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Uwe Reinhardt, a beloved health economist at Princeton University, died Monday at the age of 80. Uwe was a giant in his profession. His combination of insightful economic analysis and wit knew no equal. I always, always looked forward to hearing what Uwe had to say. We are proud to have hosted him at the Cato Institute, to have debated him, and to have called him a friend. The Cato Institute offers its condolences to the Reinhardt family, for whom Uwe made no secret of his love, and to all those in the health policy and economics professions who will miss him dearly.

A fleet of driverless cars designed by Waymo, a project of Google’s parent company, Alphabet, is on the roads of Phoenix, Arizona. Last week, Waymo CEO John Krafcik announced that in the coming months the driverless cars will be part of the world’s first autonomous ride-hailing service. The recent news is a milestone in driverless car technology history, and it’s no exaggeration to claim that the technology behind these new cars has the potential to save hundreds of thousands – if not millions – of lives in the coming decades. Sadly, drones, another life-saving technology, have had a tougher time getting off the ground.

Waymo’s cars are not suddenly arriving on the scene. Google has been working on getting a driverless car on the road since 2009, and Waymo has been offering some lucky passengers in the Phoenix area rides since April. However, these cars had a driver at the wheel, just in case. The fleet now driving in Phoenix does not include safety drivers. 

This may prompt unease among some Phoenix residents. A clear majority of Americans are uncomfortable about getting into driverless cars. Yet human drivers are deadly. More than 90 percent of car crashes can be attributed to human error, and motor vehicle accidents killed an estimated 40,200 people on American roads last year.

Fortunately, the life-saving potential of driverless cars seems to have been a persuasive selling point to lawmakers and regulators. This is in part because of their massive unrealized benefits, but also because auto-safety regulators tend to allow car manufacturers to get their product on the market after certifying that they’re in compliance with safety standards, relying on recalls if and when safety standards are violated, as Ars Technica technology reporter Timothy Lee explained:

Another important factor is that auto-safety regulators have a tradition of being relatively deferential to car companies. Agencies like the Food and Drug Administration require companies to seek pre-market approval for their products. By contrast, the approach of the National Highway Traffic Safety Administration is to set out general guidelines requiring features like airbags and antilock brakes and then ask automakers to self-certify their compliance. NHTSA then relies on after-market recalls to deal with vehicles that turn out to be defective.

This approach creates a somewhat greater risk of defective products reaching the marketplace. But it also enables automakers to get potentially lifesaving innovations into the marketplace more quickly. And carmakers are large, bureaucratic organizations that have strong incentives to color inside the lines, so there’s not much reason to worry about small, fly-by-night manufacturers sneaking defective products into the marketplace.

We shouldn’t forget that the technology will improve lives as well as save them. For the elderly and the disabled, driverless technology offers the chance to vastly improve mobility. In fact, last year Google’s driverless car drove a blind man, Steve Mahan, in Austin. According to Mahan, “This is a hope of independence. These cars will change the life prospects of people such as myself. I want very much to become a member of the driving public again.” Parents with children busy with after-school activities will also undoubtedly benefit from the kind of driverless ride-hailing service Waymo plans to offer.

Driverless cars are not the only emerging technology that could save and improve lives. Sadly, however, these other products are governed by a tougher regulatory framework than that overseeing Waymo’s cars.   

Amazon’s experience with drones has been off to a difficult regulatory start. The Internet giant, which is interested in developing delivery drones, went to England to conduct its first drone-delivery test last year. This was despite the fact that Amazon CEO Jeff Bezos announced drone delivery plans as far back as 2013 and applied for permission from the Federal Aviation Administration (FAA) to test drones in 2014. That same year, the AP noted that other countries were outpacing the United States when it came to drone regulation:

The Federal Aviation Administration bars all commercial use of drones except for 13 companies that have been granted permits for limited operations. Permits for four of those companies were announced Wednesday, an hour before a hearing of the House Transportation and Infrastructure Committee’s aviation subcommittee. The four companies plan to use drones for aerial surveillance, construction site monitoring and oil rig flare stack inspections. The agency has received 167 requests for exemptions from commercial operators.  

Several European countries have granted commercial permits to more than a 1,000 drone operators for safety inspections of infrastructure, such as railroad tracks, or to support commercial agriculture, Gerald Dillingham of the Government Accountability Office testified. Australia has issued more than 180 permits to businesses engaged in aerial surveying, photography and other work, but limits the permits to drones weighing less than 5 pounds. And small, unmanned helicopters have been used to monitor and spray crops in Japan for more than a decade.

By the time the FAA approved Amazon’s drone it was already obsolete and out of date, with Amazon testing a more advanced drone. Amazon’s vice president of global public policy told the Senate Subcommittee on Aviation Operations, Safety, and Security in 2015, “Nowhere outside of the United States have we been required to wait more than one or two months to begin testing.”

Like driverless cars, drones are potentially life saving, with firefighters, emergency medical technicians, and building inspectors—among many others—standing to benefit from their use. Zipline, a California-based company that makes medical delivery drones, was founded in 2014. And yet, Zipline co-founder and chief executive Keller Rinaudo noted in August that, despite being based in California, Zipline had not flown any flights in the United States.

By September of this year, Zipline had flown “1,400 flights and delivered 2,600 units of blood” in rain and high winds in Rwanda.

Amazon Prime Air, by comparison, is much more restricted:

We are currently permitted to operate during daylight hours when there are low winds and good visibility, but not in rain, snow or icy conditions. Once we’ve gathered data to improve the safety and reliability of our systems and operations, we will expand the envelope. 

Fortunately, the Trump administration has taken steps to allow for a more innovative drone environment, last month launching a drone program that will allow local governments and companies to experiment with drones in a more relaxed regulatory environment.

Regulatory agencies should take an approach that allows companies to ask for forgiveness rather than permission, an approach laid out by Mercatus’ Adam Thierer in his book Permissionless Innovation. When it comes to the FAA and the Food and Drug Administration (FDA), for instance, the approach is the reverse. Almost four years ago, the FDA shut down the personal genome testing company 23andMe after it marketed its saliva collection kit “without marketing clearance or approval.” In its letter to 23andMe, the FDA did not cite any 23andMe customers who had complained about 23andMe’s product. 

It would be naive to think that there won’t be bumps in the road as more driverless cars take to the streets. For example, driverless cars could prompt regulatory fights between states and the federal government, although House and Senate driverless car legislation contain identical provisions that seek to address preemption concerns. There are also issues related to cybersecurity and insurance, but we shouldn’t forget that profit-maximizing firms have incentives to not kill or injure their customers.

Regulatory reform concerning new and emerging technology is long overdue. 3D printing, the “Internet of Things,” drones, driverless cars, and robotics, are only some of the exciting new technologies and fields that hold the potential to enrich and save lives. These benefits will be sooner realized if regulators set innovators free. The ubiquity of driverless cars won’t make the world perfect, but it will make the world better.

We often hear arguments that the World Trade Organization cannot handle an economy like China’s, with its heavy state intervention. Trade rules are just not up to this task, some people say. Here’s a recent example from a Wall Street Journal article entitled “How China Swallowed the WTO”:

Rather than fulfilling its mission of steering the Communist behemoth toward longstanding Western trading norms, the WTO instead stands accused of enabling Beijing’s state-directed mercantilism, in turn allowing China to flood the world with cheap exports while limiting foreign access to its own market.

“The WTO’s abject failure to address emerging problems caused by unfair practices from countries like China has put the U.S. at a great disadvantage,” Peter Navarro, a trade adviser to President Donald Trump, said in an interview.

China has a wide range of policies that make up its industrial policy, and we can’t address them all in a short blog post. However, we will describe one recent example, and explore briefly whether WTO rules can help. This is also from the WSJ:

Batteries have emerged as a critical front in China’s campaign to be the global leader in electric vehicles, but foreign auto makers and experts say it is rigging the market to favor domestic suppliers.

Tianjin Lishen Battery Co. here in eastern China recently agreed to sell its battery packs to Kia Motors for the EVs the South Korean company makes in China and is now in talks to supply General Motors, Mercedes-Benz and Volkswagen, a supervisor for the Chinese company said.

But that is largely because Tianjin Lishen has little foreign competition.

Foreign batteries aren’t banned in China, but auto makers must use ones from a government-approved list to qualify for generous EV subsidies. The Ministry of Industry and Information Technology’s list includes 57 manufacturers, all of them Chinese.

Foreign battery companies declined to discuss their absence. But analyst Mark Newman of Sanford C. Bernstein said the government has cited reasons such as paperwork errors to exclude foreign suppliers.

“They want to give their companies two to three years” without foreign competition to secure customers, achieve scale, and improve their technology, Mr. Newman said.

The ministry didn’t respond to questions.

So, if we accept the conventional wisdom, nothing can be done about this battery policy, right? There’s no way to prove that the policy is protectionist, so we just have to give up on the WTO as a solution here, right?

We disagree. In fact, the WTO has rules to deal with this exact kind of subtle, disguised protectionism. The WTO’s Agreement on Subsidies and Countervailing Measures prohibits subsidies that are contingent on the use of domestic goods, even where the contingency is not specified in law. If a complainant can show that the connection between the subsidies and the use of domestic goods exists on a de facto basis, the measure will be found in violation. Whether a challenge succeeds will depend on the specific facts of the case. In the electric vehicles example described above, the complainant could look for, inter alia, evidence that the electric vehicle companies which have received subsidies only use batteries on the government list, or that they switched to using the batteries on the lists after the lists were published. 

Of course, proving a case here is not going to be easy. A single WSJ article is not enough. The complainant will need to go gather some evidence and build its case. But that’s how litigation always works, and does not suggest any great flaw in the WTO.

The key point here is that what China is doing is not some novel approach to industrial policy that no one has ever seen before. Rather, it is classic protectionism that WTO litigation has handled for years. Governments do this sort of thing all the time, and many WTO cases deal with this exact kind of disguised protectionism. (As an example, in a 1999 decision examining whether certain Canadian subsidies to the aircraft industry were contingent on export, the WTO courts took into account “sixteen different factual elements” before concluding that the subsidies at issue violated the prohibition on export subsidies.) Thus, governments who are concerned with China’s policies should try to work within the WTO system to address their complaints.

It seems President Trump has aroused heightened interest in the exercise of Congress’s constitutional powers in war and peace. In a 366-30 vote this week, the House of Representatives passed a nonbinding resolution declaring the U.S. military’s role in Saudi Arabia’s war in Yemen unauthorized. That’s a start. Even more promisingly, a growing group of Senate Democrats is pushing legislation that would prohibit any use of funds for “military operations in North Korea absent an imminent threat to the United States without express congressional authorization.”

