Policy Institutes

Let’s celebrate some good news.

When politicians can be convinced (or pressured) to exercise even a modest bit of spending restraint, it’s remarkably simple to get positive results.

Here’s some of what I wrote earlier this year.

…one of the few recent victories for fiscal responsibility was the 2011 Budget Control Act (BCA), which only was implemented because of a fight that year over the debt limit. At the time, the establishment was screaming and yelling about risky brinksmanship. But the net result is that the BCA ultimately resulted in the sequester, which was a huge victory that contributed to much better fiscal numbers between 2009-2014.

And “much better fiscal numbers” really are much better.

Here’s a chart I put together showing how the burden of federal spending declined between 2009 and 2014. And this happened for the simple reason that spending was flat and the economy had a bit of growth.

But now let’s look at some bad news.

It won’t surprise anyone to learn that the big spenders in Washington don’t like fiscal discipline.

They don’t like the modest restraint required by the Budget Control Act and they want to repeal or eviscerate the law. And they’ve already enjoyed some success, replacing spending restraint with tax hikes and budget gimmicks back in 2013.

And now there’s pressure for a similar capitulation this year, led by the Committee (gee, what a shocker) that’s in charge of spending money.

An article in Politico captures some of the internal dynamics.

…what should have been a dream job for House Appropriations Chairman Hal Rogers (R-Ky.) has instead become an exercise in frustration. Despite his plum position, Rogers finds himself at odds with GOP leadership… He’s calling for his party to raise strict spending caps he says are choking off necessary funding… But Rogers’ calls for a budget deal have fallen flat.

By the way, it’s not the main point of today’s column, but the article also shows why it was so important to eliminate “earmarks.”

Lawmakers no longer can be bribed to support more spending in exchange for pork-barrel projects.

It’s a reminder of the sway lost by the once powerful appropriations panel, in an age when earmarks are outlawed… The committee, once an aspiration for every lawmaker, is struggling to make its voice heard… appropriator Steve Womack (R-Ark.)…cheered Rogers for “pushing our leaders to the extent that he can” toward a budget accord. “Appropriators are in a tough spot … We just don’t have the grease that we formerly possessed.”

Good. I don’t want big spenders to have “grease” that facilitates a bigger burden of government.

But getting rid of earmarks didn’t win the war. Washington is still filled with lobbyists, bureaucrats, cronies, special interests, and other insiders who want more spending.

They want to bust the spending caps so they can line their pockets at the expense of the American people. Which is why maintaining the BCA caps are a critical test of whether Republicans are sincere about controlling Leviathan.

To understand the importance of the spending caps, here’s a chart from the Center on Budget and Policy Priorities, a left-wing group that supports bigger government. I won’t vouch for their specific numbers since they have an incentive to exaggerate and overstate the amount of fiscal discipline that’s been imposed, but there’s no question that the big spenders have been handcuffed in recent years.

Now that we’ve reviewed why it’s important to have spending caps, let’s talk about the elephant in the room.

There are two reasons why Republicans may sell out. First, as already discussed, some of them are spendaholics. They like bribing voters with other people’s money.

The second reason the GOP may capitulate is that the President and congressional Democrats may force a “government shutdown” fight.

To be more specific, the annual spending (or “appropriations”) bills are supposed to be completed by October 1, which is the start of the new fiscal year.

If President Obama uses his veto pen, which is what most observers expect, there will be a shutdown. And even though previous shutdowns have yielded positive policy changes, Republicans are afraid that they will suffer political blowback.

Given that they won a landslide election in 2014 after the 2013 shutdown (and also prevailed after the 1995 shutdown fight), this skittishness is a bit of a mystery, but the conventional wisdom is that GOPers will capitulate to Obama and agree to a deal that busts the spending caps.

Which would be very unfortunate for the cause of good fiscal policy.

On the issue of big government and spending discipline, I recently appeared on John Stossel’s show, along with Chris Edwards, while participating in FreedomFest. Here’s what we said about the importance of shrinking Washington to promote freedom and prosperity.

Dan Mitchell and Chris Edwards on Big Government vs Growth

P.S. In this video, Chris and I pontificate at greater length on fiscal policy issues.

P.P.S. While I’m critical of the politicians on the Appropriations Committee, I don’t think they’re necessarily any worse than other lawmakers. As I explained last month when analyzing the bad behavior of politicians who are on the committees that deal with transportation, the system creates a perverse incentive structure to expand government.

P.P.P.S. Here’s some government shutdown humor. And some more at the bottom of this post.

Ecuador’s ambassador to the U.S., Francisco Borja Cevallos, wrote a letter, “Ecuador’s Progress,” which was published in the New York Times on August 8th. Ambassador Borja reviews a number of Ecuador’s recent economic accomplishments. Fine. After all, by Latin American standards, Ecuador has performed well. Indeed, my Misery Index rankings for the region in 2014 show that only Panama, Mexico, and El Salvador performed better than Ecuador did.

What Ambassador Borja failed to mention is the true source of Ecuador’s relative success: dollarization. Yes, Ecuador is dollarized. Ecuador represented a prime example of a country that was incapable of imposing the rule of law and safeguarding the value of its currency, the sucre. The Ecuadorian sucre traded at 6,825 per dollar at the end of 1998, and by the end of 1999 the sucre-dollar rate was 20,243. During the first week of January 2000, the sucre rate soared to 28,000 per dollar.

With the sucre in shambles, President Jamil Mahuad announced, on January 9, 2000, that Ecuador would abandon the sucre and officially dollarize the economy. Telephone calls from both President Bill Clinton and U.S. Treasury Secretary Larry Summers encouraged Mahuad to dollarize. The positive confidence shock was immediate. On January 11th — even before a dollarization law had been enacted—the central bank lowered the rediscount rate from 200 percent a year to 20 percent. On February 29th, the Ecuadorian Congress passed the so-called Ley Trolebus, which contained dollarization provisions. It became law on March 13th, and after a transition period in which the dollar replaced the sucre, Ecuador became the world’s most populous dollarized country. And dollarization remains, to this day, highly popular; most Ecuadorians — 85 percent — still give dollarization a thumbs up. What Ecuadorians fear is that President Rafael Correa, who has opposed dollarization in the past, might just abandon the greenback, which is Ecuador’s anchor of stability.

Motoko Rich of the New York Times reports:

Across the country, districts are struggling with shortages of teachers, particularly in math, science and special education — a result of the layoffs of the recession years combined with an improving economy in which fewer people are training to be teachers.

So do we really have a shortage of teachers today, compared to historical levels? How big were the recession layoffs in historical context? I offer an updated chart below of the % change, since 1970, in the number of teachers and students, as well as the change in the cost per graduate of a public school K-12 education.

As the chart reveals, the recession layoffs were tiny when compared to the massive growth in our teaching workforce since 1970. To this day, we employ over 150% as many teachers as we did in 1970, to teach only 109% as many students. In other words, the number of teachers has grown 5 times faster than enrollment. That does not mean that there couldn’t be a small portion of districts in the U.S. that really need to hire teachers, but it does mean that there is no “national teacher shortage” compared to historical levels of employement. To anyone who claims otherwise, we can only ask: a shortage compared to what?

Recently I got an envelope at home that looked important. It had no return address, just a notice that said “DO NOT DESTROY/OFFICIAL DOCUMENT.” Trembling, I tore it open. The reply envelope inside also looked official, with “PROCESS IMMEDIATELY” emblazoned across the top. But since it was addressed to the Republican National Committee, I began to suspect that it wasn’t actually an OFFICIAL DOCUMENT. It did say that I had been specially selected “to represent voters in Virginia’s 8th Congressional District” and that I was receiving documents registered in my name, with tracking code J15PM110. The document must be returned by August, 17, 2015.

So in another words, just another dishonest communication from a political party. The dishonesty didn’t even wait for the letter, it started with the outer envelope.

But I wouldn’t take time to complain about mere political dishonesty. What I actually found interesting was the first question on my 2015 CONGRESSIONAL DISTRICT CENSUS. It was a simple question, asking how I describe my political ideology:

1. Do you generally identify yourself as a:

  • Conservative Republican
  • Moderate Republican
  • Independent Voter who leans Republican
  • Liberal Republican
  • Tea Party Member
  • Libertarian
  • Other____________________

So it’s nice to see that at last political professionals are noticing the existence of libertarian voters. My colleague David Kirby and I have been writing about libertarian voters for about nine years now, starting with our paper “The Libertarian Vote.” In that paper we found that some 13 to 15 percent of voters give libertarian answers to three standard questions about political values. (And as Clive Crook wrote in the Atlantic, why do so FEW Americans give such “characteristically American answers” to the questions?) The Gallup Poll, with a slightly easier test, found that 24 percent of respondents could be characterized as libertarians. David Kirby found that some 34 percent of Republicans hold libertarian views, which might just be what the RNC wants to investigate.

