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The end of this month (31 October 2018) will mark the 10th anniversary of the online posting of the now-famous white paper by “Satoshi Nakamoto” outlining the concept of “Bitcoin: A Peer-to-Peer Electronic Cash System.” This is an opportune occasion to compare what Bitcoin has achieved with what Satoshi wanted to achieve. While Bitcoin’s rise to a market valuation of over $100 billion is certainly a remarkable accomplishment of one sort, the founder had other aims.

Three problems with the status quo

In announcing the new project in February 2009 Satoshi emphasized three institutional problems with the status quo payment system that Bitcoin would address. First, inflation from central banks that issue fiat money:

The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.

Second, a lack of privacy and security from commercial banks:

We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.

Third, the high cost of bank-mediated payments:

Their massive overhead costs make micropayments impossible.

How well has Bitcoin addressed these three problems?

Inflation risk and purchasing power volatility

Satoshi wanted to create a currency with less risk of inflation and devaluation. It is of course true that the history of fiat currencies is full of breaches of trust in purchasing-power stability. Central banks issuing fiat money have chronically, and sometime acutely, diluted the value of their currencies by expanding them too rapidly. Bitcoin’s source code, which predetermines the quantity path of the stock of Bitcoins, does solve that problem. There can be no unexpectedly rapid expansion. This code provides a valuable object lesson in how to write a constitutional monetary rule that is fully automatic and free from discretion.

However, Bitcoin’s fixed quantity path creates a different problem that inhibits its widespread use as currency. With the number of Bitcoins unresponsive to demand shifts, all the burden of adjustment falls on the price (purchasing power). As a result the market price of Bitcoin is enormously volatile week-to-week and even day-to-day. This makes it very risky to hold or accept BTC as a payment medium for monthly bills that are denominated in anything other than BTC (e.g. in US dollars, other fiat currencies, or commodity index baskets).

Satoshi recognized that demand growth would cause secularly rising value, but said little about the problem of high-frequency volatility of value. He did not design Bitcoin to have an automatically demand-responsive supply, because he did not know how to do it without creating the need for a trusted authority:

[I]ndeed there is nobody to act as central bank or federal reserve to adjust the money supply as the population of users grows. That would have required a trusted party to determine the value, because I don’t know a way for software to know the real world value of things. If there was some clever way, or if we wanted to trust someone to actively manage the money supply to peg it to something, the rules could have been programmed for that.

What Satoshi didn’t know how to do is still not known. The desirability of a stable-valued cryptocurrency has, however, has stimulated dozens of “stablecoin” projects in recent years.  There are two main types: (a) coin supply managed by an “algorithmic central bank” that automatically (given a data feed) varies quantity to stabilize purchasing power, and (b) coin supply made endogenous by pegging the coin to a relatively stable fiat currency, to gold, or to a commodity basket. A recent report on “The State of Stablecoins” has identified 57 projects, of which 23 are up and running. Tether USD, imperfectly pegged to the US dollar, is by far the largest of the live projects. Of the 57, twelve use the “algorithmic central bank” approach, the remainder being “asset-backed” either by fiat currency collateral or by cryptoassets. The problem remains unsolved of feeding a program with real-world data in a tamperproof way, or of running a currency peg without any risk to customers from dishonesty or incompetence by the party holding the reserves.

Satoshi  suggested—somewhat inaccurately—that Bitcoin would behave like gold under a gold standard:

In this sense, it’s more typical of a precious metal. Instead of the supply changing to keep the value the same, the supply is predetermined and the value changes.

In fact, as I have noted before, the classical gold standard system provided a great deal of long-run elasticity to the quantity of money. A rising purchasing power of gold incentivized the owners of existing mines to dig deeper and increase their output, and encouraged prospectors to seek new sources of gold. The accumulation of increased gold flow over time pushed the purchasing power back to its nearly flat long-run trend. The gold standard thereby historically constrained the inflation rate to near zero in the long term.

F. A. Hayek’s vision of competing non-commodity private monies imagined that issuers would maintain purchasing power stability by actively managing supply. A new project called Initiative Q takes basically this approach: not a cryptocurrency governed by a program, but a private non-commodity money whose quantity is governed by a human board that pledges to stabilize its purchasing power. Full disclosure: I have been a paid consultant on this project.

Satoshi anticipated a feature of Bitcoin’s fixed supply path that has played an important role in its enormous appreciation, and in its high volatility:

As the number of users grows, the value per coin increases. It has the potential for a positive feedback loop; as users increase, the value goes up, which could attract more users to take advantage of the increasing value.

In this way attracting speculators who want an appreciating store of value (and don’t care much about short-term volatility) is at root incompatible with attracting potential currency-users who want short-term value predictability. Having attracted speculative “hodlers,” it is harder to expand the set of Bitcoin users much beyond them.

Retail use of Bitcoin remains small, from all available indicators. The largest BTC retail payment processor, Bitpay, reported in October 2017 that its merchants are receiving “$110 M+ in bitcoin payments per month,” which multiplies out to $1.32 billion per year. For comparison, VISA reported in June 2018 an annual payment volume of $11 trillion, or $11,000 billion.

Coinmap.org lists 13,365 brick-and-mortar Bitcoin acceptance points worldwide, which is of course a tiny subset of retail establishments. Checking the map for Fairfax County, VA, I find that there are only seven sellers of goods and services listed, plus another 7 Bitcoin ATMs.

Privacy

Satoshi wanted to create a payment system with greater privacy. Bitcoin does enable users to send funds outside the financial panopticon that is the regulated banking system, where “Know Your Customer” and “Anti- Money Laundering” edicts require banks to surveil customer account use and report certain kinds of activity. This escape hatch has allowed ordinary people to protect their wealth from restrictions such as exchange controls and from confiscatory taxes. For example, Bitcoin became suddenly popular in Cyprus when the government imposed controls on international bank transfers and proposed to take 10 percent of bank balances during a banking crisis in 2013.

However, the way Bitcoin’s distributed ledger system shares addresses and size information about every transaction provides less privacy than would a design sharing less information. Bitcoin is not anonymous, only pseudonymous, and the pseudonyms can be pierced. This shortcoming has inspired a number of “privacycoin” projects. The best known live projects are Monero, Dash, and Zcash (for head-to-head contrasts of these and three others see here). Two interesting up-and-coming projects, using a newer-generation blockchain technology called MimbleWimble, are Beam and Grin.

Cheaper payments

As far as making micropayments at negligible cost, the Bitcoin blockchain has turned out to be infeasible for doing so. It becomes quickly congested as it approaches the modest volume of 7 transactions per second. This technological limitation was discussed by insiders (Hal Finney, Nick Szabo) as early as 2010, but did not come to wider attention until massive congestion arose with Bitcoin’s expansion in popularity in 2017, bringing a sharp rise in fees for moving your transaction to the front of the queue. Developers are now working on “sidechains” for small payments—most famously the Lightning Network—that will settle only periodically on the main BTC blockchain. So there may be a technical workaround retaining the Bitcoin standard. The MimbleWimble projects represent another approach: because their blockchains are designed to transmit much less information among miners, they should not only provide greater privacy, but also handle many more transactions per second.

Conclusion

Bitcoin should not be regarded as the last word in private money, but should be appreciated as a remarkable technological breakthrough. Ten years after its launch, we must recognize it as the innovation that has launched financial and non-financial blockchain industries that are still in their early days. Bitcoin has established its value as an asset, and its usefulness as a medium of exchange for a certain subset of transactions. It is the main unit of account and payment medium, preferred to fiat monies, for markets in other cryptocurrencies below the top five. Whether it will achieve common use as a medium of exchange remains doubtful. The inbuilt volatility of its purchasing power makes it unlikely to displace the incumbent fiat currencies barring an inflationary explosion. Even in that case, gold seems likely to prove more popular. Whether a credible stablecoin built on Bitcoin’s shoulders, or some completely different approach, will achieve critical mass as a private money  remains to be seen.

[Cross-posted from Alt-M.org]

University of Massachusetts toxicologist (and Cato adjunct scholar) Edward J. Calabrese has arrived.  On October 3, he testified to the Senate Subcommittee on Superfund, Waste Management, and Regulatory Oversight, a part of the larger Committee on Environment and Public Works, chaired by John Barrasso (R-WY).

