Policy Institutes

Cross-posted from PoliceMisconduct.net:

So today marks our three year anniversary here at PoliceMisconduct.net!  One of our prime objectives has been to draw more attention to the problem of police misconduct across the country.  Long time readers must be amazed (as are we!) at the attention this subject has been receiving the past few months.  The President himself has acknowledged the “slow-rolling” crisis has been on-going for many years and also that some “soul searching” is in order.   Yes, it’s long overdue.  Better late than never.

The victims of police misconduct are too often without a voice and the extent of the problem was (is) unknown because few seemed interested enough to study it.  We at Cato thought it important to lend some institutional support to this critical area.  And, increasingly, the media (and others) have found this site to be a valuable resource.  Over the past year, we’ve been cited by the Washington Post, Wall Street Journal, the Economist, ABC News, the Atlantic, and Frontline.  If the first step toward addressing a problem is recognizing that a problem exists, then we’re there.

Of course, there’s much more to do.  Just wanted to mark this occasion and provide our friends with an update on our work.  One easy way you can help us is by spreading the word by taking a moment to blast a note to all your contacts via twitter and Facebook.  Thanks for your consideration and support!

In discussions of the Trans Pacific Partnership (TPP), there are often very specific figures put out there as the estimated economic gains of this trade deal.  $78 billion of annual income gains for the U.S. is a commony cited number.

It is important to keep in mind, however, that these gains are based on assumptions about what might be in the TPP, not what is actually in the TPP.  That’s because there is no TPP yet.  

The estimates come from this study, and a more detailed previous study, by a group of trade economists.  But if you read the fine print, for example on p. 23 of the second link, they make clear that they are simply estimating the TPP benefits based on the liberalization coverage of past agreements among the same parties.

The extent of the liberalization that will be in the TPP is not clear because that’s what the parties are negotiating about right now: How much to liberalize each sector.  If trade policy were run by free market economists, everyone would liberalize on their own right now.  But trade policy is influenced heavily by special interest groups.  As a result, some import restrictions remain even after a trade negotiation.

Many commentators have come out for or against the TPP already, based on assumptions about what will be in it.  I’m waiting to see the full scope of what’s in the TPP (if the negotiations are ever concluded) before making a decision.  Any liberalization needs to be balanced out against “governance” parts, such as intellectual property protection, where the impact on GDP and welfare more generally are more uncertain.  We can’t really make that calculation until we see the final deal.

Yesterday, Attorney General Loretta Lynch made the unprecedented announcement that five of the world’s largest banks – JP Morgan, Citi, Barclay’s, RBS, and UBS – would be pleading guilty to criminal charges.  According to the allegations, traders and executives working at the banks’ foreign exchange (FOREX) desks colluded through the use of chat rooms to fix currency prices on a daily basis.   The fines are in the hundreds of millions, with Barclay’s total penalty (including those levied by US and UK authorities) at $2.4 billion topping the charts and Citigroup’s $925 million following behind.  According to Assistant Attorney General Leslie Caldwell, these guilty pleas “communicate loud and clear that we will hold financial institutions accountable for criminal misconduct.”

But do they?  Can they?  In the world of “too big to fail,” JP MorganChase and Citigroup are whales among whales.  Dodd-Frank, with its “living will” provision, was supposed to end too big to fail by requiring that systemically important financial institutions (SIFIs) create a plan for an orderly unwinding in the case of failure.  But this provision contains the seeds of its own destruction.  By designating firms as SIFIs, the government has made the too big to fail designation explicit when it was previously only implicit.

If a SIFI behaves badly, even very very badly (and there is no doubt that, if the allegations are true, the FOREX traders at these banks behaved badly indeed), how much can it be punished?  While corporations can be held criminally liable, you obviously cannot imprison a corporation.  Instead, criminal penalties for companies mean two things: (1) public censure and (2) fines.  The big banks are not very popular these days and it’s unlikely the taint of public censure will cause much additional pain. 

So that leaves the government with fines.  For a fine to be a punishment, it must be large enough to hurt.  These fines are not small.  Even for a bank as large as Citi, $925 million is a chunk of change.   But in imposing these fines, the government must walk a fine line.  If Citi is a SIFI, can the government risk imposing a fine large enough that it risks destabilizing the entire company?  Almost certainly not. 

Complicating the government’s position is the fact that three of the banks – RBS, Barclay’s, and UBS – are foreign (RBS and Barclay’s are British, and UBS is Swiss).  These banks have large footprints in the U.S. markets but, even if they were to falter, the government would be hard-pressed to offer a bailout even if it wanted to.  Consider what happened during the financial crisis.  Several large foreign banks were put at risk when AIG failed.  Because the U.S. government could not, for political reasons if for no other, directly bail out these banks (even though their failure would impact U.S. markets), it instead engineered the so-called “back door bailout” by which TARP funds injected into AIG wound up in the hands of foreign banks.  If the Department of Justice were to impose a heavy enough fine on RBS, Barclay’s, and UBS today that it really hurt those banks, that is, that it put any significant part of their business at risk, it could harm U.S. markets.

Secret price-fixing is bad.  It distorts markets and prevents them from performing one of their most essential functions: price discovery.  But having doubled-down on the too big to fail designation, the government has put itself into an impossible situation when it comes to reining in SIFIs’ bad behavior.

Ben Lawsky is resigning as superintendent of financial services in New York. The New York Times says he plans to open his own firm and lecture at Stanford University. The Post reports that he will consult on digital currencies such as Bitcoin.

The move West suggests that Lawsky may want a piece of the action in Silicon Valley. If he does, it’s worth noting that the action is not in New York.

Lawsky was a leading Bitcoin antagonist. Bitcoin has not particularly flourished in New York, and Lawsky’s work makes it unlikely that New York will be a Bitcoin-friendly jurisdiction.

Ben Lawsky welcomed Bitcoin in August 2013 by sending out subpoenas to everyone in the Bitcoin world. He went on television talking about the “real dangers” of Bitcoin, including use by “narco-terrorists.” (Asked for evidence of Bitcoin misuse, he cited a centralized digital currency called Liberty Reserve, which is not Bitcoin.)

Around the same time, Lawsky precipitously announced a plan for a special “BitLicense.” Shortly after producing it, his office violated New York’s Freedom of Information Law by refusing to release the research and analysis that it claimed to have done to validate the regulation. The NYDFS found that the BitLicense would have no impact on employment in the state, after which investors poured hundreds of millions of dollars into Bitcoin companies outside of New York. (See my comments to the NYDFS for more.)

Though widely panned, Lawsky’s “BitLicense” framed the regulatory discussion in a way that other regulators have felt obliged to copy. Rather than examining how Bitcoin could be integrated into existing regulation (trimmed, perhaps, so that financial innovation can flourish), the Conference of State Bank Supervisors issued its own, more careful proposal for a Bitcoin-specific regulatory framework. The Uniform Law Commission seems to be getting pulled along in the same draft. Coin Center, a conspicuously moderate Bitcoin research and advocacy group, put out a framework for regulators that appears designed to help others avoid doing what New York did.

But if history is any guide, Ben Lawsky will be able to use the name he made attacking Bitcoin to wend his way into the Bitcoin business world. Because of the contacts he made as a regulator, he can hire himself out to Bitcoin companies wanting to signal to other regulators that they have the approval of the regulatory establishment. (Bitcoin companies didn’t hire former SEC chairman Arthur Levitt because of his crypto chops!) In all likelihood—if this is indeed what he plans—Ben Lawsky will be able to profit from thwarting financial innovation. He’ll skirt New York state’s post-employment restrictions in doing so, no doubt.

History does not have to guide developments in the revolutionary Bitcoin world, of course. The Bitcoin community may find the hypocrisy of an anti-Bitcoin regulator profiting from Bitcoin too great. They would express this by refusing to do business with firms that hire Lawsky as a consultant or advisor.

If dogged watchers in the Bitcoin community report faithfully to the Bitcoin subreddit, for example, Bitcoin companies may recognize that hiring an anti-Bitcoin former regulator is a business liability. To the extent that this kind of consumer action diminishes Lawsky’s profile in the Bitcoin consulting world, this would send virtuous signals to today’s regulators: Do not lash out against Bitcoin expecting to make a name for yourself that you can cash in on later.

