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Like certain weeds and infectious diseases, some myths about banking seem beyond human powers of eradication.

I was reminded of this recently by a Facebook correspondent’s reply to my recent post on “Hayek and Free Banking.” “We had free banking in the US from 1830 until 1862,” he wrote. “It didn’t work out too well.” “During the Wildcat Era,” he added, “banks were unregulated and failed by the hundreds.”

Imagine the effect my critic must have anticipated — the crushing blow his revelations would surely deal to my cherished beliefs. Upon reading his words, my eyes widen; my jaw goes slack. Can this really be so?, I ask myself? I read the ominous sentences again, more slowly, sub-vocalizing. Beads of sweat gather across my brow. Then, pursing my lips, my eyes downcast, I turn my head, first left, then right, then left again. If only I had known! All these years…no one ever…I mean, how was I supposed…it never occurred to me… DARNITALL! Why didn’t I think of looking at the U.S. experience before shooting my mouth off about free banking?

Well, that isn’t what happened. “What cheek this fellow has!” was more like it. (OK, it wasn’t exactly that, either.) Of course I’ve looked into the U.S. record. So has Larry White. And Kevin Dowd. And every other dues-paying member of the Modern Free Banking School. We’ve looked into it, and we’ve found nothing there to change our minds concerning the advantages of freedom in banking.

So what about all those “unregulated” wildcats? First of all, there’s never been a time in U.S. history when banking was truly unregulated, or anything close. Up until 1837, just getting permission to open a bank was a hard slog, when it wasn’t altogether impossible. Here’s Richard Hildreth’s tongue-in-cheek description of how one went about becoming a banker back in 1837:

The first thing is, to get a charter. One from the General Government, with exclusive privileges, and a clause prohibiting the grant of any other bank, is esteemed best of all. But such a charter is a non-such not easy to be got.[1]

Next best is a State Bank, in which the state government takes a portion of the stock, with a clause, if possible, prohibiting the grant of any other bank within the state. But if such a bank is not to be had, a bare charter, without any exclusive privileges, should be thankfully accepted.

It is very desirable however, that no other bank should be permitted in the county, city, town or village, in which the new bank is established; and all existing banks, are to join together upon all occasions, in a solemn protest against the creation of any new banks, declaring with one voice, that the multiplication of small banks, — which, by way of emphasis, may be denounced, as “little peddling shaving shops,” — is ruinous to the country, produces a scarcity of money, &c. &c. &c.

In order to obtain a charter, it is necessary to be on good terms with the legislature applied to. Obstinate opposers may be silenced by the promise of a certain number of shares in the stock, — which shares, if very obstinate, they must be allowed to keep without paying for.

This being properly prepared, a petition is to be presented to the legislature, representing that in the town of ——–, the public good requires the establishment of a bank. … The bank is to be asked for, solely on public grounds; not a whisper about the profits the petitioners expect to make by it.

If the petition is coolly received, it may be well to revise the private list of stock-holders, and to add the names of several of the legislators. …

If nothing better can be done, employ some influential politician to procure a charter for you, and buy him out at a premium.[2]

When Hildreth wrote, around 600 U.S. banks were in business. That may seem like plenty. But the fact that the vast majority of these were in the northeast, and that hardly any had branches, meant that most U.S. communities still had no banks at all. In most territories and states west of the Mississippi, becoming a banker wasn’t just difficult: it was illegal.

1837 was also, however, the year in which Michigan passed a “free banking” law, becoming the first of thirteen states that would pass similar laws over the course of the next two decades. The laws provided for something akin to a general incorporation procedure for banks, making it unnecessary for state legislators to vote on specific bank bills, and to that extent improved upon the former bank-by-bank charter or “spoils” system. But despite the name, which suggested, if not completely unregulated banking, at least the sort of lightly-regulated banking for which Scotland was then famous, the laws didn’t even come close to allowing American banks the freedoms that their Scottish counterparts enjoyed. Indeed, the restrictions imposed on U.S. “free” banks proved so onerous that the laws don’t even appear to have achieved a substantial overall easing of entry into the banking business.[3]

Two rules, common to all U.S. free banking laws, were to have especially important consequences. The first denied U.S. “free” banks the right to establish branches—something their Scottish counterparts were famous for doing, and that even some chartered U.S. banks could and did do. The other required them to secure their notes using specific securities, which were to be lodged for safekeeping with state banking authorities. U.S. “free” banks were not free, in other words, to decide how to employ the funds represented by their notes, which were in those days a more important source of bank funding than bank deposits. Such “bond deposit” requirements were also unknown in the Scottish system.

So U.S. “free” banks were hardly “unregulated.” They did, however, “fail by the hundreds”– 2.42 hundred, to be precise, which was no small portion of the total. The question is, why did so many American “free” banks fail? Was it because they weren’t regulated enough? No sir: it was because they were over-regulated: the free banking laws of several states forced banks to invest in what very risky securities — and especially in risky state government bonds — while the rule against branching limited their ability to diversify around this risk, especially by relying more on deposits than on notes. It was owing to these restrictive components of U.S.-style free banking that scads of American free banks ended up going bust.

And that’s not just one kooky free banker’s opinion: it’s the opinion of every competent monetary historian who has looked into the matter.[4] According to Matt Jaremski, whose 2010 Vanderbilt U. dissertation is the most careful study to date, the bond-deposit requirements of antebellum free-banking laws “seem to be the underlying cause of the free banking system’s [sic] high failure rate relative to the charter banking system. While bond price declines were significantly correlated with free bank failures, they were not correlated with the failure rate of charter banks.” Moreover, it wasn’t the general level of bond prices that mattered, but only the prices of specific securities that banks were legally obliged to purchase.

And “wildcat” banking? It’s no coincidence that that expression appears to have first gained currency, so to speak, in Michigan in the 1830s, where it was used to refer to some of the more disreputable banks established under that state’s original free banking law.[5] That law proved such a fiasco that it was repealed just two years later, after inflicting heavy losses on innocent note holders.[6] The law appears to have encouraged more than a few bankers to throw large quantities of their notes onto the market, while situating their banks as remotely as possible, the better to avoid pesky redemption requests. But here, as with U.S. free bank failures generally, regulations were to blame. It just so happened that the securities banks were encouraged to hold under Michigan’s law were especially lousy, consisting as they did “either of bonds and mortgages upon real estate within this state or in bonds executed by resident freeholders of the state.”[7] Call it the Wild West version of Community Reinvestment.

Notwithstanding what happened in Michigan, and all the attention it received, “wildcat” banking, understood to mean banking of the fly-by-night sort, was actually quite rare. In Wisconsin, Indiana, and Illinois, whose free banking laws also proved disastrous, it was unimportant, if not altogether unknown; even in Michigan itself it doesn’t seem to have survived the first free-banking law.[8] Indeed, the all-around record of U.S.-style free banking improved significantly as the Civil War approached. Even banknote discounts — another consequence of unit banking that has been wrongly treated as a necessary consequence of having multiple banks of issue — had become almost trivial by the early 1860s. According to my own research, someone who, in October 1863, was foolish enough to purchase every non-Confederate banknote in the country for its full face value, in order to sell the notes to a broker in either Chicago or New York, would have suffered a loss on that transaction of less than one percent of his or her investment.[9] That’s less than the cost merchants incur today when they accept credit cards, or what people typically pay to withdraw cash from an ATM that doesn’t belong to their own bank.

The best reason I can think of for the persistence of the myth of rampant wildcat banking is simply that stories about it made for more titillating reading than ones about the mass of less colorful, if no less unfortunate, free-bank bank failures. Wildcat banking is to the history of banking what the O.K. Corral and Wild Bill Hickok are to the history of the far west.

Somewhat harder to account for is the fact that, in America at least, “free banking” has come to refer exclusively to the antebellum U.S. episodes (as well as to a similar — and mercifully short-lived — Canadian experiment). The expression was, after all, appropriated by U.S. state legislators for the sake of its appealing connotations, after having been in use for some time overseas, where it and its equivalents (“la liberté des banques,” “bankfreiheit,” etc.) continued to stand for genuinely unregulated banking, or something close to it. Sheer parochialism is, I’m afraid, partly to blame: many authorities on American banking, whether economists, historians, or economic historians, appear to be unfamiliar with European writings on free banking, or with the banking systems those writings regard as exemplary.

The limited interest that even some of the more painstaking authorities on U.S. style “free” banking have shown in free banking of the other sort seems to me a shame. After all, what could be more informative than to compare, say, Michigan’s experience with Scotland’s, so as to gain a better understanding of the consequences of laissez-faire banking on the one hand and of certain departures from laissez faire on the other? By failing, not only to make such comparisons, but (in some cases) to even recognize non-U.S.-style free banking and the literature concerning it, such experts have unwittingly encouraged people to confuse U.S.-style “free banking” with the real McCoy.

