Cato Op-Eds

Individual Liberty, Free Markets, and Peace
Subscribe to Cato Op-Eds feed

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[2] And hyperinflation.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Live Free and Learn: Scholarship Tax Credits in New Hampshire

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here’s an excerpt of the conversation a reported by

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Watch the video of the event:

The New York Times recently reported that the Lax Kw’alaams Band, an indigenous tribe in a remote part of British Columbia, has rejected a $1 billion offer for their consent to the construction of a natural gas processing facility that would service a nearby liquefied natural gas terminal. The group, which has about 3,600 members, would have received the equivalent of about $277,000 per person to allow the plant. The leader of the group explained their decision by saying, “Hopefully, the public will recognize that unanimous consensus in communities (and where unanimity is the exception) against a project where those communities are offered in excess of a billion dollars, sends an unequivocal message this is not a money issue: this is environmental and cultural.”

In normal market transactions, resources flow to those who value them the most regardless of who owns them initially. In this case, that would imply the decision to build the facility (whether now or in the future) does not depend on whether the Lax Kw’alaams Band or the gas company owns the land. Ownership simply determines who has to pay whom in order to develop the land or leave it undeveloped. If the gas company owned the land, they would not have to pay the tribe in order to develop the plant, but the tribe could purchase the land (or, at least, an anti-development easement) from the gas company in order to keep it undeveloped. If the tribe owns the land, the gas company would have to pay or the land would stay undeveloped. In both cases, development would occur if the gas company values the land more than the tribe.

That’s the general theory, but in this particular case the facts suggest that initial property rights do matter. In the case of the Lax Kw’alaams, the group places great value on keeping the land from being despoiled by a natural gas plant. A decade or so ago, the Canadian Supreme Court determined that tribes like the Lax Kw’alaams must be consulted and accommodated if projects cross their land. The tribe clearly has strong preferences for a pristine environment, and has made the choice to forgo a windfall to maintain it.

But what would have happened if the property rights belonged to someone else? If the party given the right had weaker environmental preferences, the terminal would likely be built; it’s doubtful the Lax Kw’alaams would win (or perhaps even enter) a bidding war with the gas company over control of the land. Because participants in environmental policy disputes “know” that property rights matter in this way, they fight politically over who has the current property rights rather than allow rights to exist and be traded.

This special post was written by Travis Evans, research associate in Cato’s Defense and Foreign Policy Studies Department.

House Republicans have found a way to circumvent those bothersome Budget Control Act (BCA) spending caps. On MSNBC’s Morning Joe this morning, Rep. Mac Thornberry (R-TX), chairman of the House Armed Services Committee, brazenly stated that the $611.9 billion defense authorization bill, which was passed by the House today, adheres to the BCA cap on discretionary defense spending. How, you may be asking, is it possible to authorize $89 billion more than the caps and still adhere to them? Simple: funnel the money through a slush fund that is not beholden to the spending caps, in this case the Overseas Contingency Operations (OCO) account.

Using the OCO account to supplement discretionary defense spending is so common nowadays that Chairman Thornberry explains the Republicans’ actions as if we should applaud him and his colleagues for saving the defense budget.

The caps are a concern, but we found a way to add to the Overseas Contingency account, so that we in the House budget and the defense bill on the floor right now meet exactly the amount the president has ask for.

You see what he did there? He is able to say that the Republicans are honoring the caps (the ones they agreed to in 2011) while giving the president the defense spending he requested. Clever. But maybe too clever. Congressional Democrats don’t seem to be persuaded. Even the president is opposed to the bill (albeit because of some particulars of the bill, not the topline spending amount).

House Minority Leader Nancy Pelosi (D-CA) called the bill “disingenuous” and “dangerous,” stating that the “Republicans are trying to use war funding as a virtual slush fund for one part of the budget while letting the ax fall on everything else.” While I’m not in the habit of agreeing with Rep. Pelosi, she is right in this case.

When Sam Stein on Morning Joe asked Thornberry why it was okay to circumvent defense caps, but seen as “sacrilege” by many on the right to increase spending for domestic programs like the National Institute of Health, Thornberry said he would be open to more spending on domestic priorities, just not now.  

There are lots of Republicans, and I would be included, who would increase money for NIH and want to have something that is more rational than the Budget Control Act and its arbitrary caps and sequestration. But the point is you can’t do that on a defense authorization bill… That’s not the place or time to have that debate.