Though it merely makes more explicit something that ought to be fully understood under the Constitution, sponsors of the bill have understandable motivations here. President Trump has repeatedly claimed that he does not need Congressional authorization to initiate military action. In April, he demonstrated his commitment to this unlimited view of presidential war powers when he ordered missile strikes against a Syrian airbase in the absence of any credible claim of preemption and without legal authorization from Congress.

Two months earlier, the president gave an indication that he would not seek Congressional authorization or approval in potential military action against North Korea. In a press conference in February, when asked about it, he insisted, “I don’t have to tell you what I’m going to do in North Korea.”

In the ensuing months, the president has exacerbated the tensions between the United States and North Korea. In addition to taunting and ridiculing via his Twitter account, Trump has also made bold public threats. “North Korea best not make any more threats to the United States,” he told reporters in August, or “they will be met with fire and fury like the world has never seen.”

Adding to the heightened tensions, National Security Advisor H.R. McMaster has gone so far as to say the regime in Pyongyang is undeterrable. This is remarkably out of step with what the bulk of the academic literature says on the question, but it is also destabilizing in that the logical conclusion of such an assessment is that we must initiate a full-scale attack on North Korea. After all, if Pyongyang possesses nuclear weapons and doesn’t care about regime survival, traditional deterrence isn’t an option.

Senator Bob Corker (R-TN), who, as chair of the Senate Foreign Relations Committee would be the one to shepherd the legislation to a vote, said last month that Trump is treating the presidency like “a reality show,” and his rhetoric could set the nation “on the path to World War III.” To the extent that Trump’s advisors act as a check on the president’s erratic foreign policy inclinations, Corker added, they “separate our country from chaos.”

This escalatory rhetoric occurs in the context of a broad understanding that an outbreak of war on the Korean Peninsula would be catastrophic. Secretary of Defense James Mattis warned grimly on CBS’s Face the Nation that, “A conflict with North Korea would probably be the worst kind of fighting in most people’s lifetimes…it would be a catastrophic war if this turns into a combat if we’re not able to resolve this situation through diplomatic means.”

Scholarly and official estimates bear this out. Even a limited conventional strike by the United States against North Korean nuclear sites would risk an overwhelming number of casualties because Pyongyang’s likely response would be to immediately attack Seoul with the roughly 8,000 artillery cannons and rocket launchers positioned along the border capable of unleashing 300,000 rounds on South Korea in the first hour of the counterattack. The result would be massive destruction and hundreds of thousands of casualties in a matter of days.

And that’s if it doesn’t go nuclear, which it almost inevitably would if Pyongyang, fearful of its own destruction, found itself under attack by the world’s most powerful military. If the Kim regime targeted Seoul and Tokyo with just one nuclear weapon each, casualties would approach almost 7 million. And again, this would only generate additional escalation from all parties.

At this point, even the most cynical proponent of war would be hard pressed to identify what political end could possibly justify such devastation.

The bizarre thing about the focus on the military option is that there are plenty of worthwhile diplomatic options. American diplomats who have engaged in back-channel negotiations with North Koreans for years have made clear Pyongyang remains interested, so long as talks are conducted on the basis of mutual respect and mutual compromise, instead of demands for one-sided capitulation. Avenues include short-term confidence-building measures, like a “freeze for freeze” deal in which Pyongyang halts its nuclear weapons testing in exchange for a freeze of U.S.-South Korean joint military exercises, which the North sees as provocative. Grander bargains are also possible, but it requires a willingness on both sides to choose compromise and accommodation over rigidity and vainglory.

Explicit Congressional action prohibiting the Trump administration from initiating preventive war against North Korea may aid in checking executive war powers in this case. But only maybe. Much depends on whether the administration chooses to rely on unreasonably elastic definitions of the phrase “imminent threat.” And at the end of the day, legal constraints only have utility if the people subject to them respect them. Hopefully, the costs and risks associated with escalation will prove enough of a constraint. 

For the second week in a row, Thor: Ragnarok was the big winner at the box office, pulling in $56.6 million in North America last weekend and bringing its worldwide take to more than $650 million. Ragnarok is the mythological destruction of Asgard and the Norse gods, but in real life it has been a huge, money-making win for Marvel Studios. Meanwhile, American higher education has been declaring that it is facing its own Ragnarok in the form of the House Republican tax plan. This end time, in stark contrast to Thor: Ragnarok, will come from a distinct lack of money. As a Washington Post headline asks, is this “The Last Stand for American Higher Education?”

What the Hela

I have qualms about some of the GOP proposals. For instance, the plan would tax “tuition discounts”—basically, prices not actually charged—for graduate students. That’s not technically income, so on normative grounds I’m not sure it should be taxed. The plan also calls for an “excise tax” on the earnings of endowments worth $250,000 or more per student at private institutions. It would impact but a nano-handful of institutions—around 50 out of thousands—and amounts to little more than a politicized, “Take That, Harvard!”

That said, the idea that higher ed is somehow teetering on the edge of financial destruction is ludicrous.

Consider revenues at public colleges since the onset of the Great Recession, during which we supposedly saw massive “disinvestment.” While it is true that total state and local appropriations dipped, total public college revenue rose markedly, from $273 billion in academic year 07-08, to $347 billion in 14-15, a 27 percent increase. Even on an inflation-adjusted, per-pupil basis revenue increased: From $31,561 per student in 07-08, to $32,887 in 14-15, a 4 percent rise. To put that in perspective, per-capita income in the United States is $28,930.

Federal data on private colleges is pretty volatile—it’s not clear why, for instance, between 07-08 and 08-09 total revenue dropped from $139 billion to $69 billion—but it, too, shows little sign of penury. Between 07-08 and 14-15 total revenue rose from $139 billion to $200 billion, a 44 percent increase, and inflation-adjusted per-pupil revenue went from $51,629 to $59,270, a 15 percent increase.

Using a longer timeframe, higher ed has clearly been raking it in for decades. Inflation-adjusted spending for all of higher education ballooned from $132.7 billion in 1969-70, to an estimated $548.0 billion in 2015-16, a 283 percent increase. Meanwhile, full-time equivalent enrollment rose from 6,333,357 to 15,076,819, just a 138 percent rise. This has, of course, been accompanied by skyrocketing prices. Such supposedly draconian measures as ending the student loan interest deduction—worth about $200 per year for the average claimant—or cutting private colleges off from tax-exempt bonds for construction is not going to alter that immensely.

Then there’s the key question: What have we gotten for all this money?

Answer: A glut of increasingly empty degrees coupled with greater school opulence.

Between 1992 and 2003—the only years the assessment was given—literacy for people with four-year and advanced degrees fell precipitously. In prose literacy, the share proficient dropped from 51 percent to 41 percent among advanced degree holders! Time spent studying plummeted from about 25 hours per week in 1961, to 20 hours in 1980, to 13 in 2003. Since 2000, earnings of people with BAs and above declined as the country experienced a major surplus of degree holders. Indeed, about a third of bachelors holders are in jobs that do not require the credential, and employers increasingly call for degrees in jobs that previously did not need them and don’t appear to have substantially changed. Finally, nearly 40 percent of students who enter college do not complete their programs within eight years, and many of those likely never will. Meanwhile, schools increasingly feature such luxuries as deluxe dorms and on-campus water parks.

In light of this, the trims that could come through the GOP tax plan hardly threaten to wreak higher education Ragnarok. Indeed, they may do for colleges and universities what the latest movie did for Thor: provide a much needed haircut.

The IGM Economic Experts Panel overwhelmingly opposes a constitutional strict balanced budget amendment.

Weighted by the confidence of their answers, 99 percent of responders disagree or strongly disagree that a requirement the federal government balance the books would reduce output volatility; whilst 53 percent disagree with the view that it would lower federal borrowing costs.


This is timely. House Speaker Paul Ryan (R-WI) has tasked Rep. Doug Collins (R-Ga.) as part of a 22-person strong task force to consider alternative fiscal rules to the debt ceiling to help constrain the growth of US federal government debt. The task force offers its recommendations in December. Whilst the task force’s remit does not extend to constitutional change, the cost and benefits of different fiscal rules are bound to shape their thinking.

Why do economists demur over an ex-post balanced budget requirement that forces balance every year? Two main answers appear. First, there’s the Keynesian argument that fiscal policy can and should be used to smooth the business cycle, especially via discretionary deficit-spending during recessions. In this view, a balanced budget amendment can exacerbate output volatility by outlawing potentially helpful fiscal support and enforcing cuts when the economy is in a cyclical downturn.

Second, there’s Robert Barro’s “tax smoothing” argument, which says a government can minimize the distortionary impact of taxation by keeping tax rates relatively smooth or constant and allowing government debt to be a shock-absorber to unexpected shocks.

I’d add two more. The risk of major within-year changes to the funding programs greatly increase uncertainty for many individuals and households and makes budgeting very difficult. And a balanced budget amendment could incentivize governments to run up high spending and new programs during boom periods when there’s a “windfall” in terms of tax revenues. These could then prove “sticky” and difficult politically to get rid of, running the risk of even larger government overall with a higher tax burden in the long-term.

Economists have long recognized these problems, which is why other countries that have adopted forms of “balanced budget rules” have not adopted strict ex-post rules that do not permit any deficits.

Most modern rules in countries deemed to be successful instead seek to cap government expenditures in any given year based on trends in revenues or some estimate of “potential” GDP, meaning that revenues and hence spending caps are largely “cyclically adjusted.”

This “structural balance” means, in theory, surpluses during boom periods and deficits during periods where growth is weaker-than-trend or below potential. The result, if trends remain constant or potential GDP is estimated correctly, is the debt-to-GDP path falls overall during the business cycle, with nominal GDP rising and the budget balanced over the cycle.

The details, of course, are very different depending on the country. Switzerland stabilizes spending around a revenue trend with its so-called “debt brake,” with any deviations from forecasts within-year made up over longer periods. Their rule is constitutionally-grounded.

Chile targets a structural balance through spending caps based upon estimates of potential GDP and the price of copper calculated by independent committees, but with no consequences if outturns differ from forecasts.

Sweden has a rule requiring a budget surplus equal to 1 percent of GDP on average over the business cycle, but with more freedom for governments to run structural deficits (provided they make up for them later).

All of these are more complex than a simple balanced budget requirement. And they come with risks. In particular, most of them are vulnerable should trends in economic growth change substantially, or the economy’s output gap gets calculated incorrectly—highly likely, given estimating it correctly requires measuring accurately current GDP, potential GDP, and how spending and revenues would react to moving towards potential GDP. But overall, they are more economically sensible than a rigid year-on-year balanced budget rule.”