Calabrese was asked for his expert opinion on a draft EPA proposal to consider alternative regulatory models, including ditching the “Linear-No Threshold” (LNT) model that it employs, as does almost every other regulatory agency on earth.  You can read about EPA’s proposal here.

The LNT model assumes that the first photon of ionizing radiation (or the first molecule of a carcinogen) is capable of inducing a genetic mutation (i.e. altered DNA) that can be then transmitted to future generations.

Many years ago, Calabrese went looking for the scientific basis for the LNT, for it ran counter to what he was finding in his toxicological research—that low doses of some toxins or ionizing radiation may actually confer benefits. That, of course, is also the basis for much of modern chemical pharmacology.

Try as he could, and he tried for years, he could not locate the seminal science that gave rise to the LNT.  But he did find its progenitor, Hermann Muller, who claimed to have induced heritable point mutations with X-rays in the fruit-fly Drosophila. But where was the data and the peer-reviewed study?  Muller did author a brief article in Science on July 22, 1927, but, as Calabrese notes in his brand new paper, “He made this gene mutation claim/interpretation in an article that discussed his findings, but failed to include any data.”  The Science article said the data would be in a subsequent publication.

In fact, the data underlying what may have been the most important claim in the history of regulatory science, were never published in a peer-reviewed journal. 

Nonetheless amidst public concern about atomic radiation, the National Academy of Sciences formed the Biological Effects of Atomic Radiation (BEAR-1) panel, which reported its findings in Science in 1956.  Muller was obviously highly influential, and the Science report clearly established the LNT:

Any radiation dose, however small, can induce some mutations. There is no minimum amount of radiation dose, that is, which must be exceeded before any harmful mutations occur.

Calabrese documents that Muller’s good friend and another Drosophila geneticist, Edgar Altenberg, confidentially challenged Muller’s interpretation that he was inducing point mutations.  Rather, the very large doses of x-rays that Muller subjected the fruit flies to was simply knocking out wholesale portions of the chromosomes. 

But Altenburg never went public with his criticism.  Perhaps, Calabrese speculates, it was because of personal loyalty and a deep relationship.  When Muller attempted suicide in 1932, rather than addressing his family, his final note was to Altenburg. Muller and Altenburg ultimately lived until 1967, dying within months of each other.

Muller’s Science publication allowed him to claim research primacy, which landed him both prestige and the eventual 1946 Nobel Prize in Physiology or Medicine.

That prize validated Muller’s hypothesis and ultimately enshrined the LNT model as gospel, and it spread beyond ionizing radiation to other carcinogens and mutagens, as well as to many toxic chemicals in which, literally, the dose makes the poison. In Calabrese’s words,

…it has been Muller’s incorrect gene mutation interpretation and its legacy that created the LNT dose response model, leading to its recommendation by the US National Academy of Sciences in 1956…and then subsequently adopted by all regulatory programs throughout the world.

As a result of his recent testimony and publication, Calabrese may be changing the regulatory world. 

Unlinked References:

Biological Effects of Atomic Radiation Panel, 1956. Genetic effects of atomic radiation.  Science 123, 1157-64.

Muller H. J, 1927.  Artificial transmutation of the gene. Science 66, 84–87

 

In America’s strange legal immigration system, every country receives the exact same quota for green cards—7 percent of the number issued—regardless of how populous it is. When immigrants—mainly Indians, Chinese, Filipinos, and Mexicans—hit these “per-country limits,” nationals of other countries may pass them in line. This creates massive wait times for some immigrants, while cutting the waits for everyone else.

In 2018, for example, employer-sponsored immigrants with bachelor’s or master’s degrees waited more than three years for a green card if they were born in China, and about a decade if they were born in India, while those from other countries waited less than a year. Going forward, the Indian wait will stretch on for decades. The system is unfair, and for that reason alone, Congress should end it.

But the per-country limits are also economically senseless. They prioritize the right birthplace over the right skills. In the employer-sponsored categories, businesses could decide to pay Indian or Chinese applicants much more than other immigrants, yet Indian or Chinese employees would still suffer the same pointless discrimination. Discriminating based on nationality, rather than skills, undercuts the productivity of the United States and lowers the average wage of new immigrants to the United States.

To see if this was happening, I reviewed the data on approved labor certifications submitted by employers in the EB2 and EB3 employer-sponsored immigrant classifications to the Department of Labor (DOL). These labor certification applications contain the wage offered to the immigrant as well as their birthplace. Employers with approved labor certifications may petition for a green card on behalf of their workers, but the worker may only apply for a green card once a visa number is available under the quota. The Department of Labor validates the information provided on the labor certification in order to deal with concerns that immigrants are taking jobs from U.S. workers.

I used the latest DOL wage data from fiscal year 2018 to produce the estimates in Figure 1. To produce the weighted average wage with the country cap, I weighted the wages for each nationality by the number of their nationals admitted under the country caps in the EB2 and EB3 employer-sponsored categories. The average wage without the country cap is the average of the approved labor certification wages in 2018.[*] The weighted average wage with the per-country limits was $95,534, while the wage without it would be $107,126. The per-country limits depress the average wage for new employer-sponsored immigrants by $11,592.

Figure 1: Average Wages of EB2-EB3 Immigrants

In other words, the per-country limits strongly discriminate against higher-paid immigrants. Figure 2 shows the average offered wage for immigrants from India, China, and the rest of the world. The wages were $118,071 for Indian immigrants, $111,172 for Chinese immigrants, and $90,422 for the rest of the world. Indian and Chinese applicants have wage offers that are $27,649 and $20,750, respectively, more than other applicants. Yet Chinese and Indian immigrants must wait much longer than immigrants from the rest of the world.

Figure 2: Average Wages of EB2-EB3 Immigrants by Country of Origin

The per-country limits strongly discriminate against higher-paid immigrants. Immigrants who are offered higher wages actually wait longer under the U.S. legal system than other immigrants. That said, all employer-sponsored immigrants command much higher wages than the average income for all Americans (about $48,000).

Indian and Chinese immigrants are also more likely to be offered positions that require more experience and skills than other employer-sponsored immigrants. The Department of Labor categorizes jobs into five different “zones,” with Zone 5 commanding the most skills and experience. The average job zone was 4.1 for a position offered to an Indian immigrant, 4.0 for China, while all other immigrants were offered jobs with an average job zone of just 3.7.

Certainly, at least some of these differences come from forcing Indians and Chinese applicants to wait longer. They certainly do obtain higher wages and more experience while they wait longer for green cards. But whatever the reason for this difference, it makes no economic sense to continue to use country of birth as a factor in determining who receives a green card first.

The United States needs immigrants of all different skill and wage levels, but this diversity should emerge naturally from the free market, not from government attempting to micromanage America’s ethnic ancestry. According to a new study, the arbitrary delays are encouraging Chinese and Indian immigrants to leave the United States and take their talents elsewhere. Congress should repeal the per-country limits, and after that, it should revise or eliminate the arbitrary quotas on employer-sponsored immigrants, which have not been updated in nearly 30 years. The market—not government bureaucrats—should determine who will benefit the United States the most economically.

Table1

[*] Notes on methodology: Approved labor certifications include expired ones because they may still have been used to obtain a green card. At the high end of the wage distribution, there were some erroneous entries where wages were listed as hourly, weekly, or monthly when they should have been listed as yearly. As a data integrity measure, I excluded all labor certifications with listed wages of more than $1 million annually as well as anyone making more than $500,000 annually with a job zone of less than 5. This excluded about 30 people of a population of nearly 110,000. The offered wage of immigrants was annualized and, if necessary, was determined by taking the midpoint in any salary or wage range provided by the employer. EB2-EB3 employer-sponsored immigrants include all EB2-EB3 immigrants except for those who receive “national interest waivers,” but these immigrants do not need a sponsoring employer. Job zones were obtained by comparing Standard Occupation Classifications in DOL data to the relevant job zones.