How much much profit is available to regulators who thwart financial innovation? That depends on how aggressively the Bitcoin community holds regulators to account even after they’ve left office.

In my ultimate fantasy world, Washington wouldn’t need any sort of broad-based tax because we succeeded in shrinking the federal government back to the very limited size and scope envisioned by our Founding Fathers.

In my more realistic fantasy world, we might not be able to restore constitutional limits on Washington, but at least we could reform the tax code so that revenues were generated in a less destructive fashion.

That’s why I’m a big advocate of a simple and fair flat tax, which has several desirable features.

  • The rate is as low as possible, to minimize penalties on productive behavior.
  • There’s no double taxation, so no more bias against saving and investment.
  • And there are no distorting loopholes that bribe people into inefficient choices.

But not everyone is on board, The class-warfare crowd will never like a flat tax. And Washington insiders hate tax reform because it undermines their power.

But there are also sensible people who are hesitant to back fundamental reform.

Consider what Reihan Salam just wrote for National Review. He starts with a reasonably fair description of the proposal.

The original flat tax, championed by the economists Robert Hall and Alvin Rabushka, which formed the basis of Steve Forbes’s flat-tax proposal in 1996, is a single-rate tax on consumption, with a substantial exemption to make the tax progressive at the low end of the household-income distribution.

Though if I want to nit-pick, I could point out that the flat tax has effective progressivity across all incomes because the family-based exemption is available to everyone. As such, a poor household pays nothing. A middle-income household might have an effective tax rate of 12 percent. And the tax rate for Bill Gates would be asymptotically approaching 17 percent (or whatever the statutory rate is).

My far greater concerns arise when Reihan delves into economic analysis.

…the Hall-Rabushka tax would be highly regressive, in part because high-income households tend to consume less of their income than lower-income households and because investment income would not be taxed (or rather double-taxed).

This is a very schizophrenic passage since he makes a claim of regressivity even though he acknowledged that the flat tax has effective progressivity just a few sentences earlier.

And since he admits that the flat tax actually does tax income that is saved and invested (but only one time rather than over and over again, as can happen in the current system), it’s puzzling why he says the system is “highly regressive.”

If he simply said the flat tax was far less progressive (i.e., less discriminatory) than the current system, that would have been fine.

Here’s the next passage that rubbed me the wrong way.

…there is some dispute over whether ending the double taxation of savings would yield significant growth dividends. Chris William Sanchirico of Penn Law School takes a skeptical view in a review of the academic research on the subject, in part because cutting capital-income taxation as part of a revenue-neutral reform would require offsetting increases in labor-income taxation, which would dampen long-term economic growth in their own right.

I’m not even sure where to start. First, Reihan seems to dismiss the role of dynamic scoring in enabling low tax rates on labor. Second, he cites just one professor about growth effects and overlooks the overwhelming evidence from other perspectives. And third, he says the flat tax would be revenue neutral, when virtually every plan that’s been proposed combines tax reform with a tax cut.

On a somewhat more positive note, Reihan then suggests that lawmakers instead embrace “universal savings accounts” as an alternative to sweeping tax reform.

Instead of campaigning for a flat tax, GOP candidates ought to consider backing Universal Savings Accounts (USAs)… The main difference between USAs and Roth IRAs is that “withdrawals could be made at any time for any reason,” a change that would make the accounts far more attractive to far more people. …Unlike a wholesale shift to consumption taxation, USAs with a contribution limit are a modest step in the same general direction, which future reformers can build on.

I have no objection to incremental reform to reduce double taxation, and I’ve previously written about the attractiveness of USAs, so it sounds like we’re on the same page. And if you get rid of all double taxation and keep rates about where they are now, you get the Rubio-Lee tax plan, which I’ve also argued is a positive reform.

But then he closes with an endorsement of more redistribution through the tax code.

Republicans should put Earned Income Tax Credit expansion and other measures to improve work incentives for low-income households at the heart of their tax-reform agenda.

I want to improve work incentives, but it’s important to realize that the EIC is “refundable,” which is simply an inside-the-beltway term for spending that is laundered through the tax code. In other words, the government isn’t refunding taxes to people. It’s giving money to people who don’t owe taxes.

As an economist, I definitely think it’s better to pay people to work instead of subsidizing them for not working. But we also need to understand that this additional spending has two negative tax implications.

  1. When politicians spend more money, that either increases pressure for tax increases or it makes tax cuts more difficult to achieve.
  2. The EIC is supposed to boost labor force participation, but the evidence is mixed on this point, and any possible benefit with regards to the number of people working may be offset by reductions in actual hours worked because the phase out of the EIC’s wage subsidy is akin to a steep increase in marginal tax rates on additional labor supply.

In any event, I don’t want the federal government in the business of redistributing income. We’ll get much better results, both for poor people and taxpayers, if state and local government compete and innovate to figure out the best ways of ending dependency.

The rest of Reihan’s column is more focused on political obstacles to the flat tax. Since I’ve expressed pessimism on getting a flat tax in my lifetime, I can’t really argue too strenuously with those points.

In closing, I used “friendly fight” in the title of this post for a reason. I don’t get the sense that Mr. Salam is opposed to good policy. Indeed, I would be very surprised if he preferred the current convoluted system over the flat tax.

But if there was a spectrum with “prudence” and “caution” on one side and “bold” and “aggressive” on the other side, I suspect we wouldn’t be on the same side. And since it’s good for there to be both types of people in any movement, that’s a good thing.

A peculiar tic of contemporary American nationalism is the notion that the American state, particularly if helmed by a Republican president, makes no errors of commission in its conduct of military affairs. No American war was ill-founded, or aimed at a threat that didn’t exist or didn’t warrant the effort. This logic never applies in the domestic sphere for Republicans, where government programs are at best naïve and bound to make problems worse or at worst, venal and Machiavellian.

This tic is the only reason I can think of that we’re actually sustaining a debate in 2015 about whether, with the benefit of hindsight, it was a good idea to invade Iraq. Jim Fallows at the Atlantic argues that nobody should again ask a politician the question, since

the only people who might say Yes on the Iraq question would be those with family ties (poor Jeb Bush); those who are inept or out of practice in handling potentially tricky questions (surprisingly, again poor Bush); or those who are such Cheney-Bolton-Wolfowitz-style bitter enders that they survey the landscape of “what we know now”—the cost and death and damage, the generation’s worth of chaos unleashed in the Middle East, and of course the absence of WMDs—and still say, Heck of a job.

I actually think this makes the case why the question should be—or at least should have been—asked, since at least one fortunate Republican son, Marco Rubio, belongs in Fallows’ bitter-ender camp. To the extent voters—and donors—care about competent foreign policy, they deserve to know that Rubio strongly opposes it, even with the benefit of hindsight.

But beyond the politics, a weird narrative has begun to emerge on the right that asking about the Iraq war is a “gotcha question.” Keep in mind: we are discussing a policy that was dreamed up by the Bush administration, marketed by the Bush administration, and purchased by the vast majority of our legislators, including the likely Democratic nominee in 2016.

For example, conservative message man Rush Limbaugh whined on his radio show that this is nothing more than a “gotcha question” designed to tarnish Republicans. Iraq War monger Eliot Cohen would later echo this argument, lamenting “gotcha journalism” and calling the question a “silly hypothetical, and the people who ask it should know better.”

Pardon me. Nearly 5,000 Americans are dead, tens of thousands grievously wounded, and more than a hundred thousand Iraqis were killed, two of whom were this little girl’s parents. We spent trillions of tax dollars. We destroyed the political order that existed in Iraq, and a new one has yet to emerge. (To the partisans: Yes! President Obama, too, has failed to produce order in Iraq.)

