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The Illinois legislature has enacted a law, over the veto of Gov. Bruce Rauner (R), that will strip consumer protections from patients with preexisting conditions, throw them out of their health plans, deny them health care, and expose them to bankruptcy. Naturally, it did so in the name of…helping patients with preexisting conditions. 

The new law imposes limits on so-called “short-term” health plans. Federal law exempts short-term plans from ObamaCare’s costly and punitive health insurance regulations. As a result, short-term plans allow enrollees to purchase only the coverage they value, frequently cost half as much as ObamaCare plans, and offer broader choice of providers than ObamaCare plans. Thanks to new federal rules, short-term plans can last up to 12 months, be renewed for up to 36 months, and can enable enrollees who fall ill to keep paying low, healthy-person premiums indefinitely, making access to care more secure for the sick. Critics acknowledge the new rules could extend health insurance to 2 million previously uninsured Americans.

Consumers appear to value the broader choices that the new rules offer. The web site eHealth reports that the share of unsubsidized insurance purchasers who chose a short-term plan over an ObamaCare plan rose from 56 percent during the last enrollment period to 70 percent during this enrollment period. (See graph.)

Voters appear to believe the benefits of these new rules outweigh the costs. Polling shows voters support the new rules by nearly a two-to-one ratio–even if purchasers choose less coverage than ObamaCare requires, and even if ObamaCare premiums rise as a result. (See chart nearby.) There is reason to believe the new rules will reduce ObamaCare premiums. (See below.)

Illinois legislators, responding to critics who complain short-term plans are “junk” insurance, have decreed that short-term plans can last no longer than six months and that enrollees whose short-term plans expire must wait 60 days before purchasing a subsequent plan. The Sargent Shriver National Center on Poverty Law tweeted about the new law, “GREAT NEWS! SB1737 is law, and Illinois will now protect healthcare consumers with pre-existing conditions.”

That is exactly backward. The new Illinois law does not protect patients with preexisting conditions. It does not outlaw “junk” insurance. It creates junk insurance by taking protections away from short-term plan enrollees and exposing patients with preexisting conditions to denied care and bankruptcy.

Under prior law, short-term plans could provide many Illinois residents with seamless coverage. Residents could purchase short-term plans that could cover them indefinitely, but at least until the next ObamaCare open-enrollment period, at which point they could enroll in an ObamaCare plan without facing medical underwriting or denials of coverage. 

The new law outlaws short-term plans that last more than six months. Now, by law, short-term plan enrollees who develop cancer or other expensive illnesses will lose that coverage when their plan reaches the six-month limit. This ban will not affect healthy consumers. When their six-month plans expire, healthy consumers can just wait the required 60 days and purchase a new six-month plan. The ban will instead hurt patients with preexisting conditions–specifically, those who fall ill while enrolled in a short-term plan or during the 60-day waiting period. The new law will throw those patients out of their plans, leaving them with preexisting conditions and no health insurance at all for up to 12 months. 

As a direct result of the new law:

  • Any Illinois resident who purchases a short-term plan on January 1, 2019 and subsequently gets a cancer diagnosis will lose that coverage on June 29 and face six months of expensive medical bills with no coverage. She will not be able to obtain a new short-term plan, because her cancer will be a preexisting condition. She also will not be able to get coverage through ObamaCare for six months–i.e., until January 1, 2020. Yes, ObamaCare prohibits insurers from denying coverage on the basis of preexisting conditions, but it also generally denies coverage to everyone outside of a six-week open-enrollment period at the end of each year.
  • The same fate will befall any Illinois resident who gets a cancer diagnosis during the 60-day waiting period. By law, they will face months and months of expensive medical bills with no coverage. They will be unable to purchase another short-term plan, and they will be locked out of ObamaCare. 

This is exactly what happened to Jeanne Balvin. Similar rules imposed by the Obama administration threw Balvin out of her short-term plan, leaving her with $95,000 in medical bills and no insurance to help pay them. (The new federal rules supersede the Obama-era rules.) 

Had Illinois legislators just done nothing, or even just upheld Rauner’s veto, short-term plans could have covered Illinois residents throughout ObamaCare’s entire coverage-denial period. Instead, Illinoisans with preexisting conditions will face months and months of expensive medical bills with no coverage at all.

This is perverse. Illinois legislators knew that canceling short-term plans hurts patients with preexisting conditions. We know they knew, because they included a provision in the new law that forbids insurers from canceling short-term plans  “before the expiration date in the policy, except in cases of nonpayment of premiums, fraud,” or at the option of the enrollee. And yet the legislature will now rescind short-term plans from patients with preexisting conditions within six months of their diagnosis, no matter how much human suffering it may cause.

Supporters claim that crippling short-term plans is necessary to protect patients with preexisting conditions. If short-term plans offer lower-cost coverage to healthy consumers, they argue, healthy consumers will flee ObamaCare plans. ObamaCare premiums would then rise to the point of threatening ObamaCare’s economic and/or political viability, thereby threatening access to care for patients with preexisting conditions currently enrolled in ObamaCare plans. Among the many flaws in this argument is the fact that short-term plans can actually reduce ObamaCare premiums by keeping expensive patients out of ObamaCare’s risk pools. The new federal rules allow short-term plan enrollees to purchase “renewal guarantees” that give them the right to keep purchasing short-term plans at low, healthy-person premiums even after they develop expensive medical conditions. Short-term plans can thus reduce ObamaCare premiums by keeping expensive patients out of those risk pools, just as the pre-ObamaCare individual market kept many expensive patients out of state high-risk pools. The presumed harms that more flexible short-term plans could inflict on patients with preexising conditions in ObamaCare plans are attenuated and uncertain. The harms that the Illinois law will inflict on patients with preexisting conditions who are enrolled in short-term plans are definite, immediate, and concrete.

There is no way to dress up laws restricting short-term plans as anything other than government rationing of care to the sick. The activists and politicians who supported this law are not patient advocates. They are callous ideologues who are willing to deny care to sick patients for the sake of protecting ObamaCare.

Conventional wisdom argues that the opioid epidemic has resulted from excessive opioid prescribing, but the evidence shows just the opposite. Restrictions on opioid prescribing have pushed opioid users into the black market, where they overdose on illicit fentanyl, not prescription opioids (mainly because they cannot assess potency).   Reason’s Jacob Sullum has a nice recent piece on this point.

Yet policymakers keep doubling down on the conventional wisdom.  The U.S. Attorney for Massachusetts, Andrew Lelling, has just anounced new scrutiny of doctors who prescribe opioids:

US Attorney Andrew E. Lelling has sent letters to “a number of medical professionals” alerting them that their opioid prescribing practices “have been identified as a source of concern.”

In a statement released Thursday, Lelling said that the professionals who received the warning had prescribed opioids to a patient within 60 days of that patient’s death or to a patient who subsequently died from an opioid overdose.

The letters inform the professionals that it’s illegal to prescribe opioids “without a legitimate medical purpose, substantially in excess of the needs of the patient, or outside the usual course of professional practice.” It acknowledges that the prescriptions may have been medically appropriate, however.

Such actions will scare medicial professionals into even less prescribing, force more patients into the black market, and increase the frequency of opioids overdoses.

What a lousy deal. My colleagues at the University of Arkansas and I just released another study examining funding disparities between traditional public schools and public charter schools in 14 cities across the country. The overall finding is clear: families lose a substantial amount of education dollars when they pick charter schools for their children.

Using data from the 2015-16 school year, we find that children in charter schools receive $5,828, or 27 percent, less than their traditional public school peers each year, on average. Put differently, a family forgoes over $75,000 in educational resources for their child’s K-12 education if a charter school fits their needs better than the residentially assigned option. And, unfortunately, the funding inequities are much worse in some cities. As shown in Figure 1 below – and in the original report – children in charter schools in Washington, DC, and Camden, New Jersey receive over $10,000 less than their traditional public school peers each year.


But that’s not all. Our team has released four other reports over the past two decades with similar findings. And across the 8 cities with longitudinal data, the funding disparity favoring traditional public schools has grown by 58 percent since 2003 after adjusting for inflation. It’s like a swarm of mosquitoes in the summer. It’s persistent and never goes away.


Fortunately, one city in our sample has consistently demonstrated equitable funding across school sectors. In Houston, Texas, students in public charter schools receive only $517, or 5 percent, less than their peers in traditional public schools each year. In other words, equitable public school funding can be achieved if policymakers make the right decisions.

Families shouldn’t have to lose $5,828 each year in educational resources for each child that doesn’t fit into the one-size-fits-all education system. Thankfully, state policymakers have the authority, opportunity, and responsibility to achieve equal total funding of public school students in their states. Policymakers can deliver equitable education funding by revising state funding formulas to allow 100 percent of public education dollars to follow children to whatever school works best for them.

The latest article in the Kaiser Health News/NPR “Bill of the Month” series tells the story of Shereese Hickson, a 39-year-old disabled Medicare Advantage enrollee whose hospital charged $123,019 for two infusions of a multiple sclerosis drug:

Even in a world of soaring drug prices, multiple sclerosis medicines stand out. Over two decades ending in 2013, costs for MS medicines rose at annual rates five to seven times higher than those for prescription drugs generally, found a study by researchers at Oregon Health & Science University.

“There was no competition on price that was occurring,” said Daniel Hartung, the OHSU and Oregon State University professor who led the study. “It appeared to be the opposite. As newer drugs were brought to market, it promoted increased escalation in drug prices.”

That’s not how it’s supposed to work. New market entrants should bring more competition on price. Drug manufacturers have an incentive to capture market share by reducing their prices. But that seems to be the exception, not the rule. 

In the new Cato Institute book Overcharged: Why Americans Pay Too Much for Health Care, law professors Charles Silver and David Hyman (M.D.) show that this phenomenon occurs because government interference has eliminated incentives for pharmaceutal companies to compete on price:

Why does competition exert less influence in drug markets than it does elsewhere? One likely explanation is “parallel pricing,” which occurs when supposed competitors maintain or raise prices in lockstep. We call it “erectile pricing,” rather than parallel pricing, because we observed it when studying Viagra and other erectile dysfunction (ED) drugs…

Erectile pricing occurs with other medicines too. Insulin is a drug used by millions of Americans afflicted with diabetes. It is off-patent and made by three companies, so it should be reasonably priced. It is not. The past two decades have seen stunning price increases. Short-acting insulin, which cost about $21 in 1996, went for about $275 in 2017. And, just as with ED drugs, the prices went up in lockstep, even though there were two companies making short-acting insulin. Prices for long-acting insulins, which also had two makers, rose in tandem too.

Why does erectile pricing happen in drug markets? Many medicines are made by only a few companies, all of which are repeat players in pricing games and have learned to employ a strategy known as “tit for tat.” Whatever one company does, the others do in turn. When one raises prices, the others follow suit, knowing that if they play follow the leader, they will all get rich. The incentive to steal the market by charging less disappears because every manufacturer knows that other makers will cut their prices too, if it does. An outbreak of price competition would leave all manufacturers poorer—so they all raise prices instead of reducing them.

Ideally, tit-for-tat pricing would be unsustainable, and efforts to keep prices high would collapse, because individual producers could increase their profits by reducing their prices and stealing market share from their competitors. That appears to happen in the pharmaceutical market sector less often than it should.

Third-party payment contributes to this failure of competition. Heavily insured patients who fork over the same copays regardless of which drugs they use will not respond to rising prices by switching to lower-cost alternatives. They will buy what their doctors recommend, and their doctors will not care much about price, knowing that their patients are insured. Third-party payment may weaken drug makers’ incentive to compete for market share.

To purchase Overcharged, click here.

The National Center for Health Statistics (NCHS) just issued Data Brief Number 329, entitled “Drug Overdose Deaths in the United States, 1999-2017.” Drug overdose deaths reached a new record high, exceeding 70,000 deaths in 2017, a 9.6 percent increase over 2016. That figure includes all drug overdoses, including those due to cocaine, methamphetamines, and benzodiazepines. The actual breakdown according to drug category will be reported in mid-December. However, estimates are opioid-related deaths will account for roughly 49,000 of the total overdose deaths. 

The big takeaways, quoting the report:

- The rate of drug overdose deaths involving synthetic opioids other than methadone, which include drugs such as fentanyl, fentanyl analogs, and tramadol, increased from 0.3 per 100,000 in 1999 to 1.0 in 2013, 1.8 in 2014, 3.1 in 2015, 6.2 in 2016, and 9.0 in 2017.The rate increased on average by 8% per year from 1999 through 2013 and by 71% per year from 2013 through 2017.

-The rate of drug overdose deaths involving heroin increased from 0.7 in 1999 to 1.0 in 2008 to 4.9 in 2016. The rate in 2017 was the same as in 2016 (4.9).

