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Rep. Duncan Hunter is not pleased with the Cato Institute’s efforts to repeal the Jones Act. Taking notice of a recent op-ed I penned criticizing the California congressman’s support of this costly law, Hunter took to the pages of the same newspaper last weekend to defend his stance. It’s worth reviewing the piece in full, as it recycles several arguments typically offered in support of the Jones Act—and exposes some glaring weaknesses.

Hunter begins his defense of the Jones Act by disputing accusations that the law negatively impacts Puerto Rico’s economy:

Like many opponents of the Jones Act, the CATO Institute attempts to conflate this 100-year old law with the struggles of Puerto Rico’s economy. They repeat the same tired argument that the Jones Act is responsible for high prices and economic instability, going so far as to make the ridiculous implication that the Jones Act adds $5 to the cost of a pint of ice cream.

A recent economic study disputed these price discrepancies but if concerns remain, it is important to recognize that Puerto Ricans have other options. Most of the ships that call on Puerto Rico are foreign flagged and current law allows them to deliver as many goods from foreign ports as Puerto Ricans can consume. A 2013 Government Accountability Office Study failed to conclude that removing the Jones Act would benefit Puerto Rico and, in fact, acknowledged that the regulation provides a number of advantages. Other studies have found that the Virgin Islands — approximately 100 miles from Puerto Rico — has no Jones Act requirement, but has higher shipping prices than Puerto Rico from the mainland.

There’s a lot to unpack here, but let’s begin by noting that the “recent economic study” Hunter refers to was funded by a pro-Jones Act special interest group with a questionable methodological approach. Pointing out that Puerto Ricans have options for obtaining needed goods that are not subject to the Jones Act, meanwhile, is essentially telling them to eat cake. The rest of the United States is, by far, Puerto Rico’s largest trading partner. Simply doing business with other countries instead of the world’s largest economy with which Puerto Rico shares deep political and cultural links is oftentimes not a feasible option.

But that doesn’t mean Puerto Ricans don’t try to hunt for cheaper alternatives. The 2013 GAO report cited by Hunter highlights numerous examples of this dynamic, including farmers who purchase feed from Canada instead of New Jersey due to lower shipping costs and the sourcing of jet fuel from Venezuela rather than domestically for the same reason.  

As for the fact that shipping rates are higher to the U.S. Virgin Islands than Puerto Rico, this is an apples to oranges comparison. The U.S. Virgin Islands have a population and economy roughly 30 times smaller than Puerto Rico. With its smaller size comes smaller trade flows, smaller economies of scale, and reduced efficiency in servicing this market that is reflected in higher transport costs.

Hunter then pivots from discounting the Jones Act’s economic cost to Puerto Rico to highlighting its alleged national security benefits:

In a time of war, without the Jones Act, quickly rebuilding our shipyard industrial base would be next to impossible and training the American merchant mariners to man ships would take precious time we will not have. Instead, we would have to rely on shipyards overseas to supply our ships and we would likely have to pay foreign mariners to operate those ships. Is this really a position in the best national security interest of our nation?

We can have the strongest military in the world, but without the ships and U.S. merchant mariners to bring supplies to service members overseas, our capabilities would be severely limited, a position acknowledged by Gen. Darren McDew, Commander of U.S. Transportation Command.

The reality is that the Jones Act has presided over the steady decline of the U.S. shipyard industrial base. Since the early 1980s the United States has lost more than 300 shipyards. It’s a statistic Hunter should be familiar with given that it was mentioned on several occasions during a 2013 congressional hearing that he chaired. Furthermore, claims that the United States would be forced to rely on foreign shipyards without the Jones Act overlooks the existing reliance on foreign components and know-how to produce the few and vastly overpriced commercial ships that emerge from American shipyards.

Dependence on foreigners to support the U.S. military, meanwhile, is a description of the status quo. When the United States found itself needing to quickly transport vast amounts of equipment and war matériel to Saudi Arabia following Iraq’s invasion of Kuwait, foreign-flagged and crewed ships played a key role. According to the U.S. Transportation Command’s official history of its role in that conflict, 26.6 percent of total unit cargo was carried by foreign-flagged vessels.

While Jones Act supporters claim that the law assures the United States of ready access to ships and merchant mariners in times of war, the Pentagon found its transport capabilities so strained during that conflict that it twice requested the use of a transport ship from the Soviet Union—and was rejected both times. On the mariner front, the United States was forced to press two octogenarians into service and one 92-year-old sailor. Turning to the present day, meanwhile, the U.S. Maritime Administration published a 2017 report which, in its own words, “documents a deficit of mariners with unlimited credentials to meet the national security and force projection needs.”

Hunter continues in a similar vein:

The Jones Act also improves our safety and security. Rather than having unvetted foreign workers sail ships on our inland waterways, the Jones Act mitigates safety risks by ensuring that vessels are operated by U.S. mariners only.

Pure demagoguery. Foreign mariners already operate in U.S. waters on a daily basis and present no established threat. As a 2011 GAO report noted, overwhelmingly foreign maritime crews already make millions of entries into U.S. ports each year and yet there has never been a reported terrorist attack involving one of these seafarers. What reason is there to think these same foreign mariners would suddenly become a menace if permitted to operate on inland waters?

Furthermore, Hunter is factually wrong. Foreign mariners are already allowed to work on Jones Act vessels, with the minimum number of American crew set at 75 percent, not 100. As for safety, let’s note that it was a Jones Act ship with an American captain, the Exxon Valdez, that is responsible for one of the worst environmental disasters in U.S. history.

Congressman Hunter concludes with some comments about the Jones Act’s economic impact:

The Jones Act also provides significant economic benefits, including here in Southern California. The thousands of Jones Act vessels support nearly 500,000 domestic jobs with nearly $100 billion in economic impact.

The fact is, there are cheaper places to build ships than the United States, and I am sure that there are plenty of Chinese shipyards with cheap Chinese steel eager to undercut ones here at home. I am also sure we could find cheaper foreign workers to operate the ships currently sailed by Americans.

If building the cheapest ship manned by the lowest paid workers is the end goal, then by all means, let’s get rid of the Jones Act. If you are like me, and you value good paying U.S. jobs in American Shipyards and the Americans who can man those ships in times of conflict, then the Jones Act is clearly worth protecting.

By acknowledging that Americans could buy ships at lower cost abroad—as much as eight times cheaper—Hunter essentially concedes that the law imposes a significant economic cost. Paying vastly more to obtain the same good is the path to impoverishment, not prosperity. The secret to economic growth and an improved standard of living lies in increased efficiency and doing more with less. By blocking Americans from lower-cost alternatives, the Jones Act does the opposite.

The national security advantages we allegedly receive in exchange for the Jones Act’s price tab, meanwhile, are a figment of the imagination. If anything, the law makes us less secure, not more.

The Jones Act isn’t working. Its promised benefits have failed to materialize while the law imposes significant burdens on the U.S. economy. The time for its repeal is long past due.

On August 22, Food and Drug Commissioner Scott Gottlieb issued a press release announcing the FDA plans to contract with the National Academies of Sciences, Engineering, and Medicine (NASEM) to develop evidence-based guidelines for the appropriate prescribing of opioids for acute and post-surgical pain. The press release stated:

The primary scope of this work is to understand what evidence is needed to ensure that all current and future clinical practice guidelines for opioid analgesic prescribing are sufficient, and what research is needed to generate that evidence in a practical and feasible manner.

The FDA will ask NASEM to consult a “broad range of stakeholders” to contribute expert knowledge and opinions regarding existing guidelines and point out emerging evidence and public policy concerns related to the prescribing of opioids, utilizing the expertise within the various medical specialties. 

Recognizing the work of the Centers for Disease Control and Prevention for having “taken an initial step in developing federal guidelines,” Commissioner Gottlieb diplomatically stated the FDA initiative intends to “build on that work by generating evidence-based guidelines where needed” that would differ from the CDC’s endeavor because it would be “indication-specific” and based on “prospectively gathered evidence drawn from evaluations of clinical practice and the treatment of pain.”

The CDC guidelines for prescribing opioids, released in early 2016 and updated in 2017, have been criticized by addiction and pain medicine specialists for not being evidence-based. Unfortunately, these guidelines have been used as the basis for many new prescribing regulations instituted at the state-level and proposed on the federal level. The American Medical Association and other medical specialty organizations have spoken out against proposed federal prescription limits that are based upon an inaccurate interpretation of the flawed CDC guidelines. 

In May, Commissioner Gottlieb, in a blog post, mentioned he was aware of criticisms as well as complaints by patient and patient-advocacy groups and was interested in developing more “evidence-based information” on the matter of opioids and pain management. 

Now it appears he is taking the next step. While the press release language was diplomatic and avoided any notion of disrespect for the CDC’s efforts, it is difficult not to infer that the Commissioner agrees with many who have been criticizing the CDC guidelines over the past couple of years.

 

Sen. Elizabeth Warren’s proposal for drastic changes to corporate governance, which I wrote about in this space last week, continues to draw thoughtful responses from commentators. Colleague Ryan Bourne notes that one study “found that German firms were 27 percent less valuable to their shareholders” because of the workers-on-boards co-determination laws Warren would have us emulate. Moreover, the value given up was not merely transferred to the firms’ workforces but was in part dissipated through inefficiency. At National Review, Samuel Hammond discusses how co-determination undermines the overall dynamism of a national economy (for example, by discouraging the transfer of capital to risky, high-value new enterprises) and also notes some of the problems with making “stakeholder” value a subject of fiduciary duty for investors.  

Now NYU lawprof and Cato adjunct scholar Richard A. Epstein, a leading libertarian voice on law, tackles the Warren plan in a piece for the Hoover Institution’s Defining Ideas series. Epstein’s piece is worth reading in its entirety for his analysis of (among other topics) the “stakeholder” mystique, the efficiency-friendly role of share buybacks and executive incentive stock, and the constitutional infirmities of the overall Warren scheme (citing the unconstitutional-conditions doctrine), as well as his warning that large-scale capital flight from the U.S. could ensue if investors mistrust the whims of a new federal charter regulator.