The conservative movement used to harp on personal responsibility (at least for poor single mothers in inner cities). Today’s conservative foreign policy elite seems to revile that same value. Fortunately for our purposes, Anatol Lieven had all the necessary words for the Eliot Cohens of the world back in 2007:

by contributing… to a hasty, poorly-planned military operation, it must be repeated that Dr. Cohen took on himself a measure of the moral, intellectual and political responsibility for precisely those U.S. administration mistakes in Iraq which he now denounces, and which have cost so many American lives. It is disappointing-though not surprising-that Dr. Cohen himself does not realize that this record demands from him, as an honorable man, a lengthy period of quiet, private reflection on his mistakes and the reasons for them.

If no personal price at all is to be paid in terms of careers for errors on this scale, which contributed to the deaths of thousands of Americans, then the long-term consequences for U.S. government and U.S. democracy could be dire. If being proved obviously, dreadfully wrong brings no long-term consequences, and being proved right brings no long-term rewards, then why in the future should any U.S. analyst, adviser, commentator or public figure ever take a public stand in favor of what he or she believes to be right and correct, if this is going to lead to short-term unpopularity and career damage?

He or she shouldn’t. He or she should go along, and get along… and maybe even run for president.

On large and complex government projects, costs will double from the original estimates. This tendency is called Edwards’ Law of Cost Doubling.   

The Wall Street Journal reports on the PATH rail station at the World Trade Center. Edwards’ Law was in effect:

… it has become a budgetary boondoggle, its cost doubling to nearly $4 billion, which gives it the unenviable distinction of the world’s most expensive train station.

Some people are blaming the project’s architect, Santiago Calatrava, for the problems. But, as I noted here, the real causes seem to have been political squabbling and mismanagement by the overgrown Port Authority of New York and New Jersey (PANYNJ). The WSJ notes:

But at the World Trade Center, Mr. Calatrava’s travails signal broader disharmony and discord at the country’s most recognizable construction project. The nearly 14-year effort—for which his firm has collected more than $80 million, according to a person familiar with the payments—has been marred by frequent public fighting between the governmental and private parties involved.

Bursting budgets throughout the 16-acre site have weighed heavily on the Port Authority of New York and New Jersey, the body that owns the site. The agency has delayed other projects like renovations of the region’s airports, and tolls on bridges and tunnels to New Jersey have more than doubled in recent years to raise revenue.

Attention by agency officials and observers has focused on the PATH station, largely because it has suffered the biggest overruns and lengthiest delays. The new station for PATH, which stands for Port Authority Trans-Hudson, is scheduled to mostly open late this year, a contrast with the 2007 date targeted when state officials requested money in 2003 from the federal government for the project.

… State officials wanted it to be an anchor for lower Manhattan with an iconic design on par with Grand Central Terminal. “It was the kind of environment that inspired grand visions,” said Elihu Rubin, an architectural historian at Yale University. “The risk for overruns was there from the start. The politics of rebuilding can generate relatively modest cost estimates, when more realistic budgeting would make desirable projects seem out of reach.”

I have often highlighted government cost overruns, such as here, here, here, and here. The WSJ story mentions two further examples. Edwards’ Law was again in effect:

… The experience at the [PATH] station has been mirrored by numerous other large-scale infrastructure projects in New York. Among the projects are the Fulton Center subway station revamp, which cost $1.4 billion, almost double the initial $750 million estimate, and the creation of a new station for Long Island Rail Road under Grand Central currently under way, set to cost as much as $10 billion, up from a planned $4.3 billion.

What is the solution to such hornswoggling of taxpayers? It is to privatize as much infrastructure as possible. The Bridgegate scandal, for example, should have prompted the privatization of the PANYNJ. It is a sprawling bureaucracy that runs bridges, tunnels, bus terminals, airports, and seaports, as well as rail transit and real estate development.

Why run these business activities as government bureaucracies? All these things could be done better by private businesses, and they are done by private businesses in cities around the world. PANYNJ owns five airports including LaGuardia and JFK. Why not split them apart, sell them to entrepreneurs, and have them compete against each other?

New York City is the center of global capitalism. It has a dynamic and entrepreneurial private sector. The city should be setting the pace for privatization reforms, not embarrassing itself with a showcase of mismanaged government projects.

Federal regulations are generally issued under a notice-and-comment process. A regulating agency releases a draft of a rule, the public provides comments on the draft, the agency reviews the comments, and then issues a final rule which incorporates public feedback.  

Outside groups can and do launch campaigns to encourage citizens to weigh in on proposed rules. But now it appears that a federal regulatory agency has been using grass-roots style activism and propaganda to push its own rules. The Environmental Protection Agency launched a lobbying campaign to encourage support for a major new rule on drinking water.

The New York Times reports:

Late last year, the EPA sponsored a drive on Facebook and Twitter to promote its proposed clean water rule in conjunction with the Sierra Club. At the same time, Organizing for Action, a grass-roots group with deep ties to Mr. Obama, was also pushing the rule. They urged the public to flood the agency with positive comments to counter opposition from farming and industry groups.

The piece continued:

The Thunderclap [a social media tool] effort was promoted in advance with the EPA issuing a news release and other promotional material, including a photograph of a young boy drinking a glass of water.

“Clean water is important to me,” the message said. “I want E.P.A. to protect it for my health, my family and my community.”

In the end, the message was sent to an estimated 1.8 million people, Thunderclap said.

The EPA advocacy campaign ginned-up more than one million public comments on the proposed water rule. Then Gina McCarthy, the EPA’s administrator, had the audacity to testify to the Senate that 87 percent of commenters supported the rule—as if that high percentage was actual spontaneous and broad-based support from the public.

The EPA’s campaign may have violated federal law, but even it did not, this is a dangerous path for federal agencies to go down.

From this incident, it appears that the EPA is not serious about taking opposing public comments into account before engaging in regulatory action. The purpose of public comments is to gauge public sentiment before a final rule is issued. The agency should act as an unbiased arbitrator of comments, not as an advocacy organization.

After losing again at the World Trade Organization, U.S. regulations mandating country of origin labels (COOL) on meat may finally end.  Driven by the possibility that Canada and Mexico could retaliate with increased tariffs, Congress has already begun consideration of a bill to repeal the protectionist program.  If COOL regulations are indeed repealed, American consumers, meat packers, and retailers owe a debt to the WTO’s dispute settlement system.

In the latest WTO decision, the United States lost its appeal of a report originally issued last October.  At that time, I wrote about how the WTO process can help alter the political dynamics in ways that favor free market reform.

Under current U.S. COOL rules, retailers selling beef and pork must include labels stating what country the animal was in when it was born, raised, and slaughtered. This information might be interesting to a curious shopper, but it is completely useless in determining the quality or safety of meat. The same U.S. food safety standards apply regardless of where the animal came from.

Consumers are, of course, welcome to care about things that don’t really matter, and generally, more information is a good thing to have. Sometimes, though, the cost of providing that information is greater than its value. Mandating that companies provide consumers with information will overcome that hurdle by removing the low-information option and forcing consumers to pay the higher price. Making labels mandatory also introduces opportunities for rent-seeking by companies looking to shift costs onto their competitors.

That’s exactly what’s happening with the COOL regulations, and is the crux of the WTO complaint. Canada and Mexico are not complaining that American consumers, armed with their dinner’s travel itinerary will eschew immigrant cattle. Rather, they point out that complying with the rules imposes huge costs on U.S. meat processors who buy cattle that once lived across the border. If a slaughterhouse buys any cattle that rode on a truck traversing the 49th parallel, it must segregate those animals and their meat through the entire production and delivery process.

The arbitrary burdens imposed by COOL regulations create a strong incentive for meat packers to purchase only cattle that was born and raised in the United States in order to avoid segregation costs. The labeling rules create artificial demand for domestic cattle while increasing the cost of beef for all American consumers.

So far, this dynamic has made COOL very popular in Washington. The reality of politics is that the most popular policies are those in which the benefits go to a small well-organized group of people while the costs are spread thin to many. The Obama administration in particular is keen on furthering the interests of COOL supporters and has gone out of its way to make the rules as onerous as possible on importers of foreign cattle.