Reuters reports (“French lawmaker proposes bill to outlaw mockery of accents”) that lawmaker Laetitia Avia of Emmanuel Macron’s ruling party intends to introduce a bill adding discrimination based on accent or pronunciation (“glottophobia”) to the list of banned discrimination categories. This came after an exchange between leftist party leader Jean-Luc Mélenchon and journalist Véronique Gaurel, born in Toulouse, in which he appeared to make fun of Gaurel’s southwestern accent and then called for the next question to be in “comprehensible French.”

I thought of researching whether France has enacted other vaguely framed laws aimed at soothing the sensibilities of the Toulouse region. But since there is no way to search for vague laws as a category in themselves, I soon realized that might set me off on — if you will excuse the expression — a Too-Loose-Law Trek.

The Fifth Amendment’s Takings Clause provides that the government may not take private property without giving just compensation to property owners. It was woven into the thread of our founding document to ensure that the government will always be held accountable for its actions—or omissions—which result in landowners losing their property. Today, however, the government constantly attempts to circumvent its duty to compensate landowners, and too often courts let lend it a helping hand.

In the 1950s, the U.S. Army Corps of Engineers began constructing the Mississippi River Gulf Outlet (MRGO) navigational canal in Louisiana, turning a 650-foot channel into a half-mile wide waterway. To construct the canal, the Corps destroyed wetlands that were protecting the St. Bernard Polder, an expansive stretch of low-lying land, from hurricane flooding and resulting property damage. The Corps then failed to armor the banks of the canal from erosion or take any action to guard against the known risk of catastrophic damage to St. Bernard Parish (“parish” is the Louisiana name for a county).

When Hurricane Katrina struck Louisiana in 2005, a 25-foot storm surge went directly up the MRGO, destroying the levees and devastating St. Bernard Parish. Parish residents suffered unimaginable property loss, as their homes were utterly decimated by the storm. When the people of St. Bernard tried to hold the federal government responsible for its inaction, the U.S. Court of Appeals for the Federal Circuit denied their claim.

Still, the Supreme Court has established that if the government floods private property, it is a taking for which the Fifth Amendment requires just compensation. Cases such as Arkansas Game & Fish Commission v. United States (2012) consistently stand for this important principle. Numerous state courts agree on this issue and hold that when government inaction causes flooding and property loss, it constitutes a compensable taking.

The Federal Circuit, on the other hand, has tried to create a distinction between government action and inaction. The court’s opinion in this case is an attempt to rewrite takings jurisprudence, providing the government with a convenient escape route by which it can avoid the constitutional responsibility to compensate landowners for taking their property by not taking reasonable steps to prevent damage.

This loophole cannot be allowed to fester, so St. Bernard Parish has asked the Supreme Court to settle this issue definitively. Cato and ensemble cast of organizations and professors have filed an amicus brief supporting that petition. We argue that when the government, whether through action or inaction, takes private property, it has a distinct, well-established responsibility to compensate landowners.

The ongoing controversy surrounding the murder of a dissident Saudi journalist and Saudi Arabia’s brutal bombing campaign of a largely defenseless neighboring Yemen, which has come with an enormous human toll, have elicited increased scrutiny over the U.S.-Saudi alliance. The White House remains supportive of Riyadh, both diplomatically and with continued military aid. Republicans have offered mildly critical words for the Saudi regime, while an increasing number of Democrats are calling for a fundamental reassessment of the U.S.-Saudi relationship.

Such a reassessment is long overdue. Washington’s partnership with Riyadh has often been treated as sacrosanct, at least here in the nation’s capital. It should have been clear long ago that the Saudis are not good allies. In fact, they often act in ways that undermine U.S. interests. Backing one of the world’s most appallingly tyrannical regimes to the hilt has actually not been a net positive for U.S. national security or for stability in the region.

With any luck, the unfolding drama over the U.S.-Saudi partnership will extend beyond merely this troubled bilateral relationship to U.S. policy in the Middle East as a whole. The United States is deeply entangled in this region, with roughly 50,000 boots on the ground, dozens of permanent military bases and deployed assets, and a staggering sum of taxpayer dollars, essentially wasted. We are engaged in active combat operations in at least five countries across the Middle East and North Africa, bogged down in endless counter-insurgency campaigns, grisly counter-terrorism operations, and inglorious proxy wars. Washington also tasks Central Command with the responsibility of supporting, training, arming, and stabilizing various corrupt dictatorships, while we also try to put the squeeze on Iran.

A well-timed paper  by Chatham House’s Micah Zenko clarifies the failure of U.S. regional objectives, despite the gargantuan resources devoted to them. Zenko lists four primary objectives: (1) enhancing regional security and reducing political instability within Middle East governments; (2) preventing the emergence of terrorist safe havens; (3) ensuring the free flow of energy resources; and (4) enabling allies to build enough military capacity to defend themselves.

We have failed at each of these. Indeed, far from serving a stabilizing role, U.S. policy has rather plainly destabilized the region. The Iraq War upended the Middle East, empowered Iran, and fueled a new generation of jihadist terrorists. Washington bungled a series of changes in the Egyptian regime and helped (along with other external actors) fuel Syria’s civil war. The Obama administration’s Libya war created anarchy and new refugee flows. And our longstanding support for Saudi Arabia as a balance to Iran has not only failed to roll back Iran’s regional activity, but it has also emboldened Riyadh to act aggressively and pick fights with several of its neighbors.

Second, the effort to prevent terrorist safe havens is based on a false premise that territorial safe havens matter much at all. But even accepting the flawed premise, U.S. policies have multiplied the number of “ungoverned spaces” as incubators for terrorist groups. As Zenko points out, “troops maintained in foreign countries to prevent terrorism actually increase the probability that those troops’ home countries and global interests will experience terrorism.”

Third, there is good reason to believe that U.S. efforts to ensure the free flow of oil actually address a problem that largely solves itself. Each state has a strong interest in maintaining the flow of oil through the Persian Gulf, and Saudi Arabia is not the juggernaut it once was. Global energy markets have evolved over the last 40 years and are much more resilient and able to overcome supply shocks than in the past. At best, patrolling the Persian Gulf waterway deters a scenario - an attempt by Iran or some other party to close to Strait of Hormuz - that is already an extremely low probability event.

Fourth, the United States has certainly provided numerous authoritarian regimes in the Middle East with the military capability and know-how to protect themselves, but whether that has redounded as a benefit to U.S. interests and regional stability is another question entirely. Much of what we provided to Iraq ended up in the hands of ISIS. American made weapons have been used to ruthlessly suppress peaceful protesters, from Egypt to Bahrain. And U.S. military support for Saudi Arabia is currently enabling unspeakable war crimes in Yemen, in a conflict that has actually bolstered the position of Al-Qaeda in the Arabian Peninsula (AQAP).

Washington is terrible at self-evaluation. Our record in the Middle East is one of abject failure. Strangely, even when we have presidents that agree with that assessment to one degree or another, policy doesn’t change. President Obama wanted to shift U.S. focus and resources away from the Middle East to East Asia. It didn’t happen. Trump, in April 2018, said, “We’ve spent $7 trillion in the Middle East and we’ve got nothing for it. Nothing, less than nothing, as far as I’m concerned.” And yet his administration has increased overall troop levels in the region, doubled down on backing traditional allies, and revived an anti-Iran posture that harkens back to the Bush era neocons.

A real reevaluation of U.S. policy toward this region is imperative. After decades of trying, Washington has failed in its primary objectives. A new and enlightened policy framework for the region should appreciate the dearth of serious threats to core U.S. security emanating from the region and should emphasize diplomacy as a way to manage relations with regional actors, rather than apply heavy-handed military solutions to every conceivable problem in the area.

Yesterday, WBUR in Boston reported on a simple technology that could reduce the number of opioid deaths: fentanyl test strips. The strips can be used by drug users to test for the presence of fentanyl in drugs they buy on the street. A Brown University study found that,

Sixty-two percent of young adult drug users who participated in the study in Rhode Island dipped the thin, pliable strips into the cooker where they heated the powder, or into their urine sometime after injecting. Half reported a positive result — a single dark pink line emerging on the strip — signaling fentanyl.

Most changed their routine as a result in at least one of these ways: 45 percent said they used a smaller amount of the drug; 42 percent slowed down their use; 39 percent used with someone else who could help if they ODed; and 36 percent did a test amount before injecting the full syringe.

