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The following is an excerpt from an op-ed I wrote assessing the Trump administration’s 2019 Missile Defense Review (MDR) and the impact that the document’s recommendations may have on nuclear stability: 

The MDR is a very ambitious document. It starts with calls for more midcourse interceptors and other existing defensive systems, then urges the development of new capabilities to defeat more kinds of adversary missiles across more stages of flight. Examples of these new systems include: laser-armed drones that could disrupt missiles before they leave the atmosphere, space-based sensors to improve early detection of missile launches, and F-35s equipped to hunt mobile missiles before they can be fired.

Supporters of a bigger and better U.S. missile defense capability argue that it improves deterrence by reducing adversaries’ confidence in their ability to launch successful attacks against the United States, its military forces, and allies. This argument has some merit, but it overlooks the negative effect missile defense has on nuclear stability when other factors are considered.

To read the rest of the article, visit Defense One:  

We are in the fourth week of the partial federal shutdown, which is starting to disrupt the broader economy because the government exerts control over many major industries. These sorts of disruptions will become more frequent in coming years as deficits rise and partisan divisions persist.

To minimize the damage, we should privatize or devolve to the states activities that do not need to be run by Washington. Those activities include air traffic control, airport screening, parks, and services on Indian reservations, as discussed here and here.

The Wall Street Journal reports today that the “shutdown leaves small-business loans in limbo.” The newspaper says that Small Business Administration (SBA) “loans are a mainstay for many entrepreneurs… The shutdown has already delayed about $2 billion in SBA lending.”

Why is the government a “mainstay” of entrepreneurs? Why should the government subsidize businesses with loan guarantees? Banks have been providing business loans for hundreds of years, so it is not as if the government has unique lending skills unknown to the marketplace.

Tad DeHaven and Veronique de Rugy explain the folly of SBA loans in this Downsizing Government study. They discuss the history of the SBA and explain how politics sustains the agency’s existence rather than any coherent theory of market failure.

They argue that America’s impressive entrepreneurial achievements did not stem from small business subsidies and that the SBA is an unneeded agency that should be terminated. Tethering small businesses to Washington is misguided and the shutdown is illustrating the damage.


When Alexandria Ocasio-Cortez suggested a 60-70 percent federal income tax rate on those earning over $10 million, prominent economists and economic commentators Matt YglesiasPaul Krugman and Noah Smith argued that her policy prescription was simply mainstream economics.

But a new Chicago Booth IGM Survey poll suggests economists are generally much more skeptical of the wisdom of jacking up top federal tax rates than these commentators suggest.

The economists were asked whether a top federal marginal income tax rate of 70 percent within the current code would raise substantially more revenue than today’s 37 percent without lowering economic activity. Just 18 percent of those surveyed agreed, against 49 percent who disagreed (21 percent vs. 63 percent when weighted by confidence.)[i]

In other words, a clear majority of economists believe there’s no free lunch from higher marginal rates on the top income bracket. Either it will raise revenue but with economic distortions, or it won’t raise revenue, or it will both fail to raise revenue and be detrimental to broader economic health.

It’s worth noting the wording of the question does not leave much room for nuance. Richard Thaler asked why it deviated from Ocasio-Cortez’s actual proposal. Kicking in at a much higher income level, and so on a group likely to be more responsive in terms of tax planning, her policy would certainly raise less revenue than the policy asked about in the question.

Several other economists said they would have changed the way they voted if a word like “substantially” was inserted in front of economic activity too. But overall, a host of the economists commented to the effect that such high marginal rates within the current code would lead to a whole host of new avoidance activity, on the one hand, and reduced labor supply on the other.

Given the particular wording of the question, the most interesting vote cast was that of Emmanuel Saez, who has been responsible for much research in this area. Intriguingly, he was in the minority in voting that he agreed a 70 percent top marginal rate would raise revenue without lowering economic activity.

On one level, that’s not surprising. His work with Peter Diamond concluded that a total combined 73 percent top marginal tax rate would be revenue maximizing and “optimal” if we put zero weight on the welfare of the rich. They believe too that the real economic responses to higher top tax rates would be small. As such, their research is the academic go-to for those arguing for much higher top marginal tax rates.

But when you read the details of how they got to that result, it’s difficult to see how Saez answered this IGM question in the affirmative. The Diamond-Saez paper makes clear their 73 percent result only holds if you presume policymakers could redesign the tax code to eliminate deductions, exemptions and other possibilities for tax planning or avoidance.

If not, then presuming people in the top tax bracket are as responsive today to tax changes as in the 1980s, the revenue maximizing total combined marginal tax rate would be much lower at 54 percent – equating to around a 48 percent marginal federal income tax rate. This, incidentally, is very similar to the revenue-maximizing income tax rate calculated by the UK government.

According to Saez’s own work then, raising the 37 percent top marginal income tax rate to 70 percent within the current code (as the question clearly sets out), would take us far beyond the revenue maximizing top marginal tax rate. It would be self-defeating in terms of revenue raising. We would be far on the wrong side of the Laffer curve.

It seems extraordinarily unlikely, in a world where 48 percent is the revenue maximizing rate, that a 70 percent rate would raise “substantially more revenue” than a 37 percent rate, as Saez’s answer implies.


[i]  In 2019, the 37 percent rate will apply to all single filers with more than $510,300 of taxable income.

Press reports have created the impression that the opioid overdose antidote naloxone is now available over the counter. But in fact, the drug is still classified in the US as prescription only, so states have developed workarounds to make it easier for patients to obtain it without going to a doctor for a prescription. In most states, patients can get naloxone by going up to the counter and asking the pharmacist, who is legally authorized by the state to dispense it. 

But some states prohibit third parties from obtaining a prescription for another person, so people in those states who wish to have the antidote available because they have a friend or relative who uses opioids cannot obtain it. And experience shows that many pharmacists choose to not stock naloxone or participate in any distribution program. Furthermore, the stigma now attached to opioid use has deterred many patients from going up to the pharmacy counter and explaining to a pharmacist why they need naloxone.

To get around such obstacles, Australia and Italy have designated naloxone as a truly over-the-counter drug. People can discreetly buy it off the shelf and check out at the cash register.

The Food and Drug Administration is on record since at least 2016 as believing that it is probably appropriate for naloxone to be rescheduled as OTC and has encouraged manufacturers to petition the FDA to that end. Yesterday  FDA Commissioner Gottlieb announced the FDA has even gone to the trouble of designing Drug Facts Labels (DFL) required of manufactures for their products to be sold over the counter, and has even tested these labels for “consumer comprehension” in front of focus groups. The Commissioner stated in the announcement that this represents an unprecedented effort to facilitate and speed up the reclassification of naloxone from prescription-only to OTC.

This is commendable. But as I have written herehere, and here, the Commissioner does not have to wait for manufacturers, who may lack the incentive, to request the move to OTC. Under FDA regulations, the FDA can undertake reclassification review at the request of “any interested person,” or the Commissioner himself. States may petition the FDA for reclassification. Finally, if all else fails, Congress can order the reclassification.

The FDA should no longer wait for manufacturers to ask them to make this lifesaving drug more accessible to those in need.

Germany introduced a new economy-wide minimum wage for the first time in 2015, at a relatively high rate of €8.50 ($9.67 today). This rose to €8.84 in 2017. For reference: between 10 and 14 percent of eligible workers were thought to earn less than €8.50 before the policy was introduced.

This is interesting from a research perspective. Most minimum wage studies examine the impact of minimum wages at low levels or assess small changes to their rate. But here we have a case study of a whole regime change with a high rate introduced for the first time.

A new paper by IZA Institute of Labor Economics provides a clear literature review on the effects so far. Studies have exploited three different strategies to assess the impact: utilizing regional variation of the “bite” of the minimum wage, using treatment and control groups, and assessing the impact on firms. As the table below shows, a broad consensus is emerging, which sits well within the existing minimum wage literature:

  • Unsurprisingly, hourly wages have increased at the bottom of the income distribution, though there is little evidence of a ripple effect further up.
  • Most studies find a small but negative effect on overall employment (up to 260,000 fewer jobs), driven by reduced hiring (not layoffs) and a reduction of casual and atypical employment.
  • All studies that assessed it find a negative effect on contractual hours.
  • As a result, although hourly wages increased, the reduction in hours meant gross monthly earnings does not appear to have increased much for low-paid employees.
  • Since gross monthly earnings have not substantially increased, and those earning minimum wage are often not from the poorest households, the policy hasn’t seemingly reduced the risk of being in poverty.

For more on the state of the academic debate on minimum wages, read my Regulation article.


In his State of the City Address, New York mayor Bill de Blasio laid out his governing philosophy succinctly:

Here’s the truth, brothers and sisters, there’s plenty of money in the world. Plenty of money in this city. It’s just in the wrong hands!