But the political dynamic is about to change. The latest loss at the WTO brings us one step closer to authorized sanctions by Canada and Mexico. If America’s two largest export markets retaliate by imposing tariffs on U.S. exports, the political dynamic underpinning COOL suddenly changes. Canada has released a list of products it intends to tax—including wine, apples, rice, corn, mattresses, and furniture. These are U.S. industries that normally could not care less about cross-border livestock trade. But they will not sit idly by while their business suffers on behalf of cattle ranchers.

As expected, the looming threat of retaliation has indeed prompted Congress to act.  The WTO issued its final decision on the merits Monday, and a bill to repeal the entire COOL program was just approved by the House Agriculture Committee today by a vote of 38-6.

The House of Representatives voted yesterday to extend federal funding for highways and transit for two months. The Senate is expected to pass similar legislation later this week. While transportation bills normally last for six years, this short-term action, which followed a ten-month extension last fall and a two-year extension in 2012, has proven necessary because no one has been able to rustle up a majority agreement on the federal role in transportation.

For those who haven’t followed the issue, the federal government collects about $34 billion a year in gas taxes and related highway user fees. Once dedicated to highways, an increasing share has gone for transit and other uses since the early 1980s. A 1998 decision to mandate that spending equal the projected growth in fuel taxes compounded the problem. When fuel tax revenues stopped growing in 2007, spending did not and thus annual spending is now about $13 billion more than revenues.

Under Congressional rules, Congress must find a revenue source to cover that deficit. My colleague at the Cato Institute, Chris Edwards, thinks that the simple solution is for Congress to just reduce spending by $13 billion a year. That may be arithmetically simple, but politically it is not. Too many powerful interest groups count on that spending who have persuaded many (falsely, in my opinion) that we need to spend more on supposedly crumbling highways.

Many Democrats, as well as some Republicans, propose another arithmetically simple but politically complex solution: raise gas taxes. Each penny of gas tax brings in slightly less than $2 billion, so an eight-cent increase should completely cover the deficit. However, tax watchdogs and tea-party groups vehemently oppose any tax increases, especially since they don’t trust Congress to spend fees collected from highway users on roads.

Then there are proposals to dedicate things like off-shore oil revenues for transportation. But any federal revenues spent on transportation will just mean less revenue for something else, and so won’t reduce the overall deficit.

Dedicating gas taxes to roads at least ensures that state highways are paid for by the people who use them. Yet for several reasons, the gas tax in an ineffective user fee: it isn’t indexed to inflation or increasingly fuel-efficient cars; most local governments don’t collect gas taxes and so must subsidize their roads with other funds; and fuel taxes do nothing to mitigate congestion. Raising the gas tax solves none of these problems in the long run; indexing them to inflation as Representative Jim Rinacci (R-OH) proposes solves only the first problem.

Mileage-based user fees, soon to be extensively tested in Oregon, can solve all of these problems. Such fees are supported by liberal Democrats such as Earl Blumenauer (D-OR) as well as tea-party Republicans such as Thomas Massie (R-KY). But they are also questioned by both liberals and conservatives worried about privacy and suspicious of new taxes. Since the technology needed to collect such fees without invading people’s privacy hasn’t been thoroughly tested, they are not going to solve the conundrum this year.

The real problem is that too many in Congress relish playing the role of Santa Claus, handing out federal funds to state and local governments and interest groups. The elimination of earmarks, which dominated transportation funding from about 1992 through 2010, has weakened but not eliminated this political factor.

Congress is thus divided into at least three factions: the Democrats who want to use transportation dollars as pork as well as social engineering by encouraging transit and discouraging driving; traditional Republicans who also like pork but who may not be as enthused about the social engineering; and fiscally conservative Republicans who want to end the pork and the social engineering. Before the tea parties emerged, pork barrel won out, but now neither side has a majority.

While Cato would like to see federal highway and transit programs devolved to the state and local level, there is no easy path to get there. It appears that we likely will be stuck with short-term extensions until one of these groups wins a majority or mileage-based user fee technology takes over highway funding. If the latter happens, the federal government could be shut out of transportation funding completely and transit agencies will need to beg state and local governments for continued support.

Educational choice is on the march.

As I noted back in February, the stars appeared to be aligned for a “Year of Educational Choice.” By late April, state legislatures were halfway toward beating the record of 13 states adopting new or expanded school choice laws in 2011, which the Wall Street Journal dubbed the “Year of School Choice.” The major difference in the types of legislative proposals under consideration this year is that more than a dozen states considered education savings account (ESA) laws that allow parents to purchase a wide variety of educational products and services and save for future education expenses, including college.

On Monday, Tennessee Gov. Bill Haslam signed the Individualized Education Act, an ESA program for students with special needs. Earlier this year, Mississippi enacted the nation’s third ESA law, behind Arizona and Florida. Lawmakers in Montana also passed an ESA, but Gov. Steve Bullock vetoed it earlier this month.

Nevertheless, Gov. Bullock allowed a universal tax-credit scholarship bill to become law without his signature. The law is an important step toward educational freedom, albeit a very modest one. Taxpayers can only receive tax credits for donations to scholarship organizations up to $150, meaning that a single $4,500 scholarship will require 30 donors. No other state has such a restrictive per-donor credit cap. Unless the legislature raises or eliminates the cap, Montana’s tax-credit scholarship program is likely to help very few students.

Fortunately, other states are working toward aiding as many students as possible. Lawmakers in three states–Arizona, Florida, and Indiana–passed expansions to their educational choice programs this year. Unfortunately, despite passing both legislative chambers unanimously, Florida’s ESA expansion legislation did not become law due to a standoff between the Florida House of Representatives and the Florida Senate. 

For those keeping track at home, there have been five newly enacted educational choice law thus far this year, plus four programs expanded in two states:

New educational choice laws

  • Arkansas: vouchers for students with special needs.
  • Mississippi: ESAs for students with special needs.
  • Montana: universal tax-credit scholarship law.
  • Nevada: tax-credit scholarships for low- and middle-income students.
  • Tennessee: ESAs for students with special needs.

Expanded choice programs

  • Arizona: Expanded ESA eligibility to include students living in Native American tribal lands.
  • Arizona: Expanded the types of businesses that can receive tax credits for donations to scholarship organizations.
  • Indiana: Increased amount of tax credits available for donations to scholarship organizations ($2 million over two years).
  • Indiana: Eliminated cap on the number of vouchers available for elementary students.

Several more bills are pending around the nation:

  • The Texas Senate passed a tax-credit scholarship bill that is currently under consideration in the state house.
  • The Pennsylvania House of Representatives overwhelmingly passed bipartisan legislation to increase amount of tax credits available under the Education Improvement Tax Credit from $60 million to $100 million by a vote of 166-26. Unlike tax credits for filmmaking or green energy, scholarship tax credits can save the state a significant amount of money because the average size of the scholarships are significantly less than the amount the state spends per pupil. The legislation is now pending before the state senate.
  • New York’s Gov. Andrew Cuomo is asking the legislature to support a proposal to create a $150 million tax-credit scholarship program for low-income students. While the state senate included a version of the legislation in the budget, the New York Assembly left the tax credit out of its version of the budget. Ultimately, Gov. Cuomo signed the budget without the tax credit.
  • Gov. Scott Walker’s proposed budget would eliminate the cap on the number of available school vouchers in Wisconsin.
  • The legislatures in Nevada and Rhode Island are currently considering ESA legislation.

On New Year’s Day, 23 states had educational choice laws. Now 28 states do. As more states enact choice laws, we may be reaching a tipping point. It is becoming increasingly difficult for choice opponents to scare legislators with dire predictions about the impact of educational choice because those legislators can now see the impact of such laws on neighboring states. And as with Uber, once people get a taste of what the market offers, they don’t want to go back to the monopoly.

Washington’s collection of European security dependents (aka, the NATO allies) seek an even stronger U.S. commitment to their defense.  That desire has clearly been on the rise since Russia’s annexation of Crimea in 2014 and the subsequent escalation of the Ukraine crisis.  Not surprisingly, Moscow’s smaller neighbors, especially the three Baltic republics, worry about the Kremlin’s intentions and want to take cover behind the shield of America’s military power.  Their latest ploy is to seek the permanent deployment of a NATO brigade (some 3,000 to 5,000 troops) on their territory.  It is a safe bet that they will want U.S. forces to be part of that unit.  Indeed, the United States already keeps more than 150 troops (along with military aircraft) in those countries as part of a continuing rotation of forces.

