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Recall that President Trump said this yesterday in the context of his remarks with European Commission President Juncker:

This is why we agreed today, first of all, to work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods. 

Zero tariffs on these products through a trade agreement is a plausible and useful goal. On the other hand, zero non-tariff barriers could only be achieved through the U.S. joining an EU-style single market, which I don’t think anyone has in mind here. It is possible to remove a few of the more egregious regulatory barriers, but we should be realistic about what can be achieved.

But let’s focus on subsidies. On this issue, U.S. Trade Representative Robert Lighthizer said this today at a Senate Committee hearing (starts around 34:45):

The idea is [to have] a balanced package and move from where we are to an environment where you don’t have tariffs or subsidies. Because that’s an important part. You can’t compete with someone who is subsidized. And we don’t subsidize for the most part. 

In terms of whether we subsidize “for the most part,” I thought this recent op-ed from Cato Senior Fellow Doug Bandow would be helpful:

Subsidies Galore: Corporate Welfare For Politically-Connected Businesses Is Bipartisan

Congress created the usual special interest frenzy with its latest iteration of the Farm Bill. Agricultural subsidies are one of the most important examples of corporate welfare, money handed out to businesses based on political connections.

Business plays a vital role in a free market. In real capitalism there are no guaranteed profits. But corporate welfare eliminates this handicap for the well-connected.

Business subsidies that allow politicians to channel economic resources toward their preferred ends distort investment and trade. Moreover, turning government into an engine of illicit profit encourages what economists call rent-seeking. Well-organized special interests usually triumph over the broader public and national interest.

Aid comes in many forms.

Agriculture has spawned a gaggle of sometimes bizarre subsidies. Like a dairy program which created milk surpluses, in turn encouraging state price fixing, generating massive cheese stockpiles, in turn triggering giveaways to the poor. Payments, loans, crop insurance, import quotas, and more underwrite farmers.

Money also goes to agricultural enterprises through the Rural Business-Cooperative Service, which supports “business development.” The recently defeated Farm Bill even included $65 million in special health care subsidies for agricultural associations. Ironically, farm households enjoy higher median income and wealth than non-farm households.

The Market Access Program is one of several initiatives to subsidize agricultural exports. Other programs support general trade and investment.

For instance, the Export-Import Bank is known as Boeing’s Bank. It provides cheap credit for foreign buyers of American products. Which, ironically, gives foreign firms an advantage over U.S. producers who must pay full fare. Ex-Im’s biggest beneficiary in recent years has been China, especially its state-owned firms.

The Overseas Private Investment Corporation underwrites U.S. investment in potentially unstable nations. If the project pays off, investors win. If not, the rest of us lose. Why should the public guarantee investor profits?

At the other end of the commercial spectrum is the Small Business Administration. Smaller firms are a vital part of the American economy but they are not an underserved market. There is no dearth of, say, liquor stores. SBA is a response to a political opportunity, not an economic need.

Much corporate welfare is disguised in broader terms. The Commerce Department’s Economic Development Administration subsidizes “development” in “distressed communities,” meaning the agency underwrites business, with dubious results. There are some 180 federal pork barrel “economic development” programs.

The Rural Utilities Service (formerly the Rural Electrification Administration), continues, never mind that rural America got electricity decades ago. Today RUS has expanded into Broadband internet and even television service.

The Bureau of Land Management (mis)manages federal lands, subsidizing use of rangeland by ranchers, for instance. There are incentives for airline companies to serve small markets. Foreign Military Financing is presented as a national defense measure, but in most cases the chief beneficiaries are arms makers.

Housing subsidies are many, most notably mortgage support and tax preferences, though the latter was trimmed by last year’s tax bill. The Trump administration is pushing subsidies for what the president calls “beautiful” coal power plants.

Federal research and development offers bountiful benefits to business. The more basic the R&D, the better the argument that the public interest is being served. The closer to commercialization, the more the expenditures are essentially corporate welfare.

For example, the Obama administration funneled $535 million worth of loan guarantees to Solyndra, which President Barack Obama called an “engine of economic growth.” The company filed for bankruptcy in 2011.

Tesla Syndrome

The Advanced Technology Vehicles Manufacturing program provides $25 billion in loans for development of cars powered by alternative fuels. Tesla is a major beneficiary. Some firms enjoy multiple benefits.

Although most public attention falls on direct expenditures, trade “protection” is no less a form of corporate welfare. Both tariffs and quotas allow domestic manufacturers to charge more. Tariffs and other fees alone come to around $40 billion a year.

Tax preferences are another means of corporate welfare. Buried in the tax code, they often are difficult to identify, Measures which affect only one firm or industry, in contrast to those with general economic impact, should be treated as subsidies. The Tax Foundation once figured “special tax provisions” to cost more than $100 billion annually in lost revenue.

States and localities also offer subsidies, many through grants, free property, and tax preferences to attract businesses to a particular area. Estimates of these costs run between around $50 billion and $80 billion.

Few in Washington really want to cut spending. But ending corporate welfare would be a start to restoring fiscal sanity in Washington.

As this piece demonstrates, we subsidize a lot, and the reality is that bilateral trade agreements can’t and won’t do much to stop it. There are some WTO obligations that place limits on the amounts and kinds of subsidies, and those help. But I wouldn’t expect much progress on subsidies in any U.S.-EU trade talks.

In February 2018 Agustin Carstens, the General Manager of the Bank for International Settlements in Basel, gave a speech at Goethe University in Frankfurt entitled “Money in the digital age: what role for central banks?” The speech quickly became notorious in the cryptocurrency community for its brusque dismissal of Bitcoin and other cryptoassets. Among other things, Carstens there called Bitcoin “a combination of a bubble, a Ponzi scheme and an environmental disaster.” A combination? One may judge the price of Bitcoin a bubble, but there is no other sense in which Bitcoin is a “Ponzi scheme.” The BIS being the central bankers’ bank, crypto supporters in response mocked Carstens for merely representing the interests of national fiat currency monopolies in quashing potential competitors.

More recently Carstens gave an interview to a Swiss periodical, available in English translation on the BIS website, in which he reiterated his anti-cryptocurrency position. “It’s a fallacy to think money can be created from nothing” was one of the oddest claims he made there, given that fiat monies are closer than cryptocurrencies are to being gratuitously created. This interview too has provoked criticism from crypto defenders.

Overlooked in the debate over Carstens’ dubious statements about Bitcoin and cryptocurrency have been the dubious statements he makes about historical forms of private money. I want to shine some critical light on those statements.

Early in the speech, Carstens (p. 1) declares: “Experience has also shown that to be credible, money requires institutional backup, which is best provided by a central bank.” Best by what criteria? The dollar hasn’t been better under the Federal Reserve than it was under the classical gold standard with private banknotes. The experience of other countries under fiat monies has been even worse than that of the United States. Central banks have brought higher inflation rates, higher price level uncertainty, and higher resource costs of the monetary system. They have diminished fiscal discipline. Floating rates have diminished the gains from international trade and cross-border investment. (For the evidence behind these summary contrasts see Selgin, Lastrapes, and White (2012).)

Carstens (p. 2) states: “Money is an IOU, but a special one because everyone in the economy trusts that it will be accepted by others in exchange for goods and services. One might say money is a ‘we all owe you’.” But this is a nonsensical use of terms. A fiat dollar is not an IOU or a “weOU;” a gold coin is not an IOU or a weOU. An IOU specifies the number of units to be repaid. By contrast, a fiat dollar or a gold coin does not entitle the hold to any specific quantity of any good or service. The future purchasing power is not pre-determined. It will depend on spot prices prevailing at a future date.

Carstens correctly notes (p. 2) that “many things have served as money.” He gives some examples and provides pictures of them. But in the next paragraph (p. 3) he curiously declares: “Common to most of these examples is that the nominal value of the items that have served at one time as money is unrelated to their intrinsic value.” Most of his examples (4 of 6) are commodity monies. The claim that “the nominal value … is unrelated to their intrinsic value,” while true for fiat monies, is false for commodity monies. A full-bodied gold coin (one of his examples) normally has a nominal value in proportion to its gold content.

Surprisingly, Carstens even gets wrong the details of a non-profit community currency project in his native Mexico, called the túmin. He describes it as “a local currency circulating (illegally) for some time around 2010 exclusively in the Mexican municipality of Espinal.” A little Googling reveals, however, that the túmin is still circulating in 2018, and has spread beyond its town of origin to 16 states of Mexico’s 32 states.

In a section of his speech entitled “What constitutes good money?,” Carstens goes seriously off track. He says this (p. 5) about the history of private money: “Over the ages, many forms of private money have come and gone. … While some lasted longer than others, most have invariably given way to some form of central bank money. The main reason for their disappearance is that the ‘incentives to cheat’ are simply too high.” Even putting aside the incoherence of the expression “most have invariably,” this is far from an accurate account of why legislatures granted central banks monopolies in money issue. The view that fraud (“wildcat banking”) was endemic to open-entry private note-issuing systems, and that the United States experience demonstrated this as Carstens believes (p. 6), was once popular. Even such a free-market stalwart as Milton Friedman subscribed to it in his 1960 Program for Monetary Stability. After examining later-published evidence on free banking episodes, however, Friedman and Schwartz (1986) realized that prevalent wildcat banking was a myth, accurately summarizing the facts this way: “Historically, producers of money have established confidence by promising convertibility into some dominant money, generally, specie. Many examples can be cited of fairly long-continued and successful producers of private moneys convertible into specie.” Dr. Carstens should begin to catch up with the literature and read the historical studies cited by Friedman and Schwartz.