The money, of course, is in the hands of those who earned it. In de Blasio’s view, people who earn too much are “the wrong hands.”

In the speech itself and in an interview with Jake Tapper on CNN’s “State of the Union,” he elaborated: the wealthy have too much money because they aren’t taxed enough.

There are whole books on the correct theory of taxation. De Blasio, like many politicians, seems operate on the theory most clearly enunciated in 1990 by Sen. Barbara Mikulski (D, Md.):

Let’s go and get it from those who’ve got it.

There are many theories of taxation, such as Haig-Simons, the Tiebout model, and the Ramsay Principle. But I’d bet that the Mikulski Principle explains actual taxation best. And as “progressives” are feeling their oats, we can expect more politicians and pundits to be asking, “Who’s got the money? Let’s go get it.”

In his oval office speech, President Trump had this to say about immigrants:

This is a humanitarian crisis — a crisis of the heart and a crisis of the soul. Last month, 20,000 migrant children were illegally brought into the United States — a dramatic increase. These children are used as human pawns by vicious coyotes and ruthless gangs. One in three women are sexually assaulted on the dangerous trek up through Mexico. Women and children are the biggest victims, by far, of our broken system. This is the tragic reality of illegal immigration on our southern border. This is the cycle of human suffering that I am determined to end.

Here’s what his administration is doing to protect these women and children:

Previously, the administration had separated women from their children in order to criminally prosecute them for entering the country illegally.

Native-born American concerns about immigration are primarily about how immigration will affect the culture of the country as a whole and, to a lesser extent, how the newcomers will affect the economy.  One’s personal economic situation is not a major factor.  It’s reasonable to assume that the degree of cultural difference between native-born Americans and new immigrants affects the degree of cultural concern.  Thus, Americans would likely be less concerned over immigrants from Canada or Singapore than they would be over immigrants from Egypt or Azerbaijan. 

A large team of psychologists recently created an index of the cultural distance of people from numerous countries around the world relative to the United States.  The index is constructed from responses to the World Values Survey as well as linguistic and geographical distances.  Their index includes numerous different psychological facts such as individualism, power distance, masculinity, uncertainty avoidance, long term orientation, indulgence, harmony, mastery, embeddedness, hierarchy, egalitarian, autonomy, tolerance for deviant behavior, norm enforcement, openness, conscientiousness, extraversion, agreeableness, neuroticism, creativity, altruism, and obedience.  These are all explained in more detail in the paper.

Their paper has an index where lower numbers indicate a culture more similar to that of the United States while a higher number indicates a culture more distant from that of the United States.  As some extreme examples, Canada’s cultural distance score is 0.025 and Egypt’s is 0.24. 

Using the cultural distance index, I calculated the cultural distance of the stock of immigrants in the United States in 2015 from native-born Americans.  I then compared the cultural distance of the stock to the cultural distance of the flow of immigrants who arrived in 2012-2015.  The immigration figures come from the Annual Social and Economic Supplement of the U.S. Census Bureau.  If the stock of immigrants in 2015 was more culturally similar to native-born Americans than the flow, then the recent flow is more culturally distinct.  If the stock of immigrants in 2015 was more culturally different from native-born Americans than the flow, then the recent flow is less culturally distinct. 

Table 1 shows the results.  The immigrant flow in 2012-2015 is more culturally different from native-born Americans than the stock of immigrants was in 2015.  In other words, today’s newest immigrants are more different than those from the relatively recent past.  Relative to the stock, the cultural distinctiveness of the flow in 2012-2015 was greater by about one-fourth of a standard deviation.  In other words, the stock of American immigrants in 2015 was very culturally similar to people from Trinidad and Tobago (0.099) while the flow of new immigrants who arrived from 2012-2015 more similar to Romanians (0.11).

Table 1

Cultural Distance of Immigrants Relative to Native-Born Americans

  Cultural Distance Immigrant Stock 0.10 Immigrant Flow 0.11

Sources: WEIRD Index, ASEC, and author’s calculations.

There are a few problems with my above calculations.  First, those who choose to move here are likely more similar to Americans than those who do not.  There is obviously some difference in cultural values inside of a country as the average person does not choose to emigrate to the United States.  Second, American immigration laws likely select immigrants with similar cultural values through various means such as favoring the family members of Americans and those hired by American firms.  It’s reasonable to assume that foreigners who marry Americans and who are hired by American firms are more culturally similar than the average person from those countries.  Third, the cultural distance index only covers about two-thirds of the immigrant population in the United States.  It is possible that countries not on the list could shift the score significantly in either direction.

New immigrants to the United States are more culturally different than those of the past, but not by much.  This increase in the cultural difference of new immigrants could have had an outsized impact on Trump voters in 2016, but immigration overall is more popular with Americans than it used to be.  




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

  1. The Missile Defense Review dropped this morning. For those that have been patiently waiting to see this document for months, your time has finally arrived. Since this was just released hours ago, articles breaking down the details have yet to be posted. So stay tuned and check Twitter for commentary. 
  2. Pentagon preps for budget delay as historic shutdown drags on,” Tony Bertuca. The President’s FY2020 budget request was supposed to be publically available and kick off the budget-making process on February 4th, 2019. With the government shutdown, and various topline numbers coming out of the White House, it looks like the budget request will be delayed. 
  3. Reform panel warns Congress to overhaul Pentagon acquisitions, or lose technological edge,” Joe Gould. The Section 809 Panel was gifted the herculean task of reforming how the Pentagon buys products—everything from cybersecurity software to major weapons system hardware. The report itself is mammoth (500+ pages), but includes recommendations aimed at streamlining the acquisition process and leveraging commercial advances. 
  4. The Myth of Cyber Offense: The Case For Restraint,” Brandon Valeriano and Benjamin Jensen. What does a new era of Great Power Politics mean for American cyber policy? Mostly that it’s still being defined and actively shaped by the changing balance of power—and that the choices America makes now could have either stabilizing or destabilizing effects on the evolution of this domain. 

Two huge developments on Brexit this week.

First, Theresa May’s disastrous EU Withdrawal Agreement (negotiated and endorsed by the EU) suffered a crushing defeat in Parliament, going down by 432 votes to 202. This was a fundamental rejection of a deal with a host of problems. Under any normal circumstances, such a mammoth loss on a key policy would have ended a Prime Minister and a government.

Second, the leader of the opposition, Labour’s Jeremy Corbyn, called a subsequent vote of “no confidence” in the government. But with Brexiteers, including the Northern Irish DUP, swinging back behind the Prime Minister to avoid the possibility of a general election, the government survived (by 325 to 306).

What happens now? The default, set out by law, is that the U.K. leaves the EU on March 29th with or without a deal. It is well documented that there is a clear majority in Parliament who want to avoid leaving without a deal. But there is no clear majority for any of the options necessary to prevent a no deal exit.

I spent some time looking at the parliamentary arithmetic last night, from the perspective of Theresa May. She says that she a) wants to avoid no deal but b) wants to ensure she delivers Brexit. And there is no obvious means of achieving both of these goals.

Option 1: Operation Engage Conservatives

Her first option is to try to get more Conservatives on board to support a Withdrawal Agreement. But the difficulty of her being able to do so is set out by the graphic below. The Brexiteer Conservative rebels either want to completely throw out the Withdrawal Agreement for something new, remove a key provision (the backstop) or else simply leave without a deal. Given the EU has said publicly it will not renegotiate or remove the backstop, this seems a dead end unless May is willing to countenance no deal seriously.

The polling suggests that the Brexiteers were right about the politics up front – if the Prime Minister had pursued an “extensive Free Trade Agreement” Brexit and had not got bogged down in the complex arrangements she’d agreed, then a majority could just about have been eeked through on Conservative and DUP votes, with a smattering of Labour rebels (the no deal and no backstop crowds would have accepted it).

But we are where we are. Unless the EU is willing to reopen negotiations and offer a Canada+ deal for the whole of the UK (ending provisions to treat Northern Ireland differently) then tacking towards Brexiteers is endorsing the prospect of no deal, which May says she does not want.

It remains to be seen, of course, how many of these Brexiteers would actively support delivering Brexit through no deal if the EU rebuffed the opportunity to renegotiate outright. But through revealed preference (rejecting the Withdrawal Agreement), they have surely shown they are willing to countenance that risk.

One clear conclusion of this polling of Conservative rebels though is that there are only a tiny number of additional Conservative votes to be gained from a softer Brexit (single market *and* customs union membership – so-called Norway Plus). Given the commentariat all seem to think this week’s events must result in a softer Brexit, that means…

Option 2: Operation Engage The Opposition Parties

The second option is to give up on Conservative votes and try to reach out to opposition parties. Theresa May has offered Parliamentary talks to their leaders, and other groups of senior Parliamentarians. So far though, the leaders of the Labour party, the Lib Dems and the SNP have all said that their key demand is “taking no deal off the table.” Given no deal is the default Brexit, that essentially means “take guaranteeing Brexit off the table,” something the Prime Minister cannot do without her government likely falling.