In the passage I want to highlight, however, Epstein makes a point often overlooked in other critiques. Writing on the popular and populist Left these days often romanticizes the idea that business charters should be revocable by some central authority for misconduct (“corporate death penalty”), although it is often not spelled out whether the assets of a giant bank or oil or pharmaceutical company hit by scandal should be taken into the public sector by some sort of confiscatory state authority, allowed to revert to shareholders, or perhaps transferred to a successor entity that would maintain the same brands and facilities and headquarters as before (leaving the question of what exactly is being accomplished by charter revocation). Epstein takes the broad historical view: 

…Warren wholly misunderstands the historical role and constitutional position of corporate charters. The last thing that any country needs for economic growth is a situation in which government officials decide which firms receive charters subject to what conditions. Does she really think that some public bureaucrat should have the power to refuse to issue Apple a corporate charter unless it puts community members or union members on its board, makes gifts to the Sierra Club, or adopts minimum minority hiring set-asides? And what should be done when thousands of firms balk at these conditions? Can they go to court, or does the federal board run the corporation directly?

Lest anyone forget, the great 19th-century corporate reform was the passage of general incorporation laws that allowed any group of individuals to form a corporation, with its attendant benefit of limited liability, so long as they met certain minimum conditions relating to their capital contributions, their ability to sue and be sued, and their board structures. The new legal regime ushered in sustained economic expansion by knocking out the political favoritism that had previously given some businesses corporate charters that gave them a huge edge over direct competitors denied similar authorization. It would be unsurpassed folly to re-open the doors to these abuses today.

Indeed, a key point about general incorporation laws was that they were egalitarian: you could launch an incorporated venture even if you were obscure, new in town, or out of favor with political influentials. Supporters of plans like Warren’s should be asked whether they really want some combination of political actors – very possibly appointees of Donald Trump or another President like him – to gain power to revoke Google’s or Amazon’s or Facebook’s charter to continue doing business unless the management agrees to cut a deal, perhaps involving private understandings with officialdom, to stave off such a penalty. 

Yesterday, authorities in Iowa charged 24-year old Cristhian Bahena Rivera with the murder of Mollie Tibbetts. Facts in these types of cases come out slowly and some details, substantive or minor, may change in the months ahead that could alter the correct view of this case. But nothing can change the fact that the murder of Tibbetts was a brutal and unforgivable act and that the murderer should be punished to the full extent of the law. Rivera is charged with that murder and there is a lot of evidence to support a conviction.    

This terrible murder is already feeding into a political firestorm. People with a political axe to grind, those who want to distract from the recent conviction of Paul Manafort and plea deal for Michael Cohen, and partisans who want to compare Tibbetts’ murder to the shooting of Kate Steinle in an effort to impact the upcoming November elections are already using the tragic murder of Tibbetts as an argument for increasing the enforcement of immigration laws against people who aren’t charged with murder or any real crime except violating international labor market regulations (immigration laws). They want to convict all illegal immigrants of this murder in the court of public opinion, not just the actual murderer.    

Scarce law enforcement resources should be devoted to solving and deterring the most serious crimes regardless of who commits them.  That is the best policy for saving American lives. That means that increased enforcement of our immigration laws is not a good way to prevent murders.  Illegal immigrants are less likely to be incarcerated for crimes in the United States than native-born AmericansTexas is the only state that keeps data on the number of convictions of illegal immigrants for specific crimes (I state versions of Public Interest Requests to every state). In Texas in 2015, the rate of convictions per 100,000 illegal immigrants was 16 percent lower below that of native-born Americans. That is little consolation to the victims and their families, but the population of illegal immigrants is less likely to be convicted of murder than native-born Americans in Texas. If nationwide incarceration rates by immigration status are any clue, that trend likely holds nationwide. 

I recently received new data from Texas on the number of convictions by crime and immigration status as well as the number of individuals convicted (they are slightly different). This Texas data is the best data that we have on the commission of murder by immigrants by specific legal status.  In 2016, 746 native-born Texans, 32 illegal immigrants, and 28 legal immigrants were convicted of homicide. In that year, the homicide conviction rate for native-born Americans is Texas was 3.2 per 100,000 natives while it was 1.8 per 100,000 illegal immigrants and 0.9 per 100,000 legal immigrants (Figure 1). The illegal immigrant conviction rate for homicide was 56 percent below that of native-born Americans in 2016 in Texas. 

Figure 1: Homicide conviction rates in Texas

To calculate those conviction rates, I used an estimate of the size of the illegal immigrant population in Texas as well as data from the American Community Survey for the number of native-born Americans and legal immigrants. The conviction rates are per each subpopulation of native-born Americans, illegal immigrants, and legal immigrants. Immigration status makes no difference in the reporting of serious crimes like murder or robbery, so these statistics aren’t likely to be biased. Furthermore, states are not likely to turn over illegal immigrants for removal prior to convicting them of serious crimes. 

The Texas homicide conviction rates are consistent with the peer-reviewed evidence on immigrant conviction rates over the last century. Even Mark Krikorian, the executive director of the nativist Center for Immigration Studies, admits that “A lot of data does suggest immigrants are less likely to be involved in crime.”     

Texas isn’t Iowa and the reality in the latter state could be markedly different, but the state of Texas probably represents a near-worst-case scenario because it borders Mexico, has a large illegal immigrant population, is governed by Republicans, did not have any sanctuary jurisdiction in 2016, and has a law and order reputation for severely enforcing its criminal laws.  If there is any state that will find and prosecute illegal immigrants for crime, it’s Texas.  It should be strong evidence that the illegal immigrant conviction rate for homicide there is so low.

Already, I can hear people objecting by stating “you don’t know the size of the illegal immigrant population, so it’s just an estimate.” They are correct but virtually everybody who disagrees with the estimated size of the illegal immigrant population, which all cluster around the same number regardless of the organization doing the estimating, assumes that there are more illegal immigrants than are commonly estimated.

The real number of illegal immigrants isn’t too far off from the accepted estimates but if those critics are correct and demographers are missing a large number of them, that means that illegal immigrant crime and homicide rates are even lower than reported here and elsewhere (the denominator increases but the numerator stays the same). Ann Coulter wrote that there are 36 million illegal immigrants in her best-selling book on immigration. If she turns out to be correct and those 36 million illegal immigrants are distributed across the United States just as they are now, meaning that there are about 5.8 million in Texas, then the illegal immigrant homicide rate in 2016 was actual 0.56 per 100,000 illegal immigrants rather than the 1.8 reported here. If Coulter is correct, then she has unwittingly proven that illegal immigrants have the lowest homicide conviction rate of any population in the United States. 

Public policy must be based on data and trends, not on horrific anecdotes like the murder of Mollie Tibbets. Using law enforcement agencies on the local, state, and federal level to deport illegal immigrants who haven’t committed any violent or property crimes as a means to prevent tragic murders is a spectacularly poor way to prevent crime and save American laws. Such a misallocation of government resources will likely result in more victims as the government would spend a lot of resources deporting people who pose no security threat whatsoever and those resources must come from elsewhere, likely from other law enforcement activities. Punish the murderer of Mollie Tibbetts, don’t punish those who share the same immigration status as him from crimes they didn’t commit.        

 

 

 

EducationNext just released its 12th annual survey of public opinion. The nationally representative survey, administered in May 2018, finds that 54 percent of the general public supports private school vouchers for all students. This result is up 9 percentage points (20 percent) from 2017. On the other hand, only 43 percent of the survey respondents support income-targeted vouchers. This is great news for all families. Here’s why.

 

While there are 63 private school choice programs in the majority of the United States, less than one percent of the school-aged population actually exercises private school choice. This extremely low participation rate is largely explained by the fact that all school voucher programs are targeted based on student disadvantage. No voucher programs in the U.S. are available to all students.

Of course, universal voucher programs would benefit children from families that earn higher incomes. But universal vouchers would actually benefit the least advantaged children more than anyone. Why?

Let’s use an extreme example. Imagine that a voucher program was targeted to the very least advantaged student in a state. No educational entrepreneur would see one additional student as a big enough opportunity to take the risk of opening a new school. On the other hand, a program giving thousands of new students opportunities to attend private schools would entice several educational entrepreneurs to open new schools.

The result? Even the very least advantaged student has more educational options when school choice is open to all students. Put differently, the least advantaged students are better off when school choice programs are not targeted to them. And because the least advantaged children need better schooling options than anyone else, universal programs would benefit the least advantaged the most.

Maybe the general public is figuring this out. Or maybe people are just figuring out that all families should be able to pick the schools that are best for their own kids. Either way, majority support for universal school vouchers could lead to a lot more educational freedom in the near future.

As part of a yearly summer tradition, the Heritage Foundation and Cato Institute co-host a debate in which interns at both think tanks debate whether conservatism or libertarianism is a better ideology. Following this year’s debate, the Cato Institute conducted a post-debate survey of attendees to ask who they thought won the debate and what they believe about a variety of public policy and philosophical issues. The post-debate survey offers a unique opportunity to examine how young leaders in the conservative and libertarian movements approach deep philosophical questions that may be inaccessible to a general audience.

2018 Intern Debate Survey
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Despite agreement on domestic economic issues and free trade, the survey finds striking differences between conservative and libertarian  attitudes about Donald Trump, immigration, transgender pronouns, government’s response to opioid addiction, police, defense spending and national security, domestic surveillance, and religion. The survey also went further than just asking about policy and used Jordan Peterson’s 12 principles for a 21st century conservatism to examine the underlying philosophical differences between libertarian and conservative millennials. 

Full LvCDebate Attendee Survey results found here

Trump and Partisan Loyalties 

Libertarian and Conservative attendees have starkly different views of President Donald Trump. While 91% of conservative attendees approve of Trump’s job performance, 69% of libertarian attendees disapprove of Trump. 

1_Trump Approval
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Eighty-four percent (84%) of young conservative attendees identify as Republicans and that number increases to 99% once independent-leaning Republicans are included. Libertarian millennial attendees are far less partisan: only 19% initially identify as Republicans while 76% don’t believe either the Republican or Democratic parties represent them. However, if libertarian independents had to pick, 60% would lean Republican. Thus, both groups are more aligned with the Republican rather than Democratic Party, but libertarians are far less committed partisans. 

Young Libertarians and Conservatives Have Different Policy Priorities 

When asked to select the top three issues most important to them personally, libertarians and conservatives have different issue priorities. Conservatives are about 30 points more likely than libertarians to place greater weight on abortion (41% vs. 11%) and family values (31% vs. 4%) and are about 20 points more likely to emphasize national security (35% vs. 18%) and civil society (23% vs. 5%). 