_________________

[1] Thanks to Andrew Jackson’s efforts, the Charter of the 2nd Bank of the United States had been allowed to expire the year before.

[2] Richard Hildreth, The History of Banks (Boston: Hilliard, Gray & Company, 1837), pp. 97-8.

[3] See Kenneth Ng, “Free Banking Laws and Barriers to Entry in Banking, 1838-1860.” Journal of Economic History 48 (4) (December 1988). Since the Scottish system was itself essentially a “charter” system, entry into it was also strictly limited. Limited entry was, indeed, the most important of several departures of pre-1845 Scottish banking was genuine laissez faire.

[4] See, among other works, Hugh Rockoff, The Free Banking Era: A Reexamination (New York: Arno press, 1975); Arthur J. Rolnick and Warren E. Weber, “The Causes of Free Bank Failures: A Detailed Examination,” Journal of Monetary Economics 14 (3) (November 1984); Gerald P. Dwyer, “Wildcat Banking, Banking Panics, and Free Banking in the United States,” Federal Reserve Bank of Atlanta Economic Review, December 1996; Howard Bodenhorn, State Banking in Early America: A New Economic History (New York: Oxford University Press, 2003); and Matthew S. Jaremski, “Free Banking: A Reassessment Using Bank-Level Data” (PhD Dissertation, Vanderbilt University, August 2010).

[5] Dwyer, p. 1.

[6] Michigan took another, more successful stab at free banking in 1857.

[7] Dwyer, p. 6.

[8] Ibid., pp. 9-10, and the studies mentioned therein.

[9] See my article, “The Suppression of State Banknotes.” Economic Inquiry 38 (4) (October 2000).

[Cross-posted from Alt-M.org]

Today, the Justice Department indicted Dylann Roof on 33 federal hate crime charges for the killings of nine people at Emanuel A.M.E. church in Charleston last month. This indictment is entirely unnecessary.

Hard as it may be for some to imagine now, there was a long time in this country when racially and politically motivated violence against blacks was not prosecuted by state and local authorities. Or sometimes, as in the case of Emmett Till—the young boy from Chicago who was lynched in Mississippi for allegedly being too forward with a white woman—prosecution was a farce and the perpetrators were acquitted.

But in the present case, South Carolina authorities moved quickly and effectively to catch Roof and did not hesitate to charge him with nine counts of murder. This was South Carolina’s duty and their law enforcement officers have appeared to perform professionally and competently. 

The Department of Justice should be more judicious with its funds and resources. The opportunity costs of a duplicative prosecution takes resources away from crimes that fall more appropriately in the federal purview, such as interstate criminal enterprises and government corruption. Today’s indictment is federal meddling in a case the state already has under control.

Even if some wholly unlikely chain of events leads to Roof’s acquittal, the DOJ could push forward with their prosecution at that time. But, in reality, that isn’t going to happen and no one at DOJ thinks it will. By not waiting for the outcome of the state’s prosecution, the timing strongly suggests the DOJ wants to assume jurisdiction for Roof’s prosecution. Thus, this indictment is an unabashed political move.

While the murders were rightly condemned as a national tragedy, it was a tremendous blow to the community of Charleston and the state as a whole. As such, the primary responsibility for prosecuting Dylann Roof belongs to South Carolina. Neither national grief nor DOJ politics should stand in the way of South Carolina’s prerogative to deliver justice on its own terms.

UPDATE: Shortly after this post went live, U.S. Attorney General Loretta Lynch released a statement on the indictment. Notably, she referred to the state and federal cases as “parallel prosecutions.” But Roof cannot be in two courtrooms at the same time and so one proceeding will have to take place before the other.

It is hard to identify any justice interest served by federal prosecution. Rather, this appears to be for the institutional interests of the Justice Department. 

Karl Marx was wrong about many things but right about one thing: the revolutionary way capitalism attacks and destroys feudalism. As I explain in a new study,  in India, the rise of capitalism since the economic reforms of 1991 has also attacked and eroded casteism, a social hierarchy that placed four castes on top with a fifth caste—dalits—like dirt beneath the feet of others. Dalits, once called untouchables, were traditionally denied any livelihood save virtual serfdom to landowners and the filthiest, most disease-ridden tasks, such as cleaning toilets and handling dead humans and animals. Remarkably, the opening up of the Indian economy has enabled dalits to break out of their traditional low occupations and start businesses. The Dalit Indian Chamber of Commerce and Industry (DICCI) now boasts over 3,000 millionaire members. This revolution is still in its early stages, but is now unstoppable.

Milind Kamble, head of DICCI, says capitalism has been the key to breaking down the old caste system. During the socialist days of India’s command economy, the lucky few with industrial licenses ran virtual monopolies and placed orders for supplies and logistics entirely with members of their own caste. But after the 1991 reforms opened the floodgates of competition, businesses soon discovered that to survive, they had to find the most competitive inputs. What mattered was the price of your supplier, not his caste.

Many tasks earlier done in-house were contracted out for efficiency, and this opened new spaces that could be filled by new entrepreneurs, including dalits. DIOCCI members had a turnover of half a billion dollars in 2014 and aim to double it within five years. Kamble says dalits have ceased to be objects of pity and are becoming objects of envy. They are no longer just job-seekers, they are now job creators.

Even in rural areas, dalits have increasingly moved up the income and social ladders in the last two decades.  One survey in the state of Uttar Pradesh shows the proportion of dalits owning brick houses is up from 38 percent to 94 percent, the proportion running their own businesses is up from 6 percent to 36.7 percent, and the proportion owning cell phones is up from zero to one-third. Some former serfs have now become bosses. A rising proportion have become land-owners, and sometimes hire upper-caste workers. Even more revolutionary, say dalits, is the change in their social status. Once they were virtually bonded laborers, and could not eat or drink with the upper castes. Today the bonded labor system is almost gone, and dalits operate restaurants at which upper castes eat and drink. They remain relatively poor and discriminated against, but economic reform since 1991 has revolutionized their social and economic status.

Here we introduce a new feature from the Center for the Study of Science, “On the Bright Side.” OBS will highlight the beneficial impacts of human activities on the state of our world, including improvements to human health and welfare, as well as the natural environment. Our emphasis will typically focus on the oft-neglected positive externalities of carbon dioxide emissions and associated climate change. Far too often, the media, environmental organizations, governmental panels and policymakers concentrate their efforts on the putative negative impacts of potential CO2-induced global warming. We hope to counter that pessimism with a heavy dose of positive reporting on the considerable good humans are doing for themselves and for the planet.

According to Piao et al. (2015), the reliable detection and attribution of changes in vegetation growth are essential prerequisites for “the development of successful strategies for the sustainable management of ecosystems.” And indeed they are, especially in today’s world in which so many scientists and policy makers are concerned with what to do (or not do) about the potential impacts of CO2-induced climate change. However, detecting vegetative change, let alone determining its cause, can be an extraordinarily difficult task to accomplish. Nevertheless, that is exactly what Piao et al. set out to do in their recent study.

More specifically, the team of sixteen Chinese, Australian and American researchers set out to investigate trends in vegetational change across China over the past three decades (1982-2009), quantifying the contributions from different factors including (1) climate change, (2) rising atmospheric CO2 concentrations, (3) nitrogen deposition and (4) afforestation. To do so, they used three different satellite-derived Leaf Area Index (LAI) datasets (GLOBMAP, GLASS, and GIMMIS) to detect spatial and temporal changes in vegetation during the growing season (GS, defined as April to October), and five process-based ecosystem models (CABLE, CLM4, ORCHIDEE, LPJ and VEGAS) to determine the attribution.

With respect to detection, this work revealed that most regions of China experienced a greening trend indicative of enhanced growth across the time period studied (see Figure 1). Overall, 56 percent of the area studied experienced a significant increase in greening (95% level) when using the GLOBMAP dataset, compared with 54 and 31 percent using the GLASS and GIMMIS datasets. Those regions with the largest greening trends include southwest China and part of the North China Plain. 

Figure 1. Spatial distribution of the trend in LAIGS over the period 1982–2009 as calculated by the GIMMS dataset (a), GLOBMAP dataset (b) and the GLASS dataset (c). The frequency distribution of the significance level (P value) of the trends calculated for the three LAIGS datasets is shown in panel d.

With respect to attribution, Piao et al. report that “the combined effect of CO2 fertilization and climate change with the effect of nitrogen deposition, leads to the conclusion that these three factors are responsible for almost all of the average increasing trend of LAIGS observed from the satellites” (see Figure 2). They also report that “at the country scale, the average trend of LAIGS attributed to rising CO2 concentration is estimated to be … about 85% of the average LAIGS trend estimated by satellite datasets,” while noting secondarily that the enhanced nitrogen deposition driven by fossil fuel combustion and agricultural fertilization is likely the source of the remaining portion of China’s enhanced vegetation growth, citing the findings of Reay et al. (2008), Thomas et al. (2009), Fleischer et al. (2013) and Yu et al. (2014).

