Cato Op-Eds

Individual Liberty, Free Markets, and Peace
Subscribe to Cato Op-Eds feed

Publication of the CBO’s “The Budget and Economic Outlook: 2018 to 2028” has once again brought attention to the dire outlook for the federal public finances.

The challenge is best thought of in the following way:

1) there is a structural challenge associated with projections for debt-to-GDP ballooning in the coming decades due to unchanged entitlement programs interacting with an aging population

2) politicians have sailed us into these fiscal headwinds with a large, structural budget deficit, and debt held by the public is already at its highest level since just after World War II

The policy implications are clear: substantial entitlement reforms are, and always were, necessary if the US were to have any hope at preventing ever-rising federal debt (as Brian Riedl indicates in this excellent post).

But running something much closer to an overall balanced budget sooner rather than later is needed if the aim is to get the debt-to-GDP ratio heading back down towards historic norms over the coming decades.

It’s in this context the CBO numbers are so gloomy.

Over the next 10 years, based on current laws, the CBO estimates that the deficit will instead increase from 3.5 percent of GDP in 2017 to 5.4 percent in 2022, before fluctuating between 4.6 percent and 5.2 percent from 2023 to 2028. This compares with an average annual deficit of 2.9 percent over the next 50 years. Debt held by the public as a result is projected to rise to 96.2 percent of GDP by 2028.

But note this is based on “current law,” and assumes substantial income tax increases in 2025 as individual tax cuts expire, and that there will be spending cuts too.

As the CBO notes:

If those changes did not occur and current policies were continued instead, much larger deficits and much greater debt would result: The deficit would grow to 7.1 percent of GDP by 2028 and would average 6.3 percent of GDP from 2022 to 2028…debt held by the public under that alternative fiscal scenario would reach 105 percent of GDP by the end of 2028, an amount that has been exceeded only one time in the nation’s history.

The CBO data clearly shows that revenue as a proportion of GDP was expected to have risen back to its 2017 level by 2023 even before the expiration of many tax cuts, showing that from then on its rising spending that is driving the worsening outlook in debt over this period.

If the Republicans really wanted to lock in their tax cuts, they needed spending restraint. Instead, now, the fiscal outlook is set to deteriorate, tax cuts are being blamed (even though projections show tax revenues will still increase as a proportion of GDP), and on current policies debt is heading north pretty rapidly.

Here we go again. The 2017 round of the Nation’s Report Card was released today. The results shouldn’t surprise anyone – they are almost entirely flat at the national level. However, that doesn’t stop educators and education reformers from spinning the results to fit whatever agendas they might have. Those who defend previous reforms claim that computer-based testing must be to blame for stagnant performance – and that students today are “relatively poorer” than they were in the past. On the other hand, groups calling for additional reform claim that the NAEP results should startle Americans.

We should all settle down. Here are 3 reasons why:

  1. Test scores tell us very little about success.

Education scholars such as University of Arkansas’s Jay P. Greene have been talking about the weaknesses of standardized test scores for a long time. Specifically, Greene frequently points out that at least 10 rigorous school choice studies indicate disconnects between effects on test scores and effects on long-term outcomes such as attainment and earnings. In fact, Diane Ravitch recently praised Greene for shining a light on this issue. And it’s not every day that Ravitch and Greene agree on something.

Research reviews indicate that Greene is on to something. For example, a recent review of the academic evidence on the subject finds that “there is a weak relationship between impacts on test scores and later attainment outcomes.”

Similarly, I have started to review the causal private school choice literature that indicates divergences between effects on test scores and other long-run outcomes such as student criminality, effort, and happiness. As shown in the table below, I’ve found 11 disconnects in the literature since 2001. For example, the sample of students from the state-mandated evaluation of the Milwaukee voucher program saw no statistically significant improvements in reading test scores after the fourth year. However, those same students were more likely to enroll in a four-year college and less likely to engage in criminal activity later on in life. In other words, putting too much weight on standardized tests – like NAEP – could compromise the character development necessary for real lifelong success.

Studies with Disconnects Between Effects on Test Scores and Long-Run Outcomes

 

2. Even if test scores were strong measures of long-run success, changes in NAEP score averages alone do not tell us much about changes in nationwide performance.

Let’s assume test scores mattered. Even then, an uptick in NAEP scores wouldn’t necessarily tell us that overall performance improved. People like former U.S. education secretary Arne Duncan claim that the student population “is relatively poorer and considerably more diverse” than in the past. He may have a point. For example, single-parent households have nearly tripled since 1960. However, many scholars also point out that inflation-adjusted per capita income has nearly doubled since the 70’s, while the share of citizens with college degrees surged over the same period.

Since the magnitude – and the direction – of the student population’s relative advantage changes over time, we cannot confidently determine whether NAEP performance has actually gotten better or worse.

3. Even if test scores were strong measures of success, and we could somehow know that changes in NAEP scores reflected changes in nationwide performance, we would have no idea what policies affected those changes.

Now let’s also assume that – somehow – student advantage was held perfectly constant over time. Even then, we would have no idea what specific policies affected the changes in student performance. States that have different education policies have different populations and laws that could also affect their average standardized test scores.

Significant gains were made in Florida, for example. In fact, Florida was ranked the best-performing state for 4th grade math and reading scores after the Urban Institute controlled for several student background characteristics. But why? As a supporter of private school choice, I could spin these results in my favor by pointing to the fact that Florida has over 100,000 students participating in their privately funded private school choice program. But the truth is that the experts currently have no idea if the school choice programs in Florida have anything to do with the gains.

None of us should get this hyped up over standardized test scores. After all, these crude NAEP score averages unfortunately cannot tell us much of anything absent rigorous empirical analysis. Anyone claiming otherwise needs to slow down and reassess the situation.

Another set of national exam results—the National Assessment of Educational Progress (NAEP)—is upon us, and much will likely be made of them. But in the aggregate, what the new scores show is just that things haven’t changed much over the last couple of years, and only as captured by this particular test. Burrowing down and comparing states, subgroups of kids, and smaller jurisdictions that have implemented different policies, spent more or less, and experienced numerous other things, might suggest some avenues for further exploration, but the only conclusion we can state with any confidence is that nothing happened—not Common Core, not school choice, not the Every Student Succeeds Act (ESSA)—that appears to have seismically altered NAEP outcomes.

That may be just fine: Americans have increasingly and broadly rejected standardized tests scores as the end-all-and-be-all of education, culminating in the ESSA, which in late 2015 replaced the No Child Left Behind Act and its obsession with testing. And as we are increasingly learning, tests scores may have little connection to other outcomes like high school completion, and neither really addresses whether kids are learning desirable moral values, or creative thinking, or the myriad other big things parents want for their children.

That important preface offered, what are the highlights, such as they are, in the latest NAEP?

First, that overall scores for 4th and 8th graders—no high school kids this time around—were statistically flat between 2015 and 2017 for all but 8th grade reading, which went up two scale points, from 265 to 267. (Note, they were at 268 in 2013, so stagnation persisted over four years). Within those numbers, top scorers tended to see scores rise, and lower scorers scores decrease, while lower-income students tended to see stagnation or slight dips.  Private schools—actually, only Catholic schools are reported—also saw general stagnation.

Maybe there are some standout states? For math, only Florida saw scores rise in both 4th and 8th grade, hitting a new high in the state for 4th grade, but not yet returning to the state’s 8th grade peak in 2013. In reading no state saw increases in 4th grade, but Florida was joined by nine other states with increasing 8th grade scores. So Florida may be doing more right than any other state, but what that is NAEP can’t tell us. It has been a very choice-friendly place, but also fond of test-driven accountability systems and even requiring kids to pick “majors” in high school. Heck, maybe it just does the best standardized testing prep, which may explain a lot of score increases in the past. (Corey DeAngelis will have more on what NAEP can’t tell us soon!)

