Policy Institutes

I never watched That ’70s Show, but according to Wikipedia, the comedy program “addressed social issues of the 1970s.”

Assuming that’s true, they need a sequel that addresses economic issues of the 1970s. And the star of the program could be the Congressional Budget Office, a Capitol Hill bureaucracy that apparently still believes - notwithstanding all the evidence of recent decades - in the primitive Keynesian view that a larger burden of government spending is somehow good for economic growth and job creation.

I’ve previously written about CBO’s fairy-tale views on fiscal policy, but wondered whether a new GOP-appointed director would make a difference. And I thought there were signs of progress in CBO’s recent analysis of the economic impact of Obamacare.

But the bureaucracy just released its estimates of what would happen if the spending caps in the Budget Control Act (BCA) were eviscerated to enable more federal spending. And CBO’s analysis was such a throwback to the 1970s that it should have been released by a guy in a leisure suit driving a Ford Pinto blaring disco music.

Here’s what the bureaucrats said would happen to spending if the BCA spending caps for 2016 and 2017 were eliminated.

According to CBO’s estimates, such an increase would raise total outlays above what is projected under current law by $53 billion in fiscal year 2016, $76 billion in fiscal year 2017, $30 billion in fiscal year 2018, and a cumulative $19 billion in later years.

And here’s CBO’s estimate of the economic impact of more Washington spending.

Over the course of calendar year 2016,…the spending changes would make real (inflation-adjusted) gross domestic product (GDP) 0.4 percent larger than projected under current law. They would also increase full-time-equivalent employment by 0.5 million. …the increase in federal spending would lead to more aggregate demand than under current law. …Over the course of calendar year 2017…CBO estimates that the spending changes would make real GDP 0.2 percent larger than projected under current law. They would also increase full-time-equivalent employment by 0.3 million.

Huh?

If Keynesian spending is so powerful and effective in theory, then why does it never work in reality? It didn’t work for Hoover and Roosevelt in the 1930s. It didn’t work for Nixon, Ford, and Carter in the 1970s. It didn’t work for Japan in the 1990s. And it hasn’t worked this century for either Bush or Obama. Or Russia and China.

And if Keynesianism is right, then why did the economy do better after the sequester when the Obama Administration said that automatic spending cuts would dampen growth?

To be fair, maybe CBO wasn’t actually embracing Keynesian primitivism. Perhaps the bureaucrats were simply making the point that there might be an adjustment period in the economy as labor and capital get reallocated to more productive uses.

I’m open to this type of analysis, as I wrote back in 2012.

…there are cases where the economy does hit a short-run speed bump when the public sector is pruned. Simply stated, there will be transitional costs when the burden of public spending is reduced. Only in economics textbooks is it possible to seamlessly and immediately reallocate resources.

But CBO doesn’t base its estimates on short-run readjustment costs. The references to “aggregate demand” show the bureaucracy’s work is based on unalloyed Keynesianism.

But only in the short run.

CBO’s anti-empirical faith in the magical powers of Keynesianism in the short run is matched by a knee-jerk belief that government borrowing is the main threat to the economy’s long-run performance.

…the resulting increases in federal deficits would, in the longer term, make the nation’s output and income lower than they would be otherwise.

Sigh. Red ink isn’t a good thing, but CBO is very misguided about the importance of deficits compared to other variables.

After all, if deficits really drive the economy, that implies we could maximize growth with 100 percent tax rates (or, if the Joint Committee on Taxation has learned from its mistakes, by setting tax rates at the revenue-maximizing level).

This obviously isn’t true. What really matters for long-run prosperity is limiting the size and scope of government. Once the growth-maximizing size of government is determined, then lawmakers should seek to finance that public sector with a tax system that minimizes penalties on work, saving, investment, risk-taking, and entrepreneurship.

Remarkably, even international bureaucracies such as the World Bank and European Central Bank seem to understand that big government stifles prosperity. But I won’t hold my breath waiting for the 1970s-oriented CBO to catch up with 21st-century research.