However, our studies have also shown that more voters hold libertarian views than know or accept the word “libertarian.” In a followup study done by Zogby International we found that only 9 percent of the voters we identified as libertarian chose the “libertarian” label. (That is, only 9 percent of 15 percent, or about 1.5 percent of the electorate.) Fifty percent chose “conservative” and 31 percent “moderate.” So the RNC survey, even if the results are actually tallied, is likely to underestimate the number of Republicans who hold libertarian views. A better question, which they didn’t ask, might be 

“Would you describe yourself as fiscally conservative and socially liberal?”

In the Zogby survey 59 percent of respondents answered “yes” to that question. When we made the question a little more provocative, adding the word “libertarian”–

“Would you describe yourself as fiscally conservative and socially liberal, also known as libertarian?” 

–44 percent of respondents still said “yes.” Now that would be a fun question for the RNC to ask next time! Or indeed the DNC.

Over the next couple of days, Democratic presidential candidate Hillary Clinton will be playing up her new, $350-billion proposal primarily intended to make paying public college tuition a debt-free experience.

Beware “free”!

According to early information about the plan – I couldn’t find details on Clinton’s campaign Web page yet – under the proposal the federal government would spend $200 billion over ten years on public colleges and universities, with a condition that states also increase their higher ed outlays. The goal would be to make paying public college tuition debt-free for all. In addition, the plan – called the “New College Compact” – would give $25 billion to historically black colleges and universities, and other schools with low endowments, over ten years. Next, the proposal would allow all current student debt holders to refinance loans at lower interest rates and sign up for income-based repayment plans capping monthly payments at 10 percent of discretionary income and forgiving whatever remained after 20 years. The loan-term plan is estimated to cost $125 billion over ten years.

Of course, as with any politically good plan, it seems details on how all this would be paid for – other than to say the rich will cover the $35-billion annual price tag – will be announced at some later, likely quieter date. Ditto details on how the plan will ensure colleges spend all the new, forced taxpayer largesse on instruction rather than fluff like climbing walls and water parks that students demand and schools, increasingly, deliver. Putting off these latter details could be especially important politically because while colleges love money, they do not love strings. To keep maximum support from the Ivory Tower – typically a welcoming edifice for Democrats – you’ll want to keep the downside hazy.

Of course, the estimated price tag is just the most immediate, obvious cost of the plan. The more hidden cost would be the plan’s deleterious effects: encouraging yet more people to spend more time in programs even less tethered to real-world needs. Quite simply, when someone else pays your bills you are more likely to consume, and less likely to think efficiently about what you are consuming. That’s been the higher education problem for decades, and this plan would have someone else foot even more of the bill.

Already we see massive overconsumption of higher ed: About a third of bachelor’s degree holders are in jobs that don’t require the credential. Lots of employers seek people with degrees for jobs that don’t appear to need college-level learning. And “college-level learning” has come to mean less and less actual learning. In other words, thanks largely to third-party funding, we appear to have a vicious cycle of credential inflation that would almost certainly get even worse as more and more people saw college as “free.” And no, it does not appear that spending more on higher education automatically increases human capital and, hence, economic growth. Indeed, government college spending may well hamper growth by taking money from the individual taxpayers who earned it – and would have used it for their real needs – and giving it away to colleges regardless of what people need.

“Free” always sounds so good. Until, that is, you think through how costly “free” can be.

Regular readers might recall a Supreme Court brief Cato filed last year in SBA List v. Driehaus, which involved a challenge to an Ohio law that made it a crime to “lie” about a politician during an election. That case predictably resulted in the law being overturned as an unconstitutional violation of the First Amendment.

But that wasn’t the end of the story. Because SBA List reached the Supreme Court on procedural grounds – and the law was only declared unconstitutional by the district court on remand – the ruling didn’t automatically invalidate similar laws across the nation. Over a dozen states still have criminal laws almost identical to Ohio’s, letting thin-skinned politicians haul their critics into court whenever they think politics attacks against them are unfair.

One of these states was Massachusetts. Earlier this year, Cato filed an amicus brief in the Massachusetts Supreme Judicial Court to argue that there was no way that the law could withstand any level of First Amendment scrutiny. The SJC agreed. In an opinion released this past Thursday, the court invalidated the law for being “antagonistic to the fundamental right of free speech,” and chilling “the very exchange of ideas that gives meaning to our electoral system.”  

While a victory, the facts of Commonwealth v. Lucas show just how odious and dangerous these law are in practice. The case began with Brian Mannal, a sitting state representative. When he was last up for reelection (he won by 205 votes), Mannal took issue with a series of flyers distributed by his critics.  Instead of engaging in a debate about the underlying issues, Mannal initiated criminal proceedings against the treasurer of the organization that published the flyers. This demonstrates one of the most dangerous aspects of these laws: any politician whose ego has been bruised can file a complaint in order to silence and intimidate opponents. 

The basis for Mannal’s complaint was utterly ridiculous. The flyers drew voters’ attention to the fact that Mannal, who in addition to being a politician is also a criminal defense attorney, had sponsored bills to increase state funding for lawyers who represented indigent defendants and reduce the mandatory restrictions placed on sex offenders released on parole or probation. The flyers claimed that “Brian Mannal is putting criminals and his own interest above our families.”

Mannal insisted that this violated the state law against publishing “any false statement in relation to any candidate for nomination or election to public office, which is designed or tends to aid or to injure or defeat such candidate” because, as he put it in his formal (handwritten) complaint “the mailer inferred [sic] in no uncertain terms that Brian Mannal sought to benefit financially from legislation that he had filed.”

Instead of compounding Mannal’s foolishness by prosecuting his victim, however, the district attorney referred the case to the SJC, asking the court to rule on the law’s constitutionality. The prosecutor sensibly declined to defend the law but, at the last minute, the state’s attorney general submitted a brief urging the SJC to uphold it.

And this is when things got really weird. Remember, this case wasn’t just argued in the immediate aftermath of the Supreme Court’s decisions in SBA List and United States v. Alvarez (striking down a law that made it a crime to falsely claim to have won military honors), but after nearly 200 years of rulings holding that political discourse is at the very heart of the First Amendment’s protection – and that any law that chills or limits electoral speech is presumptively invalid. Against that backdrop, the attorney general made what the court charitably called “the rather remarkable argument that the election context gives the government broader authority to restrict speech.” Of course, as the court noted “the opposite is true.”

And that’s the point: judges and other government officials should only be called upon to determine the truth or falsity of legal propositions – not political opinions.

Although I don’t call myself a Friedmanite or a monetarist (or anything else), and many of my opinions on monetary economics are ones that he rejected, I’m a huge Milton Friedman fan. I regard him as the most influential champion of free market economics after Adam Smith, and as one of the greatest monetary economists of the last century. He is certainly among the dozen monetary economists of any era from whom I have learned the most. Finally, in my own dealings with him I found him to be an upright and generous man, as well as one who gave me a great deal of encouragement and support when I most needed it.

Consequently it distresses me to see Friedman attacked, and especially so when the attacks come from persons who share my fondness for monetary freedom. One such attack came my way two weeks ago, in the shape of a complaint about a Cato email notice commemorating what would have been Friedman’s 103rd birthday, on July 31. The writer, a free-market gold standard advocate, and a generally pleasant and mild-mannered fellow, called “Chicago School” monetary economics “a virulently anti-free market conception that has institutionalized our unstable…monetary system,” and said that, in leading it, Friedman “did us and the world an unfathomable disservice.”

Alas, far from being rare, harsh opinions about Friedman are easy to come by among the more uncompromising critics of government intervention in monetary affairs. Ludwig von Mises, another of my monetary economics heroes, may have started the trend when, according to Friedman himself, he stormed out of a debate at the first (1947) Mont Pelerin meeting after calling its other participants, Friedman among them, “socialists.” Some years later, in 1971, Murray Rothbard reached a similar verdict, this time in print, though he substituted “statist” for “socialist.” (That Friedman was more of a statist than Rothbard himself was certainly true. But who, in 1971, wasn’t?) Today more than a few “End the Fed” libertarians still accept Rothbard’s judgement.*

My first personal encounter with Friedmanophobia took place in 1988. Thinking that The Freeman might review it, I had sent a copy of The Theory of Free Banking to the Foundation for Economic Education. But instead of getting a review, I got a terse letter from Hans Sennholz, FEE’s director at the time, who was also a well-known champion of monetary freedom. In the letter Sennholz lashed out at me for having had the brass gall to send him a book that expressed approval for some of Friedman’s ideas, while also offering some (mild) criticisms of “The Master.” (“The Master,” in case you don’t know it, was von Mises.) Of course I was taken aback, and all the more so since I considered myself, back then, much more a Mises than a Friedman fan.