Figure 2. Trend in China’s LAIGS over the period 1982–2009 at the country scale for the three satellite remote sensing datasets and five process models described in the text above. Significance levels of 95 and 99 percent are denoted with one and two asterisks, respectively. See the authors’ original text (Piao et al., 2015) for additional explanation of this figure.

In considering the researchers’ several findings, it is clear that the fossil fuel combustion that has resulted in the rise in atmospheric CO2 and enhanced nitrogen deposition over the past three decades has provided a great benefit to Chinese vegetation. As illustrated in Figure 2, led primarily by the increase in CO2, that benefit has been more than sufficient to compensate for the negative effects of climate change that also occurred over that time period. Thus, it would seem far more prudent to celebrate CO2 instead of demonizing it, like so many people incorrectly do these days; for atmospheric CO2 is truly the elixir of life!

 

References

Fleischer, K., Rebel, K.T., Molen, M.K., Erisman, J.W., Wassen, M.J., van Loon, E.E., Montagnani, L., Gough, C.M., Herbst, M., Janssens, I.A., Gianelle, D. and Dolman, A.J. 2013. The contribution of nitrogen deposition to the photosynthetic capacity of forests. Global Biogeochemical Cycles 27: 187-199.

Piao, S, Yin, G., Tan, J., Cheng, L., Huang, M., Li, Y., Liu, R., Mao, J., Myneni, R.B., Peng, S., Poulter, B., Shi, X., Xiao, Z., Zeng, N., Zeng, Z. and Wang, Y. 2015. Detection and attribution of vegetation greening trend in China over the last 30 years. Global Change Biology 21: 1601-1609.

Reay, D.S., Dentener, F., Smith, P., Grace, J. and Feely, R.A. 2008. Global nitrogen deposition and carbon sinks. Nature Geoscience 1: 430-437.

Thomas, R.Q., Canham, C.D., Weathers, K.C. and Goodale, C.L. 2009. Increased tree carbon storage in response to nitrogen deposition in the U.S. Nature Geoscience 3: 13-17.

Yu, G., Chen, Z., Piao, S., Peng, C., Ciais, P., Wang, Q., Li, X., and Zhu, X. 2014. High carbon dioxide uptake by subtropical forest ecosystems in the East Asian monsoon region. Proceedings of the National Academy of Sciences USA 111: 4910-4915.

A recent AP/GfK poll finds a slim majority (51%) of Americans say businesses with religious objections should be required to serve same-sex couples. Forty-six percent (46%) say these business owners should be allowed to refuse service. However, for business owners specifically offering wedding-related services, Americans say these particular businesses “should be allowed to refuse service” by a margin of 59% to 39%. 

These results correspond with the nuanced argument Cato scholar Roger Pilon recently made in the Wall Street Journal. Pilon explains that businesses open to the public ought to serve everyone; however, business owners with religious objections (who are not a monopoly) should not be forced to participate in the creative act of planning and participating in the wedding of a same-sex couple. Referring to two couples who recently were heavily fined for declining to provide services for same-sex weddings, he writes:

“Because they represent their businesses as open to the public, the Kleins and Giffords shouldn’t be able to deny entrance and normal service to gay customers… But it is a step further—and an important one—to force religious business owners to participate in a same-sex wedding, to force them to engage in the creative act of planning the event, baking a special-order cake for it, photographing it, and so on.”

Americans seem inclined to support this nuanced view that businesses should serve all customers regardless of sexual orientation, religion, race, gender, income, national origin, etc.—but that wedding-related businesses requiring owners’ direct participation in the wedding should not be forced to provide service against the owners’ religious beliefs.

Just because the public thinks wedding-related business owners ought not be forced to serve same-sex couples doesn’t mean the public opposes same-sex marriage. Polls show (here, here) that in advance of June’s Supreme Court ruling, roughly 6 in 10 Americans supported legalizing marriage for same-sex couples.

Taken together, these polls suggest that a sizeable share of Americans think the state should not prohibit same-sex couples from getting married and that the state should not require wedding-related business owners with religious objections to provide services against their will.

In blogs over the last several months, I have revisited the fiscal records of the eight Republican presidential candidates who have gubernatorial experience. As the 2016 race heats up, the candidates will begin making many promises on tax and spending issues, but will we be able to believe them?

The records show that some governors worked hard to limit the size and scope of government. Others grew government with more spending and higher taxes. The candidates fit into three categories: the “A’s,” the falling grades, and the consistent “B’s”.

Three of the former governors earned at least one “A” during their tenure: George Pataki of New York, Jeb Bush of Florida, and Bobby Jindal of Louisiana. Pataki earned high marks for slashing state spending by $2 billion and cutting the personal income tax. Bush passed a billion dollar property tax cut coupled with a large business tax cut. Jindal dramatically cut spending. Spending is down 9 percent in Louisiana since fiscal year 2009.

Pataki’s and Bush’s grades didn’t stay in the upper tier. Pataki fell to a depressing “D” by the end of his tenure because of his support for large spending and tax increases. Spending grew at twice the rate of population growth and inflation during his tenure. He backed several tax hikes and NY issued billions in new debt. Florida’s budget exploded during Bush’s second term, lowering his final grade to a “C.”

Other governors had precipitous falls too. John Kasich of Ohio received a “B” in his first report card. In 2014 his grade fell to a “D,” and that tied him as the worst Republican governor on fiscal policy in the country. Kasich supported huge spending hikes. Spending increased 18 percent from 2012 to 2015, according to the National Association of State Budget Officers, and he expanded Medicaid over objections from the legislature. He requested another 11 percent increase for fiscal year 2016. Mike Huckabee of Arkansas fell from a “B” to an “F” as he embraced a number of net, new tax increases totaling $500 million. He also doubled total state spending.

The final group of governors includes governors who received consistent, strong grades over their tenures. These governors didn’t set the curve, but did demonstrate a record of tax-and-spending restraint. Rick Perry of Texas earned a “B” on five of his six report cards, with a “C” for the sixth grade. Spending did grow while Perry was governor, but at least its growth was limited to population growth and inflation. Scott Walker of Wisconsin passed a  large tax cut and large-scale union reforms, but spending grew a bit quicker than the national average. Chris Christie of New Jersey continues to propose tax cuts and fiscal reforms, but his progress has been stymied by the Democratic-controlled legislature.

Candidates will offer bold promises of action if they are elected. Many will pledge to cut taxes and federal spending.  The records of past governors provide some evidence to determine whether a candidate’s promises should be trusted or if the promises are just bluster to garner support.

Note: This piece discusses the eight former or current Republican governors running for the presidency. Two former Democrat governors are also running. Below is a summary of all ten candidates’ fiscal records while governor:

This is what happens in a world without markets for water, as Eli Saslow reports in the Washington Post:

Their two peach trees had turned brittle in the heat, their neighborhood pond had vanished into cracked dirt and now their stainless-steel faucet was spitting out hot air. “That’s it. We’re dry,” Miguel Gamboa said during the second week of July, and so he went off to look for water….

For a few days now, they had been without running water in the fifth year of a California drought that had finally come to them. First it had devastated the orchards where Gamboa and his wife had once picked grapes. Then it drained the rivers where they had fished and the shallow wells in rural migrant communities. All the while, Gamboa and his wife had donated a little of their hourly earnings to relief efforts in the San Joaquin Valley and offered to share their own water supply with friends who had run out, not imagining the worst consequences of a drought could reach them here, down the road from a Starbucks, in a remodeled house surrounded by gurgling birdbaths and towering oaks.

The article reads like science fiction. And it’s so tragic, because markets could go a long way toward allocating California’s water to its highest-valued uses, as Peter Van Doren and Gary Libecap discussed recently. More Cato studies on water markets here.

John Kasich, the Governor of Ohio, makes his presidential announcement today. He becomes the 16th person to join the Republican field and the 8th current or former governor.

Kasich is a fiscal policy expert. He has made a federal Balanced Budget Amendment a key talking point in his speeches and appearances so far, and was known for being a budget cutter while in Congress. His record in Ohio tells a very different story. Spending has risen rapidly  during Kasich’s tenure in Columbus.

Data from the National Association of State Budget Officers illustrates the rapid growth general fund spending. From fiscal year 2012, Kasich’s first full fiscal year, to fiscal year 2015, general fund spending increased in Ohio by 18 percent. Nationally, state general fund spending increased by 12 percent during that period. Kasich’s proposed budget for fiscal year 2016 increased spending further. It included a year-over-year increase of 11 percent. The average governor proposed a spending increase of 3 percent from fiscal year 2015 to fiscal year 2016.

