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Last weekend the Federal Reserve Bank of Kansas City hosted its annual symposium in Jackson Hole. Despite being the Fed’s largest annual event, the symposium has been “fairly boring” for years, in terms of what can be learned about the future of actual policy. This year’s program, Changing Market Structures and Implications for Monetary Policy, was firmly in that tradition—making Jerome Powell’s speech, his first there as Fed Chair, the main event. In it, he covered familiar ground, suggesting that the changes he has begun as Chair are likely to continue.

Powell constructed his remarks around a nautical metaphor of “shifting stars.” In macroeconomic equations a variable has a star superscript (*) on it to indicate it is a fundamental structural feature of the economy. In Powell’s words, these starred values in conventional economic models are the “normal, or “natural,” or “desired” values (e.g. u* for the natural rate of unemployment, r* for the neutral rate of interest, and π* for the optimal inflation rate). In these models the actual data are supposed to fluctuate around these stars. However, the models require estimates for many star values (the exception being desired inflation, which the Fed has chosen to be a 2% annual rate) because they cannot be directly observed, and therefore must be inferred.

These models then use the gaps between actual values and the starred values to guide—or navigate, in Powell’s metaphor—the path of monetary policy. The most famous example being, of course, the Taylor Rule, which calls for interest rate adjustments depending on how far the actual inflation rate is from desired inflation and how far real GDP is from its estimated potential. Powell’s thesis is that as these fundamental values change, particularly as the estimates become more uncertain—as the stars shift so to speak—using them as guides to monetary policy becomes more difficult and less desirable.

His thesis echoes a point he made during his second press conference as Fed Chair when he said policymakers “can’t be too attached to these unobservable variables.” It also underscores Powell’s expressed desire to move the Fed in new directions: less wedded to formal models, open to a broader range of economic views, and potentially towards using monetary policy rules. To be clear, while Powell has outlined these new directions it remains to be seen how and whether such changes will actually be implemented.

A specific example of a new direction—and to my mind the most important comment in the Jackson Hole speech—was Powell’s suggestion that the Fed look beyond inflation in order to detect troubling signs in the economy. A preoccupation with inflation is a serious problem at the Fed, and one that had disastrous consequences in 2008. Indeed, Powell noted that the “destabilizing excesses,” (a term that he should have defined) in advance of the last two recessions showed up in financial market data rather than inflation metrics.

While Powell is more open to monetary policy rules than his predecessors, he’s yet to formally endorse them as anything other than helpful guides in the policymaking process. At Jackson Hole he remarked, “[o]ne general finding is that no single, simple approach to monetary policy is likely to be appropriate across a broad range of plausible scenarios.” This was seen as a rejection of rule-based monetary policy by Mark Spindel, noted Fed watcher and co-author of a political history of the Fed. However, given the shifting stars context of the speech, Powell’s comment should be interpreted as saying that when the uncertainty surrounding the stars is increasing, the usefulness of the policy rules that rely on those stars as inputs is decreasing. In other words, Powell is questioning the use of a mechanical rule, not monetary policy rules more generally.

Such an interpretation is very much in keeping with past statements made by Powell. For example, in 2015, as a Fed Governor, he said he was not in favor of a policy rule that was a simple equation for the Fed to follow in a mechanical fashion. Two years later, Powell said that traditional rules were backward looking, but that monetary policy needs to be forward looking and not overly reliant on past data. Upon becoming Fed Chair early this year, Powell made it a point to tell Congress he found monetary policy rules helpful—a sentiment he reiterated when testifying on the Hill last month.

The good news is that there is a monetary policy rule that is forward looking, not concerned with estimating the “stars,” and robust against an inflation fixation. I am referring to a nominal GDP level target, of course; a monetary policy rule that has been gaining advocates.

Like in years past, there was not a lot of discussion about the future of actual monetary policy at the Jackson Hole symposium. But if Powell really is moving the Federal Reserve towards adopting a rule, he is also beginning to outline a framework that should make a nominal GDP rule the first choice.

[Cross-posted from Alt-M.org]

It would have been natural to assume that partisan gerrymandering would not return as an issue to the Supreme Court until next year at the earliest, the election calendar for this year being too far advanced. But yesterday a federal judicial panel ruled that North Carolina’s U.S. House lines were unconstitutionally biased toward the interests of the Republican Party and suggested that it might impose new lines for November’s vote, even though there would be no time in which to hold a primary for the revised districts. Conducting an election without a primary might seem like a radical remedy, but the court pointed to other offices for which the state of North Carolina provides for election without a preceding primary stage.

If the court takes such a step, it would seem inevitable that defenders of the map will ask for a stay of the ruling from the U.S. Supreme Court. In June, as we know, the Court declined to reach the big constitutional issues on partisan gerrymandering, instead finding ways to send the two cases before it (Gill v. Whitford from Wisconsin and Benisek v. Lamone from Maryland) back to lower courts for more processing. 

In my forthcoming article on Gill and Benisek in the Cato Supreme Court Review, I suggest that with the retirement of Justice Anthony Kennedy, who’d been the swing vote on the issue, litigators from liberal good-government groups might find it prudent to refrain for a while from steering the question back up to the high court, instead biding their time in hopes of new appointments. After all, Kennedy’s replacement, given current political winds, is likely to side with the conservative bloc. But a contrasting and far more daring tactic would be to take advantage of the vacancy to make a move in lower courts now. To quote Rick Hasen’s new analysis at Election Law Blog, “given the current 4-4 split on the Supreme Court, any emergency action could well fail, leaving the lower court opinion in place.” And Hasen spells out the political implications: “if the lower court orders new districts for 2018, and the Supreme Court deadlocks 4-4 on an emergency request to overturn that order, we could have new districts for 2018 only, and that could help Democrats retake control of the U.S. House.”

Those are very big “ifs,” however. As Hasen concedes, “We know that the Supreme Court has not liked interim remedies in redistricting and election cases close to the election, and it has often rolled back such changes.” Moreover, Justices Breyer and Kagan in particular have lately shown considerable willingness to join with conservatives where necessary to find narrow grounds for decision that keep the Court’s steps small and incremental, so as not to risk landmark defeats at the hands of a mobilized 5-4 conservative court. It would not be surprising if one or more liberal Justices join a stay of a drastic order in the North Carolina case rather than set up a 2019 confrontation in such a way as to ensure a maximally ruffled conservative wing.

Some of these issues might come up at Cato’s 17th annual Constitution Day Sept. 17 – mark your calendar now! – where I’ll be discussing the gerrymandering cases on the mid-afternoon panel.

In the first of this series of posts, I explained that the mere presence of fractional-reserve banks itself has little bearing on an economy’s rate of money growth, which mainly depends on the growth rate of its stock of basic (commodity or fiat) money. The one exception to this rule, I said, consists of episodes in which growth in an economy’s money stock, defined broadly to include the public’s holdings of readily-redeemable bank IOUs as well as its holdings of basic money, is due in whole or in part to a decline in bank reserve ratios

In a second post, I pointed out that, while falling bank reserve ratios might in theory be to blame for business booms, a look at some of the more notorious booms shows that they did not in fact coincide with any substantial decline in bank reserve ratios.

In this third and final post, I complete my critique of the “Fractional Reserves lead to Austrian Business Cycles” (FR=ABC) thesis, by showing that, when fractional-reserve banking system reserve ratios do decline, the decline doesn’t necessarily result in a malinvestment boom.

Causes of Changed Bank Reserve Ratios

That historic booms haven’t typically been fueled by falling bank reserve ratios, meaning ratios of commercial bank reserves to commercial bank demand deposits and notes, doesn’t mean that those ratios never decline. In fact they may decline for several reasons. But when they do change, commercial bank reserve ratios usually change gradually rather than rapidly. In contrast central banks, and fiat-money issuing central banks especially, can and sometimes do occasionally expand their balance sheets quite rapidly, if not to a dramatic extent. It’s for this reason that monetary booms are more likely to be fueled by central bank credit operations than by commercial banks’ decision to “skimp” more than usual on reserves.

There are, however, some exceptions to the rule that reserve ratios tend to change only gradually. One of these stems from government regulations, changes in which can lead to reserve ratio changes that are both more substantial and more sudden. Thus in the U.S. during the 1990s changes to minimum bank reserve requirements and the manner of their enforcement led to a considerable decline in actual bank reserve ratios. In contrast, the Federal Reserve’s decision to begin paying interest on bank reserves starting in October 2008, followed by its various rounds of Quantitative Easing, caused bank reserve ratios to increase dramatically.

The other exception concerns cases in which fractional reserve banking is just developing. Obviously as that happens a switch from 100-percent reserves, or its equivalent, to some considerably lower fraction, might take place over a relatively short time span. In England during the last half of the 17th century, for example, the rise first of the goldsmith banks and then of the Bank of England led to a considerable reduction in the demand for monetary gold, its place being taken by a combination of paper notes and readily redeemable deposits.

Yet even that revolutionary change involved a less rapid increase in the role of fiduciary media, with even less significant cyclical implications, than one might first suppose, for several reasons. First, only a relatively small number of persons dealt with banks at first: for the vast majority of people, “money” still meant nothing other than copper and silver coins, plus (for the relatively well-heeled) the occasional gold guinea. Second, bank reserve ratios remained fairly high at first — the best estimates put them at around 30 percent or so — declining only gradually from that relatively high level. Finally, the fact that the change was as yet limited to England and one or two other economies meant that, instead of resulting in any substantial change England’s money stock, level of spending, or price level, it led to a largely contemporaneous outflow of now-surplus gold to the rest of the world. By allowing paper to stand in for specie, in other words, England was able to export that much more precious metal. The same thing occurred in Scotland over the course of the next century, only to a considerably greater degree thanks to the greater freedom enjoyed by Scotland’s banks. It was that development that caused Adam Smith to wax eloquent on the Scottish banking system’s contribution to Scottish economic growth.

Eventually, however, any fractional-reserve banking system tends to settle into a relatively “mature” state, after which, barring changes to government regulations, bank reserve ratios are likely to decline only gradually, if they decline at all, in response to numerous factors including improvements in settlement arrangements, economies of scale, and changes in the liquidity of marketability of banks’ non-reserve assets. For this reason it’s perfectly absurd to treat the relatively rapid expansion of fiduciary media in a fractional-reserve banking system that’s just taking root as illustrating tendencies present within established fractional-reserve banking systems.

Yet that’s just what some proponents of 100-percent banking appear to do. For example, in a relatively recent blog Robert Murphy serves-up the following “standard story of fractional reserve banking”:

Starting originally from a position of 100% reserve banking on demand deposits, the commercial banks look at all of their customers’ deposits of gold in their vaults, and take 80% of them, and lend them out into the community. This pushes down interest rates. But the original rich depositors don’t alter their behavior. Somebody who had planned on spending 8 of his 10 gold coins still does that. So aggregate consumption in the community doesn’t drop. Therefore, to the extent that the sudden drop in interest rates induces new investment projects that wouldn’t have occurred otherwise, there is an unsustainable boom that must eventually end in a bust.

Let pass Murphy’s unfounded — and by now repeatedly-refuted — suggestion that fractional reserve banking started out with bankers’ lending customers’ deposits without the customers knowing it. And forget as well, for the moment, that any banker who funds loans using deposits that the depositors themselves intend spend immediately will go bust in short order. The awkward fact remains that, once a fractional-reserve banking system is established, it cannot go on being established again and again, but instead settles down to a relatively stable reserve ratio. So instead of explaining how fractional reserve banking can give rise to recurring business cycles, the story Murphy offers is one that accounts for only a single, never to be repeated fractional-reserve based cyclical event.

Desirable and Undesirable Reserve Ratio Changes

Finally, a declining banking system reserve ratio doesn’t necessarily imply excessive money creation, lending, or bank maturity mismatching. That’s because, notwithstanding what Murphy and others claim, competing commercial banks generally can’t create money, or loans, out of thin air. Instead, their capacity to lend, like that of other intermediaries, depends crucially on their success at getting members of the public to hold on to their IOUs. The more IOUs bankers’ customers are willing to hold on to, and the fewer they choose to cash in, the more the bankers can afford to lend. If, on the other hand, instead of holding onto a competing bank’s IOUs, the bank’s customers all decide to spend them at once, the bank will fail in short order, and will do so even if its ordinary customers never stage a run on it. All of this goes for the readily redeemable bank IOUs that make up the stock of bank-supplied money no less than for IOUs of other sorts. In other words, contrary to what Robert Murphy suggests in his passage quoted above, it matters a great deal to any banker whether or not persons who have exchanged basic money for his banks’ redeemable claims plan to go on spending, thereby drawing on those claims, or not.

Furthermore, as I show in part II of my book on free banking, in a free or relatively free banking system, meaning one in which there are no legal reserve requirements and banks are free to issue their own circulating currency, bank reserve ratios will tend to change mainly in response to changes in the public’s demand to hold on to bank-money balances. When people choose to increase their holdings of (that is, to put off spending) bank deposits or notes or both, the banks can profitably “stretch” their reserves further, making them support a correspondingly higher quantity of bank money. If, on the other hand, people choose to reduce their holdings of bank money by trying to spend them more aggressively, the banks will be compelled to restrict their lending and raise their reserve ratios. The stock of bank-created money will, in other words, tend to adjust so as to offset opposite changes in money’s velocity, thereby stabilizing the product of the two.