Even now I’m sure I’m as aware as any of Friedman’s toughest critics of the various forms of government intervention in the monetary system he favored at one time or another. Throughout most of his career Friedman categorically favored a managed fiat standard over a gold standard. He also favored (as was only natural given that first preference) flexible over fixed exchange rates. Finally, for much of his career he dismissed free banking as the equivalent of legal counterfeiting. These are all, needless to say, positions that are objectionable, if not obnoxious, to persons who believe that unhindered markets are more capable than governments are of producing orderly and reliable monetary systems.

But there is another side to the ledger that Friedman’s more radically free-market critics seem to overlook. Two items especially deserve notice. Although he favored fiat money, Friedman was an unflinching and relentless opponent of monetary discretion. We also have him (and Anna Schwartz, another of my economist-heroes), to thank for the fact that the Great Depression is no longer considered proof of the inherent instability of free markets.**

Friedman’s more strident critics also seem unaware of how his monetary ideas changed over time, evolving in a way that fans of either the gold standard and free banking ought to commend. Much of this evolution appears to have taken place during the mid-1980s. In various articles written then, Friedman admitted having erred in treating fiat money as a less expensive alternative to gold. He also renounced his previous defense of central banks’ currency monopolies, conceding that there was in fact no good reason for prohibiting commercial banks from issuing their own paper notes. Instead of recommending a constant growth rate for the money stock, as he had in the past, he switched to arguing for a constant or “frozen” monetary base, which was tantamount to recommending that the Fed’s monetary and discount window operations be altogether shut down. Finally, he publicly declared himself in favor of abolishing the Fed on numerous occasions. Think what you will of Friedman’s later opinions, you will go blue in the face trying to convince me that they are those of a “statist.”

Finally, had it not been for Milton Friedman, I and other academic (or formerly academic) proponents of monetary laissez-faire would be an even more pathetically forlorn bunch than has actually been the case. For setting a handful of “Austrian” economists aside, the list of academic economists, including economists working for central banks and other financial regulatory authorities, who have shown a willingness to take free banking ideas seriously, and to treat their authors courteously, even allowing some of their articles to get published in mainstream academic journals, consists overwhelmingly of prominent “Chicago-School” monetary economists, if not of Friedman’s own students. Had it not been for Friedman and his students, in other words, there would almost certainly not be a Modern Free Banking School of any academic standing today.***

One of those students — and yet another of my monetary economics heroes — is David Laidler, who wrote me just recently. Like that other recent correspondent David was passing on some of his thoughts about Milton Friedman on the 103rd anniversary of his birth, in the shape of a copy of his speaking notes for a talk he gave on “Milton Friedman’s Intellectual Legacy” at Canada’s Institute of Liberal Studies. David has kindly allowed me to make those notes available here. As David’s appraisal of Friedman is, like all of his work, both thoughtful and well-written, I urge everyone to read it.

In fact, I disagree with only one sentence in David’s otherwise excellent talk. This occurs when David says that, starting in the 1980s, “Milton’s…inclination was to drift toward ‘free banking’.” That doesn’t sound right to me, for “drifting” was hardly Friedman’s style. Instead, I’m inclined to believe — and Friedman himself claimed — that he moved toward free banking quite deliberately, upon finding that the predictions of its theorists conformed better to observed reality than his own earlier views did.

I hope that David would not disagree.

______________________________

* An amusing illustration of this — though one of admittedly doubtful evidential value — consists of a straw poll taken on the Ron Paul Forum in which 16 out of 28 participants held that Friedman was either “a statist leaning libertarian, or a flat out statist.” (Since I eat vegetables now and then, I suppose I must be a “radical vegetarian-leaning carnivore.”)

**In America’s Great Depression, originally published in the same year as Friedman and Schwartz’s Monetary History of the United States, Murray Rothbard also blamed the Great Depression on the Fed, basing his arguments not on monetarist ideas but on the Mises-Hayek theory of the business cycle. But regardless of the the different theories, it was Friedman and Schwartz’s work rather than Rothbard’s that was primarily responsible for reversing the tide of opinion, especially among academic economists.

***I also owe a particular debt to Dick Timberlake, a Chicago-trained monetary economist who had Friedman among his teachers. It was Dick who brought Larry White to the University of Georgia and who later, with Larry’s help, got me a job there. Dick has been yet another hero to me, as a monetary economist certainly, but also in lots of other ways.

When you go to vote for state legislators, you don’t expect that some other voters in your state will have their votes weighed double yours, just because they happen to be neighbors with people who can’t vote. But that, in effect, is what Texas is trying to do.

When Texas draws its state legislative districts, it looks only to equalize the total population in each district, ignoring how many of those people are actually citizens of voting age. The result is a plan that would create one senate district where 74% of the residents can vote and another where only 47% can vote. Depending on where you live, you might be one of 383,000 people who get to choose a senator, or one of 611,000.

This is a blatant violation of the principle of “one person, one vote” (OPOV) that the Supreme Court established 50 years ago under the Fourteenth Amendment’s Equal Protection Clause: no matter where you live in your state, your vote should have the same weight. Nonetheless, a three-judge federal district court upheld the plan, following a flawed Fifth Circuit precedent holding that the Equal Protection Clause was ambiguous as to whether total population or voter population should be equalized.

But if a state really only has to care about total population, it could create districts of 10%, 5%, or even 1% eligible voters—and the tiny groups of voters in those districts would each be able to choose one senator all the same. Cato, joined by the Reason Foundation, has filed an amicus brief in the Supreme Court arguing against this absurd result, focusing on rebuttals to two supposed justifications for allowing states to violate OPOV.

First, many have argued that the method by which members of Congress are apportioned to the states—according to total population—provides an important “federal analogy” that justifies using total population to allocate political power within a state. But history shows that the federal rule was created to solve a uniquely federal problem. Since states define suffrage for themselves, a rule based on eligible voters would provide states with a perverse incentive to expand suffrage as much as possible (for example, by lowering their voting age to 12) and thus artificially acquire more representatives.

States, however, are not mini-nations; one county in Texas cannot lower its voting age below that of the other counties in a bid to gain more state senators. The primary justification for the federal rule simply does not exist at the intra-state level. In fact, the true federal analogy is to that part of the Fourteenth Amendment which was designed to remove the newly freed but still disenfranchised slaves from their states’ apportionment total, so as not to give more voting power to their former owners. The Fourteenth Amendment confirms the principle that when unfranchised persons are not “virtually” represented by the votes of their neighbors, they should not be used to give more weight to the voting power of those neighbors.

Second, besides the misunderstood federal analogy, it has also been argued that Section 2 of the Voting Rights Act, as currently interpreted, requires states to gerrymander districts along racial lines in ways that will make low-percentage-voter districts inevitable. But a statute can’t trump the Equal Protection Clause. States should not be tied in knots with statutory requirements when drawing their districts such that OPOV is reduced to, at best, a secondary or tertiary consideration.

To the extent statutory barriers are preventing states from treating their voters equally, the Supreme Court must remove them. In this case, the Court should to equalize the weight of each vote.

The Supreme Court will hear the case of Evenwel v. Abbott late this fall.

A Washington Post story on Egypt’s addition to the Suez Canal reminds me of stories about stadiums, arenas, and convention centers. First, there’s a leader with an edifice complex:

There was no public feasibility study, just an order from the new president. He wanted Egypt to dig a new Suez Canal. Oh, and he wanted it completed in a year.

That was last August. And on Thursday, with much pomp and circumstance, President Abdel Fatah al-Sissi inaugurated the new waterway — an expansion of the original, really.

And then, as noted above, there was no real study. In the United States elected officials usually commission bogus studies that economists laugh at.

There’s the hoopla in place of sound economics:

For the past few weeks, the country has been bombarded with messages, slogans and propaganda — all extolling the virtues of what the government is calling Egypt’s “gift to the world.” The canal will double shipping traffic and change the world, officials say. In a countdown to the opening, the flagship state newspaper said: “48 hours… and the Egyptian dream is completed.”