Much of the increase is due to Kasich’s support of Medicaid expansion. In 2013 the Ohio House of Representatives opposed Medicaid expansion. They inserted a provision in the state budget forbidding the Kasich administration from expansion without their approval. Kasich stripped the provision from the budget and then proceeded to expand the program without their approval.

Just 18 months after the expansion took effect, the costs have exploded. According to a recent report from the state’s Legislative Service Commission, costs are 63 percent, or $1.4 billion, over budget. The report says the overage is because of “higher than expected caseloads and per person costs.”  The expansion population was 600,000 in June of 2015, compared to estimates of 366,000. Medicaid expenditures are 9.5 percent higher in fiscal year 2015 than they were in fiscal year 2014.

Much of this spending increase underlies Kasich’s grades on Cato’s Governors Report Card. Kasich received a respectable “B” in 2012, but his score plummeted to a “D” in 2014 as the spending increases started. He scored the worst of any governor—Republican or Democrat—on spending in the 2014 report card. And Kasich tied for the worst grade overall of any Republican governor.

Kasich has made some progress on tax reform. The personal income tax was cut in 2013, 2014, and 2015. Kasich supported a plan to exclude a portion of small-business income from taxation in 2013 and to expand the provision in 2015. But Kasich has also supported several tax increases, such as increasing taxes on shale gas and oil, the state’s gross receipts tax, and cigarettes.

Overall, Kasich’s legacy in Columbus is disappointing. He has presided over large spending increases. His proposed fiscal year 2016 spending increase was three times larger than the national average among the states. While he has made some meaningful tax reforms, his support for bigger government in numerous areas is troubling.

Last month, when Justice Anthony Kennedy found that same-sex marriage was a “fundamental right,” did he and the four other justices for whom he wrote find a “new” constitutional right? Or is it rather, as some of us have long argued, that the Constitution protected that right for nearly a century and a half, like the right to same-sex sodomy (Lawrence v. Texas), to sell and use contraceptives (Griswold v. Connecticut), to educate one’s child in a parochial school (Pierce v. Society of Sisters), and, dare I say, to freedom of contract in employment (Lochner v. New York)?

I address those questions in a piece in today’s National Law Journal, defending Kennedy’s conclusion in Obergefell v. Hodges but taking exception to his reasoning. The fundamental right to same-sex marriage rests mainly, he argued, on the liberty interest that is protected under the Fourteenth Amendment’s Due Process Clause. Not so, said Justice Clarence Thomas in his dissent. Drawing extensively on John Locke’s state-of-nature approach to political legitimacy, which the Founders and Framers drew on as well, Thomas argued that the Obergefell plaintiffs were not denied the right to marry. They were perfectly free to go to any willing clergyman who would marry them—and the state would not have interfered with their liberty to do so. What they wanted, he saw, was a state license, the state’s positive recognition of the marriage, and the legal benefits that go with the state’s recognition.

Kennedy’s conclusion as against the state, therefore, belongs properly not under the Fourteenth Amendment’s Due Process but under its Equal Protection Clause. The state denied same-sex couples the same benefits it granted opposite-sex couples and thus discriminated against them. Thus, the right to marry someone of the same sex may be a natural right that anyone would enjoy in the state of nature; but once we leave that state, if an actual state we’re in grants the privileges of marriage, that right is entailed and derived from the Fourteenth Amendment’s Privileges or Immunities Clause; and its denial is properly litigated against the state under the Equal Protection Clause. Unfortunately, Thomas never developed those points—nor could he have without coming out for same-sex marriage—nor did Kennedy’s brief and gauzy discussion of equal protection get to the heart of the matter either.

But to return to the questions with which I began above, the most disquieting aspect of the five opinions the case generated—the four dissenters wrote separate opinions—was found in Chief Justice John Roberts’ dissent. Focusing on Kennedy’s mistaken Due Process argument, Roberts took the occasion to launch a sustained attack against the Court’s discovery of unenumerated rights under the Due Process Clause. However off-point in Obergefell, his attack—citing the “discredited” Lochner decision no fewer than 16 times—included such Holmesian gems as “the Fourteenth Amendment does not enact John Stuart Mill’s On Liberty.”

Only Kennedy, for all his fuzziness, came close to putting his finger on the core of the matter before us—the constitutional status of the unenumerated rights at issue in cases like those mentioned above. The Obergefell plaintiffs, he wrote, almost in passing, “pose no risk of harm to themselves or third parties.” Indeed! That could have come straight out of John Stuart Mill. But the source is irrelevant. Rather, the constitutional point is that if the state is going to restrict your liberty, it has to have a very good reason—that’s what the Constitution, at bottom, is all about. And from Lawrence all the way back to Lochner, the state didn’t have a good reason for limiting the liberty of the plaintiffs, which means that their right was always there to be protected, even though, as in Lawrence, the Court hadn’t recognized it when it ruled otherwise, 17 years earlier in Bowers v. Hardwick, the case Lawrence overturned.

In Obergefell, Kennedy seemed to notice that when he wrote, quoting his opinion in Lawrence, that Bowers was “not correct when it was decided.” It would have been good if he had then drawn expressly the implicit conclusion, that the right at issue was always protected. It didn’t take “new insights and societal understandings” to discover that, as he averred in Obergefell. It takes simply a plain understanding of the theory of our Constitution of liberty.

 

Congress faces a deadline at the end of July to extend federal highway funding. Policymakers are likely to cobble together a short-term fix for the funding gap in the Highway Trust Fund (HTF), rather than enacting a permanent solution.

Annual HTF spending is projected to be $53 billion and rising in coming years, while HTF revenues will be $40 billion. That leaves an annual funding gap of at least $13 billion. A good permanent fix would be to cut federal spending by $13 billion to match the revenues. State governments could fill the gap with their own funding, efficiency improvements, or privatization.

That straightforward decentralization solution is not popular with highway lobby groups, and it is usually not mentioned as an option by reporters. A recent Washington Post Wonkblog column is typical. It examined road quality and potholes in the states, and then concluded that more federal money was needed.

The Post published my letter in response to Wonkblog on Saturday:

The article noted that some states (such as California) have many car-damaging potholes, while others (such as Florida) have very few. It said that “we haven’t been putting enough money into the Highway Trust Fund.”

Actually, the data reveal that California ought to be learning lessons from Florida on how to spend existing funds more efficiently. The fact that some states have much better highways than others shows that states can solve their own highway problems — without the top-down federal actions suggested in the article.

Here are some of the details from the original Wonkblog story:

… 28 percent of the nation’s major roadways—interstates, freeways, and major arterial roadways in urban areas—are in “poor” condition.

[Other than D.C.] … the worst roads are in California where 51 percent of the highways are rated poor. Rhode Island, New Jersey and Michigan all have “poor” ratings of 40 percent or more. Dang.

And while everybody loves to make fun of Florida, the Sunshine State actually has the smallest percentage of bad roads in the nation—only 7 percent. Nevada, Missouri, Minnesota and Arkansas round out the top 5.

Note that Florida is a warm and sunny, while Minnesota is cold and snowy, yet they both have very good roads. Meanwhile, California is warm and sunny, while Michigan is cold and snowy, yet they both have very poor roads. Wonkblog correctly notes, “I might have expected weather and latitude to play a big role in road quality, but that doesn’t seem to be the case here.”

So far so good, but then Wonkblog jumps to his predetermined solution, and completely ignores the implication of the data he had just presented. He says, “One main reason why our roads are in such bad shape is that we haven’t been putting enough money into the Highway Trust Fund to keep up with infrastructure needs.”

According to Wonkblog’s own chart, only 10 percent of the roads in Minnesota are in “poor” condition, while 51 percent in California are poor. Thus, bad roads are clearly a state-level failing. Wonkblog immediately grabs for the magic wand of more federal funding, but he might have asked what it is that states like Minnesota are doing right with the existing funding.  

The other weird thing about Wonkblog’s conclusion is that he says, “we haven’t been putting enough money into” the HTF. But, of course, it is spending that might affect road quality, not the revenues “into” the fund. If you look at HTF spending, it has remained high in recent years because Congress has filled it with general fund revenues, as I chart here.

In sum, there are apparently dramatic differences in road quality between the states. That may stem from differences in state funding, state efficiency, and state competence, but seemingly not climate conditions. All the states have the ability by themselves to have high quality roads, but some states it appears have important road-investment lessons to learn from the others.

Twelve states, as well as the District of Columbia and Puerto Rico, currently grant (or will soon grant) drivers’ licenses to unauthorized immigrants. An additional two—Arizona and Nebraska—explicitly grant licenses to immigrants brought to the United States as small children (“Dreamers”). This is a favorable trend, both for public safety and for liberty.