-The rate of drug overdose deaths involving natural and semisynthetic opioids, which include drugs such as oxycodone and hydrocodone, increased from 1.0 in 1999 to 4.4 in 2016. The rate in 2017 was the same as in 2016 (4.4).

-The rate of drug overdose deaths involving methadone increased from 0.3 in 1999 to 1.8 in 2006, then declined to 1.0 in 2016. The rate in 2017 was the same as in 2016 (1.0).

Despite the fact that overdose deaths from prescription opioids—and even heroin—have stabilized, the overdose rate continues to climb due to the surge in fentanyl deaths. 

This has happened despite policies in place aimed at curtailing doctors from prescribing opioids to their patients in pain. Prescription surveillance boards and government-mandated prescribing limits have pushed prescribing down dramatically. High-dose prescriptions were down 41 percent between 2010 and 2016, another 16.1 percent in 2017, and another 12 percent this year.

Policies aimed at curbing prescribing are based on the false narrative that the overdose crisis is primarily the result of greedy drug makers manipulating gullible doctors into overtreating patients in pain and hooking them on drugs. But as I have written in the past, , the overdose crisis has always been primarily the result of non-medical users accessing drugs in the dangerous black market that results from prohibition. As the supply of prescription opioids diverted to the underground gets harder to come by, the efficient black market fills the void with other, more dangerous drugs. Lately, the synthetic opioid fentanyl has emerged as the number one killer.

In a New York Times report on the matter today, Josh Katz and Margot Sanger-Katz hint that policymakers are aiming at the wrong target by stating, “Recent federal public policy responses to the opioid epidemic have focused on opioid prescriptions. But several public health researchers say that the rise of fentanyls requires different tools. Opioid prescriptions have been falling, even as the death rates from overdoses are rising.”

Prescription opioids are not the cause of the overdose death crisis. Neither is fentanyl, despite the fact that it is now the primary driver of the rising death rate. The ultimate cause of the drug overdose crisis is prohibition. US policymakers should drop the false narrative and face reality, like Portuguese health authorities did 17 years ago.

Portugal, in 2001, recognized that prohibition was driving the death rate. At the time it had the highest overdose rate in Western Europe. It decriminalized all drugs and redirected efforts towards treatment and harm reduction. Portugal saw its population of heroin addicts drop 75 percent, and now has the lowest overdose rate in Europe. It has been so successful that Norway is about to take the same route.

At a minimum, policymakers in the U.S. should turn to harm reduction. They should expand syringe exchange and supervised injection facilities, lighten the regulatory burden on health care practitioners wishing to treat addicts with medication-assisted treatments such as methadoneand buprenorphine, and reschedule the overdose antidote naloxone to a truly over-the-counter drug.

Unless this happens, we should expect more discouraging news from the NCHS in the years ahead.


Welcome to the Defense Download! This new round-up is intended to highlight what we at the Cato Institute are keeping tabs on in the world of defense politics every week. The three-to-five trending stories will vary depending on the news cycle, what policymakers are talking about, and will pull from all sides of the political spectrum. If you would like to recieve more frequent updates on what I’m reading, writing, and listening to—you can follow me on Twitter via @CDDorminey.  

  1. Senate defies White House on Saudi support in Yemen,” Elana Schor. In a 63-37 vote that took place late yesterday afternoon, the Senate moved forward on a resolution to withdraw U.S. support for Saudi Arabia’s war in Yemen. Every Democratic Senator plus 14 Republican Senators voted to ensure that this issue would be hotly debated, raising public awareness and sending a clear signal that this issue will not fissile out. 
  2. Yemen: Inquiry finds Saudis diverting arms to factions loyal to their cause,” Rod Austin. More on Yemen. The top line of the article is right in the description: “Investigators say weapons from UK and US have fallen into hands of splinter groups in Yemen, some with links to al-Qaida and ISIS.” This isn’t just small arms and light weapons. The investigation revealed that diverted weapon systems include “sophisticated armoured vehicles, rocket launchers, grenades and rifles.” 
  3. How Much Will The Space Force Cost?” Todd Harrison. Interested in the Space Force? This report goes in depth on three different ways the military could organize the Space Force: a Space Corps, Space Force-Lite, and Space Force-Heavy. You can get information down to the line-item level or just hit the highlights of total cost estimates for each option. 

Twitter recently re-activated Jesse Kelly’s account after telling him that he was permanently banned from the platform. The social media giant informed Kelly, a conservative commentator, that his account was permanently suspended “due to multiple or repeat violations of the Twitter rules.” Conservative pundits, journalists, and politicians criticized Twitter’s decision to ban Kelly, with some alleging that Kelly’s ban was the latest example of perceived anti-conservative bias in Silicon Valley. While some might be infuriated with what happened to Kelly’s Twitter account, we should be wary of calls for government regulation of social media and related investigations in the name of free speech or the First Amendment. Companies such as Twitter and Facebook will sometimes make content moderation decisions that seem hypocritical, inconsistent, and confusing. But private failure is better than government failure, not least because unlike government agencies, Twitter has to worry about competition and profits.

It’s not immediately clear why Twitter banned Kelly. A fleeting glance of Kelly’s Twitter feed reveals plenty of eye roll-worthy content, including his calls for the peaceful breakup of the United States and his assertion that only an existential threat to the United States can save the country. His writings at the conservative website The Federalist include bizarre and unfounded declarations such as, “barring some unforeseen awakening, America is heading for an eventual socialist abyss.” In the same article he called for his readers to “Be the Lakota” after a brief discussion about how Sitting Bull and his warriors took scalps at the Battle of Little Bighorn. In another article Kelly made the argument that a belief in limited government is a necessary condition for being a patriot.

I must confess that I didn’t know Kelly existed until I learned the news of his Twitter ban, so it’s possible that those backing his ban from Twitter might be able to point to other content that they consider more offensive that what I just highlighted. But, from what I can tell Kelly’s content hardly qualifies as suspension-worthy.

Some opponents of Kelly’s ban (and indeed Kelly himself) were quick to point out that Nation of Islam leader Louis Farrakhan still has a Twitter account despite making anti-semitic remarks. Richard Spencer, the white supremacist president of the innocuously-named National Policy Institute who pondered taking my boss’ office, remains on Twitter, although his account is no longer verified.

All of the of the debates about social media content moderation have produced some strange proposals. Earlier this year I attended the Lincoln Network’s Reboot conference and heard Dr. Jerry A. Johnson, the President and Chief Executive Officer of the National Religious Broadcasters, propose that social media companies embrace the First Amendment as a standard. Needless to say, I was surprised to hear a conservative Christian urge private companies to embrace a content moderation standard that would require them to allow animal abuse videos, footage of beheadings, and pornography on their platforms. Facebook, Twitter, and other social media companies have sensible reasons for not using the First Amendment as their content moderation lodestar.

Rather than turning to First Amendment law for guidance, social media companies have developed their own standards for speech. These standards are enforced by human beings (and the algorithms human beings create) who make mistakes and can unintentionally or intentionally import their biases into content moderation decisions. Another Twitter controversy from earlier this year illustrates how difficult it can be to develop content moderation policies.

Shortly after Sen. John McCain’s death a Twitter user posted a tweet that included a doctored photo of Sen. McCain’s daughter, Meghan McCain, crying over her father’s casket. The tweet included the words “America, this ones (sic) for you” and the doctored photo, which showed a handgun being aimed at the grieving McCain. McCain’s husband, Federalist publisher Ben Domenech, criticized Twitter CEO Jack Dorsey for keeping the tweet on the platform. Twitter later took the offensive tweet down, and Dorsey apologized for not taking action sooner.

The tweet aimed at Meghan McCain clearly violated Twitter’s rules, which state: “You may not make specific threats of violence or wish for the serious physical harm, death, or disease of an individual or group of people.”

Twitter’s rules also prohibit hateful conduct or imagery, as outlined in its “Hateful Conduct Policy.” The policy seems clear enough, but a look at Kelly’s tweets reveal content that someone could interpret as hateful, even if some of the tweets are attempts at humor. Is portraying Confederate soldiers as “poor Southerners defending their land from an invading Northern army” hateful? What about a tweet bemoaning women’s right to vote? Or tweets that describe our ham-loving neighbors to the North as “garbage people” and violence as “underrated”? None of these tweets seem to violate Twitter’s current content policy, but someone could write a content policy that would prohibit such content.

Imagine developing a content policy for a social media site and your job is to consider whether content identical to the tweet targeting McCain and content identical to Kelly’s tweet concerning violence should be allowed or deleted. You have four policy options:

        Delete Tweet Targeting McCain Allow Tweet Targeting McCain Delete Kelly’s Tweet



Allow Kelly’s Tweet




Many commentators seem to back option 3, believing that the tweet targeting McCain should’ve been deleted while Kelly’ tweet should be allowed. That’s a reasonable position. But it’s not hard to see how someone could come to the conclusion that 1 and 4 are also acceptable options. Of all four options only option 2, which would lead to the deletion of Kelly’s tweet but also allow the tweet targeting McCain, seems incoherent on its face.

Social media companies can come up with sensible-sounding policies, but there will always be tough calls. Having a policy that prohibits images of nude children sounds sensible, but there was an outcry after Facebook removed an Anne Frank Center article, which had as its feature image a photo of nude children who were victims of the Holocaust. Facebook didn’t disclose whether an algorithm or a human being had flagged the post for deletion.

In a similar case, Facebook initially defended its decision to remove Nick Ut’s Pulitzer Prize-winning photo “The Terror of War,” which shows a burned, naked nine year old Vietnamese girl fleeing the aftermath of an South Viernamese napalm attack in 1972. Despite the photo’s fame and historical significance Facebook told The Guardian, “While we recognize that this photo is iconic, it’s difficult to create a distinction between allowing a photograph of a nude child in one instance and not others.” Facebook eventually changed course, allowing users to post the photo, citing the photo’s historical significance:

Because of its status as an iconic image of historical importance, the value of permitting sharing outweighs the value of protecting the community by removal, so we have decided to reinstate the image on Facebook where we are aware it has been removed.

What about graphic images of contemporary and past battles? On the one hand, there is clear historic value to images from the American Civil War, the Second World War, and the Vietnam War, some of which include graphic violent content. A social media company implementing a policy prohibiting graphic depictions of violence sounds sensible, but like a policy banning images of nude children it will not eliminate difficult choices or the possibility that such a policy will yield results many users will find inconsistent and confusing.

Given that whoever is developing content moderation policies will be put in the position of making tough choices it’s far better to leave these choices in the hands of private actors rather than government regulators. Unlike the government, Twitter has a profit motive and competition. As such, it is subject to far more accountability that the government. We may not always like the decisions social media companies make, but private failure is better than government failure. An America where unnamed bureaucrats, not private employees, determine what can be posted on social media is one where free speech is stifled.

To be clear, calls for increased government intervention and regulation of social media platforms is a bipartisan phenomenon. Sen. Mark Warner (D-VA) has discussed a range of possible social media policies, including a crackdown on anonymous accounts and regulations modeled on the European so-called “right to be forgotten.” If such policies were implemented (the First Amendment issues notwithstanding), they would inevitably lead to valuable speech being stifled. Sen. Ron Wyden (D-OR) has said that he’s open to carve-outs of Section 230 of the Communications Decency Act, which protects online intermediaries such as Facebook and Twitter from liability for what users post on their platforms.

When it comes to possibly amending Section 230 Sen. Wyden has some Republican allies. Never mind that some of these Republicans don’t seem to fully understand the relevant parts of Section 230.

That social media giants are under attack from the left and the right is not an argument for government intervention. Calls for Section 230 amendment or “anti-censorship” legislation are a serious risk to free speech. If Section 230 is amended to increase social media companies’ risk of liability suits we should expect these companies to suppress more speech. Twitter users may not always like what Twitter does, but calls for government intervention are not the remedy.

In 2016, the D.C. City Council unanimously passed the Neighborhood Engagement Achieves Results (NEAR) Act, partly based on a pilot program in Richmond, California, that sought to implement a holistic approach to crime fighting. Recently, the ACLU of the District of Columbia (ACLU DC) filed suit against the Metropolitan Police Department (MPD) to implement the component of the NEAR Act that requires police to track demographic and other relevant data of individuals who police stop and frisk for weapons or otherwise search. MPD Chief Peter Newsham has admitted the department has not yet been able to comply with the law’s data collection requirement and recently a federal judge indicated that he was preparing an injunction in ACLU DC’s favor to compel the department to produce and publish the data.