The problem with dealing with the opposition parties is that they themselves are divided into two broad camps over what to do next.

Yesterday, 71 of 256 Labour MPs joined the campaign for a second referendum. Add in the Lib Dems, the SNP, the Green, a smattering of Independents who want this too and, say, 20 Conservatives, and there’s still only a combined circa 150 in the Chamber who are strongly for a fresh public vote. Even if the government went in this direction, and took the payroll vote with it, that would not command a majority in the chamber either. An overwhelming number of Conservative and Labour MPs in working class seats still by-and-large oppose a 2016 rerun. This could only happen if the Labour front-bench shift their position.

But the only other option that opposition parties might be interested in is a much softer Brexit: either a full, permanent customs union (Labour’s official position) or a Norway style option. Given 150 MPs would prefer a second referendum, it is unclear how many would opt for this if it was available. The only means of getting it through seems to be with Labour front-bench support, giving blessing to large numbers of Labour MPs to vote with the government. That would tear the Conservative party apart and probably guarantee a defeat in the next election, which would naturally appeal to Labour. But on the flipside, large numbers of Labour MPs in Leave constituencies would consider it highly risky as much of the media would describe as Brexit In Name Only, and the completely unreconciled Remainers would reject it for not fully ending Brexit.


Over the coming weeks, Parliament will likely host lots of indicative votes on all these options. The government has to bring forward a revised motion and try again. But so far the Prime Minister appears unwilling to change much of substance, and it’s not clear where she turns.

Crucial now will be the sequencing of votes by MPs for alternatives. If it gets to a stage where it’s the prospect of no deal against the last perceived line of defense against that happening, then Remainers and soft Brexiteers could unite. For now though, they are hopelessly divided too. Absent further constitutional vandalism endorsed by the Speaker of the House of Commons (a strong possibility), I still believe a no deal Brexit is highly possible, despite media claims to the contrary.

Irving Fisher’s classic treatise, The Purchasing Power of Money: Its Determination and Relation to Credit, Interest and Crises (1911), still offers valuable insights regarding monetary reform. This post examines some of Fisher’s insights and draws some lessons for Fed policy.

The Importance of Stable Money

Fisher recognized “the evils of monetary instability”—that is, “periodic changes in the level of prices, producing alternate crises and depressions of trade.”  He argued that “only by knowledge, both of the principles and of the facts involved, can such fluctuations … be prevented or mitigated, and only by such knowledge can the losses which they entail be avoided or reduced” (Fisher 1912: ix). [1]

The main principles that guided Fisher’s work were embodied in the quantity theory of money and the theory of monetary disequilibrium.  The former held that, ceteris paribus, the purchasing power of money (the reciprocal of the price level) depends on the quantity of money relative to real output (trade).  If the economy is at full employment and the velocity of money is stable, then the purchasing power of money will be inversely related to the stock of money.  If money moves in line with trade and velocity is stable, then monetary equilibrium will prevail and the value of money will also be stable (see Fisher 1912: 320).

When Fisher wrote The Purchasing Power of Money, the United States was still on the classical gold standard; there was no central bank.  In his book, he defined money as “what is generally acceptable in exchange for goods” (p. 8).  He recognized that “money never bears interest except in the sense of creating convenience in the process of exchange” and that “this convenience is the special service of money and offsets the apparent loss of interest involved in keeping it in one’s pocket instead of investing” (p. 9).

Fisher also importantly recognized that “money itself belongs to a general class of property rights” known as “currency” or “circulating media.”  More specifically, “currency includes any type of property right which, whether generally acceptable or not, does actually, for its chief purpose and use, serve as a means of exchange” (p. 10).  While Fisher classified bank notes as money and circulating media, he viewed checkable bank deposits as currency, not money in the strict sense (p. 11).

“Primary money” referred to commodity money (gold coin at the time), while “fiduciary money” (notably bank notes) referred to money whose value depended “on the confidence that the owner can exchange it for other goods” (ibid.).  “The chief quality of fiduciary money,” wrote Fisher, “is its redeemability in primary money, or else its imposed character of legal tender” (p. 12).

Fisher refined the quantity theory of money to take account of monetary disequilibrium and used statistical methods to test the theory against historical data.  Like his contemporaries, he understood that the fundamental cause of business fluctuations was erratic money.

The Theory of Monetary Disequilibrium

The main tenets of the theory of monetary disequilibrium were well known to Fisher and Harry Gunnison Brown, who assisted in writing The Purchasing Power of Money (see chap. 4). Clark Warburton summarized those tenets in his monumental book, Depression, Inflation, and Monetary Policy (1966).  They are listed in Table 1.

TABLE 1Assumptions of the Theory of Monetary Disequilibrium 1. A change in the level of prices is a process which takes a period of time, and affects prices of various items sequentially rather than simultaneously. 2. Some prices are greatly influenced by custom or contract and move less readily than other prices; specifically, wages and contractual elements in business costs tend to be sluggish relative to price of output. 3. These differential movements of prices and also prospective further changes in prices have significant effects upon business profits and prospects and hence upon business plans, especially with respect to investment decisions and to holdings of cash relative to receipts and expenditures. 4. The economy is not static; more specifically, we live in a world where population is growing, technological developments are increasing production per worker, and other developments tend to increase the volume of transactions (in quantity terms) relative to the output of final products. 5. As a result of the foregoing and of the stability of customs (such as the periodicity of income payments) which affect the rate of circulation of money, the economy needs for equilibrium a continuous increase in the quantity of money. 6. It is theoretically possible for monetary disequilibrium to persist for months or years, and observations indicate that many such situations have occurred. 7. The actual quantity of money reflects primarily the behavior of banks or of a government treasury issuing circulating medium; and the nature of banks is such that they have a tendency to carry forward the expansion of money to the limit permitted by interbank relationships and the laws under which they operate. 8. In the United States, subsequent to establishment of the national banking system, the chief restraint on the banks, limiting their expansion and occasionally necessitating contraction, is the amount of legal reserves. 9. The impact of monetary disequilibrium is intensified by sequential changes in the rate of circulation of money [i.e., the velocity of money]. 10. Changes in the quantity of money which are not consonant with the rate of expansion needed for equilibrium also change the amount of funds available in the money loan market; thus they constitute the force which produces a departure of the market rate of interest from the equilibrium rate, and consequently disturbs property values and mutual adjustment of saving and investment decisions. 11. If the force impinging on the quantity of money, such as the state of bank reserves, can be observed ahead of change in the quantity of money, or is itself of such character as to have a direct effect on the securities market, the disturbance to property values and to investment decisions may begin ahead of the monetary disequilibrium as observed in statistical data.

Source: Warburton (1966: 28–29).

Propositions 10 and 11 in Table 1 were of particular importance to Fisher. He argued that, while “it is generally recognized that the collapse of bank credit brought about by loss of confidence is the essential fact of every crisis,” it “is not generally recognized … that this loss of confidence … is a consequence of a belated adjustment in the interest rate” (p. 66). His purpose in writing The Purchasing Power of Money was to emphasize that “the monetary causes [of crises] are the most important when taken in connection with the maladjustments in the rate of interest. The other factors often emphasized are merely effects of this maladjustment” (ibid.).

In seeing monetary instability as the chief factor in business fluctuations, Fisher was following the tradition going back to David Hume whereby classical economic theory consisted of two parts: (1) a theory of equilibrium whereby market forces would restore relative wages and prices to their equilibrium levels, and (2) a theory of disequilibrium in which there is either an excess demand for, or supply of, money.  Although the theory of monetary disequilibrium—also known as the “dynamic theory of money”—was widely recognized and developed by the first quarter of the 20th century, the ascent of Keynesian economics diverted attention from that body of knowledge.[2]

Fisher argued that an excess supply of money will not immediately be reflected in a proportionate rise in the price level. The corresponding rise in the supply of bank credit will lower the rate of interest in the short run until inflation is fully anticipated, at which point the nominal interest rate will rise and the expected profitability of investment fall. During the transition to a new equilibrium, bankruptcies will occur and unemployment rise (because of sluggish adjustment of relative wages and prices).[3]

In looking at the case of “overinvestment,” Fisher notes:

The stockholder and enterpriser generally are beguiled by a vain reliance on the stability of the rate of interest, and so they overinvest. It is true that for a time they are gaining what the bondholder is losing and are therefore justified in both spending and investing more than if prices were not rising; and at first they prosper. But sooner or later the rate of interest rises above what they had reckoned on, and they awake to the fact that they have embarked on enterprises which cannot pay these high rates [p. 66].