But by ignoring the caps on defense spending, Republicans have rendered the BCA meaningless. The BCA was never meant to manage the federal budget; it was specifically designed to force the two parties to negotiate by using their respective spending priorities as leverage. But now that the defense caps are off the table, that leverage is gone.

Congressional Democrats are right to be up-in-arms over the Republican’s latest tactic. President Obama could veto the bill, if for no other reason than to preserve the BCA caps and the leverage they provide. While it was never the wisest way to keep spending in check, the BCA caps are better than the alternative passed by the Republican-controlled House today. 

Five years ago, Bob Poole and I argued that the nation’s air traffic control (ATC) system should be transformed into a private, nonprofit organization supported by customer charges, not taxpayer subsidies. I have argued that Canada’s privatized system is a good model for U.S. reforms.

Well, how about that: the Wall Street Journal reports that Congress and various aviation interest groups are coming around to the Cato way of thinking on the matter: 

A push to radically reshape the outmoded U.S. air-traffic control system is gaining support, as airlines and some labor unions join to back change and a top lawmaker drafts legislation that could effectively privatize services.

Rep. Bill Shuster, a Pennsylvania Republican and the chairman of the House Transportation and Infrastructure Committee, and his staff are drafting legislation to strip the nation’s 15,000 civilian controllers and more than 230 air-traffic facilities from the Federal Aviation Administration, possibly putting them under the control of a nonprofit corporation, people familiar with the plan say.

… Rep. Shuster’s spokesman said this month that the goal is “serious reform” and the committee “has looked extensively at other air-traffic models around the world.”

… A number of influential organizations are joining the chorus for change. Paul Rinaldi, president of the controllers union, hasn’t signed onto the idea of privatization but has become less resistant to the general concept. He has complained about the unpredictability of congressional appropriations by saying “we are going to lose our competitive edge if we don’t knock it off.”

In the New York Times on Wednesday, David Leonhardt presented a chart under the headline “Amtrak Crash and America’s Declining Construction Spending.”

The chart shows federal, state, and local government construction spending as a share of GDP. Leonhardt discusses America’s “crumbling infrastructure,” particularly rails, bridges, highways, and airports. He highlights the spending decline as a share of gross domestic product over the past five years.

Leonhardt also cites Joe Weisenthal of Business Insider, who presented a similar chart after the collapse of a bridge near Seattle two years ago. Weisenthal’s brief piece was called “The Collapse Of Public Infrastructure Spending In One Chart.”

There is a big problem here: the falling spending that Leonhardt and Weisenthal point to has very little to do with transportation. The data come from the Census, which the two writers extracted from this Fed database. The data can be broken out into a dozen subcomponents for the period 2002–2015. If the writers had done that, they would have come to different conclusions.

The three largest subcomponents of government construction are highways and streets, education, and (non-road) transportation, which includes airports, seaports, and transit. Using the Fed database, I charted the three components in millions of dollars; that chart is below the jump. (I’ll look at spending as a percentage of GDP in a moment.)

Government spending on highways and streets (light blue) and transportation (brown) have been roughly flat the past five years after surging the prior five years. It is spending on education (dark blue) that has plunged, and which has dragged down overall government construction spending. I don’t know why construction on schools and colleges soared and then plunged, but that is the main cause of the recent downward trend in public construction, not any form of transportation.

As a share of GDP, Leonhardt’s chart shows a drop in total infrastructure spending from 2.2 percent in 2009 to 1.5 percent in 2015. By my calculations, just 0.1 percentage point of that 0.7 percentage point drop came from any type of transportation spending. And note: that small drop came from what was an extraordinary peak in 2009. Plus, in dollar terms, transportation spending hasn’t declined at all.

In sum, the data underlying the charts presented by Leonhardt and Weisenthal do not support their themes of crumbing transportation infrastructure.

A further concern about such infrastructure articles is that they focus on spending levels, not spending quality or efficiency. The Soviet Union and other central-planning failures should have convinced everybody that spending quality is more important than spending levels. Leonhardt says that some of our airports look “dilapidated” compared to airports in Europe and Asia, but one reason is that American airports are all government-owned. By contrast, many airports abroad are now privately owned or managed.