P.S. Here’s some humor about Keynesian economics.

P.P.S. If you want to be informed and entertained, here’s the famous video showing the Keynes vs. Hayek rap contest, followed by the equally clever sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

In this Bloomberg BNA podcast, Supreme Court correspondent Kimberly Robinson and I discuss King v. BurwellSissel v. HHS (the Origination Clause case), and House of Representatives v. Burwell, (the House GOP’s lawsuit against the Obama administration’s efforts to exceed its powers under the Constitution and the Affordable Care Act).

Keep an eye out for my article on King v. Burwell with Jonathan Adler in the upcoming Cato Supreme Court Review.

Adler and I will be speaking about King at the Cato Institute’s 14th annual Constitution Day symposium on September 17, 2015. Register here.

Of course I didn’t expect my recent post, listing “Ten Things Every Economist Should Know about the Gold Standard,” to stop economists from repeating the same old misinformation. So I’m not surprised to find two of them, from the New York Fed, repeating recently some of the very myths that I would have liked to lay to rest.

The subject of James Narron and Don Morgan’s August 7th Liberty Street Economics post is the California gold rush. After describing the discovery at Sutter’s mill and the “stampede” of prospectors anxious to get their hands on part of the “vast quantities of gold” whose existence that discovery had revealed, Narron and Morgan observe that the

large gold discovery functioned like a monetary easing by a central bank, with more gold chasing the same amount of goods and services. The increase in spending ultimately led to higher prices because nothing real had changed except the availability of a shiny yellow metal.

No economist worthy of the name would deny that, other things being equal, under a gold standard more gold means higher prices. But other things evidently weren’t equal in the U.S. in the late 1840s and early 1850s, for if they had been the path taken by the U.S. CPI between 1830 and 1880 would not have looked as it does in the chart shown below, which was also in my above-mentioned post:

*Graphing Various Historical Economic Series,” MeasuringWorth, 2015.

As you can see, the gold rush didn’t even cause a blip in the CPI, which was about as stable from 1840 to 1860 as it has ever been. Indeed, prices fell slightly, making for an annual inflation rate of minus .19 percent. For the shorter period of 1845 to 1860 the inflation rate is, admittedly, much higher: a whopping .63 percent. But even this higher rate is, according to the Fed’s current credo, was dangerously low. Were one to assume that a 2 percent inflation rate was as desirable 167 years ago as Fed officials claim it to be today, one would have to conclude that the gold rush, far from having made the U.S. money stock grow too rapidly, didn’t suffice to make it grow rapidly enough.

Having left their readers with a quite false impression regarding the inflationary effects of the gold rush, the New York Fed economists go on to claim that “the gold standard led to more volatile short-term prices (including bouts of pernicious deflation) and more volatile real economic activity (because a gold standard limits the government’s discretion to offset aggregate demand shock [sic]).”

Here again, a little more attention to both the statistics themselves and the economic forces underlying them, casts doubt upon the Fed experts’ conclusions.

It is, first of all, notorious that early macroeconomic statistics tend to be based on smaller samples, and ones that lean more heavily on relatively volatile components, than modern ones. Christina Romer documented this fact with respect to early real GNP estimates, but the same goes for early price-level measures. Consequently it is more than likely that at least some of the gold standard’s apparent short-run price level volatility is nothing more than a statistical artifact.

Second, and more fundamentally, the authors’ implicit premise — that an ideal monetary standard avoids short-run price level volatility — is false. What’s desirable isn’t that the price level not fluctuate, or that it only fluctuate within narrow limits, but that it should fluctuate only to the extent that is needed to reflect corresponding changes in the general scarcity of final goods. In other words, the price level ought to vary in response to shocks to “aggregate supply,” but not because of shocks to total spending or “aggregate demand,” which an ideal monetary system will prevent.

