children from different backgrounds would learn to get along with one another and become proper citizens. However, when students throw rocks at a seven-year-old boy with a rare genetic condition, call him a monster on a daily basis, and push him towards contemplating suicide, we must wonder if our public schools are actually creating good citizens.

Over 90 percent of school-aged children in the U.S. attend public schools. While it is clear that government-run schools have a nearly perfect monopoly on education funding, they do not have a monopoly on producing tolerant citizens. In fact, it isn’t even close. According to the ten experimental or quasi-experimental studies that exist on the topic, none find that public schools outperform private schools on increasing student tolerance or civic engagement. As discussed in a recent Cato Policy Forum, and shown in table 1 below, a majority of the findings reveal that private school choice programs improve civic outcomes.

While the existing evidence may have surprised the father of the common school movement, Horace Mann, I am not all that shocked. Since it is highly costly for families to escape residentially assigned public schools that do not produce proper citizens, public school leaders do not have the incentives nor the information necessary to significantly improve character education. Alternatively, private schools must cater to families’ desires to have their children become functioning members of society.   When students engage in conversations about controversial subjects, they are more likely to understand and tolerate opposing views. But why would public school teachers – or anyone – spend much time fostering difficult debates about sensitive topics if they are incentivized to focus on standardized tests? 

Complaints about illegal immigration are constant and repetitive.  They’re sowing chaos along the border, using welfare, taking American jobs, and their mere presence is destroying respect for the law.  Some oppose legalizing any illegal immigrants until the border is secure.

Good news: The border is secure and it has been for a long time.

99.7 percent of all people who successfully enter the United States do so legally (Figure 1).  Whether as a tourist, guest worker, or refugee, the vast majority of all admissions to the United States have been legal from 2003 through 2015.  A mere 0.3 percent of all entries to the United States during that time were illegal.  The big red arrow on Figure 1 points to where illegal entries peaked in 2004 at 0.42 percent of all entries.  The last year for which data is available, 2015, provides evidence that illegal entries are falling as 99.81 percent of all admissions were legal while only 0.19 percent were illegal. 

Figure 1

All Legal and Illegal Admissions into the United States

Sources: DHS Yearbook of Immigration Statistics and Center for Migration Studies.

Figure 1 includes all entries on the I-94, new immigrant arrivals, and refugees – an admittedly back-of-the-envelope calculation but close enough to the real number.  Figure 1 actually overstates the percentage of entries that are illegal because this data excludes the majority of short-term legal admissions from Mexico and Canada. 

99.7 percent compliance is remarkably high for our complex immigration and border control system (Figure 2).  Most of the admissions in Figure 1 do not have to pass through this system as it’s remarkably easy for tourists from rich countries to legally enter through the Visa Waiver Program.  Tourists from poorer countries face other hurdles while guest workers, students, lawful permanent refugees, refugees, and others face legal hurdles similar to those in Figure 2.

Figure 2

Simplified Map of the Legal Immigration System

Source:  Immigrationroad.com. 

In 2015, about 5 out of every 100,000 foreigners entered the United States illegally (99.995 percent did not).  In that same year, 189 out of every 100,000 Americans entered jail (99.8 percent did not).  The annual flow of Americans into prison would drop by 97.4 percent, from roughly 608,300 to about 16,093, if Americans were as respectful of criminal laws as foreigners are of our immigration laws.  If that happened, then federal and state prisons would mostly empty out in about 3 years.

About 99.995 percent of all foreigners did not unlawfully enter the United States in 2015 despite the vast economic incentive to do so.  The median wage gain from coming to the United States from the developing world is about 3.95 fold – an increase in wages that would transform the lives of virtually every human alive.  American immigration enforcement and foreign respect for American laws keep compliance high.  Despite rumors to the contrary, the United States does not have open borders. 

Border Patrol and CBP apprehended or turned back an additional 529,459 people at ports of entry in 2015 but many of them were humanitarian cases or did not intend to break our immigration laws.  Although some of them eventually succeeded in illegally entering the United States, this barely adjusts the final figures when avoiding double counting.

Building a wall along the Southwest border is a gargantuan expenditure of resources that would barely diminish an already tiny flow of new illegal immigrants.  Such an endeavor would be comical if it did not cost taxpayers around $43.8 billion over 10 years.  Mandating E-Verify, creating an entry and exit system, and restricting legal immigration with the RAISE Act are all huge overreactions to a legal system with 99.7 percent compliance when crossing the border and 99.995 percent annual compliance from foreigners.  Wasting resources on more immigration enforcement would make us less safe by squandering resources that could be spent on tackling real crimes with real victims.  Most of those immigration enforcement programs would also be enforced against Americans anyway.    