I would agree with Leonhardt and Weisenthal that America faces infrastructure challenges. But we can meet those challenges by decentralizing funding and decisionmaking as much as possible, and to follow the lead of other advanced economies and privatize. For further reading on infrastructure reform, see here and here. For Amtrak, see here and here.

(Thanks to Veronique for pointing out the NYT article).

The Washington Post ran an editorial on Wednesday indicting Hillary Clinton for her silence on the trade agenda. Yesterday morning, the Post published an op-ed by Robert Kagan of Brookings titled “Clinton’s Cowardice on Trade.” Both pieces offer some valid observations, but the matter deserves more scrutiny still.

Is it just me or do others see it as presumptuous, disrespectful, and even contemptuous that the person who expects to head the Democratic Party ticket next year feels entitled to her silence on the single most divisive issue confronting that party? Trade policy is causing a schism between Democrats, and Clinton chooses to showcase her leadership bona fides by … refraining from taking a position? And what does that say about the judgment of her steadfast supporters, whose return silence countenances an evasion akin to deceit? On the other hand, Clinton’s supporters are accustomed to accommodating a more expansive definition of honesty, so perhaps they’re oblivious.

If I were an engaged Democrat, I’d demand to know, now, where Hillary Clinton stands on trade. And if I were a presidential candidate with a reputation for favoring expedience over principle and whose most compelling claim to the White House is that I really, really want to be president, I would want to demonstrate my worthiness by taking a firm position, explaining to my party why I believe that position is the right one, pointing out (as President Obama has) that many of the Left’s objections to trade are based on fallacies, and sticking to it, even if it alienates some factions. Making some people unhappy is a necessity of leadership.

Like President Obama, Hillary Clinton has a history of flip-flopping on trade, so people are understandably confused. As First Lady, she advocated on behalf of her husband’s efforts to forge NAFTA. As a U.S. senator, she was a solid protectionist, voting against trade barriers only 31 percent of the time and against trade-distorting subsidies only 13 percent of the time. As a candidate for president, she expressed skepticism and, at times, indignation about trade agreements and joined with the political left in vilifying NAFTA. As secretary of state, she not only embraced the Trans-Pacific Partnership (TPP), but was instrumental in making it the centerpiece of the administration’s “pivot to Asia.” Today, in the midst of a debate that will make or break the TPP and shape next year’s Democratic Party platform and more, Clinton is mum.

The Trade Promotion Authority legislation struggling to gain support from congressional Democrats would extend the terms of TPA through the entirety of the next president’s first term and into the second (it would expire in July 2021). It is a tool that would be welcomed by any president who sees trade agreements as channels for economic growth and diplomacy. Clinton’s silence implies indifference to the outcome of the TPA debate in Congress and, thus, indifference to trade liberalization as a policy tool. Clinton is well aware that the most important aspect of U.S. foreign policy to most countries is our trade and commercial policy.

So, unless the former top U.S. diplomat, as president, would turn her back on the TPP she once embraced, and pull the rug out from under the Transatlantic Trade and Investment Partnership—outcomes that would deprive the economy of valuable growth opportunities, offend 39 foreign governments, and reinforce perceptions of U.S. decline—she should affirmatively endorse TPA now.

Clinton’s endorsement would signal leadership and provide cover for scores of Democrats in Congress who are wary of the party’s dash to the far left. It would provide refuge for members who want to be on the economically responsible side of the schism. It would create an environment where it is safe to say the anti-trade, progressive emperor is stark naked. 

The latest results of the Nation’s Report Card for history, geography, and civics are out, and as usual they are depressing. The exam, formally known as the National Assessment of Educational Progress, is administered to a representative sample of U.S. students to give a snapshot of student performance in a variety of subjects nationwide. Education Week reports:

The nation’s eighth graders have made no academic progress in U.S. history, geography or civics since 2010, according to the latest test results from the National Assessment of Educational Progress (NAEP).

Fewer than one-third of students scored proficient or better on any of the tests and only 3 percent or fewer scored at the advanced level in any of the three subjects.

However, Chad Aldeman of Bellwether Education Partners argues that saying students “have made no academic progress” is “the wrong way to look at it” because of something called Simpson’s Paradox (which has nothing to do with the voice of Principal Skinner and Mr. Burns turing down a $14 million contract):

Because NAEP takes a representative sample, it’s also vulnerable to something called Simpson’s Paradox, a mathematical paradox in which the composition of a group can create a misleading overall trend. As the United States population has become more diverse, a representative sample picks up more and more minority students, who tend to score lower overall than white students. That tends to make our overall scores appear flat, even as all of the groups that make up the overall score improve markedly.