It is not hard to understand why small, weak nations would seek maximum protection from a distant power against a large, powerful neighbor that has displayed worrisome intentions.  It is much harder to understand, though, why undertaking such a risk would be in the best interest of the United States.  Allies are only beneficial when they augment a nation’s strength, and the potential benefits of defending them significantly outweigh the potential costs and risks. The Baltic republics (and most NATO members, for that matter) spectacularly fail that basic test.  They do next to nothing to augment America’s already vast military power, while (being on bad terms with their powerful neighbor) they create the risk of a U.S.-Russia confrontation where none would otherwise exist.  In short, they are strategic liabilities, not strategic assets. 

Making matters even worse, the Baltic countries and the other European members of NATO don’t seem terribly serious about their own defense, even as they sound alarm bells about Russia’s behavior.  As I note in a new article in Aspenia Online, their defense spending continues to be woeful.  Despite a commitment following the 2006 NATO summit, only the United States, Britain, Greece, and Estonia currently spend at least two percent of annual GDP on defense.  What is especially frustrating is that several major NATO powers, including Germany, Italy, and Spain, have spending levels far below the two percent target.  By comparison, just the U.S. base military budget is more than four percent of a much larger GDP, and if overseas contingency spending for supposed emergency missions (like the ongoing wars in Iraq and Afghanistan) is included, Washington’s defense outlays reach nearly five percent. 

In March, Samantha Power, U.S. Ambassador to the United Nations, flew to Brussels to encourage the leaders of NATO countries to fulfill their two percent commitment.  She warned that “the number of missions that require advanced militaries to contribute around the world is growing, not shrinking.”  In a subsequent interview on BBC Radio 4, Power conceded that “in most cases” not only was European defense spending inadequate, it was shrinking, despite the growth in security threats.

The contrast in U.S. and European efforts is especially striking.  U.S. military spending nearly doubled during the decade following the 9-11 terrorist attacks. Meanwhile, the outlays of NATO’s European members continued the downward trajectory that existed since the end of the Cold War.  Indeed, the onset of the global Great Recession in 2007-2008 led to even sharper reductions in European defense efforts.

Even in Eastern Europe, supposedly so worried about Russian intentions, the tangible military response has been meager.  Poland announced with great fanfare in February that it had earmarked 33.3 billion euros to upgrade its military forces.  But the fine print in the announcement confirmed that the figure was a spending increase parceled out over the coming decade.  Moreover, even if future governments maintain that course, it would only bring Warsaw’s defense budget up to the two percent level that it promised to achieve following the 2006 summit—some nine years ago. 

Likewise, the fanfare greatly exceeded the substance accompanying Lithuania’s announcement that it was increasing its military spending by nearly fifty percent.  That change, if actually implemented, would bring the country’s military budget barely up to one percent of GDP—still far below the long-standing, very modest, two percent pledge.

U.S. leaders need to face the reality that the United States has weak security dependents, not worthwhile military allies, in NATO.  It was a colossal mistake even to bring such nations into the alliance.  It would be even greater folly to deepen our existing entanglement.  Instead, we need to jettison such unwise commitments before a crisis erupts.

Congress has created an ongoing crisis in the Highway Trust Fund (HTF). Year after year, policymakers spend more on highway and transit aid to the states than the HTF raises from gas taxes and other dedicated revenues. CBO projects that annual HTF spending will be $53 billion and rising in coming years, while HTF revenues will be $40 billion. That leaves an annual funding gap of at least $13 billion.

Congress faces a deadline at the end of May to reauthorize the HTF. However, Congress will probably enact a short-term HTF extension, and then grapple with the funding gap problem later in the summer. Everyone agrees that Congress should find a long-term solution to the funding gap.

The best solution for the HTF is simple: cut annual spending by $13 billion to match revenues. State and local governments are fully capable of funding more of their own highway and transit expenses. Congress can help the states by reducing federal regulations that boost transportation construction costs, such as Davis-Bacon and environmental rules.

Cutting federal aid for highways and urban transit would improve the efficiency of infrastructure investment. Ending transit aid would be particularly beneficial. Local officials often focus on maximizing the flow of money from Washington, rather than ensuring that projects generate overall net value. By injecting federal dollars and regulations into local transit planning, Congress distorts local decision making and increases the complexity, bureaucracy, and costs of projects. 

Cutting HTF spending by $13 billion would be a substantial reform, but a reasonable one given the rise in HTF spending over the years. The chart below shows HTF spending since 1970 in real, or inflation-adjusted, dollars. The Interstate Highway System was essentially complete by the early 1990s, so you might think that federal spending would have fallen after that. Instead, spending ballooned between the mid-1990s and mid-2000s, and it has remained at an elevated level ever since. (HTF data here and here. I used the CPI to convert to 2015 dollars).

In sum, cutting spending by $13 billion would be a good way to close the HTF funding gap. It would bring real spending down to the more reasonable levels of the late Clinton years. And it would encourage the states to make more efficient investment decisions to meet their diverse transportation needs. 

 For more on infrastructure reforms, see here and here.

Washington’s latest symbolic battle is looming. America’s money celebrates its early political leaders, all white males. There’s now a campaign to add a woman. A recent poll named antislavery activist Harriet Tubman the favorite, ahead of First Lady Eleanor Roosevelt.

Of course, it wouldn’t be the first time that a woman appeared on America’s money. Suffragette Susan B. Anthony and Native American Sacagawea graced ill-fated dollar coins which were little used and quickly forgotten.

President Barack Obama indicated his interest in showcasing more women. Republican legislators should take up the challenge and introduce a resolution urging the Treasury to add Tubman. There’s nothing sacred about the present currency line-up. After all, America was created by many more people than presidents and other politicians. Indeed, replacing Andrew Jackson makes a certain sense since he resolutely opposed a federal central bank.

Moreover, Tubman would be a great choice to replace him. She was born between 1820 and 1822 in Maryland to slave parents. Tubman was hired out and often beaten. After her owner’s death in 1849, which led his widow to begin selling their slaves, she escaped through the Underground Railroad to Philadelphia.

However, a year later she returned to Maryland to rescue her niece and the latter’s two children, beginning a career of leading slaves to freedom. She was daring and creative; her plans were sophisticated. Although she trusted God she also saw value in arming herself. She directed her last rescue in December 1860.

Tubman also was an active abolitionist and lecturer, friendly with New York Senator William Seward. She aided John Brown, though she played no direct role in his raid on Harper’s Ferry. During the Civil War she pressed abolition on the Lincoln administration.

With greater effect she aided slave refugees, served as a nurse, and acted as a scout for the federal army. Long after the war she aided the cause of women’s suffrage, working with Susan Anthony, among others. Despite manifold health problems she lived past 90, dying in 1913.

As I point out in American Spectator online: “Tubman fought enormous injustice and promoted human liberty. She advocated genuine equality of opportunity, allowing women to vote, rather than the sort of PC notions of equality popular today. She exhibited courage in fighting and breaking unjust laws. Never did she wait for bureaucrats, politicians, judges, lawyers, and others to act. Instead, she acted to rescue the oppressed.”

In short, she represented the common women and men across the country who contributed much to make America. Until slavery ended the nation could not be considered either truly good or free.

Equally important, putting Tubman on America’s money would make no political statement. For President Obama to place Eleanor Roosevelt on a banknote would look like an attempt to gain partisan advantage. Not so using Tubman’s image.

True, writer Feminista Jones made an uncommonly silly argument against adding Tubman or any woman to U.S. currency: “Her legacy is rooted in resisting the foundation of American capitalism. Tubman didn’t respect America’s economic system, so making her a symbol of it would be insulting.”

In fact, capitalism rests on a foundation of economic liberty, which is violated by the institution of human slavery. The original industrial state, Great Britain, ended slavery decades before America. The northern states, where industrial capitalism was strongest in the U.S., also rejected slavery early.