He goes on to explain that “a curious thing happens: borrowers, unable to get easy loans, blame the high rate of interest for conditions which were really due to the fact that the previous rate of interest was not high enough. Had the previous rate been high enough, the borrowers never would have overinvested (p. 67, emphasis added).

In sum, the importance of erratic money in Fisher’s theory of business fluctuations and his recognition that transition periods could last a considerable time make his theory part and parcel of the dynamic theory of money (see Warburton 1966: 4–5).  Fisher held that, in studying business fluctuations, one cannot ignore variations in the quantity of money relative to output. That is why he chose those variations as the  “chief factor” in his study of commercial crises (Fisher 1911: 55).  Moreover, he argued that “periods of transition are the rule and those of equilibrium the exception, [so that] the mechanism of exchange is almost always in a dynamic rather than a static condition” (p. 71). One of his major contributions was a rigorous discussion of “maladjustments in the rate of interest” in the process of adjustment to a new equilibrium by distinguishing between nominal and real rates of interest.

Proposed Reforms and Method of Persuasion

Fisher considered a number of reforms designed to stabilize the long-run price level, and thus maintain the purchasing power of money. They included changes in monetary law to:

  • “Make inconvertible paper the standard money, and to regulate its quantity.”
  • “Regulate the supply of metallic money by a varying seigniorage charge.”
  • “Issue paper money, redeemable on demand, not in fixed amounts of the basic precious metal, but in varying amounts, so calculated as to keep the level of prices unvarying.”[4]
  • “Adopt the gold-exchange standard combined with a tabular standard” [p. 348].[5]

In proposing any monetary reform designed to safeguard the long-run value of money, Fisher believed that “the first step” should be “to persuade the public, and especially the business public, to study the problem of monetary stability” (ibid.) When the time is ripe for reform, the intellectual groundwork will be ready for policymakers and the public to take the appropriate action. The fact that certain monetary reforms may not be politically feasible at the moment should not dissuade scholars from contemplating reforms that may improve the monetary arrangement and benefit society.  As Fisher wrote,

The necessary education once under way, it will then be time to consider schemes for regulating the purchasing power of money in the light of public and economic conditions of the time. All this, however, is in the future. For the present there seems nothing to do but to state the problem and the principles of its solution in the hope that what is now an academic question may, in due course, become a burning issue [ibid.].

As noted earlier, Fisher saw “the problem of stability and dependability in the purchasing power of money” as “the most serious problem” (p. 321).  Variations in the price level can occur due to (1) “transitional periods constituting credit cycles” and (2)  “secular variations” due to “incidents of industrial changes.”  Both those disturbances can be mitigated, according to Fisher, by increasing “knowledge as to prospective price levels.”  If the public anticipates changes in the price level, then those changes will be reflected in nominal interest rates: “a foreknown change in price levels might be so taken into account in the rate of interest as to neutralize its evils” (ibid.).

Fisher summed up by writing:

While we cannot expect our knowledge of the future ever to become so perfect as to reach this ideal, viz. compensations for every price fluctuation by corresponding adjustments in the rate of interest—nevertheless every increase in our knowledge carries us a little nearer that remote ideal [ibid.].

Giving people better information, however, may not change their behavior if they have a vested interest in maintaining the status quo. Thus, Fisher observes:

The prejudice of business men against the variability of, and especially against a rise of the rate of interest, probably stands in the way of prompt adjustment in that rate and helps to aggravate the far more harmful variability in the level of prices and its reciprocal, the purchasing power of money [p. 322].

Nevertheless, Fisher thought that “while there is much to be hoped for from a greater foreknowledge of price [level] changes, a lessening of the price changes themselves would be still more desirable” (p. 323).

The Search for Stable Money

The quantity theory of money attributes price-level changes mainly to “changes in money and trade.”  As Fisher remarks,

There has been for centuries, and promises to be for centuries to come, a race between money and trade. On the results of that race depends to some extent the fate of every business man. The commercial world has become more and more committed to the gold standard through a series of historical events having little if any connection with the fitness of that or any other metal to serve as a stable standard. So far as the question of monetary stability is concerned, it is not too much to say that we have hit upon the gold standard by accident [pp. 323–24].

While there is little support for a gold standard at present, that monetary regime was taken as a given in 1911, and there seemed to be little chance of replacing it:

Now that we have adopted a gold standard, it is almost as difficult to substitute another as it would be to establish the Russian railway gauge or the duodecimal system of numeration. And the fact that the question of a monetary standard is today so much an international question makes it all the more difficult” [p. 324].

What is of interest here is that Fisher did “not attempt to offer any immediate solution of this great world problem of finding a substitute for gold.”   Rather, he reasoned that “before a substitute for gold can be found, there must be much investigation and education of the public” (ibid.).  His strategy was

to call attention to the necessity for this investigation and education, to examine such solutions as have been already proposed and, very tentatively, to make a suggestion which may possibly be acted upon at some future time, when, through the diffusion of knowledge, better statistics, and better government, the time shall become ripe [ibid.].

Fisher reviews a number of proposals for fundamental monetary reform in chapter 13, including “honest government regulation of the money supply” aimed at price-level stability. A simple scheme would be for the monetary authority to issue  “inconvertible paper money in quantities so proportioned to increase of business that the total amount of currency in circulation, multiplied by its rapidity, would have the same relation to the total business at one time as at any other time.” He argued that, “if the confidence of citizens were preserved, and this relation were kept, the problem [of achieving a stable price level] would need no further solution” (p. 329, emphasis added).

However, Fisher rejects this proposed monetary rule, because “sad experience teaches that irredeemable paper money, while theoretically capable of steadying prices, is apt in practice to be so manipulated as to produce instability” (ibid.) His preferred reform was to introduce a “gold-exchange standard combined with a tabular standard.”[6] He recognized that, a tabular standard alone, which could be introduced by private contractual parties without any government action, would not suffice to bring about monetary and price-level stability (see pp. 334–37).  But it should be pointed out that his mixed system also has problems: it is not a real gold standard, it is open to speculative attacks, and it depends on an unsustainable degree of central bank cooperation.

We now turn to lessons for the Fed and monetary reform from the insights of Fisher.

Lessons for the Fed and Monetary Reform   

Irving Fisher’s examination of monetary theory and history led him to refine the quantity theory of money and to offer various proposals for monetary reform.  He took a comparative institutions approach to reforming the monetary regime.  He did not expect immediate results, but emphasized the importance of laying the groundwork for future reform so that when the time was ripe he could offer well-developed alternatives to the existing system. He sought to improve the chances for price-level stability and lessen the chances for crises due to erratic money.

Fisher’s emphasis on the discoordination generated by monetary disequilibrium is still relevant today, but has been lost sight of in macroeconomic models devoid of money. His emphasis on a stable and predictable value of the dollar is useful as a guide to monetary policy, but ignores problems with a price-level target as opposed to targeting nominal spending. Instead of maintaining a constant inflation rate, a nominal GDP target would allow the rate of inflation to vary with changes in the growth rate of real output, declining in times of relatively rapid output growth, and rising in times of slower growth. As New Zealand economist Allan G. B. Fisher noted, “If prices are not allowed to fall in proportion to improvements in the efficiency of production, misleading indications will be given to producers as to the directions in which it is desirable to retard or accelerate the flow of capital; and the errors thus encouraged are likely to cause dislocation throughout the whole economic structure.”[7]

Fisher’s attention to transition periods and especially to the “maladjustments in the rate of interest,” caused by an excess supply of money, is relevant for helping understand financial crises. His analysis of financial booms and busts led to the idea that interest rates can be kept too low for too long and that “had the previous rate [of interest] been high enough, the borrowers never would have overinvested” (p. 67). This idea is evident in John Taylor’s and Anna Schwartz’s critique of Fed policy prior to the 2008 financial crisis and the Great Recession.[8]

The 2008 financial crisis revealed the flaws in the current discretionary government fiat money system with a central bank that kept its policy rate too low for too long.  Although there were nonmonetary factors contributing to the 2008 crisis, especially misguided housing policy, the monetary policy mistakes were of critical importance.

John Taylor, in his reassessment of the 2008 financial crisis after 10 years, concluded:

There was a significant deviation in 2003–2005 from the more rules-based monetary policy strategy [the Taylor rule] that had worked well in the two prior decades. The resulting extra low policy interest rates were a factor leading to a search for yield, excessive risk taking, a boom and bust in the housing market, and eventually the financial crisis and recession… . These actions spread internationally as central banks tended to follow each other in setting their policy interest rate” [Taylor 2018: 2].