Finally, 21 districts have new NAEP scores. Not surprisingly given the national results, most saw little change between 2015 and 2017. San Diego, though, saw statistically significant increases in 4th grade math and reading, so maybe that city bears watching.

Two years of new data is not very much, and a whole lot influences standardized test scores. And frankly, such scores tell us only a fraction—maybe a very tiny one—of what parents want to know about education. So let’s hope we don’t lose our collective heads over these scores, and do not see a new policy obsession with standardized testing outcomes like we experienced under No Child Left Behind. Instead, let’s let individual educators and parents—who value so many things—choose what they think is most important in education.

There are many aggravating tropes that keep reemerging in the debate over immigration policy but one of the worst is that every problem with the U.S. immigration system is the result of the supposedly perfidious Mexico.  Changes in Mexican law and policy certainly have an impact on immigration to the United States but it is not true that our laws would operate wonderfully even if foreign governments had policies to support them.  Those who blame Mexico should, at the minimum, get their stories straight. 

In many versions of this tale, the Mexican government is hypocritical because its immigration laws are strict yet it complains about laws like SB 1070 in Arizona and the deportation of Mexican citizens from the United States.  Talk radio show host Rush Limbaugh famously used this rhetorical tactic when sarcastically (maybe?) proposing a series of immigration reforms that mirrored the worst of Mexican immigration law in 2007.          

The Mexican government fiercely criticized the passage of Arizona’s SB 1070 in 2010, a bill that forced state and local police to enforce federal immigration laws.  When then-President of Mexico Felipe Calderon visited the White House and intended to complain about the law directly to President Obama, Representative Ted Poe (R-TX) said, “I wonder if they’ll discuss whether or not Calderon supports his own country’s immigration policy.”  Both Limbaugh and Poe rightly criticized Mexico’s famously restrictive, self-destructive, and hypocritical immigration policy.

Partly in response to the American criticism, Mexico gradually reformed its immigration laws beginning in 2008.  In that year, Mexico reduced the punishment for illegal entry to a maximum fine of 5,000 pesos, down from a potential ten-year prison sentence.  They also created a temporary agricultural guest worker visa program for agricultural laborers from Guatemala and Belize working in Mexico’s southern states.  In 2010, the Mexican government stated that illegal immigrants would not have to fear immigration enforcement when reporting human rights violations or receiving medical treatment. 

The Mexican government did not stop there.  The Mexican Congress passed a Migratory Act in 2011 that went into effect on November 1, 2012.  This law replaced the Mexican General Law of Population that was the source of their restrictive immigration laws.  Among other things, the new Mexican immigration law allowed immigrants and migrants equal access to Mexican courts, reduced the power of local police to enforce immigration law, reformed the humanitarian admissions system, simplified entrance and reduced residency requirement by, in part, creating a points system, and created a three-day regional visitor’s visa for people from neighboring countries.  In other words, Mexico liberalized and expanded its legal immigration system.  Although Mexican reforms did not go far enough, they were a significant step away from protectionism toward a more liberal immigration regime. 

Shortly after the Migratory Act of 2011 went into effect, the number of Unaccompanied Alien Children (UAC) apprehended by Border Patrol skyrocketed (Figure 1).  The change in Mexican immigration law allowed Central Americans to travel to the U.S. border in greater numbers which, combined with the worsening economic and crime problems in Central America, helped exacerbate a surge of non-Mexican (OTM) illegal immigrants and asylum seekers who were overwhelmingly from south of Mexico’s border (Figure 2).  Other non-Mexican legal changes like the Central America-4 Border Control Agreement, that created a visa-less Central America among El Salvador, Guatemala, Honduras, and Nicaragua, also made it cheaper for migrants or UAC from those countries to make it to Mexico and then to the United States.    

 

Figure 1

Southwest Border Monthly Border Patrol Apprehensions of Unaccompanied Alien Children

Source: Customs and Border Protection.

 

Figure 2

Other than Mexican and Mexican Southwest Border Apprehensions

 

Source: Customs and Border Protection.

As the surge of UACs heated up over the summer of 2014, the American government started pushing Mexico to strictly enforce its own immigration laws before the migrants got the American border.  All of a sudden, Mexico’s immigration laws had become too lax and American politicians and commentators were furious.  The hyperbole from the U.S. government rose to such levels that Marine Corps General John Kelly, then-SOUTHCOM chief, said, “[m]any argue these threats are not existential and do not challenge our national security. I disagree.”  The Soviet Union would have been an existential threat if it attacked the United States during the Cold War but it strained General Kelly’s credibility to claim that a surge of UAC and other migrants, equal to a small percentage of legal admissions that year, was a threat to the country’s existence.

During the 2016 presidential campaign, then-candidate Donald Trump blamed the Mexican government for America’s illegal immigrant population and frequently said that he will build a wall that Mexico will pay for.  The Mexican hypocrisy of defending illegal immigrants in the United States while having a strict immigration policy on its own southern border rankled Trump and many of his supporters despite recent changes to Mexican immigration law.      

Recently, President Trump criticized the Mexican government for not enforcing its immigration laws well enough in order to stop the caravan of about 1,000 Central Americans traveling to the U.S. border to ask for asylum.  As soon as the Mexican government largely broke up the caravan, President Trump quickly reversed course and praised Mexican laws for being stronger than American laws.

Mexico has serious problems.  Although it has made some strides in recent years, low economic and individual freedom have produced endemic corruption.  The U.S.-subsidized war on drugs has created a level of violence that occasionally reaches civil-war-level death tolls.  Regardless of those problems, Mexico should cease to be the blame for the failures of American immigration policy.  It is easy for American politicians to blame foreign governments rather than take responsibility for a sclerotic American immigration system that Congress has failed to substantially reform in almost three decades.  Recognition that Mexico has serious problems is at odds with the standard political received-wisdom that we should outsource much of our immigration enforcement policy to the very same government with so many problems.  Better American laws that allow more legal immigration through a cheaper, simpler, and better-enforced system will do a lot more to bring order to the border than relying on the Mexican government.  The policies of foreign government affect immigrant flows to the United States and no reasonable person could claim otherwise but the American political tradition of criticizing Mexican immigration law for either being too strict or not strict enough based on the U.S. news cycle should stop.  

The Congressional Budget Office has released new projections for the federal budget.

If Congress makes no reforms, federal spending is expected to rise from $4.14 trillion this year to $7.05 trillion by 2028, as shown in the chart. The rise represents an annual average growth rate of 5.5 percent, substantially higher than the 4.0 percent expected nominal growth rate of the economy.

The spending increases are expected to push up federal deficits from $804 billion this year to $1.53 trillion by 2028, while jacking up federal debt held by the public from $15.7 trillion this year to $28.7 trillion by 2028.

President Trump wants new spending on a NASA moon mission, but spending on existing programs is already blasting off for unknown fiscal frontiers.

Worried that their spending spree in the recent omnibus bill will suppress conservative turnout at the polls this November, Republicans are now considering a “rescission” package. The package of spending cuts—being designed by the White House—could be passed in Congress with simple majorities in both chambers.

The omnibus increased discretionary spending 13 percent in a single year, with large increases in both defense and domestic (nondefense) spending. The bill passed with majorities of Republicans in both House and Senate, and was signed by President Trump.

Some conservative commentators have suggested that Trump and the GOP did not want to increase domestic spending that much, but were pushed into it by the Democrats. Putting a spending rescission package—with cuts to low-value domestic programs—up for a vote would be a nice test of that theory, as it would not need Democratic votes for passage.