A sharp rise in prices connected to a drought-induced harvest failure, for example, isn’t the same thing as one caused by a surplus of exchange media. The rise supplies a desirable signal of underlying real economic conditions. Far from making anyone better off, a monetary system that kept prices from rising under the circumstances would have to do so by reducing the flow of spending, which would only mean adding the hardship of tight money to the damage done by the drought itself.

As numerous studies (including several that I, Bill Lastrapes, and Larry White cite in “Has the Fed Been a Failure?”) have shown, harvest failures and other sorts of aggregate supply shocks were a relatively much more important cause of macroeconomic volatility during the gold standard era than they have been in more recent times. It follows that one would expect both the price level and real output to have varied more during the gold standard days than they do now even if, instead of having been governed by a gold standard, the money supply back then had been regulated by a responsible central bank. As a matter of fact, according to a fairly recent study by Gabriel Fagan, James Lothian, and Paul McNelis, had a Taylor Rule been in effect during the gold standard period, it would not have resulted in any welfare gain.

Just as there are good reasons for allowing adverse supply shocks to be reflected in higher prices, so too are there good reasons for allowing the price level to decline in response to positive supply innovations. Those reasons can be found both in my writings defending a “productivity norm” and in arguments by Scott Sumner and others for targeting NGDP.

Consideration of these arguments brings me to Narron and Morgan’s claim that the gold standard was responsible for “bouts of pernicious deflation.” That the gold standard did bring periods of deflation no one would deny. But it doesn’t follow that those deflationary episodes, or most of them, were “pernicious.” In fact, Michael Bordo, whom Narron and Morgan give as the source for their claim, has himself denied that “pernicious” deflation was a frequent occurrence under the classical gold standard. According to the abstract to Bordo’s paper, “Good versus Bad Deflation: Lessons from the Gold Standard Era,” written with John Landon Lane and Angela Redish,

the deflation of the late nineteenth century reflected both positive aggregate supply shocks and negative money supply shocks. However, the negative money supply shocks had little effect on output. This we posit is because the aggregate supply curve was very steep in the short run during this period. This contrasts greatly with the deflation experience during the Great Depression. Thus our empirical evidence suggests that deflation in the nineteenth century was primarily good.

Several other recent studies reach broadly similar conclusions, including at least a brief research note from another Federal Reserve economist.[1]

To say that deflation can be either “good” or “bad,” depending on whether it stems from goods becoming more abundant or from money becoming more scarce, and to observe that, under the gold standard, deflation was mostly good, isn’t to deny that there’s such a thing as bad deflation. But if it’s striking examples of bad deflation that one seeks, one will find them, not by peering back into the days before the Fed’s establishment, but by looking no further back than the Coolidge recession of 1920-21, or the Great Contraction of 1930-33, or the Roosevelt Recession of 1937-8. Heck, instead of even going back that far, one could just consider the subprime deflation of 2008-9. According to the linked sources, in each of these instances, deflation was to some considerable extent an avoidable consequences of the Fed’s deliberately-chosen policies, rather than something beyond the Fed’s control.[2]

Besides exaggerating both the inflationary and the deflationary risks posed by the classical gold standard, Narron and Morgan repeat the myth that a gold standard costs considerably more than a fiat standard:

Apart from their macroeconomic disadvantages, gold standards are also expensive; Milton Friedman estimated the cost of mining the gold to maintain a gold standard for the United States in 1960 at 2.5 percent of GDP ($442 billion in today’s terms).

What Friedman’s calculation actual showed was, not that “gold standards” are quite expensive, but that one very peculiar sort of gold standard is so, namely, a “pure” gold standard arrangement in which gold coins alone serve as exchange media, without the help of any fractionally-backed substitutes! Not a single one of modern history’s actual “gold standards” ever even came close to Friedman’s fictional case. (Even mid-17th century goldsmith-banks are said to have kept specie reserves equal to about a third of their “running cash” liabilities.) If one assumes that banks in 1960 would have required 10 percent gold reserves, one arrives at a gold-standard cost estimate of .25 percent of GDP; if one assumes (still more plausibly) that 2 percent reserves would have sufficed, one arrives at an estimate one-fiftieth as large as Friedman’s! When, oh when!, will economists stop taking Milton Friedman’s absurd 2.5 percent estimate seriously?