While these routine changes aren’t as effective at preventing overdose as not taking the drugs at all, they do reduce the risk of a fentanyl overdose. So why aren’t more of these potentially lifesaving strips in the hands of those who could use them? As WBUR recounts,

But few drug users have access to fentanyl test strips. They are not FDA-approved, so are not for sale in drugstores or other outlets in the U.S. A handful of harm reduction groups fund distribution through private contributions. Other groups say they’d like to order the strips from the Canadian manufacturer but can’t afford the cost: about $1 per strip.

As federal and state officials are scrambling to come up with policy responses to the opioid epidemic it seems they are ignoring one easy measure: get out of the way and let the market provide low-cost harm reduction tools to those who can benefit from them.

Written with research assistance from David Kemp.

If the Democrats take the House, they’ll impeach Justice Kavanaugh, President Trump warned at a mass rally in Iowa last week. “Impeach, for what? For what?” Trump demanded. For perjury, most likely: “If we find lies about assault against women,” says Rep. Luis Gutierrez (D.-Ill.) one of several House Judiciary Committee members calling for renewed investigation, “then we should proceed to impeach.” 

I’m not the newly-minted Justice’s biggest fan. From the start, I thought Kavanaugh was a lousy pick for the Court: weak on the Fourth Amendment and unreasonably fond of extraconstitutional privileges for the president. I’ve also argued, at great length, that we ought to impeach federal officers more frequently than we do. That goes for Supreme Court Justices as well. The Framers thought impeachment could serve as a valuable check on abuses of judicial power: that we’ve managed to impeach just one member of the “high court” in 230 years is pretty anemic. 

All that said, I find the case for impeaching Justice Kavanaugh uncompelling, for the reasons that follow.

It’s true that there’s ample precedent for impeaching federal judges for perjury. Our last five judicial impeachments were based on charges of lying under oath. 

Here’s a brief rundown of each case: in 1986, the House impeached, and the Senate removed, Judge Harry E. Claiborne (D. Nev.) for filing false tax returns under penalty of perjury (Claiborne had been convicted of those offenses earlier that year, becoming the first sitting federal judge to be incarcerated). Three years later, the Senate removed two more judges for lying under oath. One, the inauspiciously surnamed Walter L. Nixon (S.D. Miss.), was serving five years in prison for lying to a federal grand jury about his attempt to influence a drug smuggling prosecution. The other, Alcee L. Hastings (S.D. Fla.), had been prosecuted for soliciting a $150,000 bribe in exchange for reducing the sentences of two mob-connected developers who’d robbed a union pension fund. He beat the rap in court, but lost his post when the Senate voted to remove him for the bribery scheme and perjuring himself at trial. (Hastings bounced back pretty quickly, however, winning election to the U.S. House of Representatives in 1992. He currently represents Florida’s 20th congressional district.)

More recently, we have the grotesque behavior of Judge Samuel Kent (S.D. Tex.), impeached in 2009 for sexually assaulting two court employees and lying about it to federal investigators. (Kent resigned before completion of his Senate trial.) Finally, there’s Judge G. Thomas Porteous (E.D. La.), impeached and removed in 2010 for “a longstanding pattern of corrupt conduct,” including kickbacks from attorneys, perjury in his personal bankruptcy filing, and “knowingly ma[king] material false statements about his past” to the Senate Judiciary Committee “in order to obtain the office of United States District Court Judge.” 

In principle and in practice, then, perjury is an impeachable offense. That obviously includes lying under oath to gain confirmation to higher office. In Monday’s Wall Street Journal, David Rivkin and Lee Casey insist that “Justice Kavanaugh cannot be impeached for conduct before his promotion to the Supreme Court,” including “any claims that he misled the Judiciary Committee.” But that’s nonsense. Misleading the Judiciary Committee about prior conduct was precisely what was at issue in the Porteous impeachment. 

And yet, the cases outlined above differ from Brett Kavanaugh’s in at least one crucial respect: in each of them, Congress had overwhelming evidence of impeachable falsehoods. Claiborne, Nixon, and Kent were already in federal prison when the House voted to impeach. Hastings and Porteous were removed after exhaustive investigations pursuant to the Judicial Conduct and Disability Act convinced their colleagues impeachment referrals were warranted. Indeed, despite Hastings acquittal in his criminal trial, a Judicial Investigating Committee concluded there was “clear and convincing evidence” he lied and falsified documents in order to mislead the jury.

When it comes to the central charge against Kavanaugh, however, clear and convincing evidence is unlikely to emerge. I don’t know if he’s lying about whether he sexually assaulted Christine Blasey Ford in the early ‘80s, and neither do you. It’s hard to imagine that further investigation, however exhaustive, will lead to dispositive proof one way or the other. 

Members of Congress are, of course, free to adopt a less stringent burden of proof—and maybe they should. The Constitution’s impeachment provisions nowhere specify clear and convincing evidence, proof beyond a reasonable doubt, or any particular evidentiary standard. That recent judicial impeachments have mirrored criminal-law standards is a result of the post-1980 statutory regime for disciplining federal judges and the “Overcriminalization of Impeachment” more generally. Since the purpose of impeachment is less to punish bad actors than to expel unfit officers, looser standards are arguably warranted. 

But unless members of Congress are willing to proceed on something closer to reasonable suspicion, any attempt to impeach Justice Kavanaugh would have to focus elsewhere, where the evidence for false statements is stronger. Did he testify falsely “regarding what he knew about emails stolen from the Senate Dems by a Republican operative” in judicial confirmation fights in the early 2000s? Did he attempt to mislead the Senate about his high-school yearbook?

In fact, I strongly suspect Kavanaugh lied about several items on his yearbook page. Was the reference to “Renate Alumnius” really just “intended to show affection” toward a female student at a nearby school? Was “boof[ing]” meant to indicate “flatulence”? I went to high school in the mid-Atlantic in the ‘80s, several years after Kavanaugh graduated, and I remember the term being a corny euphemism for sex. That usage better fits what Kavanaugh actually wrote—“Judge—Have You Boofed Yet?”—unless we credit him with unusual concern about his drinking buddy’s intestinal discomfort. 

But just going through the “boof-sleuthing” exercise in the prior paragraph cost me several IQ points and a soupcon of self-respect. The Framers viewed impeachment as a solemn and serious affair. Hamilton described “the awful discretion which a court of impeachments must necessarily have, to doom to honor or to infamy the most confidential and the most distinguished characters of the community.” A Kavanaugh impeachment inquiry would be awful in a different way: a spectacle proving mainly that high school never ends.  

“Imagine what it would look like,” writes Stephanie Mencimer in Mother Jones:

Hours of testimony from Squi, Timmy, and PJ over whether a Devil’s Triangle is really, as Kavanaugh testified, a drinking game. Expert debates over the definition of “boofing.”…. Michael Avenatti could figure prominently. It’s the kind of stuff that could end up making former House Oversight Committee chairman and Benghazi conspiracy theorist Rep. Jason Chaffetz (R-Utah) look like an elder statesman.

Really, must we? Sure, it might be entertaining to hear Rep. Alcee Hastings (D-Fla.), impeached for lying about participation in a gangland bribery scheme—and lately dogged by his own sex scandal—justify a vote to impeach over “Renate Alumnius.” But the proceeding as a whole would hardly be edifying. 

 A much-discussed recent survey puts two-thirds of Americans into a category the authors dub “the exhausted majority”—voters who are “frustrated and fed up with tribalism.” A Kavanaugh impeachment effort seems tailor-made to exhaust them even further.  

 

Max Gulker of the American Institute for Economic Research has a great short paper out summarizing the problems with a federal jobs guarantee. It echoes many of the issues that I raised about such a program on this blog.

One thing that is often underappreciated is just the sheer scale of the programs proposed. For reasons I outlined, the true numbers could potentially be much higher than the Levy Institute and Center on Budget and Policy Priorities (CBPP) worked proposals. But even taking their numbers as given, the estimated 10.7 million participants according to CBPP and 12.7-17.5 million from Levy would make the federal program by far the world’s largest employer, if thought as a single firm or entity.

Consider the striking chart below.