This last result, far from implying a means by which fractional-reserve banks might fuel business cycles, suggests on the contrary that the equilibrium reserve ratio changes in a free banking system can actually help to avoid such cycles. For according to Friedrich Hayek’s writings of the 1930s, in which he develops his theory of the business cycle most fully, avoiding such cycles is a matter of maintaining, not a constant money stock (M), but a constant “total money stream” (MV).

Voluntary and Involuntary Saving

Hayek’s view is, of course, distinct from Murray Rothbard’s, and also from that of many other Austrian critics of fractional reserve banking. But it is also more intuitively appealing. For the Austrian theory of the business cycle attributes unsustainable booms to occasions when bank-financed investment exceeds voluntary saving. Such booms are unsustainable because the unnaturally low interest rates with which they’re associated inevitably give way to higher ones consistent with the public’s voluntary willingness to save. But why should rates rise? They rise because lending in excess of voluntary savings means adding more to the “total money stream” than savers take out of that stream. Eventually that increased money stream will serve to bid up prices. Higher prices will in term raise the demand for loans, pushing interest rates back up. The increase in rates in turn brings the boom to an end, launching the “bust” stage of the cycle.

If, in contrast, banks lend more only to the extent that doing so compensates for the public’s attempts to accumulate balances of bank money, the money stream remains constant. Consequently the increase in bank lending doesn’t result in any general increase in the demand for or prices of goods. There is, in this case, no tendency for either the demand for credit or interest rates to increase. Instead of being self-reversing, the investment “boom,” if it can be called such, is not inevitably self-reversing. Instead, it can go on for as long as the increased demand for fiduciary media persists, and perhaps forever.

As I’m not saying anything here that I haven’t said before, I have a pretty darn good idea what sort of counterarguments to anticipate. Among others I expect to see claims to the effect that people who hold onto balances of bank money (or fiduciary media or “money substitutes” or whatever one wishes to call bank -issued IOUs that serve as regularly-accepted means of exchange) are not “really” engaged in acts of voluntary saving, because they might choose to part with those balances at any time, or because a bank deposit balance or banknote is “neither a present nor a future good,” or something alone these lines.

Balderdash. To “save” is merely to refrain from spending one’s earnings; and one can save by holding on or adding to a bank deposit balance or redeemable banknote no less than by holding on to or accumulating Treasury bonds. That persons who choose to save by accumulating demand deposits do not commit themselves to saving any definite amount for any definite length of time does not make their decision to save any less real: so long as they hold on to bank-issued IOUs, they are devoting a quantity of savings precisely equal to the value of those IOUs to the banks that have them on their books: as Murray Rothbard himself might have put it — though he certainly never did so with regard to the case at hand — such persons have a “demonstrated preference” for not spending, that is, for saving, to the extent that they hold bank IOUs, where “demonstrated preference” refers to the (“praxeological”) insight that, regardless of what some outside expert might claim, peoples’ actual acts of choice supply the only real proof of what they desire or don’t desire.  According to that insight, so long as someone holds a bank balance or IOU, he desires the balance or IOU, and not the things that could be had for it, or any part of it. That is, he desires to be a creditor to the bank against which he holds the balance or IOU.

And so long as banks expand their lending in accord with their customers’ demonstrated preference such acts of saving, and no more, while contracting it as their customers’ willingness to direct their savings to them subsides, the banks’ lending will not contribute to business cycles, Austrian or otherwise.

Of course, real-world monetary systems don’t always conform to the ideal sort of banking system I’ve described, issuing more fiduciary media only to the extent that the public’s real demand for such media has itself increased. While  free banking systems of the sort I theorize about in my book tend to approximate this ideal, real world systems can and sometimes do create credit in excess of the public’s voluntary savings, occasionally without, though (as we’ve seen) most often with, the help of accommodative central banks. But that’s no reason to condemn fractional reserve banking. Instead it’s a reason for looking more deeply into the circumstances that sometimes allow banking and monetary systems to promote business cycles.

In other words, instead of repeating the facile cliché that fractional reserve banking causes business cycles, or condemning fiduciary media tout court, Austrian economists who want to put a stop to such cycles, and to do so without undermining beneficial bank undertakings, should inquire into the factors that sometimes cause banks to create more fiduciary media than their customers either want or need.

[Cross-posted from Alt-M.org]

As I reported before, a group of Chinese investors under the EB-5 immigration program have challenged the government’s illegal practice of counting spouses and minor children of investors against the immigration quota for investors. This practice, however, hurts all legal immigrants because the same provision governs the admission of derivatives of all legal immigrants. Counting derivatives dramatically reduces legal immigration, harming people trying to immigrate legally to the United States. The government finally responded to the lawsuit on Friday, and its response leaves much to be desired.

Background

Section 203 of the Immigration and Nationality Act (INA) provides three broad pathways for legal immigrants to receive green cards (i.e. permanent residence):

(a) Preference allocation for family-sponsored immigrants.—Aliens subject to the worldwide level specified in section 201(c) of this title for family-sponsored immigrants shall be allotted visas as follows …

(b) Preference allocation for employment-based immigrants.—Aliens subject to the worldwide level specified in section 201(d) of this title for employment-based immigrants in a fiscal year shall be allotted visas as follows …

(c) Diversity immigrants… aliens subject to the worldwide level specified in section 201(e) of this title for diversity immigrants shall be allotted visas each fiscal year as follows …

Subsections (a), (b), and (c) of section 203 make the spouses and minor children of the family members, employees-investors, or diversity lottery winners eligible for status. It is only subsection (d) that creates an opportunity for them to immigrate:

(d) Treatment of family members.—A spouse or child… shall, if not otherwise entitled to an immigrant status and the immediate issuance of a visa under subsection (a), (b), or (c), be entitled to the same status, and the same order of consideration provided in the respective subsection, if accompanying or following to join, the spouse or parent.

Nothing in subsection (d) of section 203 applies the “worldwide levels” (or quotas) under subsection (a), (b), or (c) to the spouses and minor children of immigrants. They are then presumptively not subject to those limits.

The Government’s Argument

1) “Although the Court’s analysis should begin with the INA’s text, the meaning the Court ascribes to the statutory text must reflect the statute’s ‘context.’” -P. 19

The most incredible thing about the government’s response is that it explicitly eschews any effort to explain its practice using the language of section 203(d). I expected them to make the incorrect argument that because an immigrant has the “same status” as another immigrant, they are both subject to the same quota. But this is obviously false, for reasons I explain here. Adult children of U.S. citizens are subject to a quota under subsection (a) of section 203, while minor children are not subject to a quota under section 201(b), yet both receive the same immigrant status. What matters is not the status an immigrant has, but under which provision they receive that status—one with a cap or one without a cap. Yet this bad argument is better than what the government argues in its response, which is nothing at all.

2) “Section 203(d) is a means by which a derivative spouse or child can obtain a visa under their principal’s applicable category in Section 203(a), (b) or (c).” Emphasis added, P. 22

This is as close to an explanation as the government gives for its interpretation. It is asserting that dependents don’t receive status under subsection (d) of section 203 which has no quota, but under subsections (a), (b), and (c) which do have quotas. Yet it provides zero textual support for this view. In fact, the investors’ brief (p. 17) cites several provisions where Congress explicitly describes dependents as receiving status under subsection (d): 8 U.S.C. 1101(a)(15)(V); 8 U.S.C. 1154(l)(2)(C); 8 U.S.C. 1186b; 8 U.S.C. 1255(i)(1)(B); and Public Law 107 – 56.

3) “The country cap also explicitly applies to derivatives, as stated in INA section 202(b)… . And since the country cap is a subset of the overall family and employment-based caps, then equally clearly, if the country cap applies to derivatives, then so too do the overall caps” -Pp. 25-26

There are two types of immigration quotas: 1) “worldwide levels” that limit the absolute number of immigrants, and 2) “per-country” levels that limit the share of the worldwide level that a single nationality can receive. Section 202 of the INA does mention rules for counting some spouses and minor children against the per-country limits, but it never references spouses and minor children admitted under section 203(d). That is notable because subsection (d) of section 203 explicitly describes two types of spouses and minor children—those entitled to status under subsection (d) and those “otherwise entitled to immigrant status… under subsection (a), (b), or (c).”

This second group includes, for example, certain special immigrants under subsection (b)(4). The reason that spouses and children of these special immigrants are counted against the limits is that they are part of the definition of a special immigrant (see section 101(a)(27)).  That means that these derivatives have to be counted because they receive status, not under subsection (d) of section 203 which has no cap, but under the capped sections of section 203. Under the government’s view, these provisions that include spouses and children as part of the definition of special immigrants serve no purpose at all, which violates a basic cannon of statutory interpretation. The government is attempting to confuse the two types of derivatives in order to save its erroneous interpretation.

4) “Congressional intent is further demonstrated by the fact that when Congress exempts derivative spouses and children from an applicable numerical cap, it almost always does so explicitly.” -P. 38.

This statement is the opposite of the truth. In support of its statement, it cites a number of categories of nonimmigrants (H-1Bs, H-2Bs, H1-B1s, E-3s, Ts, Us) and special immigrant Iraqis and Afghanis, but in almost every one of its cases that it cites, the spouse or child is part of the definition of the eligible category. For example, H-1Bs are defined in section 101(a)(15)(H) as “an alien… who is coming temporarily to the United States to perform services… in a specialty occupation… and the alien spouse and minor children of any such alien.” In other words, spouses and children start out eligible, and so subject to the quota, so if Congress wanted to exempt them, it had to do so explicitly. But in section 203, spouses and children start out ineligible, and so not subject to a cap, and are separately made eligible under subsection (d), which has no quota so there is no need to explicitly exempt them.

In every comparable case, where the spouses and children start out ineligible and then separately are made eligible, Congress specifically required them to be counted. The Refugee Act of 1980, section 207 of the INA, has a directly comparable provision. Spouses and children are not eligible under the definition of a refugee under section 101(a)(42) and so not subject to the cap on refugees in section 207(a), but section 207(c)(2)(A) makes them eligible, and when it does so, it explicitly states, “Upon the spouse’s or child’s admission to the United States, such admission shall be charged against the numerical limitation …” In other words, exactly the language that isn’t in section 203(d).

 5) “There is a particular reason why Congress would have specified derivative counting in this way in the Refugee Act: unlike the caps at issue in this case, which are set by statute, the refugee cap is established by the President. Thus, the specific derivative provision is a deliberate check on the very broad authority that Congress had otherwise delegated to the President in the Refugee Act.” -P. 40

This explanation simply doesn’t work for the government. Why would Congress need a special “check” on his authority to not count derivatives if, on the government’s theory, the statute requires them to be counted to begin with? It doesn’t make any sense.

6) “Plaintiffs point to a single allegedly contrary provision in the Refugee Act of 1980.” -P. 39

This is just false. The investors’ motion also cites three other directly comparable instances, all of which were enacted at the exact same time as section 203 in 1990 (pp. 21-22). These provisions provided green cards to Hong Kong employees, displaced Tibetans, and transitional diversity visa applicants. In each case, Congress created the category for principal applicants and separately created the eligibility for their spouses and minor children using almost exactly the same language as section 203(d). But in 1991, it amended each provision to require that spouses and children be counted against those quotas. Did the government not actually read the motion or did it misrepresent it?

7) “The 1990 Act contained exactly the same language as the 1965 Act… . When Congress repeats language with a well understood construction in a new statute, it is presumed to intend to continue that same construction.” -P. 23

This is also false. Under the Immigration Act of 1965, derivatives were explicitly required to be counted, being listed in a subsection that began “Aliens who are subject to the numerical limitations specified in section 201(a) shall be allotted visas … as follows:”. The last category was a “spouse or child” of a primary applicant. In 1990, spouses and children became their own subsection, not included in the categories subject to the worldwide limits. The government’s claim is simply untrue.

8) “Plaintiffs contend that the restructuring of Section 203 in the 1990 Act had huge substantive effects by taking EB-5 investors’ spouses and children… completely out of the preference system altogether.”

This is again false. Spouses and children of investors are still part of the preference system as their eligibility is tied to their parents or spouses, and they must wait alongside them. They cannot simply enter “outside the preference system.”

9) “Not once in the thirty years since the 1990 Act was passed has any court ever interpreted the INA in the way Plaintiffs now claim Congress intended all along.” -P. 35

First, the EB-5 backlog didn’t exist until 2014, so they never would have had standing to sue prior to then. Second, this isn’t the first time that the government has been caught miscounting green cards years after it implemented the policy. The Johnson, Nixon, and Ford administrations interpreted the Cuban Adjustment Act of 1966 to count Cubans against the immigration quotas, and almost a decade after the bill’s passage, the Ford administration was sued, and it admitted in court that it was wrong to count them all along. The fact that a practice has occurred for many years does not mean that the practice is correct.

10) “The D.C. Circuit has cautioned that ‘legislative posturing serves no useful purpose …’ …  The isolated floor statements that Plaintiffs cite thus carry little weight in constructing the meaning of the INA’s provisions respecting counting derivatives towards the annual allotments of EB-5 visas.” -P. 33

The government dismisses evidence that I reported on here that clearly indicates that members of Congress explicitly expected that the EB-5 program would admit 10,000 investors, not 3,500 investors and 6,500 derivatives. Some members explicitly described the process through which they envisioned spouses and children entering. While the government is correct that this shouldn’t trump the text of the law, it doesn’t—it reinforces what is already there. The government responds by citing an ambiguous conference committee report on the final bill that does not contradict the floor statements of the members and does not explicitly explain how it deals with the issue of derivatives. This could be because the conference committee was just as interested in determining the outcome of the bill as those individual members and didn’t want to lose members by stating one way or another.