I’ll blog in the coming weeks about other countries’ specific experiences with these types of fiscal rules. But one conclusion that stands out from the vast literature is that rules require buy-in both from the political class and the broader public to be effective. It is no coincidence, for example, that Sweden introduced its rule after a budget crisis in the 1990s, and Switzerland’s constitutional rule was delivered after obtaining 85% support from voters in a 2001 referendum. Without a broad consensus behind a rule, politicians seek to circumvent them with clever accounting, off-balance-sheet wheezes, optimistic forecasts and, ultimately, abandoning the rules when they start to bind.

Asking whether particular fiscal rules could be applied to the US federal government, in a technocratic sense, puts the cart before the horse. Yes, rules can bring focus on an issue and provide a framework for budgeting. But the elephant in the room is the question: does the US have the political will to move towards fiscal discipline? Bill White’s “American’s Fiscal Constitution” shows that in the past such a consensus for fiscal probity existed. But given the federal budget is now used for so many purposes, and with the political parties so divided on the optimal size of the state, could such a consensus exist again?

As Republicans assemble their tax reform legislation, Cato has released a study on one corporate tax break that is ripe for repeal. In “Low-Income Housing Tax Credit: Costly, Complex, and Corruption-Prone,” Vanessa Brown Calder and I describe the multiple failures of this tax credit.

The LIHTC is inefficient and bureaucratic. It breeds corruption in local governments and crowds out market-based housing. But by chanting “low income” and “affordable housing,” special-interest groups have distracted attention from the large LIHTC subsidies that flow to developers and big banks.

Republicans are hunting for revenue offsets for their tax bill. Under current law, the LIHTC will reduce federal revenues by almost $100 billion over the next decade, with 95 percent of the tax benefits going to corporations. Repealing the LIHTC would simplify the tax code and generate revenues to offset the corporate tax rate cut.         

The LIHTC study is here.

Equating mere allegations of misconduct with definitive evidence is a growing habit in the United States.  That tendency is most prevalent regarding national security matters, and the trend has been building since the onset of the so-called war on terror following the 9-11 attacks.  Conservatives are especially prone to assert that “terrorists” are not entitled to constitutional rights, even if they are American citizens.  The obvious problem with that argument is that until a fair and impartial trial is held, the individuals in question are merely accused terrorists.  The whole point of due process is to determine whether a defendant is guilty or not. 

Alarmingly, George W. Bush’s administration asserted the authority to jail suspected terrorists without trial or even a hearing before an independent tribunal.  In the case of Jose Padilla, an American citizen apprehended at Chicago’s O’Hare International Airport, the government designated him an “enemy combatant” and held him (as well as inflicted torture) for nearly four years at a military prison in South Carolina before bringing charges to a grand jury.  Even then, the administration’s belated application of due process occurred only in response to the U.S. Supreme Court’s prodding.

It would be a mistake, though, to assume that only right-wing leaders embrace the notion that accusation equals guilt.  The Obama administration escalated its predecessor’s contempt for due process.  President Bush merely asserted his alleged authority to imprison American citizens without trial.  President Barack Obama asserted an authority to execute such people without trial.  That point was underscored when he authorized a September 2011 drone strike that killed radical Islamic cleric Anwar al-Awlaki, an American citizen, in Yemen.  A separate strike the following month killed Alwaki’s 16-year-old son

There is little doubt that the elder Awlaki was a committed terrorist. (The indications regarding his son are less clear.)  But that’s really not the point.  Giving the president of the United States the power to execute an American citizen based on nothing more than his determination (or more accurately, a determination by bureaucratic appointees) that the individual is guilty of terrorism sets a horrifying precedent.  It is the ultimate in the accusation- equals-guilt thesis, with devastating consequences.  An American’s right to life would then be wholly dependent not only on the reasonableness, but the infallibility, of U.S. leaders.  The republic’s founders knew better than to rely on such factors for guaranteeing liberty.

The erosion of due process in the name of national security continues to spread.  People are placed on the arbitrary terrorist watch list, and its subset, the “no-fly” list, based on the most opaque criteria.  Most cannot even discover through legal proceedings how or why they were marked for scrutiny and restrictions.  And it is a list riddled with errors.  Individuals prevented from flying have included several pre-teen children and California Republican State Senator (now U.S. Representative) Tom McClintock.  Even the late U.S. Senator Ted Kennedy was repeatedly flagged for additional screening because of faulty information.

Proponents of the accusation-equals-guilt thesis apparently are not content with violating an implied constitutional right to travel unhindered in the United States.  Gun control advocates now favor using the terrorist watch list to bar gun purchases.  Last year, congressional Democrats, including Senators Diane Feinstein and Charles Schumer, pushed legislation to impose such a restriction, a move that would deprive citizens of an explicit constitutional right under the Second Amendment.  Fortunately, the Senate rejected their measure, but the sentiment in favor of using the no-fly list for that purpose continues unabated in progressive circles.

The growing, casual indifference to basic due process standards threatens liberties that have been hard-won over centuries since the Magna Carta.  It is imperative to establish an unyielding standard that distinguishes mere allegations from proof of guilt.  Everyone, even the most suspicious or unpleasant people, are entitled to the presumption of innocence until guilt clearly has been established.  We erode that standard at our great peril.

In the middle of President Trump’s underwhelming Asia trip, other countries in the region took the opportunity to make some real progress on trade liberalization. Remember the Trans Pacific Partnership (TPP), the Asia Pacific trade deal from which President Trump withdrew soon after taking office? Well, this past weekend, the remaining countries made some pretty good progress in getting the deal done on their own, without the United States. They may have even made it better in two areas (the Cato Working Paper assessing the original TPP is here). 

The deal is not done yet, as some countries have raised additional issues they want changed. But it’s getting close.

One key aspect of this new TPP deal is that the “TPP 11” (that is, the countries other than the United States who are part of the TPP talks) would like the United States to rejoin at some point. Clearly, that is not going to happen during the Trump administration, but perhaps it could under some future administration. To allow for this possibility, the changes the TPP 11 have made to the deal are not permanent, but rather just “suspensions” of the previous terms. There were a few provisions that the United States pushed for, but many other countries did not want. These provisions will be suspended for the time being, but could be restored to their original form if the United States wants to join later.

There is also an issue that may seem minor and technical, but could be a problem for having the United States join later, which is the new name for the agreement. It is now called the “Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).” Besides being an unwieldy name, putting the word “progressive” in there will not be good for U.S. politics. For one thing, most high-profile American progressives don’t like any trade agreement, so calling it progressive is not likely to get them on board. In addition, libertarians, conservatives, and others are going to be wary of anything labeled progressive. This new name seems like a big mistake to me (especially given that the agreement is not, in fact, progressive in the way that most people would use that term!).

The larger point here is that the rest of the world is moving forward on trade liberalization, while the United States is doing next to nothing. Perhaps when U.S. businesses start to feel the impact of all this, the Trump administration will begin to do something productive on trade, but for now, it feels like we are mostly going backward.

As Dan noted, President Trump has been in Asia, making a state visit to China and then meeting with foreign leaders at an Asia-Pacific Economic Cooperation forum in Vietnam. As part of the trip, and perhaps in an effort to recapture his populist mojo amidst cratering job approval numbers back home, he has remounted one of his favorite hobby horses: decrying “unfair trade deals” that he says put America at a disadvantage with its trading partners.

The president does make oblique references to barriers that other countries place on American products entering their markets. But his comments suggest his biggest concern is the large trade deficits the United States has with some countries. According to Trump, those deficits are all the proof necessary that America is being snookered, and that current trade arrangements should be dissolved and renegotiated.

“The United States really has to change its policies because they’ve gotten so far behind on trade with China and, frankly, with many other countries,” he said in a press conference with President Xi in China. “The current trade imbalance is not acceptable,” he told reporters in Vietnam, adding: “I do not blame China or any other country, of which there are many, for taking advantage of the United States on trade. If their representatives are able to get away with it, they are just doing their jobs. I wish previous administrations in my country saw what was happening and did something about it. They did not, but I will.”

But if a trade deficit—especially a large, persistent one—is proof positive of unfair dealing, then Trump has some things to discuss with U.S. authorities about his own business empire, the Trump Organization.

Consider the tenants in his office, retail, and condo complexes, the lodgers at his hotels, and the players on his golf courses. They spend hundreds of dollars a day and thousands or millions of dollars a year on Trump products. Yet it’s highly doubtful that the Trump Organization simultaneously purchases hundreds of dollars a day or thousands and millions of dollars a year in goods from those same customers. Those customers thus have huge trade deficits with the president and his businesses. By his own logic, the Trump Organization must be treating those customers unfairly.

But wait, the president might protest, that’s not right—his businesses may not buy things from his customers, but the Trump Organization buys things from other businesses, and those businesses buy from other businesses, and sooner or later the money winds its way back to his customers.

But people in foreign countries likewise use American dollars to buy things from other countries, and invest in other countries, and some of that money winds its way back to the United States, too. Besides, even if China were to keep every U.S. dollar it receives and tuck them all away in some giant mattress, that would hardly reduce the number of dollars the United States can spend on domestic goods—after all, we own printing presses! Meanwhile, as all those dollars whirl around or get tucked away, the United States receives more and more Chinese goods—goods that we value more than the dollars we exchange to purchase them.

Unfortunately, the president ascribes to a very simplistic—and wrong—understanding of trade. The next time he launches in on the horrors of U.S. trade deficits, I hope someone asks him if there’s also a problem with the imbalanced trade the Trump Organization has with its customers. 

Members of the House Financial Services Committee made some progress on monetary reform this past week by introducing three new bills in the House on November 7th and 8th, to be marked-up in Committee on Tuesday — along with a host of other financial services related bills. The monetary measures serve as free-standing counterparts to similar provisions and goals of the comprehensive Financial CHOICE Act passed by the House earlier this year.

The Independence from Credit Policy Act (H.R. 4278), introduced by Rep. French Hill (R-AR), is intended to restrict the Fed’s asset holdings, apart from gold, foreign exchange, and IMF-issued SDRs, particularly by requiring it to swap its current MBS holdings for Treasury obligations. In future emergencies the Fed could temporarily acquire certain non-Treasury assets in connection with its 13(3) lending operations (concerning which see below); but it would be allowed to hold such assets for no more than a year, after which it would also have to trade them in for Treasury securities.