Just this week the mayor of St. Louis, saved by a judge from having to endure a public vote on taxpayer funding for a new NFL stadium, exulted:

“Having an NFL team in a city is really, I think, a huge amenity,” he said. “It’s one of the things that make living in a big city fun.”

Like the stadiums, the new canal path wasn’t needed:

But less important amid the hyper-nationalist fervor, it seemed, is the fact that the $8 billion expansion of one of the world’s most important waterways probably wasn’t necessary….It will probably shave only a few hours off the time that vessels wait to traverse the canal. Global shipping, economists say, has been sluggish since the 2008-2009 world financial crisis.

As with stadiums and other grand municipal projects, economists scoff at the purported benefits:

“This is politics. [The government] wants to give the impression we are entering a new phase of the Egyptian economy,” said Ahmed Kamaly, an economics professor at the American University in Cairo. Egypt’s economy tanked with the turmoil of the Arab Spring, with foreign reserves plummeting and the tourism industry suffering.

“It’s all propaganda,” Kamaly said of government’s grand promises of a revived national economy. “The benefit is overestimated.”

Egypt wants to be known as a modern country. Well, spending taxpayers’ money on white elephants is certainly a characteristic of rich, advanced countries. But $8 billion is a lot even in the white elephant league.

In one of my recent posts I observed, not only that Canada’s ca. 1913 currency and banking system was sound and stable, but that it was “famously” so. Many of my readers may wonder about that description. After all, relatively few people today are aware of Canada’s having had such a successful system; and most current writings on U.S. monetary history don’t even refer to it. That one can read one official Federal Reserve account after another of that history, and especially of the Fed’s origins, without hearing so much as a whisper about Canada’s having had a well-working banking and currency system, albeit one without a central bank, goes without saying.

But the story was far different a century or more ago. Back then, just about any U.S. adult who paid attention to current events knew all about Canada’s smoothly-working monetary system, and also about various reformers’ efforts to replicate it’s success in the U.S. Where’s my proof? It’s all right here, in hundreds of articles that appeared in scores of U.S. newspapers between 1890 and 1913.

Read ‘em, or some of them at least. And weep.

The foreign press also took some notice of Canadian banking. One such notice, consisting of a long letter in the September 7, 1896 London Times, seems to me especially noteworthy. Though it was sent from Blackfriars, it’s author, Thomas G. Shearman, was actually a British-born American citizen then visiting London. A lawyer by trade (he defended Henry Ward Beecher in his sensational trial for adultery), he was also a well-respected political economist and the original author of the “Single Tax” proposal that was subsequently endorsed by Henry George.

What distinguishes Shearman’s letter from many of the other writings I’ve referred to is the fact that it traces William Jennings Bryan’s popularity — especially among farmers — and that of the free silver and greenback movements, to the peculiar shortcomings of the U.S. currency and banking system, and especially to the lack of adequate banking facilities in many parts of the country:

In the south and west it is quite common to find numerous populated districts…in which there is not a single bank of deposit. In most of the agricultural regions back of the North Atlantic States payment by cheque is practically unknown. All transactions are settled either by payment in paper money or by book accounts.

For reasons pointed out in my earlier post, there simply wasn’t enough coin and paper money to pay for half of the crops, let alone to pay for them all. Consequently farmers were forced to buy goods on credit from country or “crossroad” stores, at stiff annual rates of between 20 and 40 percent, to be settled eventually with their crops. “Is it at all surprising, under such circumstances,” Shearman asks, “that these small farmers, hardly pressed for a living, should clamorously demand more money of every kind — gold, silver, paper, or rags?”

A much less dangerous remedy, Shearman observes, would be to simply give farmers better access to banking facilities. In the U.S., however, that solution was ruled out both by laws against branch banking and by a tax of two or three percent on bank capital. Not so in Canada:

Just across the northern boundary of the United States lies a country, inferior in climate and lacking many of our natural and social advantages, shut out from its natural commerce by absurd tariffs on each side, even more dependent upon agriculture than we are, and having no opportunities which we do not possess in at least equal measure. Why does not Canada have a currency question? Why do not Canadian farmers clamour for silver coinage and fiat money?

The answer, of course, was nationwide branch banking, thanks to which

first class banks of deposit and discount are made easily accessible to every farmer, mechanic, lumberman, and fisherman in the remotest parts of Canada on substantially the same terms with the residents of the largest cities. Each branch… has at command a supply of loanable funds ten times greater than it actually needs, because the head office always has millions lent on call in the United States, which it would be glad to use among the farmers of Canada. A similar state of things might easily exist in the United States; but it is made impossible by legislation… .

In short, “the true remedy for the hardships of American farmers is to be found (as in so many other cases) not in more restriction, but in more liberty.”

Couldn’t have said it better myself.

[Cross-posted from Alt-M.org]

Former Pennsylvania Senator Rick Santorum, who has declared “I am not a libertarian, and I fight very strongly against libertarian influence within the Republican Party and the conservative movement,” is also unlikely to win any prizes for temperateness of rhetoric. Last night at the Fox News debate he likened the Supreme Court’s jurisprudence on gay marriage to the infamous case of Dred Scott v. Sandford, a line he’s been using for a while.

Very likely he picked it up from a coterie of social-conservative commentators at places like National Review and First Things who’ve been using the comparison a lot. Last October I wrote a piece on this curious trope. A few excerpts: 

Dred Scott v. Sandford was the decision that 1) entrenched slavery and 2) set the nation on a path to Civil War. Slavery and the Civil War having been more horrible than most things happening in America lately, libertarian lawyer/author Timothy Sandefur has proposed that comparisons to Dred Scott should trigger American law’s version of the Internet’s “Godwin’s Law” under which whoever brings in Hitler has lost the argument….

[A National Review commentator claims] that the marriage rulings, like Dred Scott, pose a “comprehensive threat to republican government.”

Note what he’s asserting here. It’s one thing to object to a Supreme Court decision as restricting what laws the democratic process can make. That’s what Supreme Court decisions do, at least when they recognize constitutional rights that curtail government power. (Conservatives, like liberals, have their favorite Court decisions that do this, on topics that include freedom of education, gun liberty, and freedom of campaign speech.) It’s another thing to claim a given decision will make it impossible for republican government itself to function in the future in some sort of “comprehensive” way.

It happens that Dred Scott is one of the very few Supreme Court decisions you could describe without hyperbole as doing this, since in a nation closely divided between slave and free, it entrenched the slave power in a way that tended to paralyze political action in general. In the cataclysm that followed, the survival of republican government indeed was in peril….

The Supreme Court reports are littered with rulings that are poorly reasoned, wrongly decided or both, some of which have had dire consequences for the nation. But for the reasons Sandefur suggests, most sensible commentators refrain from lumping these decisions in with Dred Scott. One is that they hesitate to liken other evils to slavery. The other is that they hesitate to liken other episodes of social division to the American Civil War. None of the candidates on the podium last night believe so strongly in reversing a decision like Obergefell that they would see it as worth putting America through the horrors of civil war. Do they?

Foreign policy didn’t get a lot of air time in last night’s GOP debate, which often seemed to focus primarily on Donald Trump and the fact that John Kasich’s dad was a mailman. The candidates appeared worryingly ill-prepared to discuss foreign policy issues, with confused and misleading statements, incorrect facts, and a few truly bizarre comments. 

There is a lot of great news coverage - see here or here for examples - highlighting these statements, from Jim Gilmore’s call for the U.S. to create a Middle Eastern NATO, to Ted Cruz’s decision to describe the opinions of the Chairman of the Joint Chiefs, Gen. Martin Dempsey, as nonsense. At least one candidate conflated Iran with ISIS. The first debate included a baffling discussion of ‘cyberwalls,’ a never-before heard term that seemed to encompass both the Great Firewall of China and the refusal of private companies like Google to hand over data to the U.S. government.  

The bigger problem with the debate, however, was the mass oversimplification of foreign policy. Only one candidate, Carly Fiorina, acknowledged that foreign policy can be complicated, a statement immediately undermined when she noted that some issues are black and white, and promised to tear up the Iran deal on her first day in office. Unfortunately, foreign affairs is actually complex. Take the Middle East, where the United States is involved in conflicts both in opposition to, and in alignment with Iranian proxies. Or our relationship with Russia, which isn’t limited to confrontation in Ukraine, but includes cooperation on the Iranian nuclear deal and Syrian issues. Debates, with their reliance on manufactured soundbites, aren’t the best place to delve into these complexities. But no candidate on the stage gave any indication of a willingness to engage with the complicated nuances of foreign policy. 