Trump proposed many cuts in his 2018 and 2019 federal budgets. Here are some that would be good candidates to include in a rescission package:

  • Ending the Community Development Block Grant.
  • Ending the Economic Development Administration.
  • Ending Essential Air Service subsidies.
  • Ending the USDA’s rural subsidies.
  • Ending various energy industry subsidies.
  • Ending the Low Income Energy Assistance Program.
  • Ending the Community Services Block Grant.
  • Ending the Weatherization Assistance Program.
  • Ending funding for the NEA, NEH, and CPB.
  • Cutting housing rental subsidies.
  • Cutting job-training subsidies.
  • Cutting farm subsidies.
  • Cutting foreign aid subsidies.
  • Cutting federal retirement benefits.

You can read about the merits of most of these cuts at DownsizingGovernment.org.

On November 24, 2015, Keith Wood stood on a public sidewalk in front of a courthouse in Big Rapids, Michigan, and distributed pamphlets published by the Fully Informed Jury Association (“FIJA”). These pamphlets discussed the history of the jury trial as an ancient and sacred safeguard of liberty, and the jury’s crucial role as the voice of the conscience of the community. It reminded jurors that they have the authority to engage in so-called “jury nullification“ — that is, to refuse to return a guilty verdict when doing so would be manifestly unjust, even if legal guilt was proven.

In other words, Mr. Wood was engaged in speech at the very core of the First Amendment’s aegis: classic political advocacy (peacefully distributing pamphlets) in the quintessential public forum (the sidewalk in front of a courthouse) on a matter of public concern more ancient than Magna Carta, and at the heart of Anglo-Saxon law (the rights, duties, and independence of citizen jurors). But Mr. Wood’s advocacy nevertheless led to his arrest and conviction for violating a Michigan “jury tampering” statute that makes it a crime for anyone to “willfully attempt[] to influence the decision of a juror in any case by argument or persuasion, other than as part of the proceedings in open court in the trial of the case.” Incredibly, neither the trial court nor the first-level appellate court thought there were any free-speech concerns with Mr. Wood’s conviction.

The Cato Institute has therefore filed a brief with the Michigan Court of Appeals, urging it to reverse Mr. Wood’s conviction. Under binding Supreme Court precedent, “[g]overnment regulation of speech is content based if a law applies to particular speech because of the topic discussed or the idea or message expressed.” Reed v. Town of Gilbert, 135 S. Ct. 2218, 2227 (2015). That is exactly the case here; the statute specifically targets “argument or persuasion” on a specific subject matter — jury decision-making. The statute is therefore subject to strict scrutiny, which it cannot possibly satisfy. Although states certainly have a compelling interest in protecting the integrity of jury trials, this statute sweeps far beyond this legitimate purpose and implicates massive volumes of speech entitled to the highest degree of First Amendment protection. Moreover, the state has no interest — compelling or otherwise — in preventing Mr. Wood from discussing the history of jury independence, including the jury’s right to engage in “nullification.”

Mr. Wood’s conviction is all the more troubling because the jury trial itself is dwindling to the point of a practical nullity — 97% of federal criminal convictions today are obtained through plea bargaining, not trials. We have, in effect, traded the transparency, accountability, and legitimacy that arises from public jury trials for the simplicity and efficiency of a prosecutor-driven conviction machine. There is no panacea for the jury’s diminishing role in our criminal justice system, but the least that states can do is not exacerbate the situation by singling out for punishment protected speech meant to inform jurors of their rights, obligations, and historical role as the conscience of the community.

April 10th is Equal Pay Day according to the National Committee for Equal Pay. The holiday “symbolizes how far into the year women must work to earn what men earned in the previous year.”

Unfortunately, Equal Pay Day is a holiday created by people that don’t understand economics. If they did, Americans would celebrate the holiday in January.

Equal Pay Day is based on the gender pay gap, which compares the median woman’s wages to the median man’s wages. The resulting 18-percent-plus difference is often portrayed as attributable to gender-based discrimination.

But the gender pay gap is a flawed measure: comparing median men’s and women’s wages doesn’t tell you anything useful. In order to make a fair comparison, researchers must compare male and female workers that have similar characteristics beyond being the middle worker in the income distribution.

Important characteristics include age, education, years of experience, job title, employer, and location. A recent Glassdoor study controlled for these characteristics and the gender pay gap fell from nearly twenty-five percent to around five percent.

Of course, if the remaining five percent gap represents discrimination that is a problem. But the Glassdoor study didn’t control for all relevant characteristics, and it’s likely the adjusted gender pay gap would fall a bit further if it did.

Americans should observe Equal Pay Day part-way through January, assuming the Glassdoor study is correct. Observing Equal Pay Day in January would paint a more accurate picture of the state of gender pay equity.

In a recent Washington Post op-ed on China’s trade practices, Fareed Zakaria concludes by saying: “Getting tough on China is a case where I am willing to give Trump’s unconventional methods a try. Nothing else has worked.” In my view, he gets a number of things wrong in this piece, but he does raise some important issues, and it’s a good jumping off point for a discussion of how China actually behaves in its trade policy, and what the possible responses are.

Zakaria’s main claim is that, “on one big, fundamental point, President Trump is right: China is a trade cheat.” Many people say this, or some variation of it. But what exactly does it mean to be a “trade cheat”?

What Zakaria seems to have in mind is that China is breaking some World Trade Organization (WTO) rules or taking actions that undermine them. Zakaria refers to the recent Section 301 report by USTR, which he says finds evidence that China “uses formal and informal means to block foreign firms from competing in China’s market.” According to this report, he explains, “the Chinese government has increased its intervention in the economy, particularly taking aim at foreign companies,” and he notes that “[a]ll of this directly contradicts Beijing’s commitments when it joined the World Trade Organization in 2001.” Later, he elaborates on the Chinese behavior at issue:

Look at the Chinese economy today. It has managed to block or curb the world’s most advanced and successful technology companies, from Google to Facebook to Amazon. Foreign banks often have to operate with local partners who add zero value — essentially a tax on foreign companies. Foreign manufacturers are forced to share their technology with local partners who then systematically reverse engineer some of the same products and compete against their partners. And then there is cybertheft. The most extensive cyberwarfare waged by a foreign power against the United States is done not by Russia but by China. The targets are American companies, whose secrets and intellectual property are then shared with Chinese competitors.

The difficulty here is that some of this behavior violates WTO rules, while some may not, as WTO rules don’t cover everything. There’s a good case to be made that the forced technology transfer imposed on foreign investors does violate the rules; but some of the cybertheft issues may not be covered.

For the behavior that is covered by WTO rules, the answer is easy: File more WTO complaints. As my colleague Huan Zhu and I have argued, WTO complaints against China are pretty effective. The system is far from perfect, and sometimes governments do not comply immediately and fully, but overall it works and China complies as well as other governments do.

But what about areas that are not covered by the rules? Can China be “cheating” in a more general sense, even if it is not breaking any specific rules, by not behaving “fairly”? One key area, which Zakaria does not mention, is state-owned enterprises (SOEs), which China has a lot of and which often don’t behave in a market-oriented way. Unfortunately, the WTO does not have extensive rules on SOEs. The best approach here is to add new trade rules on SOEs, so as to require these entities to behave in a manner consistent with commercial principles. The Trans Pacific Partnership has some detailed rules on this, and although China was not a member of the TPP, there was the possibility that it would join, or that the SOE rules in there could be used as a model for applying such rules to China in a different trade agreement. But the Trump administration pulled out of the TPP, and the opportunity for the administration to push this in relation to China may have been lost for now.

A similar issue is that China’s tariffs are higher than U.S. tariffs, which is something the Trump administration has complained about. This is true, but it’s within WTO rules. The reason China’s tariffs are higher is that China was fairly poor during the period (1986-1999) when it was negotiating to join the WTO, and therefore it was allowed to take on fewer commitments in some areas. As part of its WTO commitments, China did agree to lower its tariffs from existing levels, but not by as much as wealthier countries had done over the years in a series of trade negotiating rounds.