As a policing researcher, the value of new empirical data is high, because, until recent decades, we haven’t had much of it. For just one example, this paucity of reliable policing data led the federal government to underestimate the number of persons shot and killed by police in the United States by about 150 percent every year. Thanks to the researchers at the Washington Post, we now know that police officers fatally shoot an average near 1,000 individuals every year instead of the roughly 400 that were annually reported by the FBI. Data is particularly helpful when trying to measure the racial and ethnic impacts of intrusive policies like stop and frisk because claims of racial bias are nearly impossible to prove in a single circumstance, but data can support or undermine claims of racial bias depending on population and other variables. While numbers by themselves cannot tell the whole story of any given policy, well-cultivated data can show where and in what circumstances disparities arise, giving researchers information to explain what is happening.

Before the judge made his announcement in the ACLU DC lawsuit, MPD had been training its officers to implement the demographic recording section of the NEAR Act. I had conversations with more than a dozen patrol officers over the past several weeks, and the NEAR Act was often a subject of discussion. While each officer I talked to said they would implement the law in line with their general order to do so, personal reactions ranged from ambivalent, to skeptical, to fearful of what implementation would bring. Most notably, officers were apprehensive about asking people who they have stopped and potentially searched for even more personal information, including their ethnicity and gender identity.

The general order posted on the MPD website states that officers should use the following statement when asking for personal information, “Per the NEAR Act, as passed by the Council of the District of Columbia, we are required to ask for your gender, race, ethnicity, and date of birth.”

But the text of the NEAR Act does not require officers to ask this personal information, only to record it.  Indeed, researchers use demographic information to discover racial and other disparities in police stops and to determine whether those disparities are driven by officer bias or by departmental policy. In either case, the relevant demographic information is the sex and race of the stopped individual that the officer observed while making a stop, not the ethnicity or gender identity of the person stopped. What’s more, the general order instructs officers to select “unknown” whenever an individual refuses to answer the questions, subverting the purpose of recording the officer’s observations because of an uncooperative subject.

According to Scott Michelman, ACLU DC’s legal co-director and lead counsel on the NEAR Act lawsuit, requiring the officers to ask the demographic data “was a police decision and it’s actually one of several examples in ways in which the District has rolled out its partial implementation that seems designed to undermine effective data collection.” Michelman continued, “We think MPD is intentionally designing a cumbersome system for the same reason they have been foot-dragging implementing it. That is, they are hostile to this law, they are hostile to its purposes, they don’t want it implemented, they don’t want the public to know whom they’re stopping and why, because they are afraid of what the data will show.”

When asked for comment, the MPD public information office responded that “There were concerns raised during [D.C. City] Council [and] community discussion[s] of the bill that officer observation of gender and race was not sufficient.” MPD also said that the current data collection is an interim step and that the full system should be operational in summer 2019. 

Irrespective of MPD’s true motivation, the general order as written puts patrol officers in a tenuous spot not only because they are going further than the law requires, but if the officers use the text in the general order, they are misrepresenting what the law is requiring them to do. MPD officers are acutely aware of the tensions between themselves and D.C. residents, particularly those who live in economically disadvantaged, racial and ethnic minority communities. Accordingly, none of the officers I spoke to wanted to antagonize individuals by intruding further into stopped individuals’ lives than was necessary, but all acknowledged they would abide by the general order.

The NEAR Act was passed with the understanding that the MPD needs to improve its relationships with the communities it patrols. The officers who are tasked with carrying out the act ought to be given instructions based on accurate information so they do not further damage the relationships they have with D.C.’s most vulnerable communities.

Even if fully implemented as envisioned, the NEAR Act’s intended outcomes are far from certain. However, the NEAR Act is the law and should be followed as written to give it the best chance of success. Both D.C. residents and MPD officers deserve that much.



Todd Bensman, the Senior National Security Fellow at the Center for Immigration Studies (CIS), wrote a recent report entitled “Have Terrorists Crossed Our Border?” in which he presents a list of  “15 suspected terrorists have been apprehended at the U.S.-Mexico border, or en route, since 2001.”  Bensman lists these 15 individuals, some of which don’t have names, and describes their actions.  He writes that his research is based on publicly available information, so it is likely a “significant under-count” of the actual terrorists who entered.  Bensman also writes that “several reports that strongly indicated the crossing of additional migrant terrorism suspects were excluded from this list due to insufficient detail.” 

If the goal of this CIS report was to show how small the terrorist threat along the Mexican border is, then it succeeded marvelously.  None of the terrorists identified committed an attack on U.S. soil, were convicted of planning an attack on U.S. soil, or even charged with doing so.  They killed or injured zero people on U.S. soil in terrorist attacks.  The only actual terrorism conviction for this group is of conspiracy to materially aid a foreign terrorist organization.  However, one person who entered the United States on his way to Canada did commit an attack in Alberta where he injured five people. 

Six of the 15 people that Bensman identifies are unnamed, thus we cannot independently verify or check whether they belong on this list (Table 1).  Interestingly, much of the evidence for those six unnamed individuals comes from passing comments in news stories or a Texas Department of Public Safety (DPS) report whose evidence is “deemed credible,” but that “could not be independently corroborated.”  Who deemed that evidence to be credible?  If people can’t independently corroborate the evidence, how can we know that it is credible?  We should take such claims with a large grain of salt, especially after frequent government terrorism exaggerations

Table 1 organizes the names that Bensman provides.  None committed or attempted to commit an attack on U.S. soil.  Two of the individuals were charged with terrorism offenses.  Mahmoud Kourani was charged and convicted of conspiracy to materially support a foreign terrorist organization (MSFT), Hezbollah, and sentenced to 54 months.  His actions are certainly troubling and should be illegal, but there is no evidence that he was a threat to American lives or property.  The Muhammad Kourani case is more nuanced and odd. He was a member of Hezbollah who became an informant for the United States.  After giving the FBI information on Hezbollah, the government used that information to charge Kourani with MSFT and conspiracy to do so.  There’s no evidence that he had any intention to every commit an attack on U.S. soil.  His trial will occur in 2019, so it’s premature to count him as a terrorist although he seems to have deep “ties” with Hezbollah.

Table 1
Terrorists, Suspected Terrorists, and Those with Suspected Terrorism Ties

Name Committed an Attack on US Soil Attempted or Planned an Attack on US Soil Terrorism Charges in the United States Terrorism Convictions in the United States Notes Abdulahi Sharif No No No No Sharif committed an attack in Canada, injuring 5. Ibrahim Qoordheen No No No No   Unidentified Afghan national No No No No   Muhammad Azeem No No No No   Mukhtar Ahmad No No No No   Unnamed Somali national No No No No   Unnamed Sri Lankan national No No No No   Unnamed Somali national No No No No   Unnamed Bangladeshi National No No No No   Abdullahi Omar Fidse No No No No 18 USC 1505 is not a terrorism statute, but there is an extra penalty if it involves a terrorism investigation.  Mohammad Ahmad Dhakane No No No No   Farida Goolam Ahmed No No No No   Muhammad Kourani No No MSFT and MSFT Conspiracy No A court case is scheduled for 2019. Al-Manar Television employee No No No No   Mahmoud Kourani No No MSFT Conspiracy Yes  


Source: “Have Terrorists Crossed Our Border?” by Todd Bensman. 

Another interesting example is Ibrahim Qoordheen (sometimes spelled Qoordheer), who was arrested in Costa Rica while supposedly on his way to the U.S. border.  There is almost no publicly available research on him after his arrest in March 2017.  Gustavo Mata, the Costa Rican Minister of Public Security, said they would extradite Qoordheen to the United States if the U.S. government provided any evidence of his terrorism ties beyond a hit in a government database.  There is no government press release announcing his extradition to the United States and no other evidence online of what happened to Qoordheen, but he certainly wasn’t charged or convicted with any terrorism offenses in the United States. 

The only example of a real terrorist who crossed the border with Mexico during this time was Abdulahi Sharif.  He injured five people in an attack in Canada in 2017 and is currently awaiting trial there.  The evidence is sketchy, but Sharif apparently tried to enter the United States through a port of entry in 2011 and was detained – as he should have been.  There’s no indication that he made an asylum claim.  Regardless, the U.S. government let him go because it could not deport him to Somalia and lost track of him as he applied for refugee or asylum status in Canada in early 2012.  Five years later, Sharif tried to murder five people in Alberta, Canada.  Six years passed from Sharif’s attempted entry to the United States in 2011 to his attack in Canada in 2017.  His weapons were a knife and a car.  It’s hard to believe that he was planning to commit an attack before going to Canada, but a perfect system that could predict the future would have stopped him.  It bears repeating that Sharif did not commit an attack on U.S. soil and did not plan to commit an attack here.

Furthermore, Bensman’s rhetoric is unreasonably alarming relative to the scale of the terrorist threat along the Mexican border.  The title of Bensman’s report is “Have Terrorists Crossed Our Border?”  Surely, that means he must be talking about only terrorists, right?  Nope.  The subtitle walks back the title: “An initial count of suspected terrorists encountered en route and at the U.S. Southwest Border Since 2001 [emphasis added].”  So, his report only covers suspected terrorists?  Nope.  Elsewhere in the document, Bensman writes that his report:

[P]rovides an initial accounting of publicly documented instances, between 2001 and November 2018, of some 15 migrants with credibly suspected or confirmed terrorism ties who were encountered at the southern border after smuggling through Latin America, or who were encountered while presumably en route [emphasis added].

Those with “credibly suspected or confirmed terrorism ties,” are quite a bit different from suspected terrorists and even more distantly related to real terrorists.  Lots of people have “ties” to terrorists that are not significant in any way.  For instance, those related to terrorists have “terrorism ties,” but that does not mean that the family members of terrorists are themselves, terrorists.  In other words, he’s counting just about everyone apprehended who has “terrorism ties” according to “credible” evidence that “could not be independently corroborated” in many cases.  To see how ludicrous this standard is, which is common in much of the terrorism literature, substitute in another crime such as robbery for “terrorism” and see how unremarkable these statements are.   

This is a common rhetorical trick in terrorism publications.  For instance, a government list of “627 terrorism-related” prosecutions revealed that 45 percent of them were only convicted of non-terrorism offenses.  The three Abuali brothers are my favorites.  They are included in the government’s list of “terrorism-related” convictions even though their crime was stealing boxes of breakfast cereal, Kellogg’s specifically.  Stealing boxes of Raisin Bran is a crime, but depriving people of their breakfast doesn’t count as terrorism and neither are the cases that Bensman provides below. 

A count of real terrorists who have crossed the Mexican border since 2001 and wanted to harm Americans would be very short: it would contain zero names.  Three people entered the U.S. illegally through the Mexican border in 1984 and grew up to be terrorists who were convicted of planning an incompetent plot in 2008.  When Americans think of terrorists, they think of people attacking Americans on U.S. soil.  Sending information to Hezbollah is a terrorist offense and it should be illegal, but it is not as dangerous or severe as setting off a bomb or shooting people in pursuit of Jihad.  The only possible exception to this is Abdulahi Sharif who entered the United States on his way to Canada where he then committed an attack five years later. 

Bensman claims that he left out many names because of “insufficient detail,” but one can only imagine how thin the evidence against them is based on how little of it exists to condemn men with names as terrifying as “Al-Manar Television employee” and “Unnamed Bangladeshi national.”  Except for Abdulahi Sharif, who tried to enter through a port of entry and then went to Canada several years before committing his attack where he injured five people, there is little evidence of a terrorist threat from the Mexican border.  If this is the best evidence available of a terrorist threat across the Mexican border, then we should all feel a lot more secure.  

By a vote of 8-0 (Justice Kavanaugh did not participate), the Supreme Court today gave a rational reading of both the Endangered Species Act (ESA) and its own power to review administrative agency actions. The decision in Weyerhaeuser v. U.S. Fish & Wildlife Service is an important win for property owners against arbitrary agency decisions. See Cato’s amicus brief here.

The case arose when the Fish and Wildlife Service (FWS), which administers the ESA on behalf of the Secretary of the Interior, designated a large parcel of land in Louisiana owned by Weyerhaeuser and a group of family landowners as critical habitat for the endangered dusky gopher frog, a small population of which lives today in Mississippi. The problem, however, was that the frog had not lived in Louisiana for decades and, worse still, the land in question, far from being critical habitat, was no habitat at all since it was unsuitable for sustaining the frog’s life cycles. On appeal, FWS did not dispute that critical habitat must be habitat; it argued instead that habitat includes areas that would require “some degree of modification” to support a sustainable population of a given species. In her dissent from the Fifth Circuit’s decision, Judge Priscilla Owen nicely summarized the immense practical implications of that view: “If the Endangered Species Act permitted the actions taken by the Government in this case, then vast portions of the United States would be designated as ‘critical habitat’ because it is theoretically possible, even if not probable, that land could be modified to sustain the introduction or reintroduction of an endangered species.”