One suspects that Tubman did not see herself as spiriting the enslaved away to freedom to save them from “capitalism” but to allow them, like whites, to take advantage of the manifold opportunities of a free economy. Given her experience with government oppression, it is unlikely she would have advocated turning the economy over to the very same politicians who proved willing to institutionalize human bondage.

America’s current currency line-up is not sacrosanct. Andrew Jackson has had a fine run on the $20 bill. It’s time to give someone else a chance. Why not Harriet Tubman? 




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I’m very well acquainted… with matters mathematical,
I understand equations, both the simple and quadratical,
About binomial theorem I’m teeming with a lot o’ news,
With many cheerful facts about the square of the hypotenuse.
I’m very good at integral and differential calculus;
I know the scientific names of beings animalculous:
In short, in matters vegetable, animal, and mineral,
I am the very model of a modern Major-General

One of the chief goals Cato’s Center for Monetary and Financial Alternatives is to make people aware of alternatives to conventional monetary systems—that is, systems managed by central bankers wielding considerable, if not unlimited, discretionary authority. The challenge isn’t just one of informing the general public: even professional monetary economists, with relatively few exceptions, are surprisingly ill-informed about such alternatives.

I recently came across a document that perfectly illustrates this last point: a power point presentation by a senior Federal Reserve Bank research economist, given at a conference aimed at school teachers specializing in economics.

I have no desire to single-out the economist in question, who I will therefore refer to simply as “our economist.” On the contrary: I offer his presentation as an example of the all-too common tendency for otherwise competent monetary economists (and our economist is in fact very accomplished) to misread the historical record regarding potential alternatives to central banking and to otherwise give such alternatives short shrift.

This unfortunate tendency rests in part on the fact that most economics graduate programs stopped teaching any sort of economic history decades ago (our economist earned his PhD in the early 1990s), while burdening their students with enough mathematics and statistics to all but guarantee that they never so much as crack open a book on the subject. But the trouble isn’t just that many monetary economists don’t know their monetary history: it’s that they know, and teach, monetary history that ain’t so. That’s what our economist did when he lectured a roomful of teachers on the merits of central banks and “Alternative Monetary Systems.”

The first sign of our economist’s limited awareness of “Alternative Monetary Systems” appears in a slide listing the topics he plans to address. These are: (1) “What is Money?”; (2) “Methods of Monetary Policy”; (3) “Central Banks”; and (4) “Central Banks vs. Commodity Standard.” The last dichotomy makes little sense, both because central banks and commodity standards, far from being mutually exclusive, coexisted for much of the early history of the former, and because one can have a fiat monetary standard without having a central bank—as the U.S. did between 1863 and 1879 and as Hong Kong and other places equipped with currency boards do today.

On a later slide our economist does at least mention currency boards. But he still fails to recognize explicitly the distinction between monetary systems—whether commodity or fiat—in which paper currency is monopolized and those in which it is competitively supplied. The only reference he makes to the competitive alternative is an implicit one, in a slide referring to the instability of the pre-1914 U.S. economy.

I’ll have more to say about that slide in a moment. But before he comes to it, our economist takes up the topic of commodity standards. According to him, under such standards, the money supply changes only as “People dig holes in the ground, haul out ore and turn it to the central bank for money.” That will do, I suppose, if one’s purpose is to make such standards appear hopelessly primitive compared with ones that allow for monetary “fine tuning.”[2] But as a summary of how actual commodity standards, and the classical gold standard in particular, worked, its extremely misleading. Although the mining of new gold was an important determinant of long-run gold-standard money supply changes, in the short run it was far less important than international gold flows, movements of gold from non-monetary to monetary uses and vice versa, and changes in bank reserve ratios and other determinants of base-money multipliers.[3]

Rather than mention any of these often stabilizing determinants, our economist invites his audience to imagine what would happen, under a gold standard, to the price level (among other things) if “we just conquered a good portion of the New World.” Although his slide doesn’t say what visions he helped his listeners to conjure up, I will bet you top dollar (1) that he told them about the great “Price Revolution” of the 15th-17th centuries, when specie shipments from Mexico caused prices in Western Europe increased six-fold; and (2) that he did not tell them that this six-fold increase over the course of 150 years amounted to an annual inflation rate of between 1 and 1.5 percent, that is, a rate that the Fed and other central banks now consider dangerously low.

Our economist next makes a case for central banking, by arguing that there must be a lender of last resort. Like many monetary economists whose understanding of bank panics is informed by Diamond and Dybvig’s (1983) ingenious but extremely misleading article on the subject, he asserts that “Bank runs can be self-fulfilling,” ignoring evidence that, in the U.S. at least, they have seldom been so. Rather than consult that evidence he refers to the bank-run scene in It’s a Wonderful Life.[4] Ben Bernanke would later take the same tack in the course of his GWU lectures.[5] Whether our economist has read Bagehot’s Lombard Street is unclear. In any event there’s no evidence that he share’s Bagehot’s understanding that a lender of last resort is something a country needs only once it has taken the unfortunate step of establishing a privileged bank of issue in the first place.

We thus arrive at our economist’s review of pre-Fed experience, which he summarizes with a slide showing the gyrations of U.S. GDP between 1880 and 1914, and highlighting the panic years 1884, 1890, 1893, and 1907. The slide’s title asks “Why Do We Need a Lender of Last Resort?” The implicit answer is: “Look at all the panics we had when we didn’t have one!”

To draw lessons from history is a fine thing. But it is not fine to look only a selective bits of history, ignoring other bits and even some large chunks, depending on which pieces do or do not affirm one’s prior beliefs. For his part our economist selects the 34 years prior to the Fed’s establishment, while setting aside the 34 following its establishment. He is thus able to overlook some awkward facts, to wit: that the number of banking crises was actually greater after 1914 than before; and that on three occasions (1920, 1930-33, and 1937-8) the percentage decline in output was greater than it had been in any of the pre-Fed crises. Indeed, even setting the tumultuous interwar period aside, while employing the best available statistics, it isn’t clear that the Fed has brought any substantial improvement in macroeconomic stability.

Because our economist refers only to U.S. experience, his listeners may also not have learned that banking crises were far more common in the pre-1914 U.S. than they were in other nations that l lacked central banks. In particular, they may not have been told that Canada altogether avoided the crises by which the U.S. was buffeted, and did so despite being on the same gold-based dollar standard and despite being a much smaller and less-diversified economy. Indeed, it seems quite unlikely that our economist told them, for doing so would have reduced his argument for having a central bank into a transparent non sequitur. Nor was there any peculiar or mysterious reason for Canada’s having managed to avoid crises without a central bank such as might justify setting its example aside. The Canadian system was stronger because, unlike their U.S. counterparts at the time, Canadian banks were allowed to establish nationwide branch networks, and were free from regulations limiting their ability to issue circulating banknotes. Restrictions of the latter sort, dating from the Civil War, were the fundamental cause of frequent U.S. currency shortages and occasional currency “panics” like the one in 1893.

In short, far from proving that the U.S. needed a lender of last resort, a careful look at U.S. monetary experience reveals (1) that what “we” really needed was to deregulate U.S. banks by letting them branch and by letting them issue notes backed by their general assets; and (2) that a “lender of last resort” was not just a poor substitute for such deregulation, but one that was tragically flawed.

The rest of our economist’s talk is devoted to the question of optimal inflation and alternative monetary policy targets, including the Taylor Rule. Here, too, his understanding is at best highly conventional and, at worst, extremely indulgent of the Fed’s shortcomings. He never considers the very different implications of productivity- and demand-driven deflation, much less the possibility that there might be some advantage to having either a variable inflation rate or one that’s ever negative. He makes no mention of the sharp increase in price-level uncertainty that has occurred since the Fed’s establishment, and especially since 1971. And he shrugs off the even more serious decline of the dollar’s purchasing power, blandly observing that practically all economists these days believe “that low and stable inflation has very low costs” (as if U.S. inflation has always been “low and stable”); that it isn’t useful to compare price level measures across long intervals because they involve different baskets of goods (as if most of the 96 percent decline in the dollar’s purchasing power since 1914 could be written-off to what ought to be unbiased statistical errors ); and that inflation is often due to wars (as if the Fed’s role as handmaiden to the U.S. Treasury had nothing to with past wartime price increases).