Since then, of course, China has become wealthier, although it is not nearly as wealthy as the United States. There is a case for China lowering its tariffs further now, but the way to pursue that would be another negotiation. Keep in mind that although China had fewer commitments on tariff reduction, it did take on additional commitments in other areas (so-called “WTO-plus” commitments), so a negotiation of this sort might involve a mix of adding new obligations on China and removing some of the existing ones. That’s probably the most politically viable approach to this issue.

Putting all this together, there should be two components to efforts to address China’s behavior in trade policy: (1) File more WTO complaints, and (2) sit down with China to negotiate new rules (on issues not yet covered, and so that China takes on more liberalization commitments in the areas that are covered). Both of these will work better if the U.S. joins with its trading partners in a coordinated effort. 

I don’t mean to make this sound easy. It would be a lot of work. But Zakaria is missing the mark when he says, “Previous administrations exerted pressure privately, worked within the system and tried to get allies on board, with limited results.” When previous administrations brought WTO complaints, the results were usually pretty good. But there were a lot of possible complaints that were not filed, and the negotiating efforts were fairly limited. Perhaps there were reasons for this, such as a reluctance to press China on trade because the U.S. wanted China’s help on foreign policy issues. But it sounds like now the Trump administration is elevating trade concerns to the fore. If so, there are plenty of opportunities to press China within the system, or to expand and improve that system. 

Some government actions can discourage or “chill” speech. Donald Trump’s tweet storm this week criticizing Amazon head Jeff Bezos may be seeking to chill speech.

Trump argues that the U.S. Post office is subsidizing Amazon’s deliveries. We need not decide whether Trump or Amazon is right about this matter.  The subsidy may not be the issue according to the Wall Street Journal:

Fueling Mr. Trump’s ire is not so much Amazon, the online giant that is revamping the retail industry, but the company’s Chief Executive Officer Jeff Bezos, who also owns The Washington Post, people close to the White House say. Mr. Trump sees Mr. Bezos’s hand in newspaper coverage he dislikes and is lashing out at Amazon as a proxy, these people said.

 The Journal notes that the criticism arose from specific Post stories: 

The president’s most recent flurry of tweets targeting Amazon has coincided with publication of Washington Post stories he dislikes. Over the past week, Mr. Trump has privately complained about two particular Post stories, White House aides and others said: a March 30 article that documented problems at a White House office that vets political appointees and another the following day that depicted Mr. Trump acting more independently of chief of staff John Kelly and other “moderating forces.”

So what, you might think. The president has a right to free speech too, and Bezos is not in jail. If Bezos can’t stand the heat, as the saying goes, he should stay out of the DC kitchen.

But therein lies the free speech problem. Bezos could get out of Trump’s kitchen by telling the editors and reporters at his newspaper to shut up about the President. That would be a classic case of the “chilling effect” of government threats on political speech.

Why would Bezos do that in response to mere criticism by Trump? It’s not as if Trump is an authoritative public figure whose views garner widespread respect. Trumpian attacks might even increase Bezos’ public standing.

But investors might well believe that Trump will follow his criticism with actions to harm Amazon. For example, the administration might reward a $10 billion defense contract to one of Amazon’s rivals. (To be fair, Trump apparently told one of those rivals that the decision was not his to make). The president also appoints the Postal Service governing board that sets postal rates. Any president will have many other ways to harm a critic, especially one whose successful business interacts often with government policies. For these reasons investors might think Amazon had become less valuable after Trump’s tweeting. Indeed Amazon fell 7% and lost close to $60 billion in market value in the week after the public learned that Trump wanted to “go after” the company. 

This whole sorry affair suggests two points, one libertarian, one not so much. The U.S. president stands at the top of a powerful federal government. He has wide discretion over that federal power. Some believe that a benevolent president can use such power to instill “energy to the executive” and improve the world. But a vindictive man overly sensitive to criticism can also use presidential power to harass his critics.

Libertarians focus rightly on the rule of law, but not all restraints on power are written in formal rules. Informal norms can also constrain public officials. We might expect, for example, that an elected official would not directly threaten the value of a business to silence a critic. That expectation appears rather naïve. We may be entering a time when free speech is less free both because it is more threatened and because more sacrifices will be necessary to protect it.

Jeff Bezos is not in jail, but he is lighter in the wallet, at least for now. Will his speech be chilled by this illiberal president? There are reasons for hope. Post officials deny that Bezos intervenes in their coverage of the White House. Amazon is a popular company. Attacking him may not be popular beyond Trump’s base. Bezos built Amazon. He cannot be a weak man given to giving in to bullies. Much depends on what he does next.

Speaking at the National Rx Abuse and Heroin Summit in Atlanta, John Eadie, coordinator for the National Threat Initiative, warned, “We’re now facing a very significant stimulant epidemic.” Abuse of prescription stimulants such as Adderal and Ritalin (used to treat Attention Deficit Disorders) as well as illicit stimulants, like cocaine and methamphetamine, are surging. “No one is paying attention to this,” Eadie said, because the focus has been on opioids.

Law enforcement has seized 15 kilograms of stimulants for every kilogram of heroin it has seized during the last 5 years. The Centers for Disease Control and Prevention reports that psychostimulant overdose deaths rose 30 percent in the past year. There is evidence to suggest stimulant abuse is now outpacing opioid abuse. And the Drug Enforcement Administration reports that cocaine use and availability are at their highest level in a decade.

I wrote here about the resurgence of methamphetamine abuse once meth labs, especially in Mexico, found a substitute for Sudafed after the federal and state governments made it more difficult to obtain. And Oregon health authorities reported overdose deaths from heroin dropped in 2016 to 107 while overdose deaths from methamphetamine rose to 141.

There are lessons to be learned from this news if anyone chooses to learn them. The obvious one is that the “War on Drugs,” America’s longest war, is unwinnable. This lesson was apparently not learned when the nation experimented with alcohol prohibition in the early 20thcentury. When a market exists for willing buyers and sellers, prohibition just drives that market underground. Waging a war on drugs is like playing a game of “Whac-a-mole.”

But the other lesson relates to current opioid policy. Policymakers seem stuck in what should, by now, be an obviously false narrative: that the opioid overdose crisis is a product of doctors prescribing opioids to their patients. And even after considerable reductions in the prescribing and manufacturing of opioids for patients has shifted non-medical users over to heroin and fentanyl—now the dominant causes of opioid deaths—policymakers can’t disabuse themselves of this false narrative. They continue to double down on restricting prescriptions of opioids and make many patients suffer in the process. 

The opioid overdose crisis has always primarily been the result of non-medical users seeking opioids in the illicit market—where the dose, purity, and even the actual identity of a substance can never be known with confidence. 

The resurgence of stimulant abuse and overdose should not be viewed in isolation. It should be integrated with the opioid issue. Both should be viewed in the broader context of substance abuse in the presence of drug prohibition. Sociocultural and psychosocial factors may ultimately explain why the use and abuse of mind altering drugs is on the rise across much of the developed world

As long as policymakers continue using supply-side interventions, hoping to win an unwinnable war, the problem will continue to grow.

The watering holes in Virginia, where I live, don’t seem to show much variety when it comes to advertising happy hour specials. Nor should you blame a lack of creativity on the part of saloon owners. Entrepreneurs like Chef Geoff Tracy have plenty of clever promotions they want to run, from “half priced bottles of wine” on “Wine Down Wednesdays” to “$5 drafts” on “Turn Down For What Tuesdays.” There’s just one problem: in the Old Dominion, it’s literally illegal to talk about happy hour outside of the restaurant.

In Virginia, any happy hour advertisement placed outside of a bar – whether it be a newspaper ad or tweet – is prohibited from including the most important piece of information: the promotion or discount. Businesses are limited to using the generic terms “Happy Hour” or “Drink Special” to describe their offerings. Fun and creativity are forbidden.