The debate also lacked regional balance, focusing almost entirely on the Middle East, Iran deal, and ISIS. These issues aren’t unimportant, but other major topics went unaddressed. Russia got limited talk time, while China - arguably America’s most important diplomatic relationship - wasn’t even discussed. Trade issues were glossed over, except Donald Trump’s facile assertions that he’ll help America “win” at trade. America’s relationship with Latin America, our fastest growing trade partner, came up only in the context of illegal immigration. 

By failing to address other regional or topical issues, the foreign policy debate focused on the immediate future, and didn’t address long-term strategic concerns. The next president needs to think not only about the issues in today’s headlines, but about how actions taken today will impact foreign affairs in the future. Indeed, one question - which asked candidates their plan to defeat ISIS in ninety days - showed an utter lack of awareness of America’s own recent history. After two decade-long insurgencies in Iraq and Afghanistan, the time commitment required to intervene in such conflicts shouldn’t be a surprise to anyone. 

The many gaffes and omissions in last night’s GOP debate highlighted how few of the candidates are genuinely prepared to address foreign affairs issues. There are many more primary debates to come, for both the Republican and Democratic Party. Hopefully future debates will feature not only candidates who are better-prepared on foreign policy issues, but also questions which allow them to address more than just the Middle East. 

In last night’s GOP presidential debate, Sen. Marco Rubio (R-FL) said in response to a question about the Common Core national curriculum standards that, sooner or later, the Feds would de facto require their use. If you know your federal education – or just Common Core – history, that’s awfully hard to dispute.

Said Rubio: “The Department of Education, like every federal agency, will never be satisfied. They will not stop with it being a suggestion. They will turn it into a mandate. In fact, what they will begin to say to local communities is: ‘You will not get federal money unless you do things the way we want you to do it.’”

That is absolutely what has happened with federal education policy. It started in the 1960s with a compensatory funding model intended primarily to send money to low-income districts, but over time more and more requirements were attached to the dough as it became increasingly clear the funding was doing little good. Starting in the 1988 reauthorization of the Elementary and Secondary Education Act (ESEA) we saw requirements that schools show some level of improvement for low-income kids, and those demands grew in subsequent reauthorizations to the point where No Child Left Behind (NCLB) said if states wanted some of the money that came from their taxpaying citizens to begin with, they had to have state standards, tests, and make annual progress toward 100 math and reading “proficiency,” to be achieved by 2014.

Predictably, instead of setting high proficiency bars that were tough to get over, states set them low enough, it seemed, for most kids to trip over them. That largely spurred the move to get all states onto “common” standards and tests, which ultimately became the Common Core and connected assessments. True, the Common Core was created by the National Governors Association (NGA) and Council of Chief State School Officers (CCSSO), but there’s no real question that the federal government was meant to drive adoption.  The NGA and CCSSO called for it in the 2008 report Benchmarking for Success, Core supporters worked with the Obama administration to have the Core de facto required for states to compete for a slice of $4 billion in Race to the Top ducats, and Core adoption was one of only two standards options to get a waiver from NCLB. Oh, and for good measure, the federal government selected and funded the consortia writing Core-aligned tests.

If what has actually happened isn’t enough to convince you of Rubio’s wisdom, what the Obama administration has asked for should be: that annual appropriations of federal education money be tied to adoption of, and performance on, “college- and career-ready” standards, and like under waivers, states could only use either the Core, or standards a state university system certified as acceptable. And really, if the premise is that states won’t hold themselves accountable for performance – and it is – what other entity than the federal government has the power to make them?

Of course, all the political force that has kept state standards and accountability largely toothless would be directed at Washington were the feds to take full control, so the control would be educationally impotent. But effective or not, it is clear that standards-and-testing logic demands federal force.

But isn’t Washington shrinking away from control? Isn’t the national mood strongly inclined to reduce DC’s power under NCLB, as reflected in the House and Senate bills to reauthorize the ESEA?

Thanks to a massive backlash by parents against the federally strong-armed Common Core and accompanying tests, and teacher opposition to tying test scores to evaluations, the current mood is indeed hostile to federal domination. But both ESEA reauthorization bills leave open potentially sizeable back doors for federal control, and when public anger eventually subsides, the more lasting impulse for politicians will be to “do something” when schools perform poorly. And “doing something” usually means more federal control, even if the signs are that it almost certainly won’t work.

Rubio is right to worry.

Last night many Cato scholars watched and live-tweeted the Republican presidential primary debates. Missed the conversation? Read our scholars’ statements below. 

“Unfortunately, neither the Fox questioners nor the candidates spent much time discussing how to limit government or expand freedom. There was too much focus on keeping immigrants out of America. Bush and Walker seemed calm and stable, and in the long run that may be what voters want. Christie and Paul both made their points strongly, including one epic confrontation, appealing to different parts of the electorate. Somebody should just set up the two of them to debate. The candidates kept talking about the ‘weak’ U.S. military. The United States spends more on the military than China, Russia, Great Britain, France, Japan, India, Saudi Arabia, Germany, Brazil, and the next 4 countries combined.” 

David Boaz, Executive Vice President of the Cato Institute 

“This was another disappointing night for those seeking a smaller, less costly, less intrusive government. Depending on the candidate, we heard calls for more spending, more domestic spying, more intervention overseas, and more control over people’s personal lives. Big-government conservatism is back with a vengeance.” 

Michael D. Tanner, Senior Fellow 

“A number of governors touted that they had balanced their state budgets. That’s no big deal because, unlike the federal government, every state is required to balance its budget every year. Fox News gave short-shrift to economic growth issues and cutting the federal budget, which are crucial issues for voters and for the future of the nation.”

Chris Edwards, Director of Tax Policy Studies at Cato and Editor of DownsizingGovernment.org

“The federal government will spend almost $4 trillion this year, and more next year. Overall, the candidates failed to detail plans on how to overhaul the federal  budget and limit its growth. Eighty-five percent of federal spending growth over the next decade is due to Social Security, our major medical programs, and interest on the national debt. Refusing to propose reforms ignores this reality.” 

Nicole Kaeding, Budget Analyst 

“I was disappointed, but not surprised, by the tone of both debates, especially with respect to the size of the U.S. military, which remains the most dominant in the world by a very wide margin, and by the superficial and misleading portrayal of the nuclear deal with Iran. The GOP, with the possible exception of Sen. Paul, appears not to have learned the lessons of Iraq. Sen. Graham appears to have learned the least: he repeatedly called for sending U.S. troops back into Iraq. If the GOP continues to be associated with that disastrous war, the party’s nominee, no matter who that is, simply cannot be taken seriously on foreign policy.” 

Christopher A. Preble, Vice President for Defense and Foreign Policy Studies

“Tonight’s debate was disappointing on the foreign policy front for a couple of reasons. The debate was pretty narrowly focused on the Middle East, and only the second debate even touched on other foreign policy issues. It would have been nice to see debate on some of the other big strategic issues which the U.S. will face in the next decade: the pivot to Asia, how to handle a resurgent Russia or international trade issues, for example. Even on the Middle East, most candidates were also pretty lacking in substance, talking tough, but providing few concrete policy ideas. Hopefully future debates will see more substance and less grandstanding on foreign affairs issues.”

Emma Ashford, Visiting Research Fellow 

“Fixing the country’s dysfunctional education system is crucial, but thankfully it didn’t come up much in the debate. Why? Because the federal government has no constitutional authority to govern education, and it has a very poor track record when it’s been – increasingly – involved. When education did briefly come up, that the candidates who spoke went to pains to say it should not be at all federally controlled, that was a good thing. In keeping with the Constitution, they shouldn’t have said much more than that.” 

Neal McCluskey, Director of Cato’s Center for Educational Freedom 

“’Cross-examination is the greatest legal engine ever invented for the discovery of truth,’ a great legal scholar once wrote. Fox News proved it – and generated a superior, entertaining debate – by aiming genuinely hard, personalized questions at the Republican front-runners. We know more now about which candidates are heedless of liberty and the U.S. Constitution, ill-prepared or inconsistent. Would that the press were this tough on all candidates.” 

Walter Olson, Senior Fellow 

“The candidates agreed Obamacare has to go, yet they breathed not a word about what they would put in its place to make healthcare better, more affordable, and more secure. It’s just as well: some of them have endorsed ideas that are best described as ‘Obamacare lite.’ Fortunately, there is still time for candidates to stand out by endorsing health care reforms that work.”