To support his monetary theory of the 2008 crisis, Taylor used an econometric model to simulate what the housing market would have looked like if the Fed had followed the Taylor rule in setting its policy rate.  He found that “the [housing] boom and the bust disappeared”; and that, “if the Fed had not held rates too low, there would have been less search for yield, less risk-taking and fewer problems on the banks’ balance sheets” (pp. 3–4).[9]

Taylor’s “real concern” is with “preventing central banks from causing asset bubbles” by keeping rates too low for too long (p. 4). A rules-based monetary policy would help in that regard.  Moreover, “a rules-based monetary policy is an essential part of a well-functioning market economy” (p. 24).

Anna J. Schwartz also argued that “if monetary policy had been more restrictive, the asset price boom in housing could have been avoided.” She criticized Alan Greenspan for not seeing this fact (Schwartz 2009: 22–23). In Fisherian fashion, Schwartz (p. 19) stated:

The basic groundwork to the disruption of credit flows can be traced to the asset price bubble of the housing price boom. It has become a cliché to refer to an asset boom as a mania. The cliché, however, obscures why ordinary folk become avid buyers of whatever object has become the target of desire. An asset boom is propagated by an expansive monetary policy that lowers interest rates and induces borrowing beyond prudent bounds to acquire the asset.

Schwartz then laid out the sequence of monetary policy steps that helped fuel the housing boom:

The Fed was accommodative too long from 2001 on and was slow to tighten monetary policy, delaying tightening until June 2004 and then ending the monthly 25 basis point increase in August 2006. The rate cuts that began on August 10, 2007, and escalated in an unprecedented 75 basis point reduction on January 22, 2008, was announced at an unscheduled video conference meeting a week before a scheduled FOMC meeting. The rate increases in 2004 were too little and ended too soon [pp. 19–20].

The Fed’s unconventional monetary policies, characterized by near zero interest rates, large-scale asset purchases (i.e., “quantitative easing”), and forward guidance (keeping rates “lower for longer”) were designed to revive the economy after the panic of 2008.  There is no doubt that those policies boosted asset prices and had a wealth effect, but they increased risk taking, incentivized leverage, and misallocated capital. Raising rates is more difficult than lowering them—as Fed Chairman Powell is experiencing from President Trump’s harsh criticism and the market’s reaction.  When rates do normalize the wealth created by unconventional policies may well turn out to be a pseudo wealth effect rather than a real one; after all, “easy money” can’t permanently increase real economic growth.

Nevertheless, the Fed seems determined to keep unconventional monetary policy tools available in case of another recession, reverting once again to quantitative easing if the effective fed funds rate reaches the zero lower bound (i.e., a zero nominal rate).  In the meantime, there is the danger of drifting toward a higher inflation target to push nominal interest rates up and thus have more room to decrease the policy rate in case of a recession. Such interest-rate manipulation is part and parcel of our government fiat money regime.

The main lesson from Fisher’s work is that there needs to be a thorough study of the current discretionary regime and an examination of alternatives that would reduce regime uncertainty and mitigate monetary-induced business fluctuations.  Possible alternatives include a price level rule, nominal GDP targeting, Fisher’s compensated dollar plan, and Hayek’s free-market money proposal. The return to a commodity-based regime, in which there is no central bank and the supply of money is market determined, should also be part of the debate over the future of money, as should the use of cryptocurrencies.[10]

The Fed plans to host a conference later this year at the Chicago Fed to discuss its dual mandate and strategies to achieve full employment and price stability.  Hopefully, that discussion will include a close examination of the current operating procedure by which the Fed uses interest on excess reserves (IOER) and the overnight reverse repo rate (ONRRP) to set the range for its policy rate.  Paying IOER to banks above the opportunity cost of holding those reserves at the Fed plugs up the monetary transmission mechanism, increases the demand for reserves, and reduces the impact of changes in the monetary base on broader monetary aggregates—and thus on nominal GDP. Moving away from the “floor system” to a “corridor system” and reducing the size of the Fed’s balance sheet are necessary steps for normalizing policy.[11]

The Fed conference is a step in the right direction for increasing public debate over the role of the central bank, but it is insufficient.  Congress, in its constitutional duty of safeguarding the value of money, needs to take that responsibility seriously and establish the Centennial Monetary Commission that was proposed under the Financial CHOICE Act of 2017 (Title X, Sec. 1011) to examine the Fed’s performance since its creation in 1913, and to consider various reforms. In doing so, it should not neglect the importance of restoring constitutional money and understanding how alternative monetary regimes affect uncertainty.


In thinking about monetary alternatives, there is no better place to start then a review of Irving Fisher’s work, especially The Purchasing Power of Money.  His insights can guide all those interested in improving the current government fiat money regime and in avoiding the mistakes of the past.  The Fed, in particular, ought to listen to what Fisher had to say about sound money—that is, money of stable purchasing power.  There is no perfect monetary system, but one needs to understand what a “good system” would look like in order to move in the right direction.  A deep knowledge of monetary theory, monetary alternatives, and monetary history are essential in order to improve the present monetary regime.

Fisher (1911: 329) sought to avoid those reforms that “would be subject to the danger of unwise or dishonest political manipulation.” That is wise advice.  We cannot assume that public officials have perfect information or will act in “the public interest.”  That is why James Madison, the chief architect of the Constitution, wrote:

The only adequate guarantee for the uniform and stable value of a paper currency is its convertibility into specie—the least fluctuating and the only universal currency. I am sensible that a value equal to that of specie may be given to paper or any other medium, by making a limited amount necessary for necessary purposes; but what is to ensure the inflexible adherence of the Legislative Ensurers to their own principles and purposes? [Madison 1831, “Letter to Mr. Teachle,” Montpelier, March 15, emphasis added].

Fisher recognized that, even under the gold standard, the price level would vary in the short run; indeed, it had to in order to maintain stability over the long run. By anchoring the price level under the price-specie-flow mechanism, interest rates stayed low for long periods and governments could issue long-dated bonds (consols).  Fiscal rectitude accompanied monetary stability.

In the search for stable money, reform proposals that may seem farfetched today may become feasible in the future.  Those who lived under the classical gold standard would be shocked to learn of its demise and replacement with a central bank having a balance sheet of more than $4 trillion and the power to engage in large-scale asset purchases, including mortgage-backed securities.  It’s time for an audit of the Fed: not just its books, but its structure, conduct, and performance.  Revisiting the works of  great monetary thinkers like Fisher is not a bad place to start.

[1] All quotes are from the 1912 reprint of The Purchasing Power of Money (Macmillan). The 1922 edition can be found at

[2] See Warburton (1966: chaps. 1 and 4).  Also see Leland B. Yeager, The Fluttering Veil: Essays on Monetary Disequilibrium, Part 3 (Liberty Fund, 1997).

[3] See Fisher (2012: chap. 4).

[4] Under this so-called compensated dollar plan, “the amount of gold obtainable for a paper dollar would vary inversely with its purchasing power per ounce as compared with commodities, the total purchasing power of the dollar being always the same.”  In such a system, “the supply of money in circulation would regulate itself automatically” (Fisher 1911: 331). For a more thorough discussion of Fisher’s compensated dollar plan, see Don Patinkin, “Irving Fisher and His Compensated Dollar Plan,” Federal Reserve Bank of Richmond Economic Quarterly (79/3, Summer 1993):1–33. Also see Chapter 6, “The Quantity Theory Alternative,” in Thomas M. Humphrey and Richard H. Timberlake’s forthcoming book, Gold, The Real Bills Doctrine, and the Fed: Sources of Monetary Disorder, 1922–1938 (Cato Institute, 2019).

[5] A gold-exchange system would provide for a country not on the gold standard to exchange its currency at par with a country whose currency is linked to gold.  A tabular standard uses a price index to ensure that creditors are paid back in dollars of constant purchasing power.

[6] For a discussion of the operation of this standard, see Fisher (1911: 337–47).

[7] Allan G. B. Fisher, “Does an Increase in Volume of Production Call for a Corresponding Increase in Volume of Money?” American Economic Review 25/2 (June 1935): 197. Also see George Selgin’s Less than Zero: The Case for a Falling Price Level in a Growing Economy (Cato Institute, 2017).

[8] It is important to note, however, that the Taylor Rule is not the same as Fisher’s compensated dollar rule. Unlike Taylor’s rule, Fisher’s allows for no feedback from the state of output or employment. It is a price level or inflation rule pure and simple. It is also a general inflation rather core inflation rule. As such, it would have called for more tightening than Taylor’s rule, and even more than the Fed engaged in, during 2008. I am indebted to George Selgin for this point.

[9] In a study of 18 OECD countries from 1920 to 2011, Bordo and Landon-Lane (2013) found that “‘loose’ monetary policy—that is, having an interest rate below the target rate or having a growth rate of money above the target growth rate—does positively impact asset prices and this correspondence is heightened during periods when asset prices grew quickly and then subsequently suffered a significant correction.”

[10] For a discussion of alternative monetary rules, see Dorn (2018).