Fortunately, Chief Justice Robert’s, writing for the Court, today carefully parsed the ESA’s language to avoid that result. And of equal if not greater importance, he did the same to sustain the Administrative Procedure Act’s “basic presumption of judicial review” of agency action, finding here that the EPA requires the Secretary to take into consideration economic and other impacts before making a critical habitat designation. The economic impact to these plaintiffs of losing their right to develop their land was estimated to be $34 million—all to preserve a frog’s uninhabitable habitat. No wonder the decision was 8-0. Still, the plaintiffs had to go all the way to the Supreme Court to vindicate their rights.

This morning, the Supreme Court ruled, unanimously, that a species’ “critical habitat” for purposes of the Endangered Species Act (ESA), is habitat where the species actually lives. Accordingly, it sent Weyerhaeuser v. U.S. Fish & Wildlife Service back to the U.S. Court of Appeals for the Fifth Circuit to determine whether that’s the case for certain land involving the dusky gopher frog, as well as to see whether the federal agency properly used cost-benefit analysis in its designation.

This quick ruling, coming less than two months after argument, was a breath of fresh air. The ESA doesn’t give the government unlimited authority to do whatever it wants—and land on which a particular animal has never lived and where it can’t live can hardly be considered “critical habitat.” The Fish and Wildlife Service should look into ways of protecting critters without intruding on private property rights or abusing federal power. Good on the Supreme Court for holding bureaucrats’ feet to the fire of judicial review.

For more on the case, see this background and Cato’s brief.

Of many interesting things said during Cato’s 36th Monetary Conference, one in particular tempted me to rush to the podium to give its author a big hug. The speaker, Joe Gagnon of the Peterson Institute, was calling into question the now-conventional wisdom that, to avoid interfering with the efficient allocation of credit or otherwise involving itself in matters best left to Congress, the Fed must stick to purchasing Treasury securities, and nothing else.

“It puzzles me,” Joe said (at 00:31:36)

why people think that the Fed should only allocate credit to the government. Why is that the obvious thing to do? …What seems to me more neutral would be [for the Fed and central banks generally to] hold the market basket of all assets, and then conduct their policy proportionately in all assets. That doesn’t favor anybody or any sector — it’s neutral. It seems like the natural way to go.

Think tank employees, and employees at different think tanks especially, aren’t generally inclined to hug one another. But if one is, you can bet your boots its because the other fellow said something he’d have liked to have said himself.

In fact I’ve long been planning to write a post on the issue Joe raised, making an argument quite similar to his. I even started the project, present title and all, several months ago, only to shove it into my “drafts” folder, where it’s been gathering dust ever since. Thanks to Joe, I’m finally inspired to finish what I started.

Treasuries Only

Central banks are, ideally, supposed to regulate the scale of nominal magnitudes — things like the price level, monetary aggregates, and nominal spending — without influencing relative prices or the allocation of scarce savings. In particular, their policy actions aren’t suppose to be aimed at favoring particular security issuers or markets.

These notions suggest, for starters, that central banks should usually rely on open-market operations or other broad-based monetary operations. They’re also generally taken to mean that, when central banks can’t avoid extending “last resort” credit to particular firms, the firms so aided should be solvent and should pay market (that is, “normal” market) rates. They should, in other words, be the sort of firms private lenders themselves might assist were it not for information and transactions costs, or private credit-market disruptions, that keep them from doing so. A central bank that fails to meet these requirements is guilty of engaging in “credit policy,” meaning actions that serve not just to regulate nominal magnitudes but to interfere with the efficient allocation of scarce resources among competing users.

But while the aforementioned conditions for steering-clear of credit policy may be necessary, they aren’t sufficient, in part because whether a central bank avoids taking part in credit policy or not also depends on the assets it chooses to purchase on the open market.

So what sorts of central bank asset purchases are, and what sorts aren’t, consistent with avoiding credit policy? The conventional wisdom here — and the view Joe Gagnon questions — consists of the “Treasuries only” doctrine. That doctrine’s best-known exponent is Carnegie-Mellon economics professor (and as yet unconfirmed Federal Reserve Board of Governors nominee) Marvin Goodfriend, who happens to have shared his opinions on the topic at another Cato Institute event: the 2008 Symposium of the Shadow Open Market Committee.

According to Goodfriend, “Monetary policy refers to Federal Reserve policy actions that change the stock of high-powered money, i.e., currency plus bank reserves.” In contrast, “[t]he Fed takes a credit policy action …  by shifting the composition of its assets holding high-powered money fixed.”

When the Fed substitutes an extension of credit for a Treasury security in its portfolio, the Fed can no longer return to the Treasury the interest it had received on the Treasury security that it held. In other words, when the Fed sells a Treasury security to make a loan, it’s as if the Treasury issued new debt to finance the loan. Credit policy executed by the Fed is really debt financed fiscal policy. …

In effect, Fed credit policy works by interposing the United States Treasury between lenders and borrowers in order to improve credit flows. In doing so, however, the Fed essentially makes a fiscal policy decision to put taxpayer funds at risk. In the event of a default, if the collateral is unable to be sold at a price sufficient to restore the initial value of Treasury securities on the Fed’s balance sheet that was used to fund the credit initiative, then the flow of Fed remittances to the Treasury will be smaller after the loan is unwound. The Treasury will have to make up that shortfall somehow, namely, by lowering expenditures, raising current taxes, or borrowing more and raising future taxes to finance increased interest on the debt.

Because the Fed is exempt from the appropriations process, Goodfriend argues, it “should avoid, to the fullest extent possible, taking actions that can properly be regarded as within the province of fiscal policy and the fiscal authorities.” Doing that, in his view, boils down to having the Fed limit its portfolio holdings to Treasury securities. A “Treasuries only” policy, he says, “respects the integrity of fiscal policy fully” while helping “to preserve the Fed’s independence” because it “leaves all the fiscal decisions to Congress and the Treasury and hence does not infringe on their fiscal policy prerogatives.” In contrast

all financial securities other than Treasuries carry some credit risk and involve the Fed in potentially controversial disputes regarding credit allocation. When the Fed extends credit to private or other public entities, it is allocating credit to particular borrowers, and therefore taking a fiscal action and invading the territory of the fiscal authorities.

Fiscal Doublespeak

There is, to say the least, something fishy about the claim that, by sticking to buying Treasury securities, the Fed avoids “invading the territory of the fiscal authorities.” The claim is admittedly true enough if one takes the term “invasion” literally to suggest a hostile incursion, meaning one that does harm to the parties encroached upon, in this case by chipping away at the Treasury’s earnings. So far as Goodfriend is concerned, so long as the Treasury benefits from the Fed’s operations, the Fed hasn’t tread on fiscal turf at all. On the contrary: it might gobble-up all the Treasury (and guaranteed agency) securities it likes, without being guilty of “taking a fiscal action.”

But Goodfriend’s is, surely, an overly restrictive view.  As I’ve argued elsewhere,

[w]hile confining the Fed to Treasury purchases may enhance its long-run contribution to government revenue, it cannot be said to minimize its fiscal footprint. On the contrary: It involves the Fed quite decidedly in the allocation of credit, albeit in a manner that favors the federal government over other parties.

There is, indeed, no older nor more frequently-recurring theme in the history of money than that concerning the tendency of governments, whether despotic or democratic, to treat monetary institutions over which they exercise some degree of control as official piggy banks, whether by debasing official coins or by pressuring fiat-money issuing central banks to finance their debts, even when doing so means allowing inflation to run wild.

Seen against this historical background, including plenty of recent experiences, the suggestion that central banks can best avoid entangling themselves in their governments’ fiscal affairs by devoting their resources to buying government debt sounds like a bad joke. This isn’t to say that Goodfriend is an apologist for inflationary finance, or for inflation itself. On the contrary: if he’s anything he’s an inflation hawk. But the fact remains that his understanding of what constitutes fiscally-neutral monetary policy leaves a lot be be desired.

Yet that hasn’t stopped others who also dislike inflation and inflationary finance from embracing that same understanding. Consider this 2012 article by Charles Plosser, who was then President of the Philadelphia Fed. Plosser starts out by reiterating what we might call the old-time (as opposed to new-fangled) “fiscal-neutrality” religion. “It is widely understood,” he says,

that governments can finance expenditures through taxation, debt — that is, future taxes — or printing money. In this sense, monetary and fiscal policy are intertwined through the government budget constraint. Nevertheless, there are good reasons to prefer an arrangement that provides a fair degree of separation between the functions and responsibilities of central banks and those of the fiscal authorities. For example, in a world of fiat currency, central banks are generally assigned the responsibility for establishing and maintaining the value or purchasing power of the nation’s monetary unit of account. Yet, that task can be undermined or completely subverted if fiscal authorities independently set their budgets in a manner that ultimately requires the central bank to finance government expenditures with significant amounts of seigniorage in lieu of tax revenues or debt. The ability of the central bank to maintain price stability can also be undermined when the central bank itself ventures into the realm of fiscal policy.

So far so good. But when it comes to saying how we should go about achieving the desired “separation between the functions and responsibilities of central banks and those of the fiscal authorities,” Plosser offers us a textbook case of cognitive dissonance by serving-up Goodfriend’s “Treasuries only” elixir, in the shape of his own similar proposal for a new “accord” that would prevent the Fed from acquiring other sorts of assets. “I have long argued,” Plosser says,

for a bright line between monetary policy and fiscal policy, for the independence of the central bank, and for the central bank to have clear and transparent objectives. I have also stressed the importance of a systematic approach to monetary policy that serves to limit discretionary actions by the central bank. Furthermore, I have proposed a new accord between the Treasury and the central bank that would severely limit, if not eliminate, the central bank’s ability to lend to private individuals and firms outside of the discount window mechanisms. I have noted that decisions to grant subsidies to particular market segments should rest with the fiscal authorities — in the U.S., this means Congress and the Treasury Department — and not with the central bank. Thus, the new accord would limit the Fed to an all-Treasuries portfolio, except for those assets held as collateral for traditional discount window operations.

Just how the accord in question would prevent the Fed from “financ[ing] government expenditures with significant amounts of seigniorage in lieu of tax revenues or debt” Plosser doesn’t say. But the answer is simple enough: it wouldn’t. It wouldn’t prevent the Fed from employing its powers in a way that unduly favors not private-sector firms or markets, but the Federal government itself. Here again, the problem obviously isn’t that Plosser doesn’t mind inflationary finance. It’s that he has embraced a flawed doctrine of what it means for the Fed to avoid “fiscal” operations as much as possible.

From “No Treasuries!” to “Treasuries Only”

Before we consider alternatives to the “Treasuries only” understanding of fiscally neutral monetary policy, let’s take a quick detour into the Fed’s early history, for the sake of illustrating just how far the newfound understanding of how to keep the Fed clear of fiscal policy veers from the orthodoxy that prevailed when the Fed was founded.

Although the original Federal Reserve Act allowed Fed banks to purchase U.S. government securities, it was understood that such purchases would be exceptional, and that the Fed’s interest-earning assets would consist mainly of short-term commercial, agricultural, or industrial paper presented to it for rediscounting by its member banks. That understanding reflected the conventional wisdom, supported on one side by the “real bills” doctrine, according to which confining rediscounting to certain kinds of commercial paper would prevent inflation, and on the other by the view that central bank lending to the government was dangerous, because, as David Marshall explains, it could end up “tying the supply of credit to the spending whims of the government.”

Paul Warburg, one of the Federal Reserve System’s chief architects, expressed the prevailing attitudes at the time of the Fed’s founding especially clearly and succinctly in his essay on “The Discount System in Europe,” originally included among the publications of the National Monetary Commission and then republished in Essays on Banking Reform in the United States (1914, p. 154):

Notes issued against discounts mean elasticity based on the changing demands of commerce and trade of the nation, while notes based on government bonds mean constant expansion without contraction, inflation based on the requirements of the government without connection of any kind with the temporary needs of the toiling nation. Requirements of the government should be met by direct or indirect taxation or by the sale of government bonds to the people. But to use government bonds or other permanent investments as a basis for note issue is unscientific and dangerous.

Nor were such beliefs peculiar to the U.S. Because central bank purchases of government securities, even in the open market, were widely seen as equivalent to direct lending to governments, the belief that such purchases ought to be strictly limited was one held by most economists. As Ralph Hawtrey puts it in The Art of Central Banking (1933, p. 131),

the acquisition of Government securities by the central bank is regarded as opening the door to inflation. It is usual for the power of the central bank to lend to the Government to be carefully circumscribed, and the dividing line between lending direct and buying Government securities in the market may be rather a fine one.

In those days no less than today, Marshall reminds us, “it was thought that a well-run central bank should be free from political influence.” But the fear then was that “extensive holdings of government debt might compromise central bank independence,” and not that central bank purchases of commercial paper would do so.

That this early understanding was soon to be turned on its head must surely rank among the more fascinating developments in the history of modern monetary thought. The process began when, following the United States’ entry into World War I, under pressure from Treasury Secretary William McAdoo (who was an ex officio member of the Federal Reserve Board), the Fed reluctantly started buying substantial quantities of Treasury securities at above-market prices.