Recent NAEP results in history, geography, and civics illustrate this trend once again. Education Week reported that scores were “flat” from 2010 to 2014. That’s mostly true—the scores were all higher than in 2010 but didn’t meet the standard for statistical significance. But scores are up over longer periods of time. Here are the gains since 2001 on geography (* signifies statistically significant):

• All students: +1
• White students: +4*
• Black students: +7*
• Hispanic students: +9*
• Students with disabilities: +8*
• English Language Learners: +7

… A few things jump out from these longer-term results. First, overall scores are up a little bit, but particular groups of students are making big gains. One rule of thumb suggests that 10–15 points on the NAEP translates into one grade level. Applying that here, scores for most groups of students have improved by roughly a full grade level over the last 15 years or so. Second, achievement gaps are closing as lower-performing groups are catching up to higher-performing ones. Third, Simpson’s Paradox makes the overall scores look relatively “flat.” Don’t let that mislead you. Although we might wish for faster progress, American achievement scores are rising.

However, other education policy experts have cast a gimlet eye on this interpretation. Jay P. Greene of the University of Arkansas argues, “It is not appropriate to explain away the lack of aggregate progress in academic achievement by referencing Simpson’s Paradox and dis-aggregating results by racial/ethnic group.” In a blog post on the mis-use of Simpson’s Paradox a few years ago, Greene wrote:

The unstated argument behind the use of Simpson’s Paradox to explain the lack of educational progress [is that] minority students are more difficult to educate and we have more of them, so holding steady is really a gain.

The problem with this is that it only considers one dimension by which students may be more or less difficult to educate —race. And it assumes that race has the same educational implications over time. Unless one believes that minority students are more challenging because they are genetically different [which, Greene notes, he does not think Aldeman believes], we have to think about race/ethnicity differently over time as the host of social and economic factors that race represents changes. Being African-American in 1975 is very different from being African-American in 2008. (Was a black president even imaginable back then?) So, the challenges associated with educating minority students three decades ago were almost certainly different from the challenges today.

If we want to see whether students are more difficult to educate over time, we’d have to consider more than just how many minority students we have. We’d have to consider a large set of social and economic variables, many of which are associated with race. Greg Forster and I did this in a report for the Manhattan Institute in which we tracked changes in 16 variables that are generally held to be related to the challenges that students bring to school. We found that 10 of those 16 factors have improved, so that we would expect students generally to be less difficult to educate.

In addition, my Cato colleague Andrew Coulson—creator of the infamous chart below—expressed skepticism about using the main NAEP assessment (which changes between test administrations) to analyze long-term trends. Instead, he points to the NAEP’s “Long-Term Trend” series that was designed just for that purpose. Unlike the main NAEP assessment, the Long-Term Trend remains relatively unchanged over time. Sadly, the results are bleak:

It is true that both black and Hispanic students now score higher than they did in the early 1970s, and the difference isn’t negligible as it is with the overall aggregate trend. … The trends for white students, who still make up the majority of test takers, are only marginally better than the overall trends. Whites gained four points in each of reading and math, and lost six points in science. The overall picture for whites is thus also essentially a flat line, and it is their performance that is chiefly responsible for the stagnation in the overall average scores, not the increasing participation of historically lower-scoring groups.

In short, there is little evidence that Simpson’s Paradox explains flat U.S. student performance in the last few decades.

An Amtrak locomotive caught fire yesterday on its way from Chicago to Milwaukee. Fortunately, all 51 passengers were safely evacuated from the six-car train.

At about the time the locomotive was burning, a reporter was telling me that “everyone” in Washington was saying that the Philadelphia accident proves that Amtrak needs more money. No doubt the Wisconsin incident will add to those calls for more funding.

But go back and read the first paragraph: There were only 51 passengers on that train. All of them could have fit on one motorcoach, many of which have 52 or more seats. The Horizon coaches used on this train typically have 60 seats, which means the train was less than one-sixth full. According to Amtrak’s performance report for fiscal year 2014, the Chicago-Milwaukee Hiawatha trains filled an average of 36 percent of their seats in 2014, or about two-and-one-half buses worth.