[11] For a detailed analysis of the pre- and post-crisis operating system, see Selgin (2018): Floored! How a Misguided Fed Experiment Deepened and Prolonged the Great Recession.

[Cross-posted from]

“That buzzing noise over a construction site could be an OSHA drone searching for safety violations,” notes Littler Mendelson lawyer Tammy McCutchen in a piece for the Federalist Society. Quoting a U.S. Department of Labor memorandum from May of last year obtained by Bloomberg Law, McCutchen writes that “your friendly neighborhood OSHA inspector is now authorized by the Labor Department ‘to use camera-carrying drones as part of their inspections of outdoor workplaces.’”

What about the Fourth Amendment, you may ask? Well, court review is unlikely because current procedures call for the agency to obtain employer consent before sending the spycams aloft. Which makes everything okay, right? 

Not really. As McCutchen writes, employers who refuse such consent “risk the ire of the DOL, with serious consequences. Nothing is more likely to put a target on an employer’s back for multiple and frequent future investigations than sending a DOL investigator away from your doors. Refusing consent will label you at the DOL as a bad faith employer that deserves closer scrutiny. This I know through experience practicing before DOL and as a former Administrator of DOL’s Wage & Hour Division.” 

So consent will often, maybe nearly always, be given despite the dangers one might imagine. Some of those dangers: “The drones could record trade secrets or employees doing things they shouldn’t.  But the memo contains not a single word on protecting the privacy of employers or employees caught on video.  How long will OSHA retain the video? Who will have access to the video? Will the videos be obtainable by competitors or unions through a FOIA request?” Or, for that matter, by other law enforcement agencies seeking to build a completely unrelated legal case against the employer, employees, or perhaps even the owners or users of nearby property?

All of which points up one of the problems with trying to turn the abstractions of civil liberties into something real: before a court can act on behalf of your rights, you need to be able to say no to the government’s demand in the first place, or else there will be no dispute for the court to review. And across much of our regulatory and administrative state, that power to say no in the first place has been tending to ebb away.  [adapted from Overlawyered]

At a press conference earlier this month, California Governor Gavin Newsom announced a new plan to offer 6-months of paid family leave in the Golden State. Despite it being the most generous in the nation, CNN parenting contributor Elissa Strauss felt it’s not enough, saying it’s “so much better than nothing, but leaves room for improvement.” Yet, the Cato 2018 Paid Leave Survey finds that at the national level, Americans are not supportive of establishing a 6-month paid leave program. 

The survey found that less than half (48%) support “establishing a new government program to provide 6-months of paid, job-protected, leave to workers after the birth or adoption of a child or to deal with their own or a family members serious illness.” Fifty-percent (50%) oppose establishing a 6-month paid leave program. 

Find full survey results here 

Notably, support is low despite the question not mentioning anything about tax increases or other trade-offs that are required when establishing a new government program. As the New York Times rightfully points out, it remains unclear how California will pay for 6-months of paid family leave benefits.

Fortunately, the Cato 2018 Paid Leave Survey asked Americans how much they’d be willing to pay in higher taxes each year to establish a 6-month paid leave program. The survey finds that 66% of Americans would oppose establishing a 6-month paid leave program if it cost them $525 per year in higher taxes, 68% would oppose if it cost $750 a year, and 69% would oppose if it cost $2,100 in higher taxes.[1] These costs are based on using certain program assumptions from the Family Medical Insurance Leave (FAMILY) Act sponsored by Sen. Kirsten Gillibrand (D-NY) and Rep. Rosa DeLauro (D-CT). (See here for more information).

Without mentioning tax increases, majorities of women (54%), mothers of children under 3 (59%), and African Americans (59%) favor creating a 6-month leave program, while majorities of men (58%) and whites (54%) would oppose. Latinos are evenly divided with 49% in support and 45% opposed. But, each of these groups opposes a 6-month program once taxes are mentioned. Majorities oppose among women (64%), men (67%), mothers of children under 3 (54%), whites (71%), Latinos (58%), and African Americans (51%) if a 6-month paid leave program cost $525 a year in higher taxes. 

Some could reasonably point out that California is more liberal than the rest of the country, with California voting Democratic in 7 of the past 10 presidential elections. To consider how Democratic-leaning Californians might feel about increasing their taxes to pay for a 6-month paid leave program, we can examine what Democrats nationally think about it:

When no taxes are mentioned 61% of Democrats support establishing a 6-month paid leave program and 38% are opposed. This includes 67% of Democratic women and 55% of Democratic men. (In contrast, 70% of Republicans oppose, including 64% of Republican women and 76% of Republican men). However, Democratic support flips as soon as tax increases are mentioned. If the 6-month program cost people $525 a year in higher taxes, 55% of Democrats would oppose the program and 44% would favor. If costs turned out to be higher, 67% of Democrats would oppose if the program cost them $750 a year in higher taxes and 71% would oppose if it cost them $2,100 a year in higher taxes. Furthermore, majorities of both Democratic women and men oppose a 6-month paid leave program once costs are considered.

These results suggest that if California voters more closely resemble national Democratic voters rather than the nation as a whole, they would like the program in theory but not in practice. While they may desire to offer a 6-month paid family leave benefit to people, they would not tolerate the higher taxes likely required to properly fund the program. 

California already has the highest income tax rates in the country, reaching up to 13.30%, with the average family paying 9.30%, and a statewide sales tax rate of 7.25% percent in addition to local sales tax rates. Especially given these conditions, it remains uncertain voters would be willing to tolerate another tax increase. One option to keep costs low could be to means-test the program so that only the needy would receive benefits. Otherwise, the program may be too expensive for voters to accept. Another option is to promote tax-advantaged savings accounts. Eighty-two percent (82%) of Democrats, as well as 78% of all Americans, would support creating tax-advantaged family leave savings accounts that could be used if people needed to take family or medical leave.

Altogether, these results indicate that while Californians may be excited about the benefits that this new program would offer, they are likely to resist the higher taxes likely required to make the program possible.

Read about the full survey results and analysis here.

For public opinion analysis sign up here to receive Cato’s upcoming digest of Public Opinion Insights and public opinion studies.

The Cato Institute 2018 Paid Leave survey was designed and conducted by the Cato Institute in collaboration with YouGov. YouGov collected responses online during October 1-4, 2018 from a national sample of 1,700 Americans 18 years of age and older. Restrictions are put in place to ensure that only the people selected and contacted by YouGov are allowed to participate. The margin of error for the survey is +/- 2.4 percentage points at the 95% level of confidence. 


[1]Public support doesn’t change much after taxes reach $525 a year perhaps because Americans aren’t supportive of the program to begin with. After taxes are mentioned there may be a threshold after which cost-conscious people will be opposed. Those who remain in support even if the costs rose to $2,100 a year may be very ideologically committed to establishing a program, they think someone else will foot the bill, or they may not believe taxes would actually be raised that much.

The new Democratic majority in the House of Representatives has introduced H.R. 1, a bill with two public financing components: one a pilot program for vouchers, and the other a conventional if generous subsidy program for small donations. I focus here on the latter. 

Public financing schemes have often focused on encouraging small donors in part to allegedly counter the influence of “Big Money.” The financing of campaigns by taxpayers fits easily into a number of dichotomies that structure our public discourse: small/large, vulnerable/powerful, poor/rich, left/right, and of course, friend/enemy. The realities are less exciting and persuasive than the rhetoric. 

It is an odd time to be pushing government spending on congressional candidates. Federal deficits are now approaching a trillion dollars annually. Small donor fundraising is much easier and much more successful than in the past. ActBlue, a “fundraising technology for the left [seeking] to democratize power and help small-dollar donors make their voices heard in a real way,” had a record election in 2018. It funneled over $1.6 billion to Democratic candidates.     

In that respect, this bill is entirely predictable in a highly partisan time. The government subsidy is six times the sum raised by small donations. A new majority is thus proposing a $9.6 billion (yes, billion) subsidy for its congressional candidates in the 2020 election. All things being equal, that would be a massive advantage for the party in that election. 

But things need not be equal. Such a huge subsidy would encourage the GOP to find small donors. Maybe “ActRed” would ready for 2020 and enjoy equal success. That’s not likely but let’s assume it is for purposes of argument.  

Where would the billions needed to finance this program come from? The funding  would involve new taxes or borrowing since it is new spending. So either current or future taxpayers would finance the program.  

Here’s one problem: the government would be using its power of coercion to force people to support candidates and parties they do not support (indeed, to support people they don’t want their children to marry). This coercion would happen more to Republicans than Democrats at first, but Republicans might get better at claiming the subsidies over time. We would end up with the government coercing everyone without regard to partisan commitments.  