While it is true, as Carstens notes, that banknotes did not circulate a par nationwide in the United States during the antebellum period, the reason was not fraud but government interference in the form of legal restrictions against interstate branching. Nationwide par circulation was the norm where banks were free to branch, as in Canada and Scotland. When Carstens (p. 7) refers to “the unhappy experience with private forms of money” he ignores the facts. When he suggests that “the experience with currency debasement that has peppered history” should warn us against “the proliferation of such private monies,” he inverts the facts. Currency debasements have been symptomatic of government monopoly in currency, not of private competition. A central bank with a monopoly on currency issue can debase the currency. A single bank in a multi-issuer issuer cannot, neither legally nor practically. As Adam Smith noted, the greater the proliferation of private note-issuers, the lesser the consequence to the public of the failure of any one of them. The system is robust. A central bank monopoly, by contrast, is a fragile single point of failure.

Yesterday, European Commission President Jean-Claude Juncker met with President Trump at the White House to talk about trade. Afterwards, to the surprise of many (including me), they held a press conference at which they said positive things about the U.S.-EU trade relationship. Then later, President Trump had five positive tweets about the meeting. It was more amicable than anything we’ve seen in U.S. trade policy for many months.

But obviously, positive tweets only get you so far. What does all this mean in terms of substance? That’s hard to say at this point. The key items the parties agreed on were the following:

– They will work towards “zero tariffs, zero non-tariff barriers, and zero subsidies” on non-auto industrial products. That’s not a huge category of goods, as it excludes agriculture and raw materials, among other things, and zero non-tariff barriers and subsidies seems really unlikely. But still, it would be great if we made progress here.

– The EU will buy more U.S. soybeans and liquid natural gas. This was probably going to happen anyway because of market shifts and other factors.

– They will have a dialogue about conflicting regulatory standards in the U.S. and EU. This is a long-time goal of U.S. and EU trade policy-makers. It sounds easier than it really is.

– They will work together on reform of the WTO, and to address problems to the trading system caused by China.

As for the existing tariffs the Trump administration has imposed on steel and aluminum from the EU, and the retaliatory tariffs imposed by the EU, those will stay in place, but progress on the broader talks could help resolve the tariff issue. Also, it appears that the threatened tariffs on auto imports will not be imposed on the EU.

In some ways, this seems like a “light” version of the Transatlantic Trade and Investment Partnership that the Obama adminisration had been trying to negotiate with the EU. But it’s too early to come up with a label. We need to see how this develops. 

It would be nice if we knew why Trump changed his tone yesterday. Has he recognized the limits of his aggressive approach to trade policy? Does he fear the impact of a trade war on voters? Did he have a good personal rapport with Juncker? This would help us understand whether a permanent change in approach is possible. Unfortunately, it’s not clear at this point where this is all going and how long it will last. But one day of trade peace is nice after months of harsh rhetoric and escalating tariffs. 

Nearly a century has passed since Justice Oliver Wendell Holmes’s legendary proclamation that “while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.” But that statement did little to actually clarify when the Fifth Amendment’s protections against uncompensated takings of property applies to government action that regulates away the use of land rather than physically taking it through eminent domain.

Attempting to clear up that confusion, the Supreme Court 40 years ago handed down the now infamous Penn Central decision (involving the historic qualities of NYC’s Penn Central Station). Penn Central requires courts to go through a balancing test based on (1) the economic impact of the regulation, (2) the extent to which the regulation interferes with reasonable investment-backed expectations, and (3) the nature or character of the government action. Unfortunately, that’s a lot of words to give very little direction, so property owners, regulators, lawyers, and lower courts have been clamoring for meaningful guidance on those fact-bound, ad-hoc inquiries ever since.

As the story of Simone and Lyder Johnson illustrates, the Supreme Court needs to provide true guiding principles on regulatory takings. The Johnsons were drawn to Ponce Inlet, Florida, where they bought land and made plans to construct their dream home. Sensing that the town may be able to benefit, Ponce Inlet persuaded the Johnsons to expand their plans into “a delightful mixed-use waterfront development.”

Over several years, the Johnsons bought additional parcels while working hand-in-hand with the town. They were amenable to providing everything the town asked for, like a nature preserve and boat slip. After millions of dollars were spent, the town changed its mind, halted all work, denied permits, and went so far as to pass legislation prohibiting all development on the Johnsons’ property.

The Johnsons sued, claiming that Ponce Inlet’s actions amounted to a compensable taking. The state trial court agreed, but the appellate court reversed and sent the case back to determine if a taking had occurred based on the economic impact on the “parcel as a whole” (meaning all the Johnsons’ property, rather than the specific parcels the trial court had found to be left devoid of economic value).

The Johnsons—through companies collectively known as Pacetta—have now asked the U.S. Supreme Court to review their case. Cato, along with the NFIB Small Business Legal Center, filed a brief supporting that petition. The Supreme Court has consistently referred to the Penn Central factors as the North Star of regulatory-takings law but has done little to clarify the meaning of each factor or how they should be weighed relative to one another.

What we do know is that property owners almost always lose under Penn Central. Under that nebulous test, lower courts are free to use those malleable factors to find that what government is attempting to achieve through its regulations is so important that a taking has not occurred, regardless of the regulation’s economic impact on the owner or the extent of its interference with invest-backed expectations. Likewise, lower courts frequently find that the economic impact of a regulation is not quite drastic enough—despite destroying as much as 95% of a property’s value—to find that a taking occurred, despite the extent of interference with investment-backed expectations.

The Court should take up Pacetta v. Ponce Inlet and use it as an opportunity to clarify at least one aspect of property law: that when one of Penn Central’s three ad-hoc inquiries tips strongly in favor of the owner, a taking has occurred and compensation is due.

A compelling explanation for why the American immigration system is more restrictive than other developed countries is that voters here do not feel that they have control over the border.  Pictures, videos, and the widespread perception that there is chaos on the border caused by illegal immigrants, despite facts to the contrary, have the effect of convincing American voters to be less liberal on the issue than they otherwise would be.  A recent paper by political scientists Allison Harell, Stuart Soroka, and Shanto Iyengar in the journal Political Psychology tests this “locus of control” argument by comparing immigration policies in Canada, the United States, and the United Kingdom with perceptions of control over immigration and its impact on their society. 

Harell et alia examine three perceived loci of control: individual, social, and an outgroup’s control over one’s own economic condition.  Across the three countries, the more that a respondent perceives himself and his society as being in control, the more pro-immigration he is.  When a respondent thinks that immigrants are responsible for his own personal economic or life outcomes then he is more hostile toward them because of his perceived lack of control.   They sum up their findings as:

Those who feel in control (personally or as a society) are less hostile towards immigrants, while those who attribute negative outcomes to immigrants’ predispositions are also more hostile. Results also suggest that measures of control are related to, but distinct from, both partisanship and racial prejudice.

Respondents’ perceptions of control across countries are related to the openness of immigration policies in the three countries studied by Harel et alia.  Canada has the most open immigration policy and Canadians have the greatest sense of control over immigration. Americans and British feel like they have less control, due to the Southern border with Mexico and membership in the Schengen Area, respectively.  Some of these measures of control, such as individual, social, or an outgroup’s degree of power, vary between the countries but the pattern holds: a greater perception of control is correlated with a more open immigration system.

Harell et alia’s theory passes the smell test, is consistent with what I know about psychology, and their empirics help explain different immigration policies across this small sample of countries.  However, the recent separation of families, caging of child migrants and asylum seekers on the border, the inability of the government to reunite them efficiently, and the chaos that this has created add an important caveat.  Voter reactions to border chaos probably depend on whom they blame for the chaos.  If voters blame the pro-immigration political party for the chaos, then voters are more likely to react by adopting more anti-immigration views.  With the exception of the current situation, politicians with a pro-immigration reputation (even when undeserved) have presided over the recent border crises so it makes sense that respondents would blame them.  However, if voters blame the anti-immigration political party for the chaos then they could react by adopting more pro-immigration views. 

There are two cases that help illustrate this point.

There was a large surge of unaccompanied alien children (UAC) on the border in 2014 that caused a crisis for the Obama administration.  Republicans reacted by claiming that Obama created the chaos by being too lax in enforcing immigration laws and that his announcement of DACA created the mass influx – two assertions that do not stand up to a bare minimum of scrutiny.  First, President Obama was nicknamed the Deporter-in-Chief because he deported more people than any other administration and will likely never have that odious honor taken from him.  As for border security, the number of crossers precipitously fell during his administration due to the poor American economy, rising fortunes and falling birthrates south of the border, and more effective border enforcement.  Secondly, the surge in child migrants that led to the crisis for Obama in 2014 began before he announced DACA, continued after everybody knew that the new crossers were ineligible, and was more linked to homicides in Central American countries than any change in American policy (although Mexican policy mattered quite a bit).  Regardless, voters blamed the feckless-looking Obama administration for the border chaos and Republicans took control of the Senate that year and nominated the most anti-immigration candidate in the GOP primary for president who shortly thereafter went on to barely win the election.