Michael F. Cannon, Director of Health Policy Studies 

“Despite rapidly growing and bipartisan support for criminal justice reform, criminal justice issues received very little attention in this first week of debates and forums. If the GOP truly wants to expand its reach into younger and more diverse communities, the candidates must tackle important issues like drug prohibition, police misconduct, and overcriminalization. The limited government message rings hollow when it turns a blind eye to the criminal justice system, especially in light of so many high-profile cases of government misconduct.”

Adam Bates, Policy Analyst with Cato’s Project on Criminal Justice

“We heard multiple candidates endorse a return to torture, call for massive increases in defense spending that would rival the biggest budgets of the Cold War, and attack people who didn’t look or sound or think like them. Except for one candidate. Ohio Governor John Kasich seemed to be the only adult on stage. His answers were generally rational and coherent, whether that will matter in GOP primaries remains to be seen.” 

Patrick G. Eddington, Policy Analyst in Homeland Security and Civil Liberties

For half a century now, the “rules versus discretion” debate in monetary economics has focused on the so-called “time inconsistency” problem.  The problem is that, although a discretionary central bank might promise not to allow the inflation rate to rise above zero (or some other ideal value), the fact that an inflation “surprise” can boost employment and output in the short run will tempt it to break its promise.  Realizing this, market participants will anticipate higher inflation.  The long-run result is a higher inflation rate with no improvement in either employment or output.  By limiting the central bankers’ options, a monetary rule solves the time inconsistency problem.

An earlier rules-versus-discretion debate had taken place in the 1920s and 1930s.1  The later one, which was inspired by the stagflation of the 1970s, differed in that it was influenced by the New Classical revolution that was taking place around the same time.  Consequently, the later critics of monetary discretion, including Finn Kydland and Edward Prescott,  Guillermo Calvo, Benn McCallum, Robert Barro and David Gordon, and John Taylor,2 differed from their predecessors by building their arguments on the premise that central bankers were both well (if not quite perfectly) informed and well intentioned.  Discretion, according to them, leads to less than ideal outcomes not because central bankers are ignorant or misguided, but because of misaligned incentives.

Naturally, champions of discretionary monetary policy also regarded monetary policy makers as well-meaning and well-informed experts.  Their counterargument was simply that such experts could in principle out-perform any rule.  Well-trained monetary technocrats might, after all, resist the short-run temptation to take advantage of established inflation expectations by creating inflation surprises.

But just how likely is it that technocrats will behave well in practice?  Even such a technocratically-inclined proponent of discretion as Joseph Stiglitz recognizes that the “decisions made by the central bank are not just technical decisions; they involve trades-offs, judgments.. .”3  Will such “judgments” typically be wise ones?  Although the sub-discipline didn’t even exist when the rules-versus-discretion debate was revived in the 1970s, let alone when it was first aired in the 1920s, the findings of behavioral economists are the natural place to turn to for answers to this question.  At least some of those answers seem to decidedly favor the rules side of the rules-versus-discretion debate.

As Nobel winning economist and psychologist Daniel Kahneman has observed, experts suffer from all sorts of biases that result in bad decisions and outcomes.  Building upon the work of Paul Meehl,4 Kahneman argues that expert decisions can be inferior to simple algorithms (like a Taylor Rule) because experts “try to be clever, think outside the box, and consider complex combinations of features in making their predictions.”5

In the studies reviewed (and sometimes conducted by) Kahneman, experts are always looking for that one additional data point that suggests a different course of action.  Fed officials have behaved that way lately in repeatedly insisting that their decisions will be “data-dependent,” without actually saying what data they have in mind or how its components will be weighted.  Kahneman also notes that experts are often inconsistent, giving different answers to the same (or similar) question.  Here, too, Fed experts conform to the theory, thereby making it difficult if not impossible for market participants to grasp the direction of monetary policy.  Kahneman reaches  the “surprising” conclusion that “to maximize predictive accuracy, final decisions should be left to formulas, especially in low-validity environments.”6  With respect to monetary policy, that  conclusion would seem to favor a policy rule over discretion.

In research conducted with psychologist Gary Klein, Kahneman has also investigated the conditions that are or are not favorable to discretionary decision making.  Previous scholars had  found that firefighters often have surprisingly good intuition about such things as when the floor of a burning building is about to collapse.7  Kahneman and Klein find, however, that such expert skills must be built up over time.  Novice firefighters do not possess them in the way that veterans do.

Interestingly, Fed officials often liken themselves to “firefighters.”  If the analogy is a good one, and Kaheman and Klein are also correct, then having long (14 year) terms for Fed governors is a good idea.  Unfortunately, Fed governors seldom serve more than a modest fraction of their maximum terms.  As major economic crises and downturns happen only so often — every 13 years in case of U.S. crises, according to Reinhart and Rogoff8 — relatively few Fed governors ever experience more than one crisis, and most are unlikely to witness more than two cyclical turning points.  For a Fed staffed by such novices, the case for rules is especially strong.  Indeed, because monetary policy operates with “long and variable lags,” as Milton Friedman famously put it, even seasoned Fed governors cannot be counted on to employ discretion responsibly.

To summarize these implications of behavioral economics, experts can be expected to employ their discretion advantageously when 1) they operate in a regular, predictable environment, and 2) there is an opportunity for learning via repeated practice.  Neither of these conditions characterize monetary policy.  Behavioral economics has sometimes been presented as an avenue to justify government intervention to correct the failings of ordinary people.  But the same literature reminds us that even the most expert policymakers also suffer from a variety of biases.  Just as default rules may be useful in minimizing consumer errors, monetary rules can serve to minimize errors of monetary policy.

____________________

[1] For an overview of earlier debates see Robert Hetzel, “The Rules versus Discretion Debate Over Monetary Policy in the 1920s.” Federal Reserve Bank of Richmond Economic Review ( November 1985), p. 1-12 and George Tavlas, “In Old Chicago: Simons, Friedman and the Development of Monetary-Policy Rules.” Journal of Money, Credit and Banking 47(1) (January 2015), p. 99-121.

[2] Finn E. Kydland and Edward C. Prescott, “Rules rather than discretion:  The inconsistency of optimal plans,” Journal of Political Economy, 85(3) (June 1977), p. 473-490; Guillermo A. Calvo, “On the Time Consistency of Optimal Policy in a Monetary Economy,” Econometrica 46(6) (November 1978), p. 1411-1428; Bennett T. McCallum, “Monetarist Rules in the Light of Recent Experience,” American Economic Review 74(2) (May 1984), p. 388-91; Robert J. Barro and David B. Gordon, “Rules, Discretion, and Reputation in a Model of Monetary Policy,” Journal of Monetary Economics 12(1) (July 1983), p. 101-121; Robert J. Barro and David B. Gordon, “A Positive Theory of Monetary Policy in a Natural-Rate Model,” Journal of Political Economy 91(4) (August 1983), p. 589-610; and John B. Taylor, “What Would Nominal GNP Targeting Do to the Business Cycle?” Carnegie-Rochester Conference Series on Public Policy 22 (9) (January 1995), p. 61-84.

[3] Joseph Stiglitz. “Central Banking in a Democratic Society,” De Economist 146(2) (July 1998), p. 199-226.

[4] Paul E. Meehl, Clinical vs. Statistical Prediction: A Theoretical Analysis and a Review of the Evidence (University of Minnesota, 1954).

[5] Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus, and Giroux, 2011). Especially chapters 21 and 22.

The Republicans took the stage in their first presidential debate Thursday night. Of the 16 major candidates, eight have gubernatorial experience. I have written a number of times recently about the fiscal records of the candidates with gubernatorial experience. Their records are instructive. A governor who promises to cut federal spending is more believable if he held spending in check when he was governor.

As my blog post earlier in the week detailed, there are a number of ways to measure how and why state spending changes. Gubernatorial policies play a large role in influencing state general fund spending. Other factors, such as the state’s budget process, legislative policies, and federal mandates, can contribute to changes in spending, but as a state’s Chief Executive, governors have impact.

Using data from the National Association of State Budget Officers, I wanted to see just how much each governor increased spending on an annual basis. Analyzing the data on an annual basis allows us to control for the length of governor tenure. George Pataki was governor of New York for twelve years, while Scott Walker has been governor of Wisconsin for only four years. Comparing Pataki’s increase of 39 percent to Walker’s increase of 16 percent is unfair to Pataki.