At that time, as Kenneth Garbade reports (p. 3),  the Directors of the Federal Reserve Bank of New York memorialized their misgivings, while expressing their conviction “that the normal services of the Bank as fiscal agent will best be rendered by assisting in distributing Government securities rather than by acting as a purchaser of them” and that their wartime action “should not be considered as establishing a precedent or a policy which will necessarily be followed in the future.”

But the Great Depression was to dash any hope of such opinions being heeded. Instead, during it the collapse of the markets for bankers’ acceptances and other sorts of commercial paper, the first appearance of short-term Treasury bills, and the fiscal exigencies of the New Deal, would collectively lead the Fed to shift to a Treasuries-only regime.[1]

It was while this shift was taking place, in the spring  of 1933, that the Board of Governors granted the Fed banks permission to purchase up to $1 billion of government securities for the express purpose of helping the Treasury to market its debt. A second precedent was thus established for the Fed’s agreement, during World War II, to formally commit itself to helping to finance the war by using open-market purchases to peg the interest rate on Treasury bills at a low level of just 3/8 percent. The Fed’s substantial involvement in the market for Treasury securities thus ended up doing just what the Fed’s founders feared it might do, to wit: transforming the Fed into a handmaiden of the U.S. Treasury.

The Fed’s commitment to support the market for government bonds was still in effect when, during the Korean War, an increase in the CPI inflation rate to over 21 percent caused the Board of Governors, led by then-Chairman Thomas McCabe, to renounce it. Although that singular act of defiance cost McCabe his job, it also set the stage for the famous “Treasury Accord” by which the Fed was ultimately freed from any obligation to support the prices of government securities.

Ironically, it’s from the 1951 Treasury Accord that Marvin Goodfriend draws inspiration for his own proposed “‘Accord’ for Federal Reserve Credit Policy,”  a chief element of which is a commitment to the “Treasuries only” doctrine that helped make the original Accord necessary in the first place.

A Better Approach

If a “fiscally neutral” Fed is neither a Fed that sticks to Treasuries only nor one that can direct credit willy-nilly to any firm or asset market it chooses, what is it?

Joe Gagnon’s suggestion that the Fed “hold the market basket of all assets” has the distinct advantage of being intuitively appealing, jibing as it does with established notions of monetary neutrality in the broad sense. Unfortunately, that intuitive appeal is more  than matched by the suggestion’s unattractiveness as a practical policy. Who, for one thing, wants to see the Fed get into the business of buying real assets? And, stepping back down to planet earth, who really wants to see it taking a leaf from the central banks of Japan and Switzerland by loading-up on stocks, which make up a large share of all U.S. financial assets?

MIT’s Deborah Lucas points the way toward a more pragmatic solution. “A central bank policy is fiscal,” she proposes, “when it confers a net subsidy to a private entity, or when it has a direct effect on government spending or revenues.” This definition, Lucas notes,

makes no special distinction between transactions involving Treasury securities and those involving private securities. If the Federal Reserve were to purchase a Treasury bond at an above-market price it would have a fiscal effect measured by the amount of the overpayment. However, if the Federal Reserve were to purchase a high-risk mortgage or corporate bond at a fair market price, there would be no fiscal effect because there is no subsidy. Relatedly, the assumption of credit risk is not in itself fiscal; along with other priced risks such as prepayment, interest rate and liquidity risk, it only gives rise to fiscal effects when the Federal Reserve transacts at non-market prices.

While Lucas’s point seems perfectly reasonable, and has the merit of suggesting that central banks can avoid engaging in credit policy, including the shunting of savings toward the U.S. Treasury, without having to buy every asset under the sun, it still fails to add-up to a practical proposal. Instead it begs the question: just how is the Fed to avoid favoring the issuers of certain assets by buying them at above-market prices? How, in particular, can it do so while refusing to purchase certain kinds of financial assets at any price?

Flexible OMOs

As it happens, I think I have an answer to those questions. It consists of the plan I proposed in 2017 for “flexible” open-market operations, as published in the Heritage Foundation volume, Prosperity Unleashed. Although that proposal is aimed at reforming the Fed’s procedures for supplying emergency credit to illiquid but solvent institutions, the “flexible open-market operations” (or “flexible OMOs”) it calls for would also serve to make the Fed’s operations fiscally neutral.

Flexible OMOs would do this for three reasons. First, they would  have the Fed standing ready to purchase, in its routine open-market operations,[2] not just Treasury or agency securities but a much broader set of assets, consisting of all those marketable securities that can presently qualify as collateral for the Fed’s discount-window loans. Second, they would be undertaken not with a score or so of “primary dealers” only, but with numerous counterparties, including all banks that might be eligible for discount window loans as well as all those counterparties presently taking part in the Fed’s overnight reverse repurchase (ON-RRP) operations. Third, flexible OMOs would be undertaken using a version of Paul Klemperer’s “product-mix” auction procedure specifically designed to prevent the Fed from favoring any particular securities  or counterparties.

Although flexible OMOs would allow the Fed to purchase private  securities, it would not allow it to arbitrarily steer credit toward particular private security issuers, holders, or markets. Instead it would allow counterparties possessing private securities, as well as those equipped with Treasuries, to bid for federal funds. Nor would its terms discriminate in favor of particular securities, except to the extent of giving proportionately larger haircuts to riskier ones, comparable to those that the Fed presently applies to different sorts of collateral in its discount-window lending.

While flexible OMOs are themselves fiscally neutral, they can only serve to keep a central bank employing them fiscally neutral if it relies upon them exclusively, rather than in combination with other lending operations. But the beauty of flexible OMOs is precisely that, apart from being fiscally neutral themselves, they allow a central bank that relies upon them in undertaking its ordinary monetary policy operations to dispense with other types of lending and with supplemental (ad-hoc or standing) lending facilities and programs. Instead, all counterparties that might otherwise be assisted through such supplemental programs would be eligible to take part in routine OMOs, using any collateral that might have secured for them a direct central-bank loan.

Done right, flexible OMOs serve to make a central bank’s asset purchases neutral, not by having it purchase Treasury securities only, or by having it purchase the whole “market basket” of assets, but by having it purchase, especially during occasions of financial distress, the same basket of assets private-market financial firms might themselves be willing to purchase, or to treat as acceptable collateral, in ordinary times. Achieving fiscal neutrality thus goes hand-in-hand with having central banks efficiently fulfill their last-resort lending duties.


[1] That the Banking Act of 1935 prohibited the Fed from purchasing securities directly from the Treasury, compelling it to buy them on the open-market only, did nothing to  discourage or otherwise interfere with the shift in question. Nor did it serve to limit the Fed’s ability to finance the government’s deficits. Although some supporters of the measure may simply have failed to understand that the Fed could assist the Treasury just as effectively by buying its securities in the open market as it might by dealing directly with it, then Fed Chairman Marriner Eccles was almost certainly on to something in attributing it “to certain Government bond dealers who quite naturally had their eyes on business that might be lost to them if direct purchasing were permitted” (Garbade 2014, p. 7).

[2] My plan assumes that the Fed relies on regular open-market operations to achieve its operating target. That is, it assumes a “corridor” system of monetary control, rather than the “floor” system currently in place. Concerning why a corridor system should be preferred to a floor system see my recently-published book, Floored!

[Cross-posted from]

The 1990 Global Change Research Act requires quadrennial  “Assessments” of the effects of global climate change on the U.S. The first was published in 2000, the second in 2009 (the G.W. Bush Administration chose to ignore the law), the third in 2014, and the fourth, last Black Friday.

We contributed extensive public comments on the penultimate draft of the latest Assessment, which has changed very little between the review draft and the final copy. The final version contains the same fatal flaws we noted earlier this year. It’s based upon a family of climate models that are predicting far more warming than has been occurring in the all-important tropical atmosphere. It should have used the one model (out of the 102 available runs) that actually gets things right, the Russian INM-CM4, but it relied upon the average warming produced by all 102. INM-CM4 has the least warming of all of them, but doing the right thing—using the one that works—would have pretty much gutted climate change as a serious issue.

These reports take several years to produce, and the current one was largely a product of the Obama Administration. If there’s a Trump Administration when the next one is scheduled (2022), it is likely to be very different. Why the current regime just didn’t do as Bush did and simply elide the 1990 law is probably so it will get another crack at it in 2022.

Our lengthy technical comments still apply.

Is cake-baking art, and if so, can someone be compelled to bake one in violation of his or her religious beliefs? More specifically, can a Christian baker refuse to design a wedding cake for a same-sex couple due to her sincere religious objections to same-sex marriage?

Wait, didn’t the Supreme Court already resolve these questions in the Masterpiece Cakeshop case earlier this year? Actually no; the Court declined to answer these and related important issues, instead ruling narrowly in the baker’s favor because the state civil rights commission displayed animus toward his religious beliefs. There was even unresolved disagreement over whether the baker refused to sell the couple a custom cake or any cake. In short, the Court’s decision was really a minor work, not a masterpiece.

But the Court’s punt, to mix metaphors, didn’t kick the can very far down the road. While the Washington Supreme Court is going through the motions of reconsidering the Arlene’s Flowers case in light of Masterpiece, an Oregon case involving another baker has reached the Supreme Court’s doorstep. Melissa and Aaron Klein are practicing Christians who owned and operated a bakery where they made and sold custom wedding cakes. An administrative law judge fined them $135,000 (!) for refusing to make a wedding cake for a same-sex couple, putting them out of business. Even though the Kleins had gladly served the couple in the past, and merely objected to helping celebrate this particular ceremony, Oregon state appellate court upheld the fine.

But freedom of expression, as protected by the First Amendment, doesn’t only secure the ability to say what you wish. It also prevents the government from compelling you to say something you don’t agree with. Cake-baking, as anyone who has seen one of countless TV shows can confirm, is an expressive art form. Accordingly, bakers, as artists, cannot be forced to convey messages that violate their beliefs—whether based in religious or secular values. To live according to one’s own conscience is the foundational principle of a free society. If people who agree with same-sex marriage are the only ones allowed to operate businesses related to weddings, freedom of expression will become a hollow principle in that regard.

Cato, the only organization in the entire country to have filed Supreme Court briefs supporting same-sex couples seeking to get married and vendors who don’t want to participate in those weddings, has now filed a brief supporting the Kleins’ petition to the U.S. Supreme Court. Although quite similar to Masterpiece Cakeshop, the Kleins’ case is neater, with fewer distractions unrelated to the core question of expression. For starters, there is no allegation that the Oregon Bureau of Labor and Industries showed anti-religious animus. Moreover, the Kleins did not sell off-the-shelf cakes to the general public; they created only custom cakes.

The Court should take the case to clarify that the First Amendment protects people from having to convey messages or express support for ceremonies with which they disagree. Klein v. Oregon Bureau of Labor & Industries presents an inquiry into the scope and nature of expression itself—and much like a good cake, we hope that the Court finds these issues too enticing to pass up.

With the impending arrival of Amazon HQ2, New York City and northern Virginia need to make some changes. At the top of the list is reforming zoning regulations to reduce the shock of a rush of workers and their respective families into already strained housing markets.

Amazon has promised 25,000 jobs to each headquarters city, and that could mean up to 25,000 new Amazon workers in each area. In addition to Amazon-specific jobs, tech jobs have a multiplier effect, and it is estimated every new high tech job creates five non-high tech jobs. That would mean 125,000 new jobs each in New York City and northern Virginia as a result of Amazon’s move.

It’s likely that a portion of these workers and their families reside within New York City and northern Virginia areas already. But even adding part of 125,000 workers and their respective families to Long Island City and National Landing will add pressure to housing markets in these neighborhoods.

Housing prices are already high in both places: the median home in Queens, NY (where Long Island City is located) is valued at $640K and the median home in Arlington, VA (where National Landing is located) is north of that, at $660K. These figures are roughly three times the national median home price, and prices in both markets are on-trend to grow over the coming year.

Complacency by officials in the face of increased demand will lead to continued declines in housing affordability. Without proactive regulatory reform, New York City and northern Virginia will continue shutting working class people and minorities out of their communities, which is what happened in San Francisco when tech workers arrived and city officials remained complacent about regulatory policy.

So, what can be done? Local government needs to reduce regulatory barriers to housing development to contain housing costs. Here are a few ways they can do that:

1. Increase allowable development density – yes, even in New York City.

Maintaining or improving housing affordability means ensuring housing supply meets demand for housing. But in urban areas, land in the most desirable areas has already been developed, so in order to increase housing supply developers need to build up. Unfortunately, New York City and northern Virginia prohibits this through their zoning codes.  