Libertarian attendees on the other hand are about 20 points more likely than conservatives to prioritize criminal justice issues (24% vs. 2%), regulation (28% vs. 8%), government spending (37% vs. 22%), and free speech (47% vs. 34%). 

Both libertarians and conservatives agree that taxes (25% vs. 24%), welfare state issues (14% vs. 16%), and immigration (24% vs. 20%) are top priorities. Similarly, both groups say policy related to housing, transportation, the environment, unions, and paid leave are not their top priorities (<5%).

Conservatives Say Political Life Should be Based on Judeo-Christian Principles 

Nearly 9 in 10 conservative attendees (87%) believe that “political life in this country should be based on Judeo-Christian principles,” while 13% believe it should not. Conversely, 70% of libertarian attendees believe that these religious principles should not be the basis of American political life, 30% believe it should be. 

Part of the reason for this may be that conservatives are far more likely to attend church regularly (59% vs. 16%) and to believe people need to be raised with religion to learn good values (84% vs. 41%). Furthermore, conservatives also believe government has a role to play in promoting traditional values (83% vs. 9%). While libertarians are more likely to see value in religious teaching for children they do not extend such a role to government.  

ReligiousValues
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Libertarians Want More Immigration, Conservatives Want to Keep It the Same or Decrease It 

Young libertarian attendees have a more open and permissive view of immigration while conservatives take a more restrictive approach—from the border wall, citizenship for illegal immigrants, sanctuary cities, legal immigration procedures, and the Muslims travel ban.   

Strong majorities of conservatives favor building a large wall along the U.S.-Mexican border (74%), oppose sanctuary cities (94%), and support deportation of illegal immigrants (55%). 

In the opposite direction, strong majorities of libertarians oppose a border wall (86%), support sanctuary cities (58%), and favor citizenship for unauthorized immigrants (59%).

Border Wall
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Even when it comes to legal immigration processes, 74% of libertarians want to increase the number of immigrants legally allowed to enter the US, compared to 28% of conservatives. Instead a plurality of conservatives (43%) would rather keep legal immigration flows the same and nearly a third (29%) would decrease it. 

Number of Legal Immigrants
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Both libertarian and conservative attendees oppose a temporary travel ban on Muslims entering the United States; however, libertarians are nearly 40 points more opposed (89% vs. 51%). 

Given the divide between young libertarians’ and conservatives’ views of immigration, it’s perhaps unsurprising that conservatives are nearly twice as likely (80% vs. 44%) as libertarians to agree that “Western civilization is at risk of losing its identity.”  

Western Civilization
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Libertarians Say U.S. Foreign Policy Causes Instability and Chaos 

Young libertarians and conservatives have dramatically different evaluations of the impact of U.S. foreign policy. Nearly 9 in 10 (86%) libertarians believe American foreign policy “does more to promote instability and chaos.” In stark contrast, 82% of conservatives believe American foreign policy “does more to promote peace and stability” in the world. Few questions polarize libertarians and conservatives more than the impact of U.S. foreign policy.  

Impact of U.S. Foreign Policy
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This might explain why 60% of libertarians think the U.S. should leave Afghanistan “now,” and 93% say at least within the next five years. In contrast, a plurality (40%) of conservatives say the U.S. should stay in Afghanistan for “as long as it takes,” while 31% say the U.S. should leave in the next five years, and only 25% think we ought to withdraw troops immediately. 

Involvement in Afghanistan
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What Pronouns Do You Prefer? 

Libertarians and conservatives are also diametrically opposed on the use of transgender pronouns. While three-fourths (75%) of libertarians use a transgender person’s preferred gender pronouns, three-fourths (73%) of conservatives say they use the pronouns corresponding with the transgender person’s biological sex. 

These results are consistent with the fact that a majority (52%) of conservatives do not think society should “do more ensure LGBT people feel fully accepted in society,” 20% have no opinion, and 27% think society does have this obligation. Instead, a majority (55%) of libertarians think society does need to do more to ensure LGBT people feel accepted, while 24% have no opinion, and 22% disagree. 

Gender Pronouns
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Conservatives Want Government To Do Something about Opioids 

Nearly three fourths (71%) of conservatives agree that government needs to ”do more” to combat prescription painkiller addiction, while 14% think it should not. However, nearly 6 in 10 (59%) of libertarians think government should not do more to address opioid addiction, while 25% think it should. 

Opioid Crisis
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Conservatives and Libertarians Disagree About Police Misconduct 

Conservatives and libertarians are divided in their perceptions of police misconduct with conservatives more apt to defend and libertarians more skeptical of police. Eight in ten (80%) young conservative attendees believe that that police only use lethal force when necessary. Conversely, 77% of libertarians instead think that the police are too quick to use lethal force.

Police Use of Lethal Force
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Conservatives Support Domestic Surveillance, Libertarians Overwhelmingly Opposed 

A slim majority (54%) of conservative millennials approve of the government’s collection of telephone and internet data as part of anti-terrorism efforts while 46% oppose. However, libertarian attendees are overwhelmingly opposed with 93% who disapprove including 75% who strongly disapprove. Only 7% support such a program. 

V2_Collection of Telephone Data
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Young Conservatives and Libertarians Agree About Economics and Free Trade 

Despite the many aforementioned differences, the young conservative and libertarian attendees agree that smaller government is better, that we shouldn’t tax the wealthy more than we already are to raise revenue for more social programs, and that the costs of free trade to some domestic industries is outweighed by the benefits to consumers.  

Furthermore, nearly 100% of both groups say they prefer a smaller government providing fewer services with low taxes over a larger government with more services and high taxes (96% vs. 97%). Similarly, overwhelming majorities of young libertarians (91%) and conservatives (88%) oppose raising taxes on households earning more than $250,000 a year. 

Size of Government
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Despite President Trump’s persistent criticism of free trade deals, strong majorities of conservatives (75%) and libertarians (94%) agree “free trade must be allowed, even if domestic industries are hurt by foreign competition.” A quarter (25%) of conservatives and 6% of libertarian attendees think “trade restrictions should be used to protect domestic industries.” 

Young Libertarians and Conservatives Tolerant of Free Speech and Political Expression 

Another area in which young libertarians and conservatives largely agree is that people should be allowed to express their political opinions publicly. Majorities of both libertarian (91%) and conservative attendees (58%) also believe that NFL players who refuse to stand for the national anthem should not be fired. Even still, libertarians are more than 30 points more likely to say the athletes shouldn’t be fired. Similarly, majorities of both libertarians (95%) and conservatives (58%) oppose a law banning flag burning, even still, libertarians are nearly 40 points more opposed.

Understanding the Differences between Conservatives and Libertarians 

Why do libertarians and conservatives agree on economics but disagree so vehemently on matters of immigration, national security, police, drugs, and LGBT issues? To explore the underlying philosophical differences between conservatives and libertarians, we asked attendees to evaluate a series of statements about tradition, order, change, social conformity, responsibility, and loyalty. Several of these statements come from University of Toronto professor Jordan Peterson’s 12 proposed principles for a 21st century conservatism, several others were written by the survey author.[i] 

Libertarians and conservatives think about change and the importance of social order differently. Fully 88% of conservatives agree that “radical change should be viewed with suspicion, particularly in a time of radical change.” About half that—43%—of libertarian attendees agree with that statement while nearly as many (42%) disagree. Instead, nearly two-thirds (65%) of libertarians agree that “social change and disruption, even if they’re chaotic, are necessary to improve human happiness.” Only a quarter (24%) of conservative attendees agree that sometimes disruption and chaos are necessary for human flourishing.

Improve Human Happiness
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Libertarians are more likely than conservatives to reject the “wisdom of the ages” idea that longstanding social norms are more likely to be correct. Conservatives are more likely to believe that social institutions and norms that have withstood the test of time have revealed truth given their longevity. A strong majority of conservative attendees (69%) agree that “we should judge our political system in comparison to other actual political systems and not to a hypothetical ideal.” Instead a plurality (45%) of libertarians disagree with this statement while 38% agree with it. 

Political System
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Those who judge our system relative to a hypothetical ideal would be more comfortable with changing our political institutions to conform with a hypothetical—and thus untested—idea of a better future. However, those more cautious of change would be skeptical of transforming deeply rooted longstanding political institutions, that they view have withstood the test of time, into something untested.

In a similar vein, 67% of libertarian attendees disagree that “it is better to do what everyone has always done unless you have an extraordinarily valid reason not to,” while only 13% agree. Instead, a plurality (42%) of conservatives agree with this statement, 32% neither agree nor disagree and 25% disagree.  

In a consistent pattern, nearly 9 in 10 (89%) of conservatives agree that “intact heterosexual two-parent families constitute the necessary bedrock for a stable polity,” including 73% who strongly agree with this statement. Libertarian attendees are split on this idea with 47% who agree and 40% who disagree. 

Rule 8 Wisdom of Ages
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Conservatives are more likely to emphasize social conformity as a useful and necessary tool for a properly functioning society. Libertarians tend to be skeptical. Nearly 9 in 10 (86%) of conservative attendees agree that it is “just and right to demand some sacrifice of individual impulse and idiosyncrasy so that society can function properly.” Libertarians are about 50 points less likely to agree (37%). Instead half (49%) disagree that people ought to curtail their own idiosyncrasies to get along in society and 14% have mixed feelings.

Rule 2 Social Conformity
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One reason why conservatives may expect greater social conformity from others is that they are far more likely to believe there is a “right way” to do things. If one believes there is a hierarchy of proper and effective behaviors it’s clear why one would expect others to get with the program.  Nearly 8 in 10 conservative attendees (78%) agree “there is always a right way to do things.” In contrast, a slim majority (51%) of libertarian attendees disagree that there is always a right way to do things. Ostensibly, libertarians tend to believe there could be several or even many equally effective ways of doing things.

Right Way to Do Things
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Libertarians may de-prioritize social conformity because they tend to believe that flexible social norms are necessary to allow people to discover better ways of doing things. Even if they believe there is one right way, perhaps society hasn’t yet figured out what that right way is. Thus, 86% of libertarian millennial attendees agree that “we should keep social norms and laws flexible to allow people to discover better ways of doing things.” Only 33% of conservative attendees agree; instead a plurality disagree (44%) with that sentiment. 