At the Levy report’s upper-bound estimate, the numbers employed would exceed the world’s nine largest employers combined. Even the CBPP’s lower estimate would only be marginally below the employment level of the world’s five largest employers combined.

When is it appropriate to privatize the work of public prosecutors? And does it make things better or worse when “cause” lawyering is at issue? As Jeff Patch reports at Real Clear Investigations, a project called the State Energy & Environmental Impact Center at New York University supplies seasoned lawyers to the offices of nine state attorney general offices, plus D.C. They serve there in such roles as special assistant attorney general while being paid by the NYU project, which is funded by and closely identified with former New York City Mayor Michael Bloomberg. The catch, which explains why the program is not likely to hold appeal for AGs in some other states: “Under terms of the arrangement, the fellows work solely to advance progressive environmental policy at a time when Democratic state attorneys general have investigated and sued ExxonMobil and other energy companies over alleged damages due to climate change.” 

Private funding of lawyers inside public prosecutors’ offices is not a new idea. Iowa’s AG office, for example, told Patch that it has employed legal talent from an American Bar Association-supported program. In another variation, it is not unusual for prosecutors to accept funding from the insurance industry for efforts to combat insurance fraud. Undergirding the political viability of these schemes is the (perhaps wobbly) premise that the state office is not farming out influence over politically or ideologically sensitive policy matters to outside groups that may have their own agenda.  

The AG offices participating in the program (Illinois, Maryland, Massachusetts, New Mexico, New York, Oregon, Pennsylvania, Virginia, and Washington state, as well as the District of Columbia) might plausibly argue that the projects they’re paying the Bloomberg embeds to work on are mostly ones they’d want to pursue zealously in any case, such as suing the EPA and other federal agencies over alleged lapses. Critics point to the ideologically fraught nature of the work and say the arrangement could violate some states’ ethics rules or generate improper conflicts of interest, as through an obligation to report activities back to the Bloomberg center. 

The spotlight on backstage doings at state AG offices arises from reports by Chris Horner of the Competitive Enterprise Institute based on public records requests that were fought tooth and nail by various AGs. (Besides the CEI report on attorneys general, Horner’s written a companion report on governors.) CEI is anything but a disinterested party in all this, of course, having been hit with a AG subpoena (later beaten back in court) over its supposedly wrongful advocacy on climate issues. That was itself part of a subpoena campaign targeting more than 100 research and advocacy groups, scientists, and private figures on the putatively wrong side of climate debates, which we and others decried at the time as a flagrant attack on rights protected by the First Amendment. 

Where Brexit negotiations are concerned, we have reached (as they say in Britain) “squeaky bum time.” The triggering of Article 50 on March 29th 2017 started a 2-year countdown for the UK and EU to negotiate a withdrawal agreement for a binding international treaty. Yet just 5 months from deadline, the EU’s position on Northern Ireland and a lack of domestic support for Prime Minister Theresa May’s desired long-term trading relationship mean a no deal Brexit in March remains a real possibility (the tweet linked here quotes Britain’s trade minister Liam Fox).

True, much of the withdrawal agreement has been long agreed. A transition period through to 31 December 2020 is planned to essentially keep the UK within the EU’s economic institutions (the single market and customs union), though reports suggest both sides might be willing to extend this for an extra year. Free movement of people would continue for this period, and the UK would pay £39 billion into the EU budget. Importantly, though Article 50 states that a withdrawal agreement must take account of the longer term post-exit relationship, this is not going to be achieved in time: the agreement would merely be accompanied with a joint, loose-languaged political declaration on the future framework.

But it’s here where difficulties have arisen, and most center around the Northern Irish border. Both sides have said from the start that, post-Brexit, they want to keep the border between the Republic of Ireland (an EU state) and Northern Ireland (part of the UK) free of physical infrastructure and associated interventions at politically-sensitive crossings. But making that commitment self-evidently necessitates a trade relationship. Given long-term trade arrangements will not be agreed in the withdrawal agreement, the EU has therefore insisted that the withdrawal deal itself contain backstop provisions to ensure the border remained open should another arrangement or trade deal incorporating not be agreed.

This is what led last December to the UK and EU agreeing in principle to a fudged “backstop” position on Northern Ireland. In vintage legalese, the text stated: “In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all-island economy and the protection of the 1998 Agreement.”

Given the UK government has said repeatedly that the UK would be leaving the EU customs union and single market, this text raised Brexiteer eyebrows. Yes, the UK government agreed this to kick forward future trade relationship talks, and in the hope it would not be ultimately necessary. But talk of full alignment left ambiguity, and the potential for the backstop itself to keep the UK locked into Brussels’ regulatory and customs orbit. However much the UK government insisted that this language did not mean regulatory harmonization, but instead merely achieving shared regulatory goals via detailed sanitary rules, customs procedures, and the Single Energy Market, the backstop left an uncomfortable feeling that the UK had fallen into a trap.

This was not helped when the EU then rejected proposed “technological solutions” and “away from the border checks” that the UK insisted could have avoided the backstop. The unease intensified when, from February, the EU and Ireland began proposing a backstop arrangement where Northern Ireland alone would remain within the EU single market and customs union to ensure a soft border. This was something out of kilter not only with the text but with the wishes of the Northern Irish Democratic Unionist party which props up the Conservative minority government.

This is all significant because Brexiteers fear now that the Northern Irish border has become the tail wagging the dog not just on the backstop, but on the potential future long-term trade relationship between the EU and UK. They fear the UK is being hoodwinked into a Brexit-in-name-only by threats of breaking up the UK through saying that only a soft Brexit can keep the Northern Irish border without physical infrastructure.

The Prime Minister Theresa May’s proposals for a longer-term trade relationship (known as the Chequers Plan) is Exhibit A. Rather than aiming for the best trade arrangements and then seeking to minimize disruption at the Irish border, the plan seems explicitly designed to keep the border as frictionless as possible, at the cost of an extraordinary loss of policy freedom. Chequers proposes a common rulebook between the UK and the EU on goods and agri-goods trade but not services, where fears of Brussels regulating the City of London alone without a UK vote were reason enough alone for exclusion. Non-regression-like clauses on environmental and labor laws would be included.  A complex facilitated customs arrangement would see the UK collect the EU’s tariffs on its behalf.

This deal has proven anathema to most Conservative Brexiteers, binding as it does the UK to EU goods regulation without voting power over it and stripping away the bargaining chip of goods regulation in making liberalising trade deals with third parties. They see Chequers as an unnecessary loss of sovereignty, and want Theresa May to “Chuck Chequers” and instead negotiate with the aim of a whole of UK FTA and practical solutions at the border.

Incidentally, the EU doesn’t like Chequers either. They rightly see it as cherry-picking parts of the single market, are suspicious of a foreign government collecting its duties and would prefer even tighter integration of lots of regulations (including commitments for full harmonization on labor and environmental laws), such that the UK cannot secure a competitive advantage. Political commentators in the know say Chequers is dead as far as the EU is concerned.

In the EU’s eyes, the preferred long-term options have always been a Canada-style free trade agreement, or maintained UK membership of the single market and a customs union (in essence, a political Brexit but not an economic Brexit). Most Brexiteers very much prefer the former, which comes with more regulatory and trade policy freedoms.

This brings us to the crux of the current political crisis. May’s government have thus far lined up with the EU (and against Brexiteer insistence otherwise) in stating that it’s impossible to solve the border problem satisfactorily through an ordinary UK-EU free trade deal and other practical solutions. They imply that with a Canada-style FTA, Northern Ireland alone would have to remain tied to EU economic institutions to avoid a hard border, effectively creating an economic border down the Irish Sea. Conveniently, May claims that only something like her Chequers plan can avoid this.

But with Chequers seemingly without much support at home or in the EU, the future relationship talks have effectively stalled. With so much uncertainty about it, the backstop agreement has taken center-stage, because de facto that could become the default relationship. And here Brexiteer fears have heightened. Since May insists no UK government would countenance Northern Ireland having different customs arrangements from Britain, she has proposed the whole of the UK remaining in a customs union-like arrangement as a backstop.