If you want an illustration of the public safety benefits from using drivers’ licenses solely for driving administration, give a read to this Voice of America article which illustrates clearly that illegal immigrants drive even when licensing is unavailable to them. Now that licensing is available, a California applicant who is not legally in this country must first prove residence. “He must also take an eye test to show he can see well, and a written test on driving rules. He must also take a driving test to show he can operate a motor vehicle.” Bringing all drivers up to such minimum standards undoubtedly improves safety outcomes.

For liberty, though, the shift back toward using driver licensing for driving is especially welcome. In 2005, amid a wave of anti-immigrant sentiment stoked by terror fears, Congress passed the REAL ID Act, which requires states to get proof of legal presence if their licenses and IDs are to be accepted by federal agencies. It appeared for a time as though states kowtowing to the federal government would help turn their driver’s licenses into an all-purpose federal tracking and control instrument, a national ID.

It has become increasingly clear that the Department of Homeland Security’s Transportation Security Administration will never follow through on the feds’ threat to turn away air travelers from states that don’t comply with REAL ID (though many are still taken in by DHS talking points). Some states are declining to implement REAL ID at all. Others are producing easy-to-acquire licenses that are labeled “not for federal purposes,” which REAL ID permits.

The states giving licenses to unauthorized immigrants today run the gamut from “liberal” to “conservative”: California, Colorado, Connecticut, Delaware (effective December 2015), Hawaii (effective January 2016), Illinois, Maryland, New Mexico, Nevada, Utah, Vermont, and Washington. For varying reasons—and with varying levels of controversy—they’re re-asserting state authority over a state prerogative: driver licensing policy.

That’s good federalism. It’s good for road safety. And it’s especially good for keeping motor vehicle bureaucrats from being TSA agents and vice versa.

A new Cato Institute/YouGov poll finds a solid majority—58%—of Americans supports the main components of the Iran nuclear deal, in which the United States and other countries would ease oil and economic sanctions on Iran for 10-15 years in return for Iran agreeing to stop its nuclear program over that period. Forty percent (40%) oppose such a deal.

Americans also prefer Congress to allow such a deal to go forward (53%) rather than block the agreement (46%). Support declines slightly when the deal is described as an agreement between the “Obama administration and Iran.”

Full poll results found here

Despite support for the deal, Americans remain skeptical it will stop Iran’s nuclear program. Fifty-two percent (52%) of Americans say the agreement is “unlikely” to “stop Iran from developing nuclear weapons,” including 32% who say it’s “extremely unlikely.” Conversely, 46% believe the deal is likely to achieve its primary goal.

However, Americans are more optimistic the deal will delay Iran from developing nuclear weapons. The poll found 51% of Americans think the deal will likely “delay” Iran’s nuclear development while 47% disagree.

The survey also offered Americans an opportunity to select which one of several policy options would be “most effective” in reducing the likelihood Iran develops nuclear weapons. Doing so found a plurality –40%— think the Iran nuclear agreement would be more effective than taking military action against Iran’s nuclear facilities (23%), imposing new economic sanctions against Iran (23%) or continuing existing sanctions against Iran (12%).

Ultimately, 63% of Americans say it would be a “disaster” if Iran developed nuclear capabilities while 32% say the problem could be managed and 5% say it wouldn’t be a problem. Nevertheless, Americans tend to have confidence that the Iran nuclear agreement may be the next best step toward reducing that possibility.

Partisanship and Religion Polarizes, Youth Gives Confidence

Partisanship polarizes support for the Iran nuclear agreement and the perceived threat.

Fully 80% of Democrats support the deal while 62% of Republicans oppose it. Independents side with Democrats with 55% in favor. Democrats are also far more likely to believe the deal will “stop” Iran from developing nuclear weapons (71%) compared to only 22% of Republicans. Even still, Democrats are 30 points less likely than Republicans to say Iran obtaining a nuclear weapon would be a disaster (49% v 79%).

Young Americans are also far more supportive of the deal, more likely to believe in its efficacy and less likely to fear Iran obtaining a nuclear weapon compared to older Americans.

Fully 68% of Americans 18-29 support the Iran nuclear deal compared to 50% of those over 65. Furthermore, 6 in 10 millennials say the agreement will stop Iran’s nuclear development compared to only 3 in 10 seniors.

Ultimately, young Americans are simply less concerned if Iran gains nuclear capabilities. While 76% of seniors say such an outcome would be a disaster only 48% of 18-29 year olds agree. Instead, 51% of millennials say Iranian nuclear capabilities would be a “problem that can be managed” (39%) or “not a problem at all” (12%). These results comport with findings from Trevor Thrall and Eric Goepner’s recent study of millennial attitudes on foreign policy.

Religiosity plays a role as well: the more someone attends religious services the more they believe that economic sanctions or military intervention will best prevent Iran from obtaining nuclear capabilities and the less likely they are to believe that the Iran nuclear agreement will work.

For instance, among those who often attend religious services, 40% think economic sanctions will best reduce Iranian nuclear development followed by 30% who say the nuclear agreement and 28% who say military intervention. Conversely among those who never attend religious services 47% think the Iran nuclear agreement will be most effective, followed by 30% who think economic sanctions and 19% who think military intervention will work best.

Similarly, Protestants are about 20 points less likely than the religiously unaffiliated to think the Iranian nuclear agreement (28% v. 49%) will work better than economic sanctions or military intervention in reducing Iranian nuclear capabilities.

Sign up for future releases of Cato public opinion studies and insights here.

The Cato Institute/YouGov Poll of 1,004 adults was conducted July 14-16, 2015, using a sample drawn from YouGov’s probability-based online panel, which is designed to be representative of the U. S. population. The margin of sampling error for all respondents is plus or minus 4.3 percentage points. Toplines (.pdf) results can be found here, crosstabs (.xls) can be found here.

I owe a heckuva lot to Friedrich Hayek. Had it not been for him, I might never have heard of “free banking,” meaning the genuine article rather than the phony antebellum U.S. version. Certainly I would never have found myself writing about it. Nor, perhaps, would any other modern economist.

It was two pamphlets that Hayek published in the 1970s — first, Choice in Currency (1976) and then Denationalisation of Money (1978) — that caused the scales to fall off of my eyes and of those of some other economists, thereby encouraging us to reconsider the merits of private and competitive currency systems. That reconsideration in turn led to a revival of interest in former free banking episodes, including those of Scotland and Canada, which monetary economists had previously neglected or overlooked. In short, were it not for Hayek, there’d be no such thing as a Modern Free Banking School.

Yet Hayek himself was no free banker. For starters, his own vision of “choice in currency” had little if anything in common with historical free banking arrangements. In those arrangements, banks dealt in established, precious-metal monetary units, like the British pound and the American dollar, receiving deposits of metallic money, or claims to such, and offering in place their own readily-redeemable liabilities, including circulating banknotes. In Hayek’s scheme, in contrast, competing firms issue irredeemable paper notes, with each brand representing a distinct monetary unit. Far from resembling ordinary commercial banks, Hayek’s “banks” resemble so many modern central banks in that they issue a sort of “fiat” money. But they differ from actual central banks in enjoying neither monopoly privileges nor the power to compel anyone to accept their products.1

Competition, Hayek claimed, would force private issuers of irredeemable currencies to maintain those currencies’ purchasing power, or else go out of business. An overexpanding free bank, in contrast, is disciplined, not by an eventual loss of reputation, but by the more immediate prospect of running out of cash reserves. Hayek’s claims have always been controversial, even among persons (myself among them) who are inclined to favor competitive currency arrangements over monopolistic ones. It isn’t clear that a Hayekian money issuer would ever manage to get its paper accepted, or that it would resist the temptation to hyperinflate if it did.2

But Hayek didn’t merely differ from free bankers in proposing a form of currency competition distinct from free banking. He expressly opposed free banking. Asked, during a 1945 radio interview, whether he considered the Federal Reserve System a step along “the road to serfdom,” he unhesitatingly replied, “No. That the monetary system must be under central control has never, to my mind, been denied by any sensible person.”3 And although by the 1970s he had come to believe it both possible and desirable to have a currency stock consisting of the irredeemable paper of numerous private firms, he also continued to maintain that, so long as government authorities supplied a nation’s standard money, private firms should not be able to issue circulating paper claims denominated and redeemable in that money.