President Trump is now dealing with his own border surge just like President Obama did.  The recent surge in asylum seekers along the southwest border who enter unlawfully and surrender to Border Patrol is entirely an unintended creation of the Trump administration’s anti-asylum policies.  First, Trump’s administration has turned away many asylum seekers along the border and told them to “come back later.”  Second, they were changing asylum rules to restrict who could ask in the first place.  Those two factors, individually and together, incentivized asylum seekers to enter the United States illegally and ask for asylum because, for all they knew, they would never be able to at a port of entry.  They did so and got struck by the Trump administration’s third policy: zero tolerance and prosecution of all unlawful border crossers.  Since Trump’s administration ordered that every border crosser had to be prosecuted to the fullest extent of the law, the government separated parents from their minor children so as to charge the former with the misdemeanor of illegal entry.  Children aren’t caged with their parents when their parents are charged with a crime.  That turned into the nightmare of children in cages without their parents and the government’s inability to reunite them with their parents in many cases. 

Obama looked helpless, incompetent, and brutal in the 2014 border chaos as his administration caged entire families in deplorable conditions.  Trump now looks incompetent, brutal, and responsible for everything that’s happened on the border under his watch.  Republicans politically capitalized on the border chaos in 2014 by painting the Democrats as either complicit with the migrants or helpless to stop it.  The Republicans introduced a bill to gut the asylum system in response.  The Democrats, for their part, didn’t have a coherent explanation except “nuh-uh.”

Now that the dynamic has flipped, and anti-immigration politicians are being blamed for the chaos, we can test the locus of control theory.  If enough voters also blame their recent perceptions of border chaos and lack of control on anti-immigration politicians then they could react by supporting more liberal immigration policy rather than reflexively opposing liberalization.  Polling already shows that Americans are more supportive of increasing immigration during the Trump administration, and perhaps this could be in response to the chaos created by his policies or the fact that they are too brutal for voters, but those numbers have also been trending up for decades.

It is difficult for President Trump and the Republican Party to capitalize on the border chaos that he created when everybody believes that they created it.  The recent surge in asylum seekers and migrants on the border could provide an excellent testing ground for this caveat to the locus of control theory and whether perceptions of chaos always lead to less support for liberalization.  

Campaigning is officially over—and Pakistan will hold its third consecutive general elections tomorrow, on July 25. These elections have raised concerns about the state of civil–military relations within Pakistan amongst Pakistan-watchers. The Financial Times has labeled tomorrow’s elections as the “dirtiest elections in years” while the Economist explains that “The true winner may be the army; the losers will be Pakistanis.”

Pakistan’s military establishment is known for being involved in the state’s political affairs. In its 70 years of independence, Pakistan has spent more than half of its life under military rule: it has experienced four military coups, and each has turned into a 7–10 year military dictatorship. Even when civilian governments have been in power, the military has been known to interfere, calling the shots in foreign policy and national security. Oftentimes, the civilian leadership has called on the military in times of domestic security crisis, and the public has usually favored the military.  

But what makes the military’s interference in this election worse than past interferences? Politicians, analysts, human rights groups, and media personnel in Pakistan have accused the military of doing three things that are considered troublesome.

The first is targeting the Pakistan Muslim League–Nawaz party, who was elected in 2013. Historically, the army and recently ousted prime minister Nawaz Sharif have had a tumultuous relationship. Two years ago, it was the army along with Pakistan Tehrik-i-Insaf’s Imran Khan that brought the lawsuit that led to Sharif’s court-ruled dismissal, disqualification from running for office, and corruption trial that has sentenced him and his daughter to 10 and 7 years in prison respectively. However, Imran Khan and the military deny any links to each other.

The second problematic activity is the army’s pressure on the media. Pakistan is considered to be one of the most dangerous countries for journalists regardless of the kind of government in power. Hameed Haroon, chief executive of the Dawn Media Group (the largest English media company in Pakistan) and the president of the All Pakistan Newspapers Society wrote an op-ed in the Washington Post about how this time the level and kind of media censorship is different. The recent media censorship is all about ensuring that the media does not provide independent coverage of Pakistan’s central political issue, which is the “deepening power struggle between the military and civilian authorities.” In April, a widely watched cable news channel, Geo News, was forced to go off air after appearing too sympathetic toward Sharif. Only direct negotiations with army officials allowed Geo News to go back online. Dawn newspaper has also experienced pressure, where newspapers have been confiscated in army-controlled areas and distributors have been harassed by army officials.

The third, and perhaps most concerning, is how the military has been using the judiciary as a cover. The military’s encroachment into judicial space began after the December 2014 Army Public School attack by the Pakistani Taliban that killed over 130 children and teachers. The Sharif government and then-Chief of Army Staff Raheel Sharif came together and developed the National Action Plan, a 20-point plan designed to counter domestic terrorism. The plan reinstated the death penalty and established military courts, where those charged with terrorism would now be tried, avoiding the overburdened civilian special courts called the Anti-Terrorism Courts. In the past, any time a civilian government or military dictatorship created military courts to try civilians, the Supreme Court of Pakistan struck the courts down as being unconstitutional. But in 2015, the parliament passed a constitutional amendment, called the 21st amendment, which discarded the separation of powers between the branches of government for those charged with terrorism, granting jurisdiction to the military and applying court martial rules to those charged with terrorism. The media eventually uncovered that the civilian government had been pressured by the military to pass the constitutional amendment. Later in 2015, the Supreme Court ruled to uphold the 21st amendment. Military courts remain active today.

The Pakistan Army, therefore, views itself as the manager of the government rather than a subordinate. But for a democratic system to work, the military needs to be beholden to the civilian leadership. If a military controls foreign policy then it will create a military-centric foreign policy where a solution to every national security problem will be seen as something that can, and should, be solved by the military. As they say, when you have a hammer, everything looks like a nail. But as a developing country with a host of other issues, such as a looming financial crisis and a youth bulge where 64% of the population is under the age of 29, Pakistan can’t afford to have a military-centric foreign policy.

Ultimately, the military’s current involvement and interference in the political system undermines its own credibility—and that of the system that it so desperately wants to lead.

The declining cost of solar panels and the widespread adoption of rooftop solar in California lead to many cocktail party discussions about the competitiveness of green energy. While at first glance it may seem that solar power and other renewable energy sources are able to compete with conventional resources, a closer examination of the characteristics and costs of electricity systems demonstrates that current renewable technologies are not economically competitive.

The fixed costs of electricity systems, the capital costs of transmission and distribution systems, are large. Actual electricity tariffs do not typically recover fixed costs explicitly and separately from electricity use. Instead they recover them through use charges per kWh. If electricity pricing were more efficient, customers would pay a large fee for the use of the transmission and distribution systems disconnected from the amount of electricity they use and would be charged a separate variable fee based on actual consumption. (See this article by Ahmad Faruqui and Mariko Geronimo Aydin in the Fall 2017 issue of Regulation for a more thorough discussion of electricity pricing.) Thus, current bills do not inform consumers about how high the fixed costs of the system really are.

Understanding the significance and recovery of fixed costs is important because of the manner through which customers with solar panels on their roof are reimbursed for the power they generate.  Solar production in many states, especially California, is reimbursed at full retail rates. But when a household produces solar power and reduces the use of system-generated electricity, the system saves only the marginal costs of the power that it did not have to produce, which is usually much less than the retail rate. None of the large fixed costs are saved.

In California, because of its tiered retail rate structure, the discrepancy between the retail rate and the amount the system saves because of rooftop solar production is large. The marginal cost of power generation is about 6-10 cents per kWh, but customers are reimbursed at full retail rates (many at over 30 cents per kWh) rather than the lower marginal costs of system generation. Reimbursement at full retail rates shifts the fixed costs of the electric system from solar panel households to other users. Without the excessive payments, decentralized solar would not be competitive.

Other renewable generation sources would appear to be competitive with natural gas generation. According to estimates of the total costs of various generation technologies over their operating lifetime, large-scale centralized solar generation in the deserts of the American southwest and large-scale onshore wind generation both have costs that are competitive with new natural gas generation. (Offshore wind is much more costly. See my blog on Cape Wind, a failed plan to build a wind farm off the coast of Massachusetts.)

However, even if the lifetime average costs of wind and solar are the same as coal or natural gas, the equivalence needs to be qualified. Different electricity generation technologies are very imperfect substitutes. The marginal value of electricity varies across time because demand varies by time of day and space because of transmission constraints. For example, wind power supply is greatest during winter nights, when demand is low, and lowest during summer when demand is highest. Wind is also most plentiful far from where people live and consume electricity, meaning it incurs additional costs to transport the electricity to people. At least solar output is large during the summer afternoon peak demand period. But both solar and wind are not dispatchable. That is, their output cannot be made to vary up or down.

Until cost-competitive green energy that is dispatchable is available, renewable sources of electricity require backup conventional generation. Because the sun eventually sets, and the wind stops blowing, natural gas generation whose output can be varied (sometimes quickly) must be available as backup. The fixed and variable costs of the backup must be paid by someone. These hidden costs need to be considered in any calculation of “cost competitiveness.”