Of course, across the Potomac from my home state is a drinking town with a politics problem. Yet nobody seriously suggests that telling customers that appletinis are $2 off between 4pm and 6pm has led to rampant hooliganism in the swamp (not literal hooliganism, at least). The only thing Virginia has accomplished with its crackdown on creativity is to harm consumers, who are kept in the dark on what the market has to offer and prevented from making informed choices about how to spend their time or money. 

These laws aren’t just outdated, or paternalistic, or absurd; they have a real effect on business owners who have to increase their compliance costs and forfeit foot traffic in order to comply. Chef Geoff, for example, has locations not only in Virginia but also in DC and Maryland, where colorful advertising and truthful prices are perfectly legal. So he has to change his ads in Virginia to avoid saying what is perfectly legal (and equally innocuous) elsewhere.

Now, I’ve got a toddler and infant at home, so I’ve left the happy hour game behind. That’s why it’s appropriate that two millennial lawyers – double-shudder – at the Pacific Legal Foundation, Anastasia Boden and Tommy Berry, are the ones representing Chef Geoff in his new lawsuit to strike down Virginia’s ban on truthful speech on tippling. (Full disclosure: Both of these legal eagles are former Cato legal associates, proving once again that we instill only the highest priorities in my shop.)

As a legal matter, the First Amendment doctrine here isn’t mixed or watered-down, but straight-up and neat. The Supreme Court struck down a very similar law in a 1996 case called 44 Liquormart v. Rhode Island. There, Rhode Island had completely banned telling anyone the price of alcohol except for signs attached to the product itself, which could not be visible from outside the building. As the plurality opinion explained, “a State’s paternalistic assumption that the public will use truthful, nonmisleading commercial information unwisely cannot justify a decision to suppress it,” even if the product pertains to a “vice.” As a chaser, the opinion added that “it is perfectly obvious that alternative forms of regulation that would not involve any restriction on speech would be more likely to achieve the State’s goal of promoting temperance.” Both observations are equally true here.

Virginia’s alcohol laws are an outdated and ineffective relic of the Prohibition Era. The days of the inconspicuous speakeasy are long since past – save a few places where hipsters go to pay $16 a cocktail. No one should have to fear being rounded up by the booze police for daring to whisper “two-for-one Ketel One” outside her own bar. The courts should put the Beverage Code’s speech ban on the rocks and serve Virginians a First Amendment win right from the tap.

Back in 2015, candidate Donald Trump caused a stir when he publicly advocated murdering the families of terrorists. At the time, this was widely condemned for its immoral cruelty and as a violation of the laws of war. Richard D. Rosen, director of the Center for Military Law and Policy at the Texas Tech University School of Law, described  “a policy of intentionally and directly targeting the families of terrorists” as “a war crime.” 

To the relief of many, the New York Times  reported  in March 2016 that Trump had “reversed course on his vow to kill the families of terrorists…saying he now recognized that such actions would violate international law.”

A disturbing report published yesterday in the Washington Post suggests President Trump may not have really changed his mind. The Post’s Greg Jaffe reports:

[W]hen the [CIA’s] head of drone operations explained that the CIA had developed special munitions to limit civilian casualties, the president seemed unimpressed. Watching a previously recorded strike in which the agency held off on firing until the target had wandered away from a house with his family inside, Trump asked, “Why did you wait?” one participant in the meeting recalled.

The article is vague about when this incident occurred, but it seems to strongly imply that Trump, as president, discouraged the CIA from taking precautions to limit civilian casualties. If the reporting is accurate, and the implication behind Trump’s question accurately portrayed, it may indicate presidential advocacy of war crimes.

Trump has directed the military to loosen the rules of engagement in its bombing of multiple countries, including Iraq, Syria, Yemen, Afghanistan, and Somalia. Numerous recent  reports  point to a signficant rise in overall deaths as well as confirmed civilian casualties from U.S. bombs over the past fifteen months. According to a Washington Post article last month, in 2017, the number of “people killed in strikes conducted by the U.S.-led coalition” increased by “more than 200 percent over the previous year.” Quoting the watchdog group Airwars, an Associated Press report from October cited the “frequent killing of entire families in likely coalition airstrikes.” 

This should be a major concern to Americans, but as the Washington Post’s media columnist Margaret Sullivan rightly pointed out last month, “the subject, considered a stain on President Barack Obama’s legacy even by many of his supporters, has almost dropped off the map…the American media is paying even less attention now to a topic it never focused on with much zeal.”

To state the obvious, calling for the deliberate killing of civilians should be beyond the pale in American politics. Trump’s alarming question to the CIA, together with the widely reported increase in bombing and civilian casualties during his presidency, should prompt a Congressional inquiry into U.S. combat operations across several countries. Congress has an obligation to check and balance indications of possible executive branch abuse of this kind. 

Two new studies released this week find that medical marijuana laws are associated with lower levels of opioid prescribing for Medicare and Medicaid patients. The authors find that:

 “Medical cannabis policies may be one mechanism that can encourage lower prescription opioid use and serve as a harm abatement tool in the opioid crisis.”

 and:

 “Medical and adult-use marijuana laws have the potential to lower opioid prescribing for Medicaid enrollees, a high-risk population for chronic pain, opioid use disorder, and opioid overdose, and marijuana liberalization may serve as a component of a comprehensive package to tackle the opioid epidemic.” 

These studies add to a growing literature suggesting that marijuana legalization, not stronger prohibition, will help address the current opioid crisis.

E-Verify is an electronic eligibility for employment verification system run by the federal government. It is supposed to check the identity information of new hires against government databases to see if they are legally eligible to work. The government created E-Verify to deny employment to illegal immigrants as a means of turning off the wage magnet that attracts so many here in the first place, but it has serious and unsolvable problems. Four states have mandated E-Verify for all new hires: Arizona, Alabama, South Carolina, and Mississippi. Their experiences with a state-level E-Verify mandate have produced several lessons of how the program would likely function if Congress ever mandated it nationwide.

The first lesson is that E-Verify data is insufficiently detailed to gauge the program’s effectiveness. As I recently wrote about South Carolina, there were several quarters from 2012 through 2014 where there were more E-Verify checks than there were new hires (Table 1). Under the smooth and lawful operation of E-Verify, as its architects intended, that is not supposed to happen by the wide margins reported below except in communities where the number of illegal immigrants is grossly disproportionate to the size of the population (not the case here). Rather than running a single E-Verify check for each new hire, employers ran more checks than were required in South Carolina. There are innocent explanations for this, such as simple corrections to human error, but also potentially destructive explanations like pre-screening of applicants by employers. Knowing the number of E-Verify checks run per each individual new hire would help estimate accurate compliance rates. Regardless, the number of E-Verify checks is greater than the number of hires. This means we cannot know how many new hires are actually run through the system in states where 100 percent of them are supposed to be. That makes accurately measuring compliance rates impossible.