11) “No legislative history even remotely supports the proposition that Congress meant to exclude all derivatives from applicable caps …” -P. 34

This is also false. As explained above, in the Immigration Act of 1990, Congress enacted provisions providing green cards for Hong Kong employees, displaced Tibetans, and transitional diversity visa applicants using the same language as section 203(d). In 1991, Congress amended the 1990 act to explicitly require counting of spouses and minor children of the principals. Here is an example with the change in bold:

(a) In General.–Notwithstanding the numerical limitations in sections 201 and 202 of the Immigration and Nationality Act, there shall be made available to qualified displaced Tibetans described in subsection (b) (or in subsection (d) as the spouse or child of such an alien) 1,000 immigrant visas in the 3-fiscal-year period beginning with fiscal year 1991.

(d) Derivative Status for Spouses and Children.–A spouse or child … shall, if not otherwise entitled to an immigrant status and the immediate issuance of a visa under this section, be entitled to the same status, and the same order of consideration, provided under this section, if accompanying, or following to join, his spouse or parent.

If derivatives were already required to be counted against the quota, it would not have needed to insert any language into this provision, but it did anyway, making its interpretation of this language manifest to all. Congress made this amendment in every relevant place except one: subsection (d) of section 203. This is as close as it gets to positive proof of Congress’s interpretation of the statute.

Conclusion

In summation, the government provides no theory at all of how the plain language of the statute requires counting. Its indirect textual evidence falls flat and even contradicts its claims, and it repeatedly misstates the legislative history. The government concludes by fearmongering about how much legal immigration would increase if it were forced to implement the statute Congress actually passed. But legal immigration isn’t scary, and even it were, it is even scarier to allow the government the power to amend the laws without Congress.

Hours ago, Illinois Gov. Bruce Rauner (R) vetoed legislation that would have subjected enrollees in short-term health insurance plans to higher deductibles, higher administrative costs, higher premiums, and lost coverage. The vetoed bill would have blocked the consumer protections made available in that market by a final rule issued earlier this month by the U.S. Department of Health and Human Services, and would have (further) jeopardized ObamaCare’s risk pools by forcing even more sick patients into those pools.

Short-term plans are exempt from federal health insurance regulations, and as a result offer broader access to providers at a cost that is often 70 percent less than ObamaCare plans.

Rather than allow open competition between those two ways of providing health-insurance protection, the Obama administration sabatoged short-term plans. It forced short-term plan deductibles to reset after three months, and forced consumers in those plans to reenroll every three months, changes that increased administrative costs in that market.

The Obama administration further subjected short-term plan enrollees to medical underwriting after they fell ill – which meant higher premiums and cancelled coverage for the sick. Prior to the Obama rule, a consumer who purchased a short-term plan in January and developed cancer in February would have coverage until the end of December, at which point she could enroll in an ObamaCare plan. The National Association of Insurance Commissioners complained that the Obama rule required that her coverage expire at the end of March – effectively cancelling her coverage and leaving her with no coverage for up to nine months. The Obama administration stripped consumer protections from this market by expanding medical underwriting after enrollees get sick – something Congress has consistently tried to reduce.

Earlier this month, HHS restored and expanded the consumer protections the Obama administration gutted. It allowed short-term plans to cover enrollees for up to 12 months, and allowed insurers to extend short-term plans for up to an additional 24 months, for a total of up to 36 months. These changes allow short-term plans to offer deductibles tallied on an annual basis, rather than deductibles that reset every three months. They spare enrollees and insurers the expense of re-enrolling every three months. Most important, they allow short-term plans to protect enrollees who get sick from medical underwriting at least until they again become eligible to enroll in an ObamaCare plan the following January.

Indeed, HHS clarified that because the agency has no authority to regulate standalone “renewal guarantees” that allow short-term plan enrollees who fall ill to continue paying healthy-person premiums, “it may be possible for a consumer to maintain coverage under short-term, limited-duration insurance policies for extended periods of time” by “stringing together coverage under separate policies offered by the same or different issuers, for total coverage periods that would exceed 36 months.” As HHS Secretary Alex Azar explains, this helps ObamaCare:

Our decision to allow renewability and separate premium protections could also allow consumers to hold on to their short-term coverage if they get sick, rather than going to the exchanges, which improves the exchange risk pools.

I made that very argument in my comments on the proposed rule.

Illinois law automatically adopts whatever rules and definitions the federal government creates for short-term plans. If Illinois legislators had just done nothing, millions of Illinois residents automatically would have had a health insurance option that is more affordable and provides better coverage than ObamaCare.

But this is Illinois.

In their infinite wisdom, Illinois legislators passed legislation that once again would have exposed short-term plan enrollees higher deductibles, higher administrative costs, higher premiums, and cancelled coverage. The bill would have:

  • Required that initial contract terms for short-term plans last no longer than six months. It further provided that such plans could be extended for no more than six additional months.
  • Mandated that consumers who wish to keep purchasing consecutive short-term plans go uninsured for 60 days. Some consumers would inevitably develop expensive conditions during that period, and therefore be left with no coverage until the next ObamaCare open enrollment period. 
  • Prohibited renewal guarantees. The legislation specifically cut off this option. As a result, it would have dumped every single short-term plan enrollee with an expensive illness into the Exchanges. Ironically, Illinois legislators who thought they were bolstering ObamaCare actually passed a bill that would have sabotaged it.

Thankfully, Gov. Rauner stopped this ignorant, ridiculous effort to deny consumer protections to short-term plan enrollees. All eyes now turn to California, where Gov. Jerry Brown (D) must sign or veto legislation that would deny medical care to those who miss ObamaCare’s open enrollment period – by banning short-term plans altogether.

The Trump administration reached a deal with Mexico today on some bilateral issues in the renegotiation of the North American Free Trade Agreement (NAFTA). Some details of what was agreed are here. Other issues have been reported by the press as having been agreed, but until we see official government announcements, we are skeptical that those issues have been fully resolved.

This is not the conclusion of the NAFTA talks, because there are a number of outstanding issues, and Canada has to be brought back to the table as well. Nevertheless, today’s United States - Mexico deal is in some sense, “progress.” In another sense, however, it is a step backwards. To illustrate this, let’s look at the example of what was agreed on auto tariffs.

NAFTA eliminates tariffs on trade between Canada, Mexico, and the United States, but only for products that meet specific requirements to qualify as being made in North America. For example, you couldn’t make a car in China, ship it to Mexico and put the tires on, and then export it to the United States at the NAFTA zero tariff. Under current NAFTA rules, in order to qualify for duty free treatment, 62.5 percent of the content of a vehicle has to be from the NAFTA countries. 

The Trump administration has been opposed to this content threshold, arguing that it needs to be higher. A key part of the bilateral talks between the United States and Mexico was to address this issue, and also add some conditions related to wage levels.

With regard to the content threshold, the United States has asked for this requirement to be raised, and according to the fact sheet released by USTR, the new content requirement will be increased to 75 percent. On the wage levels, the United States has pushed for a provision that requires 40 percent of the content of light trucks and 45 percent of pickup trucks to be made by workers that earn at least $16 an hour, and Mexico appears to have agreed to this as well. These changes make it harder for Mexican producers to satisfy the conditions to get the zero tariffs, while Canada and the United States would not be affected by this change.

So what’s the point of all this? The goal of the Trump administration’s negotiators was to make it more difficult for autos to qualify for the zero tariffs. In other words, they are taking some of the free trade out of NAFTA.

Along the same lines, reports suggest there is a provision that would allow the United States to charge tariffs above the normal 2.5 percent tariff rate (which applies to countries that don’t have a trade agreement with the United States) for any new auto factories built in Mexico. It is not clear from today’s announcement whether this is included in the newly agreed provisions.

The impact of these changes, if the NAFTA talks are completed and the new rules go into effect, will vary by producer, so it is hard to give a precise assessment of how much it will raise costs overall. The 25 percent auto tariff that the Trump administration is currently considering – ostensibly based on national security, but really just protectionism – is likely to raise auto prices a lot. A recent study estimates that if Trump implements his proposed 25 percent tariff on auto imports, the average price of a compact car would increase by $1,408 to $2,057, while luxury SUVs and crossover vehicle prices could increase by $4,708 to $6,972. No similar study has yet been done for the new NAFTA content requirements, but whatever the final figure may be, it is clear that these stricter content requirements will raise prices to some extent, which will make autos more expensive for consumers and potentially make North American production less competitive.

The NAFTA renegotiation has led to great market uncertainty, and it would be nice to get this all resolved. But before we applaud the completion of any deal, what matters most is in the details. From what we know at the moment, those details suggest that NAFTA may have been made worse, not better. And there are a still a lot of details to work out. A full assessment of the new NAFTA will have to await all of the final terms.

Furthermore, President Trump suggested that while Canada can join soon, it may not be part of the agreement at all, and instead could face a tariff on car exports to the United States. Leaving Canada out of a new NAFTA would be a mistake. On the phone during the announcement, Mexican President Enrique Pena Nieto remarked on more than one occasion that he was looking forward to Canada rejoining the talks. This should be received positively as it suggests Mexico is still committed to a trilateral deal.  What happens next is anyone’s guess, but we should keep our eyes open for the return of Canada’s Foreign Minister Chrystia Freeland to Washington to wrap up the discussions soon. Let’s hope the other changes still under discussion point us in a more positive direction.

Sometimes it’s worth reading the fine print in obscure regulatory proposals. One such example is contained in a “proposed rulemaking” by the EPA on what are called “dose-response models.”

Buried in the Federal Register a few months back (on April 30) is this seemingly innocuous verbiage:

EPA should also incorporate the concept of model uncertainty when needed as a default to optimize dose risk estimation based on major competing models, including linear, threshold, U-shaped, J-shaped and bell-shaped models.

Your eyes glaze over, right?

Instead they should be popping out. EPA is proposing a major change in the way we regulate radiation, carcinogens, and toxic substances in our environment.

Since the 1950s, environmental regulations are largely based upon something called the “linearity-no threshold” (LNT) model, which holds, for example, that the first photon of ionizing radiation has the same probability of causing cancer as the bazillionth one.

The hypothetical mechanism is that each photon has an equal probability of zapping a single base pair in our DNA, and that can result in a breakage which may have the very remote possibility of inducing cancer.

The LNT is in fact fallout from, well, fallout—the radioactive nuclides that were the widely dispersed byproduct of atmospheric testing of nuclear weapons from the 1940s through the early 1960s. University of Massachusetts toxicologist Ed Calabrese has painstakingly built a remarkable literature showing that the LNT was largely the work of one man, a Nobel-prize winning mutation geneticist named Herman Muller. His work was classified by the old Atomic Energy Commission, and, amazingly, as shown by Calabrese, likely not peer reviewed.

His work was also wrong. Since Muller’s early work on x-ray induced mutations in fruit flies, it has since been discovered that DNA breaks all of the time, and that our cells carry their own repair kit. Cancer can occur when they are overwhelmed by large numbers of breakages.

Think of the sun’s radiation, which includes the ionizing ultraviolet wavelengths. The LNT model implies the first photon we experience can cause cancer. In reality there is clearly a threshold above which the cancer probability rises. Everyone is exposed to the sun, but only some populations are prone to basal cell skin cancers and they are in very sunny environments, which explains why it is so prevalent in Australia, and pretty much nonexistent in the planet’s northernmost populated areas.

In fact the LNT model isn’t just wrong—nature actually works opposite to it. Small amounts of exposure to things that are toxic in large amounts can actually be beneficial. Again, consider sunlight. It’s required to catalyze the final synthesis of Vitamin D. Absent Vitamin D, pretty terrible diseases, like Ricketts, with terrible disfigurement and sometimes fatal sequelae.

The alternative model is also largely the handiwork of Dr. Calabrese, which he calls the “biphasic dose-response,” or “hormetic” model. Note this is not homeopathy, which erroneously holds that the smaller the dose of something, the greater the therapeutic effect, which is nonsensical.

The biphasic response is so ubiquitous that it forms much of the basis for modern pharmacology. Small doses of things like certain snake venoms can reduce high blood pressure with all the resultant clinical benefits. Large doses are obviously fatal. In fact, the first Angiotensin Converting Enzyme inhibitor antihypertensives (referred to as ACE inhibitors) were derived from the venom of a Brazilian viper.

The obtuse verbiage quoted from the Federal Register means that EPA is proposing to, where appropriate (and that may be for a large number of instances), substitute other models, including the hormetic one, for the inappropriate LNT.

This rather momentous proposed change owes itself largely to one man—Ed Calabrese, who just happens to be a Cato adjunct scholar in the Center for the Study of Science. Calabrese has hundreds of papers in the scientific literature largely documenting the prevalence of hormesis and the rather shoddy way that the LNT was established and maintained, as well as a tremendous review article on it published last year in one of the Nature family of journals.

Last Thursday, Tucker Carlson invited Peter Kirsanow onto his top-rated Fox News show Tucker Carlson Tonight to discuss illegal immigration and crime. They began the segment by playing a recent clip of me and Carlson arguing about data on illegal immigrant criminality in Texas. In that earlier segment, Carlson said we don’t have good data on illegal immigrant criminality and I said we do, specifically from the state of Texas. The data show that illegal immigrants have a lower murder conviction rate than native-born Americans. 