Future technological breakthroughs, such as more efficient batteries to store electricity and more cost effective dispatchable solar power sources, may make green energy a better substitute for conventional generators. But for the time being, without governments putting their thumbs on the scale, green energy is not competitive. 

Written with research assistance from David Kemp.

When Katie Sherman was nineteen years old, she was incarcerated at Trumbull County jail in Ohio, for about five months. During that time, Charles E. Drennen worked as a corrections officer in the female pod of the jail where she was housed. Several female inmates had filed complaints that they’d been harassed and threatened by Drennen, who had a reputation for glaring at the inmates while they were sleeping, but Drennen began focusing on Ms. Sherman in particular. He often made highly sexual comments to her, and on at least four or five occasions, ordered her to expose herself to him, and to touch herself sexually in front of him and other inmates. Ms. Sherman – again, then a nineteen-year-old girl – complied because she was intimidated by Drennen. She eventually attempted to file a complaint against him (even though complaints were not anonymous), but she was never given the complaint form she requested. 

After she was released, Ms. Sherman - along with Michele Rafferty, her cellmate - filed a Section 1983 lawsuit, asserting (amongst many other claims) that Drennen’s sexual abuse violated her Eighth Amendment right to be free from cruel and unusual punishment. Drennen moved for summary judgment, arguing that this was “only” sexual harassment, and that because he did not physically touch Ms. Sherman himself, he hadn’t violated her constitutional rights. The district court correctly rejected this perverse “no touching” safe harbor for sexual abuse, and noted that “the facts, viewed in a light most favorable to Plaintiffs, demonstrate that Sherman only masturbated and revealed her breasts due to Drennen’s control over her.” The court likewise rejected Drennen’s claim for qualified immunity, holding that “[i]t is clearly established that sexual abuse is impermissible” and that “[a]ny reasonable prison official would understand that he has no authority to command an inmate to engage in sexual acts.”

Under normal principles of civil litigation, Ms. Sherman would then have been entitled to a jury trial on her civil rights claims. But the doctrine of qualified immunity gives defendants a one-side litigation advantage in the form of interlocutory appeals - that is, if a defendant is denied qualified immunity, they can immediately appeal that decision, before the case even goes to trial. Mr. Drennen has done exactly that, so the question of whether he should receive qualified immunity is now being briefed before the Sixth Circuit. The Cato Institute has therefore filed an amicus brief, urging the court to affirm the denial of immunity, but also to address the legal infirmities with the doctrine in general.

As I’ve  discussed  several  times now, qualified immunity was essentially invented out of whole cloth by the Supreme Court over the last half century. The text of our primary civil rights statute – usually called “Section 1983” after its place in the federal code – makes no mention of any immunity, and the common-law background against which it was adopted did not include any freestanding defense for public officials who acted unlawfully; on the contrary, the historical rule was that public officials were strictly liable for constitutional violations. In essence, qualified immunity has become nothing more than a “freewheeling policy choice” by the Court, at odds with Congress’s judgment in enacting Section 1983.

In this particular case, the district court’s denial of immunity was correct, even under existing precedent. The case law clearly establishes that sexually abusing prisoners violates their constitutional rights (including cases like this, where the defendants did not physically touch the prisoners), and any reasonable person would have known that Drennen’s actions were impermissible. As we argue in our brief:

In cases where a defendant’s alleged violation of a plaintiff’s constitutional rights arises from the defendant’s attempt to carry out otherwise lawful duties—for example, a police officer making a snap decision on how much force is necessary in making a lawful arrest—qualified immunity “gives ample room for mistaken judgments,” Malley, 475 U.S. at 343, and thus may require more factual specificity before concluding that the law is clearly established.

[But] [i]n this case, Defendant-Appellant Drennen repeatedly ordered Katie Sherman—then a teenage girl under his custody and control—to expose herself and touch herself sexually in front of him and other prisoners. It beggars belief to suggest that Mr. Drennen could possibly have thought that this behavior was lawful or appropriate, especially because—as explained in detail by the additional amicus—federal and state prison regulations already make abundantly clear that prison officials may never make sexual “requests” of inmates. See Br. of Roderick & Solange MacArthur Justice Center, at 25-27. For better or worse, qualified immunity protects “all but the plainly incompetent or those who knowingly violate the law.” Malley, 475 U.S. at 341—yet Mr. Drennen’s sexual abuse and harassment of Ms. Sherman easily meets both of these conditions.

In addition to affirming the denial of immunity, however, the Sixth Circuit should also discuss the maturing consensus that qualified immunity is itself unlawful, and vitiates the power of individuals to get redress for violations of their constitutional rights. Several  lower  court  judges have already made exactly this point, either in published opinions or in the press, and it’s reasonable to expect that the Supreme Court will be highly attuned to this judicial input as they decide whether to reconsider the doctrine at the start of the new term.

In the wake of their successful Tax Cuts and Jobs Act last year, Republicans are now considering Tax Reform 2.0.

For individuals, the 2017 law trimmed tax rates and changed deductions and exemptions. But it did not fix the tax code’s bias against personal savings, which is a serious problem given that many Americans save so little. 

One idea the GOP is mulling for 2.0 is the creation of Universal Savings Accounts (USAs). Such accounts were considered last year but were not included in the final bill.

USAs would be like vastly improved Roth IRAs. Individuals would contribute up to, say, $10,000 a year of their after-tax income, and then the account earnings would grow tax-free.

Account assets could be withdrawn tax- and penalty-free at any time for any reason, which would make the accounts simple, flexible and liquid.

You can read the rest in this new oped in The Hill.

Breaking News: Ways and Means Committee Republicans have just released today their framework for Tax Reform 2.0, and it includes Universal Savings Accounts.

You can read more about this revolutionary savings vehicle in this Cato study co-authored with Ryan Bourne.

 

I have written here and here about how patients have become the civilian casualties of the misguided policies addressing the opioid (now predominantly fentanyl and heroin) crisis. The policies have dramatically reduced opioid prescribing by health care practitioners and have pressured them into rapidly tapering or cutting off their chronic pain patients from the opioids that have allowed them to function. More and more reports appear in the press about patients becoming desperate because their doctors, often fearing they may lose their livelihoods if they are seen as “outliers” by surveillance agencies, under-treat their pain or abruptly cut them off of their pain treatment regimen.

story in the July 23, Louisville (KY) Courier Journal illustrates the harm this is causing in Kentucky. “Doctors say the federal raids on medical clinics lead to unintended consequences — patients thrust into painful withdrawals and left vulnerable to suicide or dangerous street drugs,” states the article.  Dr. Wayne Tuckerson, President of the Greater Louisville Medical Society, said, “[When investigators] go in with a sledgehammer and shut down a practice without consulting community physicians, suddenly we have patients thrown loose.” He went on to say, “Docs are very much afraid when it comes to writing pain medications…We don’t want patients to become addicted. And we don’t want to have our licenses — and therefore our livelihoods — at stake.” And if pharmacists in the area learn of a police raid or investigation of a medical practice—regardless of the outcome of that investigation—many of them refuse to fill legal prescriptions presented by patients of those practitioners.

Last week Oregon regulators announced plans for a “forced taper” of chronic pain patients in its Medicaid system. This contradicts and is much more draconian than the recommendations of the 2016 guidelines issued by the Centers for Disease Control and Prevention, which in turn have been criticized as not evidence-based. The Oregon Health Evidence Review Commission announced: 

 

The changes include a forced taper for all chronic pain patients on opioids (within a year), no exceptions. Opioids will be replaced with alternative treatments (cognitive behavior therapy (CBT), acupuncture, mindfulness, pain acceptance, aqua therapy, chiropractic adjustments, and treatment with non-opioid medications, such as NSAIDS, Acetaminophen).

 

This proposal has sparked an outcry from patients and patient advocacy groups in Oregon. While this policy proposal only applies to Medicaid patients, they fear it will soon become the standard adopted by all third-party payers in the state.

University of Alabama Medical School Associate Professor Stefan Kertesz, an addiction medicine specialist at the Birmingham VA Medical Center, tweeted in reaction to this proposal:

 

I cannot imagine a more violent rejection of the CDC Guideline on Prescribing Opioids of 2016 than the plan current before Oregon Medicaid : forced taper to 0 mg of all opioid receiving pain patients.

 

 

These policies are based on the false narrative that the overdose problem is primarily the result of doctors prescribing opioids to their patients in pain and getting them hooked. In fact, the problem has always been a product of drug prohibition—non-medical users accessing opioids on the black market. To illustrate, an often-overlooked study published in the American Journal of Psychiatry in 2009 followed more than 27,000 OxyContin addicts entering rehab programs from 2001-2004. It found 78 percent said they never had obtained a prescription of OxyContin for any medical reason, 86 percent said they used the drug because they liked the  “buzz” or “high,” and 78 percent reported prior treatment for substance abuse disorder.

There have been well-documented cases of unscrupulous doctors teaming up with dishonest pharmacists to operate “pill mills”—gaming the third-party payment system to receive compensation for running drug-dealing operations. But these bad apples have largely been rolled up by law enforcement and represented an exception to the rule of how doctors treat pain. Nevertheless, these stories continue to feed the narrative.