The graph below shows the average annual increase in spending during each candidate’s time as governor. Jeb Bush has the highest spending with a 6.08 percent average annual increase. John Kasich is second. He increased spending by 4.95 percent. Rick Perry finishes third with an average annual increase of 4.01 percent. Bobby Jindal shows the most fiscal restraint. He cut spending by 1.76 percent a year on average.

But this comparison is somewhat biased because population grows at different rates in the states. As a state’s population grows, the demand for government services, such as schools and police protection, may increase by a related amount..

The graph below presents annual average spending growth on a per capita basis. The spending increases of Jeb Bush and Rick Perry now look much smaller. Jeb Bush’s increases are still above the average, but Rick Perry falls below it. Part of the reason that spending increased quickly under Bush and Perry is that their state populations were growing quickly. John Kasich’s increases, on the other hand, are an outlier. He increased spending faster on a per capita basis. This further confirms Kasich’s lack of fiscal restraint. Bobby Jindal actually cut spending on a per capita basis by an average of 2.41 percent a year.

During the debate, these presidential candidates tried to highlight their records as governor. Many factors impact state spending growth, but gubernatorial policies directly impact the amount a state spends. Comparing spending growth figures to peers allows us to determine which candidates are frugal and which are spendthrifts.

Occupational licensing needlessly regulates scores of workers in the United States. Indeed, despite years of criticisms from economists, the percentage of workers required to hold a license has risen substantially in recent years. The Cato Institute has been talking about the problem for years. But some of our readers might be surprised to see the latest critics: A recent White House report critiquing and evaluating  licensing requirements, Occupational Licensing: A Framework for Policymakers. We’re particularly pleased that the report cited both an essay in Cato’s monthly online magazine, Cato Unbound, and one of the entries in Cato’s online forum, “Reviving Economic Growth,” which will soon be published as an ebook.  

The White House report, which was prepared by the Department of the Treasury Office of Economic Policy, the Council of Economic Advisers, and the Department of Labor, documented the massive growth of licensing in the last few decades. Over a quarter of U.S. workers now need licenses to do their jobs, and the percent of workers who need state-issued licenses has increased five-fold since the 1950s. The report concluded that this can harm employment opportunities and inflate costs for consumers. It also disproportionately affects certain populations, including immigrants and anyone with a criminal history.

The report cited Mercatus Center scholars Tyler Cowen and Alex Tabarrok, who argued against the effectiveness of licensing in “The End of Asymmetric Information” for Cato Unbound. “Yelp, Angie’s List, and Amazon Reviews all make it easy for past buyers to report their observations on seller quality and for future buyers to observe a seller’s accumulated reputation,they wrote. Thus, they said, one of licensing’s supposed benefits, helping consumers identify quality work, is becoming obsolete.

A few pages later, the Framework for Policymakers cited Cato’s growth forum, where Dean Baker of the Center for Economic Policy Research made the case for freer trade for both pharmaceutical drugs and foreign-born physicians, who face high licensing barriers in the United States. Baker argued that lowering these barriers would improve access to services for middle- and low-income consumers.

Throughout the Framework, the authors also extensively referenced the work of Morris M. Kleiner, one of the premier critics of occupational licensing, whose work has been published in Cato’s Regulation magazine, and the work of the Institute for Justice.

The White House report nicely dovetails with a new study from Brink Lindsey, Cato’s vice president for research, which identifies occupational licensing reform as one of a few key issues with the potential to unite Americans across the political spectrum—whether progressive, conservative, or libertarian. While the White House report is by no means a coup, it may be a sign that critics of occupational licensing are finally gaining traction.  

I am not surprised that Bernie Sanders is opposed to open borders.  There is a long tradition of socialists, labor unions, and Marxists opposing open borders in the United States.  Many left-wing intellectuals oppose liberalized immigration, let alone open borders, because it will destroy political support for redistribution and state control of the economy – and they might be right

However, I was surprised by the poor arguments made by Richard Eskrow in defense of Sanders.  On how immigrants affect Americans, there is little difference between the expressed opinions of Senator Sanders and Senator Sessions (see here for a rebuttal I wrote to Senator Sessions, some of the following is borrowed from it).  Senator Sanders, at least, wants to legalize the unauthorized immigrants who are here and probably doesn’t want to seriously limit future immigration.

Below I will block quote Eskrow’s arguments and respond to each one.

“Like many libertarian ideas, ‘open borders’ is bold, has superficial intellectual appeal – and is incapable of withstanding thoughtful scrutiny. It would benefit the wealthy few at the expense of the many, here and abroad.”

One of the main criticisms of immigration by restrictionists is that poor immigrants gain far more than Americans do.  Harvard professor George Borjas’ famous paper on the wage effects of immigration found that Americans benefitted very slightly from it while almost all of the gains go toward the immigrants themselves.  Even excluding the economic benefits to the immigrants themselves, poor Americans just aren’t hurt by having more people here.  Borjas did find that immigrants decrease the wages of lower skilled Americans relative to higher skilled American, but his work is the most negative in the economics literature and should be taken with several big grains of salt.  In that paper, he holds the supply of capital as fixed – an assumption that may be fine for an academic publication but it is not useful for making an argument against immigration in the real world.  The stock of capital is dynamic and increases with the population. Ignoring that important effect would make any increase in population decrease wages.  It should further be noted that Borjas, like other economists, admits that immigration does help Americans more than it harms them, but with some distributional consequences.

Borjas’ research methods applied to different periods of time yields less negative results.  This recent paper borrows Borjas’ methods but includes the wage data up through 2010 instead of stopping at 2000.  It finds wage effects so small that they are statistically insignificant. That is an important rebuttal to Borjas’ findings and the serious claims that immigrant labor-market competition lowers the wages of native workers.

With the exception of the Borjas study, most of the modern research finds very small or positive wage effects from immigration through three different economic mechanisms.  The first is called the wage effect, which is that many immigrants are not substitutes for natives and so cannot displace them in the labor market.  Instead, the differences between immigrant and native workers are so fast that they are mostly complementary. 

The second is called scale effects, which is the idea that a bigger market, more workers, more consumers, and bigger firms allows for more specialization, division of labor, and greater demand.  These effects combine to push up wages.

The third effect that counteracts the fall in wages from an increase in the supply of workers relates to increases in total factor productivity from boosts in immigration.  With more immigrants, more knowledge, technology, and productive ways of organizing the economy are discovered.  The resulting increase in productivity absorbs the increase in the labor market.  For a detailed and technical summary of these and other studies, read this

These three main economic reactions prevent immigrants from lowering wages for Americans, or at least attenuate the decrease, and will not disappear if immigration was liberalized – even to the point of open borders.       

Economists Gianmarco Ottaviano and Giovanni Peri assume that capital adjusts in response to immigrant inflows, doing away with the more static assumptions in Borjas’ older work.  Ottaviano and Peri find that immigrants have a very small effect on the wages of native-born Americans without a high school degree (-0.1 percent to +0.6 percent) and an average positive effect on all native workers of about +0.6 percent.  The negative wage effects of new immigrants are concentrated on older immigrants.  Unsurprisingly, new immigrants compete with older immigrants who both share similar skills while native-born Americans benefit from a larger supply of lower-skilled workers.  Native born American workers with the least skill and experience are teenagers so we’d expect them to compete the most with immigrants – but we still see very little evidence of that

Peri and Chad Sparber elsewhere find that increases in lower-skilled immigration induce lower-skilled natives to specialize in jobs that require communication in English while the immigrants specialize in manual-labor intensive occupations.  Communication jobs pay more than manual-labor jobs. 

This complementary task specialization reduces the downward wage pressure because natives react by adapting and specializing in more highly paid occupations, not by dropping out of the job market. This effect decreases wage competition between lower-skilled natives and immigrants by around 75 percent.  Immigrants and natives sorting themselves into jobs by skill level explains how immigration can lower the wages in certain occupations but not lower the wages for native-born Americans. 

Peter Henry found that low-skilled immigrants to an area induced natives to improve their school performance so that they wouldn’t have to compete with lower skilled immigrants. In other words, immigrants push Americans up the skills ladder rather than into unemployment..

Liberal economist David Card wrote an excellent comment called “The Elusive Search for Negative Wage Impacts of Immigration” that eviscerates the fear of immigrants taking American jobs and lowering wages.  The wage ratio between high school and less than high school educated workers is very similar over time despite the large infusion of immigrant workers into the less than high school educated workers into the market. 

Furthermore, immigrants aren’t just workers but are also consumers.  Because immigrants buy things here, they increase the demand for goods and services produced by other workers which in turn boosts demand for workers.  This counteracts some or most of the supposed negative wage effects that would occur by just adding large amounts of workers and ignoring that they actually buy things.        