Yet correcting Friedman’s estimate is only part of the story. All sorts of other things are wrong with the claim that the gold standard was expensive. Those interested in a quick summary may consult item # 2 of my “Ten Things” post. I will only add here that even Friedman himself came to doubt that fiat money was a bargain.

Narron and Morgan conclude their article thus:

Despite the demonstrable disadvantages of a gold standard, some observers still call for the Unites States to return to a classical gold standard. Should we? Let us know what you think?

What I think is that, if the gold standard really does have “demonstrable disadvantages,” Messrs. Narron and Morgan haven’t managed to put a finger on any of them.

________________________________

[1]See also Atkeson and Kehoe, Borio et al., and Beckworth.

[2]The U.S. did, of course, experience several less-severe cases of “bad” deflation during the classical gold standard era. But these episodes resulted, not from the ordinary working of the gold standard, but from financial crises that were peculiar consequences of misguided U.S. banking and currency laws.

[Cross-posted from Alt-M.org]

The Court of Appeals for the Federal Circuit heard oral arguments today in a case about dental retainers that could threaten the free flow of information over the Internet.  The question is whether the U.S. International Trade Commission has the authority to bar the “importation” of digital transmissions.  The case has serious implication for the future of 3D printing, internet service providers’ liability for copyright piracy, and the internet’s global infrastructure. 

The ITC has the power to ban imports to prevent “unfair competition” and has become a popular venue to enforce U.S. patents.   A Cato Policy Analysis from 2012 details how the ITC’s patent enforcement powers are unnecessary, protectionist, and inconsistent with U.S. trade obligations

The case before the appeals court today involves products that are manufactured inside the United States based on schematics generated by a computer in Pakistan.  The production of those schematics is covered by a patent owned by Align Technology, who successfully petitioned the ITC to issue an order barring its competitor ClearCorrect from transmitting the data from Pakistan to the United States.

An editorial in yesterday’s New York Times explained the dangers of allowing the agency to have power over digital transmissions:

The I.T.C. has long had the power to forbid companies from importing physical goods like electronics, books and mechanical equipment that violate the patents, copyrights and trademarks of American businesses. It does so by ordering customs officials to seize items at the border or by issuing cease and desist orders to importers. The commission’s order to ClearCorrect was the first time it had sought to bar the transfer of digital information. If the appeals court upholds this decision, it could set a precedent that would allow businesses to seek to block all kinds of data transmissions.

Of course businesses should be able to protect their patents and copyrights. But there are far better ways to do so. In this case, for example, Align could sue ClearCorrect and seek damages for patent infringement. Or the company could ask a judge to order ClearCorrect to stop selling products made using the information contained in the files.

It is not even clear that the commission has the authority to restrict international data transfers. Congress has given it authority to block the import of “articles,” which for decades has been understood to mean physical goods. In last year’s ruling, a five-member majority of the commission ruled that the word “article” includes data.

Groups like the Motion Picture Association of America and the Recording Industry Association of America are supporting the commission’s view. They argue that, as trade increasingly becomes digital, the definition of “article” should include data. The Internet Association, which represents companies like Facebook, Google and Twitter, is asking the court to reverse the decision.

We already know from leaked documents that the MPAA plans to use the ITC’s potential jurisdiction over data transmissions  as a way to block Americans from accessing foreign websites that host copyrighted movies.

The purpose of the ITC’s patent enforcement power is to make sure that U.S. companies have a remedy against foreign infringers who are otherwise unreachable by a domestic court.  That’s why the ITC’s remedy is a ban on future imports rather than money damages for past infringement like you would get in federal district court.  But the bulk of the ITC’s caseload, including the Align case, involves disputes between parties that can and do sue each other in U.S. courts. 