Kirsanow responded to my clip in a multi-minute near-monologue. Unfortunately, Kirsanow made many errors and misstatements. His comments on television parroted a piece that he wrote earlier this year in National Review. That piece made so many mathematical, definitional, and logical errors that I rebutted it in detail in Reason this February.

Since I was not invited on Thursday’s segment to debate Kirsanow while he criticized my points and presented his own, I’ve decided to respond here.  Below are Kirsanow’s quotes from his recent appearance on Tucker Carlson Tonight, followed by my rebuttal.

There’s something called the State Criminal Alien Assistance Program and you can extrapolate from that and get pretty reliable data.

No, you cannot extrapolate from the State Criminal Alien Assistance Program (SCAAP) data to get reliable national estimates of illegal immigrant criminality. The subsequent statistics that Kirsanow uses in his segment are nearly all from a 2011 Government Accountability Office (GAO) report that specifically says, “[w]hile our analysis provides insight into the costs associated with incarcerating criminal aliens in these states and localities, the results of this analysis are not generalizable to other states and localities.” A follow-up GAO report on SCAAP in 2018 repeated the same warning that “[o]verall, our findings are not generalizable to criminal aliens not included in our federal and state and local study populations.” Data from the report that Kirsanow relies upon cannot be used for Kirsanow’s purposes.

SCAAP is a federal program that is supposed to compensate states and localities for incarcerating some illegal immigrants, but it is not a reliable program. As Kirsanow himself admitted, SCAAP only “partially reimburses states and localities for the cost of incarcerating certain criminal aliens [emphasis added].”  States also must choose whom to report to the federal government for SCAAP refunds, which are often small compared to the cost of incarceration, so requests are inconsistent, partial, and the criteria for reporting vary considerably by state. 

He [Alex Nowrasteh] conveniently mentioned Texas to claim that the homicide rates among illegal aliens is 44 percent lower than that of lawful residents. He chose the one state where it is true that the homicide rate is lower for illegal aliens, by 15 percent, not 44 percent.

Kirsanow is mixing and matching his sources here. First, I said that the homicide conviction rate for illegal immigrants in Texas was 44 percent below that of natives in 2016. Unique among all American states, Texas records criminal convictions by crime and the immigration status of the person convicted or arrested. I requested and received data on this from the Texas Department of Public Safety and then made public information requests to every state to see if they kept similar data, but none had. 

Second, Kirsanow said that Texas is the one state where illegal immigrant homicide rates are below those of natives. Even if we analyze the SCAAP data in the GAO reports in the incorrect way that Kirsanow does, there is no evidence for his claim or that the homicide rate for illegal immigrates in Texas in 15 percent below that of native-born Americans.  Kirsanow was likely citing a Cato Immigration Research and Policy Brief that looked at the relative rates of homicide convictions in Texas in 2015, but he got the percentage wrong. In 2015, illegal immigrants had a homicide conviction rate that was 16 percent below that of native-born Americans according to our Brief. 

There are over 300,000 illegal aliens incarcerated.

Kirsanow got this number from the 2011 GAO report mentioned above. That GAO report does state that there were 295,959 incarcerations of criminal aliens in state and local prisons over the course of 2009. Kirsanow incorrectly interpreted what that number meant and made many other errors. 

First, the GAO’s definition of criminal aliens is “[n]oncitizens who are residing in the United States legally or illegally and are convicted of a crime.” Thus, the data on criminal aliens also include legal immigrants who have not yet become citizens. On television, Kirsanow erroneously assumed that the term criminal aliens is synonymous with illegal immigrants, even though he previously acknowledged the distinction in a National Review article, in which he wrote “[a]ccording to GAO, in FY 2009 295,959 SCAAP criminal aliens, of whom approximately 227,600 are illegal aliens, were incarcerated in state jails and prisons.”  

Second, the 295,959 number is the total number of incarcerations of criminal aliens in 2011, not the number of individual criminal aliens incarcerated. The 2011 GAO report states this bluntly: “SCAAP data do not represent the number of unique individuals since these individuals could be incarcerated in multiple SCAAP jurisdictions during the reporting period.”

In other words, the 295,959 number includes many of the same people who have been incarcerated multiple times. If an individual criminal alien was incarcerated for 10 short sentences, released after each one, and then re-incarcerated, then that single alien would account for 10 incarcerations. But Kirsnaow counted him as 10 separate individuals. In Kirsanow’s piece for National Review on this subject, he then compared the number of native-born individuals incarcerated with their total population to estimate relative incarceration rates. In other words, Kirsanow compares the flow of criminal aliens into prison to the stock of all aliens with the stock of natives in prison compared to the stock of all natives in the entire population. Kirsanow confused stocks and flows and his nonsensical apples-to-oranges comparison produced a relatively higher, but incorrect, illegal immigrant incarceration rate.

Third, a quick look at the American Community Survey shows just how wrong Kirsanow is. In 2009, the ACS reported that there were 162,579 non-citizens incarcerated in all federal, state, and local adult correctional facilities (S2601B, 1-year). This is slightly-more than half of the 295,959 incarcerations that SCAAP reports in just state and local prisons. That makes it logically impossible for the 295,959 number to refer to the total number of criminal aliens incarcerated. The ACS counts stocks at a specific time, the GAO counted some flows. Kirsanow is incorrect for talking about the SCAAP figures as if they are stocks of illegal immigrants incarcerated. 

They don’t count the millions of offenses and crimes committed by illegal aliens.

I wish we could count the millions of crimes committed by people that are unsolved or unreported and then study the demographics of the people who committed them, but that’s impossible. Furthermore, we would have to also have that information for all native-born Americans to make a comparison between the illegal immigrant and native-born crime rates. To go even further, I wish we could count everything that didn’t happen as it would immensely improve our world and social science. In the real world, Kirsanow’s statement does not have much relevance. 

John Lott did probably the most methodologically rigorous and comprehensive examination of this type using Arizona Department of Corrections Data.

Kirsanow approvingly cited this working paper by economist John R. Lott Jr. of the Crime Prevention Research Center, in which he purported to find that illegal immigrants in Arizona from 1985 through 2017 have a far higher prison admission rate than U.S. citizens. However, Lott made a small but fatal error that undermined his entire finding: He misidentified a variable in the dataset. Lott wrote his paper based on a dataset he obtained from the Arizona Department of Corrections (ADC) that lists all admitted prisoners in Arizona. According to Lott, the data allowed him to identify “whether they [the prisoners] are illegal or legal residents.” Yet the dataset does not allow him or anybody else to identify illegal immigrants.

The variable that Lott focused on is “CITIZEN.” That variable is broken down into seven categories. Lott erroneously assumed that the third category, called “non-US citizen and deportable,” only counted illegal immigrants. That is not true because non-US citizen and deportable immigrants are not all illegal immigrants, as confirmed by the ADC – the source of Lott’s data. A significant proportion of non-U.S. citizens who are deported every year are legal immigrants who violate the terms of their visas in one way or the other, frequently by committing crimes. According to the American Immigration Council, about 10 percent of people deported annually are Lawful Permanent Residents or green card holders—and that doesn’t include the non-immigrants on other visas who were lawfully present in the United States and then deported. 

Lott mistakenly chose a variable that combines an unknown number of legal immigrants with an unknown number of illegal immigrants and assumed that it only counted illegal immigrants. Lott correctly observed that “[l]umping together documented and undocumented immigrants (and often naturalized citizens) may mean combining very different groups of people.” Unfortunately, the variable he chose also lumped together legal immigrants and illegal immigrants. I wrote about the fatal flaw in Lott’s paper here in February. Lott and I had an exchange here. Kirsanow should have known that Lott’s paper was not methodologically sound because he misidentified the only variable that mattered for his analysis. Lott’s working paper is not the slam dunk that Kirsanow claimed it was.   

Alex is very knowledgeable and that’s why it’s puzzling that he won’t acknowledge the overwhelming amount of data that shows that illegal aliens not only commit more crimes, at a higher rate that is, than lawful residents but more serious crimes at a far higher rate than legal residents.

As I’ve shown above, Kirsanow misread, misinterpreted, and incorrectly defined numerous terms in the GAO report that was his near-exclusive source of information to make an intellectually indefensible case that illegal immigrants are more likely to be criminals than native-born Americans. What’s even more puzzling is that Kirsanow is aware of his errors after a previous exchange that he and I had on this very issue but he chose to repeat them on television regardless. 

Cato scholars have produced much original research on illegal immigrant criminality.  Based on data from the state of Texas in 2015, we found that illegal immigrants have a lower criminal conviction rate than native-born Americans for most crimes in that state (number of convictions), the rate of homicide convictions for illegal immigrants is below that of native-born Americans in 2016 (the number of people in each subpopulation convicted), and that the incarceration rates for illegal immigrants are below those of native-born Americans (but above those of legal immigrants).  Peer-reviewed research also points in roughly the same direction.   

Policy analysts, commentators, politicians, and members of the media have a duty to honestly parse the facts and debate these complex issues in good faith.

Late last week UPI news ran a report by E.J. Mundell with the headline, “Government efforts to curb opioid prescriptions might have backfired.” It cites two separate studies published online in JAMA Surgery on August 22 that examined two different restrictive opioid policies that fell victim to the Law of Unintended Consequences.

The first study, by researchers at the University of Michigan, evaluated the impact of the Drug Enforcement Administration’s 2014 rescheduling of hydrocodone (Vicodin) from Schedule III to Schedule II. Prescriptions for Schedule III narcotics may be phoned or faxed in by providers, but Schedule II narcotics require the patient to see the prescriber in person in order to obtain a prescription. The DEA’s goal was to reduce the number of Vicodin pills, popular with non-medical users, available for diversion to the black market.

The study looked at 21,955 post-surgical patients across 75 hospitals in Michigan between 2012 and 2015 and found that the number of hydrocodone pills prescribed after the 2014 schedule change increased by an average of seven 5mg tablets. The total Oral Morphine Equivalent of prescribed hydrocodone did not change significantly after the DEA made hydrocodone Schedule II. However, the refill rate decreased after the change. The study’s abstract concluded, “Changing hydrocodone from schedule III to schedule II was associated with an increase in the amount of opioids filled in the initial prescription following surgery.”

As a practicing general surgeon, my initial reaction to this study was: “Tell me something I don’t know.” Prior to the 2014 schedule change, I would often start off prescribing a small amount of hydrocodone to some of my post-op patients (depending upon the procedure and the patient’s medical history) with the knowledge that I can phone in a refill for those patients who were still in need of it for their pain after the initial supply ran out. Once it was rescheduled, I changed my prescribing habits. Not wanting any of my patients to run out after hours, over a weekend, or on a holiday—when the office is closed and their only recourse would be to go to an emergency room or urgent care center to get a prescription refill—I increased the amount I prescribe (based on my best estimate of the maximum amount of days any individual patient might need hydrocodone) to reduce the chances of them needing a refill. This results in some patients having leftover Vicodin pills in their medicine cabinet. On the other hand, fewer of those patients need refills.

Not surprisingly, many of my clinical peers have done the same thing. It’s not a surprise because most physicians place the interests of their patients ahead of the interests of regulators and bureaucrats. So the adjustment made in postoperative hydrocodone prescribing was basically a “no brainer.” 

Unfortunately, in the past couple of years, many states have gone to restricting the number and dosage of pills that can be prescribed postoperatively—in some states the limit is 5 days, in others as few as 3 days—so many patients now must go to the office (or emergency room or urgent care) just a few days after their operation to get that refill after all. The American Medical Association and most medical specialty associations oppose a proposal before the US Senate to impose a national 3-day limit on opioid pill prescriptions

The second study, from researchers at Dartmouth Medical School, evaluated the impact of New Hampshire’s Prescription Drug Monitoring Program on the number of opioid pills prescribed. At this point every state has a PDMP, a program that surveils opioid prescribing and use by providers and patients. New Hampshire’s PDMP went active January 1, 2017. The goal again is to reduce the amount of pills prescribed. 

As I have written here and here there is evidence in the peer-reviewed literature that PDMPs may indeed be intimidating doctors into reducing the number and dosage of pain pills they prescribe—but this is only serving to drive non-medical users to cheaper and more dangerous heroin (often laced with fentanyl) while making patients needlessly suffer.

However, this latest study, which looked at the number of opioids prescribed for postoperative pain to 1057 patients at the Dartmouth-Hitchcock Medical Center during the six months preceding and the six months following the activation of New Hampshire’s PDMP, came to a different conclusion. It found that the mean number of pills prescribed during the six months preceding the PDMP had decreased 22.1 percent, but that during the six months after the PDMP the rate of decrease slowed to just 3.9 percent. It concluded, “A mandatory PDMP query requirement was not significantly associated with the overall rate of opioid prescribing or the mean number of pills prescribed for patients undergoing general surgical procedures.” 

The study is limited by the small number of patients, the limitation to just one hospital, and the short length of follow up. But it does add to the growing body of evidence suggesting that PDMPs are not achieving their mission: reducing the overdose death rate while, at the same time, assuring that patients receive adequate treatment of their pain.

Alas, despite the immutable presence of the Law of Unintended Consequences, don’t expect policymakers to rethink their misguided prohibitionist approach to the opioid overdose problem any time soon.

As you’ve no doubt heard by now, on Tuesday, Michael Cohen, President Trump’s erstwhile “fixer,” pled guilty to, among other charges, making an illegal campaign contribution in the form of a $130,000 “hush money” payment to adult film star Stormy Daniels. That payment was made, Cohen affirmed, “at the direction of a candidate for federal office”—Donald J. Trump—“for the principal purpose of influencing the election.” 