Table 1

E-Verify Checks as a Percent of All New Hires

Year Quarter

Arizona

Alabama

South Carolina

Mississippi

2008 2

43.06%

NM

NM

NM

2008 3

50.75%

NM

NM

NM

2008 4

49.90%

NM

NM

NM

2009 1

52.80%

NM

NM

NM

2009 2

45.48%

NM

NM

NM

2009 3

49.89%

NM

NM

NM

2009 4

39.28%

NM

NM

NM

2010 1

47.01%

NM

NM

NM

2010 2

48.10%

NM

NM

NM

2010 3

82.48%

NM

NM

NM

2010 4

59.52%

NM

NM

NM

2011 1

61.18%

NM

NM

NM

2011 2

52.13%

NM

NM

NM

2011 3

55.21%

NM

NM

NM

2011 4

55.05%

NM

NM

55.75%

2012 1

55.51%

NM

NM

34.19%

2012 2

53.68%

NM

80.68%

41.03%

2012 3

58.96%

NM

110.32%

45.57%

2012 4

59.26%

54.68%

117.53%

57.62%

2013 1

63.09%

45.42%

112.93%

44.34%

2013 2

57.66%

40.26%

87.91%

42.15%

2013 3

64.12%

52.99%

118.09%

46.45%

2013 4

60.74%

52.90%

126.95%

51.48%

2014 1

60.98%

41.75%

123.51%

38.34%

2014 2

59.18%

37.48%

89.93%

36.09%

2014 3

66.72%

47.02%

125.32%

42.73%

2014 4

64.85%

51.40%

77.14%

48.22%

2015 1

69.38%

44.29%

73.27%

42.36%

2015 2

61.64%

37.02%

53.27%

35.64%

2015 3

73.61%

47.23%

69.89%

39.77%

2015 4

80.27%

51.60%

73.00%

44.78%

2016 1

84.61%

44.22%

69.86%

39.55%

2016 2

73.17%

39.63%

54.34%

38.46%

2016 3

83.98%

46.94%

69.47%

39.29%

2016 4

92.08%

52.71%

83.80%

49.62%

2017 1

97.87%

43.38%

71.37%

39.30%

2017 2

81.71%

41.27%

62.57%

38.19%

Sources: Department of Homeland Security and Longitudinal Employer-Household Dynamics Survey

Note: NM means “no E-Verify mandate.”

The second lesson is that compliance rates are likely very low. Figure 1 shows the E-Verify compliance rates as the percent of new hires run through E-Verify in each quarter in states where the program is mandated. As mentioned before, these compliance rates include every E-Verify check by participating employers in these states and many are for the same new hire, so they all look higher than they are on the ground. According to the rosy data presented above, that is likely impossible as only about 61 percent of all new hires who were supposed to be run through E-Verify in these states in the second quarter of 2017 were actually checked (Figure 1). That is a low level of compliance. 

Figure 1

E-Verify Compliance Rates in States with Mandated E-Verify

 

Sources: Department of Homeland Security and Longitudinal Employer-Household Dynamics Survey

The third lesson is that laws do not enforce themselves. It is easy for any level of government to pass a law declaring that E-Verify is now mandatory for all new hires. Enforcing that labor market regulation is a different challenge that requires workplace visits, inspections, and audits. Other than South Carolina, which has a remote audit program run by the state Department of Labor, Licensing, and Regulation, there is no enforcement of E-Verify by states that mandate its use for all new hires. To make matters worse, South Carolina’s audits might make the E-Verify data less reliable as employers check the same employees multiple times just to make sure they pass remote audits. Worst of all, we do not even know how often E-Verify succeeds in denying employment to illegal immigrants. South Carolina’s audits only measure if E-Verify is used, not whether it succeeds in its goal.

E-Verify is an expensive and intrusive labor market regulation that mostly affects American citizens, as every person needs to be run through it in order for it to have a hope of working. Members of Congress introduce bills to mandate it nationwide nearly every session. It is time that policymakers in Washington, DC look at the states where E-Verify is mandatory to judge how it works in reality rather than relying on Pollyanish odes about its intended effects. The low E-Verify compliance rates in states where the program is mandated point to serious problems that its cheerleaders must directly address.

Yesterday I was on a panel at Heritage looking at a Swiss-style debt brake and whether it was appropriate for the US.

US federal debt is now at its highest level as a proportion of GDP since 1950. Even prior to the recent tax cuts and budget-cap busting omnibus spending deal, debt was forecast to rise to 150 percent of GDP over the next three decades, primarily due to an aging population interacting with existing entitlement promises. Next week the Congressional Budget Office will publish its economic and fiscal outlook, which will show much higher deficits over the coming years following recent policy changes, and hence an even worse baseline of debt to ride into this fiscal headwind. Analysts expect the annual deficit could rise to around 5.3 percent of GDP in the next year or so.

Why does this matter from an economic perspective?

There are good economic reasons why we should desire a lower long-term debt-to-GDP ratio. For starters, a lower debt burden is insurance against the kind of “earthquake” debt crisis that John Cochrane and his Hoover Institution colleagues wrote about in the Washington Post last week. There are also obviously significant intergenerational consequences for taxpayers stemming from continually kicking the can down the road with ever-rising accumulated debt, with rising debt interest payments taking up a much higher proportion of government spending.

But a new Dallas Fed Economic Letter builds on previous research suggesting potentially the most damaging consequence: a rising debt trajectory seems to be associated with slower economic growth.

Back in the early part of this decade there was a huge debate about this. Ken Rogoff and Carmen Reinhart published a paper suggesting that growth across countries tended to slow substantially when government debt exceeded 90 percent of GDP. This “threshold effect” was taken by some commentators and politicians as gospel, but economists were more skeptical of thinking 90 percent represented a magical threshold beyond which disaster would strike. Then mistakes were found in the Reinhart-Rogoff work, and that hook was used to discredit the idea that there was a negative transmission mechanism between high debt and low growth at all.

This was an overreaction. Reinhart and Rogoff were not the only ones to find such an association. In fact, there was a lot of evidence out there that high debts were associated with slower growth. Stephen Cecchetti, M. S. Mohanty, and Fabrizio Zampolli identified a debt-to-GDP threshold of about 85 percent as a point beyond which growth tends to slow. Even Thomas Herndon, Michael Ash, and Robert Pollin, who replicated Reinhart and Rogoff’s work correcting for the errors, found that, on average, growth was 1 percentage point per year lower when government debt exceeded 90 percent of GDP than when debt levels were between 60 and 90 percent.

That’s what makes the new Dallas Fed note so interesting. They acknowledge, in line with basic intuition, that “the debt–growth relationship is complex, varying across countries and affected by global factors.” They also highlight the problem of disentangling the two-way causality between the two, and the possibility of discontinuities. Nevertheless, looking at a panel of advanced and emerging economies they conclude:

persistent accumulation of public debt over long periods is associated with a lower level of economic activity. Moreover, the evidence suggests that debt trajectory can have more important consequences for economic growth than the level of debt to gross domestic product (GDP).

Although there is no universally applicable threshold beyond which growth slows, countries with “rising debt-to-GDP ratios exceeding 60 percent tend to have lower real output growth rates.” What’s more, persistent accumulations of debt are associated with worse long-run growth outcomes:

These estimates are all negative and in the range of -5.7 to -9.4 percent, suggesting that a persistent accumulation in the debt-to-GDP ratio at an annual pace of 3 percent is eventually associated with annual GDP growth outcomes that are 0.2 to 0.3 percentage points lower on average.

Though the authors are careful to point out that this does not prove causality, the study does present evidence that if there is a transmission mechanism from high debt to low growth, the key to overcoming it is credible commitments and action to ensure debt increases are temporary phenomena. For the US federal government, rising debt looks a permanent reality right now as far as the eye can see.

For more on how fiscal rules could help play a part in changing this, read here.

And here’s the full discussion at Heritage from yesterday.

In the May/June 1983 issue of Regulation, economist Bruce Yandle outlined a theory of regulation he referred to as “bootleggers and Baptists.” Using the example of laws forcing bars to close on Sundays, Yandle explains how well-intentioned Baptists worried about the “dangers” of alcohol and self-interested bootleggers hoping to profit when bars are closed both support the law for fundamentally different reasons.

While public discourse over regulation frequently identifies the “Baptists,” the role of “bootleggers” is often ignored. For example, a recent New York Times article discussing the Gun Control Act of 1968 overlooks the influence of U.S. gun manufacturers. The article describes the Act as a response to the assassinations of Martin Luther King Jr. and Robert F. Kennedy, which motivated President Lyndon Johnson to call for gun control legislation.