Dr. Charles Argoff, a professor of neurology at Albany Medical College and Director of its Comprehensive Pain Center recently surveyed colleagues in a report for the medical education website Medscape.com entitled “Readers Respond: Stop Stigmatizing Opioids.” The majority of clinicians dealing with pain bemoan the hysteria driving the governments’ response to the overdose problem. One clinician emphasized, “Dependence is the rule, addiction is the exception.” Another complained about the “misinformation, distortion of evidence-based research, political influence, and even mainstream media sensationalism-style reporting, which together has deteriorated to such an extent that it is beyond belief…A person should review all available information that is opposing the arrogantly forgotten patient.”

Dr. Argoff concluded his survey with the following comment:

 

In summary, I hope these comments further epitomize and suggest how complicated opioid therapy is. But what I am struck by is how much these comments point to identifying that subset of individuals for whom these medications are successful and also outlining the risk of so many other medical treatments, both interventional and noninterventional, that we consider for our patients with chronic pain.

 

Meanwhile the civilian casualties mount. Dr. Thomas Kline, a physician in North Carolina, is maintaining a growing list of patients who commit suicide after being cut off from their pain medication. Expect the deaths—of patients as well as non-medical users—to continue until policymakers come to the realization that the root cause of the problem is drug prohibition.

Lately the old-timers here at Cato’s Center for Monetary and Financial Alternatives — which is to say, Jim Dorn and I — have been talking a lot about the Phillips Curve, which seems to be playing a part in monetary policy discussions today almost as big as the one it played in the 1970s. And you can bet that, because both Jim and I actually remember what happened in the 70s, and afterwards, neither of us has a good word to say about the concept, except as a very reduced-form means for describing very transient relationships.

Because Jim has a CMFA Policy Briefing on Phillips Curve reasoning in the works, I won’t belabor here his — and my — general objections to it. My main concern is to draw attention to a current example of that reasoning at work, in the shape of a recent New York Times op-ed by Jared Bernstein, entitled “Why Real Wages Still Aren’t Rising.”

Noting that, despite the low and still falling U.S. unemployment rate, real wage rates for workers in factories and the service industries have been stagnant for several years. Mr. Bernstein finds this stagnancy puzzling: According to the BLS, he writes, as of this June money “wages” (presumably meaning hourly wage rates) grew at an annual rate of 2.7 percent, whereas “looking at the historical link between wages and unemployment, wage growth should have been rising about a percentage point faster.” The “historical link” to which Mr. Bernstein refers is based partly on the Phillips Curve — a negative relation between the unemployment rate on one hand and the rate of either nominal “wage” or price inflation on the other — and partly on the historical tendency for the rate of nominal wage inflation to exceed that of price inflation. In the present instance, prices have failed to rise as rapidly as the decline in unemployment suggests they should, while wages — factory workers’ wages especially — have been rising still less rapidly.

How to account for this recent failure of reality to conform to the implications of the Phillips Curve? For Mr. Bernstein, this development

is mainly the outcome of a long power struggle that workers are losing. Even at a time of low unemployment, their bargaining power is feeble… . Hostile institutions — the Trump administration, the courts, the corporate sector — are limiting their avenues for demanding higher pay.

Eventually Mr. Bernstein also points a finger at “the increased concentration of companies and their unchecked ability to collude against workers.”

We’ve No Need for These Hypotheses

The least unfavorable thing that can be said about such shadowy conjectures is that one ought not to resort to them without first exhausting more prosaic possibilities.

To his credit Mr. Bernstein himself recognizes one such possibility: the well-known, general slowdown in productivity growth since the recession, which he allows to have placed “another constraint on wages.” He recognizes as well the possibility that the recent Trump-initiated trade war may have exacerbated the decline, though he dismisses it on the grounds that “ ‘final products’ — things that consumers buy versus intermediate materials used for production — have so far been spared.” Here Bernstein is surely mistaken: when intermediate materials get more expensive, so do final products produced at home. Yet the trade war does nothing to boost nominal wages. So real wages may already have been adversely affected, not by a Trump administration anti-labor conspiracy, informed by its hostility to ordinary workers, but by one of that administration’s avowed policies, informed by its ignorance of rudimentary trade theory.

In fact, as we’ll see, the general decline in productivity since the Great Recession and the more recent trade war are alone quite capable of accounting for a considerable decline in the once substantial difference between the rate of wage inflation and that of output price inflation, and hence in the growth rate of real wages.

A Phillips Curve Refresher Course

Any historical Phillips Curve relationship is just that: a historical relationship. Whatever it was then, it may have shifted around since. Consequently a decline in real wages that might, for any given Phillips Curve relationship, point to a weakening of the labor market, may point to other developments, including declining productivity, when the (short run) Phillips Curve itself has been on the move.

To overlook the ever-shifting nature of Phillips Curves is to neglect something that was driven home, painfully, to an entire generation of economists during the 1970s, as they witnessed the baneful consequences of attempts to exploit the “historical link” between inflation and unemployment represented by the 1960s vintage Phillips Curve. In particular, it’s to neglect the fact that any short-run Phillips Curve relationship depends on some underlying state of aggregate supply. When that state changes, either because workers come to anticipate future inflation, as they did in the 70s, or because productivity declines, as it has recently, the former Phillips Curve breaks down, and a new one takes its place.

For the sake of readers seeking a more explicit explanation of the logic behind naive Phillips Curve reasoning, and why such reasoning goes awry when Phillips Curves don’t stand still, I offer here a quick review, starting with some simple supply and demand diagrams representing the markets of goods and services (left) and labor (right).

Given some state of aggregate supply, as reflected by fixed, upward-sloping short-run aggregate supply (SAS) and labor supply (LAS) schedules, changes in nominal spending on goods (AD, for aggregate demand) and labor (LD) will cause prices and wages (or their respective inflation rates), employment, and output to increase together, with no tendency for wages to fall behind prices.

The standard Phillips Curve, portraying a negative relationship between the rate of price inflation and the unemployment rate, is just a reduced-form representation of these more involved relationships, showing the set of alternative, equilibrium values of inflation, π(P), and unemployment (L-N, where L is the size of the labor force) consistent with different levels of spending (AD and LD), consistent with given short-run, upward-sloping SAS and SLS schedules. By noting that one can also express the relationship in question as one between the rate of wage inflation, π(w), and the unemployment rate, one arrives at “the historical link between wages and unemployment” to which Mr. Bernstein refers. What that relationship really means is that, for any given short-run labor supply schedule, as aggregate and labor demand schedules shift out, unemployment declines, while wage rates go up.

But a historical Phillips Curve relation, whatever it may be, ceases to hold once short-run aggregate or labor supply schedules themselves start shifting. In particular, if there’s a general productivity setback, due to a trade war or for any other reason, the aggregate supply schedule shifts in, or at least fails (in a dynamic setting) to shift out as fast as the aggregate demand, labor demand, and labor supply schedules. That difference is all it takes to cause a growing gap between the equilibrium nominal wage rate and the equilibrium price level, so that real wages stagnate, assuming they don’t actually decline.

As our diagrams are necessarily static, getting from them to a more accurate, dynamic account of recent labor market developments takes a little imagination. In reality, for starters, all of the schedules tend to be shifting outwards over time. Typically the AS schedule shifts out faster than the LS schedule, thereby providing  for a general increase in real wages. Since the Great Recession, however, although AS never actually shifted to the left, the difference between the growth rate of AS and that of LS has shrunk. Consequently, instead of actually declining, real wages have merely ceased to increase as quickly as they once did.

The Real Puzzle: Labor’s Fallen Share of Productivity Gains

There remains, however, one real wage rate puzzle that post-crisis aggregate supply developments alone can’t explain. The puzzle consists, not of the breakdown of the “historical link between wages and unemployment” to which Mr. Bernstein refers, but of the breakdown of the historical link between the real wages of workers, apart from managerial-level workers, and overall productivity growth. The puzzle is that, while productivity growth has slowed down considerably, it’s still positive, whereas real wages for many sorts of workers have been altogether flat. Labor’s share of national income has, in other words, fallen. And so far it seems down for the count.

But this more genuine puzzle, which has nothing to do with the relation between wage inflation and the unemployment rate, is itself hard to attribute to some relatively recent rise of “hostile institutions,” either within the Trump administration or elsewhere in the United States. For one thing, labor’s share of income started to decline long before the recent crisis, let alone the most recent presidential election! By most accounts, labor’s share began to drift downward in the 1980s, and reached its nadir just before the 2008 crisis. For another, the decline has occurred, not just in the U.S., but in many other developed and emerging economies — despite large differences in all these countries’ governments, court systems, and collective bargaining arrangements. As Loukas Karabarbounis and Brent Neiman show in a 2017 NBER Report on “Trends in Factor Shares: Facts and Implications,” “Country-specific changes in policies … might be important for specific countries but are unlikely to account for much of the overall trend that the world has experienced.”