The most explicit, later statement of Hayek’s views on free banking occurs in a lecture he gave at a conference in New Orleans in 1977, just as Denationalisation of Money was in press:

We have indeed given government, and for fairly good reasons, the exclusive right to issue gold coins. And after we had given the government that right, I think it was equally understandable that we also gave the government the control over any money or any claims, paper claims, for coins or money of that definition. That people other than the government are not allowed to issue dollars if the government issues dollars is a perfectly reasonable arrangement, even if it has not turned out to be completely beneficial. And I am not suggesting that other people should be entitled to issue dollars. All the discussion in the past about free banking was really about the idea that not only the government or government institutions but others should also be able to issue dollar notes. That, of course, would not work.4

Actually, governments monopolized the coining of gold and other metals, not for any good reasons, but because doing so gave them the opportunity to manipulate precious-metal standards in pursuit of narrow fiscal ends. But it is the last sentence of this quote that’s most surprising, for what Hayek declares “unworkable” is an arrangement that worked quite successfully in many places, including Canada, where it survived well into Hayek’s own lifetime. Canada’s banking and currency system had in fact been remarkably stable, altogether avoiding the crises by which the U.S. was afflicted in the decades leading to the Fed’s establishment, and weathering the Great Depression far better than the U.S. system did despite having lacked a central bank until after that episode’s nadir.5

That Hayek should have written as if he was quite unaware of the Canadian experience or, for that matter, of the still more famous Scottish free banking episode is extremely puzzling. It was Hayek, after all, who supervised, and signed off on, Vera Smith’s 1935 doctoral dissertation on “The Rationale of Central Banking” (subsequently published by P.S. King & Son, and reprinted by LibertyPress) in which she discusses both the Canadian and the Scottish episodes, as well as some other free banking episodes, in unmistakably favorable terms.

Had Hayek forgotten his own PhD student’s work, if not some of his own early research? Had he simply changed his mind, reverting to conventional wisdom after a brief interval during which he had entertained a more favorable view of free banking? Or had he never accepted Free Banking School arguments?

Larry White, who drew attention to Hayek’s anti free-banking stance some years ago in a History of Political Economy article entitled, “Why Didn’t Hayek Favor Laissez Faire in Banking?,” favors the third hypothesis, tracing Hayek’s position to his unwavering belief that a free banking system would manage the stock of bank money in a procyclical manner. Whereas for Mises, who did favor free banking,6 a cyclical boom was most likely to be set off by a central bank, for Hayek it is the competitive commercial banks that are most likely to overissue. Unlike Mises, Hayek subscribed to the popular view that banks might expand credit without limit so long as they expanded in unison, and that they would in fact be inclined to overexpand, while allowing their reserve ratios to decline, in response to cyclical increases in the demand for loans.

But Hayek was mistaken. The popular view, according to which banks can expand credit all they like so long as they expand it in unison, incorrectly equates a bank’s demand for reserves with its net demand for such — that is, with its need for reserves to cover expected or deterministic outflows. This overlooks banks’ need for “precautionary” reserves, or reserves that serve to protect against an undue risk of stochastic or random reserves losses. Even a well-coordinated, industry-wide expansion of bank credit will involve some increase in banks’ collective demand for precautionary reserves. For that reason such a coordinated expansion isn’t sustainable unless it’s accompanied by an increase in the nominal quantity of bank reserves. That is why, if one examines the record of so-called bank lending “manias,” one finds that they typically involve, not a substantial decline in bank reserve ratios, but a substantial increase in the nominal quantity of bank reserves.

Whether Hayek was right to reject free banking or not, and tempting as it may be for fans of free banking to claim him as one of their own, doing so would hardly be doing justice to that great economist. We may credit him for inspiring us all; but we mustn’t otherwise associate him with opinions that, rightly or wrongly, he flatly rejected.

______________________________________

[1] The modern cybercurrency market, consisting of Bitcoin and its many less well-known rivals (“altcoins”) offers something close to a real-world counterpart of Hayek’s scheme.

[2] For criticisms of Hayek’s scheme, and others like it, see George Selgin and Lawrence H. White, “How Would the Invisible Hand Handle Money?,” Journal of Economic Literature 32 (4) (December 1994), and Lawrence H. White, The Theory of Monetary Institutions, Part XII, “Competitive Supply of Fiat-Type Money” (New York: Blackwell, 1999).

[3] Hayek on Hayek: An Autobiographical Dialogue, ed. Stephen Kresge and Leif Wenar (Chicago: University of Chicago Press, 1994), p. 116; quoted in White, “Why Didn’t Hayek Favor Laissez Faire in Banking?, p. 763 n12.

[4] F. A. Hayek, “Toward a Free Market Monetary System.” Journal of Libertarian Studies 5 (1) (Fall 1979). Whether Hayek, like Friedman before him, imagines that private banks’ circulating paper dollars would be indistinguishable from the fiat dollars issued by the central authority, is unclear from this passage. If so, he committed the crude error of equating free banking with counterfeiting.

[5] On Canada’s decision, despite its monetary system’s good record, to establish a central bank in 1935, see Bordo and Redish.

[6] See Lawrence H. White, “Mises on Free Banking and Fractional Reserves,” in John W. Robbins and Mark Spangler, eds., A Man of Principle: Essays in Honor of Hans F. Sennholz (Grove City: Grove City College Press).

Without government interference, insurance markets will naturally charge higher premiums for riskier individuals. For example, life insurance premiums vary considerably based on factors that increase the likelihood of death, such as age, gender, smoking status, and health.

Under Obamacare, many factors that influence healthcare expenditures are excluded from premiums. For example, premiums make no distinction for obesity, likelihood of having a baby, alcoholism or pre-existing conditions. One notable exception is for smokers, where premiums may be up to 50 percent higher than that for non-smokers. I have collected data on premiums for smokers and non-smokers in 35 states, and the data shows large variation in the extent to which smokers are charged more for their choice.

Smokers are certainly a risker group than non-smokers. Thus, one would expect some actuarial adjustment to premiums. Given the variation across states, it is clear that premiums vary not only due to a smoker’s greater risk, but other factors as well. At least part of the markup for smokers should be viewed as a “smoker’s tax” rather than an actuarial adjustment.

One expects that the detrimental effects of smoking would build over time. You wouldn’t expect to see large risk adjustments for young individuals. Let’s consider a 27-year-old who doesn’t receive subsidies but is mandated to purchase health insurance. If a non-smoker lived in Cheyenne, WY, he or she could purchase Blue Cross Blue Shield of Wyoming - BlueSelect Silver ValueTwo Plus Dental plan for $334 per month. This plan has a $3,000 deductible and an out-of-pocket maximum of $6,600. If the 27-year-old smoked, the same plan would be $417 per month, or 24.9% higher. For a pack-a-day smoker, this represents a $2.72 per-pack increase in expenditure due to Obamacare.

Smoker’s Premium in Wyoming - $2.72 per pack for a pack-a-day 27-year-old smoker

Smoker Non-Smoker

 

However, not all of the $2.72 per-pack is a tax. Smokers are more expensive. Consider a non-smoker in Marquette, MI, who selects Blue Cross Blue Shield of Michigan - Blue Cross Silver Extra with Dental and Vision, a Multi-State Plan. That person pays $335 per month, nearly identical to the premium for the non-smoker in Wyoming. The plan has a $2,000 deductible and an out-of-pocket maximum of $5,500. If the 27-year smoked, the same plan costs $351 per month (4.8 percent higher), or $0.53 per-pack of cigarettes. If 53 cents per pack approximates the actuarial adjustment for young smoker, then much of the mark-up in Wyoming – $2.19 of the $2.72 – doesn’t represent risk, and can be viewed as a smoking tax.

Smoker’s Premium in Michigan - $0.53 per pack for a pack-a-day 27-year-old smoker

Smoker Non-Smoker

 

It might be the case that the numbers above are the exception, not the rule. Yet, in a more comprehensive analysis of premiums, it is clear that the smoker’s premium varies considerably by state. Wyoming has some of the highest mark-ups, while Michigan has some of the lowest mark-ups. The plans presented above are quite similar with respect to premiums and cost sharing for non-smokers, yet the smoker’s mark-up varies greatly. The table below shows average mark-ups for young smokers, restricting the set of plans to Obamacare “Silver” plans for 27-year-olds.

 

If a “pack-a-day” smoker is an overstatement for actual consumption, then Obamacare cigarette taxes are extremely high in some states – in fact, far higher than the explicit excise tax. The median excise tax on cigarettes is $1.36 per pack, and is $0.60 per pack in Wyoming (ranking 40th out of the states) and $2.00 per pack in Michigan (ranking 12th).

Based on this analysis, it is clear that the Obamacare smoker’s tax doesn’t represent risk adjustment in many states. But why are cigarette taxes in Obamacare – above and beyond the actuarial adjustment – a problem? Aren’t smokers are doing something terrible to themselves (and others, through secondhand smoke)? In economics, one of the core assumptions is individual rationality. People weight the costs and benefits of their actions and do what’s best for them. Everyday behavior – from smoking cigarettes, to eating pizza instead of broccoli (or sometimes both), to jaywalking in order to save a few seconds of time, to getting in the car to drive to work – involves risk and rewards. If people understand the inherent risks and rewards, then we respect consumer autonomy even if we wouldn’t make the same choice. The economic argument for taxing behavior like smoking (through excise taxes or Obamacare taxes) is that it creates negative externalities. For smoking, there are in fact negative externalities. These are costs produced but not borne by the smoker, the most obvious of which is secondhand smoke. When such externalities exist, corrective taxation is one of several ways that a more efficient allocation of resources can be achieved. Nonetheless, evidence suggests that cigarette taxes at their current levels more than pay for such negative externalities. As importantly, there’s no reason to think these externalities are much different in Wyoming and Michigan.