Rule 9 Radical Change
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Conservative attendees largely agree that “it is more noble to teach young people about responsibilities than about rights.” This is a hard statement to evaluate because many would say both are equally important. Nevertheless, when asked to choose, two-thirds (66%) of conservatives emphasize teaching young people about their responsibilities over informing people of their rights. Libertarians are divided with a plurality (45%) who disagree that teaching responsibilities should come before teaching about rights and 38% who agree.

Responsibility v Rights
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Do young people love America? If they do, do they love it because it’s home, because of its history, because of the ideals it aspires to embody? What if America ceased living up to those ideals, would they still want to live here? Nearly two-thirds (61%) of young libertarians say no, “if another country better embodied the ideals of America” they would “want to move to that country” instead. Conversely, a majority (55%) of conservatives disagree, they would stay in America anyway. 

America
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Instead, conservatives place greater emphasis on community, which may be one reason they wouldn’t want to leave the country if another country better embodied American ideals. Even though both conservatives (100%) and libertarians (89%) agree that “it’s important for people to have community,” 82% of conservatives “strongly agree” with this statement compared to 51% of libertarians—a 31-point difference. 

Despite these divisions, young libertarians supported several principles Peterson articulated for conservatives—on matters of liberty and just deserts. In fact, libertarians were far more likely to agree that “the government, local and distant, should leave people to their own devices as much as possible.” Although overwhelming majorities of young conservatives (83%) and libertarians (98%) agree, libertarians are 53 points more likely to “strongly agree” (83% vs. 30%) than conservatives. 

Liberty
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Both libertarian and conservative attendees also overwhelmingly endorse the idea of proportional justice that people should reap the benefits of their hard work. Over 9 in 10 libertarians and conservatives agree that “citizens have the inalienable right to benefit from the result of their own honest labor.” 

Who Won the Intern Debate? 

Who won the intern debate depends on whom you ask. Among conservative attendees: 94% said the conservative team won and 6% said the libertarian team won. Among libertarian millennial attendees, 54% said the conservatives won while 46% said the conservatives won. Among the moderates, liberals, and progressives in the audience, 58% felt the conservative team won and 42% thought the libertarians won. 

Summary 

Many observers have assumed that libertarians and conservatives come from essentially the same branch of the political tree, or that one is simply a more stringent version of the other. However, the survey finds striking differences between the two groups in policy beliefs undergirded by different assumptions and philosophical worldviews. This survey of politically engaged young conservatives and libertarians highlights the commonalities as well as conflicts between the two groups and portends the political conflicts of the future.

Full LvCDebate Attendee Survey results found here

[i] Several of Peterson’s principles were re-worded for use in the survey. Although Peterson has said he doesn’t personally identify as conservative, when asked to speak to a conservative group he offered up twelve principles he thought conservatives could be for rather than against. 

The 2018 Education Next poll is upon us, probing the public’s feelings about lots of education issues, from grading public schools to thoughts on teacher pay. I’ll just highlight two things here, kind of the opposite ends of the educational freedom spectrum: school choice, and the federally coerced, national curriculum standards known as the Common Core.

School Choice

As we know about any polling, how a question is worded can have considerable bearing on the results it yields. That’s a primary reason to greet any poll with skepticism. Because the fine folks at Education Next are well aware of this, they asked different versions of several questions, including about choice. What do they reveal?

On charters, support is strongest when the term “charter” is mentioned early in the question, and “public” is not appended before it to say “public charter schools.” But it still just elicits plurality support: 44 percent for, 35 percent against.

Tax credits for donations for low-income scholarships is the choice champ—as we’ve seen before—though only one version of the question was asked. It got 57 percent support and 25 percent opposition.

There were interesting results for vouchers. A version of the question that did not specifically mention “vouchers” and emphasized “wider choice” for all families with kids currently in public schools yielded 54 percent support—a 5-year high—and 31 percent opposition. A version for all public school kids that did not emphasize “wider choice” and included “voucher” saw only 44 percent support and 39 percent opposition. A version that restricted “wider choice” to low-income families, and did not use the term “voucher,” garnered 42 percent support and 44 percent opposition. Finally, a version targeted to low-income families that used “voucher” and did not mention “wider choice” received 43 percent support and 44 percent opposition.

When it comes to vouchers, people seem to want more choice for more people, which sounds about right. But don’t actually use the v-word!

Common Core

Repeating what we’ve seen for several years, the public supports the egalitarian but innovation- and pluralism-smooshing idea that all children should be subject to the same reading and math standards, and that schools should be held “accountable” using such standards. 61 percent support that idea, while only 26 percent oppose. Mention the Common Core specifically, however, and support plummets to 45 percent, while opposition ticks up to 37 percent. It’s a lot easier to sell abstract niceties than concrete stuff.

Check out the entire survey for a whole lot more insight into what the public, and lots of groupings within it, think about American education.

At the end of my first post in this series, I observed that assessing the claim that fractional reserve banking causes business cycles meant asking two questions: first, “To what extent have historical money-fueled booms been associated, not with growth in the supply of either commodity money or central-bank supplied bank reserves, but with declining banking system reserve ratios?” and, second, “When a banking system does manage to operate on a lower reserve ratio, does its doing so necessarily contribute to an unsustainable boom?”  I answer the first question here, leaving the second to a third and final installment.

The Myth of Bank Lending “Manias”: the 19th Century

That first question is empirical, so answering it means consulting the historical record. It happens that I did just that some years ago, in response to claims to the effect that bankers, far from being immune to bouts of what Alan Greenspan famously called “irrational exuberance,” often play a lead part in fueling unsustainable booms, leading the more common herd of speculators, not to mention many perfectly innocent parties, to their ultimate undoing.

I eventually published my findings in an article on “Bank Lending ‘Manias’ In Theory and History. Although I didn’t attempt anything approaching a comprehensive review of historical booms and busts in that brief survey, I did look at several of the most notorious cases of booms and busts commonly blamed on excessive commercial bank lending.

I also made a point of selecting those cases in which commercial banks were free to issue their own notes, so that they did not have to rely on notes supplied by a central bank to meet their customers’ demands for currency. The episodes that fit that description best are the Ayr Bank Crisis of 1772, the English Panic of 1825, the U.S. Panic of 1837, the Australian Crash of 1893. After carefully reviewing each episode, I concluded that

Available evidence from less restricted banking systems does not support the banking mania tradition. Banks not subject to legal limits on their issues have not taken advantage of this to allow their reserve ratios to fall during booms. Banks have tended to hold higher than usual reserve ratios in the aftermath of crises, perhaps in anticipation of extraordinary “leakages” of high-powered money. In short, if banks have behaved in any procyclical fashion, they have leaned in the direction of exceptional conservativism during slumps. When monetary expansion has “fanned the flames” of euphoria and planted the seeds of an eventual crisis, the expansion has generally been caused not by falling reserve ratios for competitive banks (as the mania thesis claims), but by exogenous injections of high-powered [i.e. “basic”] money. These injections have sometimes consisted of specie inflows; at other times they have consisted of the expanded liabilities of a central bank of issue.

The 20th Century

But what about other famous booms? Because fans of the Austrian cycle theory often refer to the 1920s boom as fitting the theory, let’s first consider it. Doing so is made difficult by the lack of any consistent figures for bank demand deposits and reserves: while data for total bank demand deposits go back to 1914, data for bank reserves are available only for Federal Reserve System member banks. Yet there are no data for demand deposits of member banks alone! Consequently, and most frustratingly, it’s impossible to know precisely what was happening to the overall reserve ratios of either commercial banks taken as a whole or of Fed member banks only.

As an alternative way to gauge the role of fiduciary media in the lead-up to the Great Depression, the chart below shows, for 1914 (the first year for which consistent data are available) until 1930, the behavior of the following: (1) the U.S. money stock (demand deposits plus currency) (red line); (2) the stock of monetary gold (purple line); (3) total Federal Reserve “fiduciary” money creation, as measured by its holdings of commercial bills and Treasury securities (turquoise line); and (4) the relationship, expressed as a percentage, of the monetary gold stock to the broader money supply (blue line).

Although the chart does indeed appear to show a clear example of a “fiduciary media”-based boom, that boom occurs, not in the years leading to the Great Depression, but in those leading to the previous sharp but short-lived recession of 1920-21. Between the end of the war and the start of that recession the percentage of gold cover for the total money stock declined from almost 17.5 percent to less than 11.5 percent. The chart also shows how that decline was largely driven by Federal Reserve lending, which increased tenfold during the same period, from under $300 million to over $3 billion.

There’s no similarly clear evidence, on the other hand, of a fiduciary-media boom during the mid-to- late 1920s. After the ‘20-‘21 crisis, the gold cover percentage quickly recovered from its post-war decline. By May 1924 it had risen above 18 percent, a level exceeding its wartime peak. From there it declined, rose slightly, and declined again, to a not remarkably low nadir, in December 1928, of 14.6 percent, from which it proceeded to rise again until Black Tuesday. Finally, were one bold enough to venture that the modest decline of the gold cover percentage between May 1924 and December 1928 contributed importantly to an unsustainable boom, one would once again have to blame much of that decline on a substantial increase in Federal Reserve credit, the quantity of which doubled during the period in question, rather than on any fall in commercial bank reserve ratios.

And what about the post-2001 subprime mortgage boom? Here the evidence is perfectly clear: the boom had nothing to do with growth in the supply of fiduciary media, as that term is conventionally defined. Another FRED chart should settle any doubts:

Remarkably, far from having been fueled by an increased in bank demand deposits unmatched by a corresponding increase in bank reserves, the great boom of the noughts did not even involve any substantial growth in the absolutely quantity of demand deposits, which for the most part fluctuated within the narrow range of $300 billion to $350 billion. (The series for “checkable” deposits behaves almost identically.) As for the percentage of demand deposits covered by bank reserves, including both vault cash and reserve balances at the Fed, instead of declining, it shows a distinct upward trend.