Amtrak fares for its seven daily trains each way between Chicago and Milwaukee start at $24. According to Busbud, Greyhound and Megabus together offer 13 trips per day each way between Chicago and Milwaukee, and their fares are often as low as $7 and never higher than $10.

While intercity bus operators pay a discounted fuel tax, the buses otherwise operate without subsidy. Amtrak’s Hiawatha trains produced $16.8 million in ticket revenues in 2014 against $24.5 million in operating costs, for a net loss of $5.7 million (not counting amortized capital costs). The trains carried slightly less than 800,000 riders, for an average subsidy of slightly more than $7 per trip.

In other words, the subsidy alone would have been enough to give every single Hiawatha rider a free trip on Greyhound or Megabus (at the low cost of $7 per trip).

Rail proponents say we need to have trains because some people prefer trains over buses. Apparently, there aren’t very many such people, or the Hiawathas would fill more seats. But there are a few people willing to pay $24 for a trip that would only cost them $7 to $10 on a bus. I suspect most of them bill the fare to their employers.

If Amtrak were to disappear tomorrow, I’m sure Greyhound, Megabus, and other bus companies would be glad to take up the slack. For those who are too snobbish to take an ordinary bus, someone like Limoliner or Vamoose Gold would be happy to charge them two or three times ordinary bus fares to get a luxury ride with wider seats, more legroom, on-board food services, and other amenities.

Until that happens, now you know why you’re supposed to be happy that your tax dollars are going to subsidize Amtrak: so a few snobs who won’t ride ordinary buses can get subsidies to ride expensive and mostly empty trains.

Defying a demand from the federal government to stop publicizing his case, today Lyndon McLellan was told the IRS is abandoning its efforts to keep more than $107,000 it took from his bank account without ever charging him with a crime.

The case received national attention and outrage, including from a member of Congress, which led to this threatening message from an Assistant U.S. Attorney to McLellan’s lawyers:

Whoever made [the case file] public may serve their own interest but will not help this particular case. Your client needs to resolve this or litigate it. But publicity about it doesn’t help. It just ratchets up feelings in the agency. My offer is to return 50% of the money. 

So much for that; Mr. McLellan will be receiving 100% of his money back.  

That said, the government is still attempting to keep the interest earned by Mr. McLellan’s seized funds and refuses to reimburse Mr. McLellan for the costs of getting his money returned. The Institute for Justice insists the case isn’t over until that is remedied as well:

Yesterday, just two weeks after the Institute for Justice took on the case and brought it to the attention of the nation, the IRS and Department of Justice moved to voluntarily dismiss the case and give Lyndon back 100% of his hard-earned money. 

“I’m relieved to be getting my money back,” said Lyndon McLellan. “What’s wrong is wrong, and what the government did here is wrong. I just hope that by standing up for what’s right, it means this won’t happen to other people.” 

Even after he recovers his bank account, Lyndon is still out tens of thousands of dollars, thanks to the government’s actions. Lyndon paid a $3,000 retainer to a private attorney before IJ took the case on pro bono, and he also paid approximately $19,000 for an accountant to audit his business and to provide other services to help convince the government he did nothing wrong. The government is refusing to pay those expenses. And the government also is refusing to pay interest on the money. 

“The government cannot turn Lyndon’s life upside down and then walk away as if nothing happened,” said Robert Everett Johnson, an attorney at the Institute for Justice who represents Lyndon. “Lyndon should not have to pay for the government’s lapse in judgment. And the government certainly should not profit from its misbehavior by keeping the interest that it earned while holding Lyndon’s money. We’ll continue to litigate this case until the government makes Lyndon whole.”

Score another one for the good guys in the fight for a restoration of property rights and respect for due process, and kudos to Lyndon McLellan for not being cowed by the federal government’s threatening offer.  Public scrutiny of this abusive practice and the willingness of victims to fight for their property are both essential elements of vital reform efforts.

This week, people in Maryland got the news of Gov. Larry Hogan’s signature of HB 235, the so-called “Tesla Bill.” The law allows, for the first time, makers of electric cars to sell directly to consumers, bypassing traditional auto dealerships.

During the last few years, a number of states have prevented Tesla Motors from selling cars directly to consumers.  They have enforced laws that require the use of independent dealers to complete sales.