And there’s no shortage of explanations for the global decline in labor’s share of income that are far more compelling than vague references to “hostile institutions.” Karabarbounis and Neiman attribute half of it to “progress with IT-related technologies” that has “induced firms to produce with greater capital intensity.” A San Francisco Fed Study  by Mary C. Daly, Bart Hobijn, and Benjamin Pyle attributes the stagnation of real wages to “secular shifts in the composition of the labor force.” In particular, while baby boomers earning relatively high wages have been retiring, younger workers “sidelined” during the recession have had to settle for relatively low-paying full-time jobs. A 2017 MIT working paper argues that an increase in product market concentration, particularly as manifested in the rise of “superstar firms,” may also have contributed to the reduction in labor’s share of total income. But the reason isn’t superstar firms’ “unchecked ability to collude against workers”: it’s just that “there is a fixed amount of overhead labor … needed for production” in the industries in question, so that greater concentration means less labor-intensive production.

In a still more recent working paper Princeton’s Gene Grossman and several coauthors suggest that the productivity slowdown may also account for part of the decline, because “when human capital is more complementary with physical capital than with raw labor” such a slowdown “can itself lead to a shift in the functional distribution of income away from labor and toward capital.” Finally, some part of the decline in labor’s share may be a figment of the data. According to a Brookings study published in 2013, “about a third of the decline in the published labor share appears to be an artifact of statistical procedures used to impute the labor income of the self-employed that underlies the headline measure.”

While none of these alternative explanations for the stagnation of workers’ earnings may alone suffice as an alternative to Mr. Bernstein’s more sinister explanations, several could easily do so. And these are but some of many plausible possibilities. For some others, along with a good general discussion of the topic, I recommend this pair of posts by Timothy Taylor.

In short, there’s no need to suppose that the courts, the Executive Branch, and “the corporate sector” have been conspiring — or conspiring more than usual, to be precise — to deprive workers of some portion of their already meager share of the real GDP pie. And even if they were trying, it couldn’t account for the actual historical and global behavior of worker’s earnings.

The moral of the story is that it’s unwise for economists to put too much faith in historical relationships — whether between inflation and unemployment or between total income growth and workers’ real wage rates — and to conclude, when these relationships “break down,” that some conspiracy must be afoot. That courts, corporations, and presidential administrations are capable of perfidy no one can deny. But historical macroeconomic relationships are themselves untrustworthy, for reasons unconnected to goings-on in smoke-filled rooms.

[Cross-posted from Alt-M.org]

Last week Mark Zuckerberg gave an interview to Recode. He talked about many topics including Holocaust denial. His remarks on that topic fostered much commentary and not a little criticism. Zuckerberg appeared to say that some people did not intentionally deny the Holocaust. Later, he clarified his views: “I personally find Holocaust denial deeply offensive, and I absolutely didn’t intend to defend the intent of people who deny that.” This post will not be about that aspect of the interview.

Let’s recall why Mark Zuckerberg’s views about politics and other things matter more than the views of the average highly successful businessman. Zuckerberg is the CEO of Facebook which comprises the largest private forum for speech. Because Facebook is private property, Facebook’s managers and their ultimate boss, Mark Zuckerberg, are not bound by the restrictions of the First Amendment. Facebook may and does engage in “content moderation” which involves removing speech from that platform (among other actions).

Facebook F8 2017 San Jose Mark Zuckerberg by Anthony Qunintano is licensed under CC BY 2.0

What might be loosely called the political right is worried that Facebook and Google will use this power to exclude them. While their anxieties may be overblown, they are not groundless. Zuckerberg himself has said that Silicon Valley is a “pretty liberal place.” It would not be surprising if content moderation reflected the dominant outlook of Google and Facebook employees, among others. Mark Zuckerberg is presumably setting the standards for Facebook exercising this power to exclude. How might he exercise that oversight?

Mark Zuckerberg’s comments on Holocaust denial suggest an answer this question. Holocaust denial is the ultimate fake news. No decent person believes the Holocaust did not happen. And yet Holocaust denial also draws a line between narrow and broad, between European and American, visions of the freedom of speech. Europeans see censoring such speech as a militant defense of democracy rather than a lack of liberal conviction. The United States sets the limits of speech broadly enough to include even false and vile speech like Holocaust denial.

In this conflict of ideals, it would have been easy and rather conventional for Mark Zuckerberg to endorse censoring Holocaust denial. Who would have criticized him for that? After all, many people equate tolerating extreme speech with advocating it. And yet, against his interests, Zuckerberg decided to subscribe to an essentially American view of the limits of speech.

Why did he do so?  In the interview, he discusses dealing with “false news”:

There are really two core principles at play here. There’s giving people a voice, so that people can express their opinions. Then, there’s keeping the community safe, which I think is really important. We’re not gonna let people plan violence or attack each other or do bad things. Within this, those principles have real trade-offs and real tug on each other.

How should that tradeoff be resolved? He notes: “Look, as abhorrent as some of this content can be, I do think that it gets down to this principle of giving people a voice.” Zuckererg continues: “Our bias tends to be to want to give people a voice and let people express a wide range of opinions. I don’t think that’s a liberal or conservative thing; those are the words in the U.S. Constitution.”

But Zuckerberg does recognize limits to free speech as measured by a typically American test:

Let me give you an example of where we would take [speech] down. In Myanmar or Sri Lanka, where there’s a history of sectarian violence, similar to the tradition in the U.S. where you can’t go into a movie theater and yell ‘Fire!’ because that creates an imminent harm.”

In U.S. law speech directly inciting violence is an exception to the First Amendment. This broad limit sanctions tolerance of extreme speech, even speech which might buttress bigoted views of the world. It draws a line at speech likely to incite imminent violence, words tending to spark specific acts of intolerance, rather than those that might feed a more generalized grievance.

Another part of the interview increases my confidence in Zuckerberg’s judgment about free speech. In responding to a confused question about data privacy, he says, “Well facts do matter.” Passions like fear and anger threaten freedom of speech when they move politics. People who focus on facts and problem solving – engineers are a good example – are unlikely to act on such passions. When the practical-minded also support free speech in principle, our rights are even more secure.

The interview is not wholly reassuring. Zuckerberg at times seems too willing to accommodate European approaches to extreme speech. He also tends to see only the benefits (and not also the costs) of transparency.

On the whole, however, conservatives and libertarians should be reassured about the future of online speech. Zuckerberg took a risk he did not have to take by endorsing a broad conception of free speech. In an age of populisms of the left and right, Mark Zuckerberg seems a better bet for protecting free speech than current and future politicians.

The Pakistani public is headed to the polls on July 25, to vote in the third consecutive election since 2008. While it remains difficult to predict which political party will emerge victorious, one thing is clear: Pakistan’s youth will most likely determine the winner.

Pakistan is in the middle of youth bulge. According to Pakistan’s National Human Development Report, 64 percent of the population is between the ages of 15 and 29. This population is concerned with completing their education, securing a job to increase the likelihood of financial stability, having the ability to change a job if needed (indicating a desire to not only have a strong economy but also a diverse one), being able to marry and have children, having the ability to buy a house, car, and other material comforts, and being able to emigrate and/or study aboard.

But do Pakistan’s major political parties have the capacity to address the youth’s concerns? Not really.

All major political parties—Pakistan Muslim League–N (PML–N), Pakistan Tehreek-e-Insaf (PTI), and Pakistan Peoples Party (PPP)—have long understood the importance of the youth, and have tried various techniques to appeal to young voters. When campaigning for the 2013 general elections, PML–N introduced a program that provided free laptops to poor students to increase their accessibility to technology as part of a larger initiative to improve the quality of education. PPP sought to engage the youth in policymaking by creating youth councils while PTI appealed to the youth directly, urging young people to join PTI and create a “Naya (New) Pakistan” free of corruption. The 2018 campaign season has also been filled with appeals to the youth, with political parties (even religious ones) hiring DJs to “raise the passion of people.” But the political parties manifestos don’t meet the passion of the rallies.

PML–N’s 2018 manifesto describes: a self-employment scheme for youths that includes low-interest loans and increased access to community banks; the creation of low-medium skilled jobs in the agricultural sector; and an emphasis on vocational training. The manifesto states that PML–N is making youth representation in democratic forums a top priority. Yet, the manifesto is blatantly Punjab-centric. For example, the vocation training programs are all sourced from Punjab, such as TEVTA or Technical Education and Vocational Training Authority in Punjab, the PSDF or the Punjab Skills Development Fund that is designed to provide free vocational training to poor and vulnerable populations, and the PVTC or the Punjab Vocational Training Council, which focuses on vocational teacher training. What about the youth in other provinces and tribal areas?

PPP’s 2018 manifesto has a broader scope. While it goes into a more detail reforming and modernizing education, improving access to quality education, revitalizing sports, and increasing technical and vocational programs, it fails to provide actual policies and programs that can achieve these lofty goals. For example, the manifesto states that PPP aims to regulate internship programs to all young people to increase their work experience, making them more appealing when they enter the workforce. Yet, no details have been provided on this regulation program. Will it be based on a quota system? Will students be able to get university credit for internships?