None of this is meant to deny that banks played some part in fueling the subprime boom. Bank lending and deposit expansion were certainly part of the story: by mid-2008 total bank deposits were half again their value at the start of 2002. But the deposits that grew during the boom weren’t demand deposits. Instead they consisted of various sorts of time deposits, which are not supposed, according to the standard Austrian account, to be particularly capable of causing unsustainable booms. It’s partly for that reason that most (though not quite all) Austrian-school calls for 100-percent reserve banking are calls for having banks keep 100-percent reserves against their demand deposits only, and not against time deposits

Maturity Mismatching: Healthy and Unhealthy

To his credit Philip Bagus — one of the Austrian-school critics of fractional-reserve banking — has argued quite correctly against the standard Austrian view that a 100-percent reserve system would not suffice to rule-out bank maturity mismatching and business cycles that result from it. That so-called “shadow” banks, none of which actually took part in the issuance of fiduciary media as Austrian economists define it, formed the epicenter of that crisis, supports’ Bagus’s claim.

However, Bagus himself errs in supposing that maturity mismatching itself is an inevitable cause of malinvestment. Here it helps to distinguish between what I’ll call, for want of accepted terms, “item-by-item” maturity mismatching from “aggregate” maturity mismatching. The difference is crucial in the case of financial intermediaries, the functions of which include gathering savings from large numbers of independent sources, and using those savings to fund various investments. How come? Well, suppose that I borrow $1000 from a friend, while agreeing to pay that friend back any time he or she wishes, and that I in turn lend the $1000 to someone who will not pay me back for a year. In that case, assuming I did not have any other assets or liabilities, I’d be engaging in a very risky act of one-on-one maturity mismatching.

But suppose I am a bank, with thousands of customers each of whom deposit (that is, lend the bank) $1000, also for undetermined periods, and that I have been receiving such deposits for a long time. In that case, over time I learn that, thanks to having so many depositors, the withdrawals of some tend to be made up for by the fresh deposits of others: in other words, the different depositors are like so many runners in a relay race, with those drawing on their balances passing the savings baton on, as it were, to others who are making new deposits.

The banks challenge, in that case, is not that of mismatching the maturity of any individual deposit with that of some corresponding bank loan, but one of matching the maturity of the banks assets with the expected availability of the totality of its deposits. In principal a well-managed bank only has to have loans enough being repaid on any given day to meet its net deposit withdrawals for that same day, where by adequately limiting the overall quantity of its lending it might in principal keep that expected net withdrawal right at zero.

In practice, though, bankers are bound often to lose more funds than they gain, if only on a day to day basis, with the opposite happening just as often. It’s precisely for that reason that banks have reason to maintain fractional cash reserves, while also limiting the maturity of the loans they do make — as they have every reason to do unless they or their creditors expect to be bailed out. The existence of fractional reserves in a competitive banking system subject to market discipline is, therefore, properly understood, not as a symptom of bankers’ tendency to engage in dangerous or excessive mismatching of the maturities of their assets and liabilities, but as a precaution taken against the risk of excessive mismatching.

[Cross-posted from Alt-M.org]

May a city both require certain business owners to forego their Fourth Amendment rights and also enforce regulations specifically designed to advantage competing businesses in a related industry? That’s the question to be answered by the Illinois Supreme Court in LMP Services v. Chicago. The City of Chicago enacted an ordinance requiring all food trucks to install GPS trackers, in part as a means of settling disputes as to whether these vicious vehicular vittle vendors are violating yet another ordinance by operating within 200 feet of any brick-and-mortar restaurant. The lower state courts have allowed these new rules to take effect, so Cato—along with the National Food Trucks Association and the Illinois Food Truck Owners Association—has filed a brief urging the state high court to use a different constitutional recipe.

In upholding these ordinances, the intermediate state appellate court ruled that the mandatory GPS placement was not actually a “search” under the Fourth Amendment, because there was no physical intrusion by the government and as a consequence of food trucks’ operating under a revocable license. Both rationales are mistaken. While the government hired a private company to install the GPS trackers, it has long been established that the government can’t avoid constitutional scrutiny by contracting out the state-directed action.

And regardless of whether the food truck industry is subject to business licensing, the GPS requirement cannot validly fall under the judicially created exception to the warrant requirement for administrative searches of closely regulated industries. The ordinance is both overly expansive—violating more privacy rights than is necessary—and its failure to limit official discretion. Indeed, it’s hard to conceive of a warrantless-search regime that does less to place proper restraints on official discretion than a mandate that food-truck owners constantly reveal their precise location as a condition of doing business.

The lower court’s ruling not only failed to appreciate these sensible limitations, it essentially gave the government carte blanche to condition the issuance of licenses—any licenses—on applicants’ agreeing to waive their Fourth Amendment rights. Carried to its logical conclusion, such judicial indulgence would permit the government to condition issuing driver’s licenses on the installation of GPS trackers, or on standing consent to random searches of the owner’s vehicle.

As for the other ordinance—the so-called 200-Foot Rule—the lower court failed to find any violation of equal protection while ignoring ample empirical evidence that this was simple economic favoritism. The city’s own admitted rationale for the rule amounts to pure protectionism for brick-and-mortar restaurants. A city is simply not allowed to advantage restaurants over food trucks—or, say, Mexican-food joints over Thai-food eateries—because it prefers the former to thrive and the latter to struggle.

Finally, even if there was a valid government interest here—maintaining a healthy economy full of legacy restaurants—empirical evidence shows that the rule not only fails to advance this purpose, but actually undermines it. Restrictions on food trucks depress the City’s potential tax revenue while having no demonstrable impact on traditional storefront businesses. If Chicago truly wants to advance the interests of its residents, abandoning these overly burdensome restrictions would be a delicious start.

Late last month that rarest of commodities, a new U.S.-built commercial transport ship, completed its maiden voyage by entering the harbor of San Juan, Puerto Rico to deliver its cargo. Called El Coquí, the vessel is among the world’s first hybrid roll-on/roll-off container vessels—a “ConRo” in industry parlance—that is powered by liquefied natural gas. 

Supporters of the Jones Act, a protectionist law which mandates that ships transporting goods between U.S. ports be U.S.-owned, crewed, flagged, and built, have pointed to El Coquí as a symbol of the measure’s success. The President of the Shipbuilder’s Council of America cited “American skill and ingenuity, as well as critical laws like the Jones Act” in his remarks praising the new ship. A senior official with Crowley Maritime, which owns the ship, added that investments such as El Coquí “would not have been possible without the [Jones] Act.”

What El Coquí truly represents is the outdated thinking behind this law.

According to its supporters, the Jones Act helps ensure U.S. expertise in shipbuilding and a domestic capability that can be relied upon in times of war. But as El Coquí demonstrates, it’s unclear how much expertise the U.S. shipbuilding industry possesses or how purely American this capability really is. The vessel’s very DNA, for example, is more foreign than American, with design work largely performed by Finnish company Wärtsilä using a team mainly located in Poland and Norway. In addition, testing for a model of the ship took place at a facility in the Netherlands.

That’s not all. Its celebrated LNG propulsion system features engines from a German company, MAN Diesel & Turbo, that were produced in Japan. The actual LNG tanks were supplied by another German firm, TGE Marine Gas Engineering. No doubt a thorough inventory of the various components used to build the ship would reveal numerous other examples of sourcing from abroad.

The only parts of El Coquí guaranteed to be truly U.S.-built are the hull and superstructure, which is how compliance with the Jones Act’s domestic build requirement is assessed. This demand, however, brings with it a fearsome price tag. To take delivery of El Coquí as well as a sister ship, Crowley Maritime is estimated to have paid $350 million, or $175 million per vessel. For perspective, the largest containership in the world, the G-Class, features a price tag of $950 million for six ships, or $158 million per vessel.

That’s a $17 million discount for a ship with a vastly larger cargo capacity. And despite its bigger size, the first G-Class ship was delivered in a mere 18 months. El Coquí required 45 months. That’s about as much time as it took the United States to secure victory in World War II.

The key difference between El Coquí and the G-Class is that the latter is built by Samsung Heavy Industries in South Korea. While the number of large oceangoing commercial vessels built in the United States per year typically numbers in the single digits, Samsung says that its Geoje shipyard alone churns out 30 ships. With vastly greater numbers of ships under construction the South Korea shipyard is able to realize larger economies of scale than its U.S. counterparts, producing at significantly lower cost and in less time.

Because of the Jones Act these cheaper ships are effectively forbidden fruit. Instead, carriers engaged in domestic transport must purchase their vessels from U.S. shipyards at vastly higher prices. These high prices, in turn, deter competition and raise costs to consumers.

The law’s alleged national security upside, meanwhile, rings hollow given the industry’s deep international exposure and reliance on foreign know-how. Jones Act-compliant ships may be officially labeled as U.S.-built, but—as is the case with all manner of manufactured products—the production process spans the globe. 

The Jones Act brings with it considerable disadvantages in exchange for benefits that, upon closer examination, are almost entirely mythical. It’s time to rid ourselves of this nonsensical and counterproductive law.

According to press reports, South Africa’s government has begun expropriating privately-owned farmland without financial compensation, thereby ignoring the post-apartheid political settlement, which allows for land redistribution in the country on a “willing buyer, willing seller” basis.

Eighteen years ago, Zimbabwe embraced a similar policy. As a consequence, South Africa’s northern neighbor’s economy collapsed and the country descended into penury and political violence. This scenario is likely to repeat itself in South Africa. An attack on property rights will result in the destruction of South Africa’s farming community, dramatic reduction in agricultural productivity, and mass unemployment. It could also lead to a collapse of the banking sector (which depends on land as collateral for loan-making) and the local currency, hyperinflation, and even bloodshed.

In the early 1990s, the United States was heavily involved in negotiating the transfer of power from the ruling National Party to the current government, which is composed of the African National Congress and the South African Communist Party. As such, the United States bears some responsibility for ensuring that South Africa’s post-apartheid political settlement, including protection of minorities and private property, endures. President Trump should warn the South African government that if South Africa’s Constitution is amended to allow for expropriation without compensation, South Africa will be suspended from the African Growth and Opportunity Act, as Zimbabwe had been. Moreover, the U.S. Congress should hold hearings on the situation in South Africa, if the government of South Africa continues its destructive economic policies.

Section 104 of AGOA states that a sub-Saharan African country is eligible for membership of AGOA if it “protects private property rights, incorporates an open rules-based trading system, and minimizes government interference in the economy through measures such as price controls, subsidies, and government ownership of economic assets; (b) [respects] the rule of law, political pluralism, and the right to due process, a fair trial, and equal protection under the law.” Furthermore, the text of AGOA states that “If the President determines that an eligible Sub-Saharan African country is not making continual progress in meeting the requirements described in … [Section 104] the President shall terminate the designation of the country [as being eligible for membership of AGOA].” Considering that South Africa is in breach or is about to breach a number of requirements for membership of AGOA, the president should act by issuing a preemptive warning to the South African government.