In the Summer 2014 issue of Regulation professor Daniel Crane explained that these laws are a legacy of past battles between dealers and legacy automakers like GM and Ford over the distribution of wealth losses during recessions and the number of dealerships whose fixed costs must be supported relative to Toyota and Honda.

This history has little to do with niche manufacturers like Tesla that do not want to use dealers.  But dealers do not want the possibility of non-dealer sales to spread to traditional manufacturers.     HB 235 codifies this sentiment. It allows Tesla and other electric car makers to sell directly to consumers.  But it preserves the status quo for all other traditional cars and trucks, whose dealers understood that not allowing a Tesla exception would focus undue attention on their regulatory protection and perhaps cause voters to demand more fundamental reform.

Sen. Marco Rubio might fancy himself as a new type of leader for a new era, but his speech yesterday to the Council on Foreign Relations was trapped in the past. Invoking John F. Kennedy’s final speech as president, more than 50 years ago, was bad enough. But Rubio’s overarching message – the Rubio Doctrine – amounts to warmed over Cold War dogma, sprinkled with the language of benevolent global hegemony favored by so many Washington elites, but disdained by most Americans beyond the Beltway. It is difficult to understand the depths of his political and strategic myopia.

Rubio misperceives the American public’s willingness to sustain the current model indefinitely, and therefore fails to appreciate the need for a genuinely new approach to U.S. global affairs. He minimizes the costs and risks of our current foreign policies, and oversells the benefits. He ignores the way in which U.S. security assurances to a host of some-of-the-time allies have discouraged these countries from taking reasonable steps to defend themselves and their interests. And he fails to see any reasonable alternative to a world in which the United States acts – forever, it seems – as the sole guarantor of global security. Specifically, Rubio pledged: “As president, I will use American power to oppose any violations of international waters, airspace, cyberspace, or outer space.” (Any? Whew!) 

To be sure, many people around the world may be happy to allow U.S. soldiers, sailors, airmen, and Marines to attempt such an ambitious undertaking, and to have American taxpayers pick up the tab. It is reasonable to guess that most foreign leaders are anxious to preserve the current order – so long as the U.S. government provides for their defense, they are free to spend their money on other things. But the fact that foreigners like this arrangment doesn’t explain why most Americans would. When Rubio calls for huge increases in the Pentagon’s budget, he is telling Americans that they should be content to accept higher taxes, more debt, and less money to spend here at home, so that U.S. allies elsewhere can neglect their defenses, and feed their bloated welfare states.

Americans, unsurprisingly, and by a wide margin, favor something else. A poll taken last year by the Chicago Council on Global Affairs, for example, found a mere 38 percent of Americans who considered “defending our allies’ security” to be a “very important” foreign goal, below “combating world hunger” and “limiting climate change.” Several of Rubio’s other major foreign policy goals, including “promoting human rights abroad,” “protecting weaker nations against foreign aggression,” or “helping to bring a democratic form of government to other nations” ranked even lower.

To be sure, Rubio is hardly alone in his embrace of the decades-old status quo. A parade of politicians, Republicans and Democrats alike, routinely speak of the United States as the indispensable nation, and celebrate the U.S. miltary’s role as a global constabulary. But it seriously undermines Rubio’s claim to represent the hopes and aspirations of a new generation when he invokes the policies of the same-ol’ generation, and the one before it. His relative youth and stirring personal narrative will appeal to some, including possibly younger voters turned off by a cast of familiar names and has-beens. But Rubio’s fresh face alone is unlikely to compensate for his strangely stale foreign policies.  

It is not often I get a chance to latch on to someone as high profile as the President of the United States saying that public schools “draw us together.” But in his appearance at Georgetown University a couple of days ago, President Obama blamed, among other things, people sending their children to private schools for breaking down social cohesion and reducing opportunities for other children.

First, let’s get our facts straight: Private schools are not the main way better-off people, or people with high social capital, isolate themselves from poor families. Only 9 percent of school children attend private schools, and as Matt Ladner points out in a great response to the President, that percentage has been dropping over the years. No, the main way the better-off congregate amongst themselves is buying houses in nice places, which translates into access to good school districts. Even the large majority of the mega-rich appear to send their children to public schools, but rather than paying school tuition, their tuition is the far-steeper, far more exclusive price of a house. And let’s not pretend – as the President hinted – that we’ve seen anything close to long-term decreased funding for public schools. Even with a slight dip during the Great Recession, inflation-adjusted, per-pupil spending in public schools has well more than doubled since 1970.