Earlier this year she suggested this would last for an extra year beyond transition (to December 2021) and Brexiteers are still keen on this kind of time limit. But the EU says that a backstop cannot be time-limited, because otherwise it’s not a backstop. Brexiteers winced this week when the PM’s position seemingly “evolved” in the EU’s direction, with her suggesting remaining in a customs arrangement as a backstop on a “temporary” but indefinite basis. These fears heightened with news that the EU believed there was not enough time to discuss a UK-wide backstop proposal, and insisting that the withdrawal agreement incorporate a “backstop to a backstop,” with a Northern Ireland-only customs arrangement should a full UK-wide agreement fail to be agreed.

For many Brexiteers, the major economic benefit of Brexit is the ability to conduct independent trade policy, cutting deals and setting tariffs. An indefinite customs arrangement threatens this. Given the EU would seemingly prefer the whole of the UK to remain within its economic institutions, a non-time-limited customs backstop provides little incentive for the EU to agree to a future comprehensive free trade deal the Brexiteers desire.

Combined with Chequers then, Brexiteers fear a huge sell out is on the cards. The UK government’s official position has always been that the country will leave the EU single market and customs union. But now both Chequers and the backstop risk are seen to keep the UK within these arrangements to varying degrees.

The result is a political crisis. The PM this week updated the house on the negotiations but could not provide assurances any customs arrangement backstop would be time-limited. She has since floated and then rowed back on extending the transition period, something that would see UK taxpayers pay for at least another year of EU funding, without settling the backstop issue.

As a result, everyone is unhappy. There is talk of Brexiteers dethroning May as a last gasp attempt to push for the Canada FTA-type deal the EU has offered. The DUP are threatening to derail the government’s domestic legislative agenda should the PM allow Northern Ireland to be treated differently. The hardline Remainers, meanwhile, are pressing for a second referendum on any withdrawal agreement May brings back.

With the clock ticking, and stakes rising, the prospect of no deal is therefore heightening. The EU has engineered a situation where in the long-term it insists either the UK must sign up to a backstop where Northern Ireland must be effectively economically annexed, or the UK must remain locked in the EU’s regulatory and customs embrace itself.

The Brexiteers (to my mind rightly) consider this unacceptable. Ignoring whether a change of Prime Minister or strategy is perceived as bad faith negotiating by the UK, it does not seem an extreme position to say that the EU should not have the right to dictate the economic breakup of a sovereign country, nor determine its domestic economic regulations. But at such a late stage and in such a febrile political environment, who knows where this multi-actor game of chicken ends?

Management practices in firms differ widely between countries according to research summarized by economists Nicholas Bloom and John Van Reenen.  The differences between well-managed firms and those that are poorly managed are significant and could help explain differences in Total Factor Productivity (TFP) between countries.  In the field of economic history, economists Louis Putterman and David N. Weil (henceforth P&W) found that the length of time that a population of a country has lived with a centralized state and with settled agriculture (henceforth, Deep Roots) are powerful predictors of their GDP per capita today.  Perhaps there is a relationship between firm management practices by country and that country’s Deep Roots?

P&W tested their Deep Root’s hypothesis by creating a matrix of contemporary populations of each country based on their population’s ancestral origin in the year 1500.  They use a variable called state history that measures how long a country has lived under a supra-tribal government, the geographic scope of that government, and whether that government was controlled by locals or by a foreign power.  Their second variable is agricultural history and it measures the number of millennia that have passed since a country transitioned from hunting and gathering to agriculture.  P&W then combined the matrices of ancestry with the Deep Roots variables to show how long each national origin group was governed by a centralized state and how long they had settled agriculture.  The Deep Roots score varies dramatically between peoples and locations.  P&W’s findings stand in contrast to those that explain economic development and GDP per capita as the ultimate result of geography, institutions, or other conventional explanations.

Ryan Murphy and Alex Nowrasteh tested whether the Deep Roots variables can explain differing GDP per capita by U.S. state in a paper published in the Journal of Bioeconomics (working paper available here).  They found that P&W’s core result of a statistically significant and positive relationship between Deep Roots variables and GDP per capita does not hold at the subnational level in the United States.  This argument is related to immigration because new immigrants bring different state history and agricultural history scores with them, eventually affecting the Deep Roots of their new country.  Whether that matters for economic growth is up for debate.  

Since Deep Roots are correlated with GDP per capita globally and some economists think that they can explain economic development, firm management practices should probably also be correlated with Deep Roots.  To test this, we ran simple linear OLS regressions testing the relationship between firm management practices and a country’s state and agricultural history.  Our standard errors are robust to heteroskedasticity.  We controlled for the same variables that P&W did as well as the economic freedom score.  We downloaded the firm management practices dataset for 34 countries here

We found precisely nothing interesting related to the Deep Roots (Table 1).  Neither state history nor agricultural history is correlated with better management practices.  However, economic freedom and absolute latitude are positively correlated with state history and agricultural history.  On the positive side, our R-squared is 0.72, so the variables that we included can explain 72 percent of the variation.   

There are a lot of reasons why this could be.  We only had management score data for 34 countries, collinearity was rampant, cross sections are limited, or other explanations that we haven’t considered.  Regardless, there is no evidence here that there is a link between Deep Roots and firm management practices.  

 

Table 1

Firm Management Practices, State History, and Agricultural History

Millions of Americans move between states each year. These migration flows are influenced by numerous factors including job opportunities, climate, and housing costs. Interstate migration is also influenced by state and local taxes, as discussed in this recent study.

Internal Revenue Service data show that 2.8 percent of households moved to another state in 2016. The map below shows the net patterns of movement. People are leaving the red and purple states for the blue states.

The ratio of domestic gross in-migration to gross out-migration is shown for each state. In 2016, New York gained 142,722 households and lost 218,937 for a ratio of 0.65. Florida gained 307,022 households and lost 211,950 for a ratio of 1.45.

States losing population to other states have ratios of less than 1.0 and states gaining population have ratios of more than 1.0. People are generally moving out of the Northeast and Midwest to the South and West, but they are also leaving California, on net.

Here are some of the regional patterns:

  • The Northeast. New Hampshire enjoys net in-migration. It is a low-tax state with no individual income tax. Higher-tax Connecticut, Massachusetts, Rhode Island, and Vermont suffer net out-migration.
  • The Midwest. South Dakota enjoys modest net in-migration, while its higher-tax neighbors Iowa, Minnesota, and Nebraska suffer net out-migration. South Dakota is a low-tax state with no income tax. Neighbor Wyoming has net out-migration overall but has substantial net in-migration among high-earning households. Wyoming has no income tax.
  • The Southeast. Kentucky has suffered net out-migration for years, while its neighbor Tennessee has enjoyed net in-migration. Kentucky is a relatively high-tax state, while Tennessee is a low-tax state with no individual income tax.
  • The West. The largest destinations for out-migration from high-tax California are Texas, Washington, and Nevada—all low-tax states with no income taxes.

In this study, I divide the states between the 25 highest tax and 25 lowest tax, with taxes measured as state and local individual income, sales, and property taxes as a percent of personal income. In 2016, 286,431 households (with almost 600,000 people) moved, on net, from the 25 highest-tax states to the 25 lowest-tax states. Of the 25 highest-tax states, 24 of them had net out-migration in 2016. (Maine was the exception).

The 2017 federal tax reform law will likely intensify the patterns shown in the map of people moving from high-tax states to low-tax states. The law doubled standard deductions and capped state and local tax deductions. Those changes will reduce the number of households deducting state and local taxes from 42 million in 2017 to about 17 million in 2018. Those households will feel a larger bite from state and local taxes and become more sensitive to tax differences between the states.

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. Trump appears to call for defense spending cut,” Aaron Mehta. This week’s Cabinet meeting went a bit differently than most. The President, apparently due to worry about the country’s rising debts and deficits, issued a call for every federal department to cut it’s spending by five percent in Fiscal Year 2019 (FY19). Reporters understandably rushed to ask President Trump if this initiative would include defense spending; while he doesn’t seem to want the full five percent, Trump commented that the budget next year would be “around $700 billion” (a 2.3 percent cut). 
  2. Air Force B-21 Raider Long Range Strike Bomber,” Jeremiah Gertler. The Congressional Research survey released an update on the still-classified B-21 program. While many details remain unavailable to the public, this report discusses  the status of the program and includes useful information on projected research and development funding. 
  3. Air and Missile Defense at a Crossroads,” Mark Gunzinger and Carl Rehburg. The Center for Strategic and Budgetary Alternative released a new report today on adapting missile defense for protecting overseas bases, and recommendations to move the portfolio in that direction. 
  4. Senior defense committee Democrat wants to stop U.S. weapon sales to Saudi Arabia,” Tony Bertuca. Senator Jack Reed, the ranking Democrat on the Senate Armed Services Committee (SASC), said publicly that all sales of offensive weapons to Saudi Arabia should be blocked until a thorough investigation into the death of journalist Jamal Khashoggi can be undertaken. 