While the assassinations did propel the gun control movement, the Gun Control Act was also a chapter in a long running battle between U.S. gun manufacturers and importers of foreign firearms. In the fall 2015 issue of Regulation, Joseph Michael Newhard recounts the history of gun control legislation and contends that U.S. manufacturers have frequently benefitted from gun control legislation that reduces their competition.

The 1968 Gun Control Act was no different. Limits were imposed on foreign imports and manufacturers, importers, and dealers were forced to be licensed, reducing the ability of individuals to sell firearms. Instead of a decline in firearms sales in the United States, the law simply transferred profits originally going to importers to manufacturers. As the Times reported on May 4, 1969, the Act,

which barred the importation of cheap, concealable-type handguns, is being defeated by the domestic manufacture of the guns or by the importation of foreign parts for assembly in this country….A domestic industry is thus blossoming to meet the brisk demand and will soon be turning out about 500,000 cheap pistols a year, compared to roughly 75,000 made here before the import restriction.

The recent Times article, however, ignores the role of gun manufacturers and the benefits the Act conferred to them. The article focuses on provisions that were ultimately left out of the act—namely, licensing and registration requirements—because of political pressure and lobbying by the NRA. The fact that provisions that directly benefitted gun manufacturers survived political opposition and remained in the final bill is a testament to the power of bootleggers and Baptists.

Written with research assistance from David Kemp.

The Surgeon General issued an “Advisory on Naloxone and Opioid Overdose” today, drawing attention to the effectiveness of the opioid overdose antidote naloxone. The drug, approved for use since 1971, is an effective remedy that can be safely administered by lay personnel who receive basic instructions. The Advisory cites research demonstrating that community-based overdose education and naloxone distribution reduces overdose deaths, and points out that first responders in most states and communities are now equipped with the drug.

Because naloxone is available only by prescription, most states have developed workarounds to make it more available to patients and, in some cases, third parties who have proximity to medical and non-medical opioid users. This way, witnesses to an overdose can be capable of rescuing the victim. This usually involves a state authorizing pharmacists to prescribe the drug or, in many cases, the state health director, acting as the state’s physician, issuing a “standing order” to pharmacists to distribute it.

The Advisory lists a number of conditions and situations that might place a person at risk of opioid overdose and encourages such people, or people who know them, to avail themselves of naloxone. It supports efforts at wider distribution at the community level.

Unfortunately, because of the stigma that has developed in association with opioid use, many opioid patients are reluctant to speak to the pharmacist and request a naloxone prescription. In some states, the naloxone will not be prescribed to third parties who know an opioid user. Also, numerous instances have been reported where pharmacists are reluctant to prescribe the antidote, believing they are “enabling” a drug abuser.

Recognizing this obstacle to naloxone distribution, Australia made it available over-the-counter in 2016, making it as easy to purchase as cold remedies or antacids. This way medical and nonmedical opioid users can discreetly make a purchase and check out at the cash register without having to answer any questions or face scrutiny from a pharmacist. The drug has been over-the-counter in Italy for over 20 years.

Based upon an August 2016 blog post, the Food and Drug Administration thinks it is reasonable to consider reclassifying naloxone as over-the-counter, and the FDA Deputy Director stated in the post that the agency would be willing to assist manufacturers in submitting applications for reclassification. But FDA regulations allow the commissioner to order a rescheduling review and allow petitions for OTC rescheduling from “any interested person”—not just drug manufacturers.

I’ve argued here that the FDA Commissioner should order an expedited reclassification review, and, if the Commissioner is unwilling to do so, then the Secretary of Health and Human Services—or even Congress—can see that it occurs. I’ve also contended that state legislatures—or even governors—as interested parties, can formally request an FDA review.

The Surgeon General’s April 5th Advisory singing the praises of naloxone and calling for its wider distribution in communities across the nation makes it obvious that the Surgeon General is an interested party.  Because he thinks naloxone should be used more to reduce overdose deaths, the Surgeon General should formally request that the FDA Commissioner order an expedited review of naloxone in hopes that it will be available over-the-counter as quickly as possible.

The Federal Reserve Bank of New York has made its decision. On June 18 of this year John Williams, currently serving as the President of the Federal Reserve Bank of San Francisco, will succeed William Dudley as New York Fed President. This decision will have many ramifications in the years to come, but several key points immediately stand out.

It means that Jerome Powell, the newly minted chair of the Fed, who is a lawyer not an economist, will have someone steeped in monetary policy by his side on the Federal Open Market Committee (FOMC) — the NY Fed President serves as the vice chair of the FOMC and is a permanent voter.

Williams has spent nearly his entire career within the Federal Reserve System. A student of John Taylor, Williams earned his PhD in 1994 at Stanford and immediately went to work at the Board of Governors. He stayed at the Board until 2002 when he moved to the San Francisco Fed. In 2011, Williams succeeded Janet Yellen as president there, having served as her research director.

The move to NY continues Williams’ ascension through the ranks of the Fed. While the NY Fed is one of a dozen regional banks, it is far and away the most important.

As president of the San Francisco Fed, Williams was already a voter on this year’s FOMC, but leading the NY Fed gives him a vote every year — the San Francisco Fed President votes only once every three years.

With the trading desk housed at the NY Fed, it is responsible for executing the monetary policy decisions of the FOMC. The NY Fed’s special placement makes its president one of the top three officials within the Federal Reserve System — along with the Vice Chair of the Board and, of course, the Fed Chair.

While Williams has never worked directly in financial markets, that fact should not be seen as a criticism. His career in monetary policy complements Chair Powell’s business background, which is important as long as the Vice Chair of the Board remains a vacant seat. Furthermore, and perhaps because he has not worked directly in markets, Williams understands that monetary policy should not overreact to short term data, particularly drops in financial markets. In his most recent speech, he said that there is no reason to expect a “knee-jerk reaction” from the Fed in response to recent events.

Williams’ specific monetary policy expertise is important in additional ways.

For nearly twenty years Williams has been discussing ways to measure the natural rate of interest (r*), which is a key input into many monetary policy rules, including the Taylor Rule. Though r* had been declining shortly before the Great Recession, it fell sharply during the financial crisis and has not recovered. This line of research has led Williams to the conclusion that the Fed is quite likely to be at the Zero Lower Bound again during future downturns. Because of this, Williams has become one of the most prominent advocates inside the Fed for finding an alternative target for conducting monetary policy. His preferred alternative to the Fed’s current inflation rate target is price-level targeting.

Targeting the inflation rate means that policy errors are ignored going forward. When the Fed undershoots its inflation rate, as it has almost without exception since adopting it in 2012, it doesn’t take corrective action to atone for those errors. Price level targeting, on the other hand, does correct for these mistakes by returning the price level to its overall trend. Level targeting offers a stability that inflation rate targeting cannot.

While Williams should be commended for his willingness to rethink the central bank’s inflation target from within the Fed, a price level target is not the answer.

Level targeting is certainly preferable to targeting the growth rate of a nominal variable, like the inflation rate, because level targeting obliges a central bank to make up for past policy errors. But price level targeting can sometimes contribute to the business cycle.

For example, when there is a negative real shock to the economy, like a decline in the output of oil, the price level will naturally tend to rise. Yet Fed tightening under these circumstances would only cause output to fall still further. (Williams, to his credit, admitted that adverse supply shocks would pose a challenge to a price level targeting central bank when I asked him about this at a recent Shadow Open Market Committee event).

A central bank that keeps the price level stable despite rapid productivity growth may, on the other hand, overheat the economy. Partly for these reasons, there is little reason to believe that price level targeting would have improved the Fed’s performance during the financial crisis and Great Recession, even if it might have improved upon the Fed’s actual policies at other times.

That said, John Williams is a monetary policy expert steeped in decades of research that shows evolution in his thinking — which, over the years, has earned him a reputation as a data-driven Fed official. As more economists call for a new target, we can hope he joins them in seeing the benefits of a nominal GDP level target over a price level target.