Despite its reputation for towering high rises, the majority of New York City is zoned for one- or two-family homes. And surprisingly, an estimated 98% of residential structures in Queens – where Amazon HQ2 is located – are three stories or less. With Amazon on its way, restrictions on density must be relaxed to accommodate growth. New York City must continue increasing allowable density in the boroughs.

Meanwhile, although Virginia’s National Landing location is relatively more dense than many locations in the DC/Virginia metro area, its neighbors to the North and South have severely restricted development density. For example, large swaths of DC are zoned for three to four story homes (see: Capitol Hill), and between one-third and one-half of Alexandria, Virginia is zoned for single family homes (Amazon Headquarters is partially located in Alexandria). DC and Alexandria should upzone and let property owners decide if it makes sense to build more densely.

2. Relax or eliminate parking requirements.

Outside of Manhattan and a few locations in Long Island City, parking is mandated in New York City, even in transit-connected areas. These requirements should be relaxed so individuals can decide what the appropriate ratio of parking to housing is. Developers are more familiar with consumer’s needs than New York City’s planners are, and it’s likely many buildings require less parking than what’s currently mandated.

Providing parking comes at a substantial cost to developers, which pass unrecouped costs on to tenants. Streetsblog recently reported on a New York City developer that paved a basement and parts of first and second stories to provide city-required parking in a transit-connected area that didn’t need parking to begin with. The developer estimated the mandated parking requirement resulted in a $12 million-plus loss, and the space could have been used for something more productive.

Amazon HQ2 is located in Long Island City, where parking requirements are higher than the New York City average.  And although parking requirements were reduced for new subsidized housing near transit in New York City in 2016, the changes did not apply to market-rate residences, so parking requirements for market-rate residences still need an overhaul.

3. Streamline permitting processes.

Under Mayor De Blasio’s administration, New York City has made efforts to improve the building permitting experience and increase permitting transparency. Still, there are problems. For example, the City’s environmental permitting process, which is invoked in the case of “most discretionary land use actions considered by the City Planning Commission” is lengthy, costly, and unpredictable.

Estimates suggest that environmental permitting costs between $100,000 for and $2.5 million for a typical construction project, and takes 6 months to complete. Exempting projects that are likely to be compliant would increase efficiency and reduce costs.

Although northern Virginia doesn’t have local environmental assessment laws like New York City does, cities like Alexandria, Virginia have an excessive amount of regulation and development oversight. For example, there is “a 200 page design guideline guidebook on the special considerations associated with development in this historic downtown area alone… In Alexandria, there are around 25 citizen boards managing architectural, archaeological, environmental, historical, urban design and related planning considerations for proposed development. This number excludes task forces with other specific planning functions, like determining parking standards for new development.”

This web of decision makers and regulations will reduce housing development in the area south of National Landing and push prices up. In order to accommodate growth, Alexandria must overhaul and streamline this process.

Besides these recommendations, New York City and northern Virginia can relax construction standards and codes, reduce rehabilitation requirements associated with remodeling existing housing stock, reduce impact fees and exactions on development, legalize non-traditional affordable housing (accessory dwelling units, single room occupancies, manufactured housing, etc) where applicable, and expand urban development areas in Virginia. In order to avoid penalizing future and existing development, cities can collect taxes on land value instead of property.

New York City and northern Virginia have a lot of work to do to overhaul regulatory barriers to housing supply and provide an affordable home for current and future residents. The good news is there are a lot of ways to get started.

Many major political changes over the last few years are related to immigration. From the rise of Eurosceptic political parties in Germany, France, Italy, and elsewhere, to Brexit, and the U.S. election of Donald Trump, many political commentators are blaming these populist and nationalist political surges on unaddressed anti-immigration sentiment among voters. Although anti-immigration opinions certainly have a role to play in those political upsets, voter feelings of chaos and a lack of control over immigration are likely more important.

President Trump focused his campaign on the “build the wall” chant that capitalized on the perception of chaos at the southwest border where the worst from Mexico were supposedly crossing. His campaign platform called for cutting legal immigration, mandating universal E-Verify, and many of the other bells and whistles demanded by restrictionists over the years, but “reduce legal immigration” never became a chant because it doesn’t play on the perception of immigration chaos that fueled his political rise.     

The theory is that the perception of greater chaos and less control over immigration leads to opposition to immigration, even the legal variety, and greater political support for harsh repressive methods. Images of Syrians arriving by the boatload and illegal immigrants scaling border walls or walking through the desert spread the perception that immigration is out of control and that crackdowns are needed to regain control. Consequently, few people want to liberalize immigration when there’s a crisis.

As long as many people perceive chaos at the border then anti-immigration appeals will have an effect greater than the share of nativists in the electorate, as I wrote about here. The key idea here is “perception.” The number of people crossing the border illegally is down dramatically since the Bush years, the Border Patrol is much larger, homicide rates on the border are down, but those trends don’t seem to matter so long as the perception of chaos remains.

At this point, the question for supporters of liberalized immigration is: Why not give the other side a border wall and other enforcement schemes? That could decrease chaos and build support for future immigration liberalization. The downside to that is that more enforcement would make known additional illegal actions on the border and, thus, could increase the perception of chaos. Even if a border wall reduced illegal entry by 90 percent, a border wall would ensure that 100 percent of the remaining entries would be recorded and broadcast to a public that would perceive more chaos than ever before even though the amount of illegal immigration is radically reduced.    

Immigration politics in foreign countries support the perception of chaos and lack of control theory. Canada is considering an increase in legal immigration and the Australian government is considering a decrease as a way to cope with their absurdly restrictive land ordinances in Melbourne and Sydney. Importantly, the proposed policy reforms in both countries are moderate, not the result of an election but of gradual reform, and aren’t supported by recent massive changes in public opinion. In Britain, public worries about immigration diminished substantially after the Brexit vote either because the public thought that they regained control of the border through Brexit or because the surge of Syrian refugees abated. 

If the above theory is true, where does this leave us? 

First, it means that many types of immigration argument and analysis will be unlikely to politically solving the problem with exceptions for research that diminishes the perception of chaos. Arguments over the skill mix of immigrants, the assimilation of the second generation, or the fiscal effects don’t change opinions. Those issues matter for the real-world effects of immigration, of course, but they do not much affect the political debate.

Second, ignorance is the main roadblock to a more liberalized immigration policy. In all Western countries, respondents greatly exaggerate the size of the foreign-born population. The more ignorant respondents are more anti-immigration. Those levels of ignorance likely extend to ignorance of the actual levels of immigration enforcement and chaos. If there is a poll out there asking Americans about whether there should be more immigration enforcement as well as asking them about what they think the current level is, my bet is that there’d be a strong correlation between those who say there is no enforcement and that the government needs to cut immigration.    

Third, this means that those of us who favor liberalized immigration should especially favor reforms that reduce the perception of chaos. Thus, reforms that prevent caravans, illegal immigrants scaling border fences, and asylum seekers in prison cells should be adopted.

Fortunately, there are many reforms that liberalize immigration and reduce perceptions of chaos. Allowing more low-skilled immigrants in on temporary work permits would reduce the number of illegal immigrants crossing the border. Asylum seekers cannot apply from their home countries, perhaps allowing them to do so before coming here will help reduce the number of caravans. Private refugee or humanitarian sponsorship would also take the pressure off border personnel. Limiting the possibility of border detention to only serious potential security risks will reduce the perceived chaos and criminality. Opposing a border wall and the hiring of additional border patrol agents will reduce the opportunities for interactions with border crossers and cut the opportunities for reported illegal activity. 

If the perception of chaos/control thesis is correct, this means that efforts such as the RAISE Act and broader efforts to increase “merit” based immigration at the expense of lower-skilled immigration will not be politically effective. 

There is enough immigration research to fill libraries. That research has undoubtedly affected the opinions of the public and shaped elite opinion about immigration policy, but additional increases in public support for liberalized immigration may only come when the public is convinced that immigration is under control and when it perceives the system as less chaotic. Despite the current elections of politicians and political parties opposed to immigration, public opinion is moving in a more pro-immigration direction. Perceptions of control and order will push support over the line.

This is the second entry in a two-part series on the rise of index funds in U.S. equities markets. This post is for the intrepid reader interested in a thorough survey of the empirical and theoretical literature concerning the implications of institutional investors. In the first entry of this series, I disputed the mechanisms by which index funds are argued to exert an outsized influence on the firms within their portfolios. But in this second entry, I will instead grant this key premise of the anti-trust advocates’ argument: index funds, either individually or as a group, have a significant degree of influence over major decisions made by the firms in their portfolio. But the anti-trusters then go on to argue that index funds will deploy this power to induce these firms’ management to restrict intra-industry competition. While management at any given firm in an industry will be unwilling to unilaterally disarm, the fact that index funds are simultaneously invested in all of the publicly-traded incumbents in an industry allows for a solution to the prisoners’ dilemma dynamic which would otherwise thwart efforts at oligopolistic collusion.


In this post I will grant the premise that index funds, as the plurality shareholders of a given firm, will be able to select for a management team and board of directors willing to pursue their preference for maximizing total industry profits instead of individual firm profits. In this sense, we have a principal-agent model in which the principal (index funds) keeps its agent (the firm’s management) on a tight leash. This power indeed presents the potential for index funds to diminish the value of the individual firm, thereby harming the other shareholders. Yet this same governance dynamic which allows for the possibility of such speculative, thinly substantiated harm to shareholders[1]<, similarly offers a corrective for a much greater and empirically ever-present agency cost which confronts all publicly traded firms: managerial rent-seeking.

Since the publication of Berle and Means’ The Modern Corporation and Private Property in 1932, the Ur-text of corporate governance theory, scholars have elaborated on and formally modeled the profound asymmetry between a corporation’s relatively small and cohesive management team and its dispersed shareholders (Manne 1964; Clark 1986; Easterbrook and Fischel 1991). Shareholders face a collective action problem vis-a-vis the managers who allocate their capital on their behalf: no individual shareholder is sufficiently incentivized to incur costs monitoring the management to ensure these funds are being directed toward their profit-maximizing use, because any gains which accrue from such monitoring must be distributed amongst the shareholders pro-rata, and cannot be internalized by the individual who does the monitoring.

Compounding the asymmetries which inhere in the ownership vs. control relationship are a variety of state and federal laws which increase the collective action costs faced by shareholders when attempting to replace bad management. In two highly influential law review articles, Bernard Black discusses a variety of legal impediments to coordinated shareholder action, ranging from costly SEC disclosure requirements, encumbrances on proxy campaigns, and legislation such as the Williams Act which regulate tender offers[2][3]. A more recent analysis by Gilson and Gordon (2013) indicates that many of these regulatory frictions persist. Whenever transaction costs to takeovers are raised, the market for corporate control becomes less liquid, allowing for a firm’s management to extract greater wealth transfers from a firm’s creditors and shareholders. Alan Schwartz put the effects of such legislation bluntly in his 1986 article Search Theory and the Tender Offer Auction which predated the rise of index funds: “Capital markets cannot overcome the inefficiency the Williams Act creates”.

            Between their structural disadvantage as monitors and the institutional deformities introduced by the political process, shareholders face a severe principal-agent problem vis-a-vis management. A massive literature, known as the “Managerial Power Perspective”, has emerged to document the ways in which corporate charters and compensation practices have in practice been disproportionately shaped by CEOs and other senior executives (see Bebchuk and Fried’s 2004 book Pay Without Performance, as well as Bebchuk, Cohen and Ferrell 2009, for an excellent overview). Exorbitant salaries, golden parachutes, and poison pills are some of the many ways in which, according to this perspective, corporate governance in practice deviates in a pro-management direction from the “optimal contract” which would otherwise obtain in a competitive, low-transaction cost landscape of symmetrically informed arms-length deals between management and shareholders. Indeed, many of the same progressive concerns, such as income inequality, which animate the anti-trust proposals of the “common ownership” paradigm are similarly leveled against the menacing figure of the rent-seeking, imperial CEO. 

It is ironic, then, that the rise of index funds is likely to be ameliorative of this very principal-agent problem. The “common ownership” paradigm argues that index funds have perverse incentives insofar as they will induce management to reduce intra-industry competition, thereby harming the firm’s other shareholders. This amounts to an intra-shareholder wealth transfer. However, even according to this perspective, index funds will not be willing to abide the classic example of a wealth transfer from shareholders to management[4]. Such managerial rent-seeking can come in many forms: salary in excess of marginal product of labor, personal consumption of perquisites, “empire building” which entrenches management by raising its replacement cost, and so on ad infinitum. In such instances, index funds will not countenance this non-profit-maximizing behavior, because it is not in pursuit of maximizing total industry profits. Instead, index funds will be incentivized to minimize managerial rent-seeking, the benefit of which will redound to all of the firm’s shareholders. I will now discuss both the theoretical and empirical literature which demonstrates that index funds can, and do, leverage their role as large institutional investors to combat managerial malfeasance, misfeasance, and general misbehavior.    