If that’s true, would Trump’s participation in that scheme rise to the level of “high Crimes and Misdemeanors”? Maybe: you can argue it both ways, so I will.

The case against the Stormy payoff as impeachable offense would characterize it as the sort of de minimis legal violation impeachment isn’t concerned with. Just as you don’t need a crime to have an impeachable offense, the commission of a crime doesn’t automatically provide grounds for impeachment. Murder is a crime and an impeachable offense—even according to Rudy Giuliani—but you wouldn’t impeach a president for, say, importing crocodile feet in opaque containers or misappropriating the likeness of “Smokey Bear,” because those offenses don’t speak to his fitness for high office.

Impeachment opponents can argue that the criminal offense alleged here depends on a contested application of the Federal Election Campaign Act. In the 2012 prosecution of John Edwards, three former FEC commissioners testified that third-party payments to Edwards’ pregnant mistress would not have been considered campaign contributions.

The president’s defenders can also—though this may be awkward for some—compare Trump’s troubles to Bill Clinton’s two decades ago: unlawful acts committed as part of a scheme to conceal a private sexual affair. Though many of them sang a different tune in the ‘90s, they can appeal to the dominant historical consensus that impeaching Clinton for that was like wheeling out the proverbial hundred-ton gun to blast a squirrel.

The case that the Stormy payoff is an impeachable offense depends on a different, but equally plausible framing. In Trump’s case, the unlawful act quite plausibly affected the outcome of the 2016 election. Cohen made the payment less than two weeks before Election Day, in what turned out to be an extraordinarily close contest. As Laurence Tribe and Joshua Matz note, the Framers repeatedly identified “corrupt acquisition of the presidency as a paradigm case for impeachment.” One of the Framers’ key concerns was the possibility of a candidate bribing the Electors—an imperfect analogy to what’s alleged in Trump’s case. But impeachment advocates might also point to our most recent impeachment case: Judge G. Thomas Porteous, removed by the Senate in 2010, in part for corrupt acquisition of his post. Article IV of the Porteous impeachment charged the judge with lying to the Senate about his past in order to secure confirmation to the federal bench, thus “depriv[ing] the United States Senate and the public of information that would have had a material impact on his confirmation.”

Jerry Ford went too far when he said that an impeachable offense is “whatever a majority of the House considers it to be at a given moment in history.” Still, the scope of the impeachment power is much broader than is commonly recognized. It covers what Hamilton described as “those offenses which proceed from the misconduct of public men, or, in other words, from the abuse or violation of some public trust.” As the legal scholar Frank Bowman sums up: “‘high crimes and misdemeanors’ are serious offenses that either endanger the political order or demonstrate an official’s manifest unfitness to continue in office.” That leaves ample room for argument and interpretation. Moreover, while legal analysis may be able to tell you when impeachment is permissible in a given case, it can’t tell you whether it’s a good idea.

The fact that Michael Cohen has potentially implicated Donald Trump in a felony violation of federal election law has increased the president’s chances of facing a serious impeachment effort after November. But if impeachment is about guarding the public from officials dangerously unfit to wield power, “broke the law to pay off a mistress” has to be pretty far down the list behind, say, “makes off the cuff threats of nuclear annihilation.” That any impeachment inquiry will likely spend more time parsing the intricacies of federal election law than examining the president’s public conduct is yet another reason to rue the “Overcriminalization of Impeachment.”

This morning, as anticipated, the Trump administration broadened the scope of its punitive tariffs on imports from China. The list of products subject to 25 percent duties increased from 818 to 1,097 harmonized tariff schedule (HTS) subheadings. Last year, the value of these imports from China amounted to roughly $50 billion, so the tax incidence (ceteris paribus), for the sake of the argument, will be roughly $12.5 billion. 

As expected, Beijing retaliated in kind, assessing similar duties on a commensurate value of U.S. exports, which is certain to cause revenues to fall for U.S. producers of the industrial goods and agricultural products subject to those retaliatory tariffs. But let’s not forget the adverse impact of our own tariffs on our own manufacturers, farmers, construction firms, transportation providers, miners, wholesalers, retailers, and just about every other sector of the U.S. economy.

About half the value of U.S. imports consists of intermediate goods (raw materials, industrial inputs, machine parts, etc.) and capital equipment. These are the purchases of U.S. businesses, not households. The vast majority of the Chinese products on the tariff list fit this description. They are nearly all inputs to U.S. production. By hitting these products with tariffs at the border, the Trump administration is, in essence, imposing a tax on U.S. producers. Trump is raising the costs of production in the United States in sector after sector.

How significant is a roughly $12.5 billion tax in a $19 trillion economy? Well, not especially significant when put in that context. But that context masks the burdens directly imposed on the companies that rely on these inputs and indirectly imposed on their workers, vendors, suppliers, and downstream customers.

The Input-Output tables produced by the U.S. Bureau of Economic Analysis reveal—among other things—information about the relationships between industries in the United States. The “Use” tables map the output of all industries to their uses by other industries as inputs, as well as by end users.

The most recent “detailed” tables present the U.S. economy in 2007. The value of total commodity output at the time was $26.2 trillion, of which $14.5 trillion was consumed for end use and $11.7 trillion was consumed as intermediate inputs to further production. The $11.7 trillion dollar value of output from each of 389 industries (defined at the 6-digit NAICS level) is mapped to the input of each of the other 388 industries. In other words, $11.7 trillion of commodity output from 389 industries is simultaneously depicted as $11.7 trillion of intermediate inputs to 389 industries. Although the values of that industry-specific output and input certainly have changed over 10 years, it is not unreasonable to assume a roughly similar composition of input use on a percentage basis.  (Sure, production processes change and, consequently, the inputs demanded change too. But the 2007 table provides the best information available and it should produce some useful results.)

Trump’s tariffs apply to 1,097 products as defined by the Harmonized Tariff Schedule’s 8-digit subheadings. Those 1,097 HTS numbers map to 102 (of 389) 6-digit NAICS codes on the BEA’s Input-Output table. By aggregating the value of those 102 “tariffed” NAICS codes and taking that sum as a percentage of the total intermediate goods consumed, we can get a rough estimate of the burden of the tariffs on each of the 389 industries. (Note: In most cases, the estimate is likely to be higher because many NAICS-6 codes include more HTS-8 codes than are subject to the tariffs.)

Table 1 ($ millions)

As the first line in Table 1 shows, the total value of intermediate goods consumed (in 2007) was $11.7 trillion; the 2007 value of the 102 NAICS codes that include HTS numbers hit with Trump’s tariffs was $1.8 trillion; and the percentage of intermediate goods affected is 15.1%. That’s the average.

The subsequent lines in the table are presented in descending order of impact by sector (2-digit NAICS).  So, the transportation sector consumed $389 billion of intermediate goods in 2007 and $121 billion (or 31.1%) of that consumption is now subject to tariffs. The manufacturing sector consumed $3.5 trillion (almost 30% of the total) of intermediate goods in 2007 and $892 billion (or 25.7%) is now subject to tariffs.

Among those likely to be most burdened by Trump’s tariffs are industries within the manufacturing sector. In fact, every industry with more than 50 percent of their intermediate inputs subject to the tariffs is in the manufacturing sector. Table 2 shows the 25 most exposed industries (at the NAICS-6 level)—those with the greatest percentage of intermediate inputs subject to the tariffs.

Table 2($ millions)

 

Although this analysis doesn’t attempt to get at the actual cost increases that many industries will have to endure, it reinforces and makes clear the fact that tariffs are always about politicians bestowing favors on the few at the expense of many other industries.

Rep. Duncan Hunter is not pleased with the Cato Institute’s efforts to repeal the Jones Act. Taking notice of a recent op-ed I penned criticizing the California congressman’s support of this costly law, Hunter took to the pages of the same newspaper last weekend to defend his stance. It’s worth reviewing the piece in full, as it recycles several arguments typically offered in support of the Jones Act—and exposes some glaring weaknesses.

Hunter begins his defense of the Jones Act by disputing accusations that the law negatively impacts Puerto Rico’s economy:

Like many opponents of the Jones Act, the CATO Institute attempts to conflate this 100-year old law with the struggles of Puerto Rico’s economy. They repeat the same tired argument that the Jones Act is responsible for high prices and economic instability, going so far as to make the ridiculous implication that the Jones Act adds $5 to the cost of a pint of ice cream.

A recent economic study disputed these price discrepancies but if concerns remain, it is important to recognize that Puerto Ricans have other options. Most of the ships that call on Puerto Rico are foreign flagged and current law allows them to deliver as many goods from foreign ports as Puerto Ricans can consume. A 2013 Government Accountability Office Study failed to conclude that removing the Jones Act would benefit Puerto Rico and, in fact, acknowledged that the regulation provides a number of advantages. Other studies have found that the Virgin Islands — approximately 100 miles from Puerto Rico — has no Jones Act requirement, but has higher shipping prices than Puerto Rico from the mainland.

There’s a lot to unpack here, but let’s begin by noting that the “recent economic study” Hunter refers to was funded by a pro-Jones Act special interest group with a questionable methodological approach. Pointing out that Puerto Ricans have options for obtaining needed goods that are not subject to the Jones Act, meanwhile, is essentially telling them to eat cake. The rest of the United States is, by far, Puerto Rico’s largest trading partner. Simply doing business with other countries instead of the world’s largest economy with which Puerto Rico shares deep political and cultural links is oftentimes not a feasible option.

But that doesn’t mean Puerto Ricans don’t try to hunt for cheaper alternatives. The 2013 GAO report cited by Hunter highlights numerous examples of this dynamic, including farmers who purchase feed from Canada instead of New Jersey due to lower shipping costs and the sourcing of jet fuel from Venezuela rather than domestically for the same reason.  

As for the fact that shipping rates are higher to the U.S. Virgin Islands than Puerto Rico, this is an apples to oranges comparison. The U.S. Virgin Islands have a population and economy roughly 30 times smaller than Puerto Rico. With its smaller size comes smaller trade flows, smaller economies of scale, and reduced efficiency in servicing this market that is reflected in higher transport costs.

Hunter then pivots from discounting the Jones Act’s economic cost to Puerto Rico to highlighting its alleged national security benefits:

In a time of war, without the Jones Act, quickly rebuilding our shipyard industrial base would be next to impossible and training the American merchant mariners to man ships would take precious time we will not have. Instead, we would have to rely on shipyards overseas to supply our ships and we would likely have to pay foreign mariners to operate those ships. Is this really a position in the best national security interest of our nation?

We can have the strongest military in the world, but without the ships and U.S. merchant mariners to bring supplies to service members overseas, our capabilities would be severely limited, a position acknowledged by Gen. Darren McDew, Commander of U.S. Transportation Command.

The reality is that the Jones Act has presided over the steady decline of the U.S. shipyard industrial base. Since the early 1980s the United States has lost more than 300 shipyards. It’s a statistic Hunter should be familiar with given that it was mentioned on several occasions during a 2013 congressional hearing that he chaired. Furthermore, claims that the United States would be forced to rely on foreign shipyards without the Jones Act overlooks the existing reliance on foreign components and know-how to produce the few and vastly overpriced commercial ships that emerge from American shipyards.

Dependence on foreigners to support the U.S. military, meanwhile, is a description of the status quo. When the United States found itself needing to quickly transport vast amounts of equipment and war matériel to Saudi Arabia following Iraq’s invasion of Kuwait, foreign-flagged and crewed ships played a key role. According to the U.S. Transportation Command’s official history of its role in that conflict, 26.6 percent of total unit cargo was carried by foreign-flagged vessels.

While Jones Act supporters claim that the law assures the United States of ready access to ships and merchant mariners in times of war, the Pentagon found its transport capabilities so strained during that conflict that it twice requested the use of a transport ship from the Soviet Union—and was rejected both times. On the mariner front, the United States was forced to press two octogenarians into service and one 92-year-old sailor. Turning to the present day, meanwhile, the U.S. Maritime Administration published a 2017 report which, in its own words, “documents a deficit of mariners with unlimited credentials to meet the national security and force projection needs.”

Hunter continues in a similar vein:

The Jones Act also improves our safety and security. Rather than having unvetted foreign workers sail ships on our inland waterways, the Jones Act mitigates safety risks by ensuring that vessels are operated by U.S. mariners only.

Pure demagoguery. Foreign mariners already operate in U.S. waters on a daily basis and present no established threat. As a 2011 GAO report noted, overwhelmingly foreign maritime crews already make millions of entries into U.S. ports each year and yet there has never been a reported terrorist attack involving one of these seafarers. What reason is there to think these same foreign mariners would suddenly become a menace if permitted to operate on inland waters?

Furthermore, Hunter is factually wrong. Foreign mariners are already allowed to work on Jones Act vessels, with the minimum number of American crew set at 75 percent, not 100. As for safety, let’s note that it was a Jones Act ship with an American captain, the Exxon Valdez, that is responsible for one of the worst environmental disasters in U.S. history.

Congressman Hunter concludes with some comments about the Jones Act’s economic impact:

The Jones Act also provides significant economic benefits, including here in Southern California. The thousands of Jones Act vessels support nearly 500,000 domestic jobs with nearly $100 billion in economic impact.

The fact is, there are cheaper places to build ships than the United States, and I am sure that there are plenty of Chinese shipyards with cheap Chinese steel eager to undercut ones here at home. I am also sure we could find cheaper foreign workers to operate the ships currently sailed by Americans.