In today’s global economy, it’s particularly pointless to have a specialized IP court for imports, digital or otherwise.  The fact that an article is imported from outside the United States or a piece of information travels through a foreign computer server has no bearing on whether that product infringes a U.S. patent or copyright. 

Giving the ITC power to bar cross-border data transmissions invites mischievous litigation without serving any legitimate public policy goal.

The GOP’s Cleveland debate was spirited, but shed little light on foreign policy. There are important differences among the participants, but few were exposed.

For instance, elsewhere Donald Trump opined that Crimea was Europe’s problem and asked why Washington still defended South Korea. These sentiments deserved discussion.

No multi-candidate forum can delve deeply into such complex issues, however. Even those Republicans giving formal foreign policy addresses have come up short. The GOP contenders have been largely captured by a reflexive, even rabid interventionism which ignores consequences and experience.

Leading the hawks is Sen. Lindsey Graham, a member of the Senate’s unabashedly pro-war caucus. In the interventionist middle some candidates demonstrate hints of reluctance, such as Ted Cruz and John Kasich. Sen. Rand Paul brings up the rear, uncomfortably gyrating between his father’s views and the GOP conventional wisdom.

Chris Christie delivered a formal foreign policy address in which he easily staked his claim to being most committed to violating Americans’ civil liberties through surveillance of dubious value. He charged that his critics were “ideologues,” yet opposed any restraints on the new, far-reaching presidential powers that he demanded.

His foreign policy views are even worse. At age 52, Christie declared: “I don’t believe that I have ever lived in a time in my life when the world was a more dangerous and scary place.”

This is nonsense. As I pointed out on Forbes online: “Christie barely missed the Cuban missile crisis. During his life the Cold War raged, the Vietnam War was lost, the Soviets invaded Czechoslovakia and Afghanistan, and China’s Mao Zedong unleashed the bloody Cultural Revolution. People talked about the potential for a ‘nuclear winter’ from a nuclear exchange. Today the U.S. vastly outspends its potential adversaries and is allied with every major industrialized power save China and Russia.”

 “Building stronger alliances” is a “pillar” of Christie’s foreign policy. U.S. foreign policy is based on “partnership with the people and nations who share our values,” he explained. Like the totalitarian Saudis, brutal Egyptian military, and dictatorial Central Asian states?

Moreover, America’s friends can defend themselves. For instance, South Korea has 40 times the GDP of the North; Japan possesses the world’s third largest economy. Europe has a larger GDP and population than America and multiple of those of Russia.

Many so-called allies are security black holes, making America less secure. Why would Washington wish to confront nuclear-armed Moscow over interests the latter considers vital by defending nations such as Georgia and Ukraine, which always have been irrelevant to America’s security?

Christie argued that “We didn’t have to be a global policeman who solved every problem.” But that’s what Washington has done with perpetual social engineering through foreign aid, military intervention, war, and more.

In Christie’s view squandered U.S. credibility is why Russia grabbed Crimea, Syria’s Bashar al-Assad used force against his opponents, and “Iranian-backed militias are rampaging across Yemen.”

In fact, Washington never was going to go to war over Crimea with nuclear-armed Russia. Assad was determined to remain in power and therefore had to fight, irrespective of Washington’s view. Yemen’s Houthis have been in revolt for decades and have never had much connection to Iran, let alone America.

Of course, Christie demanded more military outlays. But it would be easier “to keep our edge” if Washington didn’t constantly squander Americans’ resources defending other nations and rebuilding failed states.

Christie insisted that “What happened on 9/11 must never happen again.” But he failed to understand that promiscuously supporting authoritarian regimes, aiding foreign combatants, dropping drones and, most important, bombing, invading, and occupying other lands creates enemies determined to do America ill.

Rubio and Bush also have given formal speeches, but sound no better than Christie. Most GOP candidates promise brave new interventions and wars.

If Republicans really believe in limited government and individual liberty, they should promote peace. It is time for a real Republican debate over foreign and military policy.

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.

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[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.

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