Enough. By now it should be perfectly obvious that our economist doesn’t really give a toss about “Alternative Monetary Systems.” The Federal Reserve System is, so far as he’s concerned, the best of all possible monetary systems. He gathers together hackneyed arguments in its defense, including just as much economic history as serves to affirm, but never to challenge, received opinion. He believes that he’s being objective, when in reality he’s got a severe case of status quo bias. He asserts that the opinions he expresses are his own, rather than those of a spokesman for the Federal Reserve System, without appearing to realize that a Fed spokesman would be hard-pressed to paint the Fed in more glowing colors.

But my intent, as I said at the onset, isn’t to single out our economist for a rebuke. His understanding of history and of alternative monetary systems is no worse than that of a thousand other otherwise competent monetary economists. It is proof, not of his own failure, but of the sad state of contemporary monetary economics. Above all, it underscores the dire need for an organization devoted to taking alternative monetary systems seriously.

[1] The Major-General’s song, from Gilbert and Sullivan’s Pirates of Penzanse.

[2] And hyperinflation.

[3] For a discussion of some of these determinants see chapter 2 of Lawrence White’s The Theory of Monetary Instututions (London: Blackwell, 1999).

[4] Most historical bank runs have been informed by prior information suggesting that the afflicted institutions might be insolvent.

[5] As they never refer to the bank run depicted in it, I suppose that Fed experts consider Mary Poppins to offer insufficiently “rigorous” evidence of how and why runs happen.

This morning, a Florida circuit court judge dismissed with prejudice a lawsuit by the members of the education establishment against the 13-year old Florida Tax-Credit Scholarship law, which grants tax credits to corporations that make donations to nonprofit scholarship organizations. About 70,000 low-income students in Florida currently receive tax-credit scholarships to attend the schools of their choice. Travis Pillow of RedefinEd (a blog connected to the scholarship organization Step Up for Students) has the story:

The statewide teachers union, the Florida PTA, the Florida School Boards Association and other groups filed the lawsuit in August, arguing the tax credit scholarship program unconstitutionally created a “parallel” system of publicly supported schools and violated a state constitutional provision barring state aid for religious institutions.

Judge George Reynolds, however, dismissed the case this morning. The plaintiffs, he ruled, could not show the scholarships harmed public schools, and could not challenge the program as taxpayers because it was not funded through the state budget.

Claims the lawsuit would harm public schools were purely “speculative,” Reynolds wrote, siding with arguments made by the state and parents who had intervened in the case. The plaintiffs could not show the program would hurt school districts’ per-pupil funding, or result in “any adverse impact on the quality of education” in public schools.

In dismissing the lawsuit on these grounds, the judge is following the precedent set by the U.S. Supreme Court and the New Hampshire Supreme Court.

In ACSTO v. Winn (2011), the U.S. Supreme Court rejected the standing of plaintiffs against Arizona’s tax-credit scholarship law because the scholarships constitute private funds, not government expenditures. Private funds, the Court ruled, do not become government property until they have “come into the tax collector’s hands.” Moreover, any impact on other taxes or spending is purely speculative, so the plaintiffs could not demonstrate any harm:

The costs of education may be a significant portion of Arizona’s annual budget, but the tax credit, by facilitating the operation of both religious and secular private schools, could relieve the burden on public schools and provide cost savings to the State. Even if the tax credit had an adverse effect on Arizona’s budget, problems would remain. To find a particular injury in fact would require speculation that Arizona lawmakers react to revenue shortfalls by increasing respondents’ tax liability.

Last year, in Duncan v. New Hampshire, the New Hampshire Supreme Court unanimously dismissed a lawsuit against the Granite State’s tax-credit scholarship law for the same reasons:

The personal injuries alleged by the petitioners in this case […] are insufficient to establish standing. The petitioners’ claim that the program will result in “net fiscal losses” to local governments does not articulate a personal injury. […] Moreover, the purported injury asserted here – the loss of money to local school districts – is necessarily speculative. […] Even if the tax credits result in a decrease in the number of students attending local public schools, it is unclear whether, as the petitioners allege, local governments will experience “net fiscal losses.” The prospect that this will occur requires speculation about whether a decrease in students will reduce public school costs and about how the legislature will respond to the decrease in students attending public schools, assuming that occurs.

This morning, the Florida judge reached the same, logical conclusion. The plaintiffs are not challenging “a program funded by legislative appropriations” so they lack standing to sue. Moreover, citing both of the above opinions, the judge concluded that any “injury” they allege is purely speculative:

Plaintiff’s Complaint also does not allege special injury sufficient to confer standing on Plaintiffs to challenge the constitutionality of the Tax Credit Program. […] [W]hether any diminution of public school resources resulting from the Tax Credit Program will actually take place is speculative, as is any claim that any such diminution would result in reduced per-pupil spending or in any adverse impact on the quality of education.

The plaintiffs are likely to appeal. And they are likely to lose that appeal. Last September, another circuit court judge dismissed a separate teachers union lawsuit alleging that the legislation expanding the tax-credit scholarship law was passed improperly. That judge also held that the plaintiffs lacked standing to sue because they could not demonstrate any harm.

Perhaps the education establishment should spend less time trying to prevent students from leaving their schools and more time trying to improve their schools so families will choose them.

Live Free and Learn: Scholarship Tax Credits in New Hampshire

Fifty years ago today, President Lyndon Johnson announced the launch of Project Head Start, a federal program that would deliver health, nutritional, academic, and other services to low-income, preschool children, hopefully giving them an early boost in life. It was certainly well intentioned, but as the federal government’s own research has shown, pure intentions don’t make something work, nor do hundreds-of-billions of taxpayer dollars:

In summary, there were initial positive impacts from having access to Head Start, but by the end of 3rd grade there were very few impacts found for either cohort in any of the four domains of cognitive, social-emotional, health and parenting practices. The few impacts that were found did not show a clear pattern of favorable or unfavorable impacts for children.

Unfortunately, the expansion of government pre-K programs generally seems to be based much more on good intentions than evidence. As George Mason University professor David Armor concluded in a recent examination of the research not just on Head Start, but numerous state-level preschool programs, “the evidence as it currently exists demonstrates only short-term skill gains that fade after a few years.”

It’s Head Start’s birthday. How happy should we be?

Washington’s determination to defend much of the globe has made the U.S. an international sucker, especially vulnerable to manipulation by supposed friends. Today the Gulf States are upset.

The basic “problem” in their view is that Washington is pursuing the interests of America, not Saudi Arabia & Co., which is seeking hegemony over the Gulf. The administration organized a summit yesterday to assuage their concerns, at which he promised to defend them.

They complain that Washington negotiated to prevent Iranian acquisition of a nuclear weapon rather than demanded Tehran’s surrender when that country said no, as it almost certainly would have. Even though forestalling development of an Iranian nuke would dramatically improve the region’s security environment, the Gulf nations worry that eliminating sanctions would increase Iranian revenues.

They insist on overthrowing Syria’s Bashar Assad, even though he has not threatened the U.S. Finally, they want Washington to issue security guarantees to protect corrupt gerontocracies and monarchies.

However, American foreign policy should be about promoting America’s security. As a global superpower which stands supreme militarily, the U.S. actually does not much need alliances to protect itself, especially in the Middle East.

Washington’s interests in the region are far more limited than commonly assumed. The energy market is global and expanding. The Gulf States would sell their oil even if Washington did not act as monarchical bodyguard on call.

Democratic and humanitarian concerns have been hopelessly compromised by decades of support for dictatorships like in the Gulf. First do no harm would be the best humanitarian prescription.

Israel’s safety is of concern to many Americans. However, it is a regional superpower well able to defend itself.

Instability is endemic to the region and beyond America’s control. Indeed, in recent years Washington has demonstrated that intervention promotes instability.