With that said, should we be concerned with Obamacare cigarette taxes versus, say, excise taxes? One disadvantage of differing excise taxes across state or city borders is that it encourages smuggling or purchases from low-tax areas. Thus, the tax doesn’t correct the negative externality. That differs, of course, from Obamacare taxes where a person would need to move from Wyoming to Michigan to reduce the tax. Yet, Obamacare cigarette taxes present a host of problems. The vast majority of people do not receive health insurance from Obamacare, so its cigarette taxes do not correct the externalities smoking produces. In addition, the cigarette taxes in Obamacare lack transparency. They are buried in the weeds of Obamacare premiums as hefty smoking taxes, meant to influence or punish the choices of 18 percent of American adults. Perhaps if smoking rates were as high as obesity, they’d have enough political power that bureaucrats wouldn’t punish them.

 

Aaron Yelowitz is an associate professor in economics at University of Kentucky and a Visiting Scholar at Cato Institute.

People who have heard of the Jones Act (Merchant Marine Act of 1920) generally are aware that its stated purpose is to maintain a strong U.S. merchant marine industry.  Drafters of the legislation hoped that the merchant fleet would remain healthy and robust if all shipments from one U.S. port to another were required to be carried on U.S.-built and U.S.-flagged vessels.  Unfortunately, things haven’t worked out very well. 

The protectionism of the Jones Act has given the United States the type of merchant marine that would be expected from a sector that has been cut off from market forces for close to a century.  Instead of being a global powerhouse, the U.S. merchant fleet has become a minor player.  In 1955 the 1,072 ships in the fleet accounted for 25 percent of global tonnage.  Today the 191 vessels account for 2 percent of the world total.  Those vessels primarily carry cargoes from one U.S. port to another, along with government-generated exports, such as military equipment and food aid. 

Not surprisingly, shipping goods on a U.S.-flagged vessel is a high-cost proposition, which explains why the U.S. fleet simply can’t compete in normal global commerce.  A 2011 study by the U.S. Maritime Administration (Marad) showed that the average daily operating costs for American vessels were roughly three times higher than comparable vessels registered in other countries.

Currently there are only three U.S.-flagged dry-bulk vessels of the type used to haul grains, fertilizers, and coal.  Lack of availability of U.S.-flagged vessels to ship grains between U.S. ports helps to explain a news item from last week:  50,000 metric tons of Brazilian corn have been contracted for shipment to Wilmington, NC. 

The decision to bring more grain into North Carolina isn’t hard to understand.  The state ranks second in production of pigs and turkeys, fourth in production of broiler chickens, and ninth in production of eggs.  The state’s livestock industry is large, so its animals require a lot of feed. North Carolina and surrounding southeastern states don’t raise enough corn and soybeans to meet local demand.  The United States as a whole produces plenty of livestock feedstuffs – particularly corn and soybeans – more than any other country.  From a North Carolina perspective, too much of those crops grow in the wrong place.  Des Moines, IA, for example, is in the heart of the Midwest.  It also is well over 1000 miles away from livestock producers in North Carolina. 

A substantial quantity of corn and soybeans (or soybean meal) moves by train from the Midwest to feed mills in the Southeast.  However, rail transport of bulk commodities not only is relatively costly, the timing of shipments also can be unpredictable.  Trains moving from the western Corn Belt need to go through Chicago, the busiest rail junction in the country.  Trains have been known to be delayed for days just trying to transit that city.  It’s not fun to be raising pigs or chickens when the feed you need to keep them from getting hungry is stuck on a train far away.

Several years ago a group of North Carolina livestock producers took steps to deal with the challenge of procuring a steady supply of competitively priced feedstuffs.  They banded together to build a facility for unloading cargoes of grains or soybean meal from ocean-going vessels at the port of Wilmington.  Wilmington Bulk LLC provides a cost-effective entry point for water-borne cargoes, which helps to assure abundant feed supplies for North Carolina farmers.  Instead of being limited to sourcing grains and soybean meal in the Southeast or Midwest of the United States, those products now can be procured from anywhere in the world.

But why not simply ship corn from the Midwest to Wilmington by water?  Waterborne transport of bulk commodities generally is less expensive than moving them via rail or truck.  The United States already has a highly sophisticated system for transporting agricultural commodities from the Midwest to the Gulf of Mexico that uses the Mississippi River and its tributaries.  This country long has been the world’s largest exporter of grains and soybeans.  The majority of those exports move down the river system before being loaded onto ocean vessels near New Orleans.  Why not just contract with an ocean-going dry-bulk vessel to make the relatively short trip (approx. 1600 miles) from Louisiana to North Carolina instead of the much longer trip (approx. 4500 miles) from the port of Santos in Brazil?

Yes, the Jones Act makes the perfectly rational plan of moving Midwestern grain by water to North Carolina economically infeasible.  Recall that there are only three dry-bulk vessels in the U.S.-flag fleet, and that the daily cost of chartering those vessels would be roughly three times higher than international rates.  Under those circumstances, it’s not hard to understand why the operators of Wilmington Bulk find it most cost-effective to obtain their supplies from overseas and have them shipped on foreign-flagged vessels.

The solution to this problem, of course, would be to allow foreign-flagged vessels to carry shipments from one U.S. port to another.  The best way to achieve this would be to repeal the Jones Act.  (Sen. John McCain (R-AZ) has drafted legislation to do so.)  If special maritime policies are needed to meet national security requirements, they should be targeted thoughtfully so that they don’t interfere with commercial shipping.  Until maritime statutes are reformed, though, it can be expected that North Carolina’s pigs and turkeys will continue to enjoy feedstuffs from around the world.

(For more detail on the Jones Act, see this recent article by my Cato colleague, Scott Lincicome.)

Martin O’Malley, the former governor of Maryland and Democratic presidential candidate, is no Bill and Hillary Clinton, who have made more than $100 million from speeches, much of it from companies and governments who just might like to have a friend in the White House or the State Department. But consider these paragraphs deep in a Washington Post story today about O’Malley’s financial disclosure form:

While O’Malley commanded far smaller fees than the former secretary of state – and gave only a handful of speeches – he also seemed to benefit from government and political connections forged during his time in public service.

Among his most lucrative speeches was a $50,000 appearance at a conference in Baltimore sponsored by Center Maryland, an organization whose leaders include a former O’Malley communications director, the finance director of his presidential campaign and the director of a super PAC formed to support O’Malley’s presidential bid.

O’Malley also lists $147,812 for a series of speeches to Environmental Systems Research Institute, a company that makes mapping software that O’Malley heavily employed as governor as part of an initiative to use data and technology to guide policy decisions.

I scratch your back, you scratch mine. That’s the sort of insider dealing that sends voters fleeing to such unlikely candidates as Donald Trump and Bernie Sanders.

These sorts of lucrative “public service” arrangements are nothing new in Maryland (or elsewhere). In The Libertarian Mind I retell the story of how Gov. Parris Glendening and his aides scammed the state pension system and hired one another’s relatives.

In some countries governors still get suitcases full of cash. Speaking fees are much more modern.

The same day three weeks ago that the Supreme Court ruled on same-sex marriage (Obergefell v. Hodges), our friends at the Institute for Justice claimed a strong victory in favor of individual rights and economic freedom in an important case before the Texas Supreme Court (a.k.a. SCOTEX).

In Patel v. Texas Department of Licensing and Regulation, the court was faced with a state constitutional challenge to a licensing requirement that hair threaders acquire cosmetology licenses – to the tune of nearly $9,000 and 750 hours – when such classes “are not related to health and safety or what threaders actually do.”

Threading is a South Asian and Middle Eastern beautification practice whereby a person removes eyebrow hair through the skilled application of taut cotton threads tied in a small loop. Licensing requirements have recently come under scrutiny from both Democratic and Republican leaders, who claim that they unduly restrict trade and burden the poor.

In Patel, SCOTEX interpreted the “due course of law” provision of the Texas Constitution to protect economic liberties. This despite the court’s jurisprudence in this area having been plagued by the application of inconsistent standards. State law had recognized three applicable standards of scrutiny: the “real and substantial relation” test, the rational-basis-plus-review-of-evidence test, and the good ol’ rational basis test. The expansive language of the Texas Due Course Clause would suggest that courts should be more skeptical of state regulations than they are under the rational basis test (which is similar to its federal counterpart in that essentially all laws survive such “scrutiny”). 