Lawrence D. Burns asks, in the Wall Street Journal and in his new book Autonomy: The Quest to Build the Driverless Car, why the major automobile companies ignored the technology that could create self-driving cars and are now playing catchup to Google:

Early in 2011, two top engineers for Google traveled together to Detroit on what amounted to a diplomatic mission. They had just spent 18 months on a top-secret project called Chauffeur: the development of a car that could drive itself over 10 different 100-mile routes on public roads. Now they were looking for a partner to carry the project forward. “The idea was, if you’re going to make self-driving cars, you have to work with a car company,” recalls Chris Urmson, who made the trip with fellow engineer Anthony Levandowski. “Maybe they’ll sell us cars to build a fleet. Maybe we’re going to be retrofitting our stuff onto their cars to sell.”

But they couldn’t find any takers.

They might have been better prepared if they had read Cato analyst Randal O’Toole’s early warning, also in the Wall Street Journal but in early 2010:

Consumers today can buy cars that steer themselves; accelerate and brake to maintain a safe driving distance from cars ahead; and detect and avoid collisions with other cars on all sides. Making them completely driverless will involve little more than a software upgrade.

O’Toole’s article was based on his book Gridlock: Why We’re Stuck in Traffic and What to Do About ItReading his manuscript was the first time I’d heard about the possibility of self-driving cars. You’d think Detroit would have been ahead of me, but maybe not so much.

Back in May I invited Aaron Rhodes to come over from his home in Hamburg, Germany, to talk about his new book from Encounter Books, The Debasement of Human Rights: How Politics Sabotage the Ideal of Freedom. The Wall Street Journal’s James Taranto was in town to interview Rhodes, which he did after our forum. The interview appears in today’s Journal. It’s a tour de force, pulling together the many threads of a huge, complex argument and presenting them in a short, readable format.

If you’ve ever wondered what’s wrong with the UN Human Rights establishment but have never quite been able to put your finger precisely on what it is, this interview will answer many of your questions—and the book will spell out the details. The origins of a world in which dictators sit of the UN Human Rights Council, immune from criticism while condemning free societies, can be found in progressivism’s conflation of natural and positive law, which Franklin Roosevelt mastered with his “Four Freedoms” and his wife Eleanor helped institute in 1948 in the UN Universal Declaration of Human Rights. With that foundation, equating rights to liberty with rights to social security, rest and leisure, periodic holidays with pay, job training, and more, it was only a matter of time before tyrants would find their immunity in their purported provision of such services, invariably at the expense of liberty, leading to the debasement of real rights.

During the Reagan administration I served for a time as director of policy for the State Department’s Bureau of Human Rights and Humanitarian Affairs where I saw human rights hypocrisy up close. During the annual meetings in 1987 in Geneva of what was then the UN Commission on Human Rights, for example, we introduced a resolution condemning Cuba’s human rights record, only to be met with objections from European nations, effectively excusing those abuses by pointing to Cuba’s health care record. With the end of the Cold War, which tended to sharpen the difference between these two kinds of rights, the distinction has become increasingly blurred, as Rhodes explains, drawing on his experience as director of the International Helsinki Federation from 1993 to 2007 and his present position as president of the Forum for Religious Freedom – Europe.

“Can anything be done?” Taranto asks at the end of the interview. “I wish that the Trump administration would talk about human rights once in a while,” Rhodes answers. “They should talk about freedom.” 

Sen. Elizabeth Warren of Massachusetts has introduced legislation that would radically overhaul corporate governance in America, requiring that the largest (over $1 billion) companies obtain revocable charters from the federal government to do business, instituting rules reminiscent of German-style co-determination under which workers would be entitled to at least 40% representation on boards of directors, placing directors under a fiduciary obligation to serve “stakeholders” as opposed to owners as currently, prohibiting political expenditures by corporations unless approved by at least 75 percent of directors and shareholders, and restricting directors and officers from reselling incentive stock within five years. 

“Let’s be clear, none of these are new ideas,” writes leading corporate governance expert Stephen Bainbridge of UCLA. “They are either academic utopian schemes or failed European governance models. There are very good reasons none of these dusty relics of eons of progressive corporate thought have made it into law.” His series of posts picking it apart in detail begins here.

Our friend James Copland of the Manhattan Institute points out that Sen. Warren’s proposal would pull down three main pillars of U.S. corporate governance: shareholder primacy, director independence, and charter federalism. Each has long been a subject of extensive research and debate, and the alternatives, European or otherwise, simply do not have as good a track record of supporting a dynamic economy that generates world-beating enterprises across a wide range of business sectors (as opposed to, say, the kind of specialty manufacturing at which Germany does well.) Worker board representation, in particular, shapes incentives in ways that discourage important forms of risk-taking and reallocation of capital across sectors. 

All of which helps explain why few startups would willingly accept Warren-style rules in drafting their by-laws. But there’s a big additional problem in applying the rules, as Warren would, to existing companies that have already been capitalized under different assumptions: it would in effect confiscate at a stroke a large share of stockholder value, transferring it to some combination of worker and “community” interests. This gigantic expropriation, of course, might be a Pyrrhic victory for many workers and retirees whose 401(k) values would take a huge hit in exchange for new rights of uncertain value to install board members. Already, some early enthusiasts for the Warren plan are treating the collapse of shareholder value as a feature rather than a bug, arguing that it would reduce wealth inequality. 

Whether or not it would accomplish that, it would test the restraints the U.S. Constitution places on the taking of property without compensation. Alas, the courts have been inconsistent about the extent to which they will recognize as takings, and provide a remedy for, legislative enactments that strip away much of the value of financial instruments or other property rights without expropriating fully 100% of their value.  Cato over the years has been very much part of that legal debate, arguing for a strong interpretation of the Fifth Amendment’s language: “nor shall private property be taken for public use, without just compensation.” 

Confiscatory proposals like Warren’s make it more important than ever that we be prepared to defend this element of liberty in the courts. 

John Kelly, who writes a local column for the Washington Post, set out to investigate a century-old milk bottle claiming medicinal qualities and discovered a mid-20th century story of rent-seeking and crony capitalism:

But the big change for Burton-Parsons came in the late 1960s, when it entered the burgeoning soft contact lens market — not the lenses themselves, but the solution used to clean them.

And that’s where things took an interesting turn.

Up until 1974, consumers could purify their contact lenses by boiling them for 10 minutes in distilled water with salt tablets. But that year an Food and Drug Administration microbiologist named Mary Bruch — known as “the first lady of contact lenses” — gained oversight of that product. Bolstered by FDA ophthalmologist Arnauld Scafidi, Bruch started disallowing soft lens manufacturers from utilizing salt tablets, decreeing that consumers risked eye infection.

The only cleaning solution she approved was made by Burton-Parsons, which by then was headquartered in Seat Pleasant, Md., and owned by the Manfuso family, which also owned horse-racing tracks around the state. Its product — Boil-n-Soak — cost four times as much as the simple salt tablets.

It emerged during congressional hearings in 1980 that Bruch and Scafidi had been repeatedly wined and dined by Burton-Parsons executives. The Washington Post’s John F. Berry wrote: “Expense records showed that top executives bought Bruch more than 50 meals at places ranging from Caesars Palace in Las Vegas and Brennans in New Orleans to Maison Blanche and L’Auberge Chez Francois in the Washington area . . . [Bruch] also told the congressional committee that she exchanged vintage wine with one of the Manfusos who shared her interest in fine wine.”

Scafidi was unable to provide research to substantiate his claims that salt tablets were unsafe.

In 1974, Burton-Parsons had annual sales of about $5 million. In 1979, after five years of a near monopoly, it was sold to Alcon Laboratories, a subsidiary of Nestle S.A. of Switzerland, for $110 million, according to industry estimates.

Bruch and Scafidi were investigated by the FBI for the favors they allegedly gave the firm. Scafidi resigned, and Bruch was fired.

More on rent-seeking, crony capitalism, and lobbying regulators.

Earlier this month the Centers for Disease Control and Prevention released preliminary estimates of the opioid overdose rate for 2017. The total overdose rate rose to approximately 72,000, up from a total overdose rate of 63,600 in 2016, an increase of roughly 10 percent. The total overdose rate includes deaths from numerous drugs in addition to opioids, such as cocaine, methamphetamine, and benzodiazepines. The opioid-related overdose rate increased as well, from a little over 42,000 in 2016 to over 49,000 in 2017. This increase occurred despite a 4 percent drop in heroin overdoses and a 2 percent drop in overdoses due to prescription opioids. A 37 percent increase in illicit fentanyl-related overdoses explains the jump in the death rate.

All of this is happening while the prescribing of high-dose opioids continues to decrease dramatically—over 41 percent between 2010 and 2015, with a recent report showing a further decrease of 16 percent during the year 2017.

This is more evidence, if any more was needed, that the opioid overdose problem is the result of non-medical users accessing drugs in the black market that results from drug prohibition. Whether these users’ drug of choice is OxyContin or heroin, the majority have obtained their drugs through the black market, not from a doctor. A 2007 study by Carise, et al in the American Journal of Psychiatry looked at over 27,000 OxyContin addicts entering rehab between the years 2001 and 2004 and found that 78 percent never obtained a prescription from a doctor but got the drugs through a friend, family member, or a dealer. 86 percent said they took the drug to “get high” or get a “buzz.” 78 percent also had a prior history of treatment for substance abuse disorder. And the National Survey on Drug Use and Health has repeatedly found roughly three-quarters of non-medical users get their drugs from dealers, family, or friends as opposed to a doctor.

Media and policymakers can’t disabuse themselves of the false narrative that the opioid problem is the product of doctors hooking their patients on opioids when they treat their pain, despite the large number of studies showing–and the Director of the National Institute on Drug Abuse stating—that opioids used in the medical setting have a very low addiction rate. Therefore, most opioid policy has focused on decreasing the number of pills prescribed. Reducing the number of pills also aims at making less available for “diversion” into the black market. This is making many patients suffer from undertreatment of their pain and causes some, in desperation, to turn to the black market or to suicide.