The marginal cost of reducing illegal immigration is prohibitively high at this point.  After all, it is hard to move a system where 99.7 percent of all actions on the border are legal toward one with higher compliance.  How much would taxpayers be willing to pay to move that 99.7 percent compliance to 99.8 percent?  Very little.

Counterintuitively, border security could actually lock in more illegal immigrants by obstructing the natural circular flow of migration.  As a result, cutting border security may actually decrease the stock of unlawful immigrants in the United States by encouraging circular migration.   

There is a popular media narrative that illegal immigration at the border is out of control.  An army of Border Patrol agents, hundreds of miles of fencing, and the collapse of illegal immigration in recent years has not convinced people that the border is less chaotic than at any point in my lifetime.  Border enforcement has probably contributed to that change by not as much as many want to claim.  The fact that 99.7 percent of all border crossers do so legally and that 99.995 percent of all foreigners respect our immigration laws should bust the myth that the Southern border is chaotic and uncontrolled.  Congress can finally get on with the business of reforming immigration.  

Trump’s threat to “totally destroy North Korea” at the United Nations this week generated concern in many corners but a round of applause from many hawks here in the United States. Former ambassador to the United Nations John Bolton, for example, called it “the best speech of the Trump Presidency,” praising Trump for his tougher approach to North Korea’s nuclear program. Japanese Prime Minister Shinzo Abe also voiced strong support for Trump’s approach. In a New York Times oped, Abe wrote that, “I firmly support the United States position that all options are on the table.”

Abe’s choice of the phrase “all options are on the table” was not accidental. As Figure one indicates, the phrase has steadily gained in popularity since the September 11 attacks, with its use spiking in the first year of the Trump administration, as tensions with North Korea have risen. 

Figure One: The Rise of “All Options on the Table” 

Data source: Factiva Top U.S. newspapers database.

The meaning of the phrase, at least on paper, is clear: the United States is willing to use military force should diplomacy fail. And as tensions rise, as they have over the past months with North Korea, one would expect to hear the phrase more often.

The problem, however, is that despite occasional protests to the contrary, it is increasingly obvious that the Trump administration is ready to take the most important option off the table: diplomacy. By repeatedly arguing that, “talking is not the answer,” and that “we’re out of time” to deal with North Korea’s nuclear program, the administration is raising the stakes of the crisis and the chances that it ends in a military conflict.

No matter how happy that makes the hawks, conflict with a nuclear and well-armed North Korea would be both a military disaster and out of touch with the desires of the American public. In survey after survey over the years, Americans have voiced greater confidence in diplomacy than military strength as the best path to peace.

For those with concerns about Trump’s language, it is important to note that although Trump’s bellicose style is very different from that of his predecessors, he is not much more hawkish than either George Bush or Barack Obama. As Figure Two shows, the three post-9/11 presidents all have had “hawk indexes” higher than the three previous presidents. 

The hawk index is the ratio of how often a president appears in news stories that mention the words “war” or “military” compared to how often he appears in stories that mention the words “peace” or “diplomacy.” The score reflects not only the state of the international arena the president is coping with, but also the relative frequency that he discusses military options compared to diplomatic ones. As Figure Two reveals, American discourse and news coverage has always focused far more heavily on war than peace. 

Figure Two: The Hawk Index from Reagan to Trump

 

Data source: Factiva Top U.S. newspapers database.

Given this data, Trump’s tough talk at the United Nations should come as little surprise. Nor, given the American track record of almost non-stop military intervention since the end of the Cold War, should we be surprised if “all options on the table” actually turns out to mean: “we are about to fight another war.” 

 

 

 

 

 

Federal worker compensation is rising faster than compensation in the private sector. On average, federal workers now earn 80 percent more in wages and benefits than other Americans, as examined in this blog yesterday. The data come from the Bureau of Economic Analysis (BEA), and is discussed further in this study

The BEA breaks down the data by industry. The chart below shows average compensation for the BEA’s 19 major private industries and the military, state and local governments, federal civilian workers, and federal government enterprises (mainly the postal service).

The federal government has the third highest paid workers in the United States after utilities and the management of companies. Federal compensation is higher, on average, than compensation in the information, finance and insurance, and professional and scientific industries.

Federal compensation is twice as high as compensation in the education industry, and is almost three times higher than compensation in retail trade.

Further discussion of federal pay is here.

 

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