Advocates of taxpayer financing also might think the scheme takes the side of “the people” (small donors) against the elite (current donors). ActBlue reports they had 4.9 million unique donors in 2018. That’s a large absolute number. But it constitutes about 3 percent of eligible voters in the United States. These ActBlue contributors are not average Americans. ActBlue donors are also a small portion of liberals in America. In 2016, about 26 percent of the nation identified as liberal or about 47 million people. Hence ActBlue got money from just over 10 percent of liberals. By any measure, ActBlue donors are a political elite. No doubt they are a political elite that believes their policy views represent what’s good for the nation and the average American. But they are not average Americans.  

Finally, this bill asks taxpayers to provide the parties with large sums for their campaigns. But ActBlue showed that the small donor elite can be mobilized, and Republicans have every incentive to match ActBlue’s success. Given that private political entities are doing well with small donors, why should the taxpayer be forced to support candidates and parties they do not want to support? Don’t taxpayers have better uses for $20 billion? 

This is Part II of a two-part series on the World Bank’s Doing Business Report. In this entry, I discuss the extent to which the World Bank imposes a one-size-fits-all corporate governance regime and penalizes deviations from it with lower scores on the “Protecting Minority Investors” index. For Part I, see my earlier post 

“Protecting” Minority Investors

The second major problem with the World Bank’s Doing Business Report is reflected most clearly in its “Protecting Minority Investors” category. Here, the index implicitly mistrusts the power of spontaneous private-ordering.

Countries construct their corporate law regime along a rough continuum, from a contractarian and enabling approach to a mandatory and statutory approach. The former (prevalent in common-law countries) says: “here are some basic default rules, feel free to opt-out of any but the most basic of them (such as the “good faith” requirement) and thereby customize your corporate charter as you see fit.” The latter, more prevalent in civil-law countries, says “Your charter must look like this, you may customize around the edges but the basic template is not up for negotiation”.  

The World Bank has very much embraced the mandatory approach in its “Protecting Minority Investors” index. Any corporate governance arrangement that does not reduce a firm’s management to supine figures groveling at the feet of shareholders is penalized with a lower score. The balance of power between management and shareholders in a hotly contested issue in the academic corporate governance literature, with top scholars exchanging salvos in the pages of law reviews and economics journals as we speak.  As I have written elsewhere, I believe that restrictions on shareholder power, such as insulation provisions or representative quotas for the board of directors, are inefficient and misguided (for further reading, see Lucian Bebchuk’s work, the indefatigable Harvard champion of shareholder rights). Yet this is not a justification for their proscription by the state. Let Bebchuk’s work persuade businessmen on its own merits. Likewise, statutes and regulations which impose costs or restrictions on management and the board of directors which the relevant contracting parties might not have agreed to in every instance similarly reduce the potential bargaining range and leave mutually beneficial deals on the table. If a prospective corporation were so inclined to tap the insights of the ivory tower for guidance as to how to efficiently structure its charter, shouldn’t it be permitted to emulate what it believes to be the better of the academic arguments, as applicable to its particular niche in the larger corporate ecosystem? Instead, we have the World Bank declaring Bebchuk the winner, in all circumstances, by fiat.  

Ironically, restrictions on the management and the board are tantamount to restrictions on the shareholders themselves, the principals who now possess fewer degrees of freedom along which to command their agents. When the “Protecting Minority Investors” index awards a score of 1 if “shareholders elect and dismiss the external auditor” and a 0 otherwise, this can be translated as “shareholders are never allowed to delegate this particular responsibility to management or to the board.” Translated further, we arrive at the assumption implicit in this scoring scheme: “We [the philosopher-kings] foresee, ex ante, no scenario at any company in any country in which shareholder delegation of power X would be the efficient outcome arrived at by the contracting parties to the corporate charter.”

If management’s selection of the external auditor (is having an external, as opposed to an internal, auditor always the efficient outcome? The World Bank thinks so) is inefficient for a given firm, two things will happen: 1) That firm’s shares will be discounted accordingly. The fatal conceit baked into the World Bank’s scoring approach is that if it wasn’t for the state’s wise contractual parameterization serving as guardrails, ignorant shareholders would be robbed blind by asymmetrically informed insiders.

But shareholders opt in to buying a firm’s shares after assessing not just the firm’s financial fundamentals but its corporate governance structure as well. What if insiders then simply fail to disclose this information? Shareholders will then ding the share price for this lack of transparency. 2) The firm will suffer not only a lower share price for failing to accommodate this shareholder preference, but also the undetected managerial rent-seeking that results from having a compromised auditor with a conflict of interest. All else equal, this firm will be at a competitive disadvantage in the market and we would expect this maladaptive provision to disappear except in situations in which it proves efficient. No need for the state to render certain contractual evolutions stillborn ex ante when we can simply observe ex post those efficient arrangements which survive in the market for corporate governance strewn amongst the fossils of thousands of (mostly defective) iterations.       

The less information one has about the particular, idiosyncratic nature of the business that a corporation will be engaged in, the less one is able to prescribe efficient rules for that corporation ex ante. When prescribing efficient rules for all corporations across all business environments, parsimony is key. Beyond a few basic, universally adaptive rules (e.g. the “good faith” requirement, or, “mammals should have relatively sturdy spines and thick skulls), blindly prescribing more specific rules may well prove maladaptive (all mammals should have flippers).   

The World Bank is not short on characteristics that a country’s corporate law must prescribe:

  • Extent of Disclosure Index (5 provisions)
    • The index envisions an extremely robust, mandatory disclosure regime for related-party transactions that falls upon the shoulders of management. But of course, any mandatory diversion of managerial resources (in this case, complying with disclosure requirements) imposes opportunity costs suffered by the firm writ large, including its shareholders. Management’s inclination to engage in related-party transactions indeed poses a classic agency problem for shareholders (which they can simply price-in to the cost of capital!), but it is far from clear that every firm in every country would find the precise disclosure measures codified in the World Bank index to be the value-maximizing conditions in every instance. In many economies, informal relational networks predicated on reciprocity and reputation are invaluable. Shareholders may intentionally be investing in firms with a CEO who’s tapped into such networks.   
  • Extent of Director Liability Index (7 provisions) + Ease of Shareholder Suits Index (6 provisions)
    • Allocates liability, ease of bringing a lawsuit, who can bring the lawsuit, who must pay transaction costs and legal fees, etc. Many of these might be efficient. Some might be transfers. Some might be inefficient. Anyone familiar with the law and economics tradition recognizes that every one of these provisions entails tradeoffs, whereby costs are redistributed amongst the parties. The contractiarian approach assumes that the negotiating parties will be able to arrange for the costs to fall on the party most capable of preventing them. The greater the number of non-negotiable tradeoffs imposed ex ante, the less likely this is to be the case.
  •    Shareholders’ Rights in Corporate Governance (30 provisions across multiple sub-indexes)
    • Finely prescribes the balance of power between management, the board and shareholders, between majority owners and minority investors, thresholds for agenda control amongst shareholders, auditing and disclosure requirements, etc.

Once again, it’s one thing to recommend the foregoing provisions as generally efficient default conditions which corporations may opt-out of in designing their charters if they so choose. Shareholders may then freely choose amongst various charters, pricing them accordingly. It’s entirely another thing to require, a-la the World Bank, that:


The change must be mandatory, meaning that failure to comply allows shareholders to sue in court or for sanctions to be leveled by a regulatory body such as the company registrar, the capital market authority or the securities and exchange commission… include[ing[ amendments to or the introduction of a new companies act, commercial code, securities regulation, code of civil procedure, court rules, law, decree, order, supreme court decision, or stock exchange listing rule.


The state can’t trust private entities to manage their own affairs. It must take them gently by the hand.

A reporter called the other day to ask what I thought about the National Endowment for the Arts (NEA) giving subsidies to the National Cowboy Poetry Gathering in Elko, Nevada. The government appears to have given the cowboy poets hundreds of thousands of taxpayer dollars over the years.

As the symbol of rugged individualism in the American West, I’m surprised cowboys aren’t embarrassed to take government hand-outs. The amount of money is not large, but when private groups get hooked on subsidies they become tools of the state. They lose their independence and may self-censor.

From the government’s perspective, subsidies placate dissent and encourage subservience. I’m not just talking about cowboys, but recipients of all the federal government’s more than 2,000 subsidy programs.

The NEA launched the poetry subsidies in 1985 to fix the negative image of cowboys as “strong, silent types.” Bikers and gun owners also have image problems, so we might expect the NEA to next sponsor poetry at the Sturgis Motorcycle Rally and the Crossroads of the West Gun Show.