Since 2010, opioid policy has also promoted the development of abuse-deterrent formulations of opioids—opioids that cannot be crushed and snorted or dissolved and injected. As a just-released Cato Research Brief as well as my Policy Analysis from earlier this year have shown, rendering prescription opioids unsuitable for abuse has only served to make non-medical users migrate over to more dangerous heroin, which is increasingly laced with illicit fentanyl. 

This is how things always work with prohibition. Fighting a war on drugs is like playing a game of “Whac-a-mole.” The war is never-ending and the deaths keep mounting.

The so-called “opioid crisis” has morphed into a “fentanyl and heroin crisis.” But it has been an unintended consequence of prohibition from the get go.

Several times on these pages (e.g., here and here), and elsewhere (e.g., here and here) I’ve tried to refute the claim, championed by certain Austrian-school economists and their many fans, that fractional-reserve banking is inherently fraudulent, because whenever the sum of readily-redeemable bank deposit balances and (when they exist) redeemable commercial banknotes exceeds the quantity of bank reserves, the difference must consist of so many fake “warehouse receipts” or “property titles.”

Although the popularity of the “fractional reserves equal fraud” (FR=F) thesis seems to be on the wane, many still remain in thrall to it, and I’m pretty darn sure that no further exertions by myself, Larry White, or anyone else will ever suffice to change all of their minds. Although I wish this weren’t so, I worry less and less about it. After all, there are still several Flat Earth societies, complete with dues-paying members, yet reputable geographers don’t seem to be losing any sleep over it.

There is, however, a second “prong” to the Austrian attack upon fractional-reserve banking which has also won many adherents, and which hasn’t been so thoroughly debunked as to make one wonder about those adherents’ powers of ratiocination. I mean the argument that fractional reserve banking inevitably causes business cycles by allowing banks to finance levels of investment exceeding those warranted by voluntary savings, at interest rates driven below their equilibrium of “natural” levels. The ensuing “malinvestment” boom, financed by “forced” rather than voluntary saving, inevitably leads to a bust, when unsustainable investments are liquidated, and economic activity is painfully redirected along sustainable paths.

In fact this second “fractional reserves equal Austrian business cycles” (FR=ABC) prong of the Austrian assault on fractional-reserve banking is just as unfounded as the first. The difference is that, while trying to win over the last, staunch adherents to the FR=F thesis may be futile, getting many who now believe that FR=ABC to see the error of their ways may not be so difficult, because the counterarguments haven’t been aired as often.

Those counterarguments are, on the other hand, more involved than the ones that can be brought to bear against the against the FR=F argument. Consequently I’ve chosen to devote several posts to them. I begin this first post with a review of conventional “Austrian” arguments concerning the meaning of excessive monetary expansion. I then consider the bearing of fractional reserves on an economy’s rate of monetary expansion. In two follow-up posts I use this background information to  critically assess the claim that fractional reserve banking is an important cause of Austrian-style boom-bust cycles.

Monetary Expansion and the Austrian Theory of Business Cycles

To asses the claim that fractional reserve banking is an important cause of booms and busts of the sort described by the Austrian theory of the business cycle, we have, first of all, to recognize at least two popular versions of that theory that supply grounds for this claim. Both versions attribute cycles to excessive monetary expansion. But each defines “excessive” monetary expansion differently. According to one version, a constant money supply alone is capable of averting cycles. As Murray Rothbard explains, in summarizing Austrian monetary theory,

once any commodity or object is established as a money, it performs the maximum exchange work of which it is capable. An increase in the supply of money causes no increase whatever in the exchange service of money; all that happens is that the purchasing power of each unit of money is diluted by the increased supply of units. Hence there is never a social need for increasing the supply of money, either because of an increased supply of goods or because of an increase in population. People can acquire an increased proportion of cash balances with a fixed supply of money by spending less and thereby increasing the purchasing power of their cash balances, thus raising their real cash balances overall… .

A world of constant money supply would be one similar to that of much of the 18th and 19th centuries, marked by the successful flowering of the Industrial Revolution with increased capital investment increasing the supply of goods and with falling prices for those goods as well as falling costs of production. As demonstrated by the notable Austrian theory of the business cycle, even an inflationary expansion of money and credit merely offsetting the secular fall in prices will create the distortions of production that bring about the business cycle (my emphasis).

The other version of the theory maintains instead that cycles are caused, not by growth in the money stock per se, but by growth in the supply of unbacked (“fiduciary”) bank money. According to Frank Shostak, one of several adherents to this view, what sets in motion these cycles is not fluctuations in the growth rate of money supply as such, but the fluctuations in the growth rate of money supply generated out of “thin air.” By money “out of thin air” we mean money that is created by the central bank and amplified by fractional reserve lending by commercial banks.

An increase in the money supply out of “thin air” provides a platform for non-productive activities, which consume and add nothing to the pool or real wealth. Money out of “thin air” diverts real wealth from wealth generators to non-wealth generating activities, thus weakening the wealth-generating process.

In this alternative version of the theory, what matters is whether new money is either made of or backed by some commodity, like gold, or not. In a gold standard system, growth in the stock of gold, no matter how rapid, can never set off a cycle; in contrast any decline in the ratio of gold reserves to readily-redeemable bank liabilities can set a cycle in motion. In the case of a fiat money system, the two versions of the Austrian cycle theory coincide, for in this case there is no question of any “commodity-money” driven growth in the total quantity of money, whether that growth is due to central bank expansion or to a reduction in commercial banks’ reserve ratios.

Fractional Reserves and Monetary Expansion

The next step in countering the FR=ABC thesis consists of showing that a banking system’s reserve ratio and its rate of monetary expansion are largely independent of one another. One might have a banking system that rests on slimmest of reserve cushions, in which the monetary supply doesn’t grow at all. Alternatively one could have a 100-percent reserve system in which the money stock grows at a rapid rate.

These conclusions follow from the simple fact that, in any banking system with a given reserve ratio, the growth rate of the supply of bank-created money (or, if one prefers Austrian terminology,  money “substitutes”) consisting of readily-redeemable deposits and, perhaps, commercial banknotes, will be approximately equal to the growth rate of the supply of “basic” money or bank reserves. That will be so whether these reserves consist of some commodity like gold or of the liabilities of a central bank. Nor does it matter how low the reserve ratio is: as I’ll show in a moment, although the growth rate of the money supply does depend on whether and how rapidly the banking system reserve ratio itself changes, is doesn’t depend on the absolute value of that ratio.

I say “approximately” above because some basic money may also circulate outside of the banking system, in which case movements of basic money into and out of the banking system will also influence to total money supply. To simplify the discussion, let’s assume that “basic” money consists of gold coins, but that instead of actually using these coins, the public prefers to hold banknotes and deposits, so that the supply of bank reserves is always equal to the supply of basic money. Let’s also assume that there are no mandatory reserve requirements. These circumstance make life relatively easy for the bankers, who need never fear having customers withdraw gold, and can presumably expand their liabilities more readily as a result. The assumption is therefore meant to allow as much scope for fractional-reserve based monetary expansion as possible.

The banks still need some gold, however, to settle accounts among themselves, especially when the amounts involved are too small to cover with other assets. Consequently they must maintain some positive ratio of reserves, though the ratio may fall well below 100 percent. Letting r stand for that ratio, with R and M standing for the quantities of reserves and bank-created money, respectively. Then

(1) M = R(1/r).

Differentiating (1) with respect to time after taking logs gives

(2) M = Rr,

where the italics stand for rates of change. Equation (2) shows that the growth rate of the money supply depends, not on the absolute value of r, but on how that value changes over time. A falling reserve ratio will be associated with a growing money stock, other things equal; but a small reserve ratio, if constant, doesn’t imply a more rapidly growing money stock than a high one. Instead, if the reserve ratio is constant, the money stock will grow only as rapidly as the supply of bank reserves,  regardless of the value of the reserve ratio.

Real and Pseudo Money Creation

Austrian accounts of the money-creation process often exaggerate the ability of fractional reserve banks to create money “out of thin air,” even while sticking to a fixed reserve ratio, by looking at only one part of the bank money creation process. Consider the following, typical account, from a paper by Walter Block and Kenneth M. Garschina. Banks, they write,

are able to increase the money supply due to the system of fractional reserve banking. For example, if a deposit is made of one hundred dollars, the bank is only required to hold “in reserve” or “on hand” a small fraction of this amount. The rest can be granted as credit to customers who will inevitably follow the same deposit process with their newly acquired funds. In this way, in a decentralized system, money travels from bank to bank, multiplying each time it is lent out. And the original depositor, of course, is still able to draw on the funds entrusted to the bank on demand. As the process continues, the volume of money increases, lowering the money rate of interest below the natural rate.

But is it really true that a deposit to any bank in a fractional reserve system leads to substantially greater increase in the total money stock, and a correspondingly large increase the the money stock’s fiduciary component, with all the business-cycle repercussions that follow from such?

Actually, it isn’t, for the simple reason that, more often than not, a deposit made at one bank involves a corresponding withdrawal of funds from another bank, as when the deposited sum takes the form of a check. In that case, the process of deposit expansion that Block and Garschina describe will have as its counterpart a like process of deposit destruction, where the ultimate result (assuming the simple case in which all banks maintain the same, given reserve ratio) is an unchanged total money stock, with the only actual change consisting of a change in the distribution of bank deposits among the various banks.

In order for the total money stock to increase, as Block and Garschina suggest it will, the initially deposited sum, instead of consisting of funds transferred from a different bank, must consist of basic money, meaning either cash that had been circulating outside the banking system, or basic money that has freshly entered the economy, in the shape of newly produced or imported metallic money or, alternatively, the fresh fiat money emissions of a central bank. But in that case the fundamental cause of growth in the money stock is, not the fractional value of r, but the increase in R, just as our previous equations suggested. Provided that the system reserve ratio itself stays constant, so long as the supply of bank reserves itself remains unchanged, the total quantity of bank deposits won’t change.

It follows from what’s been said so far that, to assess the claim that fractional reserve banking causes business cycles, we must ask two questions. The first question is, “To what extent have historical money-fueled booms been associated, not with growth in the supply of either commodity money or central-bank supplied bank reserves, but with declining banking system reserve ratios?” The second question is, “When a banking system does manage to operate on a lower reserve ratio, does its doing so necessarily contribute to an unsustainable boom?” I’ll answer these questions in subsequent posts.