The U.S. Treasury reports that the federal budget deficit was $779 billion in fiscal 2018. The deficit is caused by spending in excess of tax revenues and is financed by borrowing from foreign and domestic creditors.

Federal spending in 2018 was $4,108 billion and tax revenues were $3,329 billion, so Congress financed 19 percent of its spending with borrowing. Did taxpayers—who will ultimately bear the burden—really consent to that extra debt-financed spending? It is like Dad leaving the kids some cash to buy pizza, and then coming home to find that they also used his credit card to rack up charges on the Internet.

Unless the politicians grow up and start making reforms, the deficit will likely grow from $1 trillion in 2019 to more than $2 trillion a year a decade from now.

Annual deficits are piling onto accumulated federal debt held by the public of $16 trillion. That is $127,000 for every household in the nation. Compared to the size of the economy, today’s federal debt is, by far, the highest in our peacetime history.

Why is soaring government debt so worrying?

  1. Spending Induced. Most federal spending is for subsidy and benefit programs, not for activities that increase productivity. Subsidy and benefit programs distort the economy and generally reduce overall output and incomes. Those distortions occur whether spending is financed by debt or current taxes. But the availability of debt financing induces policymakers to increase overall spending, which at the margin goes toward lower-valued activities.
  2. Tax Damage Compounded. When taxes are extracted to pay for government spending, it induces people to change their working and investing activities, which distorts the economy and reduces growth. When spending is financed by borrowing, the tax damage is pushed to the future and compounded with interest costs.
  3. Investment Reduced. Government borrowing may “crowd out” private investment, and thus reduce future output and incomes. Economist James Buchanan said, “By financing current public outlay by debt, we are, in effect, chopping up the apple trees for firewood, thereby reducing the yield of the orchard forever.” The crowd out will be reduced if private saving rises to offset government deficits. But the CBO says, “the rise in private saving is generally a good deal smaller than the increase in federal borrowing.” Government debt may also deter investment through expectations—businesses will hesitate to invest if rising debt creates fears of tax increases down the road.
  4. Borrowing from Abroad. A decline in private investment due to government borrowing may be avoided if capital is attracted from abroad. Indeed, huge federal borrowing has been facilitated by global capital markets, and today more than 40 percent of federal debt is held by foreigners. Borrowing from abroad may prevent a fall in domestic investment but does not prevent the shifting of costs to future taxpayers. As government debt rises, more of our future earnings will be taxed to pay interest and principal on the government’s debt to foreigners.
  5. Macroeconomic Instability. CBO warns that a “large and continuously growing federal debt would … increase the likelihood of a fiscal crisis in the United States.” Experience shows that high levels of government debt tend to reduce growth and increase financial fragility. In their study of financial crises through history, Carmen Reinhart and Ken Rogoff concluded, “again and again, countries, banks, individuals, and firms take on excessive debt in good times without enough awareness of the risks that will follow when the inevitable recession hits.” Government debt, they found, “is certainly the most problematic, for it can accumulate massively and for long periods without being put in check by markets.”

Sadly, with regard to the federal budget, policymakers seem to be in la-la land, a “euphoric dreamlike mental state detached from the harsher realities of life.” They dream about spending on their favorite programs and act as if there won’t be harsh consequences to their profligacy. But there will be. Future living standards are being eroded as huge costs are being pushed forward, and the rising debt will eventually spark a damaging financial and economic crisis.

The focus of the Trump administration’s trade policy to date has been on renegotiating existing trade deals (with a mix of minor liberalization and modest new protectionism), putting tariffs on a wide range of imports using flimsy justifications, and engaging in a high-profile trade war with China. By contrast, it has put very little effort into pushing for significant new trade liberalization.

That may be about to change. The U.S. Trade Representative’s Office has just sent letters to Congress formally notifying the administration’s intent to enter into trade negotiations with the EU, Japan, and the UK. Cato scholars have called for exactly these negotiations (see herehere, and here, and much more detail here).

There is a lot of work ahead, as these negotiations won’t be easy. They would have been easier if the administration had not imposed “national security” tariffs on imports of steel and aluminum from these very same trading partners. Nevertheless, almost two years into the Trump administration, there is finally a glimmer of hope that there could be some trade liberalization coming.

Over the weekend, Washington Post investigative journalist and Cato alumnus Radley Balko published a devastating report on a drug unit in Little Rock, Arkansas. The squad has been conducting a high number of no-knock raids on drug suspects on evidence supplied by a less-than-reputable criminal informant. As Balko notes, that the police quite literally signed off on some of the informant’s apparent lies is one of myriad problems he uncovered in his investigation.

There are many shocking aspects to Balko’s story, but in the end, much of what he found in Little Rock reflects a broader problem of police reliance on informants to fight the drug war. Today, I published a piece in Democracy Journal explaining the many ways informants corrupt our justice system and policing itself. An excerpt:

The rules for using confidential (also called “criminal”) informants [CIs] in criminal investigations vary from jurisdiction to jurisdiction, but generally speaking, employing CIs introduces three systemic flaws into the criminal justice system. First, the use of confidential informants definitionally requires secrecy and opacity, which shields CIs and officers alike from sufficient oversight and accountability. Second, the informant system relies on bad inputs—namely, drug-addicted individuals and other people immersed in criminal activity to act as agents of the government—and thus effectively becomes a subsidy for criminal behavior. Third, the use of confidential informants creates some bad incentives for law enforcement actors and the CIs themselves, which skew toward case production and away from public safety and security. Taken together, and in the context of our everyday justice system, these flaws produce an array of bad individual and public policy outcomes while providing only superficial benefits for law enforcement.

Coincidentally, I recently testified before the Arkansas Advisory Committee to the U.S. Commission on Civil Rights in Little Rock. The committee invited me to talk about how police practices contribute to the pronounced racial disparities in mass incarceration. Among other things, my testimony included a criticism of Little Rock police using invasive, neighborhood-based pretextual traffic stops to quell an uptick in violence. Such methods fuel community resentment of the police and have not been shown to reduce crime in the process.

You can read Balko’s piece in full here. My commentary on informants can be found here. And the written version of my testimony in Little Rock can be found here.

Earlier this week, Leslie Stahl and 60 Minutes got into the subject of global warming with President Trump.  

Her question, “Do you still think climate change is a hoax” followed background on recent hurricanes Michael, Florence, Maria, and Harvey.

The President’s response was “I think something’s happening. Something’s changing and it’ll change back again. I don’t think it’s a hoax, I think there’s probably a difference. But I don’t know that it’s manmade.” 

This is a huge walk-back from his old rhetoric, which was enough to make scientists like me cringe. 

And in the context of hurricanes, his comment is also is consistent with what the National Oceanic and Atmospheric Administration’s Geophysical Fluid Dynamics Laboratory (GFDL) said in its September 20 statement titled “Global Warming and Hurricanes”: “In the Atlantic, it is premature to conclude that human activities–and particularly greenhouse gas emissions that cause global warming–have already had a detectable impact on hurricane activity.”

It is noteworthy that GFDL’s statement was in an update, and that “Global Warming and Hurricanes” has said the same about Atlantic hurricanes for years, long predating the Trump Administration.

Stahl then went on to Greenland.  Here’s the relevant transcript:

Lesley Stahl: I wish you could go to Greenland, watch these huge chunks of ice just falling into the ocean, raising the sea levels.

President Donald Trump: And you don’t know whether that would have happened with or without man. You don’t know.