If building the cheapest ship manned by the lowest paid workers is the end goal, then by all means, let’s get rid of the Jones Act. If you are like me, and you value good paying U.S. jobs in American Shipyards and the Americans who can man those ships in times of conflict, then the Jones Act is clearly worth protecting.

By acknowledging that Americans could buy ships at lower cost abroad—as much as eight times cheaper—Hunter essentially concedes that the law imposes a significant economic cost. Paying vastly more to obtain the same good is the path to impoverishment, not prosperity. The secret to economic growth and an improved standard of living lies in increased efficiency and doing more with less. By blocking Americans from lower-cost alternatives, the Jones Act does the opposite.

The national security advantages we allegedly receive in exchange for the Jones Act’s price tab, meanwhile, are a figment of the imagination. If anything, the law makes us less secure, not more.

The Jones Act isn’t working. Its promised benefits have failed to materialize while the law imposes significant burdens on the U.S. economy. The time for its repeal is long past due.

On August 22, Food and Drug Commissioner Scott Gottlieb issued a press release announcing the FDA plans to contract with the National Academies of Sciences, Engineering, and Medicine (NASEM) to develop evidence-based guidelines for the appropriate prescribing of opioids for acute and post-surgical pain. The press release stated:

The primary scope of this work is to understand what evidence is needed to ensure that all current and future clinical practice guidelines for opioid analgesic prescribing are sufficient, and what research is needed to generate that evidence in a practical and feasible manner.

The FDA will ask NASEM to consult a “broad range of stakeholders” to contribute expert knowledge and opinions regarding existing guidelines and point out emerging evidence and public policy concerns related to the prescribing of opioids, utilizing the expertise within the various medical specialties. 

Recognizing the work of the Centers for Disease Control and Prevention for having “taken an initial step in developing federal guidelines,” Commissioner Gottlieb diplomatically stated the FDA initiative intends to “build on that work by generating evidence-based guidelines where needed” that would differ from the CDC’s endeavor because it would be “indication-specific” and based on “prospectively gathered evidence drawn from evaluations of clinical practice and the treatment of pain.”

The CDC guidelines for prescribing opioids, released in early 2016 and updated in 2017, have been criticized by addiction and pain medicine specialists for not being evidence-based. Unfortunately, these guidelines have been used as the basis for many new prescribing regulations instituted at the state-level and proposed on the federal level. The American Medical Association and other medical specialty organizations have spoken out against proposed federal prescription limits that are based upon an inaccurate interpretation of the flawed CDC guidelines. 

In May, Commissioner Gottlieb, in a blog post, mentioned he was aware of criticisms as well as complaints by patient and patient-advocacy groups and was interested in developing more “evidence-based information” on the matter of opioids and pain management. 

Now it appears he is taking the next step. While the press release language was diplomatic and avoided any notion of disrespect for the CDC’s efforts, it is difficult not to infer that the Commissioner agrees with many who have been criticizing the CDC guidelines over the past couple of years.

 

Sen. Elizabeth Warren’s proposal for drastic changes to corporate governance, which I wrote about in this space last week, continues to draw thoughtful responses from commentators. Colleague Ryan Bourne notes that one study “found that German firms were 27 percent less valuable to their shareholders” because of the workers-on-boards co-determination laws Warren would have us emulate. Moreover, the value given up was not merely transferred to the firms’ workforces but was in part dissipated through inefficiency. At National Review, Samuel Hammond discusses how co-determination undermines the overall dynamism of a national economy (for example, by discouraging the transfer of capital to risky, high-value new enterprises) and also notes some of the problems with making “stakeholder” value a subject of fiduciary duty for investors.  

Now NYU lawprof and Cato adjunct scholar Richard A. Epstein, a leading libertarian voice on law, tackles the Warren plan in a piece for the Hoover Institution’s Defining Ideas series. Epstein’s piece is worth reading in its entirety for his analysis of (among other topics) the “stakeholder” mystique, the efficiency-friendly role of share buybacks and executive incentive stock, and the constitutional infirmities of the overall Warren scheme (citing the unconstitutional-conditions doctrine), as well as his warning that large-scale capital flight from the U.S. could ensue if investors mistrust the whims of a new federal charter regulator.

In the passage I want to highlight, however, Epstein makes a point often overlooked in other critiques. Writing on the popular and populist Left these days often romanticizes the idea that business charters should be revocable by some central authority for misconduct (“corporate death penalty”), although it is often not spelled out whether the assets of a giant bank or oil or pharmaceutical company hit by scandal should be taken into the public sector by some sort of confiscatory state authority, allowed to revert to shareholders, or perhaps transferred to a successor entity that would maintain the same brands and facilities and headquarters as before (leaving the question of what exactly is being accomplished by charter revocation). Epstein takes the broad historical view: 

…Warren wholly misunderstands the historical role and constitutional position of corporate charters. The last thing that any country needs for economic growth is a situation in which government officials decide which firms receive charters subject to what conditions. Does she really think that some public bureaucrat should have the power to refuse to issue Apple a corporate charter unless it puts community members or union members on its board, makes gifts to the Sierra Club, or adopts minimum minority hiring set-asides? And what should be done when thousands of firms balk at these conditions? Can they go to court, or does the federal board run the corporation directly?

Lest anyone forget, the great 19th-century corporate reform was the passage of general incorporation laws that allowed any group of individuals to form a corporation, with its attendant benefit of limited liability, so long as they met certain minimum conditions relating to their capital contributions, their ability to sue and be sued, and their board structures. The new legal regime ushered in sustained economic expansion by knocking out the political favoritism that had previously given some businesses corporate charters that gave them a huge edge over direct competitors denied similar authorization. It would be unsurpassed folly to re-open the doors to these abuses today.

Indeed, a key point about general incorporation laws was that they were egalitarian: you could launch an incorporated venture even if you were obscure, new in town, or out of favor with political influentials. Supporters of plans like Warren’s should be asked whether they really want some combination of political actors – very possibly appointees of Donald Trump or another President like him – to gain power to revoke Google’s or Amazon’s or Facebook’s charter to continue doing business unless the management agrees to cut a deal, perhaps involving private understandings with officialdom, to stave off such a penalty. 

Yesterday, authorities in Iowa charged 24-year old Cristhian Bahena Rivera with the murder of Mollie Tibbetts. Facts in these types of cases come out slowly and some details, substantive or minor, may change in the months ahead that could alter the correct view of this case. But nothing can change the fact that the murder of Tibbetts was a brutal and unforgivable act and that the murderer should be punished to the full extent of the law. Rivera is charged with that murder and there is a lot of evidence to support a conviction.    

This terrible murder is already feeding into a political firestorm. People with a political axe to grind, those who want to distract from the recent conviction of Paul Manafort and plea deal for Michael Cohen, and partisans who want to compare Tibbetts’ murder to the shooting of Kate Steinle in an effort to impact the upcoming November elections are already using the tragic murder of Tibbetts as an argument for increasing the enforcement of immigration laws against people who aren’t charged with murder or any real crime except violating international labor market regulations (immigration laws). They want to convict all illegal immigrants of this murder in the court of public opinion, not just the actual murderer.    

Scarce law enforcement resources should be devoted to solving and deterring the most serious crimes regardless of who commits them.  That is the best policy for saving American lives. That means that increased enforcement of our immigration laws is not a good way to prevent murders.  Illegal immigrants are less likely to be incarcerated for crimes in the United States than native-born AmericansTexas is the only state that keeps data on the number of convictions of illegal immigrants for specific crimes (I state versions of Public Interest Requests to every state). In Texas in 2015, the rate of convictions per 100,000 illegal immigrants was 16 percent lower below that of native-born Americans. That is little consolation to the victims and their families, but the population of illegal immigrants is less likely to be convicted of murder than native-born Americans in Texas. If nationwide incarceration rates by immigration status are any clue, that trend likely holds nationwide. 

I recently received new data from Texas on the number of convictions by crime and immigration status as well as the number of individuals convicted (they are slightly different). This Texas data is the best data that we have on the commission of murder by immigrants by specific legal status.  In 2016, 746 native-born Texans, 32 illegal immigrants, and 28 legal immigrants were convicted of homicide. In that year, the homicide conviction rate for native-born Americans is Texas was 3.2 per 100,000 natives while it was 1.8 per 100,000 illegal immigrants and 0.9 per 100,000 legal immigrants (Figure 1). The illegal immigrant conviction rate for homicide was 56 percent below that of native-born Americans in 2016 in Texas. 

Figure 1: Homicide conviction rates in Texas

To calculate those conviction rates, I used an estimate of the size of the illegal immigrant population in Texas as well as data from the American Community Survey for the number of native-born Americans and legal immigrants. The conviction rates are per each subpopulation of native-born Americans, illegal immigrants, and legal immigrants. Immigration status makes no difference in the reporting of serious crimes like murder or robbery, so these statistics aren’t likely to be biased. Furthermore, states are not likely to turn over illegal immigrants for removal prior to convicting them of serious crimes. 

The Texas homicide conviction rates are consistent with the peer-reviewed evidence on immigrant conviction rates over the last century. Even Mark Krikorian, the executive director of the nativist Center for Immigration Studies, admits that “A lot of data does suggest immigrants are less likely to be involved in crime.”     

Texas isn’t Iowa and the reality in the latter state could be markedly different, but the state of Texas probably represents a near-worst-case scenario because it borders Mexico, has a large illegal immigrant population, is governed by Republicans, did not have any sanctuary jurisdiction in 2016, and has a law and order reputation for severely enforcing its criminal laws.  If there is any state that will find and prosecute illegal immigrants for crime, it’s Texas.  It should be strong evidence that the illegal immigrant conviction rate for homicide there is so low.

Already, I can hear people objecting by stating “you don’t know the size of the illegal immigrant population, so it’s just an estimate.” They are correct but virtually everybody who disagrees with the estimated size of the illegal immigrant population, which all cluster around the same number regardless of the organization doing the estimating, assumes that there are more illegal immigrants than are commonly estimated.

The real number of illegal immigrants isn’t too far off from the accepted estimates but if those critics are correct and demographers are missing a large number of them, that means that illegal immigrant crime and homicide rates are even lower than reported here and elsewhere (the denominator increases but the numerator stays the same). Ann Coulter wrote that there are 36 million illegal immigrants in her best-selling book on immigration. If she turns out to be correct and those 36 million illegal immigrants are distributed across the United States just as they are now, meaning that there are about 5.8 million in Texas, then the illegal immigrant homicide rate in 2016 was actual 0.56 per 100,000 illegal immigrants rather than the 1.8 reported here. If Coulter is correct, then she has unwittingly proven that illegal immigrants have the lowest homicide conviction rate of any population in the United States. 

Public policy must be based on data and trends, not on horrific anecdotes like the murder of Mollie Tibbets. Using law enforcement agencies on the local, state, and federal level to deport illegal immigrants who haven’t committed any violent or property crimes as a means to prevent tragic murders is a spectacularly poor way to prevent crime and save American laws. Such a misallocation of government resources will likely result in more victims as the government would spend a lot of resources deporting people who pose no security threat whatsoever and those resources must come from elsewhere, likely from other law enforcement activities. Punish the murderer of Mollie Tibbetts, don’t punish those who share the same immigration status as him from crimes they didn’t commit.        

 

 

 

EducationNext just released its 12th annual survey of public opinion. The nationally representative survey, administered in May 2018, finds that 54 percent of the general public supports private school vouchers for all students. This result is up 9 percentage points (20 percent) from 2017. On the other hand, only 43 percent of the survey respondents support income-targeted vouchers. This is great news for all families. Here’s why.

 

While there are 63 private school choice programs in the majority of the United States, less than one percent of the school-aged population actually exercises private school choice. This extremely low participation rate is largely explained by the fact that all school voucher programs are targeted based on student disadvantage. No voucher programs in the U.S. are available to all students.

Of course, universal voucher programs would benefit children from families that earn higher incomes. But universal vouchers would actually benefit the least advantaged children more than anyone. Why?

Let’s use an extreme example. Imagine that a voucher program was targeted to the very least advantaged student in a state. No educational entrepreneur would see one additional student as a big enough opportunity to take the risk of opening a new school. On the other hand, a program giving thousands of new students opportunities to attend private schools would entice several educational entrepreneurs to open new schools.

The result? Even the very least advantaged student has more educational options when school choice is open to all students. Put differently, the least advantaged students are better off when school choice programs are not targeted to them. And because the least advantaged children need better schooling options than anyone else, universal programs would benefit the least advantaged the most.

Maybe the general public is figuring this out. Or maybe people are just figuring out that all families should be able to pick the schools that are best for their own kids. Either way, majority support for universal school vouchers could lead to a lot more educational freedom in the near future.

As part of a yearly summer tradition, the Heritage Foundation and Cato Institute co-host a debate in which interns at both think tanks debate whether conservatism or libertarianism is a better ideology. Following this year’s debate, the Cato Institute conducted a post-debate survey of attendees to ask who they thought won the debate and what they believe about a variety of public policy and philosophical issues. The post-debate survey offers a unique opportunity to examine how young leaders in the conservative and libertarian movements approach deep philosophical questions that may be inaccessible to a general audience.

2018 Intern Debate Survey
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Despite agreement on domestic economic issues and free trade, the survey finds striking differences between conservative and libertarian  attitudes about Donald Trump, immigration, transgender pronouns, government’s response to opioid addiction, police, defense spending and national security, domestic surveillance, and religion. The survey also went further than just asking about policy and used Jordan Peterson’s 12 principles for a 21st century conservatism to examine the underlying philosophical differences between libertarian and conservative millennials. 