The Monetary Policy Transparency Act (H.R. 4270), introduced by Rep. Andy Barr (R-KY), is a variation on a core aspect of the Fed Oversight Reform and Modernization (FORM) Act, which was originally introduced in 2015. The FORM Act required the FOMC to adopt a specific, formal monetary policy rule, of the FOMC’s own choosing, and report to Congress when and if monetary policy deviated from the rule — although such a requirement was not to be “construed  to prevent” the FOMC from such deviations. The new measure adds a step, calling for the FOMC to announce a particular monetary policy “strategy” each year, specifying, not mathematically but “in plain English,” its policy targets and the instrument or instruments it plans to employ to achieve them. And again, report to the appropriate House and Senate Committees concerning any deviations.

Finally, Rep. Scott Tipton (R-CO) introduced the Congressional Accountability for Emergency Lending Programs of 2017 Act (H.R. 4302). That Act would further restrict the Fed’s 13(3) lending operations by requiring that they be approved by at least two-thirds of the FOMC (as opposed to the present 5-member requirement); by disallowing the use of equity as collateral for 13(3) loans; by requiring that loans be approved not only by the Federal Reserve Board but by all Federal banking regulators having jurisdiction over the prospective borrowers; and by allowing emergency lending to be extended beyond a term of 30 days only by means of a joint resolution approved by Congress.

There’s no question that these measures, if adopted, would help to impose some much-needed discipline on the Fed — especially by preventing the Fed from propping-up markets for particular securities, save those issued by the U.S. Treasury — and by making it harder for it to bail-out insolvent firms. But crucial steps toward reforming the Fed’s current system of monetary control, with its reliance upon interest payments on banks’ excess reserve holdings as an alternative to conventional open-market operations, still need to be taken.

As I’ve stressed on numerous occasions, the current system involves a far less reliable “monetary transmission mechanism” than the old one — because it divorces changes in the Fed’s policy rate settings from any corresponding changes in the quantity of bank reserves, and also because it encourages banks to hoard reserves that come their way, instead of using them to support corresponding growth in the nominal quantities of money and credit. By encouraging banks and other financial institutions to direct funds to the Fed rather than to private-market borrowers, thereby increasing the Fed’s size relative to that of the commercial banking system, the new system also limits growth by employing savings less productively. Finally, by allowing the size of the Fed’s balance sheet — formerly a crucial determinant of the Fed’s monetary policy stance — into a “free parameter,” the new set-up makes the Fed vulnerable to the Treasury’s importuning, if not to that of other borrowers.

So, while I wish the sponsors of the present legislation good luck with their efforts so far, I hope they’ll follow them up with some reforms specifically aimed at replacing the present, unreliable, and inefficient monetary control system with a more old-fashioned, but nonetheless better, alternative.

The good news is that, legislatively-speaking, the fix is relatively easy. To compel the Fed to switch from its current “leaky floor” monetary control system, based on paying banks an above-market return on their excess reserves, to a more orthodox system in which the interest rate on excess reserves defines the lower bound of a fed funds rate “corridor,” all that’s needed is a slight clarification of existing law.

According to the statute that grants the Fed authority to pay interest on reserves, the rate it pays is “not to exceed the general level of short-term interest rates.”  Unfortunately, Congress left it to the Fed to interpret “the general level of short-term interest rates” however it liked. By choosing to interpret it so loosely as to refer to the Fed’s own discount rate (or “primary rate”), among other proxies, the Fed has managed to pretend to conform to the statute, while actually thumbing its nose at it.

To put a stop to that, Congress just has to amend the law to make the “general level of short-term rates” mean what it was originally supposed to mean, to wit: the level of any of several reasonably comparable short-term market rates. Here is one way Congress could do just that — call it the Undo the Fed’s Abuse of Interest on Reserves Act:

Section 19(b)(12) of the Federal Reserve Act (12 U.S.C. 461(b)(12)) is hereby amended by inserting after Subparagraph (C)

‘(D) General level of short-term interest rates defined.—

For purposes of this paragraph, the term “general level of short-term interest rates” shall be defined as the average value over the preceding six-week interval of the Federal Reserve Bank of New York’s benchmark Broad Treasury financing rate on overnight repurchase agreements’

So, what do you say, FSC? As long as you’re tidying-up the Federal Reserve Act, a little clarification here could go a long way.

[Cross-posted from]

Congress is considering the Honest Ads Act, an effort to force disclosure of political advertising on the Internet. We ought to be skeptical anytime Congress seeks to manage a private forum for purposes of improving political speech. I will return to my skepticism in a later post. For the moment, I want to examine how the managers of that private forum have responded to the bill.

Facebook has announced a host of changes to its advertising marketplace, attempting to forestall regulation by satisfying congressional concerns through private action. Facebook is acting to counter a threat of regulation and that itself is disturbing. We do not wish to see Facebook bullied into actions that run counter to their own inclinations. Yet, Facebook also has a history of seeking to satisfy its users, and it is possible that such business motives are at work. Perhaps we should avoid for now deciding that Facebook has been coerced. That said, there is good reason to believe that self-regulation can address the concerns of lawmakers more effectively than government action.

The Honest Ads Act is purportedly intended to reduce the ability of foreign governments to meddle in our elections while providing voters with access to information about the source of advertisements. Targeted advertisements, which appear only to users who match certain profiles, are of particular interest to legislators.

The bill attempts to achieve these goals by expanding the Federal Election Campaign Act in a number of ways. Firstly, it would require disclaimers in online political advertisements specifying who paid for the advertisement, to appear “in letters at least as large as the majority of the text in the communication” for text adverts, and for at least four seconds in videos. It is unclear how these requirements would apply to GIFs. Platforms, meanwhile, would have to maintain searchable records of all advertisements concerning “a national legislative issue of public importance” including descriptions of the targeted audience, the advert’s price, and the name of the candidate or issue to which the advert pertains. The FCC would be tasked with establishing rules to establish a common data format for these records, and authoring a biannual report concerning transparency in both paid and as-yet-undefined unpaid political advertising.

Facebook’s proposal provides its users with information in a far more user-friendly fashion than the bill, and in some cases, goes above and beyond what would be required by the Honest Ads Act. All advertisements, political or not, will be tied to a sponsoring page, accessible through the advertisement, which will house an archive of other advertisements the page has run in the past four years. A universal advert archive is likely to be more effective in informing Facebook users than mandated disclosure for adverts concerning “national legislative issues of public importance.” This nebulous category is either unlikely to fully capture the issues that divide America (Is “creeping sharia” a national legislative issue?) or prone to exert a chilling effect on constitutionally protected speech.

Anyone desiring to run election related advertisements, a clear, predefined category, will be required to verify their identity and location. The adverts themselves will include a built-in disclaimer, and a link to information describing the amount spend on the ad, the number of people who have viewed the ad, and demographic data concerning the advert’s intended audience. These requirements will first apply to federal elections, with planned expansion to cover state elections and referendums.

This planned, flexible, expansion is a key element of Facebook’s proposal that cannot be replicated with legislation. Unlike the Honest Ads Act, Facebook’s advertising policies can be tested and tweaked in an ongoing fashion, before their rollout in America’s 2018 midterms, they will be tested in Canada.

“Testing in one market allows us to learn the various ways an entire population uses the feature at a scale that allows us to learn and iterate.”

Legislation cannot be tested before it is implemented, let alone tested at any sort of realistic scale, and, particularly given its once-size-fits-all approach and partisan salience, is unlikely to be updated as time goes on. If enacted, attempts to amend or improve the Honest Ads Act will be politically fraught as Republicans and Democrats identify and re-litigate specific elements of the law which may seem to advance the cause of one party over the other.

Facebook’s proposal also distinguishes itself from the Honest Ads Act in ease of compliance. The Honest Ads Act requires anyone seeking to purchase a qualifying political advertisement, still a somewhat murky category, to furnish information concerning their identity and the nature of their advertising, on Facebook, this data collection is baked in, reducing the risk of noncompliance. If you fail to fill in the required information, your advertisement will not run, no ifs, ands, or buts. The wider net and evolving nature of Facebook’s proposal seems to put it above the Honest Ads Act, though the bill was likely instrumental in spurring, and setting goals for, Facebook’s political advertising policy.

Facebook is trying to govern their private forum in way that responds to congressional concerns and perhaps, the wishes of their users. We might wish Congress stay clear of the Internet, but that seems unlikely just now. Facebook’s effort may have the additional advantage of showing that private governance can work well in a forum that implicates freedom of speech.

Private governance can be practiced with varying levels of efficacy, however, last week’s Senate Intelligence Committee hearings on Russian influence demonstrated that while Congress may have the power to regulate social media platforms, it does not have the institutional expertise to deal well with Facebook and other private forums. Private governance may be the actual next alternative to new and expanding government regulation of speech on the Internet. Facebook is making that next alternative real. Those who doubt the wisdom of government control of speech forums will be hopeful about the prospects for private governance.   

President Trump seems to be feeling pretty good about himself right about now. He and Mrs. Trump were accorded the highest honors and warmest welcome in China. His hosts attended to every last detail of the visit to ensure the U.S. president had the opportunity to bask in his importance and appreciate just how highly regarded he is by China’s leadership and people. Then, in a gesture of deference to Trump’s business acumen, negotiating savvy, and commitment to results, Chinese President Xi Jinping gave the president a bill of business in the neighborhood of $250 billion—a pretty good haul by most standards.

In return, Trump lavished praise on Xi, expressing gratitude for his hospitality, admiration for his stewardship of Chinese society, and apologies for mistakenly blaming Beijing’s trade policies for the bilateral trade imbalance when the real culprit, after all, has been U.S. policies and previous administrations that let the relationship “get off kilter”: 

Our meeting this morning, in front of your representatives and my representatives, was excellent, discussing North Korea – and I do believe there’s a solution to that, as you do; discussing trade with the United States, knowing that the United States really has to change its policies because they’ve gotten so far behind on trade with China and, frankly, with many other countries.

And I have great respect for you for that, because you’re representing China. But it’s too bad that past administrations allowed it go get so far out of kilter. But we’ll make it fair, and it will be tremendous for both of us.

My feeling toward you is an incredibly warm one. As we said, there’s great chemistry, and I think we’re going to do tremendous things for both China and for the United States. And it is a very, very great honor to be with you. Thank you very much.

The hosting of the military parade this morning was magnificent, and the world was watching. I’ve already had people calling from all parts of the world. They were all watching. Nothing you can see is so beautiful.

So I just want to thank you for the very warm welcome, and I look forward to many years of success and friendship, working together to solve not only our problems but world problems, and problems of great danger and security. I believe we can solve almost all of them and probably all of them.

There is something to be said about the importance of good rapport between world leaders, but perhaps of much greater value is understanding the Chinese faculty for making flattery an art form.