And critically important, at the NY Fed he will see the new operating framework up close and speak to those in charge of executing it on a daily basis. Janet Yellen called the new operating framework, particularly the interest rate paid on banks’ reserves, the key tool for monetary policy. Powell at his first press conference said there was essentially no decision made or forthcoming on whether the Fed will return to the corridor system used before the crisis.

Let us hope that Williams uses his expertise to critically examine the new operating framework during his leadership of the NY Fed — particularly the role this operating system may be playing in the Fed’s inability to reach its inflation target for years.

There are of course still many open questions regarding the future conduct of monetary policy, including how much the balance sheet will shrink, and whether the Fed will ever return to its pre-crisis operating framework based upon a market-determined federal funds rate. The New York Fed will play a lead role in deciding how such questions will be answered. Williams’ openness to new ideas and in engaging his colleagues, scholars, and the public on monetary policy issues is a good sign for those interested in the debate about how the Fed should conduct monetary policy.

[Cross-posted from Alt-M.org]

Conservative groups including the Heritage Foundation are circulating a proposal that builds on legislation by Sens. Lindsay Graham (R-SC) and Bill Cassidy (R-LA) to overhaul ObamaCare. Even though I don’t know whether Graham and Cassidy have endorsed these updates, I will go ahead and call this proposal Graham-Cassidy 2.0. The proposal seems ill-advised, particularly since there is an alternative that is not only far superior in terms of policy, but also an easier political lift that would deliver more political benefit.

The key to evaluating any proposal to overhaul ObamaCare is to understand the law’s centerpiece is its pre-existing conditions provisions. Those provisions are actually a bundle of regulations, including a requirement that insurers offer coverage to all comers, restrictions on underwriting on the basis of age, an outright prohibition on underwriting on the basis of health, and a requirement that insurers treat different market segments as being part of a single risk pool. ObamaCare’s preexisting-conditions provisions have the unintended and harmful effect of penalizing high-quality coverage and rewarding low-quality coverage. ObamaCare contains other harmful regulations, but its preexisting-conditions provisions are by far the worst. Unless a proposal would repeal or completely free consumers from ObamaCare’s preexisting-conditions provisions, it is simply nibbling around the edges.

From what I have seen, Graham-Cassidy 2.0 nibbles around the edges.

To its credit, Graham-Cassidy 2.0 would zero-out funding for and repeal the entitlements to both ObamaCare’s premium-assistance tax credits (read: Exchange subsidies) and benefits under the Medicaid expansion. Unfortunately, it would not repeal that spending. Instead, it would take that money and send it to states in the form of block grants. The aggregate spending level for those block grants would grow more slowly over time than Exchange subsidies and federal Medicaid-expansion grants would under current law.

Limiting the growth of those spending streams seems like a better idea than letting them grow without limit, as current law allows. However, there is more downside than upside here.

First, Graham-Cassidy 2.0 would transform a purely federal spending stream into a intergovernmental transfer. At present, Exchange subsidies are payments the federal government makes to private insurance companies. Under Graham-Cassidy 2.0 (and 1.0), the feds would send those funds to states, which would use them to subsidize health insurance in various ways. Roping in a second layer of government diffuses responsibility and reduces accountability, regardless of whether the feds send those funds to states in the form of a block grant. Voters who don’t like how those funds are being spent would have difficulty knowing which level of government to blame, and whichever level of government is actually responsible could avoid accountability by blaming the other. Intergovernmental transfers are so inherently corrupting, there should be a constitutional amendment prohibiting them. And yet Graham-Cassidy 2.0 would substitute an intergovernmental transfer for spending with clearer lines of accountability.

Second, Graham-Cassidy 2.0 also diffuses accountability for ObamaCare’s preexisting-conditions provisions. Those provisions would continue to operate (with slight modifications). As a result, they would continue to destabilize the individual market, punish high-quality coverage, and reward low-quality coverage. The purpose of the Exchange subsidies is to mitigate that instability. Today, it is clear that Congress is responsible for any harm those provisions inflict, and the success or failure of the Exchange subsidies to mitigate those harms. Graham-Cassidy 2.0 would give that money to states and task them with mitigating those harms. When states fail to do so, as at least some states inevitably will, whom should voters blame? Congress, which started the fire? Or states, to whom Congress handed the fire extinguisher?

Third, while Graham-Cassidy 2.0 would eliminate two federal entitlements, eliminating entitlements is desirable only to the extent it limits government control over economic resources—in this case, spending. And while Graham-Cassidy 2.0 proposes to hold the growth of this repurposed ObamaCare spending below what it would be under current law, there is reason to doubt such a spending limitation would hold.

When examining the merits of any policy proposal, one must also consider the political dynamics the proposal would unleash. Generally speaking, states are a more politically powerful and sympathetic constituency than the current recipients of Exchange subsidies (private insurance companies). States have been able to use that political clout to get Congress to disregard the spending limits it imposed on SCHIP, for example, when so-called emergencies led states to blow through their initial allotments. Moreover, since Graham-Cassidy 2.0 would preserve ObamaCare’s preexisting-conditions provisions, it would come with its own built-in emergencies. As sure as the sun rises in the East, states will come to Congress and claim their block-grant allocations were insufficient to mitigate the resulting harms. Congress would be unlikely to say no—members rely on state officials for political support, after all—which means the spending restraints in Graham-Cassidy 2.0 are less than guaranteed.

Fourth, also pushing the direction of bigger government, Graham-Cassidy 2.0 would expand the constituency for ObamaCare spending. At present, the money the federal government spends on ObamaCare’s Medicaid expansion does not enjoy the support of the 19 states that have not implemented the expansion. The block grants in Graham-Cassidy 2.0, by contrast, would go to all states. As a result, non-expansion states like Texas would go from not caring about whether that federal spending continues to insisting that it does. At the same time, Graham-Cassidy 2.0 would expand the constituency of voters who want to preserve that spending. At present, able-bodied, childless adults in non-expansion states receive no benefit from ObamaCare’s Medicaid expansion or its Exchange subsidies. Graham-Cassidy 2.0 would allow (and in some cases require) states to provide subsidies to such adults below the poverty level, thereby creating another constituency that will reliably vote to expand those subsidies.

Fifth, a provision of Graham-Cassidy 2.0 that supporters consider a selling point would expand the constituency for more spending yet again. The proposal would require all states to allow all able-bodied, non-elderly Medicaid enrollees to use their Medicaid subsidy to purchase private insurance. Since greater choice would make Medicaid enrollment more valuable, and since roughly one third of people who are eligible for Medicaid are not enrolled, this would perversely lead to a large “woodwork effect,” where people who were previously eligible for Medicaid but not enrolled begin to enroll in the program. When Medicaid enrollment increases, so will Medicaid spending, and so will the population of voters who are willing to vote for higher Medicaid spending and the higher taxes required to finance it.

Since Graham-Cassidy 2.0 would preserve ObamaCare’s preexisting-conditions provisions, it is hard to see what would justify taking these one or two uncertain steps forward and multiple steps backward.

This is particularly true since there is a much better alternative on the table: strongly encouraging the Trump administration to allow insurers to offer short-term health insurance plans with renewal guarantees that protect enrollees from having their premiums increase because they got sick. Doing so would allow consumers to avoid all of ObamaCare’s unwanted regulatory costs, particularly those imposed by its preexisting-conditions provisions. The Trump administration can create this “freedom option” by administrative rulemaking—comments on the administrations proposed rule are due April 23—which is a much easier political lift than garnering 217 votes in the House and 51 votes in the Senate. Expanding short-term plans would also create salutary political dynamics that would force Democrats begin negotiating a permanent overhaul of ObamaCare.

As of today, Graham-Cassidy 2.0 just can’t compete with that cost-benefit ratio. Every ounce of energy spent on it, rather than on expanding short-term plans, is a waste.

Pages