Full LvCDebate Attendee Survey results found here

Trump and Partisan Loyalties 

Libertarian and Conservative attendees have starkly different views of President Donald Trump. While 91% of conservative attendees approve of Trump’s job performance, 69% of libertarian attendees disapprove of Trump. 

1_Trump Approval
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Eighty-four percent (84%) of young conservative attendees identify as Republicans and that number increases to 99% once independent-leaning Republicans are included. Libertarian millennial attendees are far less partisan: only 19% initially identify as Republicans while 76% don’t believe either the Republican or Democratic parties represent them. However, if libertarian independents had to pick, 60% would lean Republican. Thus, both groups are more aligned with the Republican rather than Democratic Party, but libertarians are far less committed partisans. 

Young Libertarians and Conservatives Have Different Policy Priorities 

When asked to select the top three issues most important to them personally, libertarians and conservatives have different issue priorities. Conservatives are about 30 points more likely than libertarians to place greater weight on abortion (41% vs. 11%) and family values (31% vs. 4%) and are about 20 points more likely to emphasize national security (35% vs. 18%) and civil society (23% vs. 5%). 

Libertarian attendees on the other hand are about 20 points more likely than conservatives to prioritize criminal justice issues (24% vs. 2%), regulation (28% vs. 8%), government spending (37% vs. 22%), and free speech (47% vs. 34%). 

Both libertarians and conservatives agree that taxes (25% vs. 24%), welfare state issues (14% vs. 16%), and immigration (24% vs. 20%) are top priorities. Similarly, both groups say policy related to housing, transportation, the environment, unions, and paid leave are not their top priorities (<5%).

Conservatives Say Political Life Should be Based on Judeo-Christian Principles 

Nearly 9 in 10 conservative attendees (87%) believe that “political life in this country should be based on Judeo-Christian principles,” while 13% believe it should not. Conversely, 70% of libertarian attendees believe that these religious principles should not be the basis of American political life, 30% believe it should be. 

Part of the reason for this may be that conservatives are far more likely to attend church regularly (59% vs. 16%) and to believe people need to be raised with religion to learn good values (84% vs. 41%). Furthermore, conservatives also believe government has a role to play in promoting traditional values (83% vs. 9%). While libertarians are more likely to see value in religious teaching for children they do not extend such a role to government.  

ReligiousValues
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Libertarians Want More Immigration, Conservatives Want to Keep It the Same or Decrease It 

Young libertarian attendees have a more open and permissive view of immigration while conservatives take a more restrictive approach—from the border wall, citizenship for illegal immigrants, sanctuary cities, legal immigration procedures, and the Muslims travel ban.   

Strong majorities of conservatives favor building a large wall along the U.S.-Mexican border (74%), oppose sanctuary cities (94%), and support deportation of illegal immigrants (55%). 

In the opposite direction, strong majorities of libertarians oppose a border wall (86%), support sanctuary cities (58%), and favor citizenship for unauthorized immigrants (59%).

Border Wall
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Even when it comes to legal immigration processes, 74% of libertarians want to increase the number of immigrants legally allowed to enter the US, compared to 28% of conservatives. Instead a plurality of conservatives (43%) would rather keep legal immigration flows the same and nearly a third (29%) would decrease it. 

Number of Legal Immigrants
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Both libertarian and conservative attendees oppose a temporary travel ban on Muslims entering the United States; however, libertarians are nearly 40 points more opposed (89% vs. 51%). 

Given the divide between young libertarians’ and conservatives’ views of immigration, it’s perhaps unsurprising that conservatives are nearly twice as likely (80% vs. 44%) as libertarians to agree that “Western civilization is at risk of losing its identity.”  

Western Civilization
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Libertarians Say U.S. Foreign Policy Causes Instability and Chaos 

Young libertarians and conservatives have dramatically different evaluations of the impact of U.S. foreign policy. Nearly 9 in 10 (86%) libertarians believe American foreign policy “does more to promote instability and chaos.” In stark contrast, 82% of conservatives believe American foreign policy “does more to promote peace and stability” in the world. Few questions polarize libertarians and conservatives more than the impact of U.S. foreign policy.  

Impact of U.S. Foreign Policy
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This might explain why 60% of libertarians think the U.S. should leave Afghanistan “now,” and 93% say at least within the next five years. In contrast, a plurality (40%) of conservatives say the U.S. should stay in Afghanistan for “as long as it takes,” while 31% say the U.S. should leave in the next five years, and only 25% think we ought to withdraw troops immediately. 

Involvement in Afghanistan
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What Pronouns Do You Prefer? 

Libertarians and conservatives are also diametrically opposed on the use of transgender pronouns. While three-fourths (75%) of libertarians use a transgender person’s preferred gender pronouns, three-fourths (73%) of conservatives say they use the pronouns corresponding with the transgender person’s biological sex. 

These results are consistent with the fact that a majority (52%) of conservatives do not think society should “do more ensure LGBT people feel fully accepted in society,” 20% have no opinion, and 27% think society does have this obligation. Instead, a majority (55%) of libertarians think society does need to do more to ensure LGBT people feel accepted, while 24% have no opinion, and 22% disagree. 

Gender Pronouns
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Conservatives Want Government To Do Something about Opioids 

Nearly three fourths (71%) of conservatives agree that government needs to ”do more” to combat prescription painkiller addiction, while 14% think it should not. However, nearly 6 in 10 (59%) of libertarians think government should not do more to address opioid addiction, while 25% think it should. 

Opioid Crisis
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Conservatives and Libertarians Disagree About Police Misconduct 

Conservatives and libertarians are divided in their perceptions of police misconduct with conservatives more apt to defend and libertarians more skeptical of police. Eight in ten (80%) young conservative attendees believe that that police only use lethal force when necessary. Conversely, 77% of libertarians instead think that the police are too quick to use lethal force.

Police Use of Lethal Force
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Conservatives Support Domestic Surveillance, Libertarians Overwhelmingly Opposed 

A slim majority (54%) of conservative millennials approve of the government’s collection of telephone and internet data as part of anti-terrorism efforts while 46% oppose. However, libertarian attendees are overwhelmingly opposed with 93% who disapprove including 75% who strongly disapprove. Only 7% support such a program. 

V2_Collection of Telephone Data
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Young Conservatives and Libertarians Agree About Economics and Free Trade 

Despite the many aforementioned differences, the young conservative and libertarian attendees agree that smaller government is better, that we shouldn’t tax the wealthy more than we already are to raise revenue for more social programs, and that the costs of free trade to some domestic industries is outweighed by the benefits to consumers.  

Furthermore, nearly 100% of both groups say they prefer a smaller government providing fewer services with low taxes over a larger government with more services and high taxes (96% vs. 97%). Similarly, overwhelming majorities of young libertarians (91%) and conservatives (88%) oppose raising taxes on households earning more than $250,000 a year. 

Size of Government
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Despite President Trump’s persistent criticism of free trade deals, strong majorities of conservatives (75%) and libertarians (94%) agree “free trade must be allowed, even if domestic industries are hurt by foreign competition.” A quarter (25%) of conservatives and 6% of libertarian attendees think “trade restrictions should be used to protect domestic industries.” 

Young Libertarians and Conservatives Tolerant of Free Speech and Political Expression 

Another area in which young libertarians and conservatives largely agree is that people should be allowed to express their political opinions publicly. Majorities of both libertarian (91%) and conservative attendees (58%) also believe that NFL players who refuse to stand for the national anthem should not be fired. Even still, libertarians are more than 30 points more likely to say the athletes shouldn’t be fired. Similarly, majorities of both libertarians (95%) and conservatives (58%) oppose a law banning flag burning, even still, libertarians are nearly 40 points more opposed.

Understanding the Differences between Conservatives and Libertarians 

Why do libertarians and conservatives agree on economics but disagree so vehemently on matters of immigration, national security, police, drugs, and LGBT issues? To explore the underlying philosophical differences between conservatives and libertarians, we asked attendees to evaluate a series of statements about tradition, order, change, social conformity, responsibility, and loyalty. Several of these statements come from University of Toronto professor Jordan Peterson’s 12 proposed principles for a 21st century conservatism, several others were written by the survey author.[i] 

Libertarians and conservatives think about change and the importance of social order differently. Fully 88% of conservatives agree that “radical change should be viewed with suspicion, particularly in a time of radical change.” About half that—43%—of libertarian attendees agree with that statement while nearly as many (42%) disagree. Instead, nearly two-thirds (65%) of libertarians agree that “social change and disruption, even if they’re chaotic, are necessary to improve human happiness.” Only a quarter (24%) of conservative attendees agree that sometimes disruption and chaos are necessary for human flourishing.

Improve Human Happiness
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Libertarians are more likely than conservatives to reject the “wisdom of the ages” idea that longstanding social norms are more likely to be correct. Conservatives are more likely to believe that social institutions and norms that have withstood the test of time have revealed truth given their longevity. A strong majority of conservative attendees (69%) agree that “we should judge our political system in comparison to other actual political systems and not to a hypothetical ideal.” Instead a plurality (45%) of libertarians disagree with this statement while 38% agree with it. 

Political System
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Those who judge our system relative to a hypothetical ideal would be more comfortable with changing our political institutions to conform with a hypothetical—and thus untested—idea of a better future. However, those more cautious of change would be skeptical of transforming deeply rooted longstanding political institutions, that they view have withstood the test of time, into something untested.

In a similar vein, 67% of libertarian attendees disagree that “it is better to do what everyone has always done unless you have an extraordinarily valid reason not to,” while only 13% agree. Instead, a plurality (42%) of conservatives agree with this statement, 32% neither agree nor disagree and 25% disagree.  

In a consistent pattern, nearly 9 in 10 (89%) of conservatives agree that “intact heterosexual two-parent families constitute the necessary bedrock for a stable polity,” including 73% who strongly agree with this statement. Libertarian attendees are split on this idea with 47% who agree and 40% who disagree. 

Rule 8 Wisdom of Ages
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Conservatives are more likely to emphasize social conformity as a useful and necessary tool for a properly functioning society. Libertarians tend to be skeptical. Nearly 9 in 10 (86%) of conservative attendees agree that it is “just and right to demand some sacrifice of individual impulse and idiosyncrasy so that society can function properly.” Libertarians are about 50 points less likely to agree (37%). Instead half (49%) disagree that people ought to curtail their own idiosyncrasies to get along in society and 14% have mixed feelings.

Rule 2 Social Conformity
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One reason why conservatives may expect greater social conformity from others is that they are far more likely to believe there is a “right way” to do things. If one believes there is a hierarchy of proper and effective behaviors it’s clear why one would expect others to get with the program.  Nearly 8 in 10 conservative attendees (78%) agree “there is always a right way to do things.” In contrast, a slim majority (51%) of libertarian attendees disagree that there is always a right way to do things. Ostensibly, libertarians tend to believe there could be several or even many equally effective ways of doing things.

Right Way to Do Things
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Libertarians may de-prioritize social conformity because they tend to believe that flexible social norms are necessary to allow people to discover better ways of doing things. Even if they believe there is one right way, perhaps society hasn’t yet figured out what that right way is. Thus, 86% of libertarian millennial attendees agree that “we should keep social norms and laws flexible to allow people to discover better ways of doing things.” Only 33% of conservative attendees agree; instead a plurality disagree (44%) with that sentiment. 

Rule 9 Radical Change
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Conservative attendees largely agree that “it is more noble to teach young people about responsibilities than about rights.” This is a hard statement to evaluate because many would say both are equally important. Nevertheless, when asked to choose, two-thirds (66%) of conservatives emphasize teaching young people about their responsibilities over informing people of their rights. Libertarians are divided with a plurality (45%) who disagree that teaching responsibilities should come before teaching about rights and 38% who agree.

Responsibility v Rights
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Do young people love America? If they do, do they love it because it’s home, because of its history, because of the ideals it aspires to embody? What if America ceased living up to those ideals, would they still want to live here? Nearly two-thirds (61%) of young libertarians say no, “if another country better embodied the ideals of America” they would “want to move to that country” instead. Conversely, a majority (55%) of conservatives disagree, they would stay in America anyway. 

America
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Instead, conservatives place greater emphasis on community, which may be one reason they wouldn’t want to leave the country if another country better embodied American ideals. Even though both conservatives (100%) and libertarians (89%) agree that “it’s important for people to have community,” 82% of conservatives “strongly agree” with this statement compared to 51% of libertarians—a 31-point difference. 

Despite these divisions, young libertarians supported several principles Peterson articulated for conservatives—on matters of liberty and just deserts. In fact, libertarians were far more likely to agree that “the government, local and distant, should leave people to their own devices as much as possible.” Although overwhelming majorities of young conservatives (83%) and libertarians (98%) agree, libertarians are 53 points more likely to “strongly agree” (83% vs. 30%) than conservatives. 

Liberty
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Both libertarian and conservative attendees also overwhelmingly endorse the idea of proportional justice that people should reap the benefits of their hard work. Over 9 in 10 libertarians and conservatives agree that “citizens have the inalienable right to benefit from the result of their own honest labor.” 

Who Won the Intern Debate? 

Who won the intern debate depends on whom you ask. Among conservative attendees: 94% said the conservative team won and 6% said the libertarian team won. Among libertarian millennial attendees, 54% said the conservatives won while 46% said the conservatives won. Among the moderates, liberals, and progressives in the audience, 58% felt the conservative team won and 42% thought the libertarians won. 