Similar to PPP’s manifesto, PTI’s 2018 manifesto lists a number of noteworthy goals but fails to provide any implementation details. For example, PTI’s manifesto focuses on doubling the size of existing skill development and vocational training programs but fails to explain how. The manifesto states that PTI will launch a national program to provide practical training to graduates in the public and private organizations but fails to name any specific organizations it has been in touch regarding such a program. PTI also wants to establish a liaison under the Ministry of Foreign Affairs to promote foreign placement of Pakistani talent but does not discuss what a PTI-led government will do to reduce visa restrictions that Pakistani nationals face worldwide.  

Pakistan’s National Human Development Report found that 80 percent of Pakistan’s youth has voted in the past, and reports indicate that Wednesday’s election won’t be much different. While youth involvement in Pakistan’s political processes has evolved over time, one thing is clear: Pakistan’s political parties need to not only engage the youth but also focus on how they can meet the youth’s demands in a fiscally responsible way. For now, none of the parties seem to have a clear idea of how to deal with the country’s youth bulge. 

Last week, the Washington Post picked up on an article in Police Quarterly that showed clearance rates for property and violent crimes increased in Colorado and Washington following their legalization of marijuana for recreational purposes. The clearance rate is the percentage of reported crimes that result in an arrest for those crimes. These data support the notion that Cato and other pro-legalization advocates have been saying for years: if the government ends the drug war, it frees up police resources to solve other crimes and perform other functions more necessary to public well-being than prosecuting drug crimes. Of course, these data are not conclusively causal and different agencies may react differently to legalization in their jurisdictions, but they are a good sign for reform that academics can measure as more states legalize.

On a related note, my colleague Jeff Miron published a piece today examining the budgetary impact of ending drug prohibition. You can find that here.

Over the weekend Treasury Secretary Steven Mnuchin made some remarks that could be interpreted as positive for trade liberalization:

Treasury Secretary Steven Mnuchin is “very hopeful” the US can make progress brokering separate free trade deals with the European Union and Japan during a weekend summit in Buenos Aires.

“I’m encouraged by the EU’s trade agreement with Japan,” Mnuchin said Saturday in an interview with CNN at the sidelines of the G-20 meeting in Argentina.

The EU and Japan signed a massive trade deal earlier this week, cutting or eliminating tariffs on nearly all goods. The deal is in contrast to escalating trade disputes between the US and several of its major allies, including the European Union.

The EU-Japan agreement, which covers 600 million people and almost a third of the global economy, will remove tariffs on European exports such as cheese and wine. It will also reduce barriers on Japanese automakers and electronic firms in the European Union.

President Donald Trump has imposed tariffs on a range of foreign goods from Europe, Canada, Mexico and other trading partners, and is threatening even more action.

Mnuchin said he is still reviewing the details of the EU-Japan agreement, but stressed that any free trade deal with the EU would have to go beyond cutting tariffs on goods.

“This has to be about dropping non-tariff barriers and subsidies as well. This has to be a deal with its entirety,” he said.

Elsewhere, it was reported that he said: “If Europe believes in free trade, we’re ready to sign a free trade agreement.”

If you haven’t been following trade policy for the last two years, you might see this as a positive and constructive approach by the Trump adminstration towards trade liberalization. But the broader context makes clear that this is not the case. Among other things, the Trump administration has imposed new tariffs on the EU, Japan, and others; and while there have been offhand remarks about trade liberalization (see similar remarks from President Trump and National Economic Council Director Larry Kudlow here), the administration has not made any formal efforts to get such a process started. In short, and contrary to Mnuchin’s statements, the Trump administration does not seem the least bit ready to sign a new free trade agreement, with the EU or anyone else (it is, however, revisiting some older trade agreements).

Of course, the Trump administration could, if it wanted to, negotiate free trade agreements with the EU, Japan, and others. These agreements are not a panacea for eliminating protectionism, but they do achieve significant liberalization. As long as expectations on both sides are kept at reasonable levels (in terms of timing and scope), deals are possible. Through these agreements, most tariffs on trade between the parties could be eliminated, and some non-tariff barriers could be reduced (subsidies, by contrast, are rarely addressed in bilateral deals).

However, aside from occasional offhand remarks, the Trump administration is not taking any steps towards starting these negotiations, and instead is making the possibility of deals less likely through its confrontational and unjustified Section 232 tariffs on steel and aluminum (and possibly soon, on cars). As the EU and Japan have just shown, these trade deals are possible. It remains to be seen if the Trump administration is willing and able to negotate them.

The federal government spends an unreal amount of taxpayer money cleaning up nuclear weapons sites. In this study at Downsizing Government, I noted that between 1990 and 2016, Congress spent $152 billion on nuclear cleanup, with about $6 billion more every year.

Where does the money go? About $5 billion has been spent at a facility in South Carolina called the Savannah River Site. In the study, I said, “The facility has a negligent safety culture, and environmental issues such as water contamination plagued it for years. Cleanup costs have soared. The construction of a mixed oxide fuel facility at the site was supposed to cost $5 billion, but the price tag has soared to $17 billion.”

The Wall Street Journal provided an update on the Savannah River boondoggle today:

The U.S. Energy Department says it is spending $1.2 million a day on a partially built South Carolina nuclear facility that it wants to abandon due to soaring costs.

Congress has continued funding construction of the plant, which would be used to dispose of surplus weapons-grade plutonium, despite a series of reviews casting doubt on the financial logic involved.

… The recent jousting marks the latest twist for the troubled Mixed-Oxide Fuel Fabrication Facility. In 2007, U.S. officials said the so-called MOX plant would cost $4.8 billion and be completed by 2016. DOE officials today estimate it would cost $17.2 billion and take until 2048, assuming $350 million a year in federal funding.

… In 2014, the Energy Department concluded that plutonium could be disposed far more cheaply using a different method, known as “dilute and dispose.” The shift is opposed by South Carolina officials and members of the state’s congressional delegation, including Republican Sen. Lindsey Graham.

… From 2014 to 2016, Congress gave the Energy Department the same message: Keep building the MOX plant. Last year, Congress authorized the energy secretary to stop construction if evidence showed another method would cost less than half as much.

In May, Energy Secretary Rick Perry invoked the provision and prepared to halt construction in June. South Carolina sued, and U.S. District Judge J. Michelle Childs granted a preliminary injunction June 7 in the state’s favor, pending further litigation.

For more on energy spending, see www.downsizinggovernment.org/energy/energy-subsidies.

 

On numerous occasions, President Trump has described America’s asylum laws as the most accepting—or, in his words, “dumbest,” in the world. “When people, with or without children, enter our Country, they must be told to leave… only country in the World that does this!” he tweeted this month. But many other countries are much more accepting of asylum seekers than the United States is. In fact, the United States ranks 50th in the world in net increase in asylees, refugees, and people in similar situations as a share of its population since 2012.

The United Nations High Commissioner for Refugees (UNHCR) publishes data on the number of refugees and asylum seekers in each country. From 2012 to 2017, UNHCR finds that the United States accepted a net increase of 654,128 asylees, refugees, and people in similar circumstances. That amounted to 0.2 percent of the U.S. population in 2017. As the Figure below shows, 49 other countries had higher rates of acceptance than the United States did. The average rate of acceptance for the top 50 countries was 1.2 percent of the population—six times higher than the U.S. rate.

Figure: Top 50 refugee-asylee receiving nations

In absolute terms, the United States does rank in the top 10, but it is important to control for the size of the population of the receiving country both to understand the likely effects of the absolute numbers on the country and to allow a legitimate comparison across countries. This is the same reason why per capita Gross Domestic Product (GDP) is a better measure of how wealthy people in a country are than just aggregate GDP. The Chinese are not seven times wealthier than Canadians because China’s GDP is seven times larger. In fact, Canadians are five times wealthier because Canada’s per capita GDP is five times larger. To understand how wealthy or how accepting a country is, the population of the country is as relevant as the size of its aggregate wealth or the absolute number of immigrants it accepts.

The more accepting nations include Australia and most of Western and Northern Europe—Sweden, Austria, Germany, Denmark, Switzerland, Italy, Norway, Finland, Belgium, the Netherlands, and France. The average rate for these countries was 0.7 percent—3.3 times more than the United States. But it also includes many countries that are much less wealthy than the United States. Lebanon, which has accepted an astounding 14 percent of its population in asylees just since 2012, has a per capita GDP of $8,400—7 times less than the United States—but it has accepted asylees at 73 times the rate of the United States.

President Trump is simply incorrect that other countries don’t accept refugees and asylees, including those who come in unannounced. In fact, four dozen other countries are dealing with more significant asylee populations than the United States is. Some of the difference between the United States and other countries could be explained by UNHCR shifts in methodology in who is counted as a refugee or asylee. As I have explained before, however, the United States has been one of the least welcoming wealthy countries in terms of net total immigration as a share of the country’s population in recent years. America should reform its immigration laws, but it should do so to make them more welcoming, not less.

Table: Countries with net increases in refugee-asylee populations

Venezuelans are fleeing their home country in large numbers due to the economic failure of socialism as well as the increasing authoritarianism of the Venezuelan government.  The economic collapse there, inflation reached tens of thousands of percent this year, and the escalating brutality of the Maduro dictatorship are creating a crisis unlike any faced in South America in decades – if ever.  This blog post will provide some information on the scale of the Venezuelan exodus and some suggestions for what other countries can do to mitigate problems caused by the flow of refugees and asylum seekers.   