On the deeper point, do we really know that public schools “draw us together,” and more importantly, do so better than private schooling? No, we don’t. That’s the accepted wisdom, but basic history doesn’t necessarily bear it out. Roman Catholics ended up starting their own school system – which at its peak in 1965 enrolled about 12 percent of all students – because the de facto Protestant public schools could not accommodate them. African-Americans, of course, were long legally excluded from public schools, especially white public schools. Similar situations existed for Asians and Mexican-Americans in some parts of the country. And, of course, public schools reflected the communities they served, which were often small and homogeneous. Finally, public schooling forces diverse people into a single system, which has led to seemingly incessant, cohesion-tearing clashes over values, personal identities, and much more.

It is also not the case, as President Obama’s critique implies, that private schools don’t build social capital within communities. As discussed in the book Lost Classroom, Lost Community: Catholic Schools’ Importance in Urban America, Roman Catholic schools – the most numerous of private schools – have often been hubs of their communities, and when they have closed it has contributed to major losses of social capital ultimately resulting in community disintegration and all the ills that go with that. And as I wrote when the latest NAEP exam results in geography, U.S. History, and civics came out a few weeks ago, private schools also appear to do a better job than public schools of inculcating good civic values in their students, including political knowledge and a proclivity to volunteer in one’s community.

Private schooling is not what’s pulling Americans apart, Mr. President. Indeed, it may be a powerful tool for bringing us together.

In the wake of the terrible train crash near Philadelphia, people are asking whether Amtrak budget cuts could have been a contributing factor. The short answer is that federal rail spending has not been cut. The longer answer is that rail spending has been greatly misallocated by Congress. Rather than being spent on maintenance along heavily used corridors (particularly in the Northeast), the federal rail budget has been frittered away on uneconomical rural routes and high-speed rail schemes.

In the federal budget, Amtrak is within the Federal Railroad Administration (FRA). The president estimated that fiscal 2015 outlays on the FRA would be $3.6 billion. Of that, $250 million is for Amtrak operating subsidies, $1.1 billion is for Amtrak capital grants, $1.8 billion is for high-speed rail grants, and the rest is for safety, research, and other rail activities.  

The chart shows total FRA outlays from 1990 to 2015 in current dollars (not adjusting for inflation). Outlays have soared in recent years, partly due to rising high-speed rail spending. During 2009 to 2015, high-speed rail grants were $2 million, $16 million, $304 million, $513 million, $768 million, $1.1 billion, and $1.8 billion. But even aside from that spending, FRA outlays were up modestly over the past decade.


The problem with Amtrak is that many of its routes do not make economic sense. Because of politics, the company is forced to run services through low population regions that have few passengers. Passenger rail makes sense in the Northeast corridor, but few other places in America—at least within today’s costly and unionized rail structure. The distance from Boston to Washington, D.C. is less than 500 miles, yet Amtrak operates a 21,000-mile system through nearly all the states. Money that should be used on maintenance and upgrading in the Northeast is being used on services elsewhere in the country that lose hundreds of dollars per passenger.

Amtrak’s pathologies are described in this essay by Tad DeHaven. The solution is to privatize Amtrak and deregulate passenger rail. Privatization and deregulation worked brilliantly for freight rail, and there is no reason why it could not work for passenger rail. Let’s take government out of passenger rail, and allow America’s entrepreneurs take another crack at it.


Almost every news article I read about new foreign investment in the U.S. starts off very positive and exciting.  Here’s one from earlier this week:

Volvo Cars will build a factory in South Carolina, the company said on Monday, making it the first time a Chinese-owned automaker will have an auto assembly plant in the United States.

Volvo will invest $500 million in the new factory, which will be in Berkeley County, S.C., outside Charleston. The company estimated that the plant — its first in the United States since entering the market 60 years ago — would employ 2,000 people in its early years and eventually be closer to 4,000. Construction will begin this fall and the factory will begin producing vehicles in 2018.

Volvo, which remains based in Sweden, has gone through a number of owners in recent years. In 2010, Zhejiang Geely Holdings, its current owner, bought it from Ford, which acquired it in 2000 from the Volvo Group.

It’s good news that the U.S. is so welcoming to foreign investors, including those from China.  That kind of openness is great for our economy.