And indeed here, the court adopted a more restrictive form of review – apparently yet another new standard – looking at whether “a statute’s effect as a whole is so unreasonably burdensome that it becomes oppressive in relation to the underlying governmental interest.” Applying that test, the court found the cosmetology requirements had “no rational connection to reasonable safety and sanitation requirements” and invalidated the licensing scheme as it applies to hair threaders.

After enjoying the majority opinion, don’t overlook the concurrence by Justice Don Willett, joined by two other colleagues on the nine-member court:

This case concerns far more than whether Ashish Patel can pluck unwanted hair with a strand of thread.  This case is fundamentally about the American Dream and the unalienable human right to pursue happiness without curtsying to government on bended knee.  It is about whether government can connive with rent-seeking factions to ration liberty unrestrained, and whether judges must submissively uphold even the most risible encroachments. 

George Will recently praised Justice Willett’s approach – favorably comparing him to Chief Justice John Roberts (a low bar, to be sure) – particularly for his treatment of Lochner v. New York (1905). Questions of substantive economic liberties always bring about discussion of that famous case, in which the U.S. Supreme Court struck down maximum-hours regulations regarding New York City bakers as an imposition on the constitutional freedom of contract. The New Deal Court effectively overruled Lochner in West Coast Hotel v. Parrish (1937), paving the way for Carolene Products v. United States (1938), which bifurcated our rights and protected so-called fundamental rights more than others (including economic and property rights).

That Lochner was wrong is one of the few points of agreement between conservative and progressive legal scholars, both of which would rather that “unelected black-robed philosopher-kings” stop striking down the people’s laws. (Somehow, progressives have no problem with Brown v. Board of Education, or Roe v. Wade, or indeed Obergefell, all of which invalidated state laws – and conservatives were dismayed when the Supreme Court saved RobertsCare in NFIB v. Sebelius.) Chief Justice Roberts invoked Lochner 16 times(!) in his dissenting opinion in Obergefell.

As Justice Willett notes, “The Lochner bogeyman is a mirage but a ready broadside aimed at those who apply rational basis rationally… . The Constitution does protect economic liberty.” To Justice Willett – the most Twitter-friendly jurist in the land (also a low bar) – the fundamental question in Patel and similar cases is “one of constitutional limitations”: “Should judges blindly accept government’s health-and-safety rationale, or instead probe more deeply to ensure the aim is not suppressing competition to benefit entrenched interests?” Willett would have presumed the question in favor of individual liberty, rather than presuming the constitutionality of the statute as the majority opinion did (before rebutting that presumption) to conclude that “[t]hreaders with no license are less menacing than government with unlimited license.”

So kudos to IJ, to SCOTEX, and to liberty. June 26 was a great day for judicial engagement and judicial review across the land.

After a period of foreshadowing and rumor, the Equal Employment Opportunity Commission has now gone ahead and ruled that employment discrimination on the basis of sexual orientation is forbidden under existing federal civil rights law, specifically the current ban on sex discrimination. Congress may have declined to pass the long-pending Employment Non-Discrimination Act (ENDA), but no matter; the commission can reach the same result on its own just by reinterpreting current law.

It’s not the commission that gets to have the final say on that, however; it’s the federal courts. And there is a fair trail of precedent, including circuit court authority, rejecting the proposition that sex discrimination in this setting can be stretched to cover sexual orientation discrimination. Against that, it will be argued that some recent case law has nonetheless drifted toward the idea; more important, judges will be asked to defer to the EEOC in its (new) expert opinion.

But it’s not easy to think of an agency to whose views federal courts nowadays give less deference than the EEOC. As I’ve noted in a series of posts, judges appointed by Presidents of both political parties have lately made a habit of smacking down the commission’s positions, often in cases where it has tried to get away with a stretchy interpretation of existing law. See, for example, the Fourth Circuit’s rebuke of “pervasive errors and utterly unreliable analysis“ in EEOC expert testimony, Justice Stephen Breyer’s scathing majority opinion in Young v. U.P.S. on the shortcomings of the EEOC’s legal stance (in a case the plaintiff won), or these stinging defeats dealt out to the commission in three other cases. 

My earlier thoughts on the ENDA merits are here.

Four years ago, the U.S. Court of Appeals for the D.C. Circuit ordered the U.S. Department of Homeland Security to consider the public’s input on its policy of using strip-search machines for primary screening at our nation’s airports. The TSA had “advanced no justification for having failed to conduct a notice-and-comment rulemaking,” the court found. It ordered the agency to “promptly” proceed in a manner consistent with its opinion.

Over the next 20 months, the TSA produced a short, vague paragraph that did nothing to detail the rights of the public and what travelers can expect when they go to the airport. At the time, I called the proposed rule “contemptuous,” because the agency flouted the spirit of the court’s order. In our comment on the proposed rule, Cato senior fellow John Mueller, Mark G. Stewart from the University of Newcastle in Australia, and I took the TSA to task a number of ways.

The comment period on that proposal closed more than two years ago, but the TSA has still not proceeded to finalizing its rule. Continuing the effort to bring the TSA under the rule of law—and into the world of common sense—the Competitive Enterprise Institute filed suit against TSA yesterday, asking the court to require the agency to finalize its strip-search machine rule within 90 days.

Once the rule is finalized, it can be challenged in court under the Administrative Procedure Act’s “arbitrary and capricious” standard. This will be an important step toward bringing the TSA to heel. The D.C. Circuit, which is very familiar with health and safety regulation in which lives are at stake may recognize that the Department of Homeland Security does none of the work that other agencies do to cost-effectively protect life and health. The resulting waste of money and loss of privacy for travelers are not costs the American people should have to pay. Given the strip-search machine program’s results—failure 95% of the time in recent tests—a reviewing court may recognize that the TSA is acting incoherently.

Having the TSA under law in this case will pave the way for bringing other TSA policies within the law. Slow going it is, but the strategy I outlined four years ago is continuing to play out.

A better alternative to this time-consuming process, of course, would be for Congress to restore responsibility for air security to airlines and airports, which can do better than any federal agency at balancing safety and security, cost-control, privacy, and customer service. Speaking of long times passing, it’s now been a decade that I’ve been arguing for that very policy. This Reason piece, a debate with Bob Poole from March 2005, has stood the test of time, I think.

Today, President Obama became the first sitting president to tour a federal prison when he went to El Reno federal penitentiary in Oklahoma. This visit comes two days after the president spoke about criminal justice reform to the NAACP, where he focused his remarks on reducing the sentences for non-violent drug offenders. Commendably, Obama also talked about the living conditions of the incarcerated:

“[W]e should not tolerate conditions in prison that have no place in any civilized country. We should not be tolerating overcrowding in prison. We should not be tolerating gang activity in prison. We should not be tolerating rape in prison. And we shouldn’t be making jokes about it in our popular culture. That’s no joke. These things are unacceptable.”

Indeed, the horrific stories that come out of America’s jail and prison systems are repugnant to any sense of fairness and justice. For that and many other reasons, the president’s recent actions on criminal justice are to be lauded, but also critically examined.

Drug offenders make up a significant portion of the federal prison population, but mass incarceration reduction requires reforms beyond the federal level. Most of the people incarcerated in the United States are in local jails and state prisons for violating municipal and state laws, not federal ones. Moreover, as my colleague Adam Bates wrote this week, the president hasn’t done as much as he could to reduce the federal prison population, even in this limited realm where he has sweeping constitutional authority to do so.

Obama said, “If you’re a low-level drug dealer… you owe some debt to society. You have to be held accountable and make amends. But you don’t owe 20 years. You don’t owe a life sentence.”

The underlying problem with Obama’s approach is the continued reliance on the criminal justice system to be the primary tool for handling our nation’s drug habit. In a society that wants to discourage illicit drug use and sale, it’s not at all clear that throwing a low-level dealer in a prison cell for any amount of time, let alone 20-years-to-life, makes the dealer a better citizen or makes society safer. If incarceration does neither of these, and at such high fiscal cost, perhaps non-criminal alternatives should be considered.

The president’s proposed solutions—increased use of drug courts, treatment, and probation programs—are triggered upon contact with law enforcement and presented only as an alternative to criminal punishment. As I’ve written before, due to collateral consequences, that contact with the justice system can make people less employable and thus further marginalizes individuals from productive society. This contributes to cycles of poverty and increases the likelihood of more negative outcomes in the future, even if the individual doesn’t spend any time in jail.

Again, the president is to be commended for his attention to criminal justice reform and, in particular, his speech that humanized the plight of the currently incarcerated. But the nation needs a much larger rethink about what the criminal justice system should–and should not–do. 

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