Background

The roots of the current collapse of Venezuela run deep. Hugo Chavez became the president of Venezuela in 1999 and immediately set about concentrating economic power in the government and political power in himself personally.  He instituted tight government controls on capital, exchange rates, and started a more irresponsible monetary policy that created chaotic financial market conditions that further justified his nationalizations of business and confiscations of private property.  Revenues from the Venezuelan oil industry helped keep the government and economy afloat while the private economy suffered under increasingly harsh and punitive restrictions.  Chavez died in 2013 and was succeeded by Nicolas Maduro who continued Chavez’s economic policies and accelerated the concentration of political power in himself.  The collapse of oil prices beginning in 2014 exposed the economic damage wrought by Chavez and Maduro as inflation took off, GDP shrank, and Maduro’s regime responded with increasingly brutal police crackdowns that are continuing to today.  Most watchers of Venezuela conclude that the current death spiral began in 2015, the year after the decline in oil prices.    

The Scale of the Exodus

The number of people who have left Venezuela is staggering.  Estimates usually range from 1.6 million to 4 million Venezuelans have left their home country.  The International Organization for Migration (IOM) estimates that about 2 million Venezuelans are living outside of Venezuela as of June 2018, a number that has increased by more than a million since 2015 but is still likely an underestimate.  For instance, the number of Venezuelans living in Columbia, Peru, Chile, Brazil, Ecuador, Argentina, and Uruguay in June 2018 was over 1.85 million, up by a little less than one million since 2017. 

To try and reconcile conflicting and confusing estimates, I combined a few different sources and make some simple assumptions.  First, I made a few conservative assumptions when estimating the number of Venezuelans in Argentina, Uruguay, and Brazil.  I estimated that the 2018 number of Venezuelans in Argentina and Uruguay was unchanged from 2017.  For Brazil, I relied on recent news reports to estimate that there was a net 22,000 increase in the number of Venezuelans there in 2018 over 2017.   I then added the additional one million Venezuelans living in those countries to the 1.64 million Venezuelans who were estimated to be living outside of their home country in 2017.  Thus, I estimate that 2.61 million Venezuelans are living abroad in mid-2018 (Figure 1).

Figure 1: Venezuelans living abroad

The emigrant Venezuelan population is equal to about 7.6 percent of all Venezuelan nationals (Figure 2).  The economic collapse in Venezuelan began in 2015, the year after the oil price started declining.  The percent of Venezuelans living abroad increased from 2.2 percent in 2015 to 7.6 percent in 2018 – a 3.5-fold increase.  The Syrian refugee crisis, which began with the start of the Syrian civil war in 2011, is the biggest in recent history.  The Syrian refugee crisis boosted the number of Syrians living abroad by 4.3-fold after four years of civil war.

Figure 2: Venezuelans and Syrians living abroad as a percent of their respective populations

Venezuela has a much larger population than Syria so it will take longer for a fifth of them to flee the country if it ever gets to the point.  However, the number of Venezuelans living outside of their country could meet or exceed the numbers of Syrians in a similar position in the next couple of years if trends continue (Figure 3).  According to a recent poll, about half of Venezuelans between ages 18 and 24 said they wanted to leave Venezuela and 55 percent of upper-middle-class respondents said they wanted to.  If those polls are accurate then the duration of the economic crisis in Venezuela will determine whether it reaches Syrian refugee-level proportions.

Figure 3: Syrians and Venezuelans Living Abroad

As of mid-2018, I estimate that about 71 percent of the Venezuelans who have fled are in other South American countries (Figure 4).  About 12 percent have made it to Canada or the United States, 5 percent are in Central America, Mexico, or the Caribbean, and 13 percent are in other parts of the world.

Figure 4: Destination countries

In the United States, 65,621 Venezuelans have applied for asylum at ports of entry since February 2014, picking up substantially in 2016 and 2017 (Figure 5).  The U.S. federal government reacted to this by cutting the number of tourist B-visas that it issues to Venezuelans, aided most recently by additional restrictions put on Venezuelans through President Trump’s so-called travel ban, but the number of asylum seekers continued to grow at least through the end of 2017 (Figure 6).

Figure 5: Venezuelan asylum seekers
Figure 6: Venezuelan asylum seekers and B-Visa issuances

How Venezuela’s Neighbors are Reacting

About 71 percent of Venezuelans who have fled have gone to other countries in South America.  These countries have reacted in myriad ways to the influx of Venezuelans, mainly by issuing work and residency permits to some of them while nations bordering Venezuela are stepping up border security and deploying troops.  Other nations not mentioned do not have a special policy for admitting Venezuelans.   

In the course of writing this blog, the Migration Policy Institute published a wonderful short paper by Luisa Feline Freier and Nicolas Parent on the Venezuelans emigration crisis.  Many of my comments in this section are based on their excellent work.

Colombia

Colombia initially offered a Special Stay Permit to Venezuelans as well as Border Mobility Cards which allowed free travel between the two countries.  In February 2018, Colombia stopped issuing both permits due to worries that the influx of Venezuelans was too great.  Now, many are entering illegally in dangerous circumstances.

Brazil

Brazil created a temporary residency program for Venezuelans in 2017.

Peru

Peru created the Temporary Stay Permit (PTP) for Venezuelans in January 2017.  The administrative backlog for the PTP is huge so many Venezuelans are applying for asylum instead. 

Conclusion

The Venezuelan emigration crisis is going to worsen before it improves.  If the labor market and economic integration of Syrians refugees outside of Syria since 2011 can offer any lessons to South America, they are:

  1. Allow Venezuelans to legally work in host countries so that their employment and labor force participation rates rise.
  2. Deregulate labor markets generally because more legal work opportunities will reduce Venezuelan labor market competition with locals. 
  3. Legal employment reduces the net cost of social services and charity as well as increases feelings of belonging and contentment among the emigrants.

Special thanks to Maria Rey for her help on this.

We do not need another rift between communities in our divided nation. But that is what Congress gave us with a provision in last year’s tax bill that imposed a patchwork of divisions spread across every state.

The Tax Cuts and Jobs Act created a complex new tax structure called “Opportunity Zones.” The law tasked governors with carving up their states into tax-favored O zones and tax-disfavored areas we can call NO zones. If investors and developers put a hotel in an O zone, they receive a federal capital gains tax break, but if they put the same project in a NO zone, no such luck.

Vanessa Brown Calder and I discuss Opportunity Zones in The Hill. But pictures are better than words in showing what an unfair mess Congress has created. The U.S. Treasury has posted a national map accessible here, but you get a better idea with these maps of various cities from Bloomberg.

On their way to work, members of Congress pass powerful lettering on the Supreme Court, “Equal Justice Under Law.” So why did they think it was OK to impose unequal tax rules on neighborhoods across the nation?

Since the 1960s, the federal government has made a hash of micromanaging local development through HUD and other spending bureaucracies. I fear O zones will accelerate federal meddling into local affairs on the tax side. Will the government start tying social-engineering regulations to the O zone tax rules like they have with spending aid to local governments?

Some features of federal tax law have differential effects on the states as a byproduct of the tax system’s structure. But the O zones are purposeful geographic discrimination. Aside from the unfairness, the new tax loopholes will fuel a 50-state lobbying frenzy by landowners and developers to be included in the O zones rather than the NO zones. Is it just coincidence that the founder of Quicken Loans owns lots of property in Detroit’s new O zones?

Below is the new O zone map for Washington, D.C. with the favored zones in yellow. If you own property at 5300 East Capitol St NE, federal tax law has just made you a winner. If you own property across the street at 5300 East Capitol SE, you are a loser. Local governments make lots of such winner/loser decisions, but we don’t need the federal government compounding the problem with its powerful and corrupting tentacles.

The best parts of the Republican tax law were a step forward for equal treatment, such as the capping of state and local tax deductions. It is unfortunate that a big new loophole goes in the opposite direction.    

Vanessa has further thoughts on O zones here.

Federal tax rules inducing local corruption? Check out the LIHTC.

A few weeks ago, President Trump surpassed his 500th day in office. That’s a good vantage point to appraise his economic policies to Make American Great Again.

Over at the Library of Economics and Liberty’s Econlog, I offer my assessment. It’s not good.

This may seem surprising, given current economic conditions. But economic policy isn’t merely about the current moment, but predominantly about improving economic conditions long-term. Aside from a couple provisions in the December 2017 tax law, President Trump has done precious little in that regard and much to harm the economy long-term, from borrow-and-spend fiscal policy, to harmful trade and immigration policies, to disinterest in serious regulatory reform, to his refusal to face the country’s dreay long-term fiscal challenges.

From my conclusion:

MAGAnomics appears to be little more than an impulsive dislike of free trade and immigration, a hazy desire for less regulation, disinterest in (or perhaps a lack courage to face) the nation’s long-term fiscal problems, and a desire to temporarily lower taxes without making the hard choices necessary to fiscally balance those cuts and make them enduring. In other words, MAGAnomics is a slogan supporting a few weak and many harmful initiatives, not a serious collection of policies thoughtfully designed to strengthen the nation’s economic health.

Take a look and see if you agree.

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