My initial reaction to the reported outcomes of the meetings in Beijing was that Trump got played by Xi. After all, Trump’s a fairly easy read. He likes pomp. He likes praise. He’s fascinated by parades. He believes bilateral trade balances reveal whether trade policy has succeeded or failed. And he’s confident that he has what it takes to make trade flows adhere tightly to the script of a business contract. In buttering up Trump and sending him home with $250 billion worth of purchases and investments, Xi hopes to have put his trade problems with the United States behind him.

Chinese leaders have gone to that well many times before. What better way to respond to U.S. gripes about the trade deficit than agreeing to buy a couple dozen Boeings?  As I explained to a Chinese journalist yesterday–who sat before me, incredulous at my suggestion that Xi’s actions wouldn’t solve the problem–Americans are skeptical of big business deals conducted at the highest levels of goverment. That a U.S. president would negotiate by proxy on behalf of particular U.S. businesses reaks of crony capitalism. And, furthermore, that such buying decisions can be made with the swivel of a pen by one guy in Beijing reinforces for Americans that the Chinese economy is centrally planned and operates according to non-market principles. That makes it easier for Amercians to view China as a nemesis, and to show less resistance to protectionism directed at China.

Realistically, Xi bought a quarter of a trillion dollar insurance policy–leverage he may need to soften emerging U.S. policies, including trade and investment restrictions. By promising Trump all of this business, Xi can be sure the U.S. president is well aware of the costs of a more strident U.S. economic policy toward China. What Xi giveth, Xi can taketh away. Even so, I think Trump understands what’s going on.

Unless some serious policy changes are made to fix the structural problems afflicting the relationship, frictions over trade and investment policy will worsen. Those who think China’s full cooperation with Trump on North Korea will expunge U.S. trade policy demands have not sufficiently hauled in that the security hawks in Congress are ascendant and that the U.S. intelligence community considers China’s inexorable quest for technological supremacy to be America’s next most important security challenge.

In February 2017, I explained why a U.S.-China trade war is more likely now that at any time in the past. The safeguards that had kept the train from derailing for three decades had fallen into disrepair. Then, in July I wrote about the ongoing, cybersecurity, high-tech trade battle that would likely spark a full-fledged, gloves-off, tit-for-tat trade war. The machinery has already been mobilized to effect this outcome. The Trump adminisration launched an investigation into China’s alleged forced technology transfer policies and other forms of high tech intellectual property theft earlier this year. Affirmative findings that lead to unilateral sanctions against China (i.e., in circumvention of U.S. obligations to follow WTO protocol) would be provocative and would be likely to incite reprisals against U.S. exporters and U.S. companies in China.

Meanwhile, there is an emerging bipartisan consensus in Congress that prospective Chinese acquisitions of U.S. technology companies need much greater scrutiny, and that thresholds for blocking such acquisitions should be lowered. Legislation spearheaded by Sen. Jon Cornyn (R-TX), which would broaden the authority of the Committee on Foreign Investment in the United States to stop nearly any deal that might result in technology transfer to China, was introduced in both chambers this week. It could become law this year.

Beyond these very difficult technology, intellectual property, and cybersecurity issues, there are many other unresolved problems in the economic relationship.  One potential solution, which hasn’t received enough attention (and has too often been dismissed as a political impossibility), is for both Washington and Beijing to catologue all of their gripes, all of their issues, and put them on the negotiating table. Whatever the political obstacles may be, the costs of not pursuing a U.S.-China bilateral free trade agreement could soon be all of our biggest regrets.

President Trump’s favored catchphrase when speaking about trade policy is that it must be “free, fair, and reciprocal.” His penchant for such language has certainly been on display during his current trip to Asia, where in Japan alone Trump used some variation of it on at least three separate occasions.

Conducting a joint press conference with Prime Minister Abe, Trump professed a particular affinity for the reciprocal aspect of this formulation:

[F]rankly, I like reciprocal the best of the group. Because when you explain to somebody that you’re going to charge tariffs in order to equalize, or you’re going to do other things – some people that don’t get it, they don’t like to hear that. But when you say it’s going to be reciprocal – that we’re going to charge the same as they’re charging us – the people that don’t want a 5 percent or a 10 percent tariff say, oh, reciprocal is fair – and that could be 100 percent. So it’s much more understandable when you talk about reciprocal.

Trump also noted that this prized reciprocity does not exist in the U.S.-Japan trade relationship, telling a group of U.S. and Japanese business leaders that “We want free and reciprocal trade, but right now our trade with Japan is not free and it’s not reciprocal.”

On the surface, Trump’s comments may appear to be commonsensical and correct. Indeed, ideal tariff levels between two countries are a reciprocal zero. It is also accurate that the United States and Japan do not enjoy reciprocal trade in the context of tariffs. A deeper examination of the subject, however, reveals that the president gets more wrong than he gets right. 

Let’s first note that while President Trump often frames the reciprocity argument as one in which the United States is the aggrieved party charging lower tariffs while its trading partners opt for higher ones, the opposite is also frequently the case.

The U.S.-Japan trading relationship is a useful example. Perusing the two countries’ HTS codes, one can see that the United States charges tariffs on a number of goods produced by Japan including a 2.5% duty on automobiles, a 25% tariff on trucks, and 14% tariff on imports of railway passenger coaches. Japan, in contrast, charges no tariff at all for any of these products.  

Even where the two sides both extend duty-free treatment to the same product, this can simply mask underlying protectionism. Like Japan, the United States does not apply tariffs to imports of ships used for the transport of people and goods (HTS code 8901.90.00 for those who care to look it up). It does, however, have a law on the books called The Merchant Marine Act of 1920—more commonly known as the Jones Act—which mandates that any vessel used to transport goods or people between U.S. ports must be domestically built. While a ship can be purchased from Japan tariff-free, this protectionist law ensures that its usefulness will be greatly diminished. 

None of this is to suggest that the United States is always the villain and never the victim. Japan is notoriously protectionist in the area of agricultural products, which is particularly costly to an agricultural powerhouse such as the United States. Japanese tariffs on beef, for example, are typically 38.5%—and currently 50% due to the imposition of a “safeguard” measure to give the country’s beef producers additional protection—while the U.S. rate is a comparatively low 4%. Oranges, meanwhile, incur a Japanese duty ranging from 16-32% depending on the time of year they are imported, while 100 kilograms of the fruit imported into the United States will face a tariff bill of just $1.90. Fish, mostly duty-free in the United States, typically face duties of 3.5% and higher in Japan.

Under a tariff regime based on perfect reciprocity, the United States would impose tariffs on such food products to match those of Japan. But other than raising the cost to U.S. consumers of Waygu beef or Japanese fish (Americans do not consume Japanese citrus products in any significant quantity), what would this accomplish? Japan’s high food tariffs reflect the influence of the country’s powerful farm lobby (sounds familiar!), and the prospect of diminished exports to the U.S. is unlikely to dissuade those in Japan’s agricultural sector from their protectionist stance. The likely result would be the status quo by Japan, but with American consumers facing elevated prices and reduced choice and American businesses confronted with increased input costs, thus reducing their competitiveness. Copying a trading partner’s misguided approach is not a sensible policy.

Rather than hewing to a blind insistence on tariff reciprocity which holds U.S. businesses and consumers hostage to decisions made in foreign capitals, the Trump administration should push for the conclusion of trade agreements which reduce tariffs and other forms of trade barriers by both the United States and its trading partners to the greatest extent possible. This, not simplistic sloganeering, represents the best path towards freer and expanded trade. 

“All the Benefits of Boston, Without the Headaches” New Hampshire claims in its Amazon Headquarters II (Amazon HQ2) bid. “Choose Boston and next year when you leave your tiny $4,000-a-month apartment … you’ll be wishing you were in New Hampshire” it declares.

Although New Hampshire may not be winning friends, it isn’t exactly wrong about Boston’s housing affordability challenges. As Boston residents are painfully aware, a one-bedroom apartment in the city will easily run $2,200 per month. Boston was recently named the 5th most expensive city to rent an apartment in the United States.

Surely this isn’t news to Bostonians. Perhaps more of a surprise is that something can be done about it—for free. Improving affordability can be accomplished by reforming zoning regulation. Academic research supports the view that restrictive regulation increases the cost of housing. For example, Harvard Economist Edward Glaeser found “zoning and other land-use controls play the dominant role in making housing expensive,” and one study attributes 30-50% of the cost of housing in places like Manhattan, Los Angeles, and San Francisco to the regulatory tax associated with regulation. Massachusetts is no exception: according to a recent Cato study new zoning regulation is associated with increasing home prices in the state.

But increasing home prices are just one of many unsavory impacts of restrictive regulation. There is evidence that racial and economic segregation, geographic mobility and economic growth are all significantly affected. For example, a recent Harvard University study suggests that more than 50 percent of the difference in levels of segregation between strictly regulated Boston and lenient Houston could be attributed to zoning regulations. Another study found “a strong and significantr elationship between low-density zoning and racial segregation, even after controlling for other…metropolitan characteristics.”

The quantity of zoning and land-use regulation continues to grow, despite the relationship between regulation and its adverse impacts. This is especially true in Massachusetts: my research indicates Massachusetts fared particularly poorly in recent years, adding more zoning regulation than ever before. Between 2000 and 2010, Massachusetts added more zoning regulation per capita than 45 U.S. states.


Source: Zoning, Land-Use Planning, and Housing Affordability


One silver-lining? Massachusetts’ Granite State rival isn’t faring much better. The “Live Free or Die” state isn’t living free at all. For example, New Hampshire relies heavily on exclusionary zoning and is one of the four worst states in the country for residential building restrictions according to Freedom In the Fifty States. New Hampshire’s declining population helps reduce some pressure, but not enough to escape zoning regulation’s harmful impacts on affordability.

In fact, the rival states may have more in common than they thought. For example, either state could focus on regulatory reform to boost competitiveness. Likewise, almost any of the 20 metropolitan area contenders for Amazon HQ2 would benefit from a similar approach. Many of these cities suffer from housing affordability problems and would benefit from reforming the regulatory morass which drives up development costs and crushes their resident’s ability to innovate, work, and live affordably.

Because you know what would be even better than winning Amazon HQ2? Reducing home prices across the board for current residents.

In 1993, Jony Jarjiss entered the United States on a temporary visa for fiancés of U.S. citizens. The relationship fell apart, and in 1994, an immigration judge ordered his removal for overstaying his visa. Iraq refused to accept him back, and so for 23 years, Jarjiss has checked in with immigration authorities. Then, due to a new deal with Iraq, the Trump administration arrested him in July 2017 and is now attempting to deport him. He is “terrified” of the persecution that he may face as a Christian upon his return and is attempting to reopen his immigration case. The government is trying to remove him before he has that opportunity.