A critical assumption underlying the Berle-Means managerial dominance paradigm is a set of shareholders dispersed such that no individual shareholder is sizable enough to internalize a sufficiently large pro-rata share of the gains to monitoring the corporation’s management. Yet this Olsonian dynamic is challenged by the presence of institutional investors, who would in fact be properly incentivized to do so. A large empirical literature notes the active involvement of institutional investors in overseeing managerial initiatives, consistent with their theoretical ability to internalize a sufficient portion of the gains which accrue from such activity: “A recent survey found that 63 percent of very large institutional investors have engaged in direct discussions with management over the past five years, and 45 percent had had private discussions with a company’s board outside of management presence”[5] (also see: Edmans 2009; Edmans & Manso 2011; Bharath 2013; McCahery et al 2016). 

Moreover, the transaction costs involved in mounting a formal shareholder challenge to management  (e.g. voting on a resolution or a change in the board of directors, or soliciting votes in a proxy contest) are substantially lowered when the concentration of said shareholders increases. Concentration lowers these costs by, for example, making intra-shareholder communication much easier (Appel et al 2017). Between their individual incentives to monitor management and their role in reducing coordination costs to challenging it, institutional investors are capable of being a key counterweight to managerial rent-seeking and inefficiency. Indeed, the same empirical literature which raises the specter of rent-seeking CEOs simultaneously notes the strong and negative correlation between the presence of institutional investors and pro-management corporate charters, as measured by an “entrenchment index”:

[The index consists of] four constitutional provisions that prevent a majority of shareholders from having their way (staggered boards, limits to shareholder bylaw amendments, supermajority requirements for mergers, and supermajority requirements for charter amendments), and two takeover readiness provisions that boards put in place to be ready for a hostile takeover (poison pills and golden parachutes).[6]

Other comprehensive studies surveying both the U.S. and Europe have similarly discovered an inverse relationship between institutional shareholders and such value-destroying provisions (Bebchuk, Cohen and Wang 2008; Edmans 2013), as well as institutional investors’ greater likelihood of voting against management instead of obeying the much-lamented  “always vote with management” rule of thumb which prevails amongst passive investors (Appel et al 2015, 2017; He, Huang and Zhao 2017).            

But not so fast, say the theorists of “common ownership”. Index funds are unlike other institutional investors: their portfolios are diversified such that incurring costs in monitoring any given firm’s management will almost certainly exceed the benefits which accrue as a result. They will instead be content to broadcast their preference for managers and directors willing to soft-peddle intra-industry competition, carefully husbanding their oversight resources so as to scrutinize managers’ performance on that particular metric. Any managerial rent-seeking detected in the process will be purely incidental to their primary goal of monitoring for aggregate industry profit-maximization.  

Even granting this premise, it remains true that index funds qua common owners will be incentivized to punish managerial rent-seeking when detected. Thus, there is the potential for an institutional complementarity between these passive owners, with a latent preference for managerial competence and fidelity, and activist shareholders.[7]


The modus operandi of an activist investor is to scour the market for a firm whose existing capital could be allocated more profitably in the hands of a more competent or less rent-seeking management. Then, a move to acquire a controlling stake in the firm is attempted by either purchasing a sufficient number of shares directly or by initiating a proxy battle whereby non-activist shareholders’ votes are recruited for the purposes of replacing the incumbent managers and/or directors. The lower the transaction costs involved in this process, the more liquid the market for corporate control, meaning that capital will flow into the hands of managers most capable of profitably deploying it (Fischel and Easterbrook 1989). Yet there are a variety of statutes and regulations which coagulate this market (as described in Part I of this post). Onerous SEC disclosure requirements triggered by acquiring a certain percentage of outstanding shares, the Williams Act and its restrictions on tender offers, and many other legal frictions raise the transaction costs involved in waging a corporate takeover.

Moreover, these political costs merely compound the difficulty which inheres in such an activist campaign when faced with widely dispersed, passive shareholders. Grossman and Hart articulated the free-rider problem facing an activist shareholder making a tender offer in their seminal 1980 article. Each individual shareholder is willing to hold out against accepting a tender offer if 1) their share is individually insufficient to effectuate a transfer in control and 2) the offer price is lower than the expected share price post-transfer. The communication costs involved in soliciting proxy votes are similarly prohibitive when shares are highly dispersed and turnover at a rapid rate. 

Institutional investors, including index funds, thereby present a more concentrated shareholder landscape to activist investors seeking to oust bad management. The coordination costs of corralling a few key shareholding blocs, rather than a dispersed herd, may be surmountable if the management is sufficiently incompetent or extractive. Moreover, assumption 1 of the Grossman and Hart model is now violated. By lubricating the market for corporate control in this way, index funds may potentiate the influence of activist arbitrageurs.[8] This large group of inert shareholders may not proactively sniff out rent-seeking managers, but may nonetheless serve as a transmission vector for an activist determined to do so.

Given that the less fragmented shareholder structure brought about by index funds increases the returns to activist investing, we would expect such investors to disproportionately target firms with a higher percentage of their shares held by institutions. Indeed, the empirical evidence overwhelmingly affirms this to be the case. To quote from one of the most recent such studies:

We analyze whether the growing importance of passive investors has influenced the campaigns, tactics, and successes of activists. We find activists are more likely to pursue changes to corporate control or influence when a larger share of the target company’s stock is held by passively managed mutual funds. Furthermore, higher passive ownership is associated with increased use of proxy fights and a higher likelihood the activist obtains board representation or the sale of the targeted company. Our findings suggest that the large ownership stakes of passive institutional investors mitigate free-rider problems and ultimately increase the likelihood of success by activists.

A corroborating anecdote, cited in the above article:

For example, the activist hedge fund ValueAct was successful in obtaining a seat on Microsoft’s board with less than 1% of stock because Microsoft recognized that other large institutional investors backed the fund’s demand.

A comprehensive study of all attempts at activist takeovers in closed-end funds (CEFs) between 1988 and 2003 found:

We use three proxies for the ease of communication among the stockholders of a particular fund. The first is turnover, which measures the frequency at which the shares of the CEF change hands. A high turnover rate indicates greater costs of communication because frequent changes of shareholders make it difficult to locate and inform them of an activist’s intent. The second variable is the average size of trade in the fund’s shares. Larger trades indicate that, on average, shareholders hold bigger positions in the fund, and thus, the fund has fewer shareholders which are easier to communicate with.

The third variable is the percentage of institutional ownership in the fund. Institutional investors typically hold larger positions, are more informed, and are more likely to cast votes for shareholder proposals and proxy contests than retail investors (who are often blamed for apathy). Due to regulatory disclosure requirements (such as the quarterly 13F filings of holdings), they are also easier to locate and notify regarding an activist’s intent. The results of our empirical tests are consistent with the hypothesis that smaller costs of communication enhance activist arbitrage.[9] (emphasis my own)

Two exhaustive literature reviews on activist investors and their effects (to be discussed below) by Alon Brav and coauthors note a consistent shareholder pattern among firms targeted by activists:

Activists rely on cooperation from management or, in its absence, support from fellow shareholders to implement their value-improving agendas. This explains why hedge fund activists tend to target companies with higher institutional holdings…[10]

…the targets of hedge fund activism exhibit relatively high trading liquidity, institutional ownership, and analyst coverage. Essentially, these characteristics allow the activist investors to accumulate significant stakes in the target firms quickly without adverse price impact, and to get more support for their agendas from fellow sophisticated investors.[11]

Having established that index funds structurally facilitate activist takeovers, the debate over the effects of index funds now supervenes on the effect of the activists. Although such hedge funds, leveraged-buyout artists and private equity investors have been pejoratively labeled as “vultures”, the balance of the literature strongly suggests net positive effects on firm share price, both in the short term and in the long term. The above-cited reviews by Alon Brav and coauthors, while noting that activists are particularly attracted to firms with a large concentration of institutional shareholders, focus primarily on the effects of such takeovers, which they summarize as follows:

The abnormal return around the announcement of activism is approximately 7%, with no reversal during the subsequent year. Target firms experience increases in payout, operating performance, and higher CEO turnover after activism.[12]  

The evidence generally supports the view that hedge fund activism creates value for shareholders by effectively influencing the governance, capital structure decisions, and operating performance of target firms.[13]

In a more recent study, contra such claims that activists seek to “pump-and-dump” a target firm by extracting short-term profits at the expense of long-term profits, Bebchuk, Brav and Jiang adduce the following after examining the full universe of SEC Section 13D filings in the years 2001-2006:

We find no evidence that activist interventions, including the investment-limiting and adversarial interventions that are most resisted and criticized, are followed by short-term gains in performance that come at the expense of long-term performance. We also find no evidence that the initial positive stock-price spike accompanying activist interventions tends to be followed by negative abnormal returns in the long term; to the contrary, the evidence is consistent with the initial spike reflecting correctly the intervention’s long-term consequences.[14] 

In his The Problem of Twelve article warning of index fund managers’ influence, John C. Coates acknowledges that such control might depend on leveraging the threat of an activist:

When an index sponsor “engages” with a company, that company’s CEO knows that there is some material chance that a contest or activist campaign or merger will occur before that CEO’s tenure is over. CEOs listen with a keen ear in such moments.

But in arguing that an index fund might be facilitative in such an instance, he is implicitly conceding that it cannot be catalytic. That role falls to the activist- yet, crucially, the activist will only mount a campaign if he can increase that individual firm’s share value in so doing. The entire premise of the “common ownership” argument is that index funds want managers who will deprioritize the firm’s individual value. So, while it’s quite possible to leverage the threat of an activist against a rent-seeking management, it’s impossible to leverage this same threat against a competitive management, because an activist will only be interested if the post-takeover share price is greater than the pre-takeover price minus transaction costs. This incentive mismatch between index fund managers and activists renders this particular aspect of the ”common ownership” paradigm logically incoherent.


So, there we have it. The hypothetical, speculative harm of intra-industry collusion vs. the very real and endlessly documented threat of managerial rent-seeking. Moreover, the corporate governance mechanism by which this intra-industry collusion is said to be effectuated falls apart under careful scrutiny. Let’s wait until there are serious, demonstrable harms to shareholders before turning the coercive machinery of anti-trust law and the FTC against what is, on balance, a boon to shareholders and the broader economy.

[1] Azar, Schmaltz, and Tecu (2017)

[2] Black (1990)

[3] Black (1992)

[4] The dynamic outlined in Jensen and Meckling’s seminal 1976 article

[5] Ficthner et al 2017

[6] Bebchuk, Cohen and Ferrell 2009

[7] See Gilson and Gordon (2013)

[8] ibid

[9] Bradley et al 2010

[10] Brav et al 2008

[11] Brav et al 2009

[12]  supra note 10

[13]  supra note 11

[14] Bebchuk, Brav and Jiang 2015

We weren’t kidding in the title to this post. There really is something called spelt milk. There is also soy milk, rice milk, coconut milk, almond milk, hemp milk, quinoa milk, oat milk (that’s not a typo – oat milk, not goat milk, although there is also goat milk of course), and pea milk (yes, really, pea milk). But now the cow milk producers are crying to the government (multiple branches, in many countries) that these non-dairy milks should not be allowed to use the term “milk.” They claim this is about consumer confusion, but are any consumers confused about where soy milk comes from? Although recent polling suggests that a few people think chocolate milk comes from brown cows (we suspect they were just having fun with the pollsters), it’s hard to believe that people purchasing these alternative milks couldn’t figure out their source. The term “milk” has been used to describe plant-based beverages for centuries, and we shouldn’t let the dairy lobby change that.

In the United States, there are efforts underway to push both the legislative and executive branches to protect dairy producers from their non-dairy competitors by keeping the word “milk” off the competitors’ products. With support from the industry, Senator Tammy Baldwin has introduced legislation that, as she puts it, “would require non-dairy products made from nuts, seeds, plants, and algae to no longer be mislabeled with dairy terms such as milk, yogurt or cheese.” But this legislative action may not even be necessary, because here’s what may be happening soon at the Food and Drug Administration (FDA):

The head of the FDA said … that the Trump administration will move to crack down on the use of the term “milk” for nondairy products like soy and almond beverages.

The agency will soon issue a guidance document outlining changes to its so-called standards of identity policies for marketing milk, FDA Commissioner Scott Gottlieb said at the POLITICO Pro Summit.

“An almond doesn’t lactate, I will confess,” Gottlieb said, referring to the fact that the agency’s current standards for milk reference products from lactating animals.   The move would be a major boon for dairy groups, which have been struggling amid dropping prices and global oversupply. The industry has petitioned FDA to enforce marketing standards for milk, but the agency has not previously addressed the issue.