Another reasonable response. For reasons having nothing to do with humans, ice-covered areas in Greenland endured 6,000 years of warming centering around 118,000 years ago that, in terms of integrated heating, was larger than anything humans can do to it. Yet it only lost about 30% of its ice. There were certainly more “huge chunks of ice just falling into the ocean raising sea levels” back then, with no human influence on climate.

It’s also true that the current high-latitude north polar warming is largely (but not completely) consistent with global warming theory.

Finally, they got into a “he said, he said” discussion about climate scientists’ various viewpoints.  Here’s how it ended:

Lesley Stahl: Yeah, but what about the scientists who say it’s worse than ever?

President Donald Trump: You’d have to show me the scientists because they have a very big political agenda, Lesley.

Lesley Stahl: I can’t bring them in.

President Donald Trump: Look, scientists also have a political agenda.

No, 60 Minutes cannot be expected to bring in hundreds of scientists on either side of this debate to investigate whether or not they have a political agenda.  But Al Gore may have been on to something in his comments on the recent UN report claiming temperature increases of a mere 0.6°C will be catastrophic.  He said it was “torqued up a little bit, appropriately – how [else] do they get the attention of policy-makers around the world”[?].

Hmmm. Seems like a political agenda.

This month the Washington, D.C. Council voted unanimously in favor of preliminary approval of a bill that has the potential to substantially restrict Airbnb and other short-term rentals in the District. The bill, which must pass a final vote before being officially approved, creates new licensing requirements and imposes new limits on who can rent out their spare rooms or homes and for how long. Most significantly, the legislation would only permit hosts to offer short-term rentals at their primary residence and to rent out their property for a maximum of 90 days a year while not present at their home.

The bill attempts to walk a fine line between fulfilling the promises of Airbnb and similar short-term rental companies and addressing the concerns of a coalition of community activists, hotel lobbyists, and hotel-worker unions. On the one hand, Airbnb—like Uber and some other “disruptors”—allows the middle-class to turn previously underutilized consumer durables and assets into sources of extra income. On the other hand, the groups calling for increased restrictions complain that Airbnb reduces the housing supply for long-term tenants and thus raises housing prices, has allowed commercial hotel operators to skirt regulations and taxes, and disrupts communities and neighborhoods with an influx of noisy strangers.

The benefits of Airbnb to some homeowners are clear, but the complaints of the bill’s proponents aren’t entirely baseless. Community activists argue that Airbnb exacerbates housing affordability issues. As I recounted in my working paper review in the winter 2017-2018 issue of Regulation, economists Kyle Barron, Edward Kung, and Davide Proserpio examined the impact of short-term rentals on housing prices and rent and found that, though the effect is not zero, it is small: a 1 percent increase in Airbnb listings causes a 0.018 percent increase in rents and a 0.026 percent increase in house prices.

Hotels contend that Airbnb, despite cultivating an image of middle-class owners earning extra income from renting out a spare bedroom, has allowed commercial operators to circumvent taxes and health and safety regulations. They back up this claim by citing that the vast majority of Airbnb revenue comes from entire home rentals and argue that regulations are needed to level the playing field. Browse through some of the postings on Airbnb and it is clear that these commercial operators aren’t fictitious (see this host, for example, whose description overtly describes themselves as a “full-service relocation management agency” and, with 79 available units in D.C., is the largest host in the city).

But a close look at the same hotel-lobby funded research used to justify the regulations shows that commercial operators are not as widespread as they portray: over 90 percent of entire home rentals in D.C. are offered by hosts with only one listing. That number also discounts middle-class D.C. residents who may rent out a starter home on Airbnb along with their new home, and thus technically offer two units for short-term rentals but can hardly be considered commercial operators.

Finally, some District residents complain about Airbnb and the strangers it brings into their neighborhoods and apartment buildings. These residents’ concerns about congestion, noise, and safety are probably overstated, but not unfounded. (In one egregious case, for example, one homeowner in the affluent Dupont Circle neighborhood of D.C. was renting his house out for large parties, including a concert with rapper Ja Rule.)

These issues are what is at the core of the short-term rental bill and zoning rules more generally: managing urban externalities. Unlike in rural areas, where neighbors can more easily ignore each other, in an urban environment what people do and how they live affects their neighbors because of proximity and density. Parking, noise, and land-use ordinances and regulations are attempts to create public expectations about behavior such that like-minded people become proximate to each other.

The expectations that are created are both on and off the books. While the norms in Dupont Circle create a quiet and peaceful neighborhood—and a premium for that peace and quiet—someone moving into fraternity row at George Washington University should expect a different decibel level and neighborhood flavor. As long as everyone is aware of these norms before they move in, and as long as everyone follows the norms while they live there, there are no issues.

The problems arise when people want to be different. Hosting a Ja Rule concert in Dupont violates both zoning laws and, more importantly, the established norms of the neighborhood. As it stands, someone who wants to be different can either break the rules and hope they are ignored, or lobby for change at city hall and hope for preferential treatment. But I propose a third option: buy the right to be different.

People who live next door to the concert, or even just a typical Airbnb, may not like the noise and strangers, but what if they got paid? Currently, a discontented neighbor’s only option to address their complaints is to ask the city government, through the police or enforcement of zoning laws, to use force. Instead, create a platform for rights exchange, which, as long as a price can be agreed upon, would give homeowners the right to rent their house on Airbnb providing they appropriately reimburse their neighbors for any disruption or inconvenience. 

What this platform would look like is unknown, and many questions, such as how it would handle holdouts, need to be addressed, but this sort of rights exchange is not unheard of. In the D.C. area, for example, rising home prices and demand for housing over the past 30 years created the need for denser housing developments. In Northern Virginia, which was once dominated by single-family homes, for 15 years between the late 1980s and early 2000s developers bought up neighborhoods for redevelopment, often paying homeowners more than double the listed price of their houses. Even more strikingly, a polluting coal power plant bought an entire town in Ohio for $20 million.

In both cases, the opportunity for exchange allowed the land to be used most efficiently while compensating those who had initial property rights. Though short-term rentals are on a smaller scale, the principles remain the same. Whether someone wants to rent their house on Airbnb or host a Ja Rule concert they should have the right to do so as long as they properly reimburse their neighbors for the externalities they create.

Written with research assistance from David Kemp.

School choice critics often resort to fearmongering. For example, a Superintendent of Public Instruction in North Carolina contended that citizens “could be in dangerous territory” with the expansion of private school vouchers. After all, she argued, “there is nothing in the [voucher] legislation that would prevent someone from establishing a school of terror.”

The only problem is that the facts don’t support these scare tactics.

My just-published study examines whether fluctuations in the private share of schooling affect national stability within 177 countries around the globe over 16 years. The analysis does not detect contemporaneous effects of private schooling on any of the five measures national stability. However, I find evidence indicating that increases in private schooling improve measures of perceived control of corruption and rule of law – provided by the World Bank – when students become adults.

As shown in Table 1 below (and in the original study), a one-percentage point increase in the private share of schooling enrollment is associated with around a 0.01-point increase in both the perceived control of corruption and the perceived control of the rule of law even after controlling for changes in factors such as GDP, population, and government expenditures.

Table Notes: p-values are indicated in parentheses. * p < 0.05, ** p < 0.01, *** p < 0.001. All coefficients are average marginal effects. All models use year and country fixed effects with time-variant controls added and a 7-year lag of the private share of schooling enrollment. Column 5 does not show any results for Coup d’état because the dependent variable did not vary. When the instrumental variable employed by DeAngelis and Shakeel (2018) and DeAngelis (2017)—short-run fluctuations in the demand for schooling—is used, the lag coefficient for Rule of Law remains statistically significant; however, the lag coefficient for Corrupt Control becomes statistically insignificant with a p-value of 0.11.

 

This study doesn’t provide any evidence to suggest that private schooling is dangerous to societies around the world. If anything, it appears that private schooling improves the character and citizenship skills necessary for social order. And this study isn’t alone. None of the eleven rigorous studies on the topic find that private school choice reduces social order in the U.S. The majority of these studies actually find positive effects on civic outcomes. But why?

Private schools must cater to the needs of families if they don’t want to shut down. And, of course, families want their children to become good citizens. But government schools remain open whether they teach kids character skills or not. Perhaps supporters of the status quo should consult the evidence – and basic economic theory – before resorting to scaremongering.

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