During the campaign, President Trump promised Iraqi and Syrian Christians protection in the United States, and they rewarded him with their votes. Yet in March, the United States struck a bargain with the government of Iraq: President Trump would leave Iraq off his travel ban executive order in exchange for Iraq accepting 1,400 Iraqis subject to deportation orders.

The deal was strange considering the president argued letting in any Iraqis could let “dangerous people” enter. But in any case, Immigration and Customs Enforcement (ICE) began rounding up Iraqis in June and has arrested 279 so far, about half of whom were ordered removed from the United States at least a decade ago. Most are Chaldean Christians like Jarjiss.

As their lawyers scrambled to find them legal representation to challenge their removals in immigration courts, the United States government began shipping them from Michigan across the country to 26 different states, obfuscating their efforts to obtain lawyers, and pressuring them to sign away their rights to challenge. ICE prison guards harassed Iraqis in what the ACLU alleges was a concerted effort to intimidate them. Jarjiss was shipped to Ohio.

Finally, in July, a federal district court judge temporarily blocked the removals in the case of Hamama v. Adducci. The judge’s order explains that the Iraqis’ efforts have “been significantly impeded by the Government’s successive transfers of many detainees across the country, separating them from their lawyers and the families and communities who can assist in those legal efforts,” and that these people are “confronting the grisly fate Petitioners face if deported to Iraq.” The order allowed Iraqis to file motions to reopen their removal cases in immigration courts.

Since July, immigration courts have granted 87 percent of all of these motions. In the 10 cases where judges have ruled on the merits, all received the right to remain the United States. Yet ICE continues to detain all of the others. In more difficult cases, it could take years for judges to reach the merits of the case, but ICE refuses to consider applications for release from Iraqis.

The ACLU is now challenging their continued detention. Under Supreme Court precedent, ICE cannot detain immigrants indefinitely. Their removal must be “reasonably foreseeable,” and the ACLU is demanding evidence that the removal would meet that standard. They also assert that prolonged detention requires an “individualized hearing before an impartial adjudicator.”

Most of these Iraqis were legal permanent residents, and they have already gone through immigration court proceedings at some point. Half received orders of removal at least decade ago. They lost their cases at that time. Some lost because they could not credibly claim a fear of persecution at that time; others because they lacked attorneys to represent them in court; others because they failed to apply for asylum in the time limit; and still others because they committed crimes that bar them from relief.

Until this year, the Iraqi government would only accept deportees with unexpired Iraqi passports, and it refused to issue new passports to those who the United States attempted to deport. The government has portrayed all of these people as serious criminal threats who need to be removed, but about 75 percent committed only nonviolent crimes years or decades ago. Even those barred from asylum still may have claims under the Convention against Torture. Some simply overstayed a temporary visa.

Moayad Jalal Barash who came to the United States when he was a young child served time for a drug conviction when he was 17. He is now 47 and has grandchildren in the United States. Another man served 2 years for a drug charge in 1987. Najah Konja has lived in the United States for 40 years and served time for a drug convictions decades ago. Jihan Asker paid $150 fine for a misdemeanor in 2003 and has not been arrested in 14 years since. Some like Jarjiss have no criminal history at all.

Regardless of the specifics, the U.S. government should not be attempting to thwart the legal rights of people. In 2017, the U.S. State Department described a “genocide against Yezidis, Christians, and Shia Muslims” in areas of Iraq controlled by ISIS. Other credible reports of persecution by Shia militia against Muslims have surfaced. The United States should not deport nonviolent people to places where they could be killed.

Reporters and pundits are claiming that Republicans are pursuing a tax giveaway to the rich. In fact, the proposed tax changes, especially in the early years, heavily favor middle-income households.

The skewed media coverage of the GOP tax plan is partly based on a slanted presentation of results by the Tax Policy Center (TPC). As I have noted, TPC has expert analysts and does a lot of great work, but they tilt their reports to make it appear that high-earners are favored by recent Republican proposals.

The summary of TPC’s new report on the House GOP tax plan says, “The largest cuts, in dollars and as a percentage of after-tax income, would accrue to higher-income households.” The largest cuts in dollars go to high-earners—no kidding! TPC’s own data (current law data is here) reveal that the top quintile of households will pay an average of about $65,000 in income and estate taxes in 2018, compared to about $3,200 for the middle quintile. Thus, it is very difficult to cut taxes without the top group receiving the largest dollar cuts.

The TPC report presents the data shown in columns 1 and 2 below, which suggest that GOP cuts favor high earners. However, based on TPC data, I calculated columns 4 and 6. Column 4 reveals that the lower and middle groups would receive the largest percentage cuts when total federal taxes are the denominator.  

But, as I discuss here, column 6 presents the best data showing the relative size of GOP cuts. It shows income and estate tax cuts as a percentage of current income and estate taxes paid. Under the GOP plan, the middle quintile gets a big 26 percent tax cut, on average, while the top two quintiles would receive cuts of 16.9 percent and 7.4 percent. Looked at this way, middle earners would get the largest tax cuts under the GOP plan.

President Trump’s nomination of Jerome Powell as the next chairman of the Federal Reserve System is a bet that he will continue Janet Yellen’s policies and not rock financial markets. The expectation is that Powell will follow the Fed’s already-announced normalization schedule, which calls for slowly reducing the Fed’s $4.2 trillion balance sheet, by rolling off maturing mortgage-backed securities (MBS) and longer-term Treasuries, and gradually increasing the target range for the fed funds rate.[1]

The presidential vote of confidence for Powell reflects the White House and Treasury’s desire for low interest rates to fund the public debt and support high asset prices, as well as the probability that the Senate will quickly confirm the nominee.

Mr. Powell also appears open to revisiting financial regulations, such as the Volcker rule and regulations that discriminate against smaller banks. In testimony, before the Senate Committee on Banking, Housing, and Urban Affairs, on June 22, 2017, Governor Powell set forth “Guiding Principles to Simplify and Reduce Regulatory Burden.” One of the key principles is that Fed policymakers “should assess whether we can adjust regulation in common-sense ways that will simplify rules and reduce unnecessary regulatory burden without compromising safety and soundness.” He emphasized that the Fed’s goal should be “to establish a regulatory framework that helps ensure the resiliency of our financial system, the availability of credit, economic growth, and financial market efficiency.” However, during his tenure on the Fed’s Board of Governors since May 2012, he has consistently voted in favor of tightening the Fed’s grip on financial regulation.[2] Thus, one must remain skeptical about whether he would embrace market-friendly deregulation.

Unconventional Monetary Policy and Uncertainty

Unconventional monetary policy — in the form of quantitative easing (i.e., large-scale asset purchases) and ultra-low interest rates — has misallocated credit, distorted interest rates, encouraged risk taking, inflated asset prices, fueled government deficit spending, and done little to promote long-run private investment.[3]

By purchasing massive amounts of high-risk MBS and long-term government bonds, the Fed helped lower longer-term interest rates but steered credit away from private investment, which was also impeded by stricter macro-prudential regulations. Moreover, by keeping short-run interest rates near zero for more than seven years, paying interest on excess reserves (IOER) above the effective fed funds rate, and convincing markets that rates would stay low for a long time (forward guidance), the Fed has increased the reach for yield and appears more interested in priming Wall Street than in letting markets set interest rates and allocate credit.

The Fed’s current operating procedure is to administer the target range for the fed funds rate using IOER and reverse repos, in contrast to the pre-crisis arrangement whereby the Fed’s open market desk bought or sold short-term Treasuries to increase or decrease bank reserves, and then let market participants determine the effective funds rate.[4] As a result, changes in the monetary base are no longer “high powered” — the money multiplier has collapsed and the monetary transmission mechanism that prevailed prior to 2008 is broken.

Unconventional monetary policy, macro-prudential regulation, and the lack of any monetary rule have increased uncertainty about the future of monetary policy and, thus, have had a negative effect on private investment. To his credit, Mr. Powell has recognized some, but not all, of these problems. In January this year, he told members of the American Finance Association in Chicago that “the current extended period of very low nominal rates calls for a high degree of vigilance against the buildup of risks to the stability of the financial system.” However, he downplayed that risk by saying that “the bottom line is that there has not been an excessive buildup of leverage, maturity transformation, or broadly unsustainable asset prices.”[5]

The Limits of Monetary Policy

The purpose of the Bernanke-Yellen monetary policy has been to lower longer-term rates and pump up asset prices creating a wealth effect to spur spending and real economic growth. But there has been a differential impact favoring the housing and government sectors, while private investment has been sluggish due to regime uncertainty, regulatory costs, and a fall in the private saving rate. From a long-run perspective, the Fed cannot permanently increase wealth by monetary policy. Powell recognizes the limits of monetary policy when he notes that “ultimately, the only way to get sustainably higher interest rates is to improve the broader environment for growth, by adopting policies designed to increase productivity and potential output over the long term — policies that are mainly outside the scope of our work at the Federal Reserve.”[6] Recognition of the limits of monetary policy is an important first step toward sound monetary policy.

The Schizophrenic Nature of Fed Policy

In his January speech, however, Powell is silent on the schizophrenic nature of Fed policy — a policy designed to increase risk taking, allocate credit to favored sectors, and stimulate economic activity but that plugs up the monetary transmission mechanism by paying IOER, and discourages lending to productive ventures by an onerous system of macro-prudential regulation. As market analyst Brian Barnier notes, “Low interest rates don’t help if companies face high risk and uncertainty. Central banks that cause volatility and uncertainty have been defeating their own interest rate actions.”

Normalizing Monetary Policy and Instituting a Rules-Based Regime

Regime uncertainty could be reduced by first normalizing monetary policy by reducing the size of the Fed’s balance sheet and ultimately eliminating IOER and restoring a market-driven fed funds rate. A rule-based monetary regime could then be instituted to guide monetary policy. In the present unconventional regime — with the absence of a competitively determined fed funds rate and a weak link between base money (i.e., currency in circulation plus bank reserves), broad monetary aggregates, and nominal GDP — the implementation of monetary rules such as the Taylor rule and a final demand rule would fail.