We are not scientists, but his statement about almonds not lactating sounds right to us. But regardless of whether almonds or other plants lactate, there is a long history of using the term “milk” for plant-based products that do not lactate. Smithsonian Magazine recently put it this way: “Linguistically speaking, using ‘milk’ to refer to the ‘the white juice of certain plants’ (the second definition of milk in the Oxford American Dictionary) has a history that dates back centuries.” We didn’t check all the dictionaries, but here are a couple that illustrate the point. The online edition of Webster’s Dictionary, 1828 defines milk as: 

1. A white fluid or liquor, secreted by certain glands in female animals, and drawn from the breasts for the nourishment of their young.

2. The white juice of certain plants.

3. Emulsion made by bruising seeds.

Along the same lines, the Oxford English Dictionary defines milk as: 

1. An opaque white fluid rich in fat and protein, secreted by female mammals for the nourishment of their young.

‘a healthy mother will produce enough milk for her baby’

1.1 The milk from cows (or goats or sheep) as consumed by humans.

‘a glass of milk’

1.2 The white juice of certain plants.

‘coconut milk’

1.3 A creamy-textured liquid with a particular ingredient or use.

‘cleansing milk’

And the American Heritage Dictionary of the English Language defines milk as:

1. A whitish liquid containing proteins, fats, lactose, and various vitamins and minerals that is produced by the mammary glands of all mature female mammals after they have given birth and serves as nourishment for their young.

2. The milk of cows, goats, or other animals, used as food by humans.

3. Any of various potable liquids resembling milk, such as coconut milk or soymilk.

4. A liquid resembling milk in consistency, such as milkweed sap or milk of magnesia.

All of these definitions include non-dairy liquid substances as examples of what can be considered milk. Thus, identifying these products as “milk”  is nothing new. In fact, in examining the etymology of the word milk, it appears that “milk-like plant juices” date back to the 13th century, with some even showing up in medieval cookbooks.

The issue has also arisen outside the United States. The Codex Alimentarius Commission, an international body that develops food standards, defines milk as “the normal mammary secretion of milking animals obtained from one or more milkings without either addition to it or extraction from it, intended for consumption as liquid milk or for further processing.” However, the Codex standard for the use of dairy terms also stipulates that the restrictive use of the term “milk” for labelling of milk, milk products or composite milk products “shall not apply to the name of a product the exact nature of which is clear from traditional usage or when the name is clearly used to describe a characteristic quality of the non- milk product.” So there appears to be some flexibility in how countries apply this standard, and Codex even notes that “Plain soybean beverage is the milky liquid prepared from soybeans” and that some countries refer to soybean beverages as “soybean milk.”

So what have other countries done in regulating non-dairy milk products? It may be helpful to first take a look at the European Union’s rules, as Europeans famously tend to have fairly strict food labelling standards. Milk is no exception. In fact, this very debate played out in a European Court of Justice case in 2017, Verband Sozialer Wettbewerb eV v GmbH, where German company TofuTown argued that it clearly identified its products as plant-based, and thus should not be prohibited from calling its products “Soyatoo tofu butter” or “Veggie cheese” for instance. But EU rules prohibit the use of these terms for non-dairy products, so in this case TofuTown’s descriptions of its products were found to be in violation. 

At the same time, the EU rules do allow Member States to make exceptions, noting that the restrictions on marketing a product as a “milk” product “shall not apply to the designation of products the exact nature of which is clear from traditional usage and/or when the designations are clearly used to describe a characteristic quality of the product” (this language mirrors that of Codex). Notably, products such as almond milk and coconut milk are exempt, among many other common designations, such as nut butters. 

Closer to home, it appears that Canada is even stricter in its approach than the EU. The Canadian Food Inspection Agency states that “Milk, unless otherwise designated, refers to cow’s milk” (though goat’s milk is ok too) and provides strict guidelines for the marketing of milk products. However, some plant-based beverages can be considered “milk product alternatives” and the Canada Food Guide, which provides information to Canadians about diet and nutrition, suggests “fortified soy beverages” as an alternative to milk. They just can’t refer to it as “milk” on the label. (The mom of one of this post’s authors has verified that her carton of almond milk doesn’t have the word milk on it anywhere—there’s some small print that reads “fortified almond beverage.” Her mom still referred to it as milk, however, suggesting that government policy may not reflect common language usage.) 

To illustrate how these products look on the shelves in the EU and Canada, we enlisted some skeptical friends and family members (who couldn’t see how this could possibly be related to our work) to take pictues:

So what’s going on in the United States, and why is Sen. Baldwin pushing the DAIRY PRIDE Act (Defending Against Imitations and Replacements of Yogurt, Milk, and Cheese To Promote Regular Intake of Dairy Everyday)? Whatever happened to American exceptionalism, and are we on our way to adopting the metric system now? Hint—the word to focus on here is “promote.” It is no secret that the U.S. dairy industry has been in decline (Americans drink 18 gallons of milk a year, compared to 30 gallons back in the 1970s), while almond milk has witnessed the opposite trend, with sales growth of 250% in the last 5 years. Taking into all the various milks, non-dairy milk has seen sales grow by 61% over the last five years. 

The dairy lobby recently flexed its muscles in pushing for concessions from Canada in the U.S.-Mexico-Canada Agreement (i.e., the new NAFTA), but that’s clearly not enough for them. They’re now ramping up efforts to challenge their direct competitors, the non-dairy milk industry. While it’s not clear that changing the labelling standard would alter consumer behavior in any way, that does not mean that government intervention in this area is harmless. It uses up governing resources, and creates consumer confusion where none currently exists. Perhaps there is some small risk that Thanksgiving will be ruined when someone brings a pumpkin pie that is made with coconut milk, but we don’t think this worry merits legislative or executive action.



Like almost every week, Facebook has been in the news. Much has been said about their earlier decisions regarding the speech of Russian agents, much of it negative. Amid that debate, you might overlook Mark Zuckerberg’s latest post about Facebook’s content moderation work. Don’t. Facebook’s moderation decisions impact speech across the globe and Zuckerberg’s post is an intriguing and important statement of the company’s position.

While the post announces changes to Facebook’s appeals process, for now I will focus on the ideas and values informing their policies about online speech.

We make tradeoffs among values all the time, even tradeoffs involving freedom of speech. While free speech is a fundamental value in the United States, it nonetheless may be curtailed to prevent violence, suppress obscenity, and protect a person’s reputation, among other reasons. Over time, these other values have come to matter less relative to free speech. Speech must directly and immediately lead to violence to be restricted; that does not happen much. Courts gave up on defining obscenity and made it difficult for public figures to win libel judgments. As a constitutional matter, we limit free speech in order to realize other values; in practice, speech almost always trumps other concerns.

At least in the public sphere. We could by law or custom demand that everyone, everywhere vindicate freedom of speech. But we don’t. I have the power to exclude speakers who ask irrelevant questions at Cato forums (though I rarely exercise it). Facebook has the same power to remove the speech of individuals or organizations from their platform. As a nation we choose private governance of private property over free speech when these values come into conflict.

That brings us to Mr. Zuckerberg. Facebook protects less speech than the U.S. Supreme Court. What values matter more to Facebook in some instances than free speech? Zuckerberg believes that Facebook should “balance the ideal of giving everyone a voice with the realities of keeping people safe and bringing people together.” Safety comprises, among other things, protection against terrorism and self-harm. “Bringing people together” implies avoiding social polarization by restricting hate speech and misinformation, the latter perhaps condemned less for its falsity and more for its divisiveness. Speech that contravenes these values constitutes “harmful content” that may be removed.

More abstractly, Facebook values community a lot. It protects its members against external and internal threats and seeks to foster unity. This concern for unity (and worries about division) marks a sharp departure from First Amendment doctrine. Limiting speech to preclude violence seems more familiar to students of liberty than restrictions in pursuit of social harmony. After all, divisive and polarizing speech (including “hate speech”) enjoys full protection by the courts. In the classic struggle between the individual and community, Facebook cares more about the latter than say, the average classical liberal, or indeed, the average free speech advocate.

You might think Facebook’s values reflect the challenges of building a lasting global business. Facebook users may prefer safety and unity over free speech. Community preferences and business logic might well go together. No doubt this is part of the story. But it is not the whole story. Facebook has a commitment to community that goes beyond profitability.

Zuckerberg’s post offers a novel discussion of “borderline content” which is defined as “more sensationalist and provocative content [which]… is widespread on cable news today and has been a staple of tabloids for more than a century.” Such content does not violate Facebook’s community standards; it toes the line. Facebook restricts the distribution and virality of such content but does not remove it. Why? “At scale it can undermine the quality of public discourse and lead to polarization. In our case, it can also degrade the quality of our services.” The latter is the concern of a businessman; the former are the values of a citizen who believes his company has a social obligation to foster civic unity at some margin.

These tradeoffs and the underlying philosophy suggest two problems for Facebook. First, the traditional problem of drawing lines. Racial and religious invective divides society and thus may be removed from the platform. Easy choices, you might think. But consider harder questions. Many people found The Bell Curve by Charles Murray and Richard Herrnstein racially offensive. They specifically deplored its treatment of IQ and race. Facebook’s Community Standards specifically preclude negative mentions of either.  Should speech favoring that work be removed?  On the other hand, a couple of years ago prominent law professor Mark Tushnet argued that President Hillary Clinton should have treated conservatives and Republicans as Germany and Japan were treated after 1945 (“…taking a hard line seemed to work reasonably well in Germany and Japan after 1945.”)  Given that “taking a hard line” toward Germany after 1945 arguably led to the deaths of at least 500,000 people, should speech like Tushnet’s recommendation be banned from Facebook going forward? It will be hard to draw these lines consistently at scale while avoiding the appearance of political bias. 

Second, Facebook’s aspirations may conflict with the expectations of investors. Zuckerberg says Facebook research indicates that people want to engage with borderline content. If Facebook is a business, and businesses give customers what they want, why make it harder for customers to get the permitted content they want? More generally, Facebook managers may be mistaken about “borderline content” and about their audience. The economist Robin Hanson recently noted: ordinary people “are more interested in gossip and tabloid news than high-status news, they care more about loyalty than neutrality, and they care more about gaining status via personal connections than via grand-topic debate sparring. They like wrestling-like bravado and conflict, are less interested in accurate vetting of news sources, like to see frequent personal affirmations of their value and connection to specific others, and fear being seen as lower status if such things do not continue at a sufficient rate.” I admire Zuckerberg’s desire to improve public discourse. How widely shared is that ambition? Does our shared aspiration reflect the social norms of Facebook users? If not, should the CEO’s hopes trump his customers wants?

A final point. Much has been made of liberal bias at Facebook. Zuckerberg himself has noted that the environs of Menlo Park are quite left-leaning. It’s also true that many on the left do emphasize community over the individual as a matter of philosophy. But the community values mentioned in Facebook’s post are not necessarily those of the left. Conservatives have, at various times, argued for government action to protect community values against noxious speech. They have tended to lament divisions and praise the larger social whole (think of their view of patriotism and “our country”). Facebook’s idea of community may be either left, or right, or neither. What it cannot be is consistent with a philosophy that always accords free speech priority over social unity.

The European Union comes in for a lot of criticism, including around these parts. Not all my colleagues have been so critical. Still, burdensome regulations by an unaccountable bureaucracy would trouble any libertarian. 

But this article in the Washington Post reminded me of the original promise of the Common Market, which grew into the European Union:

The degree to which the European Union’s post-nationalist vision has transformed the continent is evident in the German region of Saarland, an area of 1 million residents hard on the French border. 

The region — marked by lush forests, gentle hills and rich coal deposits that once made Saarland an industrial jackpot — has changed hands eight times over the past 250 years. In the past century alone, it was traded between France and Germany four times.

The first of those came in the aftermath of World War I, when France claimed the territory as compensation for German destruction of France’s own coal industry.

Germany lost the land again after World War II and only got it back in 1957.

As recently as the 1990s, the nearby border was subject to strict controls. But today, it’s largely invisible. French citizens commute to Saarland for work or pop by to buy a dishwasher. Germans cross Saar into France for lunch or to pick up a bottle of wine. French — the language of the longtime enemy and occupier — is part of the fabric of Saarland, and it’s welcome.

“We’re neighbors. We’re friends. We marry each other. One hundred years ago, we killed each other. It’s been a great evolution,” said Reiner Jung, deputy director at the Saar Historical Museum in the region’s capital, Saarbrücken.

Of course, countries could drop their trade barriers without creating a supranational bureaucracy. But too many people misunderstand economics and believe giving up their trade barriers is a cost, so creating a customs union, a common market, or even a European Union may often be the only way to get the substantial benefits of free trade. And frictionless trade is even harder to achieve without multinational negotiations. So there are pros and cons to arrangements such as the European Union, but we shouldn’t underestimate the great benefits of commerce and movement across national borders.