[Cross-posted from Alt-M.org]

On Tuesday, a Sudanese immigrant to the United Kingdom named Salih Khater crashed his car into cyclists and pedestrians in a terrorist attack in London. Fortunately, Khater did not murder anybody in his attack but he did injure three pedestrians, one of whom was so lightly wounded that he was treated at the scene and released. The other two wounded people have since been released from the hospital. 

Terrorism has been relatively common in the United Kingdom for decades, from the Irish Republican Army to al Qaeda to ISIS. However, there is little research on the actual risk of a British person being killed or injured in a terrorist attack. This post is an attempt to quantify that risk.

According to data from the Global Terrorism Database at the University of Maryland, the RAND Corporation, and online sources for 2018, terrorists murdered 2,402 people in the United Kingdom from 1975 through August 14, 2018 (Figure 1). Despite increases in the number of murders committed by terrorists in recent years, especially a series of horrible attacks in 2017 that murdered 42 people, the long run trend is a decline in the number of people murdered by terrorists in the United Kingdom. Figure 2 shows that 5,267 people were wounded in terrorist attacks in the United Kingdom during the same period. Figures 1 and 2 only include victims and exclude the terrorists themselves from the death and injury statistics. Using existing data sources, somebody with knowledge and a lot of time could use the GTD and RAND databases to identify the nativity, ideology, and other characteristics of each terrorist like I did for the United States

Figure 1: Annual murders committed by terrorists in the United Kingdom
 " class="oembed-title">Figure 2: Annual injuries committed by terrorists in the United Kingdom

From 1975 through August 15, 2018, a British person’s chance of being murdered in a terrorist attack on British soil was about 1 in 1.1 million per year.  But that annual chance of being murdered in a terrorist attack obscures big shifts over time. Over the last decade, the annual chance of being murdered in a terrorist attack on British soil was about 1 in 11.4 million per year, far lower than the entire 1975-2018 period. Especially relevant is the number of injuries given that Khater only injured people in his attack. The annual chance of being injured over the entire time was 1 in 496,464 per year, but only 1 in 1.4 million per year over the last decade. 

Figure 3 tries to show how the risk has changed over time by using a moving three-year average of the annual chance of being murdered in a terrorist attack. I used a three-year moving average because zero people were killed by terrorists in many years and one cannot divide by zero. A note about reading Figures 3 and 4: the Y-axis is the annual chance of being murdered or injured in a terrorist attack, so the 2011 number of 63,280,444 in Figure 3 means that the chance of a British person being murdered in a terrorist attack was 1 in 63,280,444 that year. Thus, the higher the number, the lower the chance of being murdered in a terrorist attack. 

Figure 3 shows that the annual chance of being murdered in a terrorist attack fell rapidly from 1975 through 2004, rose over the next several years, fell again, and has been increasing since about 2012. Dropping the moving gives sharper divides: In 2016, 2017, and 2018 (so far), the annual chance of being murdered in a terrorist attack was about 1 in 7.3 million per year, 1 in 1.8 million per year, and zero (so far), respectively. 

Figure 3: Annual chance of being murdered in a terrorist attack in the United Kingdom

Figure 4 shows a similar decline in injuries inflicted by terrorists from 1975 through 2003 that abruptly reverses in 2004, falls again in the following years, and then starts to increase over the last few years. 

Figure 4: Annual chance of being injured in a terrorist attack in the United Kingdom

These above figures show that the chance of dying or being injured in a terrorist attack in the United Kingdom is small. Yet terrorism succeeds in terrifying people. None of the numbers above would give comfort to the actual victims of terrorism or their families because what happened to them is the equivalent of “winning” an evil anti-lottery. But the above numbers should show British citizens, their government, and the world at large that terrorism is a relatively small problem in the United Kingdom.    

The big picture of U.S. - China trade tensions can be difficult to sort out. How problematic are China’s trade practices, as compared to those of other countries? What is the appropriate U.S. government response? These are not easy questions to answer (although we do have some views).

Sometimes it can be helpful to focus on particular sectors instead. One such sector is beef, which U.S. farmers would like to export more of to China. At a recent Senate hearing, U.S. Trade Representative Robert Lighthizer was asked about this (starts around 20:00):

Sen. Jerry Moran: Let me get another question in before my time is fully expired. I applauded the administration for successfully concluded negotiations with China in 2017 to allow the US beef exports resumption into China after they were blocked in 2003. However, the 25% retaliatory tariff on US beef, which stems from the USTR 301 investigation, threatens to halt those exports and certainly any expansion. So on one hand, we had the opportunity to high five and brag about beef going to China. That seems – that opportunity seems to have disappeared and most concerning is what the growth potential that exists in China, what it does to our opportunities for increasing US beef sales.

Lighthizer: So, if I can, let me speak for a second about beef with China. I think it is a good example of what we are facing with China. So, the President’s strategy, as was the strategy of prior administrations, was to initially engage in a dialogue with China. We clearly have a chronic problem with China, we have a trade deficit with China, which was unsustainable, 375 billion dollars. A lot of which is not the result of real economics but really is a result of state capitalism. So, ten years ago as a result of negotiations because of their unfair practices, China agreed to allow US beef in certain circumstances, ten years ago. Over the course of the next ten years they didn’t let in beef because they made the promise but didn’t keep the promise. The President, during the 100-day period, when the President decided I will try a dialogue first, had that dialogue and as a result of that they agreed to let beef in. Let’s be clear though. The amount of beef – US beef that was eligible to come in was less than 3% of US production. So it wasn’t like it was going to be a panacea, although a lot of people thought it was. The result is that after the last time I saw the numbers, which were eight or nine months in, this was something like $60 million worth of beef sold in all of China. So I guess to me the China beef situation is more an example of what we’re facing with China than it is actually a solution. We really thought we would (a) be able to sell beef with hormones, the normal US production of beef into China for a long period of time. We don’t think they have a WTO right to keep us out. So while we made some headway in there, you’re right, they did take it away. That raises the question, this is going to be the question not with beef, but with all of the members and all of the retaliation, this may not be the appropriate time to raise it, I’ll do it on someone else’s time if you’d like, but we have to at some point discuss why we’re doing any of this. Because there clearly is pain associated with what we’re doing and the President is very sympathetic to not only cattle ranchers but to everyone else and a lot of ag but a lot of over people who are being, we believe, unfairly treated as a result of our attempt to really level the playing field.

Last year we wrote about the problems faced by U.S. beef exporters. (It’s worth noting that the 2003 ban mentioned by Senator Moran was in response to concerns about mad cow disease, and other countries also blocked U.S. beef exports). In our paper, we had some data showing how much beef imports into China have increased in recent years, and how well other countries were doing selling their beef in China:

 

Since we put together this data, China removed its ban on U.S. beef as part of a broader U.S.-China agreement, and U.S. exports of beef to China have grown. U.S. Meat Export Federation data show that, after the ban was lifted, there have been just over $60 million in sales of U.S. beef in China, over the past year or so. That figure matches pretty closely to the one Lighthizer referred to in his answer above. However, this figure is still dwarfed by the imports from other countries. As the table shows, imports come mostly from countries other than the United States. There are a number of reasons for the expansion of non-U.S. beef imports into China in recent years, but it is worth pointing out that Australia and New Zealand have a price advantage over their competitors, because those countries have negotiated trade agreements with China under which China cut its beef tariffs. Some of the other major beef exporting countries are also negotiating with China. Beyond tariffs, a trade negotiation provides a forum to talk about regulatory barriers.

If you don’t like numbers, we now have some visual evidence as well, as one of us (Huan) just went over to China, and while there she took a picture of the beef for sale in a Chinese grocery store in downtown Guangzhou, one of the most developed cities in China:  

 

This picture illustrates that imported beef is available for sale in China, but the market is dominated by non-U.S. beef. As can be seen in this picture, beef from Australia (indicated by an Australian flag and a yellow boundary) far exceeds the beef from anywhere else. Canadian beef (indicated by a red boundary) is a distant second. And American beef (indicated by a blue boundary) is pulling up the rear. 

When there is a situation where nobody can sell a product or service in China, it is clear that the problem is with China. But when other countries are selling a lot in China, it is worth thinking about what other countries are doing right and what the United States might need to improve.

Something promising is happening at the Department of Housing and Urban Development. Recent New York Times and Wall Street Journal articles suggest Secretary Ben Carson and his team are impressing on policymaker’s minds that 1) local policymakers have created housing affordability problems and 2) local policymakers can solve those problems. 

According to the Times article, “as city and state officials and members of both parties clamor for the federal government to help, Mr. Carson has privately told aides that he views the shortage of affordable housing as regrettable, but as essentially a local problem.”

Meanwhile, a Journal article published this week reports “[Carson] plans instead to focus on restrictive zoning codes. Stringent codes have limited home construction, thus driving up prices and making it more difficult for low-income families to afford homes, Mr. Carson said.” 

Carson is right to describe housing affordability as a local problem, and smart to signal HUD can’t and won’t solve the problem for local policymakers.

For its part, Cato scholars have argued for zoning reform in numerous places. Earlier this month, Cato Institute published a new issue brief on zoning regulation and housing prices. Elsewhere I’ve written about zoning in the context of Affirmatively Furthering Fair Housing, the controversial HUD rule the agency opened for public comment and revision earlier this week. 

Carson seems to understand that federal assistance has encouraged poor local policies. In a Cato report published last year I show that the federal government subsidizes housing in states with more restrictive zoning at higher rates than those with less restrictive zoning. Specifically, the most-restrictively zoned states receive nearly twice the federal dollars per capita compared to the least-restrictively zoned states (see figure). 

 

Because restrictive zoning drives the cost of housing up, local governments actively undermine the purpose of federal housing subsidies when they adopt restrictive zoning and land use policies. HUD staff have mentioned housing vouchers cost more money each year to service the same number of people.

Local zoning regulations grow every year, so it makes sense HUD would see climbing costs. For fiscal conservatives that care about efficiently using government dollars, attaching pro-market zoning requirements to HUD grants is arguably a cost-saving device. Pro-market zoning requirements also support the purpose of housing affordability subisidies by ensuring cities are doing their part to allow development. 

Determining whether attaching requirements to grants is a constitutionally-sound strategy is best decided by a legal expert. However, Carson’s new focus on educating policy makers on the damaging consequences of local policy, while acknowledging HUD cannot overcome local problems by spending money, is a welcome change.

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