Under unconventional monetary policy, we therefore are stuck in a fully discretionary fiat money regime — and, thus, in a fog of uncertainty. Maintaining such a system ignores the institutional uncertainty brought about by not having a credible monetary rule. Such a rule would help depoliticize monetary policy and incentivize the Fed to take a long-run perspective, thereby reducing uncertainty.[7] As Karl Brunner has pointed out regarding the knowledge problem facing monetary policymakers,

We suffer neither under total ignorance nor do we enjoy full knowledge.  Our life moves in a grey zone of partial knowledge and partial ignorance.  More particularly, the products emerging from our professional work reveal a wide range of diffuse uncertainty about the detailed response structure of the economy… . A nonactivist [rules-based] regime emerges under the circumstances … as the safest strategy. It does not assure us that economic fluctuations will be avoided.  But it will assure us that monetary policymaking does not impose additional uncertainties … on the market place.[8]

In a speech at the Forecasters Club of New York in February, Powell argued that monetary rules can help guide policy, but he sees those rules as too simple to take account of the complexity confronting policymakers. He has in mind the Taylor rule, which would set the nominal fed funds rate based on a single equation:

(1) R = r* + π + a (ππLR) + b (gap)


R = nominal federal funds rate

r* = neutral real federal funds rate

π = the inflation rate

πLR = 2 percent

gap = percentage deviation of output from its potential level or unemployment from its natural rate.

Taylor, in his 1993 article, set a = 0.5 and b = 0.5.

According to Powell,

I think it’s fair to say that simple policy rules are widely thought to be both interesting and useful, but to represent only a small part of the analysis needed to assess the appropriate path for policy. I am unable to think of any critical, complex human activity that could be safely reduced to a simple summary equation. In particular, no major central bank uses policy rules in a prescriptive way, and it is hard to predict the consequences of requiring the FOMC to do so, as some have proposed. Policy should be systematic, but not automatic.

In fact, complexity is what makes a rules-based regime desirable. No one on the Federal Reserve Board or the Federal Open Market Committee predicted the 2008 financial crisis. The purpose of a systematic, rules-based monetary regime is to keep the economy on track and prevent a sharp decline in final demand. No rule can be perfect; there is always a learning process.  But as Brunner noted, a nonactivist rule would reduce uncertainty inherent in a period-by-period discretionary monetary regime. A long-run strategy based on achieving a stable growth path of nominal final demand would avoid the type of errors associated with a purely discretionary regime.

The Great Moderation and the Case for a Final Demand Rule

During the “Great Moderation” (1987–2006), under Fed chairman Alan Greenspan, the trend rate of growth of final demand, as measured by nominal final sales to domestic purchasers (FSDP), was 5.4 percent per year — split into real growth of 3 percent and inflation of 2.4 percent.[9] Cato’s former chairman Bill Niskanen found that variation around that trend “had significant effects on asset prices and the real economy, and most of this variation was a consequence of the Fed’s response to financial crises.” Figure 1 from his 2006 Cato Journal article is reproduced below.

Figure 1: Nominal Final Sales to Domestic Purchasers

Based on his research, Niskanen concluded that the Greenspan Fed implicitly followed a final demand rule but that it overreacted in increasing demand when faced with financial crises. Niskanen sees the primary duty of the Fed as maintaining “a steady increase in aggregate demand consistent with a low target rate of inflation.”

The Great Moderation was also in line with the Taylor rule but that rule depends on knowledge of r* and the output gap, both of which are difficult to estimate. As Powell noted in his February speech, “The neutral rate changes significantly over time, and estimates of its level entail substantial uncertainty.”  Moreover, “there is particularly high uncertainty about measuring the deviation of output from its potential,” and the values of the coefficients, a and b, in Taylor’s rule need to be specified.

Niskanen prefers a final demand rule over an interest rate rule, in part, because it does not require imputing values to r*, or estimating the output gap.[10]  In the 2009 edition of Cato’s Handbook for Policymakers, he recommended that “Congress should amend the Full Employment and Balanced Growth Act of 1978 to clarify the congressional guidance on the conduct of monetary policy.” In particular, he argued that

Congress is best advised (1) to specify a target rate of increase of final sales and (2) to instruct the Federal Reserve to minimize the variance around this target rate. The target rate of increase of final sales may best be about 5 percent a year, sufficient to finance a realistic rate of economic growth of 3 percent and an acceptable rate of inflation of about 2 percent.[11]

Niskanen saw nominal FSDP as “a feasible target” because it is “almost completely determined by U.S. monetary policy, whereas the rate of economic growth and the inflation rate are separately affected by a variety of domestic and foreign conditions.” The problem is that, under the Fed’s current operating procedure, the link between base money creation and final demand has been severed. Moving to a rules-based regime thus requires normalizing monetary policy and restoring the monetary transmission mechanism as discussed earlier.

Some congressional leaders think it’s time to create a rules-based monetary regime. The Financial CHOICE Act of 2017 (H.R 10), which recently passed the House, would make the Fed responsible for specifying a monetary rule and justifying to Congress any deviations from it.[12]  Whether the CHOICE Act passes or not, it is important to consider alternative monetary rules and to be prepared to make the case for rules over discretion when the opportunity for reform arises.

The Phillips Curve Is a Poor Guide for Monetary Policy

The Phillips Curve model of the economy, which posits an inverse relationship between unemployment and inflation, has been a poor guide for monetary policy, yet the Fed still incorporates that relationship into its thinking.[13] With the rate of unemployment now at 4.1 percent, policymakers are puzzled why inflation hasn’t increased to the Fed’s target of 2 percent. They could look to their own operating procedures used since October 2008. Without IOER and Dodd-Frank type regulations, banks would be lending more, and base money would have a stronger impact on overall money growth and the price level.

Powell’s Challenge

Mr. Powell, no doubt, will be under pressure from the White House and Treasury to keep rates low — even if markets are pushing them upward. Intervening to postpone necessary adjustments, however, would only complicate future policy changes and increase the costs of adjustment.

It is essential that Powell understand the risks involved in the post-2008 operating techniques and the underpricing of risk that unconventional monetary policy has occasioned. His challenge will be making the transformation to a new policy regime that gets the Fed out of the business of allocating credit and pegging interest rates at artificial levels.


Congress has ultimate authority for monetary policy. During the confirmation process, there needs to be a discussion of the limits of monetary policy and how Mr. Powell sees the future of monetary policy, and the steps he would take in a crisis situation. Finally, Congress needs to make the Fed accountable for its mistakes and ensure it abides by the rule of law.


[1] See George Selgin, “Operation SNAIL,” Alt-M, September 26, 2017.

[2] See Binyamin Appelbaum, “In Choice of Fed Chairman, Trump Downgrades Deregulation,” New York Times, October 29, 2017.

[3] There is no doubt that nonmonetary forces have contributed to historically low interest rates. Real rates have been declining for some time, due to slower productivity growth, demographics, and other factors (see Powell’s January 7, 2017 speech). It is hard to deny, however, that Fed policy has not contributed to the low-interest environment and helped fuel selected asset prices. Indeed, Powell, in his January address to the American Finance Association, argued that, with regard to the impact of “highly accommodative monetary policies, … studies generally show that they lowered rates across the curve and moved other asset prices as well.” At the same time, he admitted that “isolating the effects of these policies is challenging.” If Mr. Powell is correct that rates are mostly reflecting nonmonetary factors, then asset prices may be sustainable, but if he is wrong, then there is a strong possibility that as the Fed exits its unconventional polices, there will be a significant market correction.

[4] For a detailed discussion of the Fed’s pre- and post-crisis operating procedures, see George Selgin, “Interest on Reserves and the Fed’s Balance Sheet,” testimony before the House Subcommittee on Monetary Policy and Trade, May 17, 2016. See also Norbert Michel and Selgin, “Fed Must Stop Rewarding Banks for Not Lending,” American Banker, May 30, 2017.

[5] The IMF is less sanguine. In its latest Global Financial Stability Report (October 2017), the IMF raises “concerns about a continuing buildup in debt loads and overstretched asset valuations [that] could have global economic repercussions” (p. 42).

[6] Jerome Powell, “Low Interest Rates and the Financial System,” Speech at the 77th Annual Meeting of the American Finance Association, Chicago, January 7, 2017.

[7] Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corporation and former president of the Federal Reserve Bank of Kansas, has argued “that monetary and regulatory policies have for some time been overly focused on short-run effects at the expense of long-run goals, which has unintentionally served to increase uncertainty and economic fragility.”  See Hoenig, “The Long-Run Imperatives of Monetary Policy and Macroprudential Supervision,” Cato Journal (Spring/Summer 2017), p. 195.

[8] Karl Brunner, “The Control of Monetary Aggregates,” in Controlling Monetary Aggregates III, p. 61. Boston: Federal Reserve Bank of Boston, 1980.

[9] Final sales to domestic producers (FSDP) is defined as “the sum of nominal gross domestic product  plus imports minus exports minus the change in private inventories.” See Niskanen, “Monetary Policy and Financial Regulation,” in Cato Handbook for Policymakers (2009), 7th ed., p. 377.

[10] In his 1992 Cato Journal article, “Political Guidance on Monetary Policy,” Niskanen examined three viable monetary rules: (1) targeting the price of gold or a broad price index, (2) targeting a monetary aggregate, and (3) targeting nominal GDP or domestic final sales. He argued that “any one of these rules would be better than guidance based on interest rates or exchange rates, or on any real variable such as the growth of output or the level of the unemployment rate” (p. 281). His preferred rule, however, is to minimize “the variance around an approved target path of nominal domestic final sales” — an objective that “is probably the most that can be expected of monetary policy” (p. 285).

[11] Market monetarists, such as Scott Sumner and David Beckworth, prefer to target nominal GDP (NGDP) rather than final sales. Their arguments for a final demand rule, however, are similar to Niskanen’s. For example, Beckworth argues that “a NGDP target aims to stabilize total dollar spending. It is one target that has embedded in it both the supply of and the demand for money (i.e. total dollar spending = money supply x velocity of money). The beauty of a NGDP target is that the Fed does not need to know what is exactly happening to the money supply or money demand. All the Fed only needs to worry about is the product of the two components. There is no need to track the money supply or estimate money demand. By focusing on total dollar spending, the Fed will be fostering a stable monetary environment where movements in money supply and money demand are offsetting each other.” Bill Woolsey, in comparing a monetary rule targeting NGDP versus one targeting FSDP, finds no significant difference.

[12] See Title X of H.R. 10: “Fed Oversight Reform and Modernization.” H.R. 10 also calls for a Centennial Monetary Commission to examine the Fed’s history and to recommend reforms.

[13] See, e.g., J. A. Dorn, “It’s Time to Bury the Phillips Curve,” Investor’s Business Daily, September 26, 2017.

[Cross-posted from]

As Republicans work on details of their tax legislation, many reporters and pundits are painting the effort as slanted in favor of the rich. But that is not what a fair reading of the official data shows. The House bill proposed last week provides the largest percentage cuts to middle-income taxpayers, at least in the early years.

The Joint Committee on Taxation (JCT) has published estimates on the House bill. In the table below, the first three columns show the results for 2019, which is the first year in the JCT analysis.

Column 3 shows that middle-income groups would enjoy somewhat larger percentage tax cuts than higher-income groups under the GOP plan. Those are the raw JCT results.