But then, inevitably, the article says something like this:

South Carolina officials lined up sizable incentives to lure the Volvo plant. The automaker will receive about $200 million in combined incentives. That includes $120 million in economic development bonds, $30 million in state grants and an additional $50 million of incentives from a state-owned utility company, Santee Cooper.

Foreign investment is great, but governments competing for it with massive subsidies makes absolutely no sense.  One of the most important issues related to foreign investment right now is how to rein in these subsidies.

Unfortunately, the actual debate over foreign investment rules focuses on special provisions in trade and investment agreements that let foreign investors sue governments.  We are debating the issue right now at Cato Unbound; I’m one of the two critics of such provisions, and two others are writing in support of these provisions.  One of the points I make is that subsidies to foreign investors are the real problem, and any international rules in this area should focus on that.  We’ll see how the supporters respond.

It appears that the Amtrak crash that killed seven people Tuesday resulted from speeding, but big-government advocates are already using this accident to make their case for more infrastructure spending. In fact, the problem is not too little money, but too much money going to the wrong places.

In 2008, President George Bush signed a law mandating that most railroads, including Amtrak, install positive train control (PTC) by December of 2015. PTC would force trains to slow or stop if the operator ignored signals or speed limits.

In 2009 and 2010, President Obama asked a Democratic Congress to give him $10 billion to spend on high-speed trains, and Congress agreed. Not one cent of that money went to installing PTC in Amtrak’s Northeast Corridor.

PTC would have prevented this accident. There was plenty of money available to install it, but the Obama administration, in its infinite wisdom, chose to spend it elsewhere. Two days ago, it would have been embarrassing to think that the government-run Amtrak hadn’t yet completed installation of PTC on its highest-speed corridor. Today, it’s a tragedy. But how is it the fault of fiscal conservatives?

This accident is just one more example of a political fact of life: Politicians are more likely to put dollars into new construction, such as high-speed rail, than to spend them on safety and maintenance of existing infrastructure. As John Nolte says on Breitbart, “Amtrak is not underfunded; it is criminally mismanaged.”

Transportation journalist Don Phillips presents one example of Amtrak mismanagement in the June issue of Trains magazine: instead of promoting a culture of safety, Amtrak has a culture of don’t care. Phillips points to a February report from Amtrak’s Inspector General that found that Amtrak has the least-safe working environment of any major railroad. Amtrak employees are more than three times as likely to be injured or killed on the job as employees of BNSF, CSX, Norfolk Southern, or Union Pacific.

This poor record, says the report, is a direct result of a lack of accountability “at all levels.” Employee injuries in 2013 were only one-twelfth as likely to result in disciplinary action as in 2009, resulting in employees who believe today that they “can ignore rules and safe practices with impunity.” Safety is of so little importance in the organization that three out of four of the employees interviewed by the inspector general believed that Amtrak’s safety record was better, not worse, than other railroads.

One reason why Amtrak has a poor safety culture may be that Congress has legally limited Amtrak’s liability for any single crash to $200 million. Imagine the outrage if Congress limited the liability of oil companies, pipeline companies, Monsanto, or other private corporations. Yet the progressives who wrote Amtrak legislation considered such a liability limit perfectly acceptable.

If Congress were to respond to this crash by increasing federal infrastructure spending, it is all too likely that much if not most of that money would go for useless new projects such as new high-speed rail lines, light rail, and bridges to nowhere. We don’t need intercity trains that cost several times as much but go less than half as fast as flying; we don’t need urban trains that cost 50 times as much but can’t carry as many people per hour as buses; we don’t need new bridges if bridge users themselves aren’t willing to pay for them.

As I’ve documented elsewhere, infrastructure that is funded out of user fees tends to be better maintained than infrastructure that is funded out of tax dollars. User fees also give transportation managers signals for where new infrastructure is really needed; if people won’t pay for it out of user fees, it probably isn’t necessary.

Before 1970, America’s transportation system was almost entirely funded out of user fees and it was the best in the world. Since then, funding decisions have increasingly been made by politicians who are more interested in getting their pictures taken cutting ribbons than in making sure our transportation systems run safely and smoothly.

This country doesn’t need more infrastructure that it can’t afford to maintain. Instead, it needs a more reliable system of transport funding, and that means one based on user fees and not tax subsidies or federal deficit spending.