Summary 

Many observers have assumed that libertarians and conservatives come from essentially the same branch of the political tree, or that one is simply a more stringent version of the other. However, the survey finds striking differences between the two groups in policy beliefs undergirded by different assumptions and philosophical worldviews. This survey of politically engaged young conservatives and libertarians highlights the commonalities as well as conflicts between the two groups and portends the political conflicts of the future.

Full LvCDebate Attendee Survey results found here

[i] Several of Peterson’s principles were re-worded for use in the survey. Although Peterson has said he doesn’t personally identify as conservative, when asked to speak to a conservative group he offered up twelve principles he thought conservatives could be for rather than against. 

The 2018 Education Next poll is upon us, probing the public’s feelings about lots of education issues, from grading public schools to thoughts on teacher pay. I’ll just highlight two things here, kind of the opposite ends of the educational freedom spectrum: school choice, and the federally coerced, national curriculum standards known as the Common Core.

School Choice

As we know about any polling, how a question is worded can have considerable bearing on the results it yields. That’s a primary reason to greet any poll with skepticism. Because the fine folks at Education Next are well aware of this, they asked different versions of several questions, including about choice. What do they reveal?

On charters, support is strongest when the term “charter” is mentioned early in the question, and “public” is not appended before it to say “public charter schools.” But it still just elicits plurality support: 44 percent for, 35 percent against.

Tax credits for donations for low-income scholarships is the choice champ—as we’ve seen before—though only one version of the question was asked. It got 57 percent support and 25 percent opposition.

There were interesting results for vouchers. A version of the question that did not specifically mention “vouchers” and emphasized “wider choice” for all families with kids currently in public schools yielded 54 percent support—a 5-year high—and 31 percent opposition. A version for all public school kids that did not emphasize “wider choice” and included “voucher” saw only 44 percent support and 39 percent opposition. A version that restricted “wider choice” to low-income families, and did not use the term “voucher,” garnered 42 percent support and 44 percent opposition. Finally, a version targeted to low-income families that used “voucher” and did not mention “wider choice” received 43 percent support and 44 percent opposition.

When it comes to vouchers, people seem to want more choice for more people, which sounds about right. But don’t actually use the v-word!

Common Core

Repeating what we’ve seen for several years, the public supports the egalitarian but innovation- and pluralism-smooshing idea that all children should be subject to the same reading and math standards, and that schools should be held “accountable” using such standards. 61 percent support that idea, while only 26 percent oppose. Mention the Common Core specifically, however, and support plummets to 45 percent, while opposition ticks up to 37 percent. It’s a lot easier to sell abstract niceties than concrete stuff.

Check out the entire survey for a whole lot more insight into what the public, and lots of groupings within it, think about American education.

At the end of my first post in this series, I observed that assessing the claim that fractional reserve banking causes business cycles meant asking two questions: first, “To what extent have historical money-fueled booms been associated, not with growth in the supply of either commodity money or central-bank supplied bank reserves, but with declining banking system reserve ratios?” and, second, “When a banking system does manage to operate on a lower reserve ratio, does its doing so necessarily contribute to an unsustainable boom?”  I answer the first question here, leaving the second to a third and final installment.

The Myth of Bank Lending “Manias”: the 19th Century

That first question is empirical, so answering it means consulting the historical record. It happens that I did just that some years ago, in response to claims to the effect that bankers, far from being immune to bouts of what Alan Greenspan famously called “irrational exuberance,” often play a lead part in fueling unsustainable booms, leading the more common herd of speculators, not to mention many perfectly innocent parties, to their ultimate undoing.

I eventually published my findings in an article on “Bank Lending ‘Manias’ In Theory and History. Although I didn’t attempt anything approaching a comprehensive review of historical booms and busts in that brief survey, I did look at several of the most notorious cases of booms and busts commonly blamed on excessive commercial bank lending.

I also made a point of selecting those cases in which commercial banks were free to issue their own notes, so that they did not have to rely on notes supplied by a central bank to meet their customers’ demands for currency. The episodes that fit that description best are the Ayr Bank Crisis of 1772, the English Panic of 1825, the U.S. Panic of 1837, the Australian Crash of 1893. After carefully reviewing each episode, I concluded that

Available evidence from less restricted banking systems does not support the banking mania tradition. Banks not subject to legal limits on their issues have not taken advantage of this to allow their reserve ratios to fall during booms. Banks have tended to hold higher than usual reserve ratios in the aftermath of crises, perhaps in anticipation of extraordinary “leakages” of high-powered money. In short, if banks have behaved in any procyclical fashion, they have leaned in the direction of exceptional conservativism during slumps. When monetary expansion has “fanned the flames” of euphoria and planted the seeds of an eventual crisis, the expansion has generally been caused not by falling reserve ratios for competitive banks (as the mania thesis claims), but by exogenous injections of high-powered [i.e. “basic”] money. These injections have sometimes consisted of specie inflows; at other times they have consisted of the expanded liabilities of a central bank of issue.

The 20th Century

But what about other famous booms? Because fans of the Austrian cycle theory often refer to the 1920s boom as fitting the theory, let’s first consider it. Doing so is made difficult by the lack of any consistent figures for bank demand deposits and reserves: while data for total bank demand deposits go back to 1914, data for bank reserves are available only for Federal Reserve System member banks. Yet there are no data for demand deposits of member banks alone! Consequently, and most frustratingly, it’s impossible to know precisely what was happening to the overall reserve ratios of either commercial banks taken as a whole or of Fed member banks only.

As an alternative way to gauge the role of fiduciary media in the lead-up to the Great Depression, the chart below shows, for 1914 (the first year for which consistent data are available) until 1930, the behavior of the following: (1) the U.S. money stock (demand deposits plus currency) (red line); (2) the stock of monetary gold (purple line); (3) total Federal Reserve “fiduciary” money creation, as measured by its holdings of commercial bills and Treasury securities (turquoise line); and (4) the relationship, expressed as a percentage, of the monetary gold stock to the broader money supply (blue line).

Although the chart does indeed appear to show a clear example of a “fiduciary media”-based boom, that boom occurs, not in the years leading to the Great Depression, but in those leading to the previous sharp but short-lived recession of 1920-21. Between the end of the war and the start of that recession the percentage of gold cover for the total money stock declined from almost 17.5 percent to less than 11.5 percent. The chart also shows how that decline was largely driven by Federal Reserve lending, which increased tenfold during the same period, from under $300 million to over $3 billion.

There’s no similarly clear evidence, on the other hand, of a fiduciary-media boom during the mid-to- late 1920s. After the ‘20-‘21 crisis, the gold cover percentage quickly recovered from its post-war decline. By May 1924 it had risen above 18 percent, a level exceeding its wartime peak. From there it declined, rose slightly, and declined again, to a not remarkably low nadir, in December 1928, of 14.6 percent, from which it proceeded to rise again until Black Tuesday. Finally, were one bold enough to venture that the modest decline of the gold cover percentage between May 1924 and December 1928 contributed importantly to an unsustainable boom, one would once again have to blame much of that decline on a substantial increase in Federal Reserve credit, the quantity of which doubled during the period in question, rather than on any fall in commercial bank reserve ratios.

And what about the post-2001 subprime mortgage boom? Here the evidence is perfectly clear: the boom had nothing to do with growth in the supply of fiduciary media, as that term is conventionally defined. Another FRED chart should settle any doubts:

Remarkably, far from having been fueled by an increased in bank demand deposits unmatched by a corresponding increase in bank reserves, the great boom of the noughts did not even involve any substantial growth in the absolutely quantity of demand deposits, which for the most part fluctuated within the narrow range of $300 billion to $350 billion. (The series for “checkable” deposits behaves almost identically.) As for the percentage of demand deposits covered by bank reserves, including both vault cash and reserve balances at the Fed, instead of declining, it shows a distinct upward trend.

None of this is meant to deny that banks played some part in fueling the subprime boom. Bank lending and deposit expansion were certainly part of the story: by mid-2008 total bank deposits were half again their value at the start of 2002. But the deposits that grew during the boom weren’t demand deposits. Instead they consisted of various sorts of time deposits, which are not supposed, according to the standard Austrian account, to be particularly capable of causing unsustainable booms. It’s partly for that reason that most (though not quite all) Austrian-school calls for 100-percent reserve banking are calls for having banks keep 100-percent reserves against their demand deposits only, and not against time deposits

Maturity Mismatching: Healthy and Unhealthy

To his credit Philip Bagus — one of the Austrian-school critics of fractional-reserve banking — has argued quite correctly against the standard Austrian view that a 100-percent reserve system would not suffice to rule-out bank maturity mismatching and business cycles that result from it. That so-called “shadow” banks, none of which actually took part in the issuance of fiduciary media as Austrian economists define it, formed the epicenter of that crisis, supports’ Bagus’s claim.

However, Bagus himself errs in supposing that maturity mismatching itself is an inevitable cause of malinvestment. Here it helps to distinguish between what I’ll call, for want of accepted terms, “item-by-item” maturity mismatching from “aggregate” maturity mismatching. The difference is crucial in the case of financial intermediaries, the functions of which include gathering savings from large numbers of independent sources, and using those savings to fund various investments. How come? Well, suppose that I borrow $1000 from a friend, while agreeing to pay that friend back any time he or she wishes, and that I in turn lend the $1000 to someone who will not pay me back for a year. In that case, assuming I did not have any other assets or liabilities, I’d be engaging in a very risky act of one-on-one maturity mismatching.

But suppose I am a bank, with thousands of customers each of whom deposit (that is, lend the bank) $1000, also for undetermined periods, and that I have been receiving such deposits for a long time. In that case, over time I learn that, thanks to having so many depositors, the withdrawals of some tend to be made up for by the fresh deposits of others: in other words, the different depositors are like so many runners in a relay race, with those drawing on their balances passing the savings baton on, as it were, to others who are making new deposits.

The banks challenge, in that case, is not that of mismatching the maturity of any individual deposit with that of some corresponding bank loan, but one of matching the maturity of the banks assets with the expected availability of the totality of its deposits. In principal a well-managed bank only has to have loans enough being repaid on any given day to meet its net deposit withdrawals for that same day, where by adequately limiting the overall quantity of its lending it might in principal keep that expected net withdrawal right at zero.

In practice, though, bankers are bound often to lose more funds than they gain, if only on a day to day basis, with the opposite happening just as often. It’s precisely for that reason that banks have reason to maintain fractional cash reserves, while also limiting the maturity of the loans they do make — as they have every reason to do unless they or their creditors expect to be bailed out. The existence of fractional reserves in a competitive banking system subject to market discipline is, therefore, properly understood, not as a symptom of bankers’ tendency to engage in dangerous or excessive mismatching of the maturities of their assets and liabilities, but as a precaution taken against the risk of excessive mismatching.

[Cross-posted from Alt-M.org]

May a city both require certain business owners to forego their Fourth Amendment rights and also enforce regulations specifically designed to advantage competing businesses in a related industry? That’s the question to be answered by the Illinois Supreme Court in LMP Services v. Chicago. The City of Chicago enacted an ordinance requiring all food trucks to install GPS trackers, in part as a means of settling disputes as to whether these vicious vehicular vittle vendors are violating yet another ordinance by operating within 200 feet of any brick-and-mortar restaurant. The lower state courts have allowed these new rules to take effect, so Cato—along with the National Food Trucks Association and the Illinois Food Truck Owners Association—has filed a brief urging the state high court to use a different constitutional recipe.

In upholding these ordinances, the intermediate state appellate court ruled that the mandatory GPS placement was not actually a “search” under the Fourth Amendment, because there was no physical intrusion by the government and as a consequence of food trucks’ operating under a revocable license. Both rationales are mistaken. While the government hired a private company to install the GPS trackers, it has long been established that the government can’t avoid constitutional scrutiny by contracting out the state-directed action.

And regardless of whether the food truck industry is subject to business licensing, the GPS requirement cannot validly fall under the judicially created exception to the warrant requirement for administrative searches of closely regulated industries. The ordinance is both overly expansive—violating more privacy rights than is necessary—and its failure to limit official discretion. Indeed, it’s hard to conceive of a warrantless-search regime that does less to place proper restraints on official discretion than a mandate that food-truck owners constantly reveal their precise location as a condition of doing business.

The lower court’s ruling not only failed to appreciate these sensible limitations, it essentially gave the government carte blanche to condition the issuance of licenses—any licenses—on applicants’ agreeing to waive their Fourth Amendment rights. Carried to its logical conclusion, such judicial indulgence would permit the government to condition issuing driver’s licenses on the installation of GPS trackers, or on standing consent to random searches of the owner’s vehicle.

As for the other ordinance—the so-called 200-Foot Rule—the lower court failed to find any violation of equal protection while ignoring ample empirical evidence that this was simple economic favoritism. The city’s own admitted rationale for the rule amounts to pure protectionism for brick-and-mortar restaurants. A city is simply not allowed to advantage restaurants over food trucks—or, say, Mexican-food joints over Thai-food eateries—because it prefers the former to thrive and the latter to struggle.

Finally, even if there was a valid government interest here—maintaining a healthy economy full of legacy restaurants—empirical evidence shows that the rule not only fails to advance this purpose, but actually undermines it. Restrictions on food trucks depress the City’s potential tax revenue while having no demonstrable impact on traditional storefront businesses. If Chicago truly wants to advance the interests of its residents, abandoning these overly burdensome restrictions would be a delicious start.

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