I’m not receiving any NEA subsidies, but I nonetheless crafted a song sung to the tune of Rhinestone Cowboy:

“Welfare Cowboy”


I’ve been studyin’ the budget so long

Complainin’ about the wasteful mor-ons

I know every hand-out in the dirty hallways of Congress

Where money’s the name of the game

And our taxes get washed down the pork-barrel drain


There’s one program so surprisin’

On the road Elko, Nevada

That’s where NEA shines a light on its inanity


Like a welfare cowboy

Writing poetry for a subsidized gathering

Like a welfare cowboy

Getting hand-outs from people they don’t even know

And offers gained from a lobbying lasso

Note: the cowboy poets appear to have received about $35,000 every year or two from the NEA since the 1980s. They also receive support from the Nevada government and City of Elko.

Deregulation and profits are unpopular ideas in some quarters these days. In a major speech last summer, Senator Elizabeth Warren lashed out at the Trump administration’s deregulatory efforts:

Deregulation is code for ‘let the rich guys do whatever they want’ … The Trump administration and an army of lobbyists are determined to rig the game in their favor, to boost their own profit, the cost of the consumer be damned.

… Regulations are about setting the rules of the road, plain and simple. Done right strong fair regulations protect the freedom of every American.

Warren’s comments are internally inconsistent and divorced from the actual workings of politics and the economy. On politics, her latter comments assume that the government works in the public interest, yet her former comments suggest that the government gets hijacked by private interests.

In economics, deregulation is actually code for “undercut the rich guys and their lobbyists by opening the door to new competition.” Deregulation and competition channel the profit-seeking impulses of producers into providing more value to consumers.

The only good part of the recently enacted farm bill was the deregulation of hemp growing. The prospect of high profits is now drawing farmers into hemp and encouraging businesses to develop new consumer products in health, food, and textiles.

A Wall Street Journal story on hemp today illustrates the harmony between deregulation, profits, freedom, and consumer benefits:

Cultivation was largely banned from 1970 until December, when President Trump signed a new $867 billion farm bill that removed hemp from a list of federally controlled substances.

Hemp’s return to farm fields this spring coincides with a surge in demand for cannabidiol, a derivative of hemp or marijuana that has become a popular additive in drinks, foods and dietary supplements. Proponents say it relieves anxiety, inflammation and other maladies without the psychotropic ingredient that delivers a high to marijuana users.

Farmers and processors believe growing demand for cannabidiol will turn hemp into a lucrative cash crop.  

… Hemp flourishes in rocky soils inhospitable to other crops. It also represents a new potential revenue stream for tobacco farmers abandoning that crop. Other growers are eager to diversify away from mainstream crops after several years of low prices spurred by a production glut and trade tensions.

… Growers can earn $200 to $400 an acre growing hemp for use in textiles, plastics, insulation and construction materials, according to Rodale Institute, a farming research agency. Hemp grown for cannabidiol could earn farmers thousands of dollars an acre, according to the institute. Farmers earned net profits of around $11 per acre for soybeans and lost $62 for corn in 2017, federal figures show.

… Processors in the U.S. also are expanding. Folium Biosciences is building a $30 million, 110,000-square-foot hemp extraction facility in Colorado to increase its capacity 10-fold, said Chief Executive Kashif Shan. 

To recap. President Trump and Congress deregulated hemp. Farmers and corporations lured by potentially high profits are producing a range of new and beneficial products. Over the longer-term, high profits will be eroded by competition in markets and prices for the new products will be driven down. Farmers have new freedom to diversify. The nation’s income and output will be higher as investment increases and new jobs are created.

In her speech, Senator Warren said, “To hide what they’re doing big corporations and Republicans here in Washington often claim that regulations are bad for the economy. They go on and on about how big government restricts freedom and makes it harder for businesses to succeed. That is a big greasy baloney sandwich.”

Hemp regulations were bad for the economy, they did restrict freedom, and they made life harder for farm businesses. So Warren’s logic would only make sense to someone smoking a big, greasy cigarette of hemp’s sister species.

The Trump Administration’s trade warfare with China began in earnest last March 22nd (following steel and aluminum tariffs that primarily hit other countries). U.S. and Chinese tariffs on each other’s goods then escalated repeatedly through September 18 with threats of much more the same by May 1 of this year.

The effect so far has been quite different from what President Trump first promised and still keeps pretending.  In fact, U.S. goods exports to China (excluding services) fell by 26.3% from March through October, while U.S. imports from China rose by 36.5%.   

U.S./China trade data were supposed to be updated for November on January 8, but that potential embarrassment was mercifully postponed by President Trump’s government shutdown.  Yet Reuters, using Chinese data, estimates the U.S. trade deficit with China rose 17% last year.  The table makes that estimate look low. 

Meanwhile, the Trump shutdown is rationalized by his fanciful untruths about people and drugs “flooding across the border” on foot between checkpoints, rather than in planes, trains, ships, trucks, and cars (not to mention overstaying visas).  

Oddly enough, Mr. Trump waited until after Republicans had lost the House to demand more billions for “The Wall” (as though the Executive Branch wrote the laws). 

If the end result of political feuding over a border wall turns out to be half as big a fiasco as President Trump’s trade war, how could he hope to run for reelection on the blatant failure of his two noisiest campaign issues?  But it might not be too late for Trump to quietly discard his losing cards and pivot toward more promising games and issues.  

As the government shutdown drags on, it is starting to damage activities across the economy because federal tentacles are in everything. But we better get used to it because with rising deficits and growing partisan discord such disruptions will probably become more frequent and damaging.

Sadly, the expansion and centralization of government power in recent decades has made our $20 trillion economy dependent on a small group of self-interested and often ill-informed politicians. Centralization and dysfunction at the core is a toxic mix.

The shutdown is affecting activities that the government needlessly monopolizes—such as air traffic control. It is affecting activities that the government needlessly regulates and subsidizes—from Smuttynose’s beer labels in New Hampshire to Betty Gay’s home repairs in Kentucky.

And it is needlessly harming a large group of people that it has micromanaged for far too long—American Indians. “The shutdown has hit Native American tribes especially hard because so many of their basic services depend on federal funding,” notes the Washington Post. Education, health care, road maintenance, and other services on reservations are often run by the federal government or run by tribal employees paid by the federal government.

That dependency has long resulted in mismanaged and low-quality services for the million people who live on reservations. In the New York Times, one tribal leader spoke of federal support, “The federal government owes us this: We prepaid with millions of acres of land,” while another said the shutdown “adversely affects a population that is already adversely affected by the United States government.”

I agree with those views. In the long run, subsidies are not a good way to generate prosperity, but they are needed until Congress tackles basic problems of property rights and legal institutions on reservations that stymie growth.

In the meantime, funding should be converted to block grants to the tribes or vouchers to individuals on reservations. Tribes and individuals would use the benefits to contract for services such as schooling and health care from private firms or nearby local governments. That would further the goal of Indian self-determination and ensure that reservation life doesn’t get caught in the political crossfire.

At the end of January, someone at the National Shooting Sports Federation asked the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF) about non-binary people purchasing firearms. The ATF responded that, despite gender non-binary licenses being acceptable identification, the individual must still select either “male” or “female” on the standard firearm transfer form 4473.

The ATF’s rigid, unreasoned response makes it clear there’s a huge disconnect between the purpose of the form, and the ATF’s interpretation. Form 4473, which everyone must fill out when they purchase a firearm from a federally licensed dealer, is intended to identify the purchaser of the firearm, have them confirm they are legally eligible to receive the firearm, and give enough identifying information to run a background check.

How can forcing a prospective gun owner to select “male” or “female” make any difference in identifying them when they have already provided a driver’s license, a home address, place of birth, full name, and even social security number? When a form has so much information, it’s clear that someone’s sex adds little to its ability to properly identify them. Even in the odd situation where completely filling out the form would still yield multiple results, the ATF offers the creation of Unique Personal Identification Numbers (UPIN’s). Still, even with all these avenues of precisely identifying a person, the ATF insists that dealers may not transfer a firearm to a purchaser who refuses to “check the box.”

Guns and LGBTQ rights might seem like strange bedfellows in today’s political climate, but the pairing makes sense. We’ve known for a long time that LGBTQ people are frequent targets of violent crime. Thus their need for an effective means for self-defense is best served by robust access to firearms. Putting an arbitrary and demeaning barrier between sexually nonbinary individuals and access to a firearm hampers—or even eliminates—their ability to provide for their own defense.

An individual’s sexual identity has absolutely no bearing on their ability to safely own and operate a firearm. Whether you care more about gun rights or LGBTQ rights, you shouldn’t avert your eyes from this injustice. The ATF, in their directive to bar gun dealers from transferring firearms to individuals who refuse to select “male” or “female,” are worsening the status of a class of people predisposed to victimization.

There is no excuse for the ATF’s rigid and unreasoned stated policy. As long as the transferee provides sufficient information to identify themselves and enable a background check to be performed, there is no reason to deny them their natural right to arms. The ATF should reverse course, and in the future take proper stock of the rights of people who might be affected by such judgment calls.