However, the JCT calculates its results using a denominator that not only includes income taxes, but also payroll and excise taxes, even though Republicans are not changing those taxes. JCT’s inclusion of payroll and excise taxes slants its presentation to exaggerate the benefits to higher groups compared to lower groups.

Columns 4 and 5 include just individual and corporate income taxes since those are the taxes that Republicans are cutting. Column 4 shows my rough estimate (details below) of the 2019 totals of those taxes since the JCT did not provide those figures. In aggregate, households earning less than $40,000 do not pay any income taxes, so they are n/a.

Column 5 shows the GOP tax cuts as a percent of estimated income taxes paid under current law. You can see that using this more sensible denominator, the results show huge percentage tax cuts for middle earners. Households in the $40,000 to $50,000 group would get their income taxes cut almost in half, in aggregate. The House bill would make the tax code substantially more “progressive,” which is not a good idea since the code is already far too progressive or unequal.

Two caveats. The JCT does not include estate tax changes. Also, I focused on 2019, but over time the tax cuts bend more toward the top end. However, my main point is that distribution tables can show the same model results in very different ways, suggesting different messages. To me, the adjusted JCT data reveal that the GOP has moved too far left in designing its tax package.

The most important goal of tax reform is to raise economic output and incomes over the longer term, and the GOP’s business tax reforms will do that. However, because the GOP tilted left on its individual changes, those changes will not spur any economic growth, according to the Tax Foundation. Sadly, that looks like it could be a missed opportunity for tax reform this year.

Data Note: I could not find an estimated breakout of federal taxes between income, payroll, and excise for 2019 on JCT’s website. So I used a recent TPC estimate for 2019 (T17-0045) of the current law breakdown in the same income categories as JCT. Since TPC’s tax and income estimates are somewhat different than JCT’s, I adjusted the TPC data to match the JCT figures.

Since the 1986 Immigration Reform and Control Act (IRCA) came into force, it has been against the law for illegal immigrants to work in the United States. Prior to IRCA, they could be deported if discovered by the Immigration and Naturalization Service (INS), that era’s federal immigration agency, but illegal immigrants were not barred from working. For decades prior to 1986, immigration restrictionists and labor unions had tried to make illegal immigrant employment illegal. Prior to IRCA, the INS even instituted the Texas Proviso whereby they wouldn’t enforce harboring or other statutes against employers of illegal immigrants. IRCA ended this arrangement in 1986.

Since November 6, 1986, everybody seeking a job in the United States must fill out an I-9 form at the point of hire to supposedly prove that they are legally allowed to work in the United States. The new hire must show the employer some documents that corroborate the information on the I-9 form, copies of which the employer must keep on site. This requirement has had multiple negative effects. 

The first is that it has decreased the wages of illegal immigrants relative to similarly skilled native-born Americans and legal immigrants by diminishing employer demand for their labor. While this is the point of the I-9 check, it is disingenuous of immigration restrictionists to complain about slow immigrant wage convergence when the I-9 regulations that they support are slowing down that convergence for lower-skilled immigrants.

The second negative effect of IRCA is its creation of a large-scale black market for legal documents in the United States. The value of document fraud increased after ICRA because false documents became necessary for illegal immigrants to fill out an I-9 form to work. Since working is the main reason immigrants, especially illegal immigrants, come to the United States, a growing cottage industry of black market identity documents rose to serve them.

This is where identity theft enters the immigration debate. Many illegal immigrants in the United States work and fill out I-9 forms which many voters think means that they must have stolen somebody’s identity and committed a felony. That’s not necessarily true. Aggravated identity theft is a felony that requires the user to knowingly use another person’s identity, but falsely using another person’s identity is a misdemeanorMerely purchasing an identity from another person and using that for employment purposes doesn’t count as a felony because the purchaser does not know if it belonged to somebody else because it could be fake. 

In popular terminology, as opposed to legal terminology, anybody who uses somebody else’s identification without the owner’s permission commits identity theft. This makes it complicated for supporters of legalization to argue that illegal immigrants who are otherwise law-abiding should have a path to citizenship because, if they have worked on an I-9, then there is a good chance that they’ve worked using somebody else’s identity.

The Internal Revenue Service (IRS) further complicated this issue by granting Individual Taxpayer Identification Numbers (ITIN) to foreigners ineligible for a Social Security Number (SSN). ITINs are available for foreign investors, spouses of foreign workers, and others so they can pay taxes. Illegal immigrants understandably take advantage of the ITIN. A recent government report suggests that about 1.2 million ITIN filers are also using a name or SSN that does not match their ITIN.

Most illegal immigrant use of other people’s identities is likely for employment purposes. Rarely does it result in truly awful crimes. Virtually all employment-related identity theft would disappear if illegal immigrants were legalized and future immigrant flows were liberalized because immigrants wouldn’t have to steal identities in order to work. The best solution would be to remove the I-9 requirement entirely and shrink, or separate, the SSN or other government-issued identification requirements for employment authorization. If there is no reason to steal SSNs for employment then nobody will steal them for employment. But those arguments only get legalization proponents so far against people who are disgusted by rampant employment-related identity theft.

Many of the so-called instances of employment-related identity theft committed by illegal immigrants are actually identity loans where the owner of a government-issued identity allows the illegal immigrant worker to use that legal identity for work purposes. There are few statistics available to estimate the frequency of identity loans but they appear to be commonplace. One survey-based paper found that immigrant farmworkers estimated that 50 to 70 percent of their coworkers used loaned documents whose procurement is usually arranged by a supervisor, friend, colleague, or a fourth party.

Other family members frequently supply the loaned identities. For example, many unlawful immigrants use the SSNs of parents, children, or other family members who either voluntary lend the information or are not using it – a form of family wealth. Oftentimes, the actual owner of the identity is outside of the country or too young to work. A good example of this is the story of Manuel:

An unauthorized immigrant from Zacatecas, Manuel had first settled in the San Francisco Bay Area and sought work in construction. However, because the construction industry in San Francisco is unionized, Manuel had discovered that potential employers would check his I-9 form with E-Verify, a federal database that matches Social Security cards and names. So Manuel contacted an uncle in Zacatecas who had obtained a Social Security card in the early 1970s when he had first migrated to California—to ask about using his card. His uncle, who had returned to Mexico permanently with no plans to reenter the United States, agreed.

When next applying for work, Manuel presented his uncle’s Social Security card and a fake legal permanent resident card (green card) bearing his uncle’s name—which he had purchased from a local vendor—to the employer. The employer, in turn, was able to verify that the SSN was on file with the Social Security Administration (SSA) and that it matched the uncle’s name. This ploy allowed Manuel the luxury of finding work in a sector of the economy normally closed to the unauthorized. In entering a unionized construction job, Manuel benefited from more comfortable work conditions and employer-provided benefits. Moreover, in contrast to what he had earned in agriculture—typically about $25,000 a year—Manuel was able to earn $60,000 to $80,000 a year in construction.

Some researchers claim that the lending of identity is a form of community-wide mutual assistance or insurance but the family property explanation is better.  

Sometimes, the fourth party identity-loaner will loan his or her own identity so that the taxes paid by the illegal immigrant worker will contribute to welfare fraud. In this scenario, taxes paid by the illegal immigrant identity-borrower count toward government benefits like unemployment or Social Security for the identity owner. Sometimes, the American identity owner even pays the illegal immigrant to work with their identity in order to commit welfare fraud. This brief description explains how the scam works:

Elisabeta remembers that she had just arrived in the United States when her neighbor, Amparo, approached her to ask whether Elisabeta would “work” her papers (trabajar sus papeles). At the time, Elisabeta was barely 15 and was a single girl seeking work in agriculture, an industry dominated by males. She had come to the United States to earn money to send to her recently widowed mother, who lived with Elisabeta’s older sisters on the family farm in rural Jalisco, Mexico. Yet before she could get to work, she needed to procure the identity documents—a fake Social Security card and a “green card” (or resident alien visa)—that would allow her to find a job. She lacked the cash necessary to purchase a set of fake papers at a flea market or from a fly-by-night document mill. Thus, Elisabeta faced the kind of dilemma that plagues many unauthorized new arrivals: Without “papers,” she could not find employment. And yet, without employment, how could she possibly purchase “papers”?

Amparo drew on her knowledge of Elisabeta’s situation when she made the case for the loan. “Why don’t you just work my papers?” she had proposed. “Because being recién llegada (recently arrived) and all, where will you possibly get them otherwise?”

Amparo herself was in her midfifties. She walked slowly and stiffly. As she grew older, she told Elisabeta, working in the fields made her back hurt. So Amparo offered Elisabeta what seemed to the latter like a bargain. If Elisabeta used Amparo’s mica (green card) and seguro (Social Security number) to find work, Amparo would pay her an additional $100 for every $1,000 that she earned.

The “tip” that Amparo offered to entice Elisabeta to “work” her documents is the kind of financial incentive that often accompanies document exchange in California’s Central Valley. While the exchange appeared advantageous to Elisabeta, Amparo herself also stood to benefit. A person’s unemployment payments are based on the calendar quarter within the previous 12-month period during which he or she earned the highest amount. Thus, while Elisabeta would gain identity documents that would allow her to find work, her work history would fatten Amparo’s unemployment checks at the end of the season.

A preliminary analysis of law enforcement press releases, far from a precise measure, reveals a few patterns that should be the basis for future research. For instance, when non-citizen immigrants commit identity theft, they mostly do so for employment purposes. When American citizens commit identity theft, they usually do so in order to commit welfare fraud, financial fraud, or in order to sell identities to illegal immigrants either on their own or as part of a conspiracy that involves the immigrants themselves. For example, some of the instances of identity theft committed by U.S. citizens were committed to steal wages, create fake schools to supply “student” visas, marriage fraud, H1-B visa fraud, visa fraud and harboring, manufacturing and selling fraudulent identities, EB-5 visa fraud, defrauding migrant clients, bribery, and illegal issuing of driver’s licenses, among others. In many of these cases, immigrants would purchase the identities but U.S. citizen intermediaries initially stole them.

Borrowing another person’s identity with the owner’s permission for employment purposes can still be a crime but it is a lot less egregious than taking somebody’s identity without their permission. Working in the United States is extremely valuable but government immigration laws make it very difficult for foreigners to do so lawfully. Most illegal immigrants have to work on a legal or false identity in order to earn a wage, which incentivizes identity loans and identity theft. Although researchers need to conduct more detailed quantitative and qualitative work on identity loans borrowed and identity theft committed by illegal immigrants, it is a more nuanced issue with fewer and different victims than many commentators realize.

Special thanks to Jen Sidorova for her help on this blog post.