As for poor foreigners, it’s almost impossible to imagine how open borders could not vastly improve their quality of life.  The place premium, the higher wages an identical marginal worker can make in the United States as compared to their home countries, is enormous.  Vietnamese workers see their wages rise by 649 percent, Haitians by over 1000 percent, and Mexicans by about 253 percent.  Those gains are so dramatic because those workers are much more productive in the United States than in their home countries.  Looking at numerous estimates of how open borders would affect incomes by allowing people to move from countries where they are relatively unproductive to ones where they can be productive, economist Michael Clemens estimates a 50 to 150 percent increase in gross world product.  That estimate assumes an unrealistic and massive large scale movement of people in response to wage pressures but estimates 1/10 as large are still gigantic.  Hard to see how that won’t pull more poor people out of poverty than any other policy change.

“Bier claims that it is ‘patently untrue’ that an open borders policy ‘would make everybody in America poorer,’ and cites a study from the (Koch Brothers-funded) Cato Institute as evidence.  Unfortunately, that study based on a far lower rate of immigration than an open borders policy would produce, rendering his interpretation of it meaningless.”

Eskrow linked to two Cato publications.  The first is the Cato Journal edition where numerous professors contributed essays on the economic benefits of immigration to the United States.  UCLA Professor Raul Hinojosa-Ojeda’s paper used a Computable General Equilibrium model called GMig2 to estimate the economic impact of immigration.  That work and the rest in our series by other professors like Joshua C. Hall, Richard K. Vedder, Pia M. Orrenius, Madeline Zavodny, Giovanni Peri, and Gordon H. Hanson cannot be dismissed via ad hominem

The second Cato piece that Eskrow dismissed without reading was a rebuttal to a popular but highly flawed report written by the Center for Immigration Studies (CIS).  They claimed that all of the new jobs created in the recent past went to immigrants, a claim that I found to be untrue after reproducing their results.  Cato’s research on this issue, and that produced by dozens of academics and economists, cannot be seriously dismissed in the manner Mr. Eskrow did so.  I look forward to a serious response from Eskrow after he’s read the research.

“If that comparison seems harsh, consider this: The Southern Poverty Law Center issued a report on ‘guest worker’ programs in the United States – programs which might be considered a model for the open borders concept – and entitled it ‘Close to Slavery.’”

Eskrow’s weirdest argument is that open-borders would be bad because America’s current practically closed borders guest worker visa programs unintentionally expose migrants to poor treatment.  Guest workers, however, are the result of a heavily restricted and government managed immigration system and not a consequence of open borders.  The guest worker abuse that Eskrow described are a result of our practically closed borders immigration system, not open borders. 

Guest worker programs tie migrants to particular employers  to prevent them from competing with too many Americans for jobs.  After all, if migrants could switch jobs easily then they could come in to work for Company X in Montana but then move to work for Company Y in Illinois.  A lack of migrant mobility is the policy response of fears, expressed by Senator Sanders, that migrants take American jobs.  However, restricting migrant mobility means that they cannot quit jobs or leave bad employers who abuse them.  Guest worker visa rules designed to protect American workers unintentionally hurts migrants. 

Allowing migrants to switch jobs would virtually eliminate this problem, as I have proposed before (here and here).  The problem of migrant worker abuse exists because guest worker programs are more restrictive, designed to protect American workers, and regulated than an open borders immigration system. 

“Bier mocks the idea that an open borders policy means ‘doing away with the concept of the nation state.’ But his policy prescription would leave a sovereign people unable to set its own minimum wage or determine its own employment policies.”

The laws of economics limit the ability of governments to arbitrarily set price controls too, does that mean the United States is not a sovereign country?  Will we not be a “sovereign people” until we declare our independence from scarcity, gravity, mortality, psychology, and all of the other inconvenient limitations on human behavior?  I’ve never read a criticism of open borders based on the sovereignty argument that is compelling – including Eskrow’s and Sanders’.

Eskrow did not respond to Bier’s historical claim that the United States must not have been sovereign until 1882 because it had open borders prior to that time.  National sovereignty depends upon keeping out other sovereigns, not on regulating international labor markets.    

Eskrow’s defense of Senator Sanders’ comments is very weak.  There may good arguments against open borders – I analyze some of them here – but you won’t find them by listening to Senator Sanders or his defenders.        

The Taiwan issue, which has been mercifully quiescent since the election of Ma Ying-jeou as Taiwan’s president in 2008, shows increasing signs of returning as a major source of geopolitical tensions.  That point was underscored this week when Zhang Zhijun, the head of China’s Taiwan Affairs Office, the agency with primary responsibility for dealing with the self-ruled island, warned the Taiwanese that they must not return to “the evil ways of independence.”  He added that the Taiwanese people would “soon have to choose” between continuing the development of peaceful economic and political ties with the mainland that have taken place since 2008 or reigniting the animosity that existed during the administration of Democratic Progressive Party (DPP) leader Chen Shui-bian from 2000 to 20008.

That warning reflects growing worries in Beijing that the DPP is poised to return to power in next year’s elections.  Given the pervasive unpopularity of Ma and the governing Kuomintang Party (KMT) among Taiwanese voters, a DPP victory is indeed probable. That outcome has become even more likely with the entry of James Soong, chairman of the People First Party, into the presidential race.  Soong is certain to siphon votes from the already beleaguered KMT.

A DPP triumph does not necessarily mean an immediate crisis.  DPP leader Tsai Ing-wen is considerably more circumspect than Chen and less inclined to provoke Beijing.  Moreover, the surge of economic links with the mainland over the past seven years has benefited key DPP constituencies and dampened the enthusiasm for aggressively pushing the party’s official independence agenda.

Nevertheless, a DPP electoral victory will make Beijing deeply unhappy and increase cross-strait tensions.  China’s strategy toward Taiwan since Ma’s election has been to draw the island into an ever tighter economic embrace, with an underlying assumption that the growth of such ties will gradually erode support for independence and lead to a corresponding receptivity to political reunification with the mainland.  

It was always a flawed strategy.  Most Taiwanese show no enthusiasm for reunification, even as economic relations with the mainland have surged. Wide majorities prefer the status quo of de facto independence, and many would prefer formal independence, if they did not fear that Beijing would use force to prevent such an outcome.  Understandably, few Taiwanese want to merge their democratic capitalist society with a mainland ruled by a one-party dictatorship.  Indeed, given the economic and cultural differences between the two societies that have developed over more than a century, many Taiwanese would be reluctant to relinquish control of their own affairs and have their island become merely one small province of a vast country even if the mainland was fully democratic.

In short, a DPP victory would be strong evidence that Beijing’s hopes of eventually enticing Taiwan to accept reunification are illusory. Chinese officials are not likely to react well to that realization.   At a minimum, there is likely to be a drift back toward the tensions that characterized the Chen years.  With China’s growing regional military capabilities and global economic clout, the temptation may even emerge to adopt an overtly coercive policy toward the recalcitrant island.

Unfortunately, the United States would be more than an interested observer to such a development.  Under the 1979 Taiwan Relations Act, Washington is committed to regard any coercive actions that Beijing might take toward Taiwan as a “grave breach of the peace” of East Asia and respond accordingly.   Although that commitment falls short of an obligation to defend Taiwan with U.S. military forces, few observers doubt that Washington would intervene in a Taiwan Strait crisis.  Yet a decision to intervene could well lead to a disastrous war with a serious military power–and a country that is a leading U.S. economic and financial partner.  Such a clash would be catastrophic not only for both countries, but for the entire international system.

U.S. officials need to assess the situation and have a clear strategy for dealing with a resurgence of the troublesome Taiwan issue.  They especially need to ask themselves whether protecting Taiwan’s de facto independence is worth risking a crisis, and perhaps all-out war, with China.  The past seven years did not mark an end to the Taiwan problem, it was merely a beneficial lull that now seems to be coming to an end.

Politics is America’s national sport, so it’s not too surprising that political rhetoric focuses more on playing the game than on real-world policy solutions. While this might make for more entertaining television, viewing political discourse in this way can be a serious detriment to our society.

That’s why Cato scholars will be injecting insightful commentary and hard-hitting policy analysis into the national conversation throughout the 2016 campaign season, using the Twitter hashtag #Cato2016.

The coverage started with Mondays’s Voters First Forum (highlights here), and will continue today with the two national debates to be aired by Fox at 5:00 p.m. and 9:00 p.m. tonight.

Tune in and join the conversation on Twitter using #Cato2016.

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