America’s most important interest is terrorism. Yet U.S. support for authoritarian monarchies angered the likes of Osama bin Laden, making America a target of violence, including 9/11. At the same time the Gulf States, especially Saudi Arabia, were underwriting Islamic fundamentalism and violent extremism. The Riyadh-led attacks on Yemen have empowered al-Qaeda in the Arabian Peninsula.

A “new equilibrium” is desperately required, as President Barack Obama suggested. But not the one he favors.

Before the summit the Gulf States pushed for a formal defense treaty, but likely congressional opposition killed that option. So, explained Secretary of State John Kerry last week: “we are fleshing out a series of new commitments that will create, between the United States and the GCC, a new security understanding, a new set of security initiatives that will take us beyond anything that we have had before.”

As I write on Forbes online: “It is hard to imagine a worse idea than committing America to directly intervene in conflicts irrelevant to American security on behalf of nations which share none of America’s most cherished values and which are able to defend themselves.” The conference attendees already have an institutional frameworks for common defense, the Gulf Cooperation Council and 22-member League of Arab States. Saudi Arabia ranks fourth in the world in military outlays.

The U.S. probably is best served if no single state dominates the Mideast. Certainly not Riyadh. The Kingdom tolerates no religious or political liberty at home; Riyadh has radicalized Islamic children around the world through construction of fundamentalist madrassahs. Saudi Arabia may have done more than any other country to promote terrorism.

Instead of offering long-term dependents enhanced protection, Washington should indicate that it is turning regional affairs over to those in the region. The Middle East likely would be an unstable, chaotic mess—rather like today. Conflict would continue, and it would be better for Americans to be out, not in, the unending bloodletting.

The administration did not need the summit to better communicate with the Gulf States. Washington should just say no and adopt a new policy.

You Ought to Have a Look is a feature from the Center for the Study of Science posted by Patrick J. Michaels and Paul C. (“Chip”) Knappenberger.  While this section will feature all of the areas of interest that we are emphasizing, the prominence of the climate issue is driving a tremendous amount of web traffic.  Here we post a few of the best in recent days, along with our color commentary.

A scattering of stories this week addressed the well-known, but perhaps not widely-recognized, fact that with human progress comes a more protected environment.

First up is a piece called “The Return of Nature: How Technology Liberates the Environment” posted at the Breakthrough Journal by Jesse Ausubel. This article makes a strong companion to the Ecomodernist Manifesto, that we commented on a few weeks ago.

The main premise is that human technology, as it develops and matures, actually decreases our negative impact on the environment.  This is something that we have been fond of saying—the richer and more developed a country becomes, the more it protects its environment. Instead of measures to restrict human progress (such as artificially limiting energy choice) we should be supporting efforts to further it.

Ausubel’s essay is packed with interesting nuggets of information—a comparison of amount of corn fed to people vs. that fed to cars, mpg of farm animals, peak demand of materials, etc.—some of which may be new to even ardent followers of human progress. Here is the article’s teaser:

Despite predictions of runaway ecological destruction, beginning in the 1970s, Americans began to consume less and tread more lightly on the planet. Over the past several decades, through technological innovation, Americans now grow more food on less acres, eat more sources of meat that are less land-intrusive, and used water more efficiently so that water use is lower than in 1970. The result: lands that were once used for farms and logging operations are now returning as forests and grasslands, along with wildlife, such as the return of humpback whales off the shores of New York City. As Jesse Ausubel elucidates in a new essay for Breakthrough Journal, as humans depend less on nature for the well-being, the more nature they have returned.

Ausubel’s full article is really well-worth a detailed look.

Another look at our impact on the environment was presented by Cato Adjunct Scholar Alex Epstein during his conversation with Glenn Beck this week. Alex says, “Of everything I have ever done in front of a video camera, this appearance on Glenn Beck was my favorite.”

Here’s an excerpt of the conversation a reported by TheBlaze.com:

“This is a battle, not about green energy versus fossil fuels, but about anti-humanism and anti-impact,” Epstein asserted. “If your ultimate goal is to maximize human well-being, then you care about your environment as a means to maximize human well-being.”

But Epstein said the green movement advocates minimizing human impact as its ultimate goal.

“So let’s take the decision to build New York City,” Epstein said, offering an example. “If New York City was up for a vote today, does anyone believe that the environmentalists would yes? What about Chicago? What about the first hospital? What about any given baby? No. So the idea is that if humans have an impact, it’s bad.”

Epstein said there is a “fundamental bias against humans” in the green movement, and “everyone has bought into anti-impact as an ideal,” when the philosophy really should be determining what has an “anti-negative impact for humans.”

Alex’s book is an excellent read and a persuasive case for how best to talk about global warming and the humanity’s contribution to it. If you don’t have a copy of it, You Ought to Have a Look!

Our quest for energy is also the subject of Cato’s Johan Norberg latest documentary Power to the People. This program, which recently aired on PBS, is a look at the impact that energy (or lack there of) has around the world and the best ways that are available to meet this urgent need.

The production quality as well as the informational content of Power to the People is very high, and just watching the two minute intro—cleverly spliced together from Johan’s travels around the world—is almost certain to draw you into watching the entire program.  A good thing—we promise!  Have a look:

And last, perhaps at least recognizing some of the above realities—that energy access/reliability/expansion (aka. economic development) is going to trump climate change concerns around the world—U.N. top climate officials continue to play down expectations of what is going to be achieved at the U.N.’s Climate Conference this December in Paris and its hopes of a meaningful international agreement to limit climate change. According to Reuters:

Christiana Figueres, laying out her recipe for a deal meant to be agreed by almost 200 nations at a summit in Paris, said it would be part of a long haul to limit climate change and not an “overnight miraculous silver bullet”.

The looser formula is a sharp shift from the U.N.’s 1997 Kyoto Protocol, which originally bound about 40 rich nations to cut greenhouse gas emissions and foresaw sanctions that were never imposed even when Japan, Russia and Canada dropped out.

Figueres dismissed fears by many developing nations, which have no binding targets under Kyoto and fear that a Paris accord due to enter into force from 2020 could force them to cut fossil fuel use, undermining economic growth.

“The bottom line (is that) this is an agreement and a path that is protective of growth and development rather than threatening to growth and development,” Figueres told an online news conference.

The deal would be “enabling and facilitating” rather than a “punitive-type” agreement, she said. The deal’s main thrust would be to decouple greenhouse gas emissions from gross domestic product growth.

At this point in time, being “protective of growth and development” is not going to lead to emissions reduction necessary to mitigate climate change to the degree or in the time frame envisioned by the U.N. But, regardless of any existence of international climate agreements, “growth and development” will lead to enhanced environmental protections—as today’s You Ought To Have a Look articles attest.

Rather than just being “protective” of growth and development, the U.N. ought to be encouraging it—which it could do better if it weren’t preoccupied with mitigating climate change.

This is a story we all know: the Great Depression was caused by market failure, the predictable fall-out from the excesses of the unrestrained, unregulated, Wild West that was the securities markets at the dawn of the 20th century. After all, before the 1930s, there was no Securities and Exchange Commission. The state securities laws, the so-called “blue sky laws,” were also products of the early 20th century, largely implemented between 1911 and 1931. These laws, as well as the Securities Act of 1933 and the Securities Exchange Act of 1934, tamed the wild speculators that had been defrauding the American public by requiring transparency in the markets and promoting thorough disclosure in securities offerings.

But is that story true? Paul Mahoney, Dean of the University of Virginia School of Law, has dug deeply into this narrative in his recent book, Wasting a Crisis: Why Securities Regulation Fails. The results of his research and analysis reveal a mismatch between the received wisdom about the causes of the Depression and the actual data, and a pattern of crisis-narrative-regulation that has persisted through the recent Great Recession and the implementation of Dodd-Frank.

Dean Mahoney recently shared his thoughts on these and related issues at a book forum at the Cato Institute. Joining us was also banking regulation scholar Heidi Schooner of the Columbus School of Law at the Catholic University of America, leading to an interesting discussion of the externalities of bank failures and the application of banking regulation principles to non-bank